<PAGE>
As filed with the Securities and Exchange Commission on January 20, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
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) 772-0002
(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) 772-0002
(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. [_]
------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each class Proposed Maximum Aggregate Amount of
of securities to be registered Offering Price (1) Registration Fee
- ---------------------------------------------------------------------------------
<S> <C> <C>
Class A common stock, $.01 par value
per share........................... $575,000,000 $151,800
- ---------------------------------------------------------------------------------
115,000,000 (2) 30,360
- ---------------------------------------------------------------------------------
Totals............................. $690,000,000 $182,160
</TABLE>
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- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457(o) under the Securities Act, as amended.
(2) Relates to a concurrent distribution of an aggregate of 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. Neither we nor the Cisneros Group of Companies will receive
any proceeds in connection with the distribution by the Cisneros Group of
Companies.
------------
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, as amended, 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.
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- --------------------------------------------------------------------------------
<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 shares of Class A common stock. The second
prospectus relates to a concurrent distribution of an aggregate of 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 prospectuses 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 , 2000
PROSPECTUS
[COMPANY LOGO]
Shares
America Online Latin America, Inc.
Class A Common Stock
$ per share
--------
America Online Latin America, Inc. is selling shares of its Class A
common stock. The underwriters named in this prospectus may purchase up to
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. Prior to the offering there has been no public market for the Class A
common stock. We currently expect the initial public offering price to be
between $ and $ per share. We have applied to have the Class A common
stock included for quotation on the Nasdaq National Market under the symbol
"AOLA."
--------
Investing in our Class A common stock involves risks. See "Risk Factors"
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 distribute
up to 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 in connection with 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.
--------
Joint Book-Running Managers
Salomon Smith Barney Donaldson, Lufkin & Jenrette
--------
Lehman Brothers
, 2000
<PAGE>
[A watermark of the AOL-LA logo will be placed in the background of the
outside of the prospectus cover; half of the AOL-LA logo will be placed on the
outside of each of the front and back. The inside of the cover will be a fold
out with color pictures of the home pages for the country services and various
other pages within the AOL-LA services and text describing attributes of AOL-
LA's interactive services.]
<PAGE>
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.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 10
Special Note Regarding Forward-Looking
Statements................................................................ 25
Use of Proceeds............................................................ 26
Dividend Policy............................................................ 26
Capitalization............................................................. 27
Dilution................................................................... 28
Selected Financial Data.................................................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 30
Business................................................................... 37
Management................................................................. 54
Certain Relationships and Related
Transactions.............................................................. 62
Principal Stockholders..................................................... 67
Description of Provisions of Our Restated
Certificate of Incorporation that Affect the
Scope of Our Business..................................................... 69
Description of Capital Stock............................................... 70
Shares Eligible For Future Sale............................................ 76
U.S. Tax Consequences to Non-U.S. Holders.................................. 77
Underwriting............................................................... 80
Legal Matters.............................................................. 82
Experts.................................................................... 82
Where You Can Find Additional Information.................................. 82
Index to the Consolidated Financial Statements............................. F-1
</TABLE>
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 in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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 "Risk
Factors" and our consolidated financial statements and related notes.
Our Company
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 more than 20 million users 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 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 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 network of Internet portals will offer content, community
and e-commerce opportunities to all Internet users.
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. We expect to derive our revenues principally from member
subscriptions to our AOL-LA country services, and we will seek to build our
online service member base and portal user base in order to generate additional
revenues from advertising and e-commerce.
We are beginning to offer our AOL-LA-branded interactive services in Latin
America. 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 2000, 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. Thereafter we intend
to introduce our interactive services in additional countries in Latin America.
We currently 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. In addition, we have the exclusive
right to offer in Latin America any AOL-branded wireless-based online services
developed by AOL for commercial launch before , 2004 (four years from the
effective date of the registration statement for this offering). We also have
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 50 million users,
including approximately 5 million users in Latin America, to find and
4
<PAGE>
communicate with each other in real-time. As local versions of the ICQ service
are developed, we will engage in other marketing and cross-promotion activities
with AOL. We do not have the right to offer Netscape, DigitalCity, MovieFone or
any other non-AOL-branded interactive services owned by AOL other than
CompuServe.
Our Opportunity
Although Internet use in Latin America is in a relatively early stage of
development, the region is one of the fastest growing Internet markets.
International Data Corporation projects that the number of Internet users in
Latin America will increase at a compound annual growth rate of 34% from 1998
to 2003 and the number of Internet accessing devices will increase at a
compound annual growth rate of 41% over the same period. The amount spent on
advertising and e-commerce in Latin America is also projected to increase over
the same period.
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. We intend to:
. provide superior online services that offer easy and reliable access to
local, regional and global communities, content and e-commerce
opportunities, seamless integration of the Internet, and free online and
offline customer service available 24 hours a day, 7 days a week;
. optimize the use of our management and business development teams in the
introduction of our interactive services in Latin America;
. develop our interactive services on a country-by-country and regional
basis and tailor them to local interests and preferences;
. establish a presence on the Internet through our AOL-LA country Internet
portals and our Latin American regional Internet portal to grow our
brand name, promote the AOL-LA country services and generate advertising
and e-commerce revenues;
. use extensive traditional advertising campaigns as well as innovative
marketing strategies, including the promotion of our interactive
services on ICQ in Latin America, to aggressively build our member and
user base; and
. expand our family of AOL-branded services to TV- and wireless-based
online services as they are developed by AOL.
Our History
Currently, our 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 AOL and the Cisneros Group. 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 which
AOL and the Cisneros Group will exchange their interests in the entities that
own AOL Latin America, S.L. and its affiliates for and shares of our
Series B preferred stock and Series C preferred stock, respectively. AOL will
also receive the AOL warrant.
We believe that our relationships with AOL and the Cisneros Group are
essential to our success and provide us with significant competitive
advantages. Nonetheless, you should be aware that these relationships involve
numerous risks. For a fuller discussion of these and other risks associated
with investing in our Class A common stock, please see "Risk Factors."
5
<PAGE>
To date, we have financed our operations primarily through capital
contributed by the Cisneros Group. The Cisneros Group has agreed to contribute
an aggregate amount of approximately $100 million to AOL-LA, the balance of
which, $41 million, will be contributed in quarterly installments through July
2, 2001.
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. Time Warner shareholders will receive 1.5 shares of AOL
Time Warner for each share of Time Warner stock they own. AOL shareholders will
receive one share of AOL Time Warner stock for each share of AOL stock they
own. The merger is subject to customary closing conditions, including receipt
of required regulatory approvals and the approval of AOL and Time Warner
stockholders.
Unless the context otherwise requires, "America Online Latin America, Inc.,"
"AOL-LA," "we," "us," and "our" refer throughout this prospectus to America
Online Latin America, Inc. and our subsidiaries, and our predecessor, AOL Latin
America, S.L. and its affiliates. "AOL" refers to America Online, Inc. The
"Cisneros Group of Companies" or the "Cisneros Group" are names used to
describe a group of investments, joint ventures, strategic alliances and
affiliated companies that are engaged in diversified consumer businesses,
including broadcasting and content production, in Latin America and elsewhere,
and that are associated with two of our directors, Ricardo and Gustavo
Cisneros, and their families.
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 concurrent distribution by the Cisneros Group of 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 pursuant to their rights to purchase
additional shares 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.
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) 772-0002.
------------
6
<PAGE>
The Offering
<TABLE>
<S> <C> <C>
Class A common stock offered by this prospectus...... shares
Class A common stock distributed by the Cisneros
Group to some current and former employees of the
Cisneros Group under a separate prospectus.......... shares
<CAPTION>
Number of Shares Voting Power
---------------- ------------
<S> <C> <C>
Capital stock to be outstanding after this offering
and the concurrent distribution by the Cisneros
Group:
Class A common stock...............................
Series B preferred stock...........................
Series C preferred stock...........................
Total............................................
</TABLE>
All outstanding shares of Series B preferred stock are held by AOL and all
outstanding shares of Series C preferred stock are held by the Cisneros Group.
Shares of our Series B preferred stock are convertible into shares of Class B
common stock, which are convertible into Class A common stock, in each case 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, in each case 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, the Cisneros Group intends to distribute up
to 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 and
the concurrent distribution by the Cisneros Group does not include:
. shares of Class A common stock issuable upon exercise of options that
we will grant to our employees and directors on the effective date of
this offering;
. shares of Class A common stock available for future issuance under
our stock option plan; and
. shares in any combination 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 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 issuable under the over-
allotment option, plus the shares of Class A common stock issuable under
our stock option plan. The number of shares issuable pursuant to the
warrant may be increased if we, AOL or the Cisneros Group issue or
transfer shares to one or more additional strategic stockholders. See
"Certain Relationships and Related Transactions--Admission of Additional
Principal Stockholders."
Use of proceeds................. 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,
7
<PAGE>
including possible acquisitions of, or
investments in, complementary businesses,
products or technologies. See "Use of
Proceeds."
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
13 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 13 directors.
Following this offering and the
concurrent distribution by the Cisneros
Group, AOL will control % and the
Cisneros Group will control % of the
voting power of all our capital stock. As
a result, they 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. In
addition, 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. See "Description of Capital
Stock," "Risk Factors-- Risks Related to
Control by AOL and the Cisneros Group,"
"Description of Provisions of Our
Restated Certificate of Incorporation
that Affect the Scope of Our Business"
and "Management--Committees of the Board
of Directors--The Special Committee."
Proposed Nasdaq National Market "AOLA"
symbol.........................
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, and for the three months ended September 30,
1999. Our summary balance sheet data is presented as of September 30, 1999, on
an actual basis and as adjusted to give effect to our sale of shares of
Class A common stock in this offering at an assumed initial public offering
price of $ per share, after deducting the underwriting discount and estimated
offering expenses. You should read this information in conjunction with our
financial statements and the notes to those financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
December 15, 1998
(date of inception) Three Months
to Ended
June 30, 1999 September 30, 1999
------------------- ------------------
(In thousands, except share data)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Subscriptions................................... $ 1,644 $ 1,129
Advertising and e-commerce...................... -- 78
------- -------
Total revenues................................ 1,644 1,207
Loss from operations.............................. (4,917) (2,209)
Net loss.......................................... $(5,039) $(1,972)
======= =======
Unaudited pro forma net loss per share (1)........ $ $
======= =======
Unaudited pro forma weighted average shares
outstanding (1)..................................
======= =======
<CAPTION>
As of September 30, 1999
--------------------------------------
Actual As Adjusted
------------------- ------------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $29,862 $
Working capital................................... 26,568
Total assets...................................... 34,301
Total stockholders' equity........................ 27,922
</TABLE>
- --------
(1) Pro forma net loss per share assumes, for both periods, the conversion of
the Series B and Series C preferred stock into Class A common stock, but
excludes the issuance of shares of Class A common stock in this
offering, as well as those shares issuable under our stock option plan and
upon exercise of the AOL warrant.
9
<PAGE>
RISK FACTORS
An investment in our Class A common stock involves a high degree of risk.
Before purchasing shares of Class A common stock offered by this prospectus,
you should carefully consider the risks described below, in addition to the
other information presented in this prospectus.
RISKS RELATED TO CONTROL BY AOL AND THE CISNEROS GROUP
AOL and the Cisneros Group have the ability to control matters on which all of
our stockholders may vote and have the exclusive right to vote on specific
matters
Following this offering and the concurrent distribution by the Cisneros
Group, AOL will control approximately % and the Cisneros Group will control
approximately % of the voting power of our outstanding capital stock. In
addition, AOL will have the ability to increase its level of ownership through
the exercise of the AOL warrant. As a result, they will determine the outcome
of all corporate matters requiring stockholder approval, including the election
of all of our directors, approval of merger transactions and the sale of all or
substantially all of our assets.
Further, as holders of B stock and C stock, AOL and the Cisneros Group have
exclusive voting rights on a number of specific matters. AOL and the Cisneros
Group together have the sole power to amend a number of important provisions of
our restated certificate of incorporation. In addition, 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 a large
number of corporate and business matters, including all amendments to our
restated certificate of incorporation and restated by-laws, mergers,
acquisitions, the declaration of dividends, selection of nominees to our board
of directors and all issuances of our capital stock. AOL will maintain its
special voting and control rights in the future for as long as AOL owns shares
of B stock equal to at least 50% of the number of shares of Series B preferred
stock that it currently holds, or shares. The Cisneros Group will maintain
its special voting and control rights in the future for as long as the Cisneros
Group owns shares of C stock equal to at least 50% of the number of shares of
Series C preferred stock that we originally issued to it, or shares. See
"Description of Provisions of Our Restated Certificate of Incorporation that
Affect the Scope of Our Business," "Description of Capital Stock--Voting
Rights," and "Management--Committees of the Board of Directors--The Special
Committee."
AOL and the Cisneros Group may seek one or more additional strategic
stockholders of our company and may choose to extend some or all of their
special voting and control rights to these additional parties. In that event,
the 50% threshold described above would be reduced accordingly to allow AOL and
the Cisneros Group to maintain their special voting and control rights.
AOL and the Cisneros Group have interests that conflict with your interests
AOL's and the Cisneros Group's control of our company creates actual and
potential conflicts of interest between them and us. Because AOL and the
Cisneros Group operate in the interactive services and media industries, there
will be instances in which they are faced with decisions that place their
interests in direct conflict with your interests. Neither our restated
certificate of incorporation nor our agreements with AOL and the Cisneros Group
prevent them from pursuing other opportunities or, in some instances, directly
competing with us.
Among other activities, AOL and the Cisneros Group may each offer Spanish-
and Portuguese-language interactive services targeted to markets outside of
Latin America. AOL and the Cisneros Group may each also offer Spanish- and
Portuguese-language portals that are not AOL-branded to users in Latin America.
In addition, AOL may offer Spanish- and Portuguese-language AOL-branded portals
to users in Latin America although we have 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. Moreover,
AOL may offer any non-AOL-branded TV- or wireless-based online services in
Latin America. Furthermore, AOL and the Cisneros Group are not restricted from
competing with us for advertising and e-commerce revenues.
10
<PAGE>
AOL and the Cisneros Group are generally not precluded from acquiring
minority interests of up to 35% in businesses that compete with ours. For
example, the Cisneros Group currently has a minority ownership interest in El
Sitio, an interactive services company that targets Spanish- and Portuguese-
speaking audiences in Latin America and the U.S. and is therefore a competitor
of our business. Additionally, the Cisneros Group may acquire up to a 50%
interest in RSL-LA and Galaxy Latin America, telecommunications and satellite
television service providers in which the Cisneros Group has preexisting
investments, even if these companies should become competitors of our business
in the future.
Moreover, conflicts could arise with respect to the allocation of business
opportunities between us and either AOL or 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 unless they decide not to pursue the opportunity or to
recommend it to a third party and they consent to our engaging in the business
activity. 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 a third party. Our directors and officers affiliated with AOL
and the Cisneros Group are similarly protected. In any event, 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 that a court
may impose on them for breach of fiduciary duty regarding their failure to make
business opportunities available to us or for competing with us.
Our current agreements with AOL and the Cisneros Group or their affiliates
have not been the result of arm's-length negotiations. Consequently, these
agreements may be less favorable to us than agreements that we could otherwise
have entered into with unaffiliated third parties.
In addition, some of our directors and executive officers currently 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.
We are subject to important limitations on the scope of our business
For as long as AOL continues to own shares of B stock equal to at least 50%
of the Series B preferred stock that it currently holds, or shares, and 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, or shares, we
cannot engage in any business activity other than providing PC-based
interactive services and AOL-branded TV- and wireless-based interactive
services in Latin America without their approval. Further, 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, even though 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. In addition, disputes may arise with AOL as to whether our licensed
rights extend to particular services, due to possible ambiguities in the terms
"PC-based," "TV-based," and "wireless-based" services.
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 recommend
it to a third party and, in either case, 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.
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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. Even if they
decide not to pursue the opportunity or to offer the opportunity to a third
party, they have no obligation to consent to our engaging in that business
activity.
These limitations may restrict our ability to offer new products and
services beyond AOL-branded PC-, TV- and wireless-based interactive services in
Latin America. As a result, we may be prevented from pursuing potentially
lucrative business opportunities. For example, we are currently prevented from
offering our services to Spanish- and Portuguese-speaking consumers in
countries outside of Latin America. These constraints could adversely affect
our growth. See "Certain Relationships and Related Transactions" and
"Description of Provisions of Our Restated Certificate of Incorporation that
Affect the Scope of Our Business."
Our rights to offer AOL-branded online services and portals in Latin America
are subject to important limitations
We have entered into a license agreement with AOL under which we have
exclusive rights to offer in Latin America AOL-branded PC-based online services
and, as they are developed by AOL, AOL-branded TV-and wireless-based online
services. Nevertheless, with respect to AOL-branded PC-based online services,
our exclusive rights will become non-exclusive 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. With respect to AOL-branded TV- and
wireless-based online services, our exclusive rights will become non-exclusive
upon the later of , 2005 (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. We have no control over AOL's or the Cisneros Group's level of ownership.
Moreover, AOL may terminate the agreement if we materially breach its terms. We
have no rights to offer AOL-branded wireless-based online services unless the
services are developed by AOL for commercial launch prior to , 2004 (four
years from the effective date of the registration statement for this offering).
The termination of our license or the loss of exclusivity of our rights to
offer AOL-branded online services would severely impact our business.
Our license to offer a network of Spanish- and Portuguese-language AOL-
branded portals in Latin America is non-exclusive. However, we have 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 equal to our pro-rata share of AOL's development costs. In
addition, 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 on our right to offer AOL-branded
interactive services may prevent us from pursuing potentially lucrative
business opportunities.
We depend on AOL for all of the proprietary technology related to providing our
AOL-LA interactive services in Latin America and on AOL and the Cisneros Group
for various services
In addition to our license agreement, we have entered into a services
agreement with AOL under which we pay AOL to provide us with all the support we
require to offer our interactive services in Latin America, including:
. software customized, or localized, for each of our specific target
markets;
. software updates;
. software development services;
. software installation services;
. network connections;
. host computer services;
. technical support;
. training; and
. other related services.
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Our interactive services run on AOL's host computers in the U.S., and we
depend on AOL for the development of the localized versions of our interactive
services that we intend to offer in various countries in Latin America. We do
not have the resources, including personnel and technology, to develop or run
our interactive services independently of AOL. Further, if AOL delays in
localizing our software, future launches of our interactive services may be
postponed. AOL has no obligation to reimburse us for losses caused by its
failure to deliver any services under the services agreement. AOL may terminate
the services agreement if we materially breach its terms. The termination of
this agreement with AOL would critically impact our business.
AOL and the Cisneros Group may fail to agree on matters related to our business
Since AOL and the Cisneros Group jointly control our company 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. 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
-- 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;
-- any changes to significant corporate governance provisions in our
restated certificate of incorporation and restated by-laws; and
-- a large number of other corporate and business matters.
. are each entitled to appoint five members of our board of directors.
The list of matters that both AOL and the Cisneros Group must approve is
extensive and extends beyond major corporate governance issues. See
"Management--Committees of the Board of Directors--The Special Committee" and
"Description of Capital Stock--Voting Rights." Should AOL and the Cisneros
Group disagree on any matter over which each has exclusive veto rights or the
direction of AOL-LA, our business may be adversely affected until the
disagreement is resolved. If AOL and the Cisneros Group should remain in
deadlock, or if their relationship should deteriorate as a result of any
disagreement, our business could be adversely affected.
The control exerted by AOL and the Cisneros Group over our business may inhibit
or prevent a takeover or change in management that would otherwise favorably
impact the market price of the Class A common stock
As a result of their controlling interest in our company, AOL and the
Cisneros Group will have the ability to delay or prevent a change of control or
changes in our management that you may consider favorable or beneficial.
Further, provisions in our restated certificate of incorporation and restated
by-laws may also have the effect of delaying or preventing these changes,
including provisions:
. authorizing the issuance of "blank check" preferred stock without your
approval;
. eliminating the ability of Class A stockholders to call special meetings
of stockholders; and
. requiring advance notice in order for Class A stockholders to introduce
proposals at stockholder meetings.
If a change of control or change in management is delayed or prevented, the
market price of our Class A common stock could decline and you may be deprived
of the opportunity to sell your shares of Class A common stock at a premium to
the then current market price of the Class A common stock.
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FINANCIAL RISKS
We have a short operating history, have incurred net losses since inception and
expect future losses
We launched our first AOL-LA country service and our first AOL-LA country
Internet portal in November 1999 in Brazil. As a result, we have only a limited
operating history for you to evaluate our business. We incurred net losses of
approximately $7.0 million from inception through September 30, 1999. We expect
to continue to incur net losses as we expend substantial resources to develop
our business. Nearly all of our revenues through September 30, 1999 reflect
subscription fees attributable to our CompuServe Classic subscribers that we
acquired from AOL. See note 3 to our financial statements. We expect these
CompuServe revenues to decline significantly. Accordingly, you should not
evaluate our business or financial prospects based upon our historical
subscription revenues. 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.
If we are unable to raise necessary capital in the future, we may be unable to
fund necessary expenditures to grow our business
To support our operations to date, both AOL and the Cisneros Group have
provided us with various services, and the Cisneros Group has also provided
cash. However, neither AOL nor the Cisneros Group is obligated to provide any
future funding following this offering except that the Cisneros Group is
committed to provide $41 million in quarterly installments through July 2, 2001
under the terms of the stockholders' agreement. Our capital requirements depend
on numerous factors, including the rate of market acceptance of our interactive
services and our ability to maintain and expand our member and user base. We
cannot accurately predict the timing and amount of our capital requirements. If
our capital requirements vary materially from our plans, we may require further
financing sooner than anticipated, in addition to the amounts raised in this
offering and the amounts we expect to receive from the Cisneros Group. Any
additional equity financing may be dilutive to our stockholders, and any debt
financing, if available, may involve restrictions on our financing and
operating activities. If the Cisneros Group does not make its contributions as
required under the stockholders' agreement or 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 may suffer currency exchange losses if local Latin American currencies
depreciate relative to the U.S. dollar
Our reporting currency is the U.S. dollar. However, 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. 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.
To date, we have not tried to limit our exposure to exchange rate
fluctuations by using foreign currency forward exchange contracts as a vehicle
for hedging. 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. We may enter into these
hedging transactions in the future. Our business may be adversely affected as a
result of foreign currency exchange rate fluctuations if we fail to enter into
hedging transactions or if our hedging transactions are unsuccessful. In
addition, future currency exchange losses may increase if we become subject
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to exchange control regulations restricting our ability to convert local
currencies into U.S. dollars. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Inflation and Foreign Currency
Exchange Rate Losses."
Our operating results may also fluctuate due to seasonal factors
We expect that seasonality will have an effect on our business in the
future. We expect the growth in our member and user base to be highest during
our second fiscal quarter when sales of new computers and computer software are
likely to accelerate due to the holiday season. This may cause fluctuations in
our revenues and operating results and cause us to be disproportionately
dependent on second fiscal quarter results. If our expenses increase during our
other fiscal quarters, we may not generate sufficient revenues to offset these
expenses.
RISKS RELATED TO OUR MARKET STRATEGY
We face significant competition for subscription and other revenues
We compete in a rapidly changing marketplace with a wide range of other
companies in the highly competitive fields of online services, Internet access,
portals, advertising and e-commerce.
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 and Terra
Networks. Our primary local market competitors in our core target markets
include Universo Online, or UOL, in Brazil, 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 Internet access
providers in Latin America and new portals are being launched every month. In
addition, we compete for advertising revenue with traditional media, such as
newspapers, magazines, radio and television.
Recent competitive activities which may adversely affect our business
include Yahoo!'s portal launches in Brazil and Mexico and UOL's addition of an
unlimited Internet access plan in Brazil at a price significantly less than the
price we charge for our unlimited access plan. Also, because AOL and the
Cisneros Group operate in the interactive services and media industries, there
may be instances in which they are engaged in related, or even competing,
activities. We expect competition in Latin America will become more intense in
the future.
Some of our competitors and potential future competitors may have the
following advantages:
. longer operating histories;
. greater name recognition in some markets;
. larger established customer bases; and
. greater financial, technical and marketing resources, including
advantageous relationships with local and long distance telephone
services and telecommunications network providers.
Increased competition could result in:
. loss of subscription fees;
. loss of potential advertising revenues;
. loss of potential e-commerce revenues;
. loss of members of our online service or users of our portals;
. increased marketing expenses to retain and attract members; and
. loss of key employees to our competitors.
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
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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 telephone companies may
have distribution, technical and/or financial advantages regarding access to
dial-up and high-speed communications lines, including the ability to offer
free Internet access or Internet access at reduced prices. These factors could
adversely impact our business.
Past and future media coverage could adversely affect consumer acceptance of
our interactive services
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.
Although we believe that ADEC's claims are without merit and will continue to
contest them vigorously, we may not be successful in defeating their claims.
The Brazilian media has reported ADEC's claim. Past and future media coverage
of our company and our interactive services could adversely affect consumer
acceptance of our interactive services. See "Business--Legal Proceedings."
Internet access at lower prices than we charge, as well as free Internet
access, is available to consumers, which may affect our ability to generate
revenues from subscription fees
We expect to generate the majority of our total revenues from our online
service subscription fees. Moreover, our ability to generate advertising and e-
commerce revenues is dependent upon our attracting and retaining a substantial
number of online service members as well as users of our portals. Competitors
that provide free Internet access, or access at significantly lower prices than
we expect to charge, may attract price conscious consumers, including some of
our existing members. For example, UOL, the largest provider of Internet access
in Brazil, recently added an Internet access plan in Brazil that provides
unlimited access at a price that is significantly less than the price of our
unlimited access plan. In addition, two Brazilian banks, Bradesco and Unibanco,
recently began offering free limited Internet access to their online banking
customers. Banco Itau and other banks are also contemplating offering a similar
service in Brazil. These and similar actions may cause us to restructure our
pricing plans. We may lose or fail to attract price conscious members as
competitors provide free Internet access or Internet access at a reduced price.
In addition, if we lose or fail to attract members, our advertising and e-
commerce revenues could also decline. The availability of free Internet access
or Internet access at reduced prices in Latin America may adversely affect our
business.
Volatile economic, social and political conditions in Latin America may impair
our operations
Economic, social and political conditions in Latin America are volatile,
which may impair our operations. 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;
. 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.
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. Recent projections indicate
that some Latin American countries, including Brazil and Argentina, will
experience stagnant or negative growth rates in terms of their per capita gross
domestic product for 1999. Poor social, political and economic conditions may
inhibit
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use of online services and the Internet, create uncertainty regarding our
operating climate and cause advertisers to reduce or eliminate their
interactive services advertising spending, all of which may adversely impact
our business.
We may not be able to effectively penetrate our target market and future
launches may be delayed by market conditions
Our success will depend on how well our interactive services are received
and on our ability to effectively penetrate our target market of consumers who
already have computers, or who are financially able to purchase one, and who
are able to afford the cost of Internet access.
We intend to launch our interactive services in Mexico and Argentina in
2000. Thereafter, we plan to introduce our interactive services in additional
countries in Latin America. Our ability to launch our interactive services
depends on factors beyond our control, including the development and timely
availability of localized software, for which we depend on AOL, and the
availability and reliability of telecommunications network services. In
addition, the timing of these launches will depend on the market readiness of
each country. We have developed our launch schedule based on a number of
assumptions, including assumptions regarding:
. the number of personal computers owned by individuals within the markets
and the potential for future purchases;
. the accessibility, reliability and cost of telecommunications network
services;
. intensity of price competition for existing and potential Internet
users;
. regulatory developments; and
. the level of current Internet use.
If our expectations in these and other areas are not met, future launches
may be delayed and our business objectives may be compromised.
The uncertain market and increasing competition for advertising on interactive
services may reduce our advertising revenues
Currently, there are no widely accepted standards for measuring the
effectiveness of advertising on online services and the Internet, and therefore
the demand and market acceptance for this type of advertising is uncertain. If
the industry does not develop standard measurements to support and promote
online service and Internet advertising, 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.
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. If the market for
online service and Internet advertising in Latin America fails to develop or
develops more slowly than expected, our business would be adversely affected.
In addition, we believe that competition for advertising sales will become
more intense in the future. This increase could cause advertising rates to
decline, which in turn could have an adverse effect on our business.
Interactive services may fail to gain acceptance as a viable medium for e-
commerce
E-commerce in Latin America may not gain acceptance for a number of reasons,
including:
. 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 regarding consumers' personal data;
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. inconsistent quality of service;
. lack of adequate distribution and fulfillment operations for goods
purchased;
. uncertainty regarding intellectual property ownership; and
. other legal issues related to the Internet or the timely development and
commercialization of performance improvements, including high-speed
modems.
These factors could negatively impact our ability to generate e-commerce
revenues and therefore could adversely impact our business.
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. In addition,
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. Unless consumer fraud laws in Latin American countries are
modified to protect e-commerce merchants and consumers, and until secure,
integrated on-line payment processing methods are fully implemented across the
region, our ability to generate revenues from e-commerce may be limited, which
could have an adverse effect on our company.
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. If governmental authorities in Latin American countries
fail to deregulate customs duties, or if deregulation occurs slowly, our
ability to generate revenues from e-commerce will be reduced, which could have
an adverse effect on our company.
Most of our arrangements with third party content providers and e-commerce
merchants are of limited duration and are non-exclusive
We rely on third party content providers and e-commerce merchants to attract
online service members and portal users. The greater the number of members and
users of our interactive services, the more appealing we expect our services
will be to advertisers. The success of our relationships with content providers
and e-commerce merchants is therefore vital to our business. We expect most of
these content and e-commerce arrangements to be non-exclusive and short-term.
These relationships may not result in sustained business partnerships,
significant use of our interactive services, significant subscription,
advertising and e-commerce revenues or enhancement of our interactive services,
which could adversely impact our business. As competition intensifies in the
interactive services markets, it may become more difficult or expensive for us
to secure and maintain these relationships. Our failure to establish new
relationships, a loss of any existing relationships or a significant increase
in the costs associated with maintaining these relationships may have an
adverse effect on our business.
Growth may strain our operations
We will need to expand our operations in order to support the growth of our
interactive services. However, if our member base grows rapidly, our
managerial, operational and financial resources and systems may be strained
significantly. To accommodate a rapidly expanding member and user base and
manage our growth, we must continue to implement and improve these systems and
effectively hire, train and manage our employees. If we fail to manage our
growth successfully, our business could be adversely affected.
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The loss of key executives and personnel may impair the operation and growth 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. The president of
our Brazilian subsidiary recently left our company and we are currently
evaluating candidates for this position. If we are not successful in hiring a
suitable replacement in a timely manner, our ability to manage our business
effectively may be adversely affected.
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
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 damage by fire, power loss,
failures by third party service providers, unauthorized intrusions and other
events. AOL's efforts to reduce the risk of operations interruptions may not be
sufficient. Any damage to or failure of AOL's servers could adversely impact
our business. We currently have property and business interruption insurance
only for our Brazilian operations and it may not sufficiently cover our losses.
Our interactive services may be disrupted for other reasons beyond our control,
such as software defects as well as maintenance and equipment installations
that AOL performs in the ordinary course of operations. AOL's efforts to reduce
failures by providing excess equipment capacity and redundancy may not be
adequate and any outages could adversely impact our business. Computer viruses,
the occurrence of a natural disaster or other unanticipated problems affecting
AOL's servers or any other damage to or failure of these systems could result
in service interruptions. 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.
In addition, if we inadvertently transmit a computer virus through our servers,
we may be exposed to a material risk of loss or litigation and possible
liability. See "Business--Local and Long Distance Telephone Service,
Telecommunications Network Capacity and Technology."
Third party telecommunications network providers, on which we depend to
transmit our online service data, may not function reliably or be able to
accommodate our anticipated growth
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. We will be similarly dependent on these providers as we
launch our AOL-LA country services throughout Latin America. Our ability to
develop our online service business depends, in large part, on the capacity,
reliability and security of these third party networks. 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.
Currently, most of our data is transmitted between Brazil and the U.S. via
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 transmissions. If adequate quantities of fiber optic cable do
not become available for transmissions between the U.S. and Latin America, our
business may be adversely affected.
In addition, if our third party network providers are unable to accommodate
a rapid increase in use of our online services, members may encounter delays
and other difficulties in accessing and using our online
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services. If these third party network providers 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.
From time to time in the past, local and long distance networks in Latin
America have experienced capacity problems. If capacity problems occur in the
future, our members may experience delays and other difficulties accessing our
online services. We believe that some of our members may cease to use our
online services and become customers of our competitors if they experience
difficulties in accessing our services.
Further, our network capacity contracts 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. Accordingly, if the number of our
members, or their use of our online services, does not increase as we
anticipate, our network costs will not correspondingly decrease. See
"Business--Local and Long Distance Telephone Service, Telecommunications
Network Capacity and Technology."
Underdeveloped local and long distance telephone service may limit the growth
of the Internet in Latin America
Members and users of our interactive services initiate access via 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
1998, there were approximately 66 telephone lines for every 100 people in the
U.S., compared to approximately 12 in Brazil, 10 in Mexico and 20 in Argentina.
The quality, continued development and expansion of local and long distance
telephone service in Latin America by local and regional telephone service
companies will have a substantial impact on our ability to deliver our
interactive services to consumers and on the market acceptance of online
services and the Internet in Latin America. In addition, 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 further anticipated improvements to Latin American local
and long distance telephone service are not made, online services and the
Internet will not gain broad market acceptance in Latin America and our
business will be adversely affected. See "Business--Local and Long Distance
Telephone Service, Telecommunications Network Capacity and Technology."
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
Unlike in the U.S., locals calls are metered in Latin America and online
service and Internet users therefore pay for local calls that connect them to
an Internet access provider in addition to paying Internet access fees. 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, our business may be adversely affected.
We may lose members if we fail to adapt our online services to accommodate
newer and faster methods of Internet access or if we fail to keep up with
changing technologies
We expect high-speed Internet and online service access to become more
widely available in Latin America through cable, satellite broadcasting and
other technologies offered to consumers by third party telecommunications
network providers. 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. Additionally,
our members can currently access our online services only through the Windows
95 and Windows 98 operating system platforms. Our failure to effectively
accommodate other operating systems or high-speed access in a timely manner
could adversely impact our business.
20
<PAGE>
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
before , 2004 (four years from 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.
Potential Year 2000 problems may have an adverse effect on our operations and
ability to offer our interactive services without interruption
We utilize a significant number of computer software programs, operating
systems and computer equipment in our operations. We also rely on AOL's
software programs and systems for our interactive services and for some
administrative functions. These programs, systems and equipment may need to be
modified or even replaced by AOL or by us if they are unable to appropriately
interpret the calendar year 2000. For example, Spanish-language versions of our
CompuServe Classic software, used by a minority of our CompuServe Classic
members, have not been reviewed by and will not be certified as Year 2000
compliant by AOL. No patch or upgrade of these Spanish-language versions will
be available to make these versions Year 2000 compliant. However, a free
upgrade to the Year 2000 compliant English-language version, which can be
downloaded from the CompuServe Classic service, has been made available to all
members.
Third parties other than AOL have developed and currently support some of
our programs, systems and equipment, including the Internet browser featured on
our America Online Brazil service. In addition, our operations depend upon
other third parties such as content providers, e-commerce merchants and
advertisers who supply the content and services that we deliver to our members
and users. We also depend upon the continued viability of local and long
distance telephone service and third party telecommunications networks in Latin
America, including Netstream's and Embratel's networks, as well as the Internet
itself, to provide our online services to our members and enable users to
access our portal.
We have only recently begun operations and we have not conducted separate
testing of services, programs and equipment provided by third-party vendors.
These services and equipment may need to be modified if they are not Year 2000
compliant. For example, the third party Internet browser used in some versions
of our CompuServe Classic Service is not Year 2000 compliant, and a free
upgrade will be required to make the browser compliant. We have been unable to
assess the Year 2000 readiness of the local and regional telephone providers in
Brazil. In the event that any third party's programs, systems and equipment are
compromised because of the Year 2000 problem, our ability to deliver our
services and to generate revenues could be adversely affected, even if our own
and AOL's systems are fully operational.
With respect to the Internet, because no single entity or organization
manages or controls the Internet, we have no way to determine how many of the
devices or systems that contribute to the transmission of data over the
Internet may be subject to the Year 2000 risk.
We cannot predict the outcome of our Year 2000 program, whether third party
programs, systems and equipment are, or will be, Year 2000 compliant, the costs
required to address the Year 2000 issue, or whether any failure to achieve
substantial Year 2000 compliance will adversely impact our business.
RISKS RELATED TO LEGAL AND REGULATORY MATTERS
We may become subject to burdensome government regulations affecting
interactive services
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
21
<PAGE>
growth of the Internet significantly. This 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:
. libel and defamation;
. copyright, trademark and patent infringement;
. pornography;
. access to networks;
. other claims based on the nature and content of Internet materials;
. sales and other taxes;
. user privacy and data protection;
. pricing controls;
. consumer protection; and
. cross-border commerce.
Adverse changes in the legal or regulatory environments that relate to
interactive services, including the e-commerce and online service and Internet
advertising industries in Brazil, Mexico and Argentina, could adversely impact
our business.
Further, some Latin American countries, including Mexico and Argentina,
currently require Internet access providers to be licensed. While we have
applied for the required licenses in Mexico and Argentina, we cannot assure you
that these licenses will be granted in a timely manner. See "Business--
Government Regulation and Legal Uncertainties."
We may be subject to claims based on the content we provide over our network
The laws of Latin American countries relating to the liability of
interactive service providers for activities of their members and users are
currently unsettled. Claims have been made against interactive service
providers in the past for defamation, negligence, copyright or trademark
infringement, obscenity, illegal gambling, personal injury and other alleged
violations of laws or regulations relating to the posting of information online
by their members and users. We could be subject to similar claims and incur
significant costs to defend against, settle or otherwise resolve these claims.
In addition, we could be exposed to liability for the selection of listings
that may be accessible through our interactive services or through content and
materials that our members and users may post in classifieds, message boards,
chat rooms or other interactive services. It is also possible that if any
information provided through our interactive services contains errors, third
parties could make claims against us for losses incurred in reliance on the
information. We also offer e-mail services and instant messaging, which exposes
us to potential liabilities or claims resulting from:
. unsolicited e-mail or instant messages;
. lost or misdirected messages;
. illegal or fraudulent use of e-mail or instant messaging or other claims
related to the content of these messages; or
. interruptions or delays in e-mail or instant messaging services.
Investigating and defending these claims is expensive, even if they do not
result in liability.
22
<PAGE>
Unauthorized use of AOL's intellectual property by third parties may adversely
affect our business
We cannot be certain that the steps AOL has taken to protect our licensed
rights to AOL's trademarks and domain names will be adequate or that third
parties will not infringe or misappropriate our licensed rights. For instance,
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 and we rely on the protections afforded primarily by copyright
laws to protect against unauthorized reproduction of the software. We rely in
part on "click-through" licenses that are not signed by our members and,
therefore, may be unenforceable under the laws of Brazil and other
jurisdictions in which we expect to offer our online services. In addition, 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.
AOL has experienced difficulty in obtaining the rights to the domain names
www.aol.com.br in Brazil, www.aol.com.mx in Mexico, and www.aol.cl in Chile.
These domain names incorporate the AOL trademarks that have been licensed to us
by AOL. AOL is currently engaged in or is considering initiating legal
proceedings regarding 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. We may initiate similar proceedings in other Latin American countries.
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.
AOL's or our own inability to protect our licensed rights to these domain names
and any other infringement or misappropriation action could lead to public
confusion about our brand and adversely affect our business.
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. From time to time, 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 assert infringement claims
against us in the future with respect to current or future features or content
of our interactive services or that any assertion would not result in
litigation or require us to enter into royalty and other similar arrangements.
Third parties may also challenge AOL's marks from time to time and these
challenges may result in limitation or loss of our rights to use AOL's
proprietary marks. We may incur substantial expense in defending against these
third party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial liability or
materially disrupt the conduct of our business.
RISKS RELATED TO THE OFFERING
Our stock price is likely to be highly volatile
Following this offering, the trading price of our Class A common stock,
assuming that a trading market develops, may be highly volatile and may
fluctuate substantially. Failure to meet market expectations because of
quarterly fluctuations in our financial results could cause our stock price to
decline. In addition, factors that are not related to our operating performance
could cause our stock price to decline. The stock market has from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies, particularly Internet
companies. As a result, you may experience a decrease in the market value of
your Class A common stock regardless of our operating performance or prospects.
23
<PAGE>
If our stock price is volatile, we may become subject to securities
litigation, which is expensive and could result in a diversion of our
management's attention and resources. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Many
companies in our industry have been subject to this type of litigation.
We may use the net proceeds of this offering in ways with which you may not
agree
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. See "Use of Proceeds."
The market price for our Class A common stock could be adversely affected by
the large number of additional shares eligible for issuance and sale in the
future
Immediately following this offering and the concurrent distribution by the
Cisneros Group, shares of Class A common stock will be issued and
outstanding. An additional 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. Although AOL and the Cisneros Group
have agreed with the underwriters that they will not sell or otherwise dispose
of their shares for 180 days after the date of this prospectus, AOL and the
Cisneros Group have registration rights with respect to the Class A common
stock issuable to them. The sale of a substantial number of shares of Class A
common stock, 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 adversely affect the market price of our Class A
common stock. Future sales of Class A common stock by AOL, the Cisneros Group
or any other stockholder could also make it more difficult for us to sell
equity or equity-linked securities in the future at a time and price that we
deem appropriate. This could adversely affect our ability to fund our current
and future operations. In addition, AOL and the Cisneros Group may seek out one
or more additional strategic principal stockholders to join them as
stockholders of our company. As a result, we may in the future issue shares of
our capital stock to investors designated by AOL and the Cisneros Group. See
"Shares Eligible for Future Sale" and "Certain Relationships and Related
Transactions--The Stockholders' Agreement."
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
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 net
tangible book value of $ per share, assuming an initial public offering price
of $ per share. Accordingly, in the event we are liquidated, you may not
receive the full amount of your investment. See "Dilution."
Because we currently 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 foreseeable
future. In addition, our special committee must unanimously approve the payment
of any dividends before our full board of directors can approve a dividend
payment. Further, prior to 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. See "Dividend Policy."
24
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of our statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These forward-looking statements are not historical facts,
but rather are based on our current expectations, estimates and projections
about our industry, our beliefs and assumptions. These statements involve known
and unknown risks, uncertainties, and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements. We have described these risks and uncertainties in "Risk Factors"
and elsewhere in this prospectus. We caution you not to place undue reliance on
these forward-looking statements, which reflect our view only as of the date of
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, among other things, 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. In
addition, 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.
25
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of shares of Class A
common stock in this offering will be $ million. If the underwriters exercise
their over-allotment in full, we estimate that the net proceeds will be $
million. These estimates reflect the deduction of the underwriting discount and
estimated offering expenses and assume an initial public offering price of $
per share.
We currently intend to use the net proceeds of this offering for the
following purposes:
. 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.
At the present time, we have no understandings, commitments or agreements
with respect to 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.
The foregoing 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 in connection
with 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 currently 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
foreseeable future. In addition, 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, prior to 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.
26
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of September 30, 1999 on
an actual basis and as adjusted to give effect to our sale of shares of
Class A common stock in this offering at an assumed initial public offering
price of $ per share, after deducting the underwriting discount and
estimated offering expenses, and the concurrent distribution of shares of
Class A common stock by the Cisneros Group. You should read this information in
conjunction with our financial statements and the notes to those financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of
September 30, 1999
--------------------
Actual As Adjusted
------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents (1)............................. $29,862 $
======= =======
Stockholders' equity:
Preferred stock, $.01 par value; shares
authorized (2):
Series B and C cumulative redeemable convertible--
and shares authorized, respectively;
shares of Series B cumulative redeemable preferred
issued and outstanding on an actual and as adjusted
basis..................................................
shares of Series C cumulative redeemable preferred
issued and outstanding on an actual basis; shares
issued and outstanding on an as adjusted basis.........
Common stock, $.01 par value; shares
authorized (3):
Class A-- shares authorized; no shares issued or
outstanding on an actual basis; shares issued and
outstanding on an as adjusted basis.................... -- --
Class B and C-- and shares authorized,
respectively; no shares issued or outstanding on an
actual or as adjusted basis............................ -- --
Additional paid-in capital (1).......................... 35,120
Other accumulated comprehensive loss--foreign currency
translations........................................... (187)
Accumulated deficit..................................... (7,011)
------- -------
Total stockholders' equity............................ 27,922
------- -------
Total capitalization................................ $27,922 $
======= =======
</TABLE>
- --------
(1) Reflects approximately $35 million contributed by the Cisneros Group in
equity capital from our inception through September 1999. Does not include
$24 million that we received from the Cisneros Group from October 1999
through January 2000.
(2) Excludes the AOL warrant, an immediately exercisable warrant to purchase
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 to purchase a total of shares of Class A common stock
that we will grant to employees and directors as of the effective date of
this offering.
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<PAGE>
DILUTION
As of September 30, 1999, our net tangible book value was approximately
$27.9 million, or $ per share of capital stock. Net tangible book value per
share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of Class A common stock and Series
B and Series C preferred stock outstanding. Dilution is the amount by which the
initial public offering price paid by purchasers of the shares of Class A
common stock in this offering will exceed the net tangible book value per share
of our capital stock following this offering. After giving effect to our sale
of shares of Class A common stock in this offering at an assumed initial
public offering price of $ per share and the application of the estimated net
proceeds from this sale, our as adjusted net tangible book value at September
30, 1999 would have been approximately $ million, or $ per share of
capital stock. This represents an immediate increase in net tangible book value
of $ per share to our existing stockholders, AOL and the Cisneros Group, and
an immediate decrease in net tangible book value of $ per share to new
investors purchasing shares of Class A common stock in this offering. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Net tangible book value per share at September 30, 1999........... $
Increase in net tangible book value per share attributable to new
investors purchasing shares in the offering......................
---
Net tangible book value per share after the offering................
---
Dilution per share to new investors in the offering................. $
===
</TABLE>
The following table summarizes, on an as adjusted basis, as of September 30,
1999, the total number of shares of capital stock purchased from us, the total
cash consideration paid to us and the average cash price per share of Series B
and Series C preferred stock paid by AOL and the Cisneros Group, respectively,
and by new investors purchasing shares of Class A common stock, based upon an
assumed initial public offering price of $ per share before deducting the
underwriting discount and estimated offering expenses:
<TABLE>
<CAPTION>
Total
Shares Purchased Cash Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
AOL .................... % % $
The Cisneros Group .....
Investors in this
offering...............
-------- -------- -------- --------- ---
Total................. 100% 100% $
======== ======== ======== ========= ===
</TABLE>
As of the effective date of this offering, we will issue an immediately
exercisable warrant to AOL to purchase any combination of 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 will also grant options to employees
and directors to purchase a total of shares of Class A common stock. 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.
28
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data presented below in conjunction
with our financial statements and the notes to those financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. Except for pro forma share
data, the statement of operations and balance sheet data are derived from our
audited 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
December 15, 1998 Three Months
(date of inception) Ended
to September 30,
June 30, 1999 1999
------------------- -------------
(In thousands, except share data)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Subscriptions............................. $ 1,644 $ 1,129
Advertising and e-commerce................ -- 78
------- -------
Total revenues.......................... 1,644 1,207
------- -------
Costs and expenses:
Cost of revenues.......................... 1,091 632
Sales and marketing....................... 3,179 44
Product development....................... 312 252
General and administrative................ 1,979 2,488
------- -------
Total costs and expenses................ 6,561 3,416
------- -------
Loss from operations........................ (4,917) (2,209)
Other income, net........................... 9 340
------- -------
Loss before provision for income taxes...... (4,908) (1,869)
Provision for income taxes.................. (131) (103)
------- -------
Net loss.................................... $(5,039) $(1,972)
======= =======
Unaudited pro forma net loss per share (1).. $ $
======= =======
Unaudited pro forma weighted average shares
outstanding (1)............................
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of As of
June 30, September 30,
1999 1999
-------- -------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................ $17,716 $29,862
Working capital.......................................... 16,989 26,568
Total assets............................................. 20,300 34,301
Total stockholders' equity............................... 16,999 27,922
</TABLE>
- --------
(1) Pro forma net loss per share assumes, for both periods, the conversion of
the Series B and Series C preferred stock into Class A common stock, but
excludes the issuance of shares of Class A common stock in this
offering, as well as those shares issuable under our stock option plan and
upon exercise of the AOL warrant.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of the financial
condition and results of operations of America Online Latin America in
conjunction with "Selected Financial Data" and our financial statements and
related notes appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including, but not limited to, those described in "Risk Factors" and elsewhere
in this prospectus.
Overview
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 more than 20 million users in 15 countries and
seven languages.
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 network of Internet portals will offer
content, community and e-commerce opportunities to all Internet users. Our
interactive services will be developed on a country-by-country and regional
basis and tailored to local interests.
We currently 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. In addition, we have the exclusive
right to offer in Latin America any AOL-branded wireless-based online services
developed by AOL for commercial launch by , 2004 (four years from the
effective date of the registration statement for this offering). We also have
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 50 million users,
including approximately 5 million users in Latin America, to find and
communicate with each other in real-time. As local versions of the ICQ service
are developed, we will engage in other marketing and cross-promotion activities
with AOL.
Currently, our 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 AOL and the Cisneros Group. 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 which
AOL and the Cisneros Group will exchange their interests in the entities that
own AOL Latin America, S.L. and its affiliates for and shares of our
Series B preferred stock and Series C preferred stock, respectively. AOL will
also receive the AOL warrant.
We commenced operations in December 1998. As a result, we have only a
limited operating history for you to evaluate our business. We launched our
first AOL-LA country service and first AOL-LA country Internet portal in Brazil
in November 1999. We acquired AOL's Latin American CompuServe Classic
subscribers in December 1998 and as of December 31, 1999, we had approximately
7,500 CompuServe Classic members, the majority of whom were located in Mexico.
We incurred net losses of approximately $7.0 million from inception through
September 30, 1999. 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.
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<PAGE>
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. Time Warner shareholders will receive 1.5 shares of AOL
Time Warner for each share of Time Warner stock they own. AOL shareholders will
receive one share of AOL Time Warner stock for each share of AOL stock they
own. The merger is subject to customary closing conditions, including receipt
of required regulatory approvals and the approval of AOL and Time Warner
stockholders.
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 period from our inception to June 30, 1999, and for the
three months ended September 30, 1999.
<TABLE>
<CAPTION>
December 15, 1998
(date of
inception) to Three Months Ended
June 30, 1999 September 30, 1999
----------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Subscriptions........................... $ 1,644 100.0% $ 1,129 93.5%
Advertising and e-commerce.............. -- -- 78 6.5
-------- -------- --------- ---------
Total revenues........................ $1,644 100.0% $ 1,207 100.0%
======== ======== ========= =========
</TABLE>
Subscription revenues. For the periods presented, subscription revenues were
generated from members paying fees to subscribe to the CompuServe Classic
service. Subscription revenues will be generated in the future primarily from
members paying fees to subscribe to the AOL-LA country services and to a lesser
extent from the CompuServe Classic service.
AOL-LA subscription revenues. We anticipate that a substantial majority
of our total revenues will be derived from members subscribing to our AOL-LA
country services. Members subscribing to an AOL-LA country service will be able
to select from one of several 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. AOL-LA subscription
revenues will therefore include fixed monthly fees and fees paid by members for
extra hours spent online.
CompuServe Classic subscription revenues. Through September 30, 1999,
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. Since we do not
plan to add new CompuServe Classic members, we anticipate that our subscription
revenues from the CompuServe Classic service will continue to decline. We have
the right to market the CompuServe brand in Latin America. Although we have no
current plans to market CompuServe-branded products actively, we intend to
service our existing base of subscribers and will actively market this brand if
demand for a more value-oriented product develops in Latin America.
We recognize subscription revenues over the period that we provide the
service. Subscription revenues for the three months ended September 30, 1999
were approximately $1.1 million and approximately $1.6 million for the period
from our inception through June 30, 1999. We derived all of these revenues from
our CompuServe Classic service. 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. Accordingly, 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 three
months ended September 30, 1999.
31
<PAGE>
We anticipate that the majority of our members will pay their subscription
fees using methods of payment, other than credit cards, that are commonly used
in Latin America. For instance, in Brazil, our customers will use the boleto
form of payment, under which banks, designated by us, will act as conduits for
collecting accounts receivable. We will send each member a bill and the member
will pay the bill at his or her local bank. These local banks will then remit
the payments to our designated banks. This is a common form of payment in
Brazil, but is more costly for us than credit cards.
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 will be 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.
For advertising arrangements that require us to display a specified number
of advertisements, we intend to recognize advertising revenues ratably in the
period in which the advertisements are displayed, provided that no significant
obligations remain and collection of the resulting receivable is probable. To
the extent that we do not expect to meet any minimum guaranteed advertisement
display levels, we defer recognition of the corresponding revenues until
guaranteed levels are achieved. Payments received from advertisers prior to our
displaying their advertisements on our interactive services are recorded as
deferred revenues. We recognize revenues from sponsorship or co-sponsorship
arrangements ratably over the contract term, provided that we have no
significant obligations remaining.
In addition to advertising revenues, we expect to derive revenues from e-
commerce transactions conducted through our interactive services in the form of
either a flat payment or 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 derived from e-commerce
transactions when we are notified of sales that are attributable to our
interactive services.
Advertising revenues for the three months ended September 30, 1999 were
approximately $78,000. We did not generate any advertising revenues during the
period from our inception 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.
Costs and expenses. The following table presents the components of our costs
and expenses for the period from our inception to June 30, 1999, and for the
three months ended September 30, 1999.
<TABLE>
<CAPTION>
For the Period
from
December 15, 1998
(date
of inception) Three Months Ended
to June 30, 1999 September 30, 1999
----------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Costs and expenses:
Cost of revenues........................ $ 1,091 16.6% $ 632 18.5%
Sales and marketing..................... 3,179 48.5 44 1.3
Product development..................... 312 4.8 252 7.4
General and administrative.............. 1,979 30.1 2,488 72.8
-------- -------- --------- ---------
Total costs and expenses.............. $ 6,561 100.0% $ 3,416 100.0%
======== ======== ========= =========
</TABLE>
32
<PAGE>
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 associated with customer support and product
and content development;
. fees paid to selected content providers; and
. amortization of capitalized product development costs.
For the three months ended September 30, 1999, cost of revenues was
approximately $632,000 and consisted primarily of costs associated with
servicing our CompuServe Classic subscribers and the prospective launch of our
America Online Brazil service and portal. These costs 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 overhead. During
this period, the cost of services provided by AOL was approximately $451,000.
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 members and users.
For the period from our inception to June 30, 1999, cost of revenues was
approximately $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 associated with our
sales and marketing efforts and other general marketing costs. We anticipate
that these costs will include the distribution of CDs containing the software
that enables consumers to join and use our online services. We also expect to
incur costs in connection with the production of our television commercials as
well as newspaper, magazine and outdoor advertising.
For the three months ended September 30, 1999, sales and marketing expenses
were approximately $44,000, and reflected the beginning of our sales and
marketing efforts to support the launch of our America Online Brazil service
and portal in November 1999. For the period from our inception to June 30,
1999, sales and marketing expenses were approximately $3.2 million and
primarily represent our net cost of acquiring the CompuServe Classic
subscribers from AOL. All costs related to member acquisition are expensed as
incurred. See note 3 to our financial statements.
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 costs consist of charges from
AOL for personnel and related costs associated with the localization of our
interactive services and any developments we request AOL to provide. We expense
as incurred product development costs that we incur before any product or
service developed by AOL has reached technological feasibility. 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 three months ended September 30,
1999 were approximately $252,000 and approximately $312,000 for the period from
our inception through June 30, 1999. These product development costs represent
research and development costs payable to AOL primarily for localization of our
software and requested developments. In the three months ended September 30,
1999, a significant portion of these costs was due to an increase in technical
support from AOL in anticipation of the launch of our interactive services in
Brazil.
General and administrative. For the three months ended September 30, 1999,
our general and administrative costs were approximately $2.5 million. Our
general and administrative expenses increased during
33
<PAGE>
this period as we hired additional management and administrative personnel to
support the anticipated launch of our interactive services in Brazil in
November 1999. Both AOL and the Cisneros Group provided us with management and
administrative services to support the launch. As a result, during this period
we incurred support fees of approximately $841,000 and $50,000 for support
services provided by AOL and the Cisneros Group, respectively. 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 our anticipated launch of our interactive services in
Mexico and Argentina in 2000.
From our inception through June 30, 1999, our general and administrative
costs were approximately $2.0 million. Our expenses during this period were
primarily attributable to personnel costs, general office expenses and support
fees of approximately $1.0 million and $291,000 payable to AOL and the Cisneros
Group, respectively.
Income taxes. The provision for income taxes for the three months ended
September 30, 1999 and from our inception to June 30, 1999 was approximately
$103,000 and $131,000, respectively. See note 9 to our financial statements.
Liquidity and Capital Resources
To date, we have financed our operations primarily through capital
contributed by the Cisneros Group. From inception through September 30, 1999,
we received approximately $35 million in cash from the Cisneros Group.
In addition, the Cisneros Group paid us $24 million from October 1999 through
January 2000 and is obligated to pay us an additional $41 million in quarterly
installments through July 2, 2001. See "Certain Relationships and Related
Transactions--The Stockholders' Agreement--The Cisneros Group Funding."
We have used our capital to finance ongoing operations and to fund marketing
and the development of our interactive services. We plan to continue to invest
in member acquisition and retention and brand marketing to expand our member
and user base. 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
software localization. Additionally, we may use a portion of our cash for the
acquisition and subsequent funding of technologies, products or businesses
complementary to our business. However, a significant acquisition may require
additional financing. We cannot assure you that we will be able to obtain the
required financing on favorable terms. We anticipate that cash on hand,
together with cash provided by this offering and expected to be provided by the
Cisneros Group, will be sufficient to fund our operations for at least the next
12 months.
Current assets were approximately $32.9 million at September 30, 1999 and
$20.3 million at June 30, 1999, while current liabilities were approximately
$6.4 million and $3.3 million at those same dates. At September 30, 1999, we
had working capital of approximately $26.6 million, compared to working capital
of approximately $17.0 million at June 30, 1999. The increase in current assets
was primarily attributable to an increase in cash and cash equivalents
resulting from cash contributed by the Cisneros Group. Current assets also
include a credit of approximately $800,000 on future services provided by AOL
under the services agreement. This credit, reflected as a receivable from
affiliate in the consolidated balance sheets, represents an adjustment of the
purchase price for acquiring the CompuServe Classic subscribers as a result of
the decline in the number of subscribers between December 1998 and December
1999. The increase in current liabilities was due to increases in amounts
payable to our affiliates, primarily related to an increase in accrued
telecommunications costs, as well as an increase in support services. At
September 30, 1999, our material operating commitments were approximately $24.9
million, which represents our minimum obligations under third party
telecommunications network contracts through the end of fiscal 2003 and
obligations under leases for office space.
Year 2000 Compliance
We utilize a significant number of computer software programs, operating
systems and computer equipment in our operations. We also rely on AOL's
software programs and systems for interactive services and
34
<PAGE>
for administrative functions such as member billing. These programs, systems
and equipment may need to be modified or even replaced by us if they are unable
to appropriately interpret the calendar year 2000.
AOL has stated that the current version and future versions of the online
service software that we use for our America Online Brazil service is Year 2000
compliant. The third-party vendor of the Internet browser featured in our
America Online Brazil service has stated that this browser is Year 2000
compliant.
In addition, third parties have developed and currently support some of our
programs, systems and equipment, and we depend on third party content
providers, e-commerce merchants and advertisers. Our operations also depend on
the continued viability of third party telecommunications networks in Latin
America and the Internet itself to deliver our interactive services to our
members and users. As part of the process of negotiating contracts for and
obtaining the services of these third-party vendors, we obtained
representations regarding Year 2000 compliance and reviewed publicly available
Year 2000 readiness statements and reports. Because we only recently began
operations, we have not conducted separate testing of services, programs and
equipment provided by third party vendors.
Almost all of the CompuServe Classic members in Latin America use English-
language versions of the CompuServe software which AOL has stated is Year 2000
compliant. However, some of these versions feature a third-party Internet
browser that may not be Year 2000 compliant. We have provided information
online on the Year 2000 status of the English-language versions of our
CompuServe Classic service. A small portion of the CompuServe Classic members
in Latin America use Spanish-language versions which have not been tested by
AOL and will not be certified as Year 2000 compliant by AOL. No patch or
upgrade of these Spanish-language versions will be available to make these
versions Year 2000 compliant. However, a free upgrade to the Year 2000
compliant English-language version, which can be downloaded from the CompuServe
Classic service, has been made available to all members.
As of November 30, 1999, we have not incurred any costs directly
attributable to addressing Year 2000 compliance issues because we have sought
to address these issues as part of the process of negotiating contracts and
establishing our operations and we have relied on AOL's efforts related to Year
2000 compliance. We also have not estimated the costs associated with
ascertaining the Year 2000 compliance of third party systems and component
software or in taking any necessary corrective action that may be required to
address any problems related to these systems and software.
We are working with AOL and have developed a contingency plan for business
interruptions that may arise as a result of the Year 2000 problem. The
contingency plan identifies the functions critical to our operations and
recovery strategies. The contingency plan also identifies the core team for
managing the recovery process, if required.
In the event that our, AOL's or any third party's programs, systems and
equipment are compromised because of the Year 2000 problem, our ability to
deliver our interactive services and to generate revenues could be adversely
affected. If third parties cannot timely provide us with content, products,
services or systems that meet Year 2000 requirements, the content on and access
to our interactive services could be adversely affected. With respect to the
Internet, because no single entity or organization manages or controls the
Internet, we have no way to determine how many of the devices or systems that
contribute to the efficient transmission of data over the Internet may be
subject to the Year 2000 risk. The worst case scenario related to Year 2000
issues would involve a complete shutdown of the systems on which we rely and
would prevent us from delivering our interactive services to our members or
users of our portal and could result in the loss of our ability to generate
revenues until normal operations resume. Our failure to achieve Year 2000
compliance or the failure of third parties to provide network or
telecommunications services could result in our members and users being unable
to access our online services and portals. This, in turn, may result in loss of
subscription, advertising and e-commerce revenues, additional remedial costs,
and damage to our reputation.
We cannot predict the outcome of our Year 2000 program, whether third party
programs, systems and equipment are, or will be, Year 2000 compliant, the costs
required to address the Year 2000 issue, or whether any failure to achieve
substantial Year 2000 compliance will adversely impact our business.
35
<PAGE>
Inflation and Foreign Currency Exchange Rate Losses
To date, our results of operations have not been impacted by material
inflation in the U.S. or in the countries that comprise Latin America.
Our reporting currency is the U.S. dollar. However, most of our revenues
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 from our services will
decline in value if the local currencies in which we are paid depreciate
relative to the U.S. dollar. Due to our constantly changing currency exposure
and the potential substantial volatility of currency exchange rates, we cannot
predict the effect of exchange rate fluctuations on our business. However, we
believe that because we will have substantial expenses as well as revenues in
each of our principal currencies, our exposure to currency fluctuations will be
reduced.
To date, we have not tried to limit our exposure to exchange rate
fluctuations by using foreign currency forward exchange contracts as a vehicle
for hedging. 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. We may enter into hedging
transactions in the future. Our business may be adversely affected as a result
of foreign currency exchange rate fluctuations if we fail to enter into hedging
transactions or if our hedging transactions are unsuccessful. In addition,
future currency exchange losses may be increased if we become subject to
exchange control regulations restricting our ability to convert local
currencies into U.S. dollars.
36
<PAGE>
BUSINESS
Overview
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 more than 20 million users in 15 countries and
seven languages. We believe that our relationships with our founders and
principal stockholders, America Online and the Cisneros Group, give us
significant competitive advantages. 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 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 network of Internet portals will offer content, community
and e-commerce opportunities to all Internet users.
We currently 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. In addition, we have the exclusive
right to offer in Latin America any AOL-branded wireless-based online services
developed by AOL for commercial launch before , 2004 (four years from the
effective date of the registration statement for this offering). We also have
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 50 million users,
including approximately 5 million users in Latin America, to find and
communicate with each other in real-time. As local versions of the ICQ service
are developed, we will engage in other marketing and cross-promotion activities
with AOL.
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 in
order 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 tailored to local interests and a variety
of e-commerce opportunities. In addition, our AOL-LA country services will
seamlessly integrate the Internet, enabling members to access and explore the
Internet without leaving the service. 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 (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 chat. Our portals will feature
the AOL Netfind tool, which will provide users with an easy and efficient way
to
37
<PAGE>
search and navigate the wealth of content and e-commerce opportunities on the
Internet. In addition, we will draw on local cultures and interests to
aggregate and organize content tailored to our local communities.
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 December 31, 1999, our
network provided for access to our America Online Brazil service in nine cities
in Brazil. In 2000, 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. Thereafter, we intend
to introduce our interactive services in additional countries in Latin America.
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, 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..... 5.7 24.3 34% 3.2 17.7 41%
Brazil ................. 2.7 9.0 27 1.4 6.4 35
Mexico.................. 0.9 5.5 43 0.6 4.5 48
Argentina .............. 0.4 2.9 49 0.2 2.1 55
</TABLE>
- --------
Source: International Data Corporation or IDC, 1999.
Numerous factors are contributing to the increased use of the Internet in
Latin American markets such as Brazil, Mexico and Argentina. 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.
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<PAGE>
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 captures valuable data about consumer buying
patterns and preferences. Online merchants are able to operate with reduced
infrastructure and overhead, while providing consumers with a convenient method
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>
Internet Advertising Spending
E-commerce Spending (1) (2)
---------------------------- --------------------------------------
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> <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>
- --------
Source: (1) IDC, 1999.
(2) Forrester Research, Inc.
Our Competitive Advantages
We believe that our America Online-branded interactive services, our
association with our founders 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.
. 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 know-how and contain proven tools and
features that we believe differentiate our interactive services from
other services. In addition, 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, including the next version of the online
service software, AOL 5.0, which we plan to launch in Brazil in 2000. 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 20 million
members. 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. In addition, AOL's
infrastructure will 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.
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<PAGE>
. 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 over 20
million members.
. 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 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 agreed to contribute cash to us and has made various
non-monetary commitments.
. Capital contribution. The Cisneros Group has agreed to contribute an
aggregate amount of approximately $100 million to AOL-LA, the balance of
which, $41 million, will be contributed in quarterly installments
through July 2, 2001.
. 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 have not entered
into agreements with any of these companies at this time. While 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, we have no assurance that their efforts will be successful. As a
result, we may not receive access at favorable rates or at all.
. Venevision is 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. In addition, the Cisneros Group has agreed
that Venevision will make commercially reasonable best efforts to
arrange for its exclusive celebrities to take part periodically in AOL-
LA's online chat 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 movies and events on demand
(pay-per-view), while the remaining 111 channels offer continuous
programming. In addition, GLA offers 66 channels of CD-quality music.
Members of the Cisneros Group have 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,
Guatemala, 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
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electronic programming grid. Moreover, in Brazil, we have already
distributed approximately 74,000 CDs through GLA distributors to
DirecTV's Brazilian subscribers.
. Cisneros Television Group, or CTG, is one of the leading pay-TV
programming channel groups in Latin America, including channels such as
Much Music, Locomotion, AEI Latin America, Clase HTV, Imagen Satelital
and Chilevision. 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 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 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.
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 our core markets, 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;
. 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 near term;
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. To optimize the use of our management and business
development teams, 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 Internet
Internet Number of E-commerce Advertising
Population Users Internet Accessing Spending Spending
(1998) (1) (2003) (2) Devices (2003) (2) (2003) (2) (2003) (3)
---------- ---------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Brazil..... 33% 37% 36% 34% 54%
Mexico..... 19 23 25 23 25
Argentina.. 7 12 12 15 4
--- ---- ---- ---- ----
Total.... 59% 72% 73% 72% 83%
=== ==== ==== ==== ====
</TABLE>
- --------
Source: (1) International Telecommunications Union.
(2) IDC, 1999.
(3) Forrester Research.
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Accordingly, we launched our interactive services in Brazil in November
1999. Our second phase, beginning in 2000, will focus on the launch of our
interactive services 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.
Aggressively build our member and user base.
. We will make it convenient and efficient for consumers to try our online
services. In Brazil, we are distributing approximately 20 million CDs
containing the America Online Brazil service software through various
marketing channels. 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 will 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 will 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 IBM PCs and 3Com modems and have
entered into agreements with companies such as Banco Itau, Galaxy Brasil
Ltda., 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 as
consumer demand, technology, commercial viability and our license agreement
with AOL permit. In addition to our exclusive right to offer AOL-branded PC-
based online services in Latin America, AOL has granted us the exclusive right
to offer in Latin America AOL-branded TV-based online services if AOL develops
these services. In addition, we have the exclusive right to offer in Latin
America any AOL-branded wireless-based online services developed by AOL for
commercial launch before , 2004 (four years from the effective date of the
registration statement for this offering). 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.
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Our Services
Our family of 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 Latin American regional
Internet portal. Our network of Internet portals will offer content, community
and e-commerce opportunities to all Internet users. These interactive services
will be developed on a country-by-country and regional basis. We believe that
our AOL-LA country services will appeal to consumers in Latin America, while
our AOL-LA country Internet portals and Latin American regional Internet portal
will appeal to a wider audience, including Spanish and Portuguese speaking
people worldwide. However, our license agreement and our restated certificate
of incorporation do not permit us to market our interactive services outside of
Latin America.
We also have the right in Latin America to cross promote AOL's ICQ service, a
leading communications portal, that enables its worldwide community of
approximately 50 million users, including approximately 5 million in Latin
America, to find and communicate with each other in real-time. Additionally, we
have the right to market the CompuServe brand in Latin America. Although we
have no current plans to market CompuServe-branded products actively, we intend
to service our existing base of subscribers and will actively market this brand
if demand for a more value-oriented product develops in Latin America.
The AOL-LA Service.
We will tailor the AOL-LA country services to the language, cultures and
interests of each of our local markets. The AOL-LA country services will
provide subscribing members with easy and reliable access to local, regional
and global online communities, seamless access to the Internet, localized
versions of AOL's interactive products, in-depth and well-organized content of
local interest and a broad array of e-commerce opportunities.
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. 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 via 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 (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 via
AIM, the message pops up on the receiver's screen.
Online Community Center: Serves as a country-specific, regional or global
"meeting place" for the AOL-LA member community. 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 (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."
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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. Content on each localized AOL-LA country service will be
organized into channels, allowing members to navigate the service easily to
find areas of interest. Each online service will feature content obtained from
leading content providers, proprietary "homegrown" 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 chat room discussions. 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, live chats, 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. "Homegrown" news content 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.
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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 currently offer three service plans priced in the Brazilian currency, the
Real:
. unlimited access for a fixed monthly fee of R$35.00;
. 10 hours of access for a monthly fee of R$14.95, and additional time
online billed at R$1.95 per hour; and
. 5 hours of access for a monthly fee of R$9.95, and additional time
online billed at R$2.95 per hour.
Free Trial. We intend to make our AOL-LA country services, including
Internet access, available to new members on a free trial basis for a limited
period of time. In Brazil, we currently offer our new members 250 hours of free
service during their first 30 days of membership. During this trial period,
consumers can explore our service without discontinuing their current Internet
access service, if any, and without incurring any fees or other hidden costs.
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 will also provide Internet users with
a simple and efficient way to search the Internet and a forum for
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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.
Regional Portal. We plan to launch a Latin American regional Internet portal
in 2000. 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. 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 currently have promotional portals in Mexico and Argentina.
We plan to launch our Mexican and Argentine portals in 2000. 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. In addition,
each portal will 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 leading communications software and an associated portal. The
ICQ service enables its worldwide community of approximately 50 million users,
including approximately 5 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; exchange files or voice messages; conduct Internet searches;
chat 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.
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.
Offline Customer Service. We have established a local call center in Brazil
and plan to establish local call centers in Mexico and Argentina in 2000. 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
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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. Currently, our call center in Brazil is staffed
with 176 Portuguese-speaking customer representatives, comprised of both
employees and independent contractors.
Online Help. In addition to our call centers, our AOL-LA country services
will provide extensive help features to assist new users coming online for the
first time. In addition, 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
"homegrown" 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 chat room 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.
In addition, our agreements with our content providers may 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 two content
providers, Hollywood.com and LatinStocks.com. We prominently display our anchor
tenants' content in areas of our interactive services that 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 35 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.
Advertising and e-commerce
In addition to revenues from member subscriptions, we will seek to generate
revenues from advertising and e-commerce on our online services and portals. We
intend to grow our member and user base aggressively, which will afford
advertisers and e-commerce merchants an attractive audience to whom they can
advertise and sell their products. In addition, we believe that advertisers and
e-commerce merchants will benefit from traffic generated by members and users
of AOL and its international affiliates exploring 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.
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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. In addition, we may enter into
barter arrangements, including co-marketing and cross-promotion agreements. We
may also 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 Sony Music, Banco Itau, Galaxy Brasil Ltda., Citibank,
Buyonet and Banco Real.
E-commerce. The interactive nature of our services permits e-commerce
merchants to capture valuable data about consumer buying patterns and
preferences. In addition, 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 front-end "stores" on 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 currently have arrangements with
approximately 25 e-commerce merchants, including Xerox, 3Com and Sony Music.
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 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 are distributing approximately 20 million CDs
containing our America Online Brazil service software through a variety of
channels including direct mail, magazines and newspapers, shopping malls,
schools and other promotions. We have also 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. 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.
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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 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 alliances that will enable us to market our
interactive services to a significant number of existing and potential Internet
users. 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 our
America Online Brazil service software with IBM PCs and 3Com modems.
In addition, we intend to utilize other innovative marketing strategies. We
have entered into a cross-promotion agreement with Banco Itau, under which they
will market our America Online Brazil service to their customers, particularly
those who bank online. 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 via
local and long distance telephone lines. These lines are owned and operated by
local and regional telephone service companies. Accordingly, 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. As a result,
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, thereby 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, as deregulation advances the telephone service industry toward
a free market model, local and long distance telephone charges are expected to
decline as a result of increased competition. 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. See "Risk Factors--
Risks Related to the Internet and Technology Infrastructure."
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.
We will contract with third parties for the necessary telecommunications
network capacity, including a sufficient number of modems, to provide our
online services. In Brazil, we have a high capacity lease with Netstream, an
affiliate of AT&T, and Embratel, an affiliate of MCI WorldCom, to provide the
modems through
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which our members will 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. Our
network leases with Netstream and Embratel will provide access to our America
Online Brazil service in 25 cities in Brazil, which account for approximately
19% of the Brazilian population, and afford us what we believe to be excess
network capacity for the near term. As of December 31, 1999, our network
provided access to our America Online Brazil service in nine cities in Brazil,
and we intend to expand this network in 2000. 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 intend to develop 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. However, most of our data is currently transmitted between Brazil and
the U.S. by satellite because adequate quantities of fiber optic cable are not
yet available for these transmissions. We anticipate that additional fiber
optic cable will become available during 2000 to handle data transmissions
between the U.S. and Latin America. We have arranged for all data currently
transmitted between Brazil and the U.S. via satellite to be transmitted via
fiber optic cable when it becomes available, and we believe this change will
improve our network performance and the response time of our America Online
Brazil service.
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 or
other difficulties in accessing our online services. Our contracts with
Netstream and Embratel commit us to purchase a minimum amount of network
capacity and we may enter into similar network contracts as we expand into
other countries in Latin America.
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. Going forward, we intend to make our online services
available on new platforms and devices as consumer demand, technology,
commercial viability and our license agreement with AOL permit. We currently
offer AOL 4.0 to subscribers of our America Online Brazil service. AOL 5.0, the
latest version of the AOL online software available in the U.S., will be
introduced in 2000. AOL 5.0 will enable members to connect to our AOL-LA
country services through high-speed technologies as they are introduced by
local telecommunications network providers, including digital subscriber line,
cable and satellite. High speed access offers significantly faster connections
and allows for enhanced features, including the delivery of voice and full-
motion video games, music and online catalogue shopping. See "Risk Factors--
Risks Related to the Internet and Technology Infrastructure."
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
providers, 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
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Cisneros Group owns a minority interest, StarMedia and Terra Networks. 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 competitive factors in the interactive services
industries include, with respect to competition for members, service features
and performance, ease of use, marketing and distribution channels, brand
recognition, reliability and price. With respect to generating advertising and
e-commerce revenues, the principal competitive factors 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. See "Risk Factors--Risks Related to Our
Market Strategy."
The AOL License Agreement, Intellectual Property and Proprietary Rights
Our license agreement with AOL presently grants us a royalty-free, exclusive
license to offer in Latin America AOL-branded PC-based online services. We also
have the exclusive right to offer AOL-branded TV-based online services in Latin
America if AOL develops these services. In addition, we have the exclusive
right to offer in Latin America any AOL-branded wireless-based online services
developed by AOL for commercial launch before , 2004 (four years from the
effective date of the registration statement for this offering). We also have a
non-exclusive license to offer a localized network of AOL-branded portals in
Latin America. However, we have 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.
In addition, we 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.
With respect to AOL-branded PC-based online services, our exclusive rights
will become non-exclusive 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. With respect to AOL-branded TV- and wireless-based
online services, our exclusive rights will become non-exclusive upon the later
of , 2005 (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. In some
instances, the 20% thresholds described above will be lowered if an additional
strategic stockholder is admitted as a stockholder of our company, we issue
more shares of our capital stock or if AOL exercises its warrant. Our rights
under the license may be terminated only if we materially breach its terms. See
"Risk Factors--Risks Related to Control by AOL and the Cisneros Group."
We have the same rights and are subject to the same restrictions with
respect to CompuServe-branded services. We only have the right to offer AOL-
and CompuServe-branded interactive services. We also have a non-exclusive right
in Latin America to market and cross 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.
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
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domain names www.aol.com.br in Brazil, www.aol.com.mx in Mexico, 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.
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 and we rely on the protections
afforded primarily by copyright laws to protect against the unauthorized
reproduction of the software. We rely in part on "click-through" licenses that
are not signed by our members and, therefore, may be unenforceable under the
laws of Brazil and other jurisdictions in which we expect to offer our online
services. In addition, 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.
In addition, 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. From time to
time, 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. No litigation is pending in
this area that would have a material adverse effect on our ability to develop,
market and sell or operate our services. We cannot assure you that third
parties will not assert infringement claims against us in the future with
respect to current or future features or content of our services or that any
assertion would not result in litigation or require us to enter into royalty or
other similar arrangements. Third parties may also challenge AOL's marks from
time to time and these challenges may result in limitation or loss of our
licensed rights to AOL's proprietary marks.
Government Regulation and Legal Uncertainties
To date, government regulations have not materially restricted 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 currently
considering a law governing e-commerce that will, among other things, 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. We filed for registration in
July 1999 and are currently in the process of obtaining approval.
In Argentina, Internet access providers must hold a correspondent license
from the Argentine telecommunications authority. We are preparing the
documentation and information required to apply for this license and expect to
receive it prior to the launch of our services in Argentina. The Argentine
National
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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. In addition, the Argentine Constitution protects an
individual's right to know what information about him or her is contained in
any public registry or database and grants the right to demand that any false
or discriminatory information be changed, removed, kept confidential or
updated.
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 the interactive services medium.
We are unable, at this time, to predict whether any of these proposals will be
adopted. See "Risk Factors--Risks Related to Legal and Regulatory Matters."
Employees
As of December 31, 1999, we had 87 full-time employees, of whom 51 were
located in Brazil, 13 in Florida, 11 in Mexico and 12 in Argentina. Of our
full-time employees, 12 worked in sales and marketing, 50 in editorial, 14 in
finance and administration, 4 in technology and services and 7 in our call
center. We consider our relations with our employees to be good. We also have
170 independent contractors working in our Brazilian call center.
Facilities
Our principal executive office is located in approximately 9,000 square feet
of office space in Fort Lauderdale, Florida, under a lease that expires in
2004. Our Brazilian headquarters and call center is located in Santo Andre in
approximately 11,700 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. As we expand into other countries in Latin America, we anticipate
establishing sales offices and call centers regionally and locally, including
offices in Mexico City and Buenos Aires prior to the projected launch of our
interactive services in Mexico and Argentina in 2000.
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 million (or $5.4 million) in damages on behalf of consumers who
have allegedly complained about the installation of our America Online Brazil
software on their PCs. Among other things, 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. We believe
that ADEC's claims are without merit and will continue to contest them
vigorously. See "Risk Factors--Risks Related to Our Market Strategy--Past and
Future Media Coverage Could Adversely Affect Consumer Acceptance of Our
Interactive Services."
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MANAGEMENT
Executive Officers and Directors
After completion of this offering, the individuals listed below will be our
executive officers or members of our board of directors. Our board of directors
will have 13 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. The remaining three directors will initially be
appointed by the board promptly following the offering. Thereafter, they will
be elected by the holders of all shares of our outstanding capital stock.
Because AOL and the Cisneros Group will together control % of the voting power
of our capital stock following this offering and the concurrent distribution by
the Cisneros Group, they will have the power to elect the remaining three
directors in subsequent elections.
The identities of the three additional directors to be appointed are not
currently known.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Charles M. Herington.... 40 President and Chief Executive Officer
Javier Aguirre.......... 41 Chief Financial Officer
Travis Good............. 39 Vice President, Technology and Operations
Guy Garcia.............. 44 Vice President, Content Strategy
John D. Gardiner........ 34 Vice President, Business Development and General Counsel
Eduardo Hauser.......... 30 Vice President, Corporate Development
Steven I. Bandel........ 46 Director
Gustavo A. Cisneros..... 54 Director
Ricardo J. Cisneros..... 52 Director
Miles R. Gilburne....... 48 Director
J. Michael Kelly........ 43 Director
Michael Lynton.......... 40 Director
Robert S. O'Hara, Jr. .. 60 Director
Cristina Pieretti....... 48 Director
Robert W. Pittman....... 46 Director
Gerald Sokol, Jr. ...... 37 Director
</TABLE>
- --------
(1) Member of our Audit Committee
(2) Member of our Compensation Committee
Charles M. Herington. Mr. Herington has been our President and Chief
Executive Officer since February 1999. Prior to joining our company, 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. Prior to 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.
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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.
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 & 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.
John D. Gardiner. Mr. Gardiner has served as our Vice President of Business
Development and General Counsel since March 1999. 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.
Eduardo Hauser. Mr. Hauser is our Vice President of Corporate Development, a
position he has held since March 1999. Prior to joining our company, Mr. Hauser
was employed from September 1988 to March 1999 by 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 November 1999 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 December 1999 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 Univision Communications, Inc., Spalding Holdings Co., RSL-LA,
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, on the International Advisory Council of Power Corporation of
Canada and the International Advisory Board of Gulfstream Aerospace
Corporation. 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 December 1999 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.
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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. Prior to 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.
J. Michael Kelly. Mr. Kelly has been a member of our board of directors
since December 1999 and was appointed to the board by AOL. Mr. Kelly has been
Senior Vice President and Chief Financial Officer of AOL since July 1998. Prior
to 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 December 1999 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 November 1999 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 December 1999 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. Prior to 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 December 1999 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 prior to 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 China.com Corporation.
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Board of Directors
Our restated certificate of incorporation fixes our board of directors at 13
members. Each year at our annual meeting, our stockholders will elect our
directors to a one-year term of office. AOL and the Cisneros Group, holders of
all of our B stock and C stock, respectively, 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 three members to the board of directors. Although these three
directors initially will be appointed by our board following this offering,
they subsequently will be elected by our stockholders at our annual meetings.
By virtue of controlling % of the voting power of our capital stock, AOL and
the Cisneros Group will have the power to elect these remaining three members
at our subsequent annual meetings.
Committees of the Board of Directors
The Special Committee. Prior to 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 and . 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;
. 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;
. the commencement of 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;
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. 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 prior to being submitted for approval by the full board of directors.
As a result, 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. See "Risk Factors--Risks Related
to Control by AOL and the Cisneros Group."
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, prior to or promptly following this offering. The audit committee
will review, act on and report to the board of directors with respect to
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.
The Compensation Committee. Prior to 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 option plan, which is described below.
Compensation of Directors
Each member of our board of directors will be issued an option to purchase
shares of our Class A common stock when he or she joins the board. 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 connection with attending our board and committee meetings.
Compensation Committee Interlocks and Insider Participation
Following this offering, the compensation committee of our board of
directors will consist of and , none of whom has been an officer or
employee of our company at any time since our inception. No executive officer
of our company 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. Prior to the
formation of the compensation committee, the board of directors made decisions
relating to the compensation of our executive officers.
Executive Compensation
The following table presents the total compensation paid or accrued during
the fiscal year ended June 30, 1999 to our chief executive officer. None of our
other executive officers earned greater than $100,000 in our fiscal year ended
June 30, 1999.
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Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Other
Name and Principal Position Salary (1) Bonus Compensation (2)
- --------------------------- ---------- -------- ----------------
<S> <C> <C> <C>
Charles M. Herington....................... $145,833 $200,000 $33,463
President and Chief Executive Officer
</TABLE>
- --------
(1) Mr. Herington began his employment with us in February 1999. His current
annual base salary is $358,000.
(2) Includes Mr. Herington's automobile allowance and payment of membership
fees.
We did not grant any options to Mr. Herington during the fiscal year ended
June 30, 1999. Mr. Herington did not exercise any options during the fiscal
year ended June 30, 1999 and did not hold any options at June 30, 1999.
Employment Agreements
Charles M. Herington. Mr. Herington serves as our President and Chief
Executive Officer. His annual base salary is $358,000. Upon the commencement of
his employment, Mr. Herington received a bonus of $200,000, and he will receive
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. As long as Mr. Herington continues to be employed
by us, on each of January 13, 2000, 2001 and 2002, we will grant him an option
to purchase $2.0 million worth of Class A common stock. These options will have
an exercise price equal to the then current fair market value of the Class A
common stock. All options will vest on the third anniversary of each grant
date. If we terminate Mr. Herington without cause during the first two years of
his employment with us, he is entitled to receive his salary for 36 months
following termination as well as a pro rata portion of his annual bonus. If we
terminate Mr. Herington without cause 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 pro rata portion of his annual bonus.
Options granted to Mr. Herington prior to his termination will continue to vest
during the applicable severance payment period. Mr. Herington also holds
options to purchase AOL common stock.
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.
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.
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.
John D. Gardiner. Mr. Gardiner serves as our Vice President of Business
Development and our General Counsel, 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.
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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 he
will receive an additional $36,250 on the one-year anniversary of his
employment. 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 Option Plan
Our 2000 Stock Option Plan was approved by our board of directors and by our
stockholders, AOL and the Cisneros Group, in 2000. Under the stock
plan, we may grant stock options to our employees, consultants and directors. A
total of shares of Class A common stock has been reserved for issuance
under the stock option plan. As of the effective date of this offering, we will
grant options to purchase a total of shares of Class A common stock. No
other stock options have been granted.
The stock option plan will be administered by the compensation committee,
which will determine the terms of stock options, including:
. the determination of which employees, directors and consultants will be
granted options;
. the exercise price and the number of shares subject to a stock option;
and
. the schedule upon which options become exercisable.
The maximum term of options granted under the stock option plan is ten years.
Upon a change of control of AOL-LA, the compensation committee will provide
that outstanding options under the plan will be:
. assumed by the successor corporation or replaced with a comparable
option to purchase shares of capital stock of the successor corporation;
. exercisable for a specified number of days, at the end of which period
the options will terminate; or
. terminated in exchange for a cash payment equal to the difference
between the option exercise price and the fair market value of the
shares subject to the option.
To the extent that 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, provided that the substitution is of equal value to the
cash or other items that would have been paid under the chosen treatment. In
the event of a change of control, all outstanding options may, in the
discretion of the board of directors, become fully vested.
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 or she 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 connection with any civil or criminal action or
proceeding, specifically including actions by us or in our
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name (derivative suits). 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 connection with
legal proceedings. A director or officer will not receive indemnification if he
or she is found not to have acted in good faith and not in a manner he or she
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. In addition, 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. In any event,
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 regarding their failure
to make opportunities available to us.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Reorganization
Prior to this offering, the business of AOL-LA has been 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 jointly owned by AOL and the
Cisneros Group. 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 interests in the
entities that own AOL Latin America, S.L. and its affiliates for and
shares of our Series B preferred stock and Series C preferred stock,
respectively. AOL will also 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 Brazil Ltda., a Brazilian limited liability company.
The Stockholders' Agreement
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. The
following summary of key provisions of the stockholders' agreement is qualified
by reference to the actual agreement, which has been filed as an exhibit to the
registration statement, of which this prospectus forms a part. See "Risk
Factors--Risks Related to Control by AOL and the Cisneros Group."
Voting Agreement. AOL and the Cisneros Group have agreed to vote all of
their shares of B and C stock, which collectively represent % of the voting
power of our outstanding capital stock, to elect the three directors nominated
by our special committee for election by the holders of all shares of our
outstanding capital stock, voting together.
Non-Compete. Until 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, neither AOL, the Cisneros Group, nor any entity in which either of them
owns at least a 35% interest may acquire more than a 35% interest in any entity
that provides PC-based online services in Latin America to a substantial
consumer base. 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.
Until the later of , 2005 (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 any entity that
provides TV- or wireless-based online services in Latin America to a
substantial consumer base. 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 provide in Latin America any AOL-branded TV-based online
services, or any AOL-branded wireless-based online services developed by
AOL for commercial launch prior to , 2004 (four years from the
effective date of the registration statement for this offering).
In some instances, the 20% thresholds described above will be lowered if an
additional principal stockholder is admitted as a stockholder of our company,
if we issue more shares of our capital stock or if AOL exercises the AOL
warrant.
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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 with respect to PC-based online services,
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.
Restrictions on Transfer. Neither AOL nor the Cisneros Group may transfer
their shares of B stock and C stock, respectively, except:
. to their wholly-owned affiliates or to each other;
. in connection with the sale of their businesses;
. in connection with the admission of another principal stockholder as
described in "Admission of Additional Principal Stockholders" 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,
provided that, unless converted into Class A common stock, AOL or the
Cisneros Group retains the voting rights to those shares;
. for shares of Class A common stock, issuable upon conversion of shares
of B stock or C stock, to be sold in a registered offering or under Rule
144 of the Securities Act as described in "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.
In the event of any transfer of B stock or C stock, the transferee will be
subject to the provisions of the stockholders' agreement.
Admission of Additional Principal Stockholders. AOL and the Cisneros Group
may admit one or more additional stockholders of our company. Any additional
stockholder would either receive new shares of our capital stock or would
acquire shares owned by AOL and/or the Cisneros Group. If the new stockholder
is a "strategic stockholder," the Cisneros Group's ownership interest in our
company will be reduced at a disproportionately greater rate than AOL's
ownership interest in our company. 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 disinterested members of our board of directors.
The Cisneros Group Funding. From our inception through September 30, 1999,
we received approximately $35 million in cash from the Cisneros Group. In
addition, the Cisneros Group paid us $24
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million from October 1999 through January 2000. Riverview Media Corp., a
company within the Cisneros Group, is obligated to pay us an additional $41
million in the following quarterly installments:
<TABLE>
<CAPTION>
Installment Due Date Amount
-------------------- -----------
<S> <C>
April 3, 2000 $13 million
July 3, 2000 $10 million
October 2, 2000 $ 6 million
January 2, 2001 $ 6 million
April 2, 2001 $ 3 million
July 2, 2001 $ 3 million
</TABLE>
Venevision International, Inc., a company within the Cisneros Group, has
guaranteed these payments.
If Riverview Media does not make one or more of these payments, we will be
entitled to sue Riverview Media and the guarantor to receive the payment. In
addition, AOL will be entitled to:
. receive from the Cisneros Group an irrevocable proxy to vote all of the
shares of our capital stock then held by them, including their C stock
and, if the payment is more than 30 days late, vote the proxy to effect
the conversion of their C stock into Class A common stock; or
. make the payment on behalf of the Cisneros Group, and treat the payment
as a loan from AOL to the Cisneros Group.
Non-monetary contributions by the Cisneros Group. The Cisneros Group has
agreed to provide the non-monetary contributions and services described in
"Business--Our Competitive Advantages--The Cisneros Group Commitment." As of
September 30, 1999, we incurred $341,000 for services, including personnel,
travel and legal services, 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. Please
see "Description of Provisions of Our Restated Certificate of Incorporation
that Affect the Scope of Our Business."
Term and Termination. The stockholders' agreement will terminate when:
. AOL and the Cisneros Group no longer hold any shares of our capital
stock;
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. the parties mutually terminate the stockholders' agreement; or
. June 30, 2048, whichever occurs first.
In addition, 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 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 issuable under the over-allotment option, plus the shares of Class A
common stock issuable under our stock option plan. The warrant will be
immediately exercisable and will have a ten year term. The number of shares
issuable pursuant to 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 has a "net exercise" feature that 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
We have agreed to provide AOL and the Cisneros Group with unlimited "demand"
and "piggyback" 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--
Registration Rights" for a description of the registration rights agreement.
The AOL License Agreement
We have entered into a license agreement with AOL. See "Business--The AOL
License Agreement, Intellectual Property and Proprietary Rights" for a
description of this license agreement.
The ICQ Cross Promotion Agreement
We also have entered into an agreement with AOL under which we have 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 50 million users, including
approximately 5 million users in Latin America, to find and communicate with
each other in real-time. As local versions of the ICQ service are developed, we
will engage in other marketing and cross-promotion activities with AOL.
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; and
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. support and maintenance with regard to third-party software licensed to
us by AOL.
We have agreed to compensate AOL for these services at rates at least as
favorable as those charged by AOL to any other party, including joint venture
affiliates, but excluding affiliates that are at least 75% owned by AOL.
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.
As of September 30, 1999, we had incurred expenses totaling approximately
$4.4 million payable to AOL under our services agreement.
Relationships with Officers of AOL
Four members of our board of directors appointed by AOL are also executive
officers of AOL and one member of our board of directors is a director of AOL.
. Robert W. Pittman is the President and Chief Operating Officer 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 $3.2 million. We initially paid AOL approximately
$4.0 million for these subscribers. However, we expect to receive a credit of
approximately $800,000 on future services to be provided by AOL under the
services agreement described above. This credit represents an adjustment of the
purchase price as a result of the decline in the number of CompuServe Classic
subscribers between December 1998 and December 1999. This credit is reflected
on our balance sheet as a receivable from affiliate.
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PRINCIPAL STOCKHOLDERS
The following table provides information with respect to the beneficial
ownership of our Class A common stock as of , 2000 by (1) the executive
officer named in the Summary Compensation Table, (2) each individual who has
been selected to be a director following this offering, (3) all current
directors and executive officers as a group and (4) each stockholder known by
us to own beneficially more than five percent of our Class A common stock.
For purposes of this table, a holder is deemed to have beneficial ownership
of any shares of Class A common stock, including shares subject to options or
conversion rights, which the holder has the right to acquire within 60 days of
, 2000.
For purposes of calculating the percentage beneficially owned, the number of
shares of capital stock deemed outstanding prior to this offering and the
concurrent distribution by the Cisneros Group consists of shares that were
outstanding as of , 2000. The number of shares of capital stock deemed
outstanding after this offering and the concurrent distribution by the Cisneros
Group includes an additional shares of Class A common stock, which reflects
shares issued in this offering and the concurrent distribution by the
Cisneros Group.
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 , 2000 are deemed to be outstanding, but shares
which may be similarly acquired by other holders are deemed not to be
outstanding.
After this offering and the concurrent distribution by the Cisneros Group,
AOL will control % and the Cisneros Group will control % of the voting power
of our capital stock ( % and %, respectively, if AOL exercises the AOL
warrant). The total number of votes for purposes of calculating the percentage
of total voting power includes the voting power of the shares of Series B
preferred stock and shares of Series C preferred stock. Each share of Series
B and Series C preferred stock and Class B and Class C common stock, if any,
entitles the holder to ten votes.
Except as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment power with
respect to all shares of Class A common stock shown to be beneficially owned by
them based on information they have provided to us. 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.
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<TABLE>
<CAPTION>
Shares of Shares of
Class A Common Stock Class A Common Stock
Beneficially Beneficially
Owned Prior to Owned After
the Offering the Offering
and Distribution and Distribution
----------------------- -----------------------
Beneficial Owner Number Percent Number Percent
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Directors and Executive
Officers
Charles M. Herington.... % %
Steven I. Bandel........
Gustavo A. Cisneros
(1)....................
Ricardo J. Cisneros
(1)....................
Miles R. Gilburne.......
J. Michael Kelly........
Michael Lynton..........
Robert S. O'Hara, Jr. ..
Cristina Pieretti.......
Robert W. Pittman.......
Gerald Sokol, Jr........
All current executive
officers and directors
as a group
(16 persons)...........
Five Percent Stockhold-
ers
America Online, Inc.
(2)....................
The Cisneros Group of
Companies (3)..........
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the Class A common
stock.
(1) The Cisneros Group's shares are owned by Riverview Media Corp. Gustavo
Cisneros and Ricardo Cisneros each beneficially own 50% of Riverview Media
Corp.
(2) Consists of shares of Series B preferred stock, which are convertible at
any time into Class B common stock on a one-for-one basis, which in turn
are convertible at any time into Class A common stock on a one-for-one
basis, as well as the AOL warrant, a currently exercisable warrant to
purchase shares in any combination of our Series B preferred, Class A
common or Class B common stock.
(3) Consists of shares of Series C preferred stock, which are convertible at
any time into Class C common stock on a one-for-one basis, which in turn
are convertible at any time into Class A common stock on a one-for-one
basis. These shares are held by Riverview Media Corp., a company within
the Cisneros Group.
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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 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. For as long as AOL continues to
own shares of B stock equal to at least 50% of the Series B preferred stock
that it currently holds 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, our restated certificate of incorporation provides that we cannot
engage in any business activity other than providing interactive services in
Latin America through PC-based interactive services and AOL-branded TV- and
wireless-based interactive services without their approval. Further, if AOL
develops AOL-branded TV- and wireless-based online services, we will not be
able to offer these services in Latin America, even though we have a license to
do so, without 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.
For a fuller discussion of the risks associated with the limitations on the
scope of our business and the allocation of business opportunities, please see
"Risk Factors--Risks Related to Control by AOL and the Cisneros Group."
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 lend 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 AOL and the
Cisneros Group will not be liable to us or our stockholders if they
successfully obtain our corporate opportunities or if they otherwise compete
with us. We have agreed to indemnify AOL and the Cisneros Group, as well as any
of their officers, directors, agents, stockholders, members, partners,
affiliates or subsidiaries, for all damages incurred by them in any legal
action brought by us, any of our other stockholders or any other person based
on any alleged breach of any fiduciary duty resulting from any action or
inaction under the provisions of our restated certificate of incorporation that
permit AOL and the Cisneros Group to compete with us and to exploit business
opportunities in which we would otherwise have an interest.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and the relevant provisions
of our restated certificate of incorporation and our restated by-laws are
summaries and are qualified by reference to our restated certificate of
incorporation and our restated by-laws, which are included as exhibits to the
registration statement of which this prospectus is a part.
We are authorized to issue shares of Class A common stock, par value
$.01 per share, shares of Class B common stock, par value $.01 per share
and shares of Class C common stock, par value $.01 per share. We are
authorized to issue shares of Series B preferred stock, par value $.01 per
share, shares of Series C preferred stock, par value $.01 per share and
shares of undesignated preferred stock, par value $.01 per share.
Upon completion of this offering and the concurrent distribution by the
Cisneros Group, there will be shares of Class A common stock issued and
outstanding, shares of Series B preferred stock issued and outstanding and
shares of Series C preferred stock issued and outstanding. There will be no
shares of Class B common stock, Class C common stock or undesignated preferred
stock outstanding at the completion of this offering and the concurrent
distribution by the Cisneros Group. As of the effective date of this offering,
we will grant options to purchase a total of shares of Class A common stock.
In addition, as of the effective date of this offering, we will issue to AOL a
warrant to purchase shares in any combination of our Series B stock, Class
A common or Class B common stock at an exercise price equal to the initial
public offering price.
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 exclusive voting rights with respect to a
number of important provisions of our restated certificate of incorporation and
restated by-laws. 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;
. 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, in the event that 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 commencement of litigation by us that is adverse to either AOL or
the Cisneros Group.
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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 with respect to the above-described matters, unless required under
Delaware law.
In addition, unless otherwise required under Delaware law, the holders of B
stock and C stock, together with our board of directors, 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. See "Risk Factors--
Risks Related to Control by AOL and the Cisneros Group."
The affirmative vote of the holders of a majority of the outstanding shares
of B stock, voting separately as a class, as well as the holders of a majority
of the outstanding shares of C stock, voting separately as a class, is required
to approve any amendment to the provisions of our restated by-laws that relate
to our board of directors and its committees and the indemnification of our
officers and directors.
The voting rights relating to the election of the 13 members of our board of
directors are as follows:
. The holders of B stock are entitled to elect five directors;
. The holders of C stock are entitled to elect five directors; and
. The holders of all shares of our outstanding capital stock, voting
together as a single class, are entitled to elect the remaining
three directors.
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 to the restated certificate of
incorporation that would adversely alter or change the powers, preferences or
special rights of any class or series of our capital stock also must be
approved by the affirmative vote of 75% of the voting power of our outstanding
capital stock, as well as 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.
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. Our restated
by-laws may also be amended, subject to the provisions of our
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restated certificate of incorporation that give the holders of B stock and C
stock exclusive voting rights, after obtaining the following votes: (1) the
affirmative vote of a majority of the voting power of all of our capital stock,
voting as a single class; (2) if a director appointed by the holders of B stock
is entitled to be a member of our special committee, the affirmative vote of a
majority of the B stock, voting together as a single class; and (3) if a
director appointed by the holders of C stock is entitled to be a member of our
special committee, the affirmative vote of a majority of the C stock, voting
together as a single class.
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 $ per share, as and when declared by the board
of directors and prior to the payment of any dividend to the holders of the
Class A common stock. Thereafter, 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 shall be
equal in number.
Conversion of B stock and C stock. AOL and the Cisneros Group, holders of
all the Series B preferred stock and all the Series C preferred stock,
respectively, 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.
If AOL transfers any shares of its B stock to any person other than to a
wholly-owned affiliate or to the Cisneros Group, or in connection with the sale
of its business or the admission of additional strategic stockholders, those
shares will automatically convert into shares of Class A common stock. AOL may
also transfer up to 20% of its shares to its employees without triggering an
automatic conversion of its shares of B stock into Class A common stock, as
long as AOL retains the voting rights to the transferred shares.
If the Cisneros Group transfers any shares of its C stock to any person other
than to a wholly-owned affiliate or to AOL, or in connection with the sale of
its business or the admission of additional strategic stockholders, those
shares will automatically convert into shares of Class A common stock. The
Cisneros Group may also transfer up to 20% of its shares to employees and to
designated Cisneros family members without triggering an automatic conversion
of its shares of C stock into Class A common stock, as long as the Cisneros
Group retains the voting rights to the transferred shares. If at any time the
number of shares of 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, as the case may be, in the aggregate constitutes less than
50% of the number of shares that we originally issued to them, then each share
will be converted automatically as of that date into one share of Class A
common stock.
Liquidation Preference. Our Series B and Series C preferred stock each has a
liquidation preference equal to $ per share. If upon any dissolution,
liquidation or winding up of our company, 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. Thereafter, 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
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common stockholders. Neither the sale of all or substantially all of our
property or business, other than in connection with the winding up of our
business, nor the merger or consolidation of us into or with any other
corporation, will be deemed to be a dissolution, liquidation or winding up of
our company.
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, in cash, or, at our option, by delivery of fully
paid and nonassessable shares of Class B or Class C common stock, respectively,
or any combination of cash and Class B or Class C common stock, in an amount
equal to the liquidation preference, or $ per share, plus in each case all
accumulated and unpaid dividends through the redemption date. 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, respectively, at any time prior to the date on which the redemption is
to occur.
From and after the redemption date (unless we are then in default of payment
of the redemption price), dividends on the shares of the Series B and C
preferred stock to be redeemed shall cease to accumulate, shares of Series B
and Series C preferred stock shall no longer be deemed to 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 in the event of 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 with respect to each outstanding share
of common stock, regardless of class.
Other Rights. Upon the closing of the offering 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.
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 from time to time up to an aggregate of shares of preferred
stock 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.
Although we have no present plans to issue any additional shares of
preferred stock, the issuance of additional shares of preferred stock, or the
issuance of rights to purchase preferred shares, could decrease the amount of
earnings and assets available for distribution to the holders of outstanding
preferred stock and common stock, could adversely affect the rights and powers,
including voting rights, of the outstanding
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preferred stock and common stock, and could have the effect of delaying,
deterring or preventing a change of control of AOL-LA or an unsolicited
acquisition proposal.
Options
As of the effective date of this offering, we will grant options to
employees and directors to purchase a total of shares of Class A common
stock. No other stock options have been granted.
The AOL Warrant
Upon the effectiveness of this offering, we will issue a warrant to purchase
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 issuable under the over-allotment option, plus the
number of shares of Class A common stock issuable under our stock option plan.
The warrant will be immediately exercisable and will have a ten year term. The
number of shares issuable pursuant to the warrant may be increased if AOL and
the Cisneros Group admit one or more strategic stockholders. The warrant has a
"net exercise" feature that 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.
The registration rights agreement provides that AOL and the Cisneros Group
and transferees of their shares, other than the persons receiving shares in the
concurrent distribution by the Cisneros Group, are entitled to unlimited
"piggyback" registration rights, meaning that they can include any shares of
Class A common stock that they hold in registration statements that we file. In
addition, 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 associated
with all piggyback and demand registrations.
Delaware Law and Certain 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 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.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our restated by-laws provide that, for nominations to
the board of directors or for other business to be properly brought by a
stockholder before a meeting of stockholders, the stockholder must first have
given timely notice of the proposal in writing to our secretary. For an annual
meeting, a stockholder's notice generally must be delivered not less than 45
days nor more than 75 days prior to 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 by the later of 90 days prior to the
special meeting or ten days following the day on which public announcement of
the meeting is first made. Detailed requirements as to the form of the notice
and information
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required in the notice are specified in the restated by-laws. If it is
determined that business was not properly brought before a meeting in
accordance with 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. The Delaware
General Corporation Law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or restated by-laws, unless the
corporation's certificate of incorporation or restated by-laws, as the case may
be, requires a greater percentage. 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 would be in addition to any
separate class vote that is required with respect to the different classes of
capital stock.
We are not subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating takeovers. Section 203 generally makes it more
difficult for a third party to take control of a company by prohibiting a third
party owning more than 15% of the company's voting stock from entering into
transactions with the company for a period of three years after the date of the
transaction in which the person became an owner of more than 15% of the shares
of the company's voting stock, unless the transaction is approved in a
prescribed manner.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock will be .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the shares of
Class A common stock. Upon the completion of this offering and the concurrent
distribution by the Cisneros Group, we will have shares of Class A common
stock issued and outstanding. In addition, the following shares of Class A
common stock will be issuable in the future:
. 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.
. 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.
. shares of Class A common stock will be issuable upon exercise of
outstanding options granted under our stock plan.
The shares of Class A common stock being sold in this offering and the
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 held by our
"affiliates." AOL and the Cisneros Group and our directors and executive
officers are considered to be our affiliates.
The shares of Class A common stock issuable upon conversion of shares
of B stock and C stock will be 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
registered under the Securities Act. All shares of Class A common stock
issuable upon conversion of shares of our B stock and C stock and exercise of
the AOL warrant will have demand and piggyback registration rights attached to
them. Registration of these shares under the Securities Act would result in
their becoming freely tradable without restrictions immediately upon the
effectiveness of a registration statement.
AOL and the Cisneros Group and all of their affiliates, and our directors
and executive officers, have agreed not to dispose of or hedge any of their
Class A common stock or securities convertible into or exercisable for 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. The employees and former employees of
the Cisneros Group who are receiving shares in the concurrent 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.
The sale of a substantial number of shares of Class A common stock, or the
perception that sales could occur, could adversely affect the market price of
the Class A common stock. In addition, any sale or perception that sales could
occur could make it more difficult for us to sell equity securities or equity-
related securities in the future at a time and price that we deem appropriate.
We anticipate that a registration statement on Form S-8 covering the Class A
common stock that may be issued pursuant to 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 in accordance with the
provisions of Rule 144, except for the holding period requirement.
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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
certain 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 certain non-U.S. holders,
including, without limitation, 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, as amended, 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. Accordingly, each non-U.S. holder should consult a tax
advisor regarding 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
In the event that 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 such lower
rate as may be provided by an applicable income tax treaty. Non-U.S. holders
should consult their tax advisors regarding their entitlement to benefits under
a relevant income tax treaty.
Dividends that 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 ("U.S. trade or business
income"), are generally subject to U.S. federal income tax on a net income
basis at regular graduated rates, but 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 payor. Any U.S. trade or business income received
by a non-U.S. holder that is a corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as specified by an applicable income tax treaty.
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Dividends paid prior to 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 discussed above 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 certain 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
in respect of gain recognized on a disposition of Class A common stock unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
. 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 certain other
requirements;
. the non-U.S. holder is subject to tax pursuant to the provisions of
the U.S. tax law applicable to certain 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.
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. The tax relating to stock in a "U.S. real property holding
corporation" will not apply to a non-U.S. holder whose holdings, direct and
indirect, at all times during the applicable period, constituted 5% or less of
the Class A common stock, provided that the Class A common stock was regularly
traded on an established securities market.
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 and, therefore, may be subject to U.S. federal
estate tax.
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 certain payments on Class
A common stock. Under currently applicable law,
78
<PAGE>
non-U.S. holders of Class A common stock generally will be exempt from these
information reporting requirements and from backup withholding on dividends
paid prior to 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 in accordance with applicable
U.S. treasury regulations may be subject to backup withholding at a rate of 31%
on payments of dividends.
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 otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of Class A common stock 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." In the case of the payment of
proceeds from the disposition of Class A common stock 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 for certain
periods 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, (A) at least 50% of the capital or
profits interest in the partnership is owned by U.S. persons, or (B)
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" unless certain 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 regarding 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.
79
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement,
each underwriter named below has severally agreed to purchase, and we have
agreed to sell to each underwriter, the number of shares set forth 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. ...........................................
-----
Total ........................................................
-----
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of various legal matters by counsel and to other conditions. 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.
The underwriters, for whom Salomon Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Lehman Brothers Inc. are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth 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.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 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 over-
allotments, if any, in connection with this offering. To the extent 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.
At our request, the underwriters will reserve up to approximately 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 to the extent
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.
AOL-LA and our officers and directors, along with AOL and the Cisneros Group
and some of their affiliates, have agreed, for a period of 180 days from the
date of this prospectus, not to dispose of or hedge any shares of our Class A
common stock or any securities convertible into or exchangeable for Class A
common stock, without the prior written consent of Salomon Smith Barney Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation. The current and former
employees of the Cisneros Group who are receiving shares in the concurrent
distribution by the Cisneros Group have agreed not to dispose of or hedge any
of their Class A common stock for a period of 180 days from the date of this
prospectus, without 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.
Prior to 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.
80
<PAGE>
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 currently prevailing general
conditions in the equity securities markets, including current market
valuations of publicly traded companies considered comparable to us. There can
be no assurance, 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.
We have applied to have the Class A common stock included for quotation on
the Nasdaq National Market under the symbol "AOLA."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with 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>
In connection with this offering, Salomon Smith Barney Inc. or Donaldson,
Lufkin & Jenrette Securities Corporation, on behalf of the underwriters, may
purchase and sell shares of Class A common stock in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of Class A
common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the Class A common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of Class A common stock made for the purpose of preventing or
retarding a decline in the market price of the Class A common stock while this
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 cause the price of the Class A common stock to
be higher than the price that otherwise would exist in the open market in the
absence of these transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
We estimate that our total expenses of this offering will be $ .
The representatives have performed investment banking and advisory services
for AOL and the Cisneros Group from time to time for which they have received
customary compensation and reimbursement of expenses. The representatives may,
from time to time, engage in transactions with, and perform services for, AOL-
LA, AOL and the Cisneros Group in the ordinary course of business.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
81
<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 September 30, 1999 and for the
period December 15, 1998 (inception) to June 30, 1999 and the three months
ended September 30, 1999, as set forth 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 SEC a registration statement on Form S-1 under the
Securities Act with respect to the Class A common stock offered by this
prospectus. This prospectus, which is part of the registration statement, omits
certain information, exhibits, schedules and undertakings set forth 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 as to the contents or
provisions of any documents referred to in this prospectus are not necessarily
complete, 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.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC
at prescribed rates from the Public Reference Section of the SEC at the above
address and at the SEC's regional offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the SEC electronically are
publicly available through the SEC's website at http://www.sec.gov. The
registration statement, including all exhibits and amendments to the
registration statement, has been filed electronically with the SEC.
82
<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 sheets of America
Online Latin America, Inc. as of June 30, 1999 and September 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 and for the three months ended September 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Online
Latin America, Inc. at June 30, 1999 and September 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 and for the three
months ended September 30, 1999, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
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
January 20, 2000
F-2
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
-------- -------------
(In thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $17,716 $29,862
Trade accounts receivable, less allowances of $180 and
$390, respectively..................................... 1,448 1,899
Receivable from affiliate............................... 833 833
Other receivables....................................... 53 127
Prepaid expenses and other current assets............... 240 226
------- -------
Total current assets.................................. 20,290 32,947
Property and equipment at cost, net..................... 9 849
Product development costs............................... -- 503
Other assets............................................ 1 2
------- -------
Total assets.......................................... $20,300 $34,301
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................. $ 40 $ 534
Payable to affiliates................................... 2,685 4,789
Other accrued expenses and liabilities.................. 183 378
Deferred revenue........................................ -- 87
Accrued personnel costs................................. 262 357
Income taxes payable.................................... 131 234
------- -------
Total current liabilities............................. 3,301 6,379
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; shares
authorized: -- --
Series B and C cumulative redeemable convertible--
and shares authorized, respectively; and
shares issued and outstanding, respectively, at
June 30, 1999 and September 30, 1999 ($
liquidation value)...................................
Common stock, $.01 par value; shares
authorized: -- --
Class A-- shares authorized; no shares issued or
outstanding at June 30, 1999 and September 30, 1999.. -- --
Class B and C-- and shares authorized; no shares
issued or outstanding at June 30, 1999 and September
30, 1999.............................................
Additional paid-in capital.............................. 22,120 35,120
Other accumulated comprehensive loss--foreign currency
translations........................................... (82) (187)
Accumulated deficit..................................... (5,039) (7,011)
------- -------
Total stockholders' equity............................ 16,999 27,922
------- -------
Total liabilities and stockholders' equity............ $20,300 $34,301
======= =======
</TABLE>
See accompanying notes
F-3
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from
December 15, 1998
(date of inception) to Three Months
June 30, Ended September 30,
1999 1999
---------------------- -------------------
(In thousands)
<S> <C> <C>
Revenues:
Subscriptions.................... $ 1,644 $ 1,129
Advertising and e-commerce....... -- 78
------- -------
Total revenues................. 1,644 1,207
Costs and expenses:
Cost of revenues................. 1,091 632
Sales and marketing.............. 3,179 44
Product development.............. 312 252
General and administrative....... 1,979 2,488
------- -------
Total costs and expenses....... 6,561 3,416
Loss from operations............... (4,917) (2,209)
Other income, net.................. 9 340
------- -------
Loss before provision for income
taxes............................. (4,908) (1,869)
Provision for income taxes......... (131) (103)
------- -------
Net loss........................... $(5,039) $(1,972)
======= =======
</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
Other (date of inception)
Preferred Stock Common Stock Additional Accumulated to June 30, 1999
------------------ ------------- Paid-in Comprehensive Accumulated and the Three Months
Shares Amount Shares Amount Capital Loss Deficit Total Ended September 30, 1999
------- -------- ------ ------ ---------- ------------- ----------- ------- ------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 15, 1998
(inception)....... -- $ -- -- $-- -- -- -- --
Stock issued:
Capital
contribution upon
inception........ -- -- -- -- $22,120 -- -- $22,120
Foreign currency
translation
adjustment........ -- -- -- -- -- $ (82) -- (82) $ (82)
Net loss........... -- -- -- -- -- -- $(5,039) (5,039) (5,039)
------- -------- --- ---- ------- ----- ------- ------- -------
Balances at June
30, 1999.......... -- -- -- -- $22,120 $ (82) $(5,039) $16,999 $(5,121)
=======
Stock issued:
Capital
contribution..... -- -- -- -- 13,000 -- -- 13,000
Foreign currency
translation
adjustment........ -- -- -- -- -- (105) -- (105) $ (105)
Net loss........... -- -- -- -- -- -- (1,972) (1,972) (1,972)
------- -------- --- ---- ------- ----- ------- ------- -------
Balances at
September 30,
1999.............. -- $ -- -- $-- $35,120 $(187) $(7,011) $27,922 $(2,077)
======= ======== === ==== ======= ===== ======= ======= =======
</TABLE>
See accompanying notes
F-5
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period from
December 15, 1998 Three Months
(date of inception) to Ended
June 30, September 30,
1999 1999
---------------------- -------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................. $(5,039) $(1,972)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization............ -- 16
Changes in assets and liabilities:
Trade accounts receivable.............. (1,443) (432)
Receivable from affiliate.............. (833) --
Other receivables...................... (53) (74)
Prepaid expenses and other current
assets................................ (240) 12
Other assets........................... (1) (1)
Trade accounts payable................. 40 493
Payable to affiliates.................. 2,681 2,090
Accrued expenses and other current
liabilities........................... 183 196
Deferred revenue and other
liabilities........................... -- 87
Accrued personnel costs................ 262 97
Income taxes payable................... 131 101
------- -------
Total adjustments.................... 727 2,585
------- -------
Net cash (used in) provided by operating
activities.............................. (4,312) 613
Cash flows from investing activities:
Purchase of property and equipment....... (9) (856)
Product development costs................ -- (503)
------- -------
Net cash used in investing activities.... (9) (1,359)
Cash flows from financing activities:
Proceeds from capital contribution from
affiliate............................... 22,120 13,000
------- -------
Net cash provided by financing
activities.............................. 22,120 13,000
------- -------
Effect of exchange rate changes on cash
and cash equivalents.................... (83) (108)
------- -------
Net increase in cash and cash
equivalents............................. 17,716 12,146
Cash and cash equivalents at beginning of
period.................................. -- 17,716
------- -------
Cash and cash equivalents at end of
period.................................. $17,716 $29,862
======= =======
</TABLE>
See accompanying notes
F-6
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
On January , 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. 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 and the Cisneros Group will exchange
their interests in the entities that own AOL Latin America, S.L. and its
affiliates for and shares of the Company's Series B preferred stock
and Series C preferred stock, respectively. In addition, AOL will receive a
warrant to purchase 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 option plan. The accompanying financial statements
reflect the reorganization as of the earliest period presented.
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 20 million users in 15 countries and seven
languages.
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 in order 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. In addition, the Company has the
exclusive right to offer in Latin America any AOL-branded wireless-based online
services developed by AOL for commercial launch before , 2004 (four years
from the effective date of the registration statement for the 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 50 million
users, including approximately 5 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 commenced 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.
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
F-7
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AOL Time Warner. Time Warner shareholders will receive 1.5 shares of AOL Time
Warner for each share of Time Warner stock they own. AOL shareholders will
receive one share of AOL Time Warner stock for each share of AOL stock they
own. The merger is subject to customary closing conditions, including receipt
of required regulatory approvals and the approval of AOL and Time Warner
stockholders.
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.
Fiscal Year. The Company's fiscal year ends June 30.
Revenue Recognition. The Company recognizes subscription revenues over the
period that it provides the service. For advertising arrangements that require
the Company to display a specified number of advertisements, the Company
intends to recognize advertising revenues ratably in the period in which the
advertisements are displayed, provided that no significant obligations remain
and collection of the resulting receivable is probable. To the extent that the
Company does not expect to meet any minimum guaranteed advertisement display
levels, the Company defers recognition of the corresponding revenues until
guaranteed levels are achieved. Payments received from advertisers prior to the
Company displaying their advertisements on its interactive services are also
recorded as deferred revenues. The Company recognizes revenues from sponsorship
or co-sponsorship arrangements ratably over the contract term, provided that it
has no significant obligations remaining.
In addition to advertising revenues, the Company 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.
The Company's subscription revenues through September 30, 1999 consisted of
revenues from the Company's CompuServe Classic service, which the Company
acquired from AOL. See note 3.
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 and internal software........................ 2 to 5 years
Leasehold and network 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 certain costs for the development of internal use
software, including the costs of coding, software configuration, upgrades and
enhancements. To date, no such costs have been incurred.
Product Development Costs. The Company's product development costs 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. The Company expenses as incurred product
development costs incurred before any product or service developed by AOL has
reached 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
F-8
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expensed as incurred. To the extent the Company retains the rights to software
development funded by third parties, the Company capitalizes these costs in
accordance with its normal accounting policies. 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,
commencing the month after the date 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 September 30, 1999, capitalized product development costs totaled
$503,000. Amortization of these costs will begin in the second quarter of
fiscal year 2000. There were no capitalized product development costs at June
30, 1999.
Product development costs expensed for research and development for the
periods ended September 30, 1999 and June 30, 1999 totaled $252,000 and
$312,000, respectively.
Subscriber Acquisition and Advertising Costs. The Company accounts for
subscriber acquisition costs as well as other advertising costs pursuant to
AICPA Statement of Position 93-7, "Reporting on Advertising Costs." The Company
expenses these 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 as a component of stockholders'
equity. The Company includes its foreign currency transaction gains and losses
in its results of operations.
Other Income, net. For the periods ended September 30, 1999 and June 30,
1999, other income, net consisted of $306,000 and $62,000 of interest income,
respectively, and foreign currency transaction gains/(losses) of $34,000 and
($53,000), respectively.
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 Receivables. The carrying amount of the Company's trade
accounts receivables approximates their fair market value. For the periods
ended September 30, 1999 and June 30, 1999, the Company recorded provisions for
uncollectible accounts of $210,000 and $180,000, respectively. No amounts were
written off during any period presented.
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. The Company will calculate net loss per share 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
F-9
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
method set forth 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 Option 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 ("FASB")
recently issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of Effective Date of FASB Statement No. 133." This
Statement allows the Company to defer the effective date of FASB Statement 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.
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 regarding 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. The Company has entered into a royalty-free license
agreement and a services agreement with AOL. 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. In addition, the Company has the exclusive right to offer in Latin America
any AOL-branded wireless-based online services developed by AOL for commercial
launch before , 2004 (four years from the effective date of the registration
statement for the 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 software localization, updates,
development, and installation services, server connection services, technical
support, training and other related services. In addition, AOL 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's exclusive rights under the license agreement
will
F-10
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
become non-exclusive upon the later of December 15, 2003 (with respect to PCs),
, 2005 (five years from the effective date of the registration statement for
the offering) (with respect to TV- and wireless-based services) 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 also adversely impact
its business.
Note 3. Related Party Transactions
During the period ended June 30, 1999, the Company entered into agreements
with both AOL and the Cisneros Group pursuant to which AOL and the Cisneros
Group provide various support services such as: technical support, access to
databases, subscriber management, sales and marketing research, tax, financial
and legal services and general and administrative services. Some of AOL's
employees who provide these services to the Company participate in AOL's stock
option plans. In addition, certain employees of the Company hired from AOL have
retained their previously granted AOL stock options. The cost to the Company
due to AOL for support services for the three months ended September 30, 1999
and the period ended June 30, 1999 was $2.1 million and $2.4 million,
respectively. The cost to the Company for support services provided by the
Cisneros Group for the three months ended September 30, 1999 and the period
ended June 30, 1999 was $50,000 and $291,000, respectively. The unpaid portion
of these costs is included in payable to affiliates at September 30, 1999 and
June 30, 1999.
In December 1998, the Company acquired AOL's Latin American CompuServe
Classic subscribers for approximately $3.2 million. This cost is included as a
sales and marketing expense for the period ended June 30, 1999. The Company
initially paid AOL approximately $4.0 million for these subscribers. However,
the Company expects to receive a credit of approximately $800,000 on future
services provided by AOL under the services agreement. This credit represents
an adjustment of the purchase price as a result of the decline in the number of
CompuServe Classic subscribers between December 1998 and December 1999. This
credit is reflected on the Company's balance sheet as a receivable from
affiliate.
Note 4. Capital Stock and Stock Option Plan
Capital Stock
Preferred Stock
The Company is authorized to issue up to 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. Prior to
the completion of this offering, the Company had issued shares of Series B
preferred stock and 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. The Series B and
Series C preferred stock are convertible into shares of Class B and Class C
common stock, respectively, 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 up to shares of Class A common stock to some of its
current and former employees. These shares were issued by the Company to the
Cisneros Group as Series C preferred stock and will automatically convert into
shares of Class A common stock upon their distribution.
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 A common stock or any combination
thereof in an amount equal to the liquidation preference or $ 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, respectively, at any time prior to the date on which
the redemption is to occur.
F-11
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $ per share, as and when declared by the board of directors and
prior to the payment of any dividend to the holders of the Class A, Class B and
Class C common stock. Thereafter, 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 Company's Series B and Series C preferred stock each has a liquidation
preference equal to $ per share plus cumulative dividends. 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 shares of Class A common stock, par
value $.01 per share, shares of Class B common stock, par value $.01 per
share, and shares of Class C common stock, par value $.01 per share. Upon
completion of this offering and the concurrent distribution by the Cisneros
Group, there will be 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 and Class C
common stock, that they hold. From our inception through September 30, 1999,
the Cisneros Group contributed approximately $35 million to equity capital. In
addition, the Cisneros Group contributed $24 million from October 1999 through
January 2000 and is obligated to contribute an additional $41 million in
quarterly installments through July 2, 2001.
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 13-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. 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 % of
the voting power of the Company's capital stock following this offering and the
concurrent distribution by the Cisneros Group, they will have the power to
elect the remaining three 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 shares in any combination of our Series B preferred, Class A
common or Class B common stock at a per share exercise price
F-12
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 issuable under
the over-allotment option, plus the shares of Class A common stock issuable
under the Company's stock option plan. The warrant will be immediately
exercisable and will have a ten year term. The number of shares issuable
pursuant to 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 Option Plan
In January 2000, the Company's board of directors and stockholders adopted
the Company's 2000 Stock Option Plan. Under the stock option 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 option plan is ten years. A total of shares of Class A common
stock have been reserved for issuance under the stock option plan. As of the
effective date of the offering, the Company will grant stock options to
purchase a total of shares of Class A common stock. No other stock options
have been granted.
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 in
accordance with SFAS No. 128, "Earnings per Share." As a result, any conversion
of preferred stock to common stock would be antidilutive.
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 certain information based on the way it organizes
financial information for making operating decisions and assessing performance.
The Company currently has only one segment under SFAS No. 131.
The Company's revenues for the three months ended September 30, 1999 were
$869,000 in Mexico and $112,000 in Brazil. The Company's revenues for the
period ended 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.
The Company's assets are primarily cash and cash equivalents. At September
30, 1999 and June 30, 1999, cash and cash equivalents of $27.7 million and
$14.5 million, respectively, were located in Spain.
Note 7. Property and Equipment
The Company's property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
-------- -------------
(In thousands)
<S> <C> <C>
Leasehold and network improvements.................... $-- $383
Furniture and fixtures................................ -- 98
Equipment............................................. -- 298
Computer equipment and internal software.............. 9 86
--- ----
9 865
Less accumulated depreciation and amortization........ -- (16)
--- ----
Net property and equipment............................ $ 9 $849
=== ====
</TABLE>
F-13
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Commitments and Contingency
Commitments
Leases
The Company will lease facilities and equipment primarily under long-term
operating leases, some of which may have renewal options. Between June 1999 and
September 1999, the Company entered into facility leases that had the following
future minimum payments:
<TABLE>
<CAPTION>
Period Ending June 30,
---------------------- (In thousands)
<S> <C>
2000..................................................... $ 228
2001..................................................... 500
2002..................................................... 506
2003..................................................... 406
2004..................................................... 413
Thereafter............................................... 450
------
$2,503
======
</TABLE>
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's commitments under these contracts from December 1999 through August
2000 are $578,000 per month; from September 2000 through August 2001 are
$634,000 per month; from September 2001 through August 2002 are $717,000 per
month; and from September 2002 through October 2002 are $502,000 per month.
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 million (or $5.4 million) in damages on behalf of
consumers who have allegedly complained about the installation of the Company's
America Online Brazil software on their PCs. Among other things, 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 it revoked. The Company believes that ADEC's
claims are without merit and will continue to contest them vigorously.
Note 9. Income Taxes
During the periods ended September 30, 1999 and June 30, 1999, income tax
expense represented the Company's estimated provision for income tax payable in
foreign locations. As a start-up operation, the Company anticipates that it
will have net operating loss carryforwards for tax purposes, which will be
available to offset future U.S. taxable income. If the Company does not use
these carryforwards in a timely manner, they will expire. To the extent that
the Company realizes net operating loss carryforwards that relate to stock
option deductions, the resulting benefits will be credited to stockholders'
equity. As of September 30, 1999 and June 30, 1999, the Company had no deferred
tax assets or liabilities.
F-14
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the
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 future stock option deductions, if any.
The Company's net operating loss carryforwards available at September 30,
1999 and June 30, 1999 were immaterial and were fully reserved.
F-15
<PAGE>
[INSIDE BACK COVER]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
America Online Latin America, Inc.
Class A Common Stock
[LOGO]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Lehman Brothers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 , 2000
PROSPECTUS
[COMPANY LOGO]
Shares
America Online Latin America, Inc.
Class A Common Stock
One of our principal stockholders, the Cisneros Group of Companies, intends
to distribute up to 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. 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 shares of our Class A common
stock through the underwriters named in that prospectus. Neither we nor the
Cisneros Group will receive any proceeds in connection with the distribution by
the Cisneros Group of Companies under this prospectus.
Prior to 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 "AOLA."
Investing in our Class A common stock involves risks. See "Risk Factors"
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.
, 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 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 in connection with 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.................................... 300,000
Legal Fees and Expenses........................................ 1,450,000
Accounting Fees and Expenses................................... 185,000
Blue Sky Fees and Expenses..................................... 5,000
Transfer Agent and Registrar Fees.............................. 2,000
Director and Officer Insurance................................. 200,000
Miscellaneous.................................................. 50,340
----------
Total........................................................ $2,500,000
==========
</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 indemnity 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 brings 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
the 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 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 , 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 shares of our Series B preferred
stock to AOL and shares of our Series C preferred stock to Riverview Media
Corp. in exchange for their contribution to us of all their interests in AOL
Latin America, S.L.
(b) Issuance of Warrant
On , 2000, we will issue a warrant to AOL to purchase any combination
of shares of Series B preferred stock or Class A or Class B common stock at
a per share exercise price equal to the initial public offering price.
(c) Grants of Stock Options
Pursuant to our 2000 Stock Option Plan, immediately prior to the
effectiveness of our initial public offering, we will issue options to purchase
an aggregate of shares of Class A common stock.
II-2
<PAGE>
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
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
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.
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.
with respect to the legality of securities being registered.
*10.1 America Online Latin America, Inc. 2000 Stock Option 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 Amended and Restated AOL License Agreement by and between Pan
Latin Interactive Ventures C.V. and AOL Latin America, S.L.
(f/k/a Tesjuates, S.L.), dated as of , 2000.
*10.6 Amended and Restated AOL Online Services Agreement by and
between America Online, Inc. and AOL Latin America, S.L. (f/k/a
Tesjuates, S.L.), 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 regarding employment of Charles M. Herington, dated
February 26, 1999.
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. (See page II-5)
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules
Financial Statement Schedules are omitted because the information is
included in our financial statements or notes to those financial statements.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale,
Florida, on January 20, 2000.
America Online Latin America, Inc.
/s/ Charles M. Herington
By: _________________________________
Charles M. Herington
Chief Executive Officer
POWER OF ATTORNEY
We the undersigned officers and directors of America Online Latin America,
Inc. hereby severally constitute and appoint Charles Herington and Javier
Aguirre, and each of them singly (with full power to each of them to act
alone), our true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them for him and in his name, place
and stead, and in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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 January 20, 2000
______________________________________ (principal executive
Charles M. Herington officer)
/s/ Javier Aguirre Chief Financial Officer January 20, 2000
______________________________________ (principal financial and
Javier Aguirre accounting officer)
/s/ Steven I. Bandel Director January 20, 2000
______________________________________
Steven I. Bandel
/s/ Gustavo A. Cisneros Director January 20, 2000
______________________________________
Gustavo A. Cisneros
/s/ Ricardo J. Cisneros Director January 20, 2000
______________________________________
Ricardo J. Cisneros
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Miles R. Gilburne Director January 20, 2000
______________________________________
Miles R. Gilburne
/s/ J. Michael Kelly Director January 20, 2000
______________________________________
J. Michael Kelly
/s/ Michael Lynton Director January 20, 2000
______________________________________
Michael Lynton
/s/ Robert S. O'Hara, Jr. Director January 20, 2000
______________________________________
Robert S. O'Hara, Jr.
/s/ Cristina Pieretti Director January 20, 2000
______________________________________
Cristina Pieretti
/s/ Robert W. Pittman Director January 20, 2000
______________________________________
Robert W. Pittman
/s/ Gerald Sokol, Jr. Director January 20, 2000
______________________________________
Gerald Sokol, Jr.
</TABLE>
II-6
<PAGE>
EXHIBIT 10.8
OFFER LETTER
The following offer of employment (the "Offer Letter"), dated as of February 26,
1999, describes the binding agreement between Charles Herington (the
"Executive") and America Online, Inc. ("AOL") with regard to the terms and
provisions of the Executive's emp1oyment by AOL and secondment to AOL Latin
America LLC ("AOL-LA") to serve as the Chief Executive Officer of AOL-LA and as
managing director of Tesjuates, S.L. (the "JV Company"), each jointly owned by
Federal Communications S.A. and Pan Latin Ventures C.V. (the "Joint Venture").
Position: Upon secondment to AOL-LA, the Executive shall be appointed
to the position of Chief Executive Officer of AOL-LA. AOL
reserves the right to transfer the employment of the
Executive to AOL-LA, subject to the assumption by the Joint
Venture of the obligations of AOL set forth herein.
Effective Date: February 26, 1999 (the "Effective Date").
Office Location: South Florida.
Term of Agreement: The Executive's employment by AOL is at will and may be
terminated by either the Executive or the company at any
time; with or without Cause.
Base Salary: US$350,000 per year starting January 13, 1999, payable in
accordance with the ordinary payroll practices of AOL but no
less often than monthly.
Signing Bonus: US$200,000 cash on the Effective Date and US$200,000 cash on
the first anniversary of the Effective Date. In the event
that the Executive leaves the company prior to the first
anniversary of the Effective Date then the Executive must
reimburse AOL the full US$200,000 initial signing bonus.
Annual Bonus
Opportunity: 50% of annual base salary, if the Joint Venture attains100%
the target set forth in Attachment A (or such otter target
as is mutually agreed by the parties) in the applicable
fiscal year (the "Tier I Target");
70% of annual base salary, if the Joint Venture attains 120%
of the Tier I Target (the "Tier II Target'); and
130% of annual base salary, if the Joint Venture attains
150% of the Tier I Target (the "Tier III Target").
Bonuses payable for performance levels in excess of the Tier
1 Target but less than the Tier II Target shall be based on
a linear interpolation between
<PAGE>
the Tier I Target bonus and the potential Tier II Target
bonus. Bonuses payable for performance levels in excess of
the Tier II Target but less than the Tier III Target shall
be based on a linear interpolation between the Tier II
Target bonus and the potential Tier III Target bonus.
Notwithstanding the foregoing, a bonus shall be paid if the
Joint Venture attains in excess of 85% of the Tier I Target
(the "Minimum Bonus Threshold"). Bonuses payable for
performance levels that exceed the Minimum Bonus Threshold
but do not achieve the Tier I Target shall be based on a
linear interpolation between 0% of the annual base salary at
the Minimum Bonus Threshold and the potential Tier I Target
bonus.
The target objectives will include, among others, timely and
successful launch of the AOL service in the three core
markets, target subscriber acquisitions for each of the core
markets and overall management of the Joint Venture's cash
expenditures and finances over each 12-month period, such
target objectives to be agreed following steering committee
approval of the annual business plan. The first bonus year
will be the fiscal year beginning July 1,1999.
Equity
Compensation: On the Effective Date and subject to the terms of AOL's non-
qualified stock option plan and agreement, the Executive
will be granted an option to purchase US$2,000,000 of AOL
common stock based on the NYSE closing price per share on
the Effective Date. These shares will vest equally on the
first, second and third anniversaries of the Effective Date.
On each of January 13, 2000, January 13, 2001, January 13,
2002 and January 13, 2003, provided that the Executive's
employment has been transferred to the Joint Venture prior
to the date of the grant and that the Executive continues to
be employed by the Joint Venture on each such date, the
Executive will be granted stock options to purchase:
(i) US$2,000,000 of Joint Venture common stock based on the
fair market value on each such date as reasonably
determined by the Joint Venture, vesting on the third
anniversary of the date of grant; or
(ii) in the event and only in the event that the Joint
Venture has failed to adopt a stock option plan as of
the date of grant, the Executive's employment will not
be transferred to the Joint Venture and, provided that
the Executive continues to be employed by AOL on each
such date, the Executive will receive US$2,000,000 of
AOL common stock based on the NYSE closing price per
share on each such date, vesting on the third
anniversary of the date of grant.
2
<PAGE>
Subject to the terms set forth under the Termination
provisions below, the stock options shall have a 10-year
term.
Upon the transfer of the employment of the Executive to AOL-
LA, and for so long as the Executive is employed by AOL-LA,
any unexercised AOL stock options shall continue to vest,
and any vested AOL stock options shall continue to be
exercisable, on the same basis as if the Executive continued
to be employed by AOL.
Benefits: The Executive will participate in all welfare and pension
benefit programs maintained by AOL (other than the AOL
401(k) plan and the AOL employee stock purchase plan). In
the event the level of health or life insurance coverage of
such programs are substantially less favorable to that
currently provided the Executive, AOL will provide him with
a payment sufficient to enable the Executive to obtain such
coverage shortfall, provided, that the aggregate cost of
such additional coverage shall not exceed US$5,000 per year.
Perquisites: Country Club Fees. AOL will pay the one time annual fee of
-----------------
US$5,900 associated with the purchase of the Executive's
share in his current country club. In addition, during the
term of the Executive's employment the Joint Venture will
pay the Executive's annual country club dues of US$11,000,
as adjusted from time to time.
Automobile Allowance. The Executive will be reimbursed for
--------------------
actual automobile expenses incurred in an amount of up to
US$30,000 per year.
Tax and Financial Advice. The Executive will receive an
------------------------
additional payment of up to US$5,000 per year for personal
tax and financial planning.
Vacation. The Executive will be entitled to four weeks paid
--------
vacation each year.
Termination: Termination by Employer without Cause. The Executive shall
-------------------------------------
receive the severance benefits set forth in this section in
the event the Executive's employment is terminated by the
Joint Venture without "Cause" (as hereinafter defined). If
such termination occurs prior to the second anniversary of
the Effective Date, during the thirty six month period
following such termination, the Executive will continue to
receive his base salary, payable at the same time and in the
same manner as if the Executive's employment had continued
and he shall be eligible for COBRA coverage. In addition,
the Executive shall receive a pro-rata portion of the target
bonus for the fiscal year during which termination occurs,
payable following the end of such fiscal year. If such
termination occurs on or after the second anniversary of the
Effective Date, the
3
<PAGE>
Executive will receive his salary and COBRA coverage for a
period of twenty-four months after such termination. The
Executive shall receive a pro-rata portion of the target
bonus for the fiscal year during which termination occurs,
payable following the end of such fiscal year. In addition,
the Executive will continue to vest with respect to
previously granted stock options as if his employment had
continued during such applicable severance payment period.
Any such severance benefits will be reduced by the amount of
income earned by the Executive during such severance payment
period.
"Cause" shall mean either of the following circumstances:
(i) the Executive's willful violation of material Joint
Venture policy, which violation is not cured by the
Executive within thirty days after he is provided with
written notice of such violation by the board of directors
of the Joint Venture (the "Board"); (ii) the Executive's
failure to comply with the lawful direction of the Board;
(iii) the commission by the Executive of a material act of
dishonesty or fraud; or (iv) the Executive's conviction or
plea of no contest to a felony.
Termination for Cause. The Executive will receive no
---------------------
payments from the Joint Venture other than amounts accrued
and owing to him as of the termination date. All unexercised
stock options, whether vested or unvested, shall immediately
lapse and become void.
Other Termination or Resignation. In the event that the
--------------------------------
Executive's employment terminates for any reason, other that
those listed above; he shall be entitled to retain his
vested stock options. All his unvested stock options shall
immediately lapse and become void.
Terms Applicable to Termination for Any Reason. In the event
----------------------------------------------
that the Executive's employment terminates for any reason,
he will receive his base salary through the date of
termination. The Executive will not receive any further
grants of stock options after the termination date. Vested
stock options must be exercised by the Executive within a
certain period after the termination date or after such
options become vested, as the case may be, in accordance
with the applicable stock option plan and stock option
agreement.
Protection of the
Interest of the
Joint Venture: Concurrent with the execution of this Offer Letter, the
Executive will execute a confidential non-disclosure
agreement, which employee acknowledges contains restrictive
covenants prohibiting the Executive from competing with AOL
or the Joint Venture and from soliciting their respective
employees or customers for a period equal to the greater of
(i) the period during which the Executive is receiving
regular or severance
4
<PAGE>
payments and (ii) the period ending two years following his
termination or resignation of employment for any reason.
This Offer Letter maybe executed by the parties hereto in counterparts, each of
which shall be deemed an original, but which shall taken together constitute one
and the same document.
IN WITNESS WHEREOF, the parties have signed this Term Sheet dated as of the
date first set forth above.
AMERICA ONLINE, INC.
By: /s/ Shari Jernstrom
-------------------
Name: Shari Jernstrom
---------------
Title: Human Resources Director
------------------------
AOL International
-----------------
Acknowledged and Agreed:
/s/ Charles M. Herington
- ------------------------
Charles Herington
5
<PAGE>
EXHIBIT 21.1
The subsidiaries of the Registrant are as follows:
1. AOL Latin America, S.L., a corporation organized under the laws of
Spain.
2. Latin America QuotaHolder, L.L.C., a Delaware corporation.
3. AOL Brasil Ltda., a corporation organized under the laws of the
Federative Republic of Brazil.
4. AOL Argentina Ltda., a corporation organized under the laws of
Argentina.
5. AOL Mexico S. de R.L. de C.V., a corporation organized under the
laws of Mexico.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated ________________ in the Registration Statement (Form
S-1 No. 333- ) and related Prospectus of America Online Latin America, Inc.
for the registration of ___________ shares of its Class A common stock.
Ernst & Young LLP
McLean, Virginia
The foregoing consent is in the form that will be signed upon the completion of
the reorganization as described in Note 1 to the financial statements.
/s/ Ernst & Young LLP
McLean, Virginia
January 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-2000
<PERIOD-START> DEC-15-1998 JUL-01-1999
<PERIOD-END> JUN-30-1999 SEP-30-1999
<CASH> 17,716 29,862
<SECURITIES> 0 0
<RECEIVABLES> 1,628 2,289
<ALLOWANCES> 180 390
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,290 32,947
<PP&E> 9 865
<DEPRECIATION> 0 16
<TOTAL-ASSETS> 20,300 34,301
<CURRENT-LIABILITIES> 3,301 6,379
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 16,999 27,922
<TOTAL-LIABILITY-AND-EQUITY> 20,300 34,301
<SALES> 0 0
<TOTAL-REVENUES> 1,644 1,207
<CGS> 0 0
<TOTAL-COSTS> 6,561 3,416
<OTHER-EXPENSES> (9) (340)
<LOSS-PROVISION> 210 180
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,908) (1,869)
<INCOME-TAX> 131 103
<INCOME-CONTINUING> (5,039) (1,972)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,039) (1,972)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
