<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
1-15015
------------------------
(Commission File Number)
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
StarMedia Network, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1461770
- ---------------------------- ----------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
29 WEST 36TH STREET, NEW YORK, NY 10018
----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 548-9600
----------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
<PAGE>
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No[ ]
As of September 30, 1999, there were 58,350,304 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
-2-
<PAGE>
INDEX
STARMEDIA NETWORK, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998 5
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 1999 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes In Securities and Use of Proceeds 41
Item 3. Defaults upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Item 7. Signatures 42
</TABLE>
-3-
<PAGE>
FINANCIAL INFORMATION
PART I
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 133,501,000 $ 53,147,000
Account receivables, net 3,381,000 511,000
Other current assets 3,860,000 1,712,000
------------- ------------
Total current assets 140,742,000 55,370,000
Fixed assets, net 16,085,000 5,478,000
Intangible assets, net 2,110,000 179,000
Goodwill, net 15,398,000 --
Other assets 5,521,000 129,000
------------- ------------
$ 179,856,000 $ 61,156,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 5,486,000 $ 346,000
Accrued expenses 9,126,000 6,489,000
Loan payable, current portion 1,735,000 --
Capital lease obligations, current portion 67,000 220,000
Deferred revenues 284,000 815,000
------------- ------------
Total current liabilities 16,698,000 7,870,000
Loan payable, long term 2,801,000 --
Long term liabilities 381,000 9,000
Deferred rent 122,000 122,000
Series A Redeemable convertible preferred stock -- 4,218,000
Series B Redeemable convertible preferred stock -- 12,944,000
Series C Redeemable convertible preferred stock -- 79,332,000
Stockholders' equity (deficit):
Preferred Stock, authorized 100,000,000 shares:
Series 1999A Junior Non-Voting Convertible Preferred
Stock, $.001 par value, 2,300,000 shares authorized,
58,140 shares outstanding at September 30, 1999 -- --
Common stock, $.001 par value, 200,000,000 58,000 13,000
shares authorized, 58,350,304 shares and 12,309,532
shares outstanding at September 30, 1999 and
December 31, 1998, respectively
Additional paid-in capital 291,673,000 19,693,000
Deferred compensation (10,034,000) (8,666,000)
Other comprehensive loss (337,000) (32,000)
Accumulated deficit (121,506,000) (54,347,000)
------------- ------------
Total stockholders' equity (deficit) 159,854,000 (43,339,000)
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 179,856,000 $ 61,156,000
============= ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-4-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 5,618,000 $ 1,646,000 $ 11,092,000 $ 2,496,000
Operating expenses:
Product & technology development 9,987,000 1,761,000 20,006,000 4,939,000
Sales & marketing 14,274,000 7,735,000 37,200,000 13,750,000
General & administrative 3,902,000 956,000 9,544,000 1,989,000
Non-recurring merger charges 590,000 -- 1,613,000 --
Depreciation & amortization 1,684,000 211,000 3,328,000 459,000
Stock-based compensation expense 1,848,000 666,000 4,860,000 3,916,000
------------ ------------ ------------ ------------
Total operating expenses 32,285,000 11,329,000 76,551,000 25,053,000
------------ ------------ ------------ ------------
Loss from operations (26,667,000) (9,683,000) (65,459,000) (22,557,000)
Interest income, net 1,547,000 69,000 2,682,000 159,000
------------ ------------ ------------ ------------
Net loss before provision for income taxes (25,120,000) (9,614,000) (62,777,000) (22,398,000)
Provision for income taxes (116,000) -- (116,000) --
------------ ------------ ------------ ------------
Net loss (25,236,000) (9,614,000) (62,893,000) (22,398,000)
Preferred stock dividends and
accretion -- (1,908,000) (4,266,000) (2,628,000)
------------ ------------ ------------ ------------
Net loss available
to common shareholders $(25,236,000) $(11,522,000) $(67,159,000) $(25,026,000)
============ ============ ============ ============
Historical basic and diluted
net loss per common share $ (0.43) $ (0.96) $ (1.97) $ (2.31)
============ ============ ============ ============
Historical number of shares used
in computing basic and diluted
net loss per share 58,142,334 12,041,161 34,131,502 10,834,299
============ ============ ============ ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-5-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- -------------------- Additional Accumulated
Shares Amount Shares Amount Paid-in Capital Deficit
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 12,309,532 $ 13,000 $ 19,693,000 $ (54,347,000)
Deferred Compensation related -- --
to stock options, net of cancellations 6,228,000
Amortization of deferred compensation
Issuance of common stock,
net of offering costs 11,926,363 12,000 151,365,000
Shares issued for acquisition of
Servicios Interactivos Limitada 20,000 1,000,000
Issuance of common stock Webcast 58,689 949,000
Shares issued for asset purchase
of PageCell 174,418 58,140 -- 8,846,000
Conversion of redeemable convertible
preferred stock 31,996,667 31,000 100,728,000 100,759,000
Exercise of common stock options 1,864,635 2,000 2,101,000
Stock options issued for Services 31,000
Transaction expenses related to Wass
Net S.L Acquisition payable by
Wass Net Shareholders 732,000
Preferred stock dividends and accretion (4,266,000)
Net loss for the period (62,893,000)
Translation adjustment
Comprehensive loss
----------------------------------------------------------------------
Balance at September 30, 1999 58,350,304 $ 58,000 58,140 $ -- $291,673,000 $(121,506,000)
========== ======== ========== ======== ============ =============
<CAPTION>
Other Compre-
Deferred hensive
Compensation Loss Total
--------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ (8,666,000) $ (32,000) $ (43,339,000)
Deferred Compensation related
to stock options, net of cancellations (6,228,000)
Amortization of deferred compensation 4,860,000 4,860,000
Issuance of common stock,
net of offering costs 151,377,000
Shares issued for acquisition of
Servicios Interactivos Limitada 1,000,000
Issuance of common stock Webcast 949,000
Shares issued for asset purchase
of PageCell 8,846,000
Conversion of redeemable convertible
preferred stock
Exercise of common stock options 2,103,000
Stock options issued for Services 31,000
Transaction expenses related to Wass
Net S.L Acquisition payable by
Wass Net Shareholders 732,000
Preferred stock dividends and accretion (4,266,000)
Net loss for the period (62,893,000)
Translation adjustment (305,000) (305,000)
-------- --------
Comprehensive loss (63,198,000)
--------------------------------------
Balance at September 30, 1999 $(10,034,000) $(337,000) $ 159,854,000
============ ========= =============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-6-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Operating activities
Net loss $ (62,893,000) $(22,398,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,328,000 459,000
Provision for bad debts 189,000 40,000
Amortization of deferred compensation 4,860,000 3,916,000
Stock options issued for services 31,000 --
Deferred rent -- 17,000
Transaction expenses related to Wass Net, S.L 732,000 --
Changes in operating assets and liabilities:
Accounts receivable (3,122,000) (234,000)
Other assets (7,735,000) (4,791,000)
Accounts payable and accrued expenses 8,312,000 6,790,000
Deferred revenue (531,000) 805,000
------------- ------------
Net cash used in operating activities (56,829,000) (15,356,000)
Investing activities:
Purchases of fixed assets (12,389,000) (2,813,000)
Intangible assets (1,697,000) (254,000)
Cash paid for acquisitions (6,776,000) --
------------- ------------
Net cash used in investing activities (20,862,000) (3,067,000)
Financing activities:
Issuance of common stock 154,439,000 175,000
Issuance of redeemable convertible preferred stock,
net of related expenses -- 89,005
Issuance of long term debt 5,074,000 --
Issuance of convertible subordinated notes -- 6,000,000
Repayment of convertible subordinated notes -- (6,000,000)
Payments under long term debt (725,000) --
Repayment of amounts due to principal shareholders (9,000) (67,000)
Payments under capital lease obligation (153,000) (49,000)
------------- ------------
Net cash provided by financing activities 158,626,000 89,064,000
Effect of exchange rate changes on
cash and cash equivalents (581,000) --
------------- ------------
Net increase in cash 80,354,000 70,601,000
Cash at beginning of period 53,147,000 443,000
------------- ------------
Cash at end of period $ 133,501,000 $ 71,044,000
============= ============
Supplemental disclosure of non-cash investing and financing activities:
Accrued purchases of fixed assets and intangible assets $ 417,000 $ --
============= ============
Accrued costs for acquisitions $ 779,000 $ 889,000
============= ============
Accrued costs related to issuance of common stock $ 10,000 $ --
============= ============
Supplemental disclosure of cash flow information
Interest paid $ 440,000 $ 44,000
============= ============
Income taxes paid $ 101,000 $ --
============= ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-7-
<PAGE>
STARMEDIA NETWORK, INC. and SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. BASIS OF PRESENTATION 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.
The Company is the leading online network targeting Latin America and other
Spanish- and Portuguese-speaking markets worldwide. The Company's network
consists of 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. The Company promotes
user affinity to the StarMedia community by providing Spanish- and
Portuguese-language e-mail, chat rooms, instant messaging and personal
homepages. During 1999, the Company launched sales offices in Spain and Puerto
Rico and began hiring regional sales managers throughout the United States,
focusing on those regions with high Spanish-speaking populations.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
supplemental financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
supplemental consolidated financial statements and footnotes thereto included in
the Company's Form S-1 as filed with and declared effective by the Securities
and Exchange Commission on October 14, 1999.
The accompanying condensed consolidated financial statements have been restated
to reflect the May 26, 1999 acquisition of Wass Net, S.L., ("Wass Net") and the
September 14, 1999 acquisition of Webcast Solutions, Inc. ("Webcast"). Both of
these acquisitions were accounted for as a pooling of interests. (See note 2.)
-8-
<PAGE>
2. ACQUISITIONS
ACHEI INTERNET PROMOTION, LTDA
On March 10, 1999, the Company acquired all of the outstanding stock of Achei
Internet Promotion Ltda., ("Achei") a Brazilian company in exchange for cash of
$810,000.
KD SISTEMAS DE INFORMACAO LTDA
On April 13, 1999, the Company acquired all of the outstanding stock of KD
Sistemas de Informacao Ltda. ("KD Sistemas"), a Brazilian company, in exchange
for a cash payment of $5,000,000 at closing, $890,000 payable 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"), plus related expenses of $274,000. 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.
SERVICIOS INTERACTIVOS LIMITADA
In June 1999, the Company acquired all the outstanding stock of Servicios
Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock
valued at $1,000,000.
PAGECELL INTERNATIONAL HOLDINGS, INC.
On September 29, 1999, the Company purchased substantially all of the assets of
PageCell International Holdings, Inc. ("PageCell"), a provider of advanced
mobile technologies and services, in exchange for 174,418 shares of common stock
and 58,140 shares of Series 1999A Junior Non-Voting Convertible Preferred Stock
(see note 4) of the Company (the "Equity Consideration") valued at approximately
$8.8 million at the closing date and additional Equity Consideration valued at
up to $15,000,000 upon the achievement of certain quarterly performance related
targets through December 2000.
The Company accounted for the aforementioned acquisitions under the purchase
method of accounting and the results of the operations have been included in the
financial statements of the Company from the respective dates 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.
Goodwill resulting from such acquisitions of approximately $16,562,000 is being
amortized using the straight-line method over three years.
The following pro forma unaudited consolidated results of operations assumes the
consummation of (i) the KD Sistemas acquisition as of the beginning of the
respective periods, and (ii) the PageCell acquisition as of May 31, 1998
(PageCell's date of incorporation):
-9-
<PAGE>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
1999 1998
------------ ------------
Revenues $ 11,722,000 $ 3,213,000
Net loss $(65,306,000) $(24,130,000)
Net loss available for
common shareholders $(69,572,000) $(26,758,000)
Basic and diluted
net loss per share $ (2.04) $ (2.47)
The effects of the Achei and SIL acquisition were not included in the pro forma
unaudited consolidated results of operations due to immateriality.
WASS NET, S.L.
Effective May 26, 1999, the Company acquired all of the outstanding stock of
Wass Net, a company organized under the laws of Spain. The acquisition was
completed pursuant to the terms of a Share Purchase Agreement, whereby Wass Net
became a wholly-owned subsidiary of the Company. Under the terms of the
agreement, Wass Net shareholders received 161.9 shares of the Company's common
stock for each outstanding Wass Net share. Accordingly, the Company issued
1,133,334 shares of its common stock for all the outstanding shares of Wass Net
stock. Wass Net is a Spanish-language online community offering e-mail, chat,
classifieds, bulletin boards, home pages and search capabilities.
In connection with the merger, Wass Net recorded a one-time charge of $773,000
for transaction costs and StarMedia recorded a one-time charge of $294,000 in
transaction costs.
WEBCAST SOLUTIONS
On September 14, 1999, Webcast merged with and into a newly formed wholly owned
subsidiary of the Company (the "Webcast Merger"). Under the terms of the Webcast
Merger, 842,887 shares of the Company's common stock were issued in exchange for
all of the outstanding Webcast common stock based on an exchange ratio of .1084
shares of the Company's common stock for each share of Webcast common stock.
Webcast is a streaming media company focused on the global delivery of audio,
video and other Internet-based interactive media. In connection with the Webcast
Merger, the Company recorded a one-time charge of $546,000 in transaction costs.
-10-
<PAGE>
Unaudited combined and separate results of StarMedia, Webcast and Wass Net
during the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
STARMEDIA WASS NET WEBCAST INTERCOMPANY COMBINED
--------- -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------
Revenues $ 10,602,000 $ 11,000 $ 484,000 $(5,000) $ 11,092,000
Net Loss $(60,688,000) $(996,000) $(1,209,000) $ -- $(62,893,000)
NINE MONTHS ENDED SEPTEMBER 30, 1998
- ------------------------------------
Revenues $ 2,153,000 $ 21,000 $ 322,000 $ -- $ 2,496,000
Net Loss $(22,403,000) $ (72,000) $ 77,000 $ -- $(22,398,000)
THREE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------
Revenues $ 5,309,000 $ -- $ 309,000 $ -- $ 5,618,000
Net Loss $(24,128,000) $(111,000) $ (997,000) $ -- $(25,236,000)
THREE MONTHS ENDED SEPTEMBER 30, 1998
- -------------------------------------
Revenues $ 1,308,000 $ 21,000 $ 317,000 $ -- $ 1,646,000
Net Income (Loss) $ (9,624,000) $ (72,000) $ 82,000 $ -- $ (9,614,000)
</TABLE>
3. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currency of the Company's active subsidiaries in Argentina,
Brazil, Chile, Colombia and Spain is the local currency. The financial
statements of these subsidiaries are translated to U.S. dollars using period-end
rates of exchange for assets and liabilities, and average rates for the period
for revenues 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 period-end date,
while non-monetary 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 condensed consolidated statement of operations. 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.
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In connection with the PageCell acquisition, the Company issued 58,140 shares of
Series 1999A, Junior Non-Voting Convertible Preferred Stock (the "Series 1999A
Preferred"). After the first anniversary date of the issue of the Series 1999A
Preferred, the Series 1999A Preferred is convertible into common stock on
a one for one basis, subject to certain anti-dilution provisions, at any time at
the option of the holder. The holders of Series 1999A Preferred also are
entitled to certain liquidation preferences. A consolidation or merger of the
Company or a sale or transfer of all or substantially all of the Company's
assets is not deemed to be a liquidation.
-11-
<PAGE>
COMMON STOCK
Between April 30 and May 5, 1999, a group of third party investors purchased an
aggregate of 3,727,272 shares of common stock at $11 per share, or approximately
$41,000,000, less underwriting commission of $1,640,000 paid by issuing 149,091
shares of the Company's common stock. These 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.
In May, 1999, the Company realized proceeds of approximately $110,400,000, net
of underwriting discounts and commissions and related expenses, from the initial
public offering of 8,050,000 shares of its common stock.
On May 26, 1999, the Company issued 1,133,334 shares of its common stock in
connection with its acquisition of Wass Net, which was accounted for as a
pooling of interests.
On June 26, 1999, the Company issued 20,000 shares of its common stock in
connection with its acquisition of SIL, valued at approximately $1,000,000.
On September 14, 1999, the Company issued 842,887 shares of its common stock
in connection with its acquisition of Webcast, which was accounted for as a
pooling of interests.
On September 29, 1999, the Company issued 174,418 shares of its common stock and
58,140 shares of junior non-voting convertible preferred stock in connection
with its acquisition of the assets of PageCell, valued at approximately
$8,847,000.
During the nine months ended September 30, 1999, the Company issued 1,864,635
shares of its common stock for $2,103,000 in connection with the exercise of
stock options.
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 Preferred 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 were converted into
31,996,667 shares common stock on a one-for-one basis, upon the closing of the
initial public offering of the Company's common stock.
-12-
<PAGE>
5. LOSS PER SHARE
The following tables sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(25,236,000) $ (9,614,000) $(62,893,000) $(22,398,000)
Preferred stock dividends and accretion -- (1,908,000) (4,266,000) (2,628,000)
------------ ------------ ------------ ------------
Numerator for basic and diluted loss
per share - net loss available
for common stockholders $(25,236,000) $(11,522,000) $(67,159,000) $(25,026,000)
============ ============ ============ ============
Denominator:
Denominator for basic and dilutive
loss per share - weighted average
shares 58,142,334 12,041,161 34,131,502 10,834,299
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.43) $ (0.96) $ (1.97) $ (2.31)
------------ ------------ ------------ ------------
</TABLE>
Diluted net loss per share does not include the effect of options to purchase
9,045,000 and 5,920,000 shares of common stock at September 30, 1999 and 1998,
respectively.
6. STOCK OPTIONS
In connection with the granting of stock options in 1998 and the exchange of
non-qualified options for 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 $6,228,000. Deferred compensation is being amortized for financial
reporting purposes over the vesting period of the options. The amount recognized
as expense during the three- and nine-month periods ended September 30, 1999 was
approximately $1,848,000 and $4,860,000. The amount recognized as expense was
approximately $666,000 and $3,916,000 during the three- and nine-month periods
ended September 30, 1998.
7. LONG-TERM DEBT
The Company entered into a $12 million credit line for the acquisition of
computer equipment and furniture and fixtures. At September 30, 1999,
approximately $4.3 million was outstanding under the credit line. Amounts
outstanding are payable in monthly installments of principal and interest of
approximately $170,000, bear interest at approximately 13.6% per annum and are
secured by certain of the Company's 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. COMPREHENSIVE LOSS
-13-
<PAGE>
Total comprehensive loss was $25,253,000 and $63,198,000 for the three- and
nine-month periods ended September 30, 1999 and $9,614,000 and $22,398,000 for
the three- and nine-month periods ended September 30, 1998.
9. SUBSEQUENT EVENTS
In October 1999, the Company realized proceeds of approximately $193,000,000,
net of underwriting discounts and commissions and related expenses, from the
public offering of 6,000,000 shares of its common stock.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW
UNDER THE CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH
HEREIN.
OVERVIEW
StarMedia is the leading Internet media company targeting Latin America and
other Spanish- and Portuguese-speaking audiences worldwide. 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 March and April 1999, we acquired two leading Brazilian Internet guides,
Zeek!, otherwise known as Achei, and Cade?, otherwise known as KD Sistemas,
which primarily categorize and review Portuguese-language Web sites. The
aggregate purchase price paid by us for these acquisitions was approximately
$6.1 million plus $0.9 million due before March 2000. We are obligated to make
additional payments, estimated to be up to $6.4 million, to the former
stockholders of KD Sistemas if various performance targets are achieved. These
acquisitions were accounted for as purchases.
-15-
<PAGE>
In May 1999, we acquired LatinRed, otherwise known as Wass Net, a
Spanish-language online community offering e-mail, chat, classified, bulletin
boards, home pages and search capabilities. We issued 1,133,334 shares of our
common stock for all of the outstanding capital stock of Wass Net. This
acquisition was accounted for as a pooling of interests.
In June 1999, we acquired all of the outstanding stock of Servicios Interactivos
Limitada for 20,000 shares of our common stock. This acquisition was accounted
for as a purchase.
In September 1999, we acquired Webcast, a streaming media company focused on the
global delivery of audio, video and other Internet-based interactive media. We
issued 842,887 shares of our common stock for all of the outstanding capital
stock of Webcast. This acquisition was accounted for as a pooling of interests.
On September 29, 1999, we purchased substantially all of the assets of PageCell
International Holdings, Inc., a provider of advanced mobile technologies and
services, in exchange for common stock and junior non-voting convertible
preferred stock of the Company valued at $8.8 million at the closing date and
additional consideration valued at up to $15 million upon the achievement of
certain quarterly performance related targets through December 2000.
To date, we have derived our revenues primarily from the sale of advertisements
and sponsorships on our network as well as consulting and technical services.
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;
- the size and placement of the advertisement; 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
-16-
<PAGE>
the extent minimum guaranteed impression levels are not met, we defer
recognition of the corresponding revenues until guaranteed levels are achieved.
Payments received from advertisers prior to displaying their advertisements on
our network are recorded as deferred revenues. Revenues from 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 Sports America and MTV Latin America. 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 September 30, 1999, we had an accumulated deficit of
$121.5 million. These losses have been funded primarily through the issuance of
our equity securities. 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 $25.3 million
through September 30, 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. Options granted through February 1999 typically vest
over three years, although a portion of those options vested immediately.
Options granted after February 1999 generally vest over four years. Of the total
deferred compensation amount, approximately $10.4 million and $4.9 million was
amortized during the year ended December 31, 1998 and the nine months ended
September 30,
-17-
<PAGE>
1999, respectively. 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--$6,424,000
- 2000--$4,973,000;
- 2001--$2,762,000;
- 2002--$685,000; and
- 2003--$50,000.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUE
Revenues increased to $5.6 million for the three months ended September 30, 1999
from $1.6 million, for the three months ended September 30, 1998. Revenues
increased to $11.1 million for the nine months ended September 30, 1999 from
$2.5 million for the nine months ended September 30, 1998. The increase in
revenues was primarily due to an increase in the volume of revenue-producing
advertising impressions and sponsorships. During 1999, we continued to:
- expand our sales force;
- increase the number of impressions available on our network by
adding channels and by increasing our marketing efforts; and
- expand through acquisitions.
In the three months ended September 30, 1998, two advertisers each accounted for
greater than 10% of total revenues. For the three months ended September 30,
1999, no advertiser accounted for more than 10% of our revenue. For the three
months ended September 1998, our top five advertisers accounted for 53% of our
revenue. For the three months ended September 1999, our top five advertisers
account for 27% of our revenue.
In the nine months ended September 30, 1998, two advertisers each accounted for
greater than 10% of total revenues. For the nine months ended September 30,
1999, no advertiser accounted for more than 10% of our revenue. For the nine
months ended September 30, 1998, our top five advertisers accounted for 57% of
our revenue. For the nine months ended September 30, 1999, our top five
advertisers account for 21% of our revenue.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY.
-18-
<PAGE>
Product and technology expenses include:
- personnel costs
- hosting and telecommunication 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 $10.0 million, or 179% of total
revenues, for the three months ended September 30, 1999, from $1.8 million, or
113% of total revenues, for the three months ended September 30, 1998. The
increase was primarily due to an increase of approximately $2.9 million related
to additional staffing levels required to support the StarMedia network and
related systems; additional costs related to consultants, contracts, and fees of
$1.0 million; and approximately $1.0 million to enhance the content and features
of the StarMedia network. For the nine months ended September 30, 1999, product
and technology expenses increased to $20.0 million, or 180% of total revenues,
from $4.9 million, or 196% of total revenues, for the nine months ended
September 30, 1998. The increase was primarily due to an increase of
approximately $6.4 million related to staffing levels, approximately $1.0
million to enhance the content and features of the StarMedia network; increased
hosting costs of approximately $2.6 million; additional costs related to
consultants, contracts, and fees of $1.5 million; and approximately $1.0 million
to enhance the content and features of the StarMedia network.
In the three months ended September 30, 1999, we began the launch of our
Internet access services with AT&T Global Network Services. In each of the
three- and nine-month periods, charges of $0.6 million were incurred related to
the launch of the Internet access services.
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
and technological infrastructure. 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
-19-
<PAGE>
- other marketing-related expenses.
Sales and marketing expenses increased to $14.3 million, or 255% of total
revenues, for the three months ended September 30, 1999, from $7.7 million, or
481% of total revenues, for the three months ended September 30, 1998. Sales and
marketing expense increased to $37.2 million, or 335% of total revenues, for the
nine months ended September 30, 1999 from $13.8 million, or 552% of total
revenues, for the nine months ended September 30, 1998.
For the three- and nine-month periods, respectively, the increase 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 $2.9 million and $11.0 million; and
- higher personnel expenses, including sales commissions, of
approximately $2.5 million and $4.6 million.
- higher travel and entertainment costs of approximately $0.6
million and $1.7 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 $3.9 million, or 70% of total
revenues, for the three months ended September 30, 1999, from $956,000, or 60%
of total revenues, for the three months ended September 30, 1998. The increase
in general and administrative expenses was primarily due to additional salary
and related charges of $1.2 million and additional rent and related costs of
$0.4 million to support the growth of our business. General and administrative
expenses increased to $9.5 million, or 86% of total revenues, for the nine
months ended September 30, 1999, from $2.0 million, or 80% of
-20-
<PAGE>
total revenues, for the nine months ended September 30, 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 $2.5 million, additional rental costs of approximately $1.0
million, additional professional fees and consulting charges of $1.0 million,
and additional business taxes and insurance of $0.7 million.
Non-recurring merger charges for the three months and nine months ended
September 30, 1999 represent costs related to the merger of Wass Net and
Webcast. Since the mergers were accounted for as a pooling of interests,
these costs were expensed at the consummation of the merger.
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 $1.7 million, or 30% of
total revenues, for the three months ended September 30, 1999, from $211,000, or
13% of total revenues, for the three months ended September 30, 1998.
Depreciation and amortization expenses increased to $3.3 million, or 30% of
total revenues, in the nine months ended September 30, 1999 from $459,000, or
18% of total revenues, for the nine months ended September 30, 1998. The dollar
increases were primarily attributable to the increase in fixed assets of
approximately $13.6 million during the nine months ended September 30, 1999 and
$3.0 million during the nine months ended September 30, 1998. We also incurred
goodwill amortization expense of $626,000 and $1.2 million in the three months
and nine months ended September 30, 1999, respectively, related to the
acquisitions of Achei Internet Promotion Ltda., KD Sistemas and PageCell. We
expect that depreciation and amortization expenses will continue to increase as
we build the structure necessary to improve StarMedia's products and acquire
other businesses.
STOCK-BASED COMPENSATION EXPENSE
We recorded additional deferred compensation of $6.2 million during the nine
months ended September 30, 1999. Of the cumulative deferred compensation amount,
$4.9 million was recorded as an expense during the nine months ended September
30, 1999 and $1.8 million was recorded as expense in the three months ended
September 30, 1999. The unamortized balance is being amortized over the vesting
period for the individual options, which is typically three years for options
issued earlier than February 1999 and four years for options issued since that
date.
INTEREST INCOME, NET
Interest income, net includes income from our cash and investments. Net interest
income increased from $69,000 in the three months ended September 30, 1998 to
$1,547,000 for the three months ended September 30, 1999. Net interest income
increased from $159,000 for the nine months ended September 30, 1998 to $2.7
million for the nine months ended September 30, 1999. Interest income increased
as a result of capital raised from the sale of preferred shares in 1998, the
issuance of 3.7
-21-
<PAGE>
million shares of common stock to a group of third party investors in April
and May 1999, and the initial public offering of shares of our common stock
in May 1999.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have primarily financed our operations through the sale of equity
securities. At September 30, 1999, we had $133.5 million in cash and cash
equivalents, an increase of $80.4 million from December 31, 1998. In October
1999, we completed the public offering of 6,000,000 shares of our common stock
and realized proceeds of approximately $193,000,000, net of underwriting
discounts and commissions and related expenses.
In the nine months ended September 30, 1999, we used $58.5 million in operating
activities, mostly related to the our $62.9 million loss during the period which
included non-cash activities such as $3.3 million in depreciation and
amortization and $4.9 million in non-cash charges related to stock option
grants. In the nine months ended September 30, 1998, we used $15.4 million in
operating activities, consisting mostly of $22.4 million for our net loss,
partially offset by $3.9 million in non-cash charges related to stock option
grants and $6.8 million in additional liabilities. 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 in
part by:
- the amortization of deferred compensation;
- depreciation and amortization;
- increases in accrued expenses and accounts payable; and
- deferred revenues.
For the nine months ended September 30, 1999, the Company used $19.2 million in
investing activities, including $12.4 million for fixed assets and $5.1 million
for the acquisitions of KD Sistemas, Achei, and Wass Net and the related costs
of these transactions. For the nine months ended September 30, 1998, the Company
used $3.1 million for investing activities, mostly for the purchase of fixed
assets.
Net cash provided by financing activities was $158.6 million for the nine months
ended September 30, 1999 and $89.1 million for the nine months ended September
30, 1998. Net cash provided by financing activities during 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,
less underwriting commission of $1.6 million paid by issuing 149,041 shares of
the Company's common stock. In May 1999, we raised approximately $110.4 million,
net of underwriting discounts and commissions and related expenses, from the
initial public offering of shares of the Company's common stock. The Company
also entered into a financing arrangement, utilizing $5.1 million of a $12.0
million facility.
Our principal commitments consist of obligations outstanding under capital and
operating leases. We expect our capital expenditures will increase significantly
in the future as we make technological improvements to our system and technical
infrastructure.
-22-
<PAGE>
In March 1999, we entered into a $12.0 million credit line for the acquisition
of computer equipment and furniture and fixtures. At September 30, 1999,
approximately $4.3 million was outstanding under the equipment line. Amounts
outstanding are payable in monthly installments of principal and interest of
approximately $170,000, 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 at least $10 million in cash and cash
equivalents.
We have entered into an agreement with AT&T Global Network Services, formerly
IBM Global Network, under which we can offer Internet access services in
Argentina, Brazil, Chile, Colombia and Mexico. Under the agreement, we are
obligated to pay AT&T a minimum of approximately $4.3 million in 1999 and
approximately $16.0 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 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.
-23-
<PAGE>
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 are on schedule 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 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.
-24-
<PAGE>
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.
RISK FACTORS
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
-25-
<PAGE>
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 our Internet brands 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 September 30, 1999, we had an accumulated
deficit of approximately $121.5 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 September 30, 1999, we derived approximately $1.5
million, or 26% of total revenues, from these arrangements. In the nine months
ended September 30, 1999, we derived approximately $3.3 million, or 30% of total
revenue, 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
-26-
<PAGE>
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 telecommunications infrastructure in Latin America;
- competition in our markets;
- foreign currency exchange rates that affect our international
operations; and
- general economic conditions, particularly in Latin America.
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 significantly lower during the first calendar quarter of the
year because it includes the summer months in much of Latin America during
which:
- our target audience tends to take extended vacations; and
- schools and universities are generally closed.
As a result, advertisers have historically spent less in the first calendar
quarter. 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.
-27-
<PAGE>
Therefore, we will likely have substantial future capital requirements.
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
-28-
<PAGE>
fluctuate. This volatility could make it difficult for us to sustain our
expected growth in revenues and earnings, 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 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 AND OTHER SPANISH- AND PORTUGUESE-SPEAKING
MARKETS DOES NOT GROW, OUR BUSINESS WILL SUFFER
The Internet market in Latin America and other Spanish- and Portuguese-speaking
markets is in an early stage of development. Our future success depends on the
continued growth of the Internet in these
-29-
<PAGE>
markets. Our business, financial condition and results of operations will be
materially and adversely affected if Internet usage in these markets does not
continue to grow or grows more slowly than we anticipate. Internet usage in
these markets 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
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 OUR USERS
Our target markets are made up of a number of diverse regions that differ
historically, culturally, economically and politically. We generally use a
pan-regional approach to community development and to advertisements. Users,
however, may prefer content and community features which are specifically
created for a local audience 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.
-30-
<PAGE>
WE MAY NOT BE ABLE TO SUCCESSFULLY PROVIDE INTERNET ACCESS SERVICES IN LATIN
AMERICA
We recently began to offer Internet access services in Brazil and intend to
offer these services in other Latin American markets during the fourth quarter
of 1999. We have contracted with AT&T Global Network Services, formerly the IBM
Global Network, 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.
In addition, prices for Internet access services have fallen historically, a
trend we expect will continue. Accordingly, we cannot predict to what extent we
may need to reduce our prices to remain competitive or whether we will be able
to sustain our pricing level as our competition increases. This could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY NOT BE ABLE TO DEVELOP OUR BRANDS AND ATTRACT USERS TO OUR NETWORK
Maintaining our brands 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 our target markets 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 our brands will also depend on our
success in providing high quality content, features and functionality. If we
fail to promote our brands successfully or if visitors to our network or
advertisers do not perceive our services to be of high quality, the value of our
brands could be diminished. This could have a material and adverse effect on our
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
-31-
<PAGE>
It is difficult to predict which pricing model, if any, will emerge as the
industry standard. 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
For the nine months ended September 30, 1998, our top advertiser, Fox Latin
America, accounted for approximately 23% of our total advertising revenues. For
the nine months ended September 30, 1998, our top five advertisers accounted for
approximately 57% of our revenues. In the nine months ended September 30, 1999,
our top advertiser, Netscape, accounted for approximately 7.6% of our revenues.
In nine months ended September 30, 1999, our top 5 advertisers accounted for
approximately 21% 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 September 30, 1999, our advertising sales department
consisted of over 122 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
-32-
<PAGE>
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 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,
during 1999, we have made six acquisitions. Acquisitions could result in a
number of financial consequences, including:
- potentially dilutive issuances of equity securities;
- large non-recurring write-offs;
- reduced cash balances and related interest income;
- higher fixed expenses which require a higher level of revenues to
maintain gross margins;
- the incurrence of debt and contingent liabilities; and
- amortization expenses related to goodwill and other intangible
assets.
Furthermore, acquisitions involve numerous operational risks, including:
- difficulties in the integration of operations, personnel,
technologies, products and the information systems of the
acquired companies;
- diversion of management's attention from other business concerns;
- diversion of resources from our existing businesses, products or
technologies;
-33-
<PAGE>
- risks of entering geographic and business markets in which we
have no or limited prior experience; and
- potential loss of key employees of acquired organizations.
We could have difficulty in effectively assimilating and integrating these, or
any future joint ventures, acquisitions or alliances, into our operations. 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.
-34-
<PAGE>
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.
-35-
<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.
-36-
<PAGE>
We maintain our central production servers at the New Jersey data center of
Exodus Communications. A failure by Exodus to protect its 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.
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 OUT 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 continue to develop 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
-37-
<PAGE>
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 that 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 the world, 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.
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
-38-
<PAGE>
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 our target markets 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
-39-
<PAGE>
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 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.
OTHER RISKS
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
The price at which our common stock trades has been highly volatile and is
likely to continue to 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.
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
-40-
<PAGE>
Our directors, executive officers and affiliates currently beneficially own
approximately 48.8% 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.
ITEM 3. QUANTITATIVE AND QUALIITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY RATE FLUCTUATIONS
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, 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.
MARKET RISK
Our accounts receivable are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result, we do not anticipate any material losses in this area.
INTEREST RATE RISK
Our investments are classified as cash and cash equivalents with original
maturities of three months or less. Therefore, changes in the market's interest
rates do not affect the value of the investments as recorded by us.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights, and a variety of
claims arising in connection with the Company's email, message boards, and other
communications and community features, such as claims alleging defamation and
invasion of privacy. The Company is not currently aware of any legal proceedings
or claims that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or results of
operations.
-41-
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Changes in Securities:
In September 1999, the Company issued 842,887 shares of its common stock in
connection with an acquisition valued at $36,655,000 and issued in connection
with a second acquisition 174,418 shares of its common stock and 58,140 shares
of junior non-voting convertible preferred stock valued at $8,847,000 at the
closing date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) Form 8-K
1) On August 10, 1999, the Company filed Form 8-K/A amending its Form 8-K
filed on June 10, 1999 in connection with the acquisition of all of the
outstanding stock of Wass Net, S.L. (`Wass Net"). The amended form contained
certain audited financial information for Wass Net and pro forma financial
information for the Company.
2) On September 28, 1999, the Company filed Form 8-K in connection with its
acquiring all of the outstanding stock of Webcast Solutions, Inc, a company
organized under the laws of California.
-42-
<PAGE>
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 StarMedia Network, Inc.
By: /s/ Steven J. Heller
---------------------------------------------
Steven J. Heller
Chief Financial Officer (duly authorized
officer and principal financial officer)
-43-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 133,501,000
<SECURITIES> 0
<RECEIVABLES> 3,635,000
<ALLOWANCES> 254,000
<INVENTORY> 0
<CURRENT-ASSETS> 140,742,000
<PP&E> 18,882,000
<DEPRECIATION> 2,797,000
<TOTAL-ASSETS> 179,856,000
<CURRENT-LIABILITIES> 16,698,000
<BONDS> 0
0
0
<COMMON> 58,000
<OTHER-SE> 159,796,000
<TOTAL-LIABILITY-AND-EQUITY> 179,856,000
<SALES> 11,092,000
<TOTAL-REVENUES> 11,092,000
<CGS> 0
<TOTAL-COSTS> 76,551,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507,000
<INCOME-PRETAX> (62,777,000)
<INCOME-TAX> 116,000
<INCOME-CONTINUING> (62,893,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,893,000)
<EPS-BASIC> (1.97)
<EPS-DILUTED> (1.97)
</TABLE>
