<PAGE>
As Filed Pursuant to Rule 424(b)(4)
Registration No. 333-74659
<TABLE>
<S> <C> <C>
7,000,000 Shares
STARMEDIA NETWORK, INC.
</TABLE>
Common Stock
------------------
This is an initial public offering of shares of common stock of StarMedia
Network, Inc. All of the 7,000,000 shares of common stock are being sold by
StarMedia.
At the request of StarMedia, the underwriters have reserved at the initial
public offering price up to 1,200,000 shares of common stock for sale to certain
directors, stockholders, employees and associates of StarMedia.
Before this offering, there has been no public market for the common stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "STRM".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
----------- -------------
<S> <C> <C>
Initial public offering price..................... $ 15.00 $ 105,000,000
Underwriting discount............................. $ 1.05 $ 7,350,000
Proceeds, before expenses, to StarMedia........... $ 13.95 $ 97,650,000
</TABLE>
The underwriters may, subject to the terms of the underwriting agreement,
purchase up to an additional 1,050,000 shares from StarMedia at the initial
public offering price less the underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on June 1, 1999.
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
------------------------
WIT CAPITAL CORPORATION
FACILITATOR OF INTERNET DISTRIBUTION
------------------------------
Prospectus dated May 25, 1999.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
STARMEDIA NETWORK, INC.
OUR BUSINESS
StarMedia is the leading online network targeting Latin America. Our network
consists of 17 interest-specific areas or channels, extensive Web-based
community features, sophisticated search capabilities and access to online
shopping in Spanish and Portuguese. These channels cover topics of interest to
Latin Americans online, including local and regional news, business and sports.
We promote user affinity to the StarMedia community by providing Spanish and
Portuguese language e-mail, chat rooms, instant messaging and personal
homepages. We provide our content and community features to our users for free.
We derive our revenues principally from the sale of advertisements and
sponsorships on our network.
At a time when content on the Internet is overwhelmingly in English, we
offer Latin Americans a pan-regional community experience, combined with a broad
array of Spanish and Portuguese content tailored for regional dialects and local
cultural norms. We develop our product offerings both internally and through
strategic relationships with third parties, including Netscape, Disney, Reuters
and Ziff-Davis. We also provide advertisers and merchants targeted access to
Latin American Internet users, an audience with a highly desirable demographic
profile.
The total number of Web pages our users access on our network in a month,
referred to as our monthly page views, have grown from approximately 7 million
in December 1997 to approximately 60 million in March 1999. In addition, as of
March 31, 1999, we had approximately 425,000 registered e-mail users.
Our growing user base provides advertisers and merchants with a highly
attractive platform to reach their target audience and provides us with
additional revenue opportunities. In addition, we believe that StarMedia appeals
to advertisers and merchants because of our:
- focus on Latin America;
- powerful brand image in Latin America;
- highly-targeted and attractive demographic user base; and
- dedicated client services team that assists advertisers in developing,
targeting and analyzing their campaigns.
Consequently, we have been able to attract leading advertisers and sponsors
such as Banco Santander, Bradesco, Ford, Fox Television, IBM, Nokia,
Outpost.com, SkyTel, Sony and USA Networks. These customers, in the aggregate,
accounted for approximately 25.63% of total revenues in the three months ended
March 31, 1999 and 34.70% of total revenues for the year ended December 31,
1998.
OUR MARKET OPPORTUNITY
We believe that growth of Internet usage in Latin America will significantly
outpace growth of worldwide Internet usage over the next several years.
According to Nazca Saatchi & Saatchi, the number of Internet users in Latin
America is expected to increase from 7 million users at the end of 1997 to 34
million users by the end of 2000. In Latin America, 20% of the population
controls an estimated 65% of the overall buying power. Nazca Saatchi & Saatchi
also reports that 90% of Latin American Internet users are from upper and middle
socio-economic classes. This group represents an attractive demographic audience
for advertisers and businesses.
OUR STRATEGY
Our objective is to strengthen our position as the leading online network
across Latin America by:
- aggressively extending our brand recognition;
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<PAGE>
- enhancing and expanding our network of Spanish and Portuguese content and
pan-regional community;
- pursuing strategic acquisitions and alliances;
- offering Internet access service to our community of users; and
- expanding into additional Spanish- and Portuguese-speaking markets.
RECENT DEVELOPMENTS
In April and May 1999, we completed the private placement of 3,727,272
shares of our common stock to a number of strategic investors for $41 million.
These investors include:
- Critical Path, Inc.
- eBay Inc.;
- Europortal Holding S.A.;
- Hearst Communications, Inc.;
- National Broadcasting Company, Inc.; and
- Reuters Holdings Switzerland SA.
We intend to work closely with our strategic investors in order to develop
new content and to add new features to our network.
OUR HISTORY
We were incorporated in Delaware in March 1996. We commenced operations in
September 1996 and launched the StarMedia network in December 1996. As of March
31, 1999, we had an accumulated deficit of approximately $72.4 million.
Our principal executive offices are located at 29 West 36(th) Street, Fifth
Floor, New York, New York 10018 and our telephone number is (212) 548-9600. In
addition, we maintain offices in Sao Paulo, Mexico City, Buenos Aires, Bogota,
Santiago, Montevideo, Caracas and Miami. Our Internet address is
www.starmedia.com. The information on our Web site is not a part of this
prospectus.
OUR TRADEMARKS
STARMEDIA and the STARMEDIA logo are registered trademarks and service marks
of StarMedia. STARMEDIA.COM, TALKPLANET, BUSCAWEB, ORBITA, PIZARRAS and (V)PULSE
are trademarks and service marks of StarMedia. All other trademarks and service
marks used in this prospectus are the property of their respective owners.
THE OFFERING
The following information assumes that the underwriters do not exercise the
option we have granted to them to purchase additional shares in this offering.
Please see "Underwriting".
<TABLE>
<S> <C>
Shares offered by StarMedia... 7,000,000 shares
Shares to be outstanding after
this offering...............
53,150,939 shares
Nasdaq National Market
symbol......................
STRM
Use of proceeds...............
For working capital and general corporate purposes. Please
see "Use of Proceeds".
</TABLE>
This information is based on our shares of common stock outstanding as of
March 31, 1999 and gives effect to the conversion of all outstanding shares of
redeemable convertible preferred stock into 31,996,667 shares of common stock
automatically on the closing of this offering and 3,727,272 additional shares of
common stock issued to strategic investors at $11.00 per share subsequent to
March 31, 1999. This information excludes:
- 8,229,100 shares subject to options outstanding as of March 31, 1999 at a
weighted average exercise price of $1.92 per share;
- 8,770,900 additional shares that could be issued under our stock option
plans; and
- 1,500,000 additional shares available for issuance under our employee
stock purchase plan.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the financial data for our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
PERIOD FROM MARCH 5, DECEMBER 31, MARCH 31,
1996 (INCEPTION) TO ----------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
--------------------- --------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ -- $ 460 $ 5,329 $ 256 $ 1,541
Operating expenses:
Product and technology development... 36 1,229 6,816 794 3,562
Sales and marketing.................. 12 2,108 29,274 1,816 9,657
General and administrative........... 78 648 4,600 450 2,410
Depreciation and amortization........ 2 38 774 79 467
Stock-based compensation expense..... -- -- 10,421 2 1,417
-------- --------- ------------ --------- --------------
Total operating expenses............. 128 4,023 51,885 3,141 17,513
-------- --------- ------------ --------- --------------
Operating loss......................... (128) (3,563) (46,556) (2,885) (15,972)
Interest income, net................. -- 35 670 28 421
-------- --------- ------------ --------- --------------
Net loss............................... (128) (3,528) (45,886) (2,857) (15,551)
-------- --------- ------------ --------- --------------
Preferred stock dividends and
accretion............................ -- (185) (4,536) (295) (2,541)
Net loss available to common
shareholders......................... $ (128) $ (3,713) $(50,422) $ (3,152) $ (18,092)
-------- --------- ------------ --------- --------------
-------- --------- ------------ --------- --------------
Basic and diluted net loss per share... $ (0.01) $ (.37) $ (4.94) $ (.31) $ (1.74)
-------- --------- ------------ --------- --------------
Shares used in computing basic and
diluted net loss per share........... 9,147 10,012 10,202 10,012 10,410
-------- --------- ------------ --------- --------------
Pro forma basic and diluted net loss
per share............................ $ (1.09) $ (.37)
------------ --------------
------------ --------------
Shares used in computing pro forma
basic and diluted net loss per
share................................ 42,199 42,406
------------ --------------
------------ --------------
</TABLE>
The following table is a summary of our balance sheet at March 31, 1999. The
pro forma data give effect to the conversion of our redeemable convertible
preferred stock and the sale of 3,727,272 shares of common stock at $11.00 per
share subsequent to March 31, 1999 and the application of the net proceeds
therefrom. The pro forma as adjusted data reflect the sale of 7,000,000 shares
of common stock at an initial public offering price of $15.00 per share, after
deducting underwriting discounts and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 40,588 $ 79,948 $ 176,334
Working capital........................................................... 31,383 70,743 167,704
Total assets.............................................................. 53,889 93,249 188,824
Redeemable convertible preferred stock.................................... 99,035 -- --
Total stockholders' (deficit) equity...................................... (60,232) 78,163 174,313
</TABLE>
5
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS
OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
We were incorporated in March 1996. We commenced operations in September
1996 and launched the StarMedia network in December 1996. Accordingly, we have
only a limited operating history for you to evaluate our business. You must
consider the risks, expenses and uncertainties that an early stage company like
ours faces. These risks include our ability to:
- increase awareness of the StarMedia brand and continue to build user
loyalty;
- expand the content and services on our network;
- attract a larger audience to our network;
- attract a large number of advertisers from a variety of industries;
- maintain our current, and develop new, strategic relationships;
- respond effectively to competitive pressures; and
- continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks, our business, financial
condition and results of operations will be materially and adversely affected.
WE HAVE NEVER MADE MONEY AND EXPECT OUR LOSSES TO CONTINUE
We have never been profitable. As of March 31, 1999, we had an accumulated
deficit of approximately $72.4 million. We expect to continue to incur
significant losses for the foreseeable future. Although our revenues have grown
in recent quarters, our expenses have grown even faster and we expect to
increase our spending significantly. Accordingly, we will need to generate
significant revenues to achieve profitability. We may not be able to do so.
WE HAVE DERIVED A PORTION OF OUR REVENUES FROM RECIPROCAL ADVERTISING
AGREEMENTS, WHICH DO NOT GENERATE CASH REVENUE
We derive a portion of our revenues from reciprocal advertising arrangements
under which we exchange advertising space on our network predominantly for
advertising space on television and radio stations, rather than cash payments.
In the three months ended March 31, 1999, we derived approximately $424,000, or
28% of revenues, from these arrangements. In the year ended December 31, 1998,
we derived approximately $2.4 million, or 45% of revenues, from these
arrangements. We expect that revenues from reciprocal advertising arrangements
will continue to account for a portion of our revenues in the foreseeable
future. Reciprocal advertising arrangements do not generate any cash revenues.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors. Accordingly, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that in future periods our results of
operations may be below the expectations of public market analysts and
investors. This could cause the trading price of our common stock to decline.
OUR OPERATING RESULTS MAY ALSO FLUCTUATE DUE TO SEASONAL FACTORS
The level of use on our network is highly seasonal. This may cause
fluctuations in our revenues and operating results. Visitor traffic on our
network has historically been
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<PAGE>
significantly lower during the first calendar quarter of the year because:
- it includes the summer months in much of Latin America;
- our target audience tends to take extended vacations during these months;
and
- schools and universities are generally closed.
As a result, advertisers have historically spent less in the first and second
calendar quarters. We believe that these seasonal trends will continue to affect
our results of operations. If our expenses increase during these periods, we may
not generate sufficient revenue to offset these expenses.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS
We intend to continue to grow our business. Because we expect to generate
losses for the foreseeable future, we do not expect that income from our
operations will be sufficient to meet these needs. Therefore, we will likely
have substantial future capital requirements after this offering. Obtaining
additional financing will be subject to a number of factors, including:
- market conditions;
- our operating performance; and
- investor sentiment.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive for us. If we are unable to raise additional
capital, our growth could be impeded.
RISKS RELATED TO OUR MARKETS AND STRATEGY
IF THE INTERNET IS NOT WIDELY ACCEPTED AS A MEDIUM FOR ADVERTISING AND COMMERCE,
OUR BUSINESS WILL SUFFER
We expect to derive most of our revenue for the foreseeable future from
Internet advertising, and to a lesser extent, from electronic commerce. If the
Internet is not accepted as a medium for advertising and commerce, our business
will suffer. The Internet advertising market is new and rapidly evolving,
particularly in Latin America. As a result, we cannot gauge its effectiveness or
long term market acceptance as compared with traditional media.
Advertisers and advertising agencies must direct a portion of their budgets
to the Internet and, specifically, to our network. Many of our current or
potential advertising and electronic commerce partners have limited experience
using the Internet for advertising purposes and historically have not devoted a
significant portion of their advertising budgets to Internet-based advertising.
Advertisers that have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts.
In addition, companies may choose not to advertise on the StarMedia network
if they do not perceive our audience demographic to be desirable or advertising
on our network to be effective.
THE ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ADVERTISING DEPENDS ON THE
DEVELOPMENT OF A MEASUREMENT STANDARD
No standards have been widely accepted for the measurement of the
effectiveness of Internet advertising. Standards may not develop sufficiently to
support the Internet as an effective advertising medium. If these standards do
not develop, advertisers may choose not to advertise on the Internet in general
or, specifically, on our network. This would have a material adverse effect on
our business, financial condition and results of operations.
SOCIAL AND POLITICAL CONDITIONS IN LATIN AMERICA MAY CAUSE VOLATILITY IN OUR
OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS
We have and expect to continue to derive substantially all of our revenues
from the Latin American markets. Social and political conditions in Latin
America are volatile and may cause our operations to fluctuate. This volatility
could make it difficult for us to sustain our expected growth in revenues and
earnings,
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<PAGE>
which could have an adverse effect on our stock price. Historically, volatility
has been caused by:
- significant governmental influence over many aspects of local economies;
- political instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative growth;
- imposition of trade barriers; and
- wage and price controls.
We have no control over these matters. Volatility resulting from these matters
may decrease Internet availability, create uncertainty regarding our operating
climate and adversely affect our customers' advertising budgets, all of which
may adversely impact our business.
CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA MAY
ADVERSELY AFFECT OUR BUSINESS
The currencies of many countries in Latin America, including Brazil and
Argentina, have experienced substantial depreciation and volatility. The
currency fluctuations, as well as high interest rates, inflation and high
unemployment, have materially and adversely affected the economies of these
countries. Poor general economic conditions in Latin American countries may
cause our customers to reduce their advertising spending, which could adversely
impact our business and could cause our revenue to decline unexpectedly.
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. In a number of cases, however,
customers in Latin America may be billed in local currencies. Our accounts
receivable from these customers will decline in value if the local currencies
depreciate relative to the U.S. dollar. To date, we have not tried to reduce our
exposure to exchange rate fluctuations by using hedging transactions. Although
we may enter into hedging transactions in the future, we may not be able to do
so successfully. In addition, our currency exchange losses may be magnified if
we become subject to exchange control regulations restricting our ability to
convert local currencies into U.S. dollars.
IF INTERNET USE IN LATIN AMERICA DOES NOT GROW, OUR BUSINESS WILL SUFFER
The Latin American Internet market is in an early stage of development. Our
future success depends on the continued growth of the Internet in Latin America.
Our business, financial condition and results of operations will be materially
and adversely affected if Internet usage in Latin America does not continue to
grow or grows more slowly than we anticipate. Internet usage in Latin America
may be inhibited for a number of reasons, including:
- the cost of Internet access;
- concerns about security, reliability, and privacy;
- ease of use; and
- quality of service.
UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE MAY LIMIT THE GROWTH OF THE
INTERNET IN LATIN AMERICA AND ADVERSELY AFFECT OUR BUSINESS
Access to the Internet requires a relatively advanced telecommunications
infrastructure. The telecommunications infrastructure in many parts of Latin
America is not as well-developed as in the United States or Europe. The quality
and continued development of the telecommunications infrastructure in Latin
America will have a substantial impact on our ability to deliver our services
and on the market acceptance of the Internet in Latin America in general. If
further improvements to the Latin American telecommunications infrastructure are
not made, the Internet will not gain broad market acceptance in Latin America.
If access to the Internet in Latin America does not continue to grow or grows
more slowly than we anticipate, our business, financial condition and results of
operations will be materially and adversely affected.
HIGH COST OF INTERNET ACCESS MAY LIMIT THE GROWTH OF THE INTERNET IN LATIN
AMERICA AND IMPEDE OUR GROWTH
Each country in Latin America has its own telephone rate structure which, if
too
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expensive, may cause consumers to be less likely to access and transact business
over the Internet. Although rates charged by Internet service providers and
local telephone companies have been reduced recently in some countries, we do
not know whether this trend will continue. Unfavorable rate developments could
decrease our visitor traffic and our ability to derive revenues from
transactions over the Internet. This could have a material adverse effect on our
business, financial condition and results of operations.
OUR PAN-REGIONAL APPROACH TO CONTENT DELIVERY MAY NOT BE APPEALING TO LATIN
AMERICAN USERS
Latin America is made up of a number of diverse markets that differ
historically, culturally, economically and politically. We use a pan-regional
approach of customizing our content and advertisements to a particular user
based on the user's location. Users, however, may prefer content which is
specifically created for a local audience within Latin America using a strictly
localized approach over our pan-regional approach. If users do not find the
pan-regional content on our network appealing, they will decrease in number and
advertisers will find our network an unattractive medium on which to advertise.
WE MAY NOT BE ABLE TO SUCCESSFULLY PROVIDE INTERNET ACCESS SERVICES IN LATIN
AMERICA
We intend to offer Internet access services beginning in the second half of
1999. We have contracted with IBM to provide these services. We may also acquire
or develop additional Internet access services in the future. We have no
experience in marketing or operating an Internet access service, and we may not
be able to do so successfully. If we are not able to successfully develop,
market or operate our Internet access services, our expenses could increase
substantially without generating significant additional revenue, our
management's time may be wasted and our business may otherwise be materially and
adversely affected.
WE MAY NOT BE ABLE TO DEVELOP THE STARMEDIA BRAND AND ATTRACT USERS TO OUR
NETWORK
Maintaining the StarMedia brand is critical to our ability to expand our
user base and our revenues. We believe that the importance of brand recognition
will increase as the number of Internet sites in Latin America grows. In order
to attract and retain Internet users, advertisers and electronic commerce
partners, we intend to increase substantially our expenditures for creating and
maintaining brand loyalty.
Our success in promoting and enhancing the StarMedia brand will also depend
on our success in providing high quality content, features and functionality. If
we fail to promote our brand successfully or if visitors to our network or
advertisers do not perceive our services to be of high quality, the value of the
StarMedia brand could be diminished. This could have a material and adverse
effect on the business, financial condition and results of operations.
OUR ADVERTISING PRICING MODEL, THAT IS BASED ON THE NUMBER OF TIMES AN
ADVERTISEMENT IS DELIVERED TO USERS, MAY NOT BE SUCCESSFUL
Different pricing models are used to sell advertising on the Internet, and
the models we adopt may prove to not be the most profitable. Advertising based
on impressions, or the number of times an advertisement is delivered to users,
currently comprises substantially all of our revenues. To the extent that
minimum guaranteed impression levels are not met, we defer recognition of the
corresponding revenues until guaranteed impression levels are achieved. To the
extent that minimum impression levels are not achieved, we may be required to
provide additional impressions after the contract term, which would reduce our
advertising inventory. This could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT TO NEW INTERNET ADVERTISING PRICING
MODELS
It is difficult to predict which pricing model, if any, will emerge as the
industry standard.
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This makes it difficult to project our future advertising rates and revenues.
Our advertising revenues could be adversely affected if we are unable to adapt
to new forms of Internet advertising or we do not adopt the most profitable
form.
WE MAY NOT BE ABLE TO TRACK THE DELIVERY OF ADVERTISEMENTS ON OUR NETWORK IN A
WAY THAT MEETS THE NEEDS OF OUR ADVERTISERS
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our network.
Companies may choose to not advertise on our network or may pay less for
advertising if they do not perceive our ability to track and measure the
delivery of advertisements to be reliable. We depend on third parties to provide
us with some of these measurement services. If they are unable to provide these
services in the future, we would need to perform them ourselves or obtain them
from another provider. This could cause us to incur additional costs or cause
interruptions in our business during the time we are replacing these services.
We are currently implementing additional systems designed to record information
on our users. If we do not implement these systems successfully, we may not be
able to accurately evaluate the demographic characteristics of our users.
THE LOSS OF ONE OF OUR TOP ADVERTISERS COULD SIGNIFICANTLY REDUCE OUR
ADVERTISING REVENUE AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS
In 1998, our top advertiser, Fox Latin America, accounted for approximately
23% of our total advertising revenues. In 1998, our top five advertisers
accounted for approximately 62% of our total revenues. In the first quarter of
1999, our top advertiser, Netscape, accounted for approximately 19% of our total
revenues. In the first quarter of 1999, our top 5 advertisers accounted for
approximately 60% of our total revenues. Our business, results of operations and
financial condition could be materially and adversely affected by the loss of
one or more of our top advertisers. If we do not attract additional advertisers,
our business, financial condition and results of operations could be materially
adversely affected.
WE EXPECT TO CONTINUE TO RELY HEAVILY ON ADVERTISING REVENUES AND IF WE DO NOT
INCREASE OUR ADVERTISING SALES, OUR BUSINESS WILL NOT GROW AS EXPECTED
We depend on our advertising sales department to maintain and increase our
advertising sales. Our business, financial condition and results of operations
could be materially and adversely affected if our advertising sales department
is not effective. As of March 31, 1999, our advertising sales department
consisted of over 75 employees. Although we expect our advertising sales
department to grow, it can take a relatively long period of time before new
sales personnel become productive.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS
We have recently experienced a period of rapid growth. This has placed a
significant strain on our managerial, operational and financial resources. To
accommodate this growth, we must implement new or upgraded operating and
financial systems, procedures and controls throughout many different locations.
We may not succeed with these efforts. Our failure to expand and integrate these
areas in an efficient manner could cause our expenses to grow, our revenues to
decline or grow more slowly than expected and could otherwise have a material
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL THAT ARE IN HIGH DEMAND
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of our
Chairman and Chief Executive Officer, Fernando J. Espuelas, and our President,
Jack C. Chen. The loss of the services of either executive officer or any of our
key management, sales or technical personnel could have a material adverse
effect on our business, financial condition and results of operations. In
addition, our success is largely
10
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dependent on our ability to hire highly qualified managerial, sales and
technical personnel. These individuals are in high demand and we may not be able
to attract the staff we need. The difficulties and costs in connection with our
personnel growth are compounded by the fact that many of our operations are
internationally based.
OUR JOINT VENTURES, ACQUISITIONS AND ALLIANCES MAY STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND MAY BE DISRUPTIVE TO OUR BUSINESS
In the past, we have acquired or developed alliances or joint ventures with
complementary businesses, technologies, services or products. In particular, in
the first and second quarter of 1999, we acquired two Internet companies in
Brazil and have entered into an agreement to acquire an Internet company in
Spain. The closing of our acquisition in Spain is subject to a number of
conditions. Therefore, we may not be able to complete the acquisition as
planned. Moreover, we may be unable to integrate or implement these joint
ventures, acquisitions or alliances effectively. Any difficulties in this
process could disrupt our ongoing business, distract our management and
employees, increase our expenses and otherwise adversely affect our business.
FINANCING FOR FUTURE JOINT VENTURES, ACQUISITIONS OR ALLIANCES MAY NOT BE
AVAILABLE OR MAY DILUTE EXISTING STOCKHOLDERS
We do not know if we will be able to identify any future joint ventures,
acquisitions or alliances or that we will be able to successfully finance these
transactions. A failure to identify or finance future transactions may impair
our growth. In addition, to finance these transactions, it may be necessary for
us to raise additional funds through public or private financings. Any equity or
debt financings, if available at all, may impact our operations and, in the case
of equity financings, may result in dilution to existing stockholders.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS
There are many companies that provide Web sites and online destinations
targeted to Latin Americans and Spanish- and Portuguese-speaking people in
general. Competition for visitors, advertisers and electronic commerce partners
is intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in our market.
Increased competition could result in:
- lower advertising rates;
- price reductions and lower profit margins;
- loss of visitors;
- reduced page views; or
- loss of market share.
Any one of these could materially and adversely affect our business,
financial condition and results of operations.
In addition, our competitors may develop content that is better than ours or
that achieves greater market acceptance. It is also possible that new
competitors may emerge and acquire significant market share. A loss of users to
our competitors may have a material and adverse effect on our business,
financial condition and results of operations.
WE WILL NOT BE ABLE TO ATTRACT VISITORS OR ADVERTISERS IF WE DO NOT CONTINUALLY
ENHANCE AND DEVELOP THE CONTENT AND FEATURES OF OUR NETWORK
To remain competitive, we must continue to enhance and improve our content.
In addition, we must:
- continually improve the responsiveness, functionality and features of our
network; and
- develop other products and services that are attractive to users and
advertisers.
We may not succeed in developing or introducing features, functions,
products and services that visitors and advertisers find attractive in a timely
manner. This would likely reduce our visitor traffic and materially and
adversely affect our business, financial condition and results of operations.
11
<PAGE>
WE RELY FOR OUR CONTENT ON THIRD PARTIES WHO MAY MAKE THEIR CONTENT AVAILABLE TO
OUR COMPETITORS
We constantly attempt to determine what content, features and functionality
our target audience wants. We rely to a large extent on third parties for our
content, much of which is easily available from other sources. If other networks
present the same or similar content in a superior manner, it would adversely
affect our visitor traffic.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH CONTENT
PROVIDERS, ELECTRONIC COMMERCE MERCHANTS AND TECHNOLOGY PROVIDERS, WE MAY NOT
BE ABLE TO ATTRACT AND RETAIN USERS
We have focused on establishing relationships with leading content
providers, electronic commerce merchants, and technology and infrastructure
providers. Our business depends extensively on these relationships. Because most
of our agreements with these third parties are not exclusive, our competitors
may seek to use the same partners as we do and attempt to adversely impact our
relationships with our partners. We might not be able to maintain these
relationships or replace them on financially attractive terms. If the parties
with which we have these relationships do not adequately perform their
obligations, reduce their activities with us, choose to compete with us or
provide their services to a competitor, we may have more difficulty attracting
and maintaining visitors to our network and our business, financial condition
and results of operations could be materially and adversely affected. Also, we
intend to actively seek additional relationships in the future. Our efforts in
this regard may not be successful.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE
UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED
VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION
In the past, we have experienced:
- system disruptions;
- inaccessibility of our network;
- long response times;
- impaired quality; and
- loss of important reporting data.
Although we are in the process of improving our network, we may not be
successful in implementing these measures. If we experience delays and
interruptions, visitor traffic may decrease and our brand could be adversely
affected. Because our revenues depend on the number of individuals who use our
network, our business may suffer if our improvement efforts are unsuccessful.
We maintain our central production servers at the New Jersey data center of
Exodus Communications. We also have a second co-location facility at Digital
Island in New York. A failure by Exodus or Digital Island to protect their
systems against damage from fire, hurricanes, power loss, telecommunications
failure, break-ins or other events, could have a material adverse effect on our
business, financial condition and results of operations.
CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY
OF INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR NETWORK AND IMPEDE
OUR GROWTH
A significant barrier to electronic commerce and confidential communications
over the Internet has been the need for security. Internet usage could decline
if any well-publicized compromise of security occurred. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Unauthorized persons could attempt to
penetrate our network security. If successful, they could misappropriate
proprietary information or cause interruptions in our services. As a result, we
may be required to expend capital and resources to protect against or to
alleviate these problems. Security breaches could have a material adverse effect
on our business, financial condition and results of operations.
12
<PAGE>
COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY
ADVERSELY AFFECT OUR BUSINESS
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
YEAR 2000 PROBLEMS MAY DISRUPT OUR INTERNAL OPERATIONS
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Therefore, the year 2000 will
appear as "00", which the system might consider to be the year 1900 rather than
the year 2000. This could result in system failures, delays or miscalculations
causing disruptions to our operations. Our failure to correct a material Year
2000 problem could have a material adverse effect on our business, financial
condition and results of operations.
We are currently conducting an inventory, and developing testing procedures,
for all software and other systems that we believe might be affected by Year
2000 issues. Since third parties developed and currently support many of the
systems that we use, a significant part of this effort will be to ensure that
these third-party systems are Year 2000 compliant. We plan to confirm this
compliance through a combination of the representation by these third parties of
their products' Year 2000 compliance, as well as specific testing of these
systems.
RISKS RELATED TO LEGAL UNCERTAINTY
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL
UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR BUSINESS
To date, governmental regulations have not materially restricted use of the
Internet in our markets. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. The growth of the
Internet may also be significantly slowed. This could delay growth in demand for
our network and limit the growth of our revenues.
In addition to new laws and regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may cover issues which include:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- pornography; and
- other claims based on the nature and content of Internet materials.
WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS WHICH MAY
BE EXPENSIVE, TIME CONSUMING AND DISTRACTING
Because we have employees, property and business operations in the United
States and throughout Latin America, we are subject to the laws and the court
systems of many jurisdictions. We may become subject to claims based on foreign
jurisdictions for violations of their laws. In addition, these laws may be
changed or new laws may be enacted in the future. International litigation is
often expensive, time consuming and distracting. Accordingly, any of the
foregoing could have a material adverse effect on our business, financial
condition and results of operations.
13
<PAGE>
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY
AFFECT OUR BUSINESS
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO
SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS
We cannot be certain that our products do not or will not infringe valid
patents, copyrights or other intellectual property rights held by third parties.
We may be subject to legal proceedings and claims from time to time relating to
the intellectual property of others in the ordinary course of our business. We
may incur substantial expenses in defending against these third-party
infringement claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK
The laws in the United States and in Latin American countries relating to
the liability of companies which provide online services, like ours, for
activities of their visitors are currently unsettled. Claims have been made
against online service providers and networks in the past for defamation,
negligence, copyright or trademark infringement, obscenity, personal injury or
other theories based on the nature and content of information that was posted
online by their visitors. We could be subject to similar claims and incur
significant costs in their defense. In addition, we could be exposed to
liability for the selection of listings that may be accessible through our
network or through content and materials that our visitors may post in
classifieds, message boards, chat rooms or other interactive services. It is
also possible that if any information provided through our services contains
errors, third parties could make claims against us for losses incurred in
reliance on the information. We offer Web-based e-mail services, which expose us
to potential liabilities or claims resulting from:
- unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
Investigating and defending these claims is expensive, even if they do not
result in liability.
WE MAY BE SUBJECT TO CLAIMS BASED ON PRODUCTS SOLD ON OUR NETWORK
We have entered into arrangements to offer third-party products and services
on our network under which we may be entitled to receive a share of revenues
generated from these transactions. These arrangements may subject us to
additional claims including product liability or personal injury from the
products and services, even if we do not ourselves provide the products or
services. These claims may require us to incur significant expenses in their
defense or satisfaction. While our agreements with these parties often provide
that we will be
14
<PAGE>
indemnified against such liabilities, such indemnification may not be adequate.
Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations or could result in the imposition of criminal penalties. In addition,
the increased attention focused on liability issues as a result of these
lawsuits and legislative proposals could impact the overall growth of Internet
use.
RISKS RELATED TO THIS OFFERING
WE MAY USE THE 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. Our management will therefore have significant flexibility in applying
the net proceeds of this offering, including ways in which stockholders may
disagree. 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".
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
Following this offering, the price at which our common stock will trade is
likely to be highly volatile and may fluctuate substantially.
In addition, 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, investors in our common stock may experience a decrease in the value of
their common stock regardless of our operating performance or prospects.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION
WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF 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 in the past. We may also become involved in
this type of litigation. Litigation is often expensive and diverts management's
attention and resources, which could have a material adverse effect upon our
business, financial condition and results of operations.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. These sales also might
make it difficult for us to sell equity securities in the future at a time and
at a price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could suffer.
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS
Our directors, executive officers and affiliates currently beneficially own
approximately 62.3% of the outstanding shares
15
<PAGE>
of our common stock, and after the offering will beneficially own approximately
54.6% of the outstanding shares of our common stock. Accordingly, they will have
significant influence in determining the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also
the power to prevent or cause a change in control. The interests of these
stockholders may differ from the interests of the other stockholders.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment.
16
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors".
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. The assumptions include that:
- 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 five years;
- the value of online advertising dollars spent per online user hour will
increase;
- the download speed of content will increase dramatically; and
- Internet security and privacy concerns will be adequately addressed.
If any one or more of the foregoing assumptions turns out to be incorrect,
actual results may differ from the projections based on these assumptions. The
Internet-related markets may not grow over the next three to four years at the
rates projected by these 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, results of operations and financial condition, and the market price of
our common stock.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made.
17
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are $96.2 million, at an initial public offering price of $15.00
per share and after deducting the estimated underwriting discount and offering
expenses. If the underwriters' over-allotment option is exercised in full, the
net proceeds we will receive will be $110.8 million.
As of the date of this prospectus, we have not made any specific expenditure
plans with respect to the proceeds of this offering. Therefore, we cannot
specify with certainty the particular uses for the net proceeds to be received
upon completion of this offering. Accordingly, our management will have
significant flexibility in applying the net proceeds of the offering.
In addition, we intend to use our existing cash and cash equivalents, cash
from operations as well as the net proceeds of this offering for working capital
and to fund our operations.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate future access to
the public capital markets, and to increase our visibility in the marketplace.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to (1) the automatic conversion
of all outstanding shares of our convertible preferred stock into common
stock, (2) the sale of 3,727,272 additional shares of our common stock at
$11.00 per share subsequent to March 31, 1999 and the application of the
net proceeds therefrom, and (3) an increase in our authorized common stock
to 200,000,000 shares and a decrease in our authorized preferred stock to
10,000,000 shares; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an initial public offering price of $15.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations--current portion................................. $ 166 $ 166 $ 166
Long-term debt............................................................. 3,626 3,626 3,626
Preferred stock, 60,000,000 shares authorized (actual); 10,000,000 shares
authorized (pro forma and pro forma as adjusted):
Series A redeemable convertible preferred stock, $.001 par value;
7,330,000 shares authorized, issued and outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 4,311 -- --
Series B redeemable convertible preferred stock, $.001 par value;
8,000,000 shares authorized, issued and outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 13,246 -- --
Series C redeemable convertible preferred stock, $.001 par value;
16,666,667 shares authorized, issued and outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 81,478 -- --
Stockholders' (deficit) equity:
Common stock, $.001 par value; 100,000,000 shares authorized (actual);
200,000,000 shares authorized (pro forma and pro forma as adjusted);
10,427,000 shares issued and outstanding (actual); 46,150,939 shares
issued and outstanding (pro forma); 53,150,939 shares issued and
outstanding (pro forma as adjusted).................................. 10 46 53
Additional paid in capital................................................. 24,185 162,544 258,687
Deferred compensation...................................................... (11,854) (11,854) (11,854)
Other comprehensive income................................................. (218) (218) (218)
Accumulated deficit........................................................ (72,355) (72,355) (72,355)
--------- ----------- -------------
Total stockholders' (deficit) equity....................................... (60,232) 78,163 174,313
--------- ----------- -------------
Total capitalization....................................................... $ 42,595 $ 81,955 $ 178,105
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999. It does not
include:
- 8,229,100 shares subject to options outstanding as of March 31, 1999 at a
weighted average exercise price of $1.92 per share;
- 8,770,900 additional shares that could be issued under our stock option
plans; and
- 1,500,000 additional shares available for issuance under our employee
stock purchase plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$75.9 million, or $1.65 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of common stock
outstanding at that date, assuming conversion of all outstanding shares of our
convertible preferred stock into common stock and the sale of 3,727,272
additional shares of our common stock at $11.00 per share after deducting
related commissions. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering made and the net tangible book value per share of
common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the estimated underwriting discount and
offering expenses payable by us, our pro forma net tangible book value as of
March 31, 1999 would have been $172.9 million, or $3.25 per share. This
represents an immediate increase in pro forma net tangible book value of $1.60
per share to existing stockholders and an immediate dilution of $11.75 per share
to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $ 15.00
Pro forma net tangible book value per share at March 31, 1999.............. $ 1.65
Increase in pro forma net tangible book value per share attributable to
this offering 1.60
---------
Pro forma net tangible book value per share after this offering 3.25
---------
Dilution per share to new investors........................................ $ 11.75
---------
</TABLE>
------------------------
The following table summarizes, on a pro forma basis, as of March 31, 1999,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share paid
by existing stockholders and new investors purchasing shares of common stock in
this offering. The calculation below is based on an initial public offering
price of $15.00 per share, before deducting the estimated underwriting discount
and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------------- ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 46,150,939 86.8% $ 137,168,000 56.6% $ 2.97
New investors.............................. 7,000,000 13.2 105,000,000 43.4 15.00
-------------- ----- ---------------- -----
Total.................................. 53,150,939 100.0% $ 242,168,000 100.0%
-------------- ----- ---------------- -----
-------------- ----- ---------------- -----
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 8,229,100 shares of common stock with a
weighted average exercise price of $1.92 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the period
from March 5, 1996 (inception) to December 31, 1996 and the years ended December
31, 1997 and 1998 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected consolidated
balance sheet data as of March 31, 1999 and the consolidated statement of
operations for the three months ended March 31, 1998 and 1999 have been derived
from unaudited consolidated financial statements included elsewhere in this
prospectus. The selected consolidated balance sheet data as of December 31, 1996
are derived from our consolidated audited financial statements not included in
this prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, which, in the
opinion of management, are necessary for the fair presentation of our
consolidated financial position and the consolidated results of operations for
those periods. Results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
entire year or for any future period. The selected consolidated financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996
(INCEPTION) TO YEAR ENDED DECEMBER THREE MONTHS
DECEMBER 31, 31, ENDED MARCH 31,
--------------- --------------------- ---------------------
1996 1997 1998 1998 1999
--------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ -- $ 460 $ 5,329 $ 256 $ 1,541
------- --------- ---------- --------- ----------
Operating expenses:
Product and technology development................... 36 1,229 6,816 794 3,562
Sales and marketing.................................. 12 2,108 29,274 1,816 9,657
General and administrative........................... 78 648 4,600 450 2,410
Depreciation and amortization........................ 2 38 774 79 467
Stock-based compensation expense..................... -- -- 10,421 2 1,417
------- --------- ---------- --------- ----------
Total operating expenses........................... 128 4,023 51,885 3,141 17,513
Operating loss......................................... (128) (3,563) (46,556) (2,885) (15,972)
Interest income, net................................. -- 35 670 28 421
------- --------- ---------- --------- ----------
Net loss............................................... (128) (3,528) (45,886) (2,857) (15,551)
------- --------- ---------- --------- ----------
Preferred stock dividends and accretion................ -- (185) (4,536) (295) (2,541)
Net loss available to common shareholders.............. $ (128) $ (3,713) $ (50,422) $ (3,152) $ (18,092)
------- --------- ---------- --------- ----------
------- --------- ---------- --------- ----------
Basic and diluted net loss per share................... $ (0.01) $ (0.37) $ (4.94) $ (.31) $ (1.74)
------- --------- ---------- --------- ----------
Shares used in computing basic and diluted net loss per
share................................................ 9,147 10,012 10,202 10,012 10,410
------- --------- ---------- --------- ----------
------- --------- ---------- --------- ----------
Pro forma basic and diluted net loss per share(1)...... $ (1.09) $ (.37)
---------- ----------
---------- ----------
Shares used in computing pro forma basic and diluted
net loss per share(1)................................ 42,199 42,406
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Assumes conversion of all outstanding shares of redeemable convertible
preferred stock into 31,996,667 shares of common stock. See note 4 to our
consolidated financial statements included elsewhere in this prospectus for
an explanation of the method used to determine the number of shares used to
compute pro forma net loss per share.
21
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, MARCH 31,
-------------------------------- ----------
<S> <C> <C> <C> <C>
1996 1997 1998 1999
--------- --------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 230 $ 436 $ 53,141 $ 40,588
Working capital...................................................... 284 146 47,512 31,383
Total assets......................................................... 313 786 60,986 53,889
Capital lease obligations............................................ 18 220 166
Total current liabilities............................................ 324 7,763 12,419
Long-term debt....................................................... 2,541
Redeemable convertible preferred stock............................... 3,833 96,494 99,035
Total stockholders' (deficit) equity................................. 313 (3,400) (43,393) (60,232)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
StarMedia is the leading online network targeting Latin America. We were
incorporated in March 1996 and commenced operations in September 1996. For the
period from our inception through December 1996, we did not generate any
revenues, incurred minimal operating expenses and focused our operating
activities on the development of the StarMedia network.
We launched our network in December 1996. During 1997, we continued the
development of the StarMedia network and related technology infrastructure and
also focused on recruiting personnel, raising capital and developing content to
attract and retain users. In 1998, we:
- improved and upgraded our services;
- expanded our production staff;
- built a direct sales force; and
- increased our marketing activities in order to build the StarMedia brand.
In 1999, we expanded our operations in Latin America by acquiring two
leading Brazilian Internet guides, Achei Internet Promotion Ltda. and KD
Sistemas de Informacao Ltda., which primarily categorize and review
Portuguese-language Web sites. The aggregate purchase price paid by us for these
acquisitions was approximately $6.1 million. We are obligated to make additional
payments, estimated to be $7 million, to the former stockholders of KD Sistemas
if various performance targets are achieved. These acquisitions were accounted
for as purchases.
In May 1999, we entered into an agreement to purchase Wass Net S.L., a
Spanish-language online service with extensive community applications. The
aggregate purchase price for this acquisition is $17 million. The purchase price
is payable in our common stock at the initial public offering price. The closing
of the acquisition is contingent on the satisfaction of a number of conditions,
including the completion of our initial public offering. As a result, we may not
be able to successfully complete this acquisition.
In addition, we recently completed the sale of 3,727,272 shares of our
common stock to a number of strategic investors for $41 million.
To date, we have derived substantially all of our revenues from the sale of
advertisements and sponsorships on our network.
Advertising revenues are derived principally from:
- advertising arrangements under which we receive revenues based on a
cost-per-thousand-impressions basis, commonly referred to as CPMs;
- sponsorship arrangements which allow advertisers to sponsor an area on our
network in exchange for a fixed payment;
- reciprocal advertising arrangements, under which we exchange advertising
space on our network predominantly for advertising on television and radio
stations; and
- design, coordination and integration of advertising campaigns and
sponsorships to be placed on our network.
Advertising and sponsorship rates depend on:
- whether the impressions are for general audiences or targeted audiences;
- which of the specific channels within the StarMedia network display the
impressions; and
- the number of guaranteed impressions, if any.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant obligations remain and
collection of the resulting receivable is probable. To the extent minimum
guaranteed impression levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. Payments received
from
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advertisers prior to displaying their advertisements on our network are recorded
as deferred revenues. Revenues from sponsorship arrangements are recognized
ratably over the contract term, provided that we have no significant obligations
remaining. Revenue related to the design, coordination and integration of
content under sponsorship arrangements are recognized ratably over the contract
term or using the percentage of completion method if the revenue for the
services is fixed. Under some of our content arrangements, we have agreed to pay
a portion of the advertising revenue derived from the related content to the
content provider.
We have entered into reciprocal advertising arrangements with various media
companies, including Fox Latin America and USA Networks. We do not receive any
cash payments for these arrangements. We entered into these agreements to
enhance our marketing efforts and to extend our marketing presence beyond the
ten major markets in which our paid advertising is concentrated. Revenues and
expenses from these arrangements are recorded at the estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given, whichever is more readily determinable. Expenses are recorded at the
value of the television advertising received when our advertisements are
broadcast, which is typically in the same period as the advertisements are run
on our network. These expenses are included in our sales and marketing expenses.
To date, we have engaged in no reciprocal advertising arrangements under which
we have received online advertising.
In addition to advertising revenues, we derive revenues from online commerce
transactions conducted through our network. Revenues from our share of the
proceeds from sales are recognized on notification of sales attributable to our
network. To date, commerce revenues have not been significant. We anticipate
that, although commerce revenues will increase in future periods, the
substantial majority of our revenues will continue to be derived from the sale
of advertising on our network.
We have a limited operating history for you to use as a basis for evaluating
our business. You must consider the risks and difficulties frequently
encountered by early stage companies like us in new and rapidly evolving
markets, including the Internet advertising market.
We have incurred significant net losses and negative cash flows from
operations since our inception. At March 31, 1999, we had an accumulated deficit
of $72.4 million. These losses have been funded primarily through the issuance
of preferred stock. We intend to continue to invest heavily in marketing and
brand development, content enhancements, and technology and infrastructure
development. As a result, we believe that we will continue to incur net losses
and negative cash flows from operations for the foreseeable future. Moreover,
the rate at which these losses will be incurred may increase from current
levels.
We recorded cumulative deferred compensation of approximately $23.7 million
through March 31, 1999, which represents the difference between the exercise
price of some stock options granted in 1998 and 1999, and the fair market value
of the underlying common stock at the date of grant. The difference is recorded
as a reduction of stockholders' equity and amortized over the vesting period of
the applicable options, either immediately or generally over three years. Of the
total deferred compensation amount, approximately $10.4 million and $1.4 million
was amortized during the year ended December 31, 1998 and the three months ended
March 31, 1999, respectively. In the second quarter of 1999, we expect to record
additional deferred compensation of approximately $2.5 million due to options
granted in this period. The amortization of deferred compensation is recorded as
an operating expense. As a result, we currently expect to amortize the following
amounts of deferred compensation annually:
- 1999--$6.3 million;
- 2000--$5.4 million;
- 2001--$3.2 million;
- 2002--$850,000; and
- 2003--$50,000.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1999 AND 1998
REVENUE
Revenues increased to $1.5 million for the three months ended March 31, 1999
from $256,000 for the three months ended March 31, 1998. The increase in
revenues was primarily due to an increase in the volume of advertising
impressions and sponsorships. During 1999, we continued to:
- expand our sales force; and
- increase the number of impressions available on our network by adding
channels and by increasing our marketing efforts.
In the three months ended March 31, 1998, two advertisers each accounted for
greater than 10% of total revenues and four advertisers during the same period
accounted for 100% of total revenues. In the three months ended March 31, 1999,
three advertisers, Netscape, Teleglobe and Outpost.com, each accounted for
greater than 10% of total revenues. Our five largest advertisers during the same
period accounted for 60% of total revenues. In the three months ended March 31,
1999, 28% of our total revenues were derived from reciprocal advertising
arrangements with our media partners, which consist primarily of television
network operators. We do not receive any cash payments from these arrangements.
We have not engaged in any reciprocal advertising arrangements under which we
received online advertising. Electronic commerce revenues were not material
during these periods.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY. Product and technology expenses include:
- personnel costs;
- hosting and telecommunications costs; and
- content acquisition fees and revenue sharing arrangements related to
agreements with third-party content providers under which we pay
guaranteed fees and/or a portion of our revenues.
Product and technology expenses increased to $3.6 million, or 231% of total
revenues, for the three months ended March 31, 1999, from $794,000, or 310% of
total revenues, for the three months ended March 31, 1998. The increase in
product and technology expenses was primarily attributable to an increase of
approximately $1.5 million related to staffing levels required to support the
StarMedia network and related systems and approximately $700,000 to enhance the
content and features on the StarMedia network. We have, to date, expensed all
product and technology costs as incurred. We believe that increased investment
in new and enhanced features and technology is critical to attaining our
strategic objectives and remaining competitive. Accordingly, we intend to
continue recruiting and hiring experienced product and technology personnel and
to make additional investments in product development. We expect that product
expenditures will continue to increase in absolute dollars in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of:
- advertising costs, including the costs of advertisements placed on various
television networks under our reciprocal advertising arrangements;
- salaries and commissions of sales and marketing personnel;
- public relations costs; and
- other marketing-related expenses.
Sales and marketing expenses increased to $9.7 million, or 627% of total
revenues, for the three months ended March 31, 1999, from $1.8 million, or 709%
of total revenues, for the three months ended March 31, 1998. The
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increases in sales and marketing expenses were primarily attributable to:
- expansion of our advertising, public relations and other promotional
expenditures related to our aggressive branding campaign of approximately
$5.9 million; and
- higher personnel expenses, including sales commissions, of approximately
$1.8 million.
We expect sales and marketing expenses will continue to increase in absolute
dollars for the foreseeable future as we:
- continue our branding strategy;
- expand our direct sales force;
- hire additional marketing personnel; and
- increase expenditures for marketing and promotion.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of:
- salaries and benefits;
- costs for general corporate functions, including finance, accounting and
facilities; and
- fees for professional services.
General and administrative expenses increased to $2.4 million, or 156% of
total revenues, for the three months ended March 31, 1999, from $450,000, or
176% of total revenues, for the three months ended March 31, 1998. The increase
in general and administrative expenses was primarily due to increased salaries
and related expenses associated with the hiring of additional personnel of
approximately $700,000 to support the growth of our business. We expect that we
will incur additional general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of our business and
our operation as a public company. Accordingly, we anticipate that general and
administrative expenses will continue to increase in absolute dollars in future
periods.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $467,000, or 30% of
revenues, for the three months ended March 31, 1999, from $79,000, or 31% of
revenues, for the three months ended March 31, 1998. The dollar increases were
primarily attributable to the increase in fixed assets of approximately $2.4
million during 1999 and $5.8 million during 1998.
STOCK-BASED COMPENSATION EXPENSE
We recorded additional deferred compensation of $4.6 million during the
three months ended March 31, 1999. Of the cumulative deferred compensation
amount, $1.4 million was recorded as an expense during the three months ended
March 31, 1999. The unamortized balance is being amortized over the vesting
period for the individual options, which is typically three years.
INTEREST INCOME, NET
Interest income, net includes income from our cash and investments. Interest
income, net increased to $421,000 for the three months ended March 31, 1999 from
$28,000 for the three months ended March 31, 1998. The increase in interest
income was primarily due to higher average cash, cash equivalent and investment
balances as a result of capital received from the sale of preferred stock in the
first and third quarters of 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MARCH 5, 1996
(INCEPTION) TO DECEMBER 31, 1996
REVENUES
Revenues increased to $5.3 million for the year ended December 31, 1998 from
$460,000 for the year ended December 31, 1997. We did not have any revenue for
the period from March 5, 1996 (inception) to December 31, 1996. The increase in
revenues was primarily due to an increase in the volume of advertising
impressions and sponsorships. During 1998, we:
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- expanded our sales force; and
- increased the number of impressions available on our network by adding
channels and by increasing our marketing efforts.
In 1997, three advertisers each accounted for greater than 10% of total
revenues and the five largest advertisers accounted for 98% of total revenues.
In 1998, two advertisers, Netscape and Fox Latin America, each accounted for
greater than 10% of total revenues and the five largest advertisers accounted
for 62% of total revenues. In 1998, 45% of our total revenues were derived from
reciprocal advertising arrangements with our media partners, which consist
primarily of television network operators. We do not receive any cash payments
from these arrangements. We have not engaged in any reciprocal advertising
arrangements under which we received online advertising. Electronic commerce
revenues were not material during these periods.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY. Product and technology expenses increased to $6.8
million, or 128% of total revenues, for the year ended December 31, 1998, from
$1.2 million, or 267% of total revenues, for the year ended December 31, 1997.
We incurred $36,000 of product and technology expenses during 1996. The increase
in product and technology expenses was primarily attributable to an increase of
approximately $3.1 million in 1998 and $668,000 in 1997 related to staffing
levels required to support the StarMedia network and related systems and
approximately $1.5 million in 1998 and $310,000 in 1997 to enhance the content
and features on the StarMedia network. We have, to date, expensed all product
and technology costs as incurred.
SALES AND MARKETING. Sales and marketing expenses increased to $29.3
million, or 549% of total revenues, for the year ended December 31, 1998, from
$2.1 million, or 458% of total revenues, for the year ended December 31, 1997,
and $12,000 during 1996. The increases in sales and marketing expenses were
primarily attributable to:
- expansion of our advertising, public relations and other promotional
expenditures related to our aggressive branding campaign of approximately
$22.3 million in 1998 and $1.7 million in 1997; and
- higher personnel expenses, including sales commissions, of approximately
$2.9 million in 1998 and $222,000 in 1997.
Sales and marketing expenses as a percentage of total revenues have
increased as a result of the continued development and implementation of
StarMedia's branding and marketing campaign.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.6 million, or 86% of total revenues, for the year ended December 31, 1998,
from $648,000, or 141% of total revenues, for the year ended December 31, 1997,
and $78,000 during 1996. The increase in general and administrative expenses was
primarily due to increased salaries and related expenses associated with the
hiring of additional personnel of approximately $1.4 million in 1998 and
$200,000 in 1997 to support the growth of our business. General and
administrative expenses decreased on a percentage basis because of the growth in
revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $774,000, or 15% of
revenues, for the year ended December 31, 1998, from $38,000, or 8% of revenues,
for the year ended December 31, 1997 and from $2,000 during 1996. The dollar
increases were primarily attributable to the increase in fixed assets of
approximately $5.8 million during 1998 and $270,000 during 1997.
STOCK-BASED COMPENSATION EXPENSE
We recorded deferred compensation of $19.1 million during the year ended
December 31, 1998. Of this amount, $10.4
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million was recorded as an expense in 1998. The unamortized balance is being
amortized over the vesting period for the individual options, which is typically
three years.
INTEREST INCOME, NET
Interest income, net includes income from our cash and investments. Interest
income, net increased to $670,000 for the year-ended December 31, 1998 from
$35,000 for the year ended December 31, 1997. We did not record any interest
income, net during 1996. The increase in interest income was primarily due to
higher average cash, cash equivalent and investment balances as a result of
capital received from the sale of preferred stock in the first and third
quarters of 1998.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the five quarters ended March 31, 1999. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results of operations data. The quarterly data should be read with our
consolidated financial statements and the notes to those statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues...................... $ 256 $ 589 $ 1,308 $ 3,176 $ 1,541
Operating expenses:
Product and technology
development............... 794 2,384 1,552 2,086 3,562
Sales and marketing......... 1,816 4,199 7,725 15,534 9,657
General and
administrative............ 450 574 857 2,719 2,410
Depreciation and
amortization.............. 79 169 204 322 467
Stock-based compensation
expense................... 2 3,248 666 6,505 1,417
--------- -------- ------------- ------------ ---------
Total operating
expenses................ 3,141 10,574 11,004 27,166 17,513
--------- -------- ------------- ------------ ---------
Loss from operations.......... (2,885) (9,985) (9,696) (23,990) 15,972
--------- -------- ------------- ------------ ---------
Net loss...................... $(2,857) $(9,922) $(9,624) $(23,483) $(15,551)
--------- -------- ------------- ------------ ---------
</TABLE>
The operating results for any quarter are not necessarily indicative of the
operating results for any future period. In particular, because of our limited
operating history, we have limited meaningful financial data to estimate
revenues and operating expenses. In addition, we believe that we will continue
to experience seasonality in our business, with use of our network being lower
during the Latin American summer vacation period in the first calendar quarter
of the year. This may adversely affect our advertising revenue during the first
calendar quarter.
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors, including:
- growth and acceptance of the Internet, particularly in Latin America;
- our ability to attract and retain users;
- demand for advertising on the Internet in general and on our network in
particular;
- our ability to upgrade and develop our systems and infrastructure;
- technical difficulties that users may experience on our network;
- technical difficulties or system downtime resulting from the developing
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telecommunications infrastructure in Latin America;
- competition in our markets;
- foreign currency exchange rates that affect our international operations;
and
- general economic conditions in Latin America.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have primarily financed our operations through the sale of our
preferred stock. As of March 31, 1999, we had approximately $40.6 million in
cash and cash equivalents.
Net cash used in operating activities was $12.3 million for the three months
ended March 31, 1999, $30.6 million for the year ended December 31, 1998, $3.3
million for the year ended December 31, 1997 and $127,000 for 1996. To date, we
have experienced significant negative cash flows from operating activities. Net
cash used in operating activities resulted primarily from our net operating
losses, offset by:
- the amortization of deferred compensation;
- depreciation and amortization;
- increases in accounts payable and accrued expenses; and
- deferred revenues.
Net cash used in investing activities was $3.7 million for the three months
ended March 31, 1999, $4.6 million for the year ended December 31, 1998,
$280,000 for the year ended December 31, 1997 and $30,000 during 1996. Net cash
used in investing activities during 1996, 1997 and 1998 resulted primarily from
the purchase of fixed assets.
Net cash provided by financing activities was $3.6 million for the three
months ended March 31, 1999, $88 million for the year ended December 31, 1998,
$3.8 million for the year ended December 31, 1997 and $387,000 during 1996. Net
cash provided by financing activities during 1997 and 1998 consisted primarily
of proceeds from the sale of preferred stock. In April and May 1999, we
completed the sale of 3,727,272 shares of our common stock for $41 million.
Our principal commitments consist of obligations outstanding under capital
and operating leases. As of March 31, 1999, we have spent approximately $8.1
million on capital expenditures, excluding capital lease arrangements. We expect
our capital expenditures will increase significantly in the future as we make
technological improvements to our system and technical infrastructure.
In March 1999, we entered into a $12 million credit line for the acquisition
of computer equipment and furniture and fixtures. At March 31, 1999,
approximately $3.6 million was outstanding under the equipment line. Amounts
outstanding are payable in monthly installments of principal and interest of
approximately $126,000, bear interest at approximately 13.7% per annum and are
secured by certain computer equipment and furniture and fixtures of the Company.
The credit line requires us to maintain of at least $10 million in cash and cash
equivalents.
We have entered into an agreement with IBM under which we will offer
Internet access services in Argentina, Brazil, Chile, Colombia and Mexico. Under
the agreement, we are obligated to pay IBM a minimum of approximately $7.6
million in 1999 and approximately $16.6 million in 2000.
Our capital requirements depend on numerous factors, including:
- market acceptance of our services;
- the amount of resources we devote to investments in the StarMedia network;
- marketing and selling our services; and
- promoting our brand.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products
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and technologies, and plan to expand our sales and marketing programs and
conduct more aggressive brand promotions.
We believe that our current cash and cash equivalents, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. If cash generated from operations is insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased fixed
obligations and could result in operating covenants that would restrict our
operations. We cannot assure you that financing will be available in amounts or
on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers to the potential for system and processing
failures of date-related calculations, and is the result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
STATE OF READINESS
We have made a preliminary assessment of the Year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. As part of our assessment plan, we are
evaluating our date-dependent code, internally-developed software, software
developed by third parties and hardware. We plan to complete this evaluation by
October 1999. All internally-developed code will be checked, and any problematic
code identified, fixed and tested by November 1999. All material
externally-developed software that is not Year 2000 compliant will be upgraded
or replaced by November 1999. More specifically:
- We are quality assurance testing our internally-developed proprietary
software and systems related to the delivery of our service to our users.
We plan to complete this testing by November 1999.
- We have contacted our principal third-party vendors and licensors of
material hardware, software, and services that are related to the delivery
of our services to our users, and requested their confirmation of our Year
2000 compliance of the software, hardware and services they provide to us.
All of these contacted vendors and licensors have notified us that the
hardware, software and services that they have provided to us are Year
2000 compliant.
- We have contacted our principal vendors of material non-information
technology systems and services used by us, and requested their
confirmation of the Year 2000 compliance of their systems and services. We
have received notification from the majority of these vendors that the
systems and services that they have provided to us are Year 2000
compliant. By the end of the third quarter of 1999, we will either have
received this confirmation from the remaining vendors or have replaced the
systems and services they provide with compliant systems and services.
- We are formulating repair or replacement requirements and implementing
corrective measures. These requirements will be completed by October 1999,
and, if necessary, corrective measures and repair procedures will be
implemented by the end of November 1999.
- We are currently evaluating the need for, and preparing and implementing a
contingency plan, if required. The results of our assessment and
simulation testing will be taken into account when
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we determine the need for and the extent of any contingency plans. We plan
to finalize our contingency plans, if any, by November 1999.
COSTS
To date, we have spent an immaterial amount on Year 2000 compliance issues
but expect to incur an additional $200,000 to $350,000 in connection with
identifying, evaluating and addressing Year 2000 compliance issues. Most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees and consultants in the
evaluation process and Year 2000 compliance matters generally. Such expenses, if
higher than anticipated, could have a material adverse effect on our business,
results of operations, and financial condition.
RISKS
To the extent that our assessment is finalized without identifying any
additional material non-compliant IT systems operated by us or by third parties,
the most reasonably likely worst case Year 2000 scenario is a systemic failure
beyond our control, such as a prolonged telecommunications or electrical
failure. Such a failure could prevent us from operating our business, prevent
users from accessing our network, or change the behavior of advertising
customers or persons accessing our network. We believe that the primary business
risks, in the event of such failure, would include but not be limited to, lost
advertising revenues, increased operating costs, loss of customers or persons
accessing our network, or other business interruptions of a material nature, as
well as claims of mismanagement, misrepresentation, or breach of contract.
CONTINGENCY PLAN
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have developed no contingency plans to address the worst-case scenario that
might occur if technologies we are dependent on actually are not Year 2000
compliant. The results of our Year 2000 simulation testing and the responses
received from all third-party vendors and service providers will be taken into
account in determining the need for and nature and extent of any contingency
plans. We intend to develop any required contingency plans by November 1999.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received from third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are our outsourcing service
providers, suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
INFLATION AND FOREIGN CURRENCY
EXCHANGE RATE LOSSES
To date, our results of operations have not been impacted materially by
inflation in the U.S. or in the countries that comprise Latin America.
Although a substantial portion of our revenues are denominated in U.S.
dollars, an increasing percentage of our revenues are denominated in foreign
currencies. As a result,
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our revenues may be impacted by fluctuations in these currencies and the value
of these currencies relative to the U.S. dollar. In addition, a portion of our
monetary assets and liabilities and our accounts payable and operating expenses
are denominated in foreign currencies. Therefore, we are exposed to foreign
currency exchange risks. However, revenues derived from foreign currencies
historically have not comprised a material portion of our revenues. As a result,
we have not tried to reduce our exposure to exchange rate fluctuations by using
hedging transactions. However, we may choose to do so in the future. We may not
be able to do this successfully. Accordingly, we may experience economic loss
and a negative impact on earnings and equity as a result of foreign currency
exchange rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS
No. 130 requires us to report in our financial statements, in addition to our
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on investments in debt and equity securities.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. We have determined that we do not have any separately reportable
business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standard for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The statement is not expected to affect us as we currently do not have any
derivative instruments or hedging activities.
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BUSINESS
OVERVIEW
StarMedia is the leading online network targeting Latin America. Our network
consists of 17 interest-specific channels, extensive Web-based community
features, sophisticated search capabilities and access to online shopping in
Spanish and Portuguese. These channels cover topics of interest to Latin
Americans online, including local and regional news, business and sports. We
promote user affinity to the StarMedia community by providing Spanish and
Portuguese language e-mail, chat rooms, instant messaging and personal
homepages.
At a time when content on the Internet is overwhelmingly in English, we
offer Latin Americans a large, pan-regional community experience, combined with
a broad array of Spanish and Portuguese content tailored for regional dialects
and local cultural norms. We also provide advertisers and merchants targeted
access to Latin American Internet users, an audience with a highly desirable
demographic profile.
INDUSTRY BACKGROUND
THE GROWTH OF THE INTERNET AND ONLINE ADVERTISING AND COMMERCE
The Internet has developed into a significant global mass medium that allows
millions of people worldwide to find information, interact with others and
conduct business electronically. International Data Corporation, or IDC,
estimates that the number of Internet users worldwide will grow from
approximately 97 million at the end of 1998 to approximately 320 million by the
end of 2002. The Internet has also emerged as an attractive new medium for
advertisers. The Internet allows advertisers to target desired demographic
groups or consumers in specific geographic locations. It also allows them to
interact more effectively with consumers and capture valuable data about buying
patterns, preferences and demands. According to Jupiter Communications, the
dollar value of Internet advertising in the U.S. is expected to increase from
$1.9 billion in 1998 to approximately $7.7 billion in 2002, representing a
compound annual growth rate of 42%. The growth in the use of the Internet is
also providing businesses with a platform to conduct electronic commerce.
According to IDC, consumer transactions on the Internet are expected to increase
from $11.3 billion in 1998 to approximately $93.7 billion in 2002, representing
a compound annual growth rate of 70%.
INTERNET USE IN LATIN AMERICA
Latin America is comprised of 23 countries with a total population of
approximately 500 million people. These countries consist of:
<TABLE>
<S> <C>
- - Argentina - Guyana
- - Belize - Guatemala
- - Bolivia - Honduras
- - Brazil - Mexico
- - Chile - Nicaragua
- - Colombia - Panama
- - Costa Rica - Paraguay
- - Dominican Republic - Peru
- - Ecuador - Suriname
- - El Salvador - Uruguay
- - Falkland Islands - Venezuela
- - French Guiana
</TABLE>
Although divided by geographical and political boundaries, Latin Americans
share many cultural affinities, including common languages and religions, as
well as a similar heritage. A majority of Latin Americans speak Spanish or
Portuguese, with only a small portion of the population being proficient in
English.
A substantial portion of the buying power in Latin America is concentrated
within 20% of the population, according to Strategy Research Corporation. This
group of approximately 100 million people controls an estimated 65% of the
overall buying power in Latin America and enjoys a standard of living comparable
to the populations of Germany and Great Britain. As a result of these factors,
the Latin American market represents a highly desirable demographic profile for
advertisers and businesses. According to a study conducted in December 1998 by
Zenith Media, overall advertising spending across all media in Latin America was
$27 billion in 1998 and is estimated to grow to $34 billion in 2001. According
to the Forrester Research, Internet advertising in Latin America was $20 million
in 1998 and is estimated to grow to $230 million in 2001.
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While Internet use in Latin America is in a relatively early stage of
development, it has grown rapidly in recent years and, according to Nazca
Saatchi & Saatchi, is expected to significantly outpace growth in worldwide
Internet usage over the next several years. According to Nazca Saatchi &
Saatchi, the number of Internet users in Latin America is expected to increase
from 7 million users in 1997 to 34 million users by the end of 2000. According
to Nazca Saatchi & Saatchi, approximately 90% of these users are from upper and
middle socio-economic classes.
The following factors have contributed to the growth in Internet use in
Latin America:
- increased use of personal computers, particularly among affluent Latin
Americans;
- network infrastructure improvements accelerated by privatization of
telecommunications providers and increased spending;
- the relative youth of the Latin American population and their tendency to
use new technologies, like the Internet;
- reduced Internet access costs; and
- increased awareness of the Internet.
NEED FOR A LATIN AMERICAN ONLINE NETWORK
Despite the rapid growth of non-English speaking Internet users worldwide,
more than 80% of the content on the Internet remains in English. We believe that
an increasing number of Latin American Internet users are seeking a full-service
Internet destination in their local language that provides them with:
- a social interactive experience across the entire Spanish and Portuguese
speaking world;
- a variety of in-depth and focused local content;
- a broad array of compelling content at the regional and international
level; and
- sophisticated Internet applications and tools like e-mail, chat, instant
messaging, bulletin boards, personal homepages and search capabilities.
To date, few Internet sites have been tailored specifically to the interests
and needs of Latin Americans. In an attempt to address this need, some of the
English language general destination sites have translated a small portion of
their content into Spanish or Portuguese. To date, however, these sites have
been generally focused on expanding into the European and Asian markets. As a
result, they typically do not extend their Spanish and Portuguese translations
beyond selected topical content and do not provide in-depth local content or
in-language applications for Latin Americans. Furthermore, they do not tailor
their translations and content to take into account regional dialects, language
differences or local cultural norms.
Some regional sites attempt to provide content for the populations of
specific cities or countries in the local dialect. These sites, while providing
Spanish or Portuguese content, have a limited community of users and do not
provide extensive regional or global content. There are also Spanish or
Portuguese language interest-specific sites, like sports sites. These sites
offer in-depth content, but are limited to only one topic.
We believe that few of these Spanish and Portuguese language sites attract a
broad user audience. Therefore, they cannot provide advertisers with an
attractive platform to effectively reach the highly desirable Latin American
Internet user demographics.
THE STARMEDIA SOLUTION
We are the leading online network targeting Latin America. We provide
original and third-party branded content through 17 interest-specific channels,
extensive Web-based community features and sophisticated search capabilities in
Spanish and Portuguese. We believe that we have created an online network that
uniquely addresses the needs of Latin American Internet users and provides
advertisers and merchants with a highly desirable platform for targeting
affluent Latin American consumers. Our monthly page views have grown from
approximately 7 million in December 1997 to approximately 60 million in March
1999. In addition, as of March 31, 1999, we had approximately 425,000 registered
e-mail users.
We believe that our success to date is attributable to the following key
factors:
FOCUS ON LATIN AMERICA. We serve the interests and needs of Latin American
Internet users and have developed both a product and a business infrastructure
to support our focus on this market. We designed our network around the needs of
our users, providing them with:
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- customized global, regional and local content covering a variety of topics
in the appropriate Spanish and Portuguese dialects based on the
self-reported geographic location of our users;
- a broad range of in-language community features, like chat, bulletin
boards, free e-mail, personal homepages, and personal and classified ads,
that allow users to interact with other Latin Americans with similar
interests;
- an easy-to-use interface and a consistent navigation experience that
facilitates usage by the growing number of Latin Americans coming online
for the first time; and
- search capabilities that can be customized by country, region and/or
language.
In addition, we have developed a business infrastructure designed to address
the needs of our Latin American users by maintaining a strong local presence
throughout Latin America and employing a high percentage of Latin Americans both
in the U.S. and abroad. These are critical to maintaining our network's Latin
American focus and flavor.
Our Latin American employees provide us with important cultural and
linguistic insights. Our local presence allows us to better understand the needs
of local advertisers and businesses, and to maintain strong relationships with
them. We have offices throughout Latin America in Sao Paulo, Mexico City, Buenos
Aires, Bogota, Santiago, Caracas and Montevideo. Each office is staffed
predominantly with sales people from the country in which the office is located.
MARKET LEADERSHIP THROUGH BRAND DEVELOPMENT. We believe that StarMedia is
the most recognized Internet brand in Latin America. As a result, visiting the
StarMedia network is one of the first Internet experiences for many Latin
Americans. We began our marketing efforts in February 1997 and were the first
online network to make a significant investment in brand development in Latin
America. We believe that many of our regular users first visited our network in
response to our marketing efforts. We have continued to invest heavily in
building the StarMedia brand through our extensive marketing, advertising and
public relations programs. Our brand recognition has enabled us to attract a
growing user audience and leading companies as advertisers and electronic
commerce partners.
EXTENSIVE LOCAL CONTENT AND BROAD PAN-REGIONAL COMMUNITY STRUCTURE. We
believe that our extensive local content, combined with our community of
Internet users throughout Latin America, gives us a competitive advantage and is
key to our continued leadership as the Internet destination of choice in the
region. We provide our users with a broad array of relevant and in-depth local
content. In addition, our users throughout Latin America can use our network as
a virtual central plaza to meet other Latin Americans, access region-specific
information and conduct electronic commerce across boundaries. Our pan-regional
community enables us to attract a larger population of users and consequently,
provide them with greater outlets for online interaction.
DEDICATION TO USER CARE. We believe that high quality user care and
technical support are essential to our continued success and brand development
efforts. To further enhance our users' experience and to foster user loyalty, we
have local user care support teams that rapidly respond to e-mail inquiries and
provide technical advice, 24 hours a day, seven days a week in Spanish or
Portuguese. We also proactively solicit feedback from our users in order to
understand their preferences and to enhance their experience on our network. For
example, in order to better understand the demands of our users, we have
developed a special EU QUERO/LO QUIERO, or "I Want It", area which is accessible
from every page on our network. This feature enables our users to make requests
for additions or modifications to the network.
HIGHLY ATTRACTIVE PLATFORM FOR ADVERTISING AND COMMERCE. We believe that
the StarMedia network is a highly attractive platform for advertisers and
businesses because it gives them access to:
- the leading Internet brand in Latin America;
- a highly desirable user demographic profile; and
- users with a high degree of affinity and involvement through e-mail, chat,
bulletin boards and personal homepages.
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Internet advertising is new to Latin America, and we believe that buying
advertising on the StarMedia network is often one of the first Internet
advertising purchases made by businesses and advertising agencies in Latin
America. Accordingly, we have created an advertising environment that fosters
advertiser use of this new medium and solidifies our relationship with
advertisers. We have developed a client services team that is dedicated to
enhancing our relationship with these advertisers and maximizing the
effectiveness of their advertising campaigns. We use our knowledge about the
needs and sensitivities of our user base to help advertisers create more
effective advertising campaigns. In addition, we use leading advertising
techniques and tracking technologies to:
- target advertising to users with specific demographic profiles;
- gather extensive data to create an intelligence profile for each campaign;
and
- use daily tracking data to analyze the campaign's effectiveness.
We provide advertisers with detailed and timely feedback on the
effectiveness of campaigns, as well as recommendations on how to improve their
campaigns. We believe that our client services group is a key differentiator
from other Latin American Web sites and provides us with a significant
competitive advantage.
As a result, we have been able to:
- attract high-profile advertisers, including Bradesco, Ford, Fox Latin
America, IBM, Microsoft, Motorola, Nokia and Sony;
- enter into relationships with leading electronic commerce companies,
including barnesandnoble.com, Outpost.com, Disney, and N2K; and
- charge premium advertising rates.
STRATEGY
Our objective is to strengthen our position as the leading online network
across Latin America. In order to accomplish this, we will:
AGGRESSIVELY EXTEND OUR BRAND RECOGNITION. Our goal is to make the
StarMedia brand synonymous with the Internet in Latin America. We believe that
continuing to enhance our brand recognition will enable us to capitalize on our
leading position in Latin America and will make us more attractive to
advertisers and businesses conducting electronic commerce. This will increase in
importance as more Latin American consumers move online and as additional
Internet sites compete for these users.
We intend to continue to build our brand through:
- extensive television, print, Internet and outdoor advertising;
- public relations programs;
- conference sponsorships;
- new strategic alliances; and
- additional distribution relationships.
ENHANCE AND EXPAND OUR NETWORK. We intend to continue to add new content
and features to the StarMedia network. We believe that this will:
- further differentiate our network from competing sites;
- provide users with a more comprehensive and satisfying Internet
experience; and
- result in users visiting the StarMedia network more often and remaining
there longer.
Since January 1998, we have added 10 new channels to our network and expect
to add a number of other new channels in the remainder of 1999. We currently
have relationships with leading content providers, including Fox Latin America,
Internet Securities, Quote.com, Reuters, WeatherLabs, and Ziff-Davis. We are
aggressively seeking new content relationships in order to further increase the
breadth and depth of our content and community features without incurring
significant additional costs. We currently have more than 70 employees in our
content development group who are responsible for gathering, developing and
designing our content. We intend to further enlarge this group.
We are also expanding our country-specific content to further penetrate
local markets. We are aggressively seeking to enter into partnerships with
leading local interest-specific content providers and to further enhance the
features and functions of our network.
We are also seeking to aggressively expand our electronic commerce business.
We are developing relationships with credit card,
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fulfillment and transaction software companies, as well as merchants.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We plan to expand our user
base, revenues and competitive position through strategic acquisitions and
alliances. Since January 1999, we have broadened our operations by acquiring KD
Sistemas de Informacao Ltda. and Achei Internet Promotion Ltda. Through these
acquisitions, we acquired two leading Brazilian Internet sites, Cade? and Zeek!,
which are free Web-based portals that provide topical directories of Portuguese-
language Web sites. We believe that these acquisitions significantly enhance our
presence in the Brazilian market and enable us to reach a broader base of users
and advertisers. In May 1999, we entered into an agreement to acquire Wass Net
S.L., a Spanish-language online community offering e-mail, chat, classifieds,
bulletin boards, home pages and search capabilities. We believe that Wass Net's
presence in the Spanish and U.S. Hispanic market complements the StarMedia
network and gives us a competitive advantage in these markets. We anticipate
closing this acquisition after the completion of our initial public offering. We
intend to aggresively seek other opportunities to acquire or form alliances with
other companies that will complement our network.
OFFER INTERNET ACCESS TO USERS IN THE LOCAL LATIN AMERICAN
MARKETS. Beginning in the second half of 1999, we plan to offer Internet access
to users in a number of Latin American markets. We believe this service will
enable us to develop an additional source of revenue and to create closer ties
with Internet users in Latin America. We have entered into an agreement with IBM
under which we will offer Internet access services in Argentina, Brazil, Chile,
Colombia and Mexico. IBM will provide us with its existing infrastructure,
billing, operations and customer service capabilities necessary to provide these
services. We will market the service under the StarMedia brand and StarMedia
will be the pre-programmed home page for the service. We will charge users
monthly access fees with pricing based on rates that are competitive in each
local market.
EXPAND INTO ADDITIONAL SPANISH- AND PORTUGUESE-SPEAKING MARKETS. We seek to
make StarMedia the first and most frequent destination on the Internet for the
Spanish- and Portuguese-speaking population worldwide. We believe there is a
significant opportunity for a Spanish and Portuguese language online network
that extends beyond Latin America to include Spain, the United States and
Portugal. There are approximately 7.7 million Spanish-and Portuguese-speaking
Internet users dispersed through the United States, Spain and Portugal. The
Hispanic population is growing more rapidly than any other minority group within
the U.S. population. According to the Tomas Rivera Policy Institute at Claremont
University, from 1994 to 1998, Internet usage by U.S. Hispanics grew 800%.
Forrester Research Inc. estimates that by the end of 1999, 43% of U.S. Hispanics
will be online. We believe that Hispanic Americans are increasingly using our
network to maintain their cultural identities and to communicate with friends
and family in Latin America and elsewhere.
As the number of Spanish- and Portuguese-speaking Internet users outside
Latin America increases, advertisers and electronic commerce marketers will
increasingly seek an effective means to reach these audiences. To take advantage
of these opportunities, we are expanding our advertising and marketing campaigns
in the United States and Spain. In addition, we intend to expand our presence in
Spain by opening a local office.
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THE STARMEDIA NETWORK
The StarMedia network is currently organized around 17 channels, all of
which may be accessed by our users for free. These channels are grouped into:
- community services; and
- content and commerce services.
Our Welcome Screen--www.starmedia.com-- is the gateway to our network. It
provides a guide to the network channels, features special content and
promotions, offers direct access to the search, e-mail and chat services and
displays real-time news headlines. When users first visit the StarMedia network
they are prompted to indicate what country they are from and whether they prefer
to receive content in Spanish or Portuguese. This information allows us to
target both content and advertising by subject matter, dialect and country. Our
unique design and layout provides a consistent navigation experience allowing
users to access any channel on our network from any other channel on the
service. Additionally, this design allows for persistent branding throughout the
network. The following is a description of the StarMedia network.
COMMUNITY SERVICES
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
STARMEDIA TALKPLANET (CHAT) StarMedia TalkPlanet is our chat community and the foundation of our network.
TalkPlanet creates "virtual communities" where participants can interact in
group or one-on-one discussions in both Spanish and Portuguese. These
communities include broad interest areas like sports, romance and current
events. Our users can host their own scheduled chats, create their own
interest-specific rooms or participate in moderated celebrity events.
STARMEDIA MAIL StarMedia Mail is our free Web-based e-mail service and is offered in both
(E-MAIL) Spanish and Portuguese. We currently have over 500,000 registered e-mail users.
StarMedia Mail allows users to access electronic mail from any computer with a
standard Web browser. We believe that providing this service increases user
loyalty and therefore, increases traffic on our network. We have also developed
a series of "I-mails", which are interactive greeting cards that users can send
to friends and family members.
STARMEDIA ORBITA/ORBITA StarMedia Orbita/Orbita enables users to create personalized Web pages on the
(PERSONAL HOMEPAGES) StarMedia network. Using a variety of proprietary publishing tools in Spanish
and Portuguese, users are able to quickly and easily create fully personalized
homepages. Individual homepages reside in designated communities of interest
like family, business and technology. We believe that users will be more
attracted to our network when they can publish content and share experiences
with others through their personalized homepages.
QUADRO DE AVISOS/ PIZARRAS Our bulletin board area--Quadro de Avisos/Pizarras--further enhances user
(BULLETIN BOARDS) interaction. From politics and religion to music and travel, this user-generated
content augments each channel and maintains a record of ongoing communication
about a particular topic on our network.
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
STARMEDIA EXPRESS (INSTANT This instant messaging service enables users to know whether their friends and
MESSENGER) other users with similar interests are online and to send messages directly to
them. Our partnership with PeopleLink enables users to subscribe to specific
interest groups and communicate with people from around the world who share
similar interests.
STARMEDIA CLASSIFICADOS/ StarMedia Classificados/Clasificados is our classifieds marketplace, spanning
STARMEDIA CLASIFICADOS numerous product and service areas from electronics to real estate. Buyers and
(CLASSIFIEDS) sellers from across Latin America can trade timely information on goods and
services.
NAMORO PERSONET/ ROMANCE Namoro Personet/Romance Personet is an interactive meeting place for visitors in
PERSONET (PERSONALS) search of new friends and relationships. Personet connects people from a wide
range of interests, backgrounds and origins. On Personet, people meet in a
variety of ways, including through personal ad postings and in discussion
forums.
STARMEDIA JOGOS/JUEGOS The newest StarMedia channel, StarMedia Jogos/Juegos, offers a compilation of
(ONLINE GAMES) interactive games in which our users can participate and compete for prizes.
These games include fantasy sport games such as Beisbol Virtual and Ole, as well
as a variety of trivia games. In addition, StarMedia Jogos/Juegos offers a host
of free, downloadable games, which are updated several times per week. This
channel also includes a guide to our editors' picks of the best in Spanish and
Portuguese online game sites.
</TABLE>
CONTENT AND COMMERCE SERVICES
We have built our content and commerce services around our successful
community environment. We enhance the effectiveness of our community services by
wrapping them around engaging content like information, news, entertainment and
shopping.
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
STARMEDIA NOTICIAS/ NOTICIAS StarMedia Noticias/Noticias delivers a comprehensive selection of international,
(NEWS) regional and local news. Content for news and all information services is
provided by top syndicated wire services, local partnerships and by our team of
editors, producers and writers throughout Latin America. Users can react to the
latest headlines through chats, debates and polls. Our partners include Reuters,
Agencia EFE and Agence France Presse.
STARMEDIA ESPORTES/ DEPORTES Through the StarMedia Esportes/Deportes channel, we provide comprehensive local,
(SPORTS) regional and global sports news and information. Users can access headlines,
results, commentary, analysis and daily polls. They can also purchase
merchandise and win prizes through our interactive games. In addition, we are
the exclusive webcaster of FUTBOL DE PRIMERA, one the world's most popular
syndicated radio talk shows about soccer, hosted by Andres Cantor.
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
STARMEDIA MONEY (FINANCE) StarMedia Money provides online financial news and information. In addition,
users can obtain research about top Latin American companies, access information
on personal banking products and services, and track their individual investment
portfolios in Spanish and Portuguese. Information is provided by a host of
leading financial information publishers, including Avance Economico, Enfoque,
El Economista, El Universal and Quote.com.
STARMEDIA DIGITAL (TECHNOLOGY) StarMedia Digital offers the latest in technology news, product reviews and free
downloads from ZDNet. The information provided by ZDNet helps users make
informed buying decisions about technology products, which they can purchase
through StarMedia's relationship with vendors like Outpost.com.
STARMEDIA ENTRETENIMENTO/ Entertainment and music are united in the StarMedia Entretenimento/
ENTRETENIMIENTOS (ENTERTAINMENT) Entretenimientos channel. Our partnerships with USA Networks, Fox Latin America,
Billboard, eDrive, Retila, Successo CD and N2K provide content that creates a
bridge between online and traditional programming. (V)Pulse offers a popular
selection of easily playable music videos. StarMedia TV and StarMedia Radios
provide Internet broadcasts of popular television and radio stations from Latin
America and around the world.
STARMEDIA SHOPPING (ELECTRONIC StarMedia Shopping acts as a virtual central plaza for online Latin American
COMMERCE) consumers. Users are able to purchase a variety of merchandise, including
computers, books and CDs, from a host of global and local retailers like
barnesandnoble.com, N2K, CIM and Outpost.com. Products from the StarMedia
Shopping channel are also merchandised within appropriate channels. For example,
there are direct links that allow a literary chat group to easily purchase books
of interest from barnesandnoble.com.
STARMEDIA BUSCAWEB (SEARCH AND StarMedia BuscaWeb is our Internet search engine. It utilizes Inktomi's
GUIDE) sophisticated search capabilities, which have been customized to support
country-specific, regional and worldwide searches in both Spanish and
Portuguese.
STARMEDIA VIAGENS/VIAJES The travel channel offers travel guides and news through an exclusive
(TRAVEL) relationship with Lonely Planet, as well as advice about preparing for a trip,
links to travel resources on the Web and a forum for exchanging travel stories
and tips.
STARMEDIA TEMPO/TIEMPO (WEATHER) StarMedia Tempo/Tiempo provides up-to-the-minute weather conditions and extended
forecasts for 3,000 cities around the globe.
</TABLE>
STRATEGIC ALLIANCES
We have developed strategic relationships with leading content, electronic
commerce, syndication and application partners. Many of these relationships give
us various exclusive rights. For example, some of these partners have agreed
that StarMedia will be the only Internet company to display their content in
Spanish or Portuguese. Others have agreed that they will not enter into
agreements with other companies targeting the Spanish or Portuguese Internet
markets. These relationships are typically for a period of one to five years.
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These relationships are designed to:
- enhance our network;
- expand our community of users;
- increase traffic; and
- provide us with additional revenues.
Our partners allow us to display their content or technology on our network,
within one or many of our channels, in exchange for a share of revenue or a
licensing fee. We receive some of this content in a format that is ready to
publish on our network. We also receive content that we must modify in order to
publish. For example, some of our partners provide us with English-language
content. In these cases, we translate the content into Spanish and Portuguese
prior to publishing it on our network.
Our commerce partners typically pay us a flat fee for placement on our
network. This fee is based on location of links that allow for entry into their
online store and the number of links present throughout our network. These
content partners also share with us a percentage of transaction revenues
generated when our users purchase their products or services.
CONTENT AND APPLICATION PROVIDERS
We have a number of relationships with leading content and application
providers, including:
- Agence France Press--news and sports information
- Billboard--entertainment news and featured content
- Bottle Rocket--interactive sports games
- BusinessWire--business news
- Critical Path--email services
- eDrive--entertainment news and featured content
- eShare--chat software
- Agencia EFE--news and information
- Futbol de Primera--soccer Webcasts
- Inktomi--in-language search services
- Internet Securities--local business news for major Latin American cities
provided by leading publishers, including Avance Economico, El Economista,
El Universal and Enfoque
- Lonely Planet--travel information
- PeopleLink--instant messaging
- Quote.com--stock and mutual fund quotes
- Reuters--news and sports information
- WeatherLabs--weather information
- Ziff-Davis--technology news and information
COMMERCE PARTNERS
Our electronic commerce relationships include:
- barnesandnoble.com--book purchases
- CIM--Brazilian music
- Disney--branded merchandise
- Music Boulevard (N2K)--music products, CDs, clothing, posters and books
- Outpost.com--computer and technology merchandise
- SportsSuperstore--sports merchandise
- Tickets.com--event information and ticketing
NETSCAPE
In May 1998, we entered into a marketing and distribution agreement with
Netscape. Together, we developed and launched NETSCAPE GUIDE BY STARMEDIA in
both Spanish and Portuguese. NETSCAPE GUIDE BY STARMEDIA is one of the core
services available as part of Netscape's Latin American Spanish and Portuguese
browsers. We also appear as a premium bookmark located on Netscape's Spanish and
Portuguese browser toolbars. These bookmarks link users directly to our network.
StarMedia Noticias/Noticias appears as a ticker on the Netscape Latin America
and Brazil homepages and directs users to our network's general news areas. In
addition, Netscape promotes StarMedia throughout its Spanish and Portuguese
offerings.
REALNETWORKS
In February 1999, we entered into a relationship with RealNetworks, the
leading provider of streaming audio/video over the
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Internet. We are the only in-language Internet company featured as a default
channel on both the Spanish and Portuguese versions of RealNetworks' RealPlayer
G2. This relationship uniquely positions us to enhance our user base by enabling
Spanish and Portuguese-speaking Internet users to access our in-language
streaming content, including music videos, television and radio programming, and
sporting events directly from RealPlayer.
RECENT STRATEGIC INVESTORS
In April and May 1999, we completed the private placement of 3,727,272
shares of our common stock to a number of strategic investors for $41 million.
These investors include:
- Critical Path, Inc.;
- eBay Inc.;
- Europortal Holding S.A.;
- Hearst Communications, Inc.;
- National Broadcasting Company, Inc.; and
- Reuters Holdings Switzerland SA.
We intend to work closely with our strategic investors in order to develop
new content and to add new features to our network.
ADVERTISING SALES
We have built a direct sales organization of over 60 professionals located
in eight offices: Sao Paulo, Mexico City, Buenos Aires, Bogota, Santiago,
Caracas, Miami and New York.
SALES ORGANIZATION
Our sales organization is dedicated to maintaining close relationships with
top advertisers and leading advertising agencies throughout Latin America. It is
structured on a regional basis and is focused solely on selling advertising on
our network. Our sales organization consults regularly with advertisers and
agencies on design and placement of their Web-based advertising, provides
customers with advertising measurement analysis and focuses on providing a high
level of customer service satisfaction.
ADVERTISING PROGRAMS
Currently, advertisers and advertising agencies enter into agreements under
which they pay for a guaranteed number of impressions for a fixed fee. These
agreements range from one month to multiple years. Advertising on our network
currently consists primarily of banner-style advertisements, buttons and
sponsorships from which viewers can hyperlink directly to the advertiser's own
Web site. Our standard cost per thousand impressions, commonly referred to as
CPMs, for banner advertisements varies depending on location of the
advertisements on the network, the targeted country and the extent to which it
is targeted for a particular audience. Discounts from standard CPM rates may be
provided for higher volume, longer-term advertising contracts.
We also offer promotional advertising programs, such as contests, sampling
and couponing opportunities, in order to build brand awareness, generate leads
and drive traffic to an advertiser's site.
ADVERTISING CUSTOMERS
During 1998, 72 companies advertised on the StarMedia network, up from 6
advertisers in 1997. The following is a selected list of our current advertising
customers, which are representative of our customer base:
<TABLE>
<S> <C>
Banco Santander Nokia
Bradesco Outpost.com
Ford Sony
Fox Television SkyTel
IBM USA Networks
</TABLE>
These customers, in the aggregate, accounted for approximately 25.63% of
total revenues in the three months ended March 31, 1999 and 34.70% of total
revenues for the year ended December 31, 1998.
We have derived substantially all of our revenues to date from the sale of
advertisements and sponsorships. In the first quarter of 1999, we had 45
advertisers, up from four advertisers in the first quarter of 1998. In the first
quarter of 1999, three advertisers, Netscape, Teleglobe and Outpost.com, each
accounted for greater than 10% of total revenues. During the same period, our
five largest advertisers accounted for 60% of total
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revenues. In 1998, two advertisers, Fox Latin America and Netscape, each
accounted for greater than 10% of total revenues. During the same period, our
five largest advertisers accounted for 62% of total revenues.
MARKETING AND BRAND AWARENESS
We use multiple advertising media, like television, print and Web-based
advertising in order to:
- build our brand;
- increase traffic; and
- raise our profile among potential advertisers.
Our television advertisements have appeared on broadcast television in
Brazil, Mexico, Colombia, Argentina, Chile, the United States, Uruguay,
Venezuela, Spain, Peru and on cable networks throughout Latin America. Our first
television commercial, "Birth of a Star", began airing in 18 Latin American
markets in Spanish and Portuguese in February 1997. In addition to advertising
on television, we advertise in print, use outdoor advertising and have a
significant presence in highly-targeted online media. We also have an extensive
public relations campaign. We are currently in the midst of our fourth
advertising campaign across Latin America. Our strategic and content partners
also typically provide us with advertising support.
We form marketing alliances with companies that have broad reach and whose
customers are similar to our target customers. We currently have co-marketing
relationships with Fox Latin America, USA Networks and other regional television
stations.
TECHNOLOGY INFRASTRUCTURE
Our technology infrastructure is built and maintained for reliability,
security, and flexibility and is administered by our technical staff.
We maintain our central production servers at the New Jersey data center of
Exodus Communications. We also have a second co-location facility at Digital
Island in New York. We maintain regional network operating centers in Brazil and
Argentina. Our operations depend on the ability of Exodus or Digital Island to
protect their systems against damage from fire, hurricanes, power loss,
telecommunications failure, break-ins, or other events.
Exodus and Digital Island provide comprehensive facilities management
services, including human and technical monitoring of all production servers 24
hours per day, 7 days per week. Exodus and Digital Island also provide
connectivity for our U.S. servers through multiple high-speed connections. In
Brazil and Argentina, our servers are connected to the largest Internet service
providers in each country. All facilities are protected by multiple
uninterruptible power supplies.
For reliability, availability, and serviceability, we have implemented an
environment in which each server can function separately. Key components of our
server architecture are served by multiple redundant machines.
We employ in-house and third-party monitoring software. Reporting and
tracking systems generate daily traffic, demographic, and advertising reports.
Our production data is copied to backup tapes each night.
We employ in-house and third-party software to monitor access to our
production and development servers.
Our network must accommodate a high volume of traffic and deliver frequently
updated information. Components or features of our network have in the past
suffered outages or experienced slower response times because of equipment or
software downtime. These events did not have a material adverse effect on our
business.
LATIN AMERICAN TELECOMMUNICATION INFRASTRUCTURE
Many of the largest markets in Latin America, including Argentina, Brazil,
Chile, Colombia and Mexico, have privatized and begun to deregulate 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. In addition, deregulation has had a direct impact on
the cost and quality of Internet access as competition has driven down
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<PAGE>
both monthly access fees and per minute usage charges.
A few years ago, Internet service providers, or ISPs, in Latin America
charged an average of more than $80 per month for basic Internet access. In
addition to access charges, local calls to connect to the ISP range in cost from
$.01 - $.03 per minute in some countries, including Peru, Chile and Colombia,
and up to $.12-$.15 per minute in Mexico and Argentina. These per minute
charges, which are in addition to access charges, may make total cost of
Internet access substantially greater in Latin America than in the United
States, where users typically only pay a monthly access fee and nominal local
charges, if any. Long distance charges, if required, would make the total cost
of Internet access in Latin America even greater.
Recently, monthly ISP access fees have decreased to an average of $20-25 per
month. While per minute charges have not declined as rapidly, we believe that
they will trend downward as the effects of deregulation spread. Because our
target market consists of a relatively affluent part of the population across
Latin America, we do not believe that Internet access costs are a significant
deterrent for many of our users. However, if rates were to increase
substantially or fail to decline in the future, the number of visitors to our
network may decline or fail to grow.
The majority of Latin Americans access the Internet via traditional analog
dial-up accounts. Digital access is still relatively expensive and is not widely
available throughout Latin America. We do not believe that the quality of
telephone service has to date been a deterrent to the number of users that visit
our network.
COMPETITION
There are many companies that provide Web sites and online destinations
targeted to Latin Americans and Spanish- and Portuguese-speaking people in
general. All of these companies compete with us for visitor traffic, advertising
dollars and electronic commerce partners. The market for Internet content
companies in Latin America is new and rapidly evolving. Competition for
visitors, advertisers and electronic commerce partners is intense and is
expected to increase significantly in the future because there are no
substantial barriers to entry in our market. Increased competition could result
in:
- lower advertising rates;
- price reductions and lower profit margins;
- loss of visitors;
- reduced page views; or
- loss of market share.
Any one of these could materially and adversely affect our business, financial
condition and results of operations.
Our ability to compete successfully depends on many factors. These factors
include:
- the quality of the content provided by us and our competitors;
- how easy our respective services are to use;
- sales and marketing efforts; and
- the performance of our technology.
We compete with providers of content and services over the Internet,
including Web directories, search engines, content sites, Internet service
providers and sites maintained by government and educational institutions. Our
current and anticipated competitors include:
- Spanish- and Portuguese-language versions of U.S. services like Yahoo!,
America Online and Prodigy Communications; and
- services like Zaz (Brazil), Telefonos de Mexico (Mexico) and Universo
Online (Brazil), that target particular Latin American countries.
Many of our competitors and potential new competitors, have:
- longer operating histories;
- greater name recognition in some markets;
- larger customer bases; and
- significantly greater financial, technical and marketing resources.
44
<PAGE>
These competitors may also be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- adopt more aggressive advertising pricing policies;
- use superior technology platforms to deliver their products and services;
and
- make more attractive offers to potential employees, distribution partners,
commerce companies, advertisers and third-party content providers.
Our competitors may develop content that is better than ours or that
achieves greater market acceptance. It is also possible that new competitors may
emerge and acquire significant market share. This could have a material and
adverse effect on our business, financial condition and results of operations.
We also compete with traditional forms of media, like newspapers, magazines,
radio and television for advertisers and advertising revenue. If advertisers
perceive the Internet or our network to be a limited or an ineffective
advertising medium, they may be reluctant to devote a portion of their
advertising budget to Internet advertising or to advertising on our network.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
To date, regulations have not materially restricted use of the Internet in
our markets. However, the legal and regulatory environment that pertains to the
Internet is uncertain and may change. New laws and regulations may be adopted.
Existing laws may be applied to the Internet and new forms of electronic
commerce. Uncertainty and new regulations could increase our costs and prevent
us from delivering our products and services over the Internet. It could also
slow the growth of the Internet significantly. This could delay growth in demand
for our network and limit the growth of our revenues. New and existing laws may
cover issues like:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- pornography; and
- other claims based on the nature and content of Internet materials.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
intellectual property rights. Despite our precautions, it may be possible for
third parties to obtain and use our intellectual property without authorization.
Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries do not protect intellectual
property to the same extent as do the laws of the United States.
We pursue the registration of our trademarks in the United States and
internationally in Latin America, Spain and Portugal. We may not be able to
secure adequate protection for our trademarks in the United States and other
countries. An action has been filed in Spain against our application for
registration of the StarMedia trademark, which we are currently contesting. In
addition, there have been oppositions filed against our applications in other
countries for some of our other marks.
We currently hold trademark registrations in the United States, Peru,
Uruguay, Colombia and Paraguay for the StarMedia trademark and registrations for
other marks in some of these and other countries. Effective trademark protection
may not be available in all the countries in which we conduct business. Policing
unauthorized use of our marks is also difficult and expensive. In addition, it
is possible
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<PAGE>
that our competitors will adopt product or service names similar to ours,
thereby impeding our ability to build brand identity and possibly leading to
customer confusion.
We actively seek to protect our marks against similar and confusing marks of
third parties by:
- using a watch service which identifies applications to register
trademarks;
- filing oppositions to third parties' applications for trademarks; and
- bringing lawsuits against infringers.
For example, we were aware of an unauthorized use of our PIZARRAS trademark
and successfully pursued enforcement of our rights against that party. Similar
actions like this may be time consuming and expensive. Our inability to
effectively protect our trademarks and service marks would have a material
adverse effect on our business, financial condition and results of operations.
Many parties are actively developing chat, homepage, search and related Web
technologies. We expect these developers to continue to take steps to protect
these technologies, including seeking patent protection. There may be patents
issued or pending that are held by others and that cover significant parts of
our technology, business methods or services. For example, we are aware that a
number of patents have been issued in the areas of electronic commerce,
Web-based information indexing and retrieval and online direct marketing.
Disputes over rights to these technologies are likely to arise in the future. We
cannot be certain that our products do not or will not infringe valid patents,
copyrights or other intellectual property rights held by third parties. We may
be subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. In the
event that we determine that licensing this intellectual property is
appropriate, we may not be able to obtain a license on reasonable terms or at
all. We may also incur substantial expenses in defending against third-party
infringement claims, regardless of the merit of these claims. Successful
infringement claims against us may result in substantial monetary liability or
may prevent us from conducting all or a part of our business.
We also intend to continue to license technology from third parties,
including our Web-server and encryption technology. The market is evolving and
we may need to license additional technologies to remain competitive. We may not
be able to license these technologies on commercially reasonable terms or at
all. In addition, we may fail to successfully integrate any licensed technology
into our services. Our inability to obtain any of these licenses could delay
product and service development until alternative technologies can be
identified, licensed and integrated.
EMPLOYEES
As of March 31, 1999, we had 270 full-time employees, of whom 76 worked in
sales, 10 in editorial, 20 in marketing, 116 in product and technology and 48 in
finance and administration. From time to time, we employ independent contractors
to support our research and development, marketing, sales and editorial
departments. None of our personnel are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
FACILITIES
Our principal executive offices are located in approximately 19,500 square
feet of office space in New York, New York, under a lease that expires in August
2003. We also lease sales and business development office space in:
- Sao Paulo, Brazil;
- Mexico City, Mexico;
- Buenos Aires, Argentina;
- Bogota, Colombia;
- Santiago, Chile;
- Montevideo, Uruguay;
- Caracas, Venezuela; and
- Miami, Florida.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the executive officers, directors and key
employees of StarMedia, their ages and the positions held by them:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Fernando J. Espuelas......................... 32 Chairman of the Board of Directors
and Chief Executive Officer
Jack C. Chen................................. 32 President and Director
Tracy J. Leeds............................... 34 Chief Operating Officer
Steven J. Heller............................. 33 Chief Financial Officer
Adriana J. Kampfner.......................... 26 President, StarMedia de Mexico and Senior Vice President,
Global Sales
James D. Granlund............................ 35 Chief Technology Officer
Justin K. Macedonia.......................... 40 Senior Vice President, General Counsel
Douglas M. Karp.............................. 43 Director
Christopher T. Linen(1)...................... 49 Director
Gerardo M. Rosenkranz(2)..................... 48 Director
Susan L. Segal............................... 46 Director
Frederick R. Wilson(1)(2).................... 36 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
FERNANDO J. ESPUELAS is a founder of StarMedia and has been Chairman of the
Board and Chief Executive Officer since September 1996. Prior to founding
StarMedia, Mr. Espuelas was employed in various positions at AT&T from 1994 to
1996, most recently as Managing Director of Marketing Communications for the
Americas. From 1991 to 1994, Mr. Espuelas was employed in various positions at
Ogilvy & Mather, an international advertising firm, most recently as Regional
Account Director for Latin America. Prior to his employment at Ogilvy & Mather,
Mr. Espuelas worked at other major advertising agencies, including Lowe &
Partners and Wunderman Worldwide. He received a B.A. with Distinction from
Connecticut College. Mr. Espuelas is a native of Uruguay.
JACK C. CHEN is a founder of StarMedia and has been President and a Director
since March 1996. Prior to founding StarMedia, Mr. Chen was a Vice President at
S.L. Chen & Associates, Inc., an international consulting firm, from 1995
through 1996. Mr. Chen was a securities analyst at CS First Boston Investment
Management from 1994 to 1995. Prior to his employment at CS First Boston, Mr.
Chen was an investment banker at Goldman, Sachs & Co. Mr. Chen received an
M.B.A. from Harvard Business School and a B.A. with High Honors in Computer
Science from Harvard University.
TRACY J. LEEDS has been the Chief Operating Officer of StarMedia since
September 1998, and prior to that served as StarMedia's Vice President, Business
Operations since July 1997. From 1996 to 1997, Ms. Leeds was General Manager of
the Healthsite Web service for AT&T Personal Online Services. From 1994 to 1996,
she was Director of the PC DreamShop the electronic commerce project of Time
Warner Cable Programming. Prior to that, Ms. Leeds was Director, Client
Services, for Catalog 1, a joint venture between Time Warner and Spiegel. Ms.
Leeds has also held various marketing positions at Johnson & Johnson and
Playtex. Ms. Leeds received an M.B.A. from Harvard Business School and a B.A.
from Yale University.
STEVEN J. HELLER has been the Chief Financial Officer of StarMedia since May
1999,
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and prior to that served as StarMedia's Vice President, Finance and
Administration since October 1997. From 1995 to 1997, Mr. Heller was Director,
Finance and Administration, and Treasurer at Evolve Software, Inc., a software
firm based in San Francisco. Prior to that, Mr. Heller was Managing Director of
Entrepreneurial Accounting Resources, a firm he founded in 1991 that provided
finance and accounting consulting services to high technology and media
companies. Mr. Heller served in the San Francisco office of Coopers & Lybrand in
the Emerging Business Services division of the Business Assurance Group from
1987 to 1991. He received a B.S. from The American University.
ADRIANA J. KAMPFNER is President of StarMedia de Mexico and Senior Vice
President of Global Sales. Ms. Kampfner has worked at StarMedia since August
1997. Prior to her current position, Ms. Kampfner was StarMedia's Vice
President, General Manager, Mexico and StarMedia's Director of Sales, North
America, responsible for initiating relationships with key domestic and
international clients. Before joining StarMedia, Ms. Kampfner was a Senior
Financial Analyst at Chase Securities Inc. from 1996 to 1997. Ms. Kampfner
received a B.A. in Business Administration from the University of Michigan.
JAMES D. GRANLUND joined StarMedia as its Chief Technology Officer in
January 1999. Prior to joining StarMedia, Mr. Granlund was Vice President,
Operations and Technology for Turner Broadcast Systems/CNNfn from 1995 until
1999. During his tenure with CNNfn, he designed, developed and implemented
technological strategies and maintained operational integrity for both the CNNfn
television network and CNNfn.com Web site. Prior to joining Turner Broadcast
Systems, Mr. Granlund was manager of Work Group Computing for Bristol-Myers
Squibb Company from 1988 to 1995. He received a B.S. in Industrial and Labor
Relations from Cornell University.
JUSTIN K. MACEDONIA joined StarMedia as its Senior Vice President, General
Counsel in April 1999. Prior to joining StarMedia, Mr. Macedonia was employed by
the law firm of Winthrop, Stimson, Putnam & Roberts from 1994 until 1999, most
recently in the position of Counsel. Prior to joining Winthrop, Stimson, Mr.
Macedonia was a corporate associate with the law firm of Kramer, Levin,
Naftalis, Nessen, Kamin & Frankel from 1988 to 1994. He is a member of the Bar
of the State of New York. Mr. Macedonia received a J.D. from Harvard Law School
and a B.A. from Fordham College.
DOUGLAS M. KARP has been a Director of StarMedia since September 1998. Mr.
Karp is currently a Managing Director and a member of the Operating Committee of
E.M. Warburg, Pincus & Co., LLC, where he is responsible for limited partner
relationships and fund raising as well as the firm's Communications and Latin
American investments. Prior to joining Warburg, Pincus, he was a Managing
Director of Mergers and Acquisitions at Salomon Brothers Inc. from 1989 to 1991
and a manager with the Boston Consulting Group and founder of its New York
office. Mr. Karp is a member of the boards of directors of Qwest Communications,
Journal Register Company, TV Filme, Inc., Primus Telecommunications Group,
Golden Books Family Entertainment and PageNet do Brasil. Mr. Karp received a
B.A. from Yale University and a J.D. from Harvard Law School.
CHRISTOPHER T. LINEN has been a Director of StarMedia since November 1996.
Currently, Mr. Linen is Principal of Christopher Linen & Company, a venture
capital firm. Mr. Linen was President and Chief Executive Officer of Warner
Music Enterprises, a Time Warner Inc. unit charged with developing new music-
related opportunities including Internet properties and direct marketing
businesses worldwide from 1992 to 1996. From 1988 to 1992, Mr. Linen was
President and Chief Executive Officer of Time Warner Direct, a unit of Time
Warner Inc. composed of Time Life, one of the world's largest direct marketers
of books, music and videocassettes; Book-of-the-Month Club Inc., the nation's
largest book club operator; and related ventures. Prior to his employment with
Time Warner Direct, Mr. Linen held various top-level executive positions at Time
Life, including
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President and Chief Executive Officer and Managing Director for Latin America,
and currently serves on the board of directors of Allied Devices Corporation.
Mr. Linen received a B.S. from Williams College and attended the Graduate School
of Business Administration at New York University.
GERARDO M. ROSENKRANZ has been a Director of StarMedia since November 1996.
Mr. Rosenkranz is a private investor and founder and Chief Executive Officer of
Ventech International, Inc. Ventech provides consulting services to
telecommunications and information technology companies. Prior to establishing
Ventech in 1987, Mr. Rosenkranz served for 10 years at Sprint International
(formerly GTE Telenet), where he held senior executive positions in management,
business development and sales. Mr. Rosenkranz received B.S., M.S. and Engineer
Degrees in Electrical Engineering from Stanford University. He was born and
raised in Mexico City, Mexico.
SUSAN L. SEGAL has been a Director of StarMedia since July 1997. Ms. Segal
has served as General Partner and Latin American Group Head at Chase Capital
Partners since December 1996. From 1992 to 1996, Ms. Segal was a Senior Managing
Director at Chase Securities Inc. responsible for Emerging Markets Investment
Banking. She has more than 20 years of experience in emerging markets,
particularly Latin America, where her responsibilities have included trading,
capital markets and sovereign debt rescheduling. Ms. Segal is a member of the
Council on Foreign Relations, the advisory board of the Council of the Americas
and the boards of directors of the Tinker Foundation, the Americas Society and
the Corp Group. Ms. Segal received an M.B.A. from Columbia University and a B.A.
from Sarah Lawrence College.
FREDERICK R. WILSON has been a Director of StarMedia since July 1997. Mr.
Wilson is currently Managing Partner of Flatiron Partners, a venture capital
firm focused on early-stage, Internet-focused investments. Prior to founding
Flatiron Partners, Mr. Wilson was associated with Euclid Partners from 1986 to
1996. He received an M.B.A. from The Wharton School of Business at The
University of Pennsylvania and a B.S. in Mechanical Engineering and Computer
Science from MIT.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. Upon expiration of the term of a class of directors,
the directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which their term expires. Our board of
directors has resolved that Messrs. Chen and Karp will be Class I directors
whose terms expire at the 2000 annual meeting of stockholders, Messrs. Linen and
Wilson will be Class II directors whose terms expire at the 2001 annual meeting
of stockholders, and Messrs. Espuelas and Rosenkranz and Ms. Segal will be Class
III directors whose terms expire at the 2002 annual meeting of stockholders.
With respect to each class, a director's term will be subject to the election
and qualification of their successors, or their earlier death, resignation or
removal. In addition, our directors may be removed only for cause and only by
the affirmative vote of holders of not less than 66.67% of our outstanding
capital stock entitled to vote generally in the election of directors. These
provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships, may delay a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies with its own nominees.
BOARD COMMITTEES
The audit committee reports to the board regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls. The audit committee consists of
49
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Gerardo M. Rosenkranz and Frederick R. Wilson.
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors. In
addition, the compensation committee reviews bonus and stock compensation
arrangements for all of our other employees. The current members of the
compensation committee are Christopher T. Linen and Frederick R. Wilson. No
interlocking relationships exist between our board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
Directors currently do not receive a stated salary from StarMedia for their
service as members of the board of directors, although by resolution of the
board, they may receive a fixed sum and reimbursement for expenses in connection
with the attendance at board and committee meetings. We currently do not provide
additional compensation for committee participation or special assignments of
the board of directors. From time to time, some of our directors have received
grants of options to purchase shares of common stock.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1998 to our Chief Executive Officer and to each of
our most highly compensated executive officers, other than the Chief Executive
Officer, whose salary and bonus for such fiscal year exceeded $100,000.
Securities Underlying Options/SARs does not include options cancelled under our
1997 Plan, but does include the immediate reissuance of options equal to the
cancelled options under our 1998 Plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-----------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS ($) OPTIONS/SARS(#)
- --------------------------------------------------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
Fernando J. Espuelas................................................. $ 152,084 $ 200,000 1,750,000
Chairman of the Board and Chief Executive Officer
Jack C. Chen......................................................... 152,104 200,000 1,750,000
President
Tracy J. Leeds....................................................... 117,917 -- 550,000
Chief Operating Officer
Steven J. Heller..................................................... 106,667 -- 190,000
Chief Financial Officer
Adriana J. Kampfner.................................................. 138,750 -- 230,000
President, StarMedia de Mexico, Senior Vice President, Global Sales
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to our Chief Executive Officer and our most highly compensated
executive officers, other than our Chief Executive Officer, whose salary and
bonus exceeded $100,000. The options shown for each executive officer do not
include options cancelled under our 1997 Plan, but do include the immediate
reissuance of options equal to the cancelled options under our 1998 Plan. We
have never granted any stock appreciation rights. The potential realizable value
is calculated based on the term of the option at its time of grant. It is
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<PAGE>
calculated assuming that the fair market value of common stock on the date of
grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. The percentage of total
options granted to employees in the last fiscal year is based on options to
purchase an aggregate of 5,782,000 shares of common stock granted under our 1998
Plan to our employees, consultants and directors and under our 1997 Plan to
Messrs. Espuelas and Chen in the year ended December 31, 1998. All options
granted under our 1997 Plan, other than those granted to Messrs. Espuelas and
Chen, have been cancelled and reissued under our 1998 Plan.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
OPTION GRANTS IN LAST FISCAL YEAR ANNUAL RATES
INDIVIDUAL GRANTS OF
--------------------------------------------------------------------------- STOCK PRICE
NUMBER OF APPRECIATION
SECURITIES PERCENT OF TOTAL EXERCISE FOR OPTION
UNDERLYING OPTIONS GRANTED TO PRICE PER FMV ON THE TERM
OPTIONS EMPLOYEES IN SHARE DATE OF GRANT EXPIRATION -------------
NAME GRANTED(#) FISCAL YEAR (%) ($/SHARE) ($/SHARE) DATE 0%($)
- -------------------------------- ------------ ------------------- ----------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fernando J. Espuelas............ 1,000,000 17% $ 0.50 $ 2.08 4/1/08 $ 1,580,000
750,000 13 1.60 5.20 12/17/08 2,700,000
Jack C. Chen.................... 1,000,000 17 0.50 2.08 4/1/08 1,580,000
750,000 13 1.60 5.20 12/17/08 2,700,000
Tracy J. Leeds.................. 375,000 6 0.50 3.83 7/16/07 1,248,750
175,000 3 0.50 4.54 9/17/08 707,000
Steven J. Heller................ 100,000 2 0.50 3.83 7/10/08 333,000
90,000 2 0.50 4.54 9/17/08 363,600
Adriana J. Kampfner............. 130,000 3 0.50 3.83 7/10/08 432,900
100,000 2 0.50 4.54 9/17/08 404,000
<CAPTION>
NAME 5%($) 10%($)
- -------------------------------- ------------- -------------
<S> <C> <C>
Fernando J. Espuelas............ $ 2,890,400 $ 4,887,200
5,157,000 8,901,000
Jack C. Chen.................... 2,890,400 4,887,200
5,157,000 8,901,000
Tracy J. Leeds.................. 2,153,588 3,532,388
1,207,535 1,970,255
Steven J. Heller................ 574,290 941,970
621,018 1,013,274
Adriana J. Kampfner............. 746,577 1,224,561
690,020 1,125,860
</TABLE>
FISCAL YEAR-END OPTION VALUES
The following table provides some information about stock options held as of
December 31, 1998 by our Chief Executive Officer and our most highly compensated
executive officers other than our Chief Executive Officer. No options were
exercised during fiscal 1998 by any of these executive officers. There was no
public trading market for the common stock as of December 31, 1998. Accordingly,
the value of unexercised in-the-money options at fiscal year-end is based on the
initial public offering price of $15.00 per share, less the exercise price per
share, multiplied by the number of shares underlying the options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END (#) AT FISCAL YEAR END ($)
----------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fernando J. Espuelas............................. 1,750,000 -- $ 24,550,000 $ --
Jack C. Chen..................................... 1,750,000 -- 24,550,000 --
Tracy J. Leeds................................... 82,639 467,361 1,198,266 6,776,735
Steven J. Heller................................. 36,111 153,889 523,610 2,231,391
Adriana J. Kampfner.............................. 13,333 216,667 193,329 3,141,672
</TABLE>
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<PAGE>
EMPLOYMENT CONTRACTS
We have entered into executive employment agreements with Fernando J.
Espuelas, our Chairman and Chief Executive Officer, and Jack C. Chen, our
President. Each employment agreement provides for an initial annual base salary
of $150,000 that will be automatically increased effective each January 1 by not
less than 10% of the previous year's base salary. Each employment agreement also
provides for an initial annual bonus of not less than $100,000, that will also
be increased annually by not less than 10% of the previous year's bonus amount.
Each executive is also entitled to participate in our stock option plans as well
as all health, welfare and other benefit plans provided by us to key executive
employees.
Each employment agreement expires on July 31, 2000, subject to earlier
termination or extension. Each employment agreement provides that, if Messrs.
Espuelas or Chen is terminated by us without cause, or if they choose to
terminate their employment with us for good reason, they will be entitled to
receive from us:
- their base salary through the termination date;
- any accrued but unpaid vacation pay;
- the amount of all compensation previously deferred, if any, together with
any accrued interest or earnings on any deferred compensation;
- a termination payment of 200% of the annual base salary and guaranteed
minimum bonus amount applicable to the year in which the termination
occurs; and
- health and disability benefits for twenty-four months following the
termination date.
Under the agreements, good reason includes:
- a material breach of the compensation provisions of the employment
agreements;
- assignment of Messrs. Espuelas or Chen to duties that are inconsistent
with their roles as executive officers;
- relocation of Messrs. Espuelas or Chen outside of the New York
metropolitan area;
- a change of the reporting relationship of Messrs. Espuelas or Chen; or
- a change of control.
In addition, in the event Messrs. Espuelas or Chen is terminated by us
without cause, or if they choose to terminate their employment with us for good
reason, all stock options previously granted to them that have not been
exercised and are outstanding will remain outstanding and continue to become
exercisable pursuant to their respective terms.
Each employment agreement prohibits Messrs. Espuelas and Chen from competing
with us for a period of two years from the date of their termination of
employment, if they are terminated either by us for cause or if they choose to
terminate their employment with us without good reason. If we terminate their
employment without cause, the non-compete period lasts for one year from the
date of termination.
We have agreed to indemnify Messrs. Espuelas and Chen for all liabilities
relating to their status as officers or directors, and any actions committed or
omitted by them in this capacity, to the maximum extent permitted by the laws of
the State of Delaware.
STOCK OPTION PLANS
1997 STOCK OPTION PLAN
Our 1997 Stock Option Plan was adopted by the board of directors in June
1997. A total of 5,000,000 shares of common stock were authorized for issuance
under the 1997 Plan. When the 1998 Plan was adopted, all options outstanding
under the 1997 Plan were cancelled and reissued under the 1998 Plan, other than
those granted to Messrs. Espuelas and Chen in the aggregate amount of 2,000,000.
We will not issue additional options under the 1997 Plan.
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<PAGE>
The exercise price for the shares of common stock subject to option grants
made under the 1997 Plan may, at the discretion of the plan administrator, be
paid in cash or in shares of common stock valued at fair market value on the
exercise date.
In the event of a merger pursuant to which StarMedia is acquired, each
outstanding option may, at the discretion of the plan administrator, be assumed
by the successor corporation or terminated in exchange for a cash payment equal
to the difference between the fair market value of the shares for which the
option is at the time exercisable and the exercise price payable for such
shares.
The board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate in all events on December 31, 1999. Options under the 1997 Plan,
however, will remain outstanding in accordance with their terms.
1998 STOCK PLAN
Our 1998 Stock Plan was adopted by the board of directors and approved by
the stockholders in July 1998. A total of 17,000,000 shares of common stock have
been authorized for issuance under the 1998 Plan. The number of shares of common
stock available for issuance under the 1998 Plan will increase on July 1 of each
year beginning in 2000 by the lesser of:
- 4 million shares;
- 4% of the outstanding shares on such date; or
- an amount determined by the board.
Under the 1998 Plan, eligible individuals in StarMedia's employ or service
may, at the discretion of the plan administrator, be granted options to purchase
shares of common stock at an exercise price determined by the plan administrator
or may be issued shares of common stock directly through the purchase of such
shares at a price determined by the plan administrator. Eligible individuals
include officers, non-employee board members and consultants.
The 1998 Plan is administered by the compensation committee of the board.
The compensation committee as plan administrator has complete discretion to
determine which eligible individuals are to receive option grants or stock
issuances, the time or times when option grants or stock issuances are to be
made, the number of shares subject to each grant or issuance, the status of any
granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding.
The exercise price for the shares of common stock subject to option grants
made under the 1998 Plan may, at the discretion of the plan administrator, be
paid in cash, in shares of common stock valued at fair market value on the
exercise date, through a same-day sale program without any cash outlay by the
optionee or by delivering a full-recourse, interest-bearing promissory note.
In the event of an acquisition of StarMedia, whether by merger or asset
sale, each option which is not to be assumed by the successor corporation will
automatically accelerate in full and all unvested shares will immediately vest,
except to the extent that StarMedia's repurchase rights with respect to those
shares are to be assigned to the successor corporation.
The plan administrator has the authority to effect the cancellation of
outstanding options in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
The board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of:
- the date determined by the board;
- the date on which all shares available for issuance under the 1998 Plan
have been issued as fully-vested shares; or
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<PAGE>
- the termination of all outstanding options in connection with an
acquisition of StarMedia.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
in May 1999. A total of 1,500,000 shares of common stock has been reserved for
issuance under the purchase plan, plus annual increases, on July 1 of each year
beginning in 2000, equal to the lesser of:
- 500,000 shares;
- 1% of the outstanding shares on such date; or
- a lesser amount determined by the Board.
The purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended. It contains successive, overlapping 24-month
offering periods, each consisting of four six-month purchase periods. The
offering periods generally start on the first trading day on or after May 15 and
November 15 of each year, except for the first offering period which commences
on the first trading day on or after the effective date of this offering and
ends on the last trading day on or before May 14, 2001.
Our employees are eligible to participate in the stock plan if they work
with StarMedia for at least 20 hours per week and more than five months in any
calendar year. However, any employee who:
- immediately after grant owns stock representing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans exceed $25,000 worth of stock for any calendar year
may not be granted any rights to purchase stock under the purchase plan. The
purchase plan permits participants to purchase common stock through payroll
deductions of not less than 2% and up to 10% of their "cash earnings". Cash
earnings is defined as the participant's base salary plus all overtime payments,
bonuses, commissions, current profit sharing distributions and other incentive-
type payments. Cash earnings are calculated before the deduction of any income
or employment tax withholdings or any pre-tax contributions made by the
participant to a 401(k) plan or cafeteria benefit program. The maximum number of
shares a participant may purchase during a single purchase period is 2,500
shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period. Participants
may end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically upon
termination of a participant's employment.
Rights granted under the purchase plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the purchase plan. The purchase plan provides that, in the event
that we merge with or into another corporation or sell substantially all of our
assets, each outstanding right to purchase stock will be assumed or substituted
for by the successor corporation. If the successor corporation refuses to assume
or substitute for the outstanding rights to purchase stock, the offering period
then in progress will be shortened and a new exercise date will be set. The
purchase plan will terminate in 2009. The Board has the authority to amend or
terminate the purchase plan, except that, subject to certain exceptions, no such
action may adversely affect any outstanding rights to purchase stock under the
purchase plan.
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<PAGE>
CERTAIN TRANSACTIONS
In 1996, our directors, officers and 5% stockholders, and their affiliates,
purchased common stock as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PURCHASE
COMMON PRICE PER
NAME OF INVESTOR STOCK SHARE
- ------------------------------ ----------- -----------
<S> <C> <C>
Fernando J. Espuelas.......... 4,500,000 $ .0056
Jack C. Chen.................. 4,500,000 .0056
Gerardo M. Rosenkranz......... 220,000 .09
Christopher T. Linen.......... 100,000 .25
A trust, of which Mr. Chen is
trustee..................... 20,000 .50
</TABLE>
Messrs. Espuelas, Chen, Rosenkranz and Linen currently serve as our officers
and/or directors.
In May 1997, we issued options to purchase 280,000 shares of common stock at
an exercise price of $0.09 per share to Mr. Rosenkranz. At that time, we also
issued options to purchase 100,000 shares of common stock at an exercise price
of $0.25 per share to Mr. Linen. These options were granted to Messrs.
Rosenkranz and Linen in connection with services provided to us.
In July 1997, we sold 7,330,000 shares of our series A redeemable
convertible preferred stock to a number of investors at a purchase price of
$0.50 per share. Of these, our directors, officers and 5% stockholders, and
their affiliates, purchased shares as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
REDEEMABLE
CONVERTIBLE
NAME OF INVESTOR PREFERRED STOCK
- --------------------------------------- ----------------
<S> <C>
Chase Venture Capital Associates....... 5,535,000
fl@tiron Fund.......................... 465,000
Tracy Leeds and family................. 200,000
Christopher T. Linen................... 100,000
Gerardo Rosenkranz, family and
affiliates........................... 100,000
A trust, of which Mr. Chen is
trustee.............................. 20,000
</TABLE>
Chase Venture Capital Associates owns more than 5% of our stock. In
addition, Susan Segal, one of our directors, is affiliated with Chase Venture
Capital Associates. The fl@tiron Fund is controlled by Frederick Wilson, one of
our directors. Tracy Leeds currently serves as one of our executive officers.
After this offering, all of the series A redeemable convertible preferred stock
will automatically convert into an aggregate of 7,330,000 shares of common
stock.
In January 1998, we issued 8% convertible subordinated notes that were due
on the earlier of July 21, 1998 or the closing of our series B redeemable
convertible preferred stock financing to the fl@tiron Fund in the aggregate
principal amount of $410,000 and to Chase Venture Capital Associates in the
aggregate principal amount of $3,590,000. The notes were repaid in full.
In February 1998, we sold 8,000,000 shares of series B redeemable
convertible preferred stock to a number of investors at a purchase price of
$1.50 per share. Of these, our directors, officers and 5% stockholders, and
their affiliates, purchased shares as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES B
REDEEMABLE
CONVERTIBLE
NAME OF INVESTOR PREFERRED STOCK
- --------------------------------------- ----------------
<S> <C>
Chase Venture Capital Associates....... 2,393,333
fl@tiron Fund.......................... 273,333
Gerardo Rosenkranz, family and
affiliates........................... 66,666
Tracy Leeds and family................. 66,668
Family of Steven Heller................ 30,000
</TABLE>
Steven Heller is our chief financial officer. After this offering, the
series B redeemable convertible preferred stock will automatically convert into
an aggregate of 8,000,000 shares of common stock.
In August 1998, we issued 8% convertible subordinated notes that were due on
the earlier of December 31, 1998 or the closing of our series C redeemable
convertible preferred stock financing to the Flatiron Fund 1998/99 in the
aggregate principal amount of $200,000, and to Chase Venture Capital Associates
in the aggregate amount of $1,800,000. The Flatiron Fund 1998/99 is controlled
by Mr. Wilson. The notes were repaid in full.
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<PAGE>
In August 1998, we sold 16,666,667 shares of series C redeemable convertible
preferred stock to a number of investors at a purchase price of $4.80 per share.
Of these, our directors, officers and 5% stockholders, and their affiliates,
purchased shares as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES C
REDEEMABLE
CONVERTIBLE
NAME OF INVESTOR PREFERRED STOCK
- --------------------------------------- ----------------
<S> <C>
Chase Venture Capital Associates ...... 3,750,000
Warburg, Pincus Equity Partners ....... 2,380,209
Warburg, Pincus Ventures
International ....................... 2,380,208
Flatiron Fund 1998/99.................. 416,667
Gerardo Rosenkranz, family and
affiliates........................... 104,165
Tracy Leeds............................ 28,918
</TABLE>
The Warburg, Pincus entities, collectively, own more than 5% of our stock.
In addition, Douglas M. Karp, one of our directors, is affiliated with the
Warburg, Pincus entities. After this offering, the series C redeemable
convertible preferred stock will automatically convert into an aggregate of
16,666,667 shares of common stock.
We have entered into employment agreements with Fernando J. Espuelas, our
chairman and chief executive officer, and Jack C. Chen, our president.
From time to time we have retained an affiliate of Chase Venture Capital
Associates to perform various investment banking and advisory services on our
behalf. The amount paid to this affiliate of Chase in 1998 for these services
was $1.2 million.
In May 1999, we granted Steve Heller, our chief financial officer, options
to purchase 140,000 shares of common stock at the initial public offering price.
It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates be entered into only if they are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to us than could be obtained from unaffiliated parties and are
reasonably expected to benefit us.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of May 7, 1999 and as adjusted to reflect the
sale of common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Shares beneficially owned includes ownership of
shares of redeemable convertible preferred stock. Unless otherwise indicated,
the address for those listed below is c/o StarMedia Network, Inc., 29 West
36(th) Street, Fifth Floor, New York, New York 10018. Except as indicated by
footnote, and subject to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The number of shares of common
stock outstanding used in calculating the percentage for each listed person
includes the shares of common stock underlying options held by such persons that
are exercisable within 60 days of May 7, 1999, but excludes shares of common
stock underlying options held by any other person. Percentage of beneficial
ownership is based on 46,346,328 shares of common stock outstanding as of May 7,
1999, assuming the conversion of the redeemable convertible preferred stock, and
53,346,328 shares of common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
SHARES BENEFICIALLY OWNED
BENEFICIALLY --------------------------------------
NAME OF BENEFICIAL OWNER OWNED PRIOR TO OFFERING AFTER OFFERING
- ----------------------------------------------------------------- ------------- ------------------- -----------------
<S> <C> <C> <C>
Fernando J. Espuelas(1).......................................... 6,250,000 13.0% 11.3%
Jack C. Chen(2).................................................. 6,290,000 13.1 11.4
Tracy J. Leeds(3)................................................ 357,391 * *
Steven J. Heller(4).............................................. 52,778 * *
Adriana J. Kampfner(5)........................................... 62,777 * *
Douglas M. Karp(6)............................................... 4,760,417 10.3 8.9
Christopher T. Linen(7).......................................... 300,000 * *
Gerardo M. Rosenkranz(8)......................................... 588,055 1.3 1.1
Susan L. Segal(9)................................................ 11,378,333 24.6 21.3
Frederick R. Wilson(10).......................................... 1,155,000 2.5 2.2
Chase Venture Capital Associates, L.P.(11)....................... 11,378,333 24.6 21.3
Warburg, Pincus Equity Partners, L.P.(12)........................ 2,380,209 5.1 4.5
Warburg, Pincus Ventures International, L.P.(12)................. 2,380,208 5.1 4.5
All directors and executive officers as a group (12 persons)..... 31,194,751 62.3 54.6
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
(1) Includes (a) 1,750,000 shares issuable upon the exercise of currently
exercisable stock options and (b) 1,000,000 shares held by a trust, of which
Mr. Chen and the spouse of Mr. Espuelas are trustees.
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<PAGE>
(2) Includes (a) 1,750,000 shares issuable upon the exercise of currently
exercisable stock options, (b) 2,150,000 shares owned by Mr. Chen's spouse
and (c) an aggregate of 2,246,600 shares held by three trusts, of which Mr.
Chen is trustee.
(3) Includes (a) 31,250 shares issuable upon the exercise of currently
exercisable stock options and stock options which vest within 60 days and
(b) an aggregate of 250,000 shares held by a trust, of which Ms. Leeds is
trustee.
(4) Consists of 52,778 shares issuable upon the exercise of currently
exercisable stock options and stock options which vest within 60 days.
(5) Consists of 62,777 shares issuable upon the exercise of currently
exercisable stock options and stock options which vest within 60 days.
(6) All shares indicated as owned by Mr. Karp are included because of Mr. Karp's
affiliation with the Warburg, Pincus entities. Mr. Karp disclaims beneficial
ownership of all shares owned by the Warburg, Pincus entities. Mr. Karp's
address is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue, New
York, NY 10017. See note 12 below.
(7) Includes 100,000 shares owned by members of Mr. Linen's immediate family.
Mr. Linen's address is c/o Christopher Linen & Co., 113 East 19(th) Street,
New York, NY 10003.
(8) Consists of (a) 520,833 shares owned by Mr. Rosenkranz, (b) 43,055 shares
owned by a trust, of which Mr. Rosenkranz is managing trustee, and (c)
24,167 shares owned by a company controlled by Mr. Rosenkranz. Mr.
Rosenkranz's address is c/o Ventech International, Inc., 60 Arch Street,
Greenwich, CT 06830.
(9) All shares indicated as owned by Ms. Segal are included because of Ms.
Segal's affiliation with Chase Venture Capital Associates, L.P., of which
Chase Capital Partners is the general partner. Ms. Segal disclaims
beneficial ownership of all shares owned by Chase. Ms. Segal's address is
c/o Chase Venture Capital Associates, L.P., 380 Madison Avenue, 9(th) Floor,
New York, NY 10017.
(10) Consists of shares owned by the fI@tiron Fund, LLC and the FIatiron Fund
1998/99, LLC which are controlled by Mr. Wilson. Mr. Wilson's address is c/o
Flatiron Partners, 257 Park Avenue South, 12(th) Floor, New York, NY 10010.
(11) The address of Chase Venture Capital Associates, L.P. is 380 Madison
Avenue, 12(th) Floor, New York, NY 10017. Chase has expressed an interest to
purchase 450,000 additional shares of common stock in this offering at the
initial public offering price. If Chase purchases these shares, it will
beneficially own approximately 22.2% of our common stock after this
offering.
(12) THE WARBURG, PINCUS STOCKHOLDERS. The Warburg, Pincus stockholders are
comprised of Warburg, Pincus Equity Partners, L.P., including three related
limited partnerships, and Warburg Pincus Ventures International,
L.P. Warburg, Pincus & Co. is the sole general partner of each of these
entities and has a 20% interest in each of their profits. The Warburg Pincus
stockholders are each managed by E.M. Warburg Pincus & Co., LLC. Lionel I.
Pincus is the managing partner of Warburg, Pincus & Co. and the managing
member of E.M. Warburg, Pincus & Co., LLC, and may be deemed to control both
entities.
MR. KARP. Mr. Karp, a director of StarMedia, is a managing director and
member of E.M. Warburg, Pincus & Co., LLC and a general partner of Warburg,
Pincus & Co. Mr. Karp may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange of 1934, as
amended) in an indeterminate portion of the shares beneficially owned by the
Warburg, Pincus stockholders.
ADDRESS. The address of the Warburg, Pincus entities is 466 Lexington
Avenue, New York, NY 10017.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
StarMedia's amended and restated certificate of incorporation, which will
become effective upon the closing of this offering, authorizes the issuance of
up to 200,000,000 shares of common stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value $.001 per share, the rights and
preferences of which may be established from time to time by StarMedia's board
of directors. As of May 7, 1999, 14,349,661 shares of common stock were
outstanding and 31,996,667 shares of convertible preferred stock convertible
into the same amount of shares of common stock were issued and outstanding. As
of May 7, 1999, StarMedia had 97 stockholders.
COMMON STOCK
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of StarMedia, the holders of common stock
will be entitled to share ratably in the net assets legally available for
distribution to shareholders after payment of all of our liabilities and any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The rights, preferences
and privileges of holders of common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences, powers,
rights and restrictions of different series of preferred stock may differ. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock. The
issuance may also have the effect of delaying, deferring or preventing a change
in control of StarMedia. All outstanding shares of preferred stock will be
automatically converted into common stock upon the closing of this offering. We
have no current plans to issue any additional shares of preferred stock.
REGISTRATION RIGHTS
Under the terms of our amended and restated registration rights agreement,
at any time on or after the first anniversary of the effective date of this
offering, each of Chase Venture Capital Associates, Warburg, Pincus Equity
Partners and the holders of a majority of the outstanding shares of common stock
issuable after conversion of the shares of our preferred stock held by parties
to that agreement may, on one occasion only, require us to register for sale all
or any portion of the shares of common stock issuable upon conversion of the
preferred shares held by them. We are also obligated to register any of the
shares of common stock issuable upon conversion of the preferred shares held by
parties to the registration rights agreement if they request to be included in
the registration. These parties, in the aggregate, have three demand
registration rights. Further, if we become eligible to file registration
statements on Form S-3, a holder of our preferred stock which is a party to the
registration rights
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<PAGE>
agreement may require us to file a registration statement on Form S-3 under the
Securities Act with respect to the shares of common stock issuable upon
conversion of its preferred stock. We are also obligated to register the shares
of common stock issuable upon conversion of the preferred shares held by parties
to the registration rights agreement if they request to be included in the
registration, provided that we will not be required to effect any Form S-3
registration more than once in any 180-day period. In addition, holders of
preferred stock which are parties to the registration rights agreement will be
entitled to require us to register the common stock issuable upon conversion of
their preferred stock when we register stock for our own account or the account
of other stockholders. This type of registration right is known as a "piggyback"
registration right. Mr. Espuelas and Mr. Chen may also participate in any
demand, S-3 or piggyback registration.
The foregoing registration rights are subject to certain conditions and
limitations, including:
- the right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by stockholders with registration
rights to be included in any demand, S-3 or piggyback registration; and
- our right to delay for up to 90 days the filing or effectiveness of a
registration statement pursuant to a demand for registration if the board
of directors of determines that the registration would not be in our best
interest at that time.
We are generally required to bear all of the expenses of all registrations,
except underwriting discounts and commissions. Registration of any of the shares
of common stock held by stockholders with registration rights would result in
those shares becoming freely tradable without restriction under the Securities
Act immediately after effectiveness of the registration. We have agreed to
indemnify the holders of registration rights in connection with demand, S-3 and
piggyback registration under the terms of our amended and restated registration
rights agreement.
In connection with our private placement of an aggregate of 3,727,272 shares
of common stock in May 1999, we granted the investors registration rights. As a
result, each of the investors may require us to register the shares of common
stock they purchased. If at any time between the first and third anniversary of
the private placement we propose to register any of our common stock, we have
agreed, upon their written request, to include the investors' shares of common
stock in the registration. The number of shares of common stock which we will be
required to register for the investors may be reduced in an underwritten
offering by the managing underwriter.
We are generally required to bear all of the expenses of registering the
investors' shares of common stock, other than underwriting discounts and
commissions. Registration of any of the shares of common stock held by the
investors would result in those shares becoming freely tradable without
restriction under the Securities Act immediately after effectiveness of the
registration. We have agreed to indemnify the investors in connection with the
registration of their shares of common stock under the terms of the registration
rights agreements.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which are summarized in the following paragraphs,
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider it its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. Upon expiration of the term of a class of directors,
the directors in that class will be elected for three-year terms at the annual
60
<PAGE>
meeting of stockholders in the year in which their term expires. Our board of
directors has resolved that Messrs. Chen and Karp will be Class I directors
whose terms expire at the 2000 annual meeting of stockholders, Messrs. Linen and
Wilson will be Class II directors whose terms expire at the 2001 annual meeting
of stockholders, and Messrs. Espuelas and Rosenkranz and Ms. Segal will be Class
III directors whose terms expire at the 2002 annual meeting of stockholders.
With respect to each class, a director's term will be subject to the election
and qualification of their successors, or their earlier death, resignation or
removal. In addition, our board of directors may be removed only for cause and
only by the affirmative vote of holders of not less than 66.67% of our
outstanding capital stock entitled to vote generally in the election of
directors. These provisions, when coupled with the provision of our amended and
restated certificate of incorporation authorizing the board of directors to fill
vacant directorships, may delay a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the ability
of stockholders to act by written consent. Our amended and restated bylaws
further provide that special meetings of our stockholders may be called only by
the chairman of the board of directors or the president at the request of two-
thirds of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS
Our amended and restated bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
at our principal executive offices not less than 90 days nor more than 120 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within 30 days before or 70 days after the anniversary date, in order to be
timely, notice from the stockholder must be received:
- not earlier than 120 days prior to the annual meeting of stockholders, and
- not later than 90 days prior to the annual meeting of stockholders or the
tenth day following the date on which notice of the annual meeting was
made public.
In the case of a special meeting of stockholders called for the purpose of
electing directors, notice by the stockholder, in order to be timely, must be
received:
- not earlier than 120 days prior to the special meeting, and
- not later than 90 days prior to the special meeting or the close of
business on the tenth day following the day on which public disclosure of
the date of the special meeting was made.
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
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<PAGE>
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
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 bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with various
business combination transactions and the amendment of various provisions of our
amended and restated certificate of incorporation and amended and restated
bylaws, including those provisions relating to the classified board of directors
and the ability of stockholders to call special meetings.
RIGHTS AGREEMENT
Under Delaware law, every corporation may create and issue rights entitling
the holders of such rights to purchase from the corporation shares of its
capital stock of any class or classes, subject to any provisions in its
certificate of incorporation. The price and terms of such shares must be stated
in the certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
We have entered into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of our rights agreement are complex and
not easily summarized, particularly as they relate to the acquisition of our
common stock and to exercisability. This summary may not contain all of the
information that is important to you.
Our rights agreement provides that each share of our prospective common
stock outstanding will have one right to purchase one ten-thousandth of a
preferred share attached to it. The purchase price per one ten-thousandth of a
preferred share under the stockholder rights agreement is four times the average
closing price of our common stock for the first five days of trading after the
consummation of this offering.
Initially, the rights under our rights agreement are attached to outstanding
certificates representing our common stock and no separate certificates
representing the rights will be distributed. The rights will separate from our
common stock and be represented by separate certificates on the day someone
acquires 15% of our common stock, or approximately 10 days after someone
commences a tender offer for 15% of our outstanding common stock.
After the rights separate from our common stock, certificates representing
the rights will be mailed to record holders of the common stock. Once
distributed, the rights certificates alone will represent the rights.
All shares of our common stock issued prior to the date the rights separate
from the common stock will be issued with the rights attached. The rights are
not exercisable until the date the rights separate from the common stock. The
rights will expire on the tenth anniversary of the date of the completion of
this offering unless earlier redeemed or exchanged by us.
If an acquiror obtains or has the rights to obtain 15% or more of our common
stock, then each right will entitle the holder to purchase a number of one
ten-thousandths of a preferred share having a market value of twice the purchase
price of each right.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the purchase
price if an acquiror obtains 15% or more of our common stock and any of the
following occurs:
- we merge into another entity;
- an acquiring entity merges into us; or
- we sell more than 50% of our assets or earning power.
Under our rights agreement, any rights that are or were owned by an acquiror
of more than 15% of our outstanding common stock will be null and void.
Our rights agreement contains exchange provisions which provide that after
an acquiror obtains 15% or more, but less than 50% of our respective outstanding
common stock, our
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<PAGE>
board of directors may, at its option, exchange all or part of the then
outstanding and exercisable rights for common shares. In such an event, the
exchange ratio is one common share per right, adjusted to reflect any stock
split, stock dividend or similar transaction.
Our board of directors may, at its option, redeem all of the outstanding
rights under our rights agreement prior to the earlier of (1) the time that an
acquiror obtains 15% or more of our outstanding common stock or (2) the final
expiration date of the rights agreement. The redemption price under our rights
agreement is $0.001 per right, subject to adjustment. The right to exercise the
rights will terminate upon the action of our board ordering the redemption of
the rights and the only right of the holders of the rights will be to receive
the redemption price.
Holders of rights will have no rights as our stockholders including the
right to vote or receive dividends, simply by virtue of holding the rights.
Our rights agreement provides that the provisions of the rights agreement
may be amended by the board of directors prior to the day someone acquires 15%
of our outstanding common stock or 10 days after someone commences a tender
offer for 15% of our outstanding common stock without the approval of the
holders of the rights. However, after that date, the rights agreement may not be
amended in any manner which would adversely effect the interests of the holders
of the rights, excluding the interests of any acquiror. In addition, our rights
agreement provides that no amendment may be made to adjust the time period
governing redemption at a time when the rights are not redeemable.
Our rights agreement contains rights that have anti-takeover effects. The
rights may cause substantial dilution to a person or group that attempts to
acquire us without conditioning the offer on a substantial number of rights
being acquired. Accordingly, the existence of the rights may deter acquirors
from making takeover proposals or tender offers. However, the rights are not
intended to prevent a takeover, but rather are designed to enhance the ability
of our board to negotiate with an acquiror on behalf of all the stockholders. In
addition, the rights should not interfere with a proxy contest.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for StarMedia's common stock is American
Stock Transfer & Trust Company, New York, New York.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "STRM".
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares will be available for sale shortly after this offering because
of the contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
53,346,328 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 46,346,328 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or 701 under the Securities Act, which rules are summarized below.
LOCK-UP AGREEMENTS
All of our officers, directors and substantially all of our stockholders
have signed lock-up agreements under which they agreed not to transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner:
- with the prior written consent of Goldman, Sachs & Co.;
- in the case of some transfers to affiliates;
- as a bona fide gift; or
- to any trust.
Subject to the provisions of Rule 144, 144(k) and 701, restricted shares
totaling 42,619,056 will be available for sale in the public market, subject in
the case of shares held by affiliates to the volume restrictions contained in
those rules, 180 days after the date of this prospectus.
In addition, the holders of 3,727,272 shares of our common stock have agreed
not to transfer or dispose of any of their shares of common stock for a period
of one year after the date on which they purchased the shares in April and May
1999.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 533,463 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has
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<PAGE>
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with some of the restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 42,017,272 shares of our
common stock, or their transferees will be entitled to request that we register
their shares under the Securities Act.
STOCK PLANS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 18,875,140 shares of common stock reserved for
issuance under our 1997, 1998 and 1999 Plans. This registration statement is
expected to be filed as soon as practicable after the effective date of this
offering.
At March 31, 1999, options to purchase 8,229,100 shares were issued and
outstanding under our Plans and otherwise. All of these shares will be eligible
for sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lock-up agreements.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for
StarMedia by Brobeck, Phleger & Harrison LLP, New York, New York and for the
underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998, and for the
period from March 5, 1996 (date of inception) to December 31, 1996 and the years
ended December 31, 1997 and 1998 as set forth in their reports. We have included
our financial statements and schedule 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 MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration
65
<PAGE>
statement. For further information with respect to StarMedia and the common
stock, reference is made to the registration statement and the exhibits and
schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in StarMedia's files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. StarMedia's
Commission filings, including the registration statement, will also be available
to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
STARMEDIA NETWORK, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(Unaudited)................................................................... F-3
Consolidated Statements of Operations for the period from March 5, 1996 (date of
inception) to December 31, 1996 and the years ended December 31, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (Unaudited)................ F-4
Consolidated Statements of Changes in Stockholders' Deficit for the period from
March 5, 1996 (date of inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
(Unaudited)................................................................... F-5
Consolidated Statements of Cash Flows for the period from March 5, 1996 (date of
inception) to December 31, 1996 and the years ended December 31, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (Unaudited)................ F-6
Notes to Consolidated Financial Statements...................................... F-7 - F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
StarMedia Network, Inc.
We have audited the accompanying consolidated balance sheets of StarMedia
Network, Inc. (the "Company") as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the period from March 5, 1996 (date of inception) to December 31, 1996
and the years ended December 31, 1997 and 1998. These consolidated 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
StarMedia Network, Inc. at December 31, 1997 and 1998 and the results of their
operations and their cash flows for the period from March 5, 1996 (date of
inception) to December 31, 1996 and the years ended December 31, 1997 and 1998
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
New York, New York
March 5, 1999,
except for Note 12, as to which
the date is March 14, 1999
F-2
<PAGE>
STARMEDIA NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 PRO FORMA
------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 436,000 $ 53,141,000 $ 40,588,000 $ 40,588,000
Accounts receivable net of allowance for bad debts of
$0, $60,000 and $141,000 as of December 31, 1997 and
1998 and March 31, 1999, respectively................ 27,000 460,000 973,000 973,000
Other current assets................................... 7,000 1,674,000 2,241,000 2,241,000
----------- ------------ ------------ -------------
Total current assets..................................... 470,000 55,275,000 43,802,000 43,802,000
Fixed assets, net........................................ 263,000 5,403,000 7,308,000 7,308,000
Intangible assets, net of accumulated amortization of
$1,000, $93,000 and $124,000 as of December 31, 1997
and 1998 and March 31, 1999, respectively.............. 30,000 179,000 492,000 492,000
Goodwill, net............................................ 920,000 920,000
Other assets............................................. 23,000 129,000 1,367,000 1,367,000
----------- ------------ ------------ -------------
$ 786,000 $ 60,986,000 $ 53,889,000 $ 53,889,000
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ $ 286,000 $ 3,732,000 $ 3,732,000
Accrued expenses....................................... 227,000 6,442,000 6,845,000 6,845,000
Due to principal stockholders.......................... 67,000
Loan payable, current portion.......................... 1,085,000 1,085,000
Capital lease obligations, current portion............. 10,000 220,000 166,000 166,000
Deferred revenues...................................... 20,000 815,000 591,000 591,000
----------- ------------ ------------ -------------
Total current liabilities................................ 324,000 7,763,000 12,419,000 12,419,000
Capital lease obligations................................ 8,000
Loan payable, long term.................................. 2,541,000 2,541,000
Deferred rent............................................ 21,000 122,000 126,000 126,000
Preferred stock, authorized 60,000,000 shares:
Series A Redeemable Convertible Preferred Stock, $.001
par value, 7,330,000 shares authorized, 7,330,000
shares issued and outstanding at December 31, 1997
and 1998 and March 31, 1999, respectively, stated at
liquidation value, net of related expenses........... 3,833,000 4,218,000 4,311,000
Series B Redeemable Convertible Preferred Stock, $.001
par value, 8,000,000 shares authorized, 8,000,000
shares issued and outstanding at December 31, 1998
and March 31, 1999, respectively, stated at
liquidation value, net of related expenses........... 12,944,000 13,246,000
Series C Redeemable Convertible Preferred Stock, $.001
par value, 16,666,667 shares authorized, 16,666,667
shares issued and outstanding at December 31, 1998
and March 31, 1999, respectively, stated at
liquidation value, net of related expenses........... 79,332,000 81,478,000
Stockholders' deficit:
Common stock, $.001 par value, 100,000,000 shares
authorized, 10,012,000 shares, 10,392,000 shares and
10,427,000 shares issued and outstanding at December
31, 1997 and 1998 and March 31, 1999, respectively,
and 42,423,667 shares outstanding on a pro forma
basis................................................ 10,000 10,000 10,000 42,000
Additional paid-in capital............................. 431,000 19,563,000 24,185,000 123,188,000
Deferred compensation.................................. (8,666,000) (11,854,000) (11,854,000)
Other comprehensive loss............................... (37,000) (218,000) (218,000)
Accumulated deficit.................................... (3,841,000) (54,263,000) (72,355,000) (72,355,000)
----------- ------------ ------------ -------------
Total stockholders' (deficit)............................ (3,400,000) (43,393,000) (60,232,000) 38,803,000
----------- ------------ ------------ -------------
Total liabilities and stockholders' deficit.............. $ 786,000 $ 60,986,000 $ 53,889,000 $ 53,889,000
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
STARMEDIA NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5,1996
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31,
DECEMBER ----------------------------- -----------------------------
31, 1996 1997 1998 1998 1999
-------------- ------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ $ 460,000 $ 5,329,000 $ 256,000 $ 1,541,000
Operating expenses:
Product and technology development..... 36,000 1,229,000 6,816,000 794,000 3,562,000
Sales and marketing.................... 12,000 2,108,000 29,274,000 1,816,000 9,657,000
General and administrative............. 78,000 648,000 4,600,000 450,000 2,410,000
Depreciation and amortization.......... 2,000 38,000 774,000 79,000 467,000
Stock-based compensation expense....... 10,421,000 2,000 1,417,000
-------------- ------------- -------------- ------------- --------------
Total operating expenses................. 128,000 4,023,000 51,885,000 3,141,000 17,513,000
-------------- ------------- -------------- ------------- --------------
Loss from operations..................... (128,000) (3,563,000) (46,556,000) (2,885,000) (15,972,000)
Other income (expense):
Interest income........................ 35,000 715,000 56,000 459,000
Interest expense....................... (45,000) (28,000) (38,000)
-------------- ------------- -------------- ------------- --------------
Net loss................................. (128,000) (3,528,000) (45,886,000) (2,857,000) (15,551,000)
Preferred stock dividends and
accretion.............................. -- (185,000) (4,536,000) (295,000) (2,541,000)
-------------- ------------- -------------- ------------- --------------
Net loss available to common
shareholders........................... $ (128,000) $ (3,713,000) $ (50,422,000) $ (3,152,000) $ (18,092,000)
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Historical basic and diluted net loss per
common share........................... $ (0.01) $ (0.37) $ (4.94) $ (0.31) $ (1.74)
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Historical number of shares used in
computing basic and diluted net loss
per share.............................. 9,147,223 10,012,000 10,202,000 10,012,000 10,409,500
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Pro forma basic and diluted net loss per
share.................................. $ (1.09) $ (0.37)
-------------- --------------
-------------- --------------
Number of shares used in computing pro
forma basic and diluted net loss per
share.................................. 42,198,667 42,406,167
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
STARMEDIA NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO
DECEMBER 31, 1996, AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME TOTAL
---------- ----------- ----------- ------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 5,
1996 (date of
inception)........... $ $ $ $ $ $
Sale of common stock... 10,012,000 10,000 431,000 441,000
Net loss for the
period............... (128,000) (128,000)
---------- ----------- ----------- ------------- -------------- --------------- ------------
Balance at December 31,
1996................. 10,012,000 10,000 431,000 (128,000) 313,000
Accretion of preferred
stock................ (185,000) (185,000)
Net loss for the
year................. (3,528,000) (3,528,000)
---------- ----------- ----------- ------------- -------------- --------------- ------------
Balance at December 31,
1997................. 10,012,000 10,000 431,000 (3,841,000) (3,400,000)
Deferred compensation
related to stock
options, net of
cancellations........ 19,087,000 (19,087,000)
Amortization of
deferred
compensation......... 10,421,000 10,421,000
Exercise of common
stock options........ 380,000 45,000 45,000
Preferred stock
dividends and
accretion............ (4,536,000) (4,536,000)
Net loss for the
year................. (45,886,000) (45,886,000)
Translation
adjustment........... (37,000) (37,000)
------------
Comprehensive loss..... (45,923,000)
---------- ----------- ----------- ------------- -------------- --------------- ------------
Balance at December 31,
1998................. 10,392,000 10,000 19,563,000 (54,263,000) (8,666,000) (37,000) (43,393,000)
Deferred compensation
related to stock
options, net of
cancellations........ 4,605,000 (4,605,000)
Amortization of
deferred
compensation......... 1,417,000 1,417,000
Exercise of common
stock options........ 35,000 17,000 17,000
Preferred stock
dividends and
accretion............ (2,541,000) (2,541,000)
Net loss for the
period............... (15,551,000) (15,551,000)
Translation
adjustment........... (181,000) (181,000)
Comprehensive loss..... (15,732,000)
---------- ----------- ----------- ------------- -------------- --------------- ------------
Balance at March 31,
1999 (unaudited)..... 10,427,000 $ 10,000 $24,185,000 $(72,355,000) $(11,854,000) $(218,000) $(60,232,000)
---------- ----------- ----------- ------------- -------------- --------------- ------------
---------- ----------- ----------- ------------- -------------- --------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
STARMEDIA NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31,
DECEMBER --------------------------- ----------------------------
31, 1996 1997 1998 1998 1999
-------------- ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $ (128,000) $ (3,528,000) $ (45,886,000) $ (2,857,000) $ (15,551,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 1,000 38,000 774,000 79,000 467,000
Provision for bad debts................. 60,000 81,000
Amortization of deferred compensation... 10,421,000 2,000 1,417,000
Deferred rent........................... 21,000 101,000 20,000 4,000
Changes in operating assets and
liabilities:
Accounts receivable................... (27,000) (493,000) (12,000) (542,000)
Other assets.......................... (30,000) (1,773,000) (708,000) (1,805,000)
Accounts payable and accrued
expenses............................ 227,000 5,356,000 907,000 3,828,000
Deferred revenues..................... 20,000 795,000 (224,000)
-------------- ------------ ------------- ------------- -------------
Net cash used in operating activities....... (127,000) (3,279,000) (30,645,000) (2,569,000) (12,325,000)
INVESTING ACTIVITIES
Purchase of fixed assets.................... (30,000) (249,000) (4,395,000) (253,000) (2,420,000)
Intangible assets........................... (31,000) (241,000) (98,000) (344,000)
Cash paid for acquisition................... (921,000)
-------------- ------------ ------------- ------------- -------------
Net cash used in investing activities....... (30,000) (280,000) (4,636,000) (351,000) (3,685,000)
FINANCING ACTIVITIES
Issuance of common stock.................... 441,000 45,000 17,000
Issuance of redeemable convertible preferred
stock, net of related expenses............ 3,647,000 88,125,000 11,936,000
Issuance of convertible subordinated notes.. 6,000,000 4,000,000
Proceeds from long-term debt................ 3,752,000
Repayment of long-term debt................. (126,000)
Repayment of convertible subordinated
notes..................................... (6,000,000) (4,000,000)
Loans (to) from stockholders................ (54,000) 67,000
Repayments (to) from stockholders........... 54,000 (67,000) (67,000)
Payments under capital leases............... (3,000) (112,000) (1,000) (54,000)
-------------- ------------ ------------- ------------- -------------
Net cash provided by financing activities... 387,000 3,765,000 87,991,000 11,868,000 3,589,000
Effect of exchange rate changes on cash and
cash equivalents.......................... (5,000) (132,000)
-------------- ------------ ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents............................... 230,000 206,000 52,705,000 8,948,000 (12,553,000)
Cash and cash equivalents, beginning of
period.................................... 230,000 436,000 436,000 53,141,000
-------------- ------------ ------------- ------------- -------------
Cash and cash equivalents, end of period.... $ 230,000 $ 436,000 $ 53,141,000 9,384,000 40,588,000
-------------- ------------ ------------- ------------- -------------
-------------- ------------ ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid............................... $ $ $ 45,000 $ 28,000 $
-------------- ------------ ------------- ------------- -------------
-------------- ------------ ------------- ------------- -------------
NON-CASH FINANCING ACTIVITIES
Acquisition of fixed assets through capital
leases.................................... $ $ 21,000 $ 314,000 $ $
-------------- ------------ ------------- ------------- -------------
-------------- ------------ ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION)
TO DECEMBER 31, 1996, THE YEARS ENDED
DECEMBER 31, 1997 AND 1998 AND THE THREE MONTHS
ENDED MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
StarMedia Network, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All intercompany account balances and transactions have been
eliminated in consolidation. StarMedia Network, Inc. was incorporated under
Delaware law in March 1996.
The Company develops and maintains www.starmedia.com, a branded Internet online
network (the "Network") located on the World Wide Web (the "Web"). The Network
is organized around interest specific channels, community features, search
capabilities and online shopping in Spanish and Portuguese, targeted to Latin
America.
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET (UNAUDITED)
In February 1999, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would permit
the Company to sell shares of the Company's common stock in connection with a
proposed initial public offering ("IPO"). In conjunction with a qualified IPO,
all outstanding shares of Series A, B and C Redeemable Convertible Preferred
Stock, automatically convert into shares of Common Stock on a one for one basis.
Accordingly, the effect of the conversions has been reflected in the
accompanying unaudited pro forma balance sheet as if they had occurred as of
March 31, 1999.
INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1999, and for the three months ended
March 31, 1998 and 1999 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of March 31,
1999 and the results of operations and cash flows for the three months ended
March 31, 1998 and 1999 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or eliminated.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1999.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements and sponsorships, some of which also involve more integration,
design and coordination of the
F-7
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
customer's content with the Company's services, such as the placement of sponsor
buttons in specific areas of the Network. The sponsor buttons generally provide
users with direct links to sponsor homepages that exist within the Network which
are usually focused on selling sponsor merchandise and services to users of the
Network. Advertising revenues on both banner and sponsorship contracts, which
range from one month to two years, are recognized ratably in the period in which
the advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of "impressions," or
times that an advertisement appears in pages viewed by users of the Company's
Network. To the extent minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the remaining guaranteed
impression levels are achieved. The Company also earns revenues on sponsorship
contracts for fees relating to the design, coordination, and integration of the
customer's content. Revenue related to the design, coordination and integration
of the customers' content are recognized ratably over the term of the contract
or using the percentage of completion method if the fee for such services is
fixed. A number of the Company's agreements provide for the Company to receive a
percentage of revenues from electronic commerce transactions conducted by
advertisers who are selling goods or services to users of the Network. These
revenues are recognized by the Company upon notification from the advertiser of
its share of revenues earned by the Company and, to date, have not been
significant.
Revenues from barter transactions are recognized during the period in which the
advertisements are displayed on the Company's Network. Barter transactions are
recorded at the estimated fair market value of the goods or services received or
the estimated fair market value of the advertisements given, whichever is more
readily determinable. For the year ended December 31, 1997, substantially all of
the Company's revenues were derived from barter transactions. For the year ended
December 31, 1998 and the three months ended March 31, 1998 and 1999, revenues
derived from barter transactions, were approximately $2.4 million, $224,000 and
$424,000, respectively.
Deferred revenues are primarily comprised of billings in excess of recognized
revenues relating to advertising contracts and sponsorship and banner
advertising contracts.
PRODUCT DEVELOPMENT
Costs incurred in the classification and organization of listings within the
Network and the development of new products and enhancements to existing
products are charged to expense as incurred. Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based upon the Company's product development process, technological feasibility
is established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
F-8
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all financial instruments with a maturity of three months
or less when purchased to be cash equivalents. Such amounts are stated at cost
which approximates market value.
FIXED ASSETS
Fixed assets, including those acquired under capital leases, are stated at cost
and depreciated by the straight-line method over the estimated useful lives of
the assets, which range from three to five years. Leasehold improvements are
amortized over the lesser of the useful life of the asset or the remaining
period of the lease.
INTANGIBLE ASSETS
Intangible assets consist of trademarks and trade names and are being amortized
on a straight-line basis over a period of five years.
Goodwill consists of the excess of the purchase price paid over the tangible net
assets of acquired companies. Goodwill is amortized using the straight-line
method over three years. Amortization expense and accumulated amortization as of
March 31, 1999 and for the three months ended March 31, 1999 was approximately
$1,000.
The Company assesses the recoverability of its goodwill and intangible assets by
determining whether the amortization of the unamortized balance over its
remaining life can be recovered through forecasted cash flows. If undiscounted
forecasted cash flows indicate that the unamortized amounts will not be
recovered, an adjustment will be made to reduce the net amounts to an amount
consistent with forecasted future cash flows discounted at the Company's
incremental borrowing rate. Cash flow forecasts are based on trends of
historical performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
INCOME TAXES
The Company uses the liability method of accounting for income taxes, whereby
deferred income taxes are provided on items recognized for financial reporting
purposes over different periods than for income tax purposes. Valuation
allowances are provided when the expected realization of tax assets does not
meet a more likely than not criteria.
ADVERTISING COSTS
Advertising costs are expensed as incurred. For the period from March 5, 1996
(date of inception) to December 31, 1996, the years ended December 31, 1997 and
1998 and the three months ended March 31, 1998 and 1999, advertising expense
amounted to approximately $0, $1,610,000, $21,246,000, $1,068,000 and
$5,380,000, respectively. For the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 and 1999, advertising expense includes
F-9
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $460,000, $2.4 million, $224,000 and $424,000 of charges related
to barter advertising transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes thereto.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company grants stock options generally for a fixed number of shares to
certain employees with an exercise price equal to or below the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and, accordingly, recognizes compensation
expense only if the fair value of the underlying Common Stock exceeds the
exercise price of the stock option on the date of grant. In October 1995, the
FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), which provides an alternative to APB Opinion No. 25 in accounting for
stock-based compensation. As permitted by SFAS No. 123, the Company continues to
account for stock-based compensation in accordance with APB Opinion No. 25 and
has elected the pro forma disclosure alternative of SFAS No. 123 (see Note 5).
COMPUTATION OF HISTORICAL NET LOSS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Accordingly, basic earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the incremental common shares
issuable upon the conversion of the Preferred Stock (using the if-converted
method) and shares issuable upon the exercise of stock options (using the
treasury stock method); common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains the majority of its cash and cash
equivalents with one financial institution. The Company's sales are primarily to
companies located in the United States and Latin American region. The Company
performs periodic credit evaluations of its customers' financial condition and
does not require collateral. Accounts receivable are due principally from large
U.S. companies under stated contract terms and the Company provides for
estimated credit losses at the time of sale. Such losses have not been
significant to date.
F-10
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and loan payable
approximate their fair values.
FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currency of the Company's active subsidiaries in Argentina,
Brazil, Chile and Colombia is the local currency. The financial statements of
these subsidiaries are translated to U.S. dollars using year-end rates of
exchange for assets and liabilities, and average rates for the year for
revenues, costs, and expenses. Translation gains and losses are deferred and
accumulated as a component of stockholders' deficit. The functional currency of
the Company's subsidiaries in highly inflationary economies, Mexico, Uruguay,
and Venezuela, is the U.S. dollar. Accordingly, for those subsidiaries that use
U.S. dollars as the functional currency, monetary assets and liabilities are
translated using the current exchange rate in effect at the year-end date, while
nonmonetary assets and liabilities are translated at historical rates.
Operations are generally translated at the weighted average exchange rate in
effect during the period. The resulting foreign exchange gains and losses are
recorded in the consolidated statement of operations. Revenues earned by the
Company's foreign subsidiaries and assets of such foreign subsidiaries were not
significant for all periods presented or at December 31, 1997 and 1998.
Commencing January 1, 1999, the functional currency of the Company's Mexican
subsidiary changed from the U.S. dollar to the local currency as Mexico was no
longer considered a hyper-inflationary economy.
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes rules for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires foreign currency translation adjustments to be included in other
comprehensive loss.
SEGMENT INFORMATION
The Company discloses information regarding segments in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 establishes standards for reporting of financial information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports. The
disclosure of segment information was not required as the Company operates in
only one business segment.
As of and for the period and years ended December 31, 1996, 1997 and 1998
and March 31, 1999, substantially all of the Company's assets were located in
the U.S. and the Company derived substantially all of its revenue from
businesses located in the U.S.
F-11
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------- MARCH 31,
1997 1998 1999
----------- ------------- -------------
<S> <C> <C> <C>
Computer equipment................................. $ 172,000 $ 4,738,000 6,782,000
Furniture and fixtures............................. 7,000 446,000 759,000
Leasehold improvements............................. 121,000 938,000 921,000
----------- ------------- -------------
300,000 6,122,000 8,462,000
Less accumulated depreciation and amortization..... (37,000) (719,000) (1,154,000)
----------- ------------- -------------
$ 263,000 $ 5,403,000 $ 7,308,000
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
3. STOCKHOLDERS' DEFICIT
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In July 1997, the Company sold 7,330,000 shares of Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred") for $3,665,000, or $.50
per share. In February 1998, the Company sold 8,000,000 shares of Series B
Redeemable Convertible Stock (the "Series B Preferred") for $12,000,000, or
$1.50 per share. In August and September 1998, the Company sold an aggregate
16,666,667 shares of Series C Redeemable Convertible Preferred Stock (the
"Series C Preferred") for $80,000,000, or $4.80 per share. The Series A
Preferred, Series B Preferred and the Series C Preferred (collectively, the
"Preferred Stock") are convertible into common stock on a one for one basis,
subject to certain anti-dilution provisions, as defined, at any time at the
option of the holder or automatically in the event of a qualified IPO. The
holders of the Preferred Stock are entitled to the number of votes equal to the
number of common shares that could be obtained upon conversion on the date of
the vote and are entitled to a discretionary noncumulative dividend.
Upon a liquidation, including any merger or acquisition where the existing
stockholders of the Company own less than 50% of the successor entity, the
holders of the Preferred Stock are entitled to have the Company redeem their
shares at the original price paid per share (the "Original Investment"), plus a
10% cumulative return less any dividends paid.
In the event that the Preferred Stock has not been converted as of December 31,
2004, the holders of the Preferred Stock can elect to have the Company redeem
their Preferred Stock for an amount equal to their original investment plus any
dividends declared but unpaid.
No Preferred Stock dividends have been declared or paid as of March 31, 1999. At
December 31, 1997 and 1998, and March 31, 1999, total cumulative dividends in
arrears, that would be payable upon a liquidation, were approximately $183,000,
$4,233,000 and $6,625,000, respectively.
The Company has recorded issuance costs incurred in connection with the
Preferred Stock as discounts at issuance and is accreting the discounts from the
date of issuance through the date of mandatory redemption on December 31, 2004.
F-12
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
3. STOCKHOLDERS' DEFICIT (CONTINUED)
CONVERTIBLE SUBORDINATED NOTES
In January 1998 the Company issued $4,000,000 8% convertible subordinated
notes due at the earlier of the closing of the Series B Preferred financing, or
on July 21, 1998. In August 1998 the Company issued $2,000,000 8% convertible
subordinated notes due at the earlier of the closing of the Series C Preferred
financing or on December 31, 1998. All amounts outstanding were repaid during
1998 in accordance with their terms.
4. LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996
(DATE OF THREE MONTHS ENDED
INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31,
DECEMBER ----------------------------- --------------------------------
31, 1996 1997 1998 1998 1999
-------------- ------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss..................... $ (128,000) $ (3,528,000) $ (45,886,000) $ (2,857,000) $ (15,551,000)
Preferred stock dividends and
accretion.................. -- (185,000) (4,536,000) (295,000) (2,541,000)
-------------- ------------- -------------- --------------- ---------------
Numerator for basic and diluted
loss per share-- net loss
available for common
stockholders................. $ (128,000) $ (3,713,000) $ (50,422,000) $ (3,152,000) $ (18,092,000)
-------------- ------------- -------------- --------------- ---------------
-------------- ------------- -------------- --------------- ---------------
Denominator:
Denominator for basic and
dilutive loss per
share--weighted average
shares..................... 9,147,223 10,012,000 10,202,000 10,012,000 10,409,500
-------------- ------------- -------------- --------------- ---------------
-------------- ------------- -------------- --------------- ---------------
Basic and diluted net loss per
share........................ $ (0.01) $ (0.37) $ (4.94) $ (0.31) $ (1.74)
-------------- ------------- -------------- --------------- ---------------
-------------- ------------- -------------- --------------- ---------------
</TABLE>
Diluted net loss per share for the period from March 5, 1996 (date of
inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and
the three month period ended March 31, 1998 and 1999, does not include the
effect of options to purchase 0, 1,804,933, 6,131,933, 1,889,933 and 8,229,100
shares of common stock, respectively, or 0, 7,330,000, 31,996,667, 15,330,000
and 31,996,667 shares of common stock issuable upon the conversion of Preferred
Stock on an "as if converted" basis, respectively, as the effect of their
inclusion is antidilutive during each period.
F-13
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of the unaudited pro forma
basic and diluted loss per share, assuming conversion of the Preferred Stock:
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED ENDED
DECEMBER MARCH
31, 1998 31, 1999
--------------- ---------------
<S> <C> <C>
Numerator:
Net loss available to common stockholders................ $ (50,422,000) $ (18,092,000)
Preferred Stock dividends and accretion.................. 4,536,000 2,541,000
--------------- ---------------
Numerator for pro forma loss available to common
stockholders............................................. $ (45,886,000) $ (15,551,000)
--------------- ---------------
--------------- ---------------
Denominator:
Weighted average number of common shares................. 10,202,000 10,409,500
Assumed conversion of Preferred Stock to common shares
(if converted method).................................. 31,996,667 31,996,667
--------------- ---------------
Denominator for pro forma basic and diluted loss per
share.................................................... 42,198,667 42,406,167
--------------- ---------------
--------------- ---------------
Pro forma basic and diluted net loss per share............. $ (1.09) $ (0.37)
--------------- ---------------
--------------- ---------------
</TABLE>
5. STOCK OPTIONS
In January 1997, the Company adopted the 1997 Stock Option Plan and, in July
1998, the Company adopted the 1998 Stock Option Plan (collectively, the "Option
Plans"). The 1997 Stock Option Plan and the 1998 Stock Plan provide for the
authorization of 10,000,000 shares. In February 1999, an additional 7,000,000
shares were reserved for issuance pursuant to the 1998 Stock Option Plan. The
Option Plans provide for the granting of incentive stock options or
non-qualified stock options to purchase common stock to eligible participants.
Options granted under the Option Plan are for periods not to exceed ten years.
In July 1998, approximately 1,400,000 non-qualified options outstanding were
exchanged for incentive stock options having generally equivalent terms as the
non-qualified options.
Other than options to purchase 2,000,000 and 1,500,000 shares granted in
April and December 1998, respectively, which were immediately vested, options
outstanding under the Option Plans generally vest one-third after the first year
of service and ratably each month over the next two years.
In connection with the granting of stock options in 1998 and the exchange of
non-qualified options to incentive stock options, the Company recorded deferred
compensation of approximately $19,087,000. In connection with the granting of
stock options in 1999, the Company recorded additional deferred compensation of
approximately $4,605,000. Deferred compensation is being amortized for financial
reporting purposes over the vesting period of the options. The amount recognized
as expense during the year ended December 31, 1998 and the three months ended
March 31, 1998 and 1999 amounted to approximately $10,421,000, $2,000 and
$1,417,000, respectively.
F-14
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCK OPTIONS (CONTINUED)
The following transactions occurred with respect to the Option Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Granted........................................................ 1,814,933 $ 0.42
Canceled....................................................... (10,000) .50
------------
Outstanding, December 31, 1997................................. 1,804,933 .42
Granted........................................................ 6,792,000 .78
Canceled....................................................... (2,085,000) .50
Exercised...................................................... (380,000) .12
------------
Outstanding, December 31, 1998................................. 6,131,933 .81
Granted........................................................ 2,232,500 4.88
Canceled....................................................... (100,333) .66
Exercised...................................................... (35,000) .50
------------
Outstanding, March 31,1999 8,229,100 $ 1.92
------------
------------
</TABLE>
The following table summarizes information concerning outstanding options at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------------------------------------------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$0.50......................................... 4,415,433 6.75 $ 0.50 3,062,987 $ 0.50
$1.60......................................... 1,716,500 7.00 $ 1.60 1,500,000 $ 1.60
------------ ------------
6,131,933 4,562,987
------------
------------
</TABLE>
The following table summarizes information concerning outstanding options at
March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------------------------------------------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$0.50......................................... 4,295,100 6.75 $ 0.50 3,127,157 $ 0.50
$1.60......................................... 2,120,000 7.00 $ 1.60 1,507,500 $ 1.60
$5.64......................................... 1,814,000 9.9 $ 5.64
------------ ------------
8,229,100 4,634,657
------------
------------
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123 which
also requires that the information be determined as if the Company has accounted
for its stock option under the fair
F-15
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. STOCK OPTIONS (CONTINUED)
value method of the statement. The fair value for these options was estimated
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS 1997 1998
- ------------------------------------------------------------------------------ --------------- ----------------
<S> <C> <C>
Average risk-free interest rate............................................... 6.00%-6.40% 4.440%-5.70%
Dividend yield................................................................ 0.0% 0.0%
Average life.................................................................. 5 years 5 years
</TABLE>
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be representative of future periods.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Pro forma net loss available to common stockholders.............................. $ (3,749,000) $ (51,276,000)
Pro forma basic and diluted loss per share....................................... $ (0.37) $ (5.03)
</TABLE>
6. INCOME TAXES
For Federal income tax purposes at December 31, 1998, the Company had net
operating loss carryfowards of approximately $36,500,000 which expire from 2011
through 2018. The net operating loss carryforwards may be subject to Section 382
of the Internal Revenue Code, which imposes annual limitations on their
utilization. A valuation allowance has been recognized to fully offset the
deferred tax assets, after considering deferred tax liabilities.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
<S> <C> <C>
1997 1998
-------------- ---------------
Federal net operating loss carryforwards..................... $ 1,200,000 $ 12,422,000
Depreciation and amortization................................ (6,000) (227,000)
Deferred rent................................................ 9,000 55,000
Other........................................................ 27,000
-------------- ---------------
1,203,000 12,277,000
Valuation allowance.......................................... (1,203,000) (12,277,000)
-------------- ---------------
$ -- $ --
-------------- ---------------
-------------- ---------------
</TABLE>
F-16
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
The effective income tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1996
(DATE OF YEAR ENDED DECEMBER
INCEPTION) TO 31
DECEMBER 31, --------------------
1996 1997 1998
--------------- --------- ---------
<S> <C> <C> <C>
Statutory rate................................................................. (34%) (34%) (34%)
Non deductible losses from foreign operations.................................. 2
Permanent differences.......................................................... 8
Valuation allowance............................................................ 33 33 23
Other.......................................................................... 1 1 1
----- --------- ---------
Effective tax rate............................................................. --% --% --%
----- --------- ---------
----- --------- ---------
</TABLE>
7. LONG-TERM DEBT
The Company has entered into a $12 million credit line for the acquisition
of computer equipment and furniture and fixtures. At March 31, 1999,
approximately $3.6 million was outstanding under the credit line. Amounts
outstanding are payable in monthly installments of principal and interest of
approximately $126,000, bear interest at approximately 13.7% per annum and are
secured by some of our computer equipment and furniture and fixtures. The credit
line requires the Company to maintain at least $10,000,000 in cash and cash
equivalents.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Product and technology development........................ $ 14,000 $ 490,000 $ 618,000
Sales and marketing....................................... 64,000 3,639,000 4,215,000
General and administrative................................ 132,000 1,108,000 728,000
Accrued fixed asset and intangible purchases.............. 17,000 1,059,000 1,080,000
Other..................................................... -- 146,000 204,000
------------- ------------- -------------
$ 227,000 $ 6,442,000 $ 6,845,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The nature of the accrued expenses is as follows: (i) product and technology
development primarily represents content acquisition costs and telecommunication
and hosting costs related to the Company's operations; (ii) sales and marketing
primarily represent advertising expenses related to the Company's print,
television and radio advertisements; (iii) general and administrative primarily
represent professional fees and employee bonuses; (iv) accrued fixed asset and
intangible purchases primarily represent the purchase of fixed assets which have
been placed in service and certain costs incurred in connection with the
Company's trademarks and trade names.
F-17
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
9. COMMITMENTS
CAPITAL LEASE
Included in computer equipment are assets acquired under a capital lease.
The cost of such equipment as of December 31, 1997 and 1998 is approximately
$21,000 and $335,000 and the related accumulated depreciation is approximately
$1,000 and $51,000, respectively.
Future minimum lease payments under the noncancelable capital lease as of
December 31, 1998 are $231,000, including interest of $11,000, which is all due
in 1999.
In connection with the capital lease the Company has a letter of credit
outstanding of approximately $144,000 at December 31, 1998.
OPERATING LEASES
The Company rents office space under noncancelable lease agreements. The
minimum annual rental commitments under noncancelable operating leases that have
initial or remaining terms in excess of one year as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Year ended December 31:
1999........................................................... $ 330,000
2000........................................................... 330,000
2001........................................................... 330,000
2002........................................................... 286,000
2003........................................................... 182,000
----------
$1,458,000
----------
----------
</TABLE>
Rent expense amounted to approximately $0, $66,000, $392,000 for the period
from March 5, 1996 (date of inception) to December 31, 1996 and for the years
ended December 31, 1997 and 1998, respectively.
10. RETIREMENT PLAN
The Company has a 401(k) plan that covers its eligible domestic employees.
The plan does not require a matching contribution by the Company.
11. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION
For the three months ended March 31, 1999, three customers accounted for
approximately 19%, 12% and 12% of the Company's total revenue, respectively.
For the three months ended March 31, 1998, two customers accounted for
approximately 45% and 42% of the Company's total revenue, respectively.
For the year ended December 31, 1997, three customers accounted for
approximately 38%, 23%, and 18% of the Company's total revenue, respectively.
For the year ended December 31, 1998, two customers accounted for
approximately 23% and 16% of the Company's total revenue, respectively.
F-18
<PAGE>
STARMEDIA NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
12. ACQUISITION
On March 10, 1999, the Company acquired all of the outstanding stock of
Achei Internet Promotion Ltda. in exchange for cash of $810,000. The Company
accounted for the acquisition under the purchase method of accounting and the
results of the operations have been included in the financial statements of the
Company from the date of acquisition. The excess purchase price over the fair
value of the net assets acquired, including expenses incurred by the Company,
has been recorded as goodwill.
On a pro forma basis, if the acquisition had taken place at the beginning of
1998, the effect on the Company's net sales, net loss, and loss per share would
have been immaterial.
13. SUBSEQUENT EVENTS (UNAUDITED)
On April 13, 1999, the Company acquired all of the outstanding stock of KD
Sistemas de Informacao Ltda. ("KD Sistemas") in exchange for a cash payment of
$5,320,000 at closing, $570,000 due in March 2000 and additional estimated cash
payments of up to $6,400,000, in the aggregate, due in March 2000, 2001 and 2002
upon the achievement of certain performance targets (the "Earn-out"). As a
portion of the Earn-out is contingent upon the continued employment of certain
key individuals, the Company will record a portion of such payments as
compensation expense, estimated to be $3,000,000, when and if such performance
targets are met. Under Rule 3:05 of Regulation S-X the Company is required to
file with the SEC audited financial statements of KD Sistemas as soon as
possible, but in no event more than 75 days from the consummation of the
acquisition.
Between April 30 and May 5, 1999, the Company sold an aggregate of 3,727,272
shares of common stock at $11 per share, or approximately $39,400,000, net of
related commissions, to a group of third party investors. The new investors are
subject to a one year restriction on the sale or transfer of such shares after
which such investors have been granted certain registration rights.
On May 4, 1999, the Company entered into an agreement to acquire all of the
outstanding stock of Wass Net, S.L. The agreement is subject to, among other
matters, the successful consummation of the Company's IPO. The aggregate
purchase price of $17,000,000 is to be paid in common stock of the Company
valued at the IPO price.
F-19
<PAGE>
UNDERWRITING
StarMedia and the underwriters for the offering named below have entered
into an underwriting agreement with respect to the shares being offered. Subject
to the terms of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., J.P. Morgan Securities
Inc. and Salomon Smith Barney Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co.................................................................................. 2,567,600
BancBoston Robertson Stephens Inc.................................................................... 890,800
J.P. Morgan Securities Inc........................................................................... 890,800
Salomon Smith Barney Inc............................................................................. 890,800
Banc of America Securities LLC....................................................................... 200,000
BT Alex. Brown Incorporated.......................................................................... 200,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................................. 200,000
Hambrecht & Quist LLC................................................................................ 200,000
Morgan Stanley & Co. Incorporated.................................................................... 200,000
Allen & Company Incorporated......................................................................... 100,000
The Buckingham Research Group Incorporated........................................................... 100,000
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated...................................... 100,000
Guzman & Company..................................................................................... 100,000
Ramirez & Co., Inc................................................................................... 100,000
Volpe Brown Whelan & Company, LLC.................................................................... 100,000
E*Offering Corp...................................................................................... 80,000
Wit Capital Corporation.............................................................................. 80,000
-----------
Total.......................................................................................... 7,000,000
-----------
-----------
</TABLE>
------------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,050,000 shares from StarMedia to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by StarMedia. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by StarMedia
------------------
No Exercise Full Exercise
------------------ -------------
<S> <C> <C>
Per Share.......... $ 1.05 $ 1.05
Total.............. $ 7,350,000 $ 8,452,500
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.60 per share from the initial public offering price. Any of those
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $0.10 per share from the initial
public offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms.
StarMedia and its directors, officers and substantially all of its
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date
U-1
<PAGE>
180 days after the date of this prospectus, except with the prior written
consent of the representatives. This agreement does not apply to any existing
employee benefit plans. Please see "Shares Eligible for Future Sale" for a
discussion of transfer restrictions.
At the request of StarMedia, the underwriters have reserved for sale, at the
initial public offering price, up to 1,200,000 shares of common stock for
certain directors, stockholders, employees and associates of StarMedia. There
can be no assurance that any of the reserved shares will be so purchased. The
number of shares available for sale to the general public in the offering will
be reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among StarMedia and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be StarMedia's historical performance, estimates of the
business potential and earnings prospects of StarMedia, an assessment of
StarMedia's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "STRM".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
StarMedia estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$1,500,000.
J.P. Morgan Securities Inc., an affiliate of J.P. Morgan & Co., acted as a
placement agent for StarMedia in connection with the private placement of
StarMedia's series C redeemable convertible preferred stock in August 1998.
StarMedia incurred customary placement fees to J.P. Morgan Securities Inc. for
such services.
Goldman, Sachs & Co. acted as a placement agent for StarMedia in connection
with the private placement of shares of StarMedia's common stock in April and
May 1999. StarMedia incurred customary placement fees of $1,640,000 to Goldman,
Sachs & Co. for such services. StarMedia has agreed to pay the fee in shares of
common stock priced at the private placement price of $11.00 per share. Goldman,
Sachs & Co., therefore, will receive 149,091 shares and will agree with
StarMedia not to sell, transfer, assign, pledge
U-2
<PAGE>
or hypothecate any such shares for one year after the date of this offering.
Bayview Investors, an affiliate of BancBoston Robertson Stephens Inc.,
purchased 200,000 shares of StarMedia's series B redeemable convertible
preferred stock in connection with StarMedia's private placement in February
1998 and 20,834 shares of StarMedia's series C redeemable convertible preferred
stock in connection with StarMedia's private placement in August 1998. Bayview
Investors has agreed with StarMedia not to sell, transfer, assign, pledge or
hypothecate any of its 20,834 series C shares for one year after the date of
this offering.
StarMedia has agreed to indemnify the several underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
U-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Forward-Looking Statements; Market
Data............................... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 33
Management........................... 47
Certain Transactions................. 55
Principal Stockholders............... 57
Description of Capital Stock......... 59
Shares Eligible for Future Sale...... 64
Validity of Common Stock............. 65
Experts.............................. 65
Where You Can Find More Information.. 65
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------------
Through and including June 19, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as underwriter and with respect to an unsold allotment or subscription.
7,000,000 Shares
STARMEDIA NETWORK, INC.
Common Stock
---------------
------------
GOLDMAN, SACHS & CO.
BANCBOSTON
ROBERTSON STEPHENS
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
Representatives of the Underwriters
------------------------
WIT CAPITAL CORPORATION
FACILITATOR OF INTERNET DISTRIBUTION
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
