<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 June 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 of Incorporation) (I.R.S. Employer
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 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 June 30, 1999, there were 57,222,000 shares of the Registrant's Common
Stock, $0.001 par value per share, outstanding.
<PAGE>
INDEX
STARMEDIA NETWORK, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1999 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
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>
-2-
<PAGE>
PART I -- FINANCIAL INFORMATION
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 164,716,000 $ 53,141,000
Account receivables, net 2,122,000 460,000
Other current assets 2,403,000 1,675,000
------------- ------------
Total current assets 169,241,000 55,276,000
Fixed assets, net 10,616,000 5,457,000
Intangible assets, net 583,000 179,000
Goodwill, net 7,429,000 --
Other assets 4,467,000 129,000
------------- ------------
$ 192,336,000 $ 61,041,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 3,810,000 $ 308,000
Accrued expenses 8,644,000 6,442,000
Loan payable, current portion 1,497,000 --
Capital lease obligations, current portion 110,000 220,000
Deferred revenues 924,000 815,000
------------- ------------
Total current liabilities 14,985,000 7,785,000
Loan payable, long term 3,208,000 --
Long term liabilities 381,000 --
Deferred rent 124,000 122,000
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):
Common stock 57,000 12,000
Additional paid-in capital 281,553,000 19,658,000
Deferred compensation (11,609,000) (8,666,000)
Other comprehensive loss (320,000) (32,000)
Accumulated deficit (96,043,000) (54,332,000)
------------- ------------
Total stockholders' equity (deficit) 173,638,000 (43,360,000)
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 192,336,000 $ 61,041,000
============= ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-3-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 3,751,000 $ 589,000 $ 5,299,000 $ 850,000
Operating expenses:
Product & technology development 6,363,000 2,381,000 9,930,000 3,178,000
Sales & marketing 13,262,000 4,199,000 22,922,000 6,015,000
General & administration 3,960,000 583,000 6,378,000 1,033,000
Depreciation & amortization 1,166,000 169,000 1,637,000 248,000
Stock-based compensation expense 1,595,000 3,248,000 3,012,000 3,250,000
------------ ------------ ------------ ------------
Total operating expenses 26,346,000 10,580,000 43,879,000 13,724,000
------------ ------------ ------------ ------------
Loss from operations (22,595,000) (9,991,000) (38,580,000) (12,874,000)
Interest income, net 714,000 63,000 1,135,000 90,000
------------ ------------ ------------ ------------
Net loss (21,881,000) (9,928,000) (37,445,000) (12,784,000)
Preferred stock dividends and
accretion (1,725,000) (425,000) (4,266,000) (720,000)
------------ ------------ ------------ ------------
Net loss available
to common shareholders $(23,606,000) $(10,353,000) $(41,711,000) $(13,504,000)
============ ============ ============ ============
Historical basic and diluted
net loss per common share $ (0.77) $ (1.00) $ (1.97) $ (1.32)
============ ============ ============ ============
Historical number of shares used
in computing basic and diluted
net loss per share 30,637,863 10,347,374 21,142,904 10,220,866
============ ============ ============ ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-4-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
For the six months ended June 30, 1999
<TABLE>
<CAPTION>
Common Stock
Additional Other
Paid-in Accumulated Deferred Comprehensive
Shares Amount Capital Deficit Compensation Income Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 11,525,334 $12,000 $19,658,000 $(54,332,000) $(8,666,000) $(32,000) $(43,360,000)
Deferred Compensation
related to stock options,
net of cancellations 5,955,000 (5,955,000) -
Amortization of
deferred compensation 3,012,000 3,012,000
Issuance of common stock,
net of offering costs 11,926,363 12,000 151,435,000 151,447,000
Shares issued for
acquisition of
Services Interactivos
Limitada 20,000 1,000,000 1,000,000
Conversion of redeemable
Convertible preferred
stock 31,996,667 31,000 100,728,000 100,759,000
Exercise of common stock
options 1,753,636 2,000 2,014,000 2,016,000
Stock options issued for
services 31,000 31,000
Transaction expenses related
to Wass Net S.L. Acquisition
payable by Wass Net
Shareholders 732,000 732,000
Preferred stock dividends
and accretion (4,266,000) (4,266,000)
Net loss for the period (37,445,000) (37,445,000)
Translation adjustment (288,000) (288,000)
-------- -------
Comprehensive loss (37,733,000)
-------------------------------------------------------------------------------------------
Balance at June 30, 1999 57,222,000 $57,000 $281,553,000 $(96,043,000) $(11,609,000) $(320,000) $173,638,000
========== ======= ============ ============ ============ ========= ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-5-
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- ------------
<S> <C> <C>
Operating activities
Net loss $ (37,445,000) $(12,784,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,637,000 248,000
Provision for bad debts 179,000 9,000
Amortization of deferred compensation 3,012,000 3,250,000
Stock options issued for services 31,000 --
Deferred rent 2,000 27,000
Changes in operating assets and liabilities:
Accounts receivable (1,844,000) (411,000)
Other assets (5,264,000) (695,000)
Accounts payable and accrued expenses 2,995,000 3,102,000
Deferred revenue 109,000 305,000
------------- ------------
Net cash used in operating activities (36,588,000) (6,949,000)
Investing activities:
Purchases of fixed assets (5,988,000) (2,397,000)
Intangible assets (360,000) (371,000)
Cash paid for acquisitions (4,711,000) --
------------- ------------
Net cash used in investing activities (11,059,000) (2,768,000)
Financing activities:
Issuance of common stock 154,422,000 11,978,000
Proceeds from issuance of long term debt 5,074,000 --
Payments under long term debt (369,000) --
Payments under capital lease obligation (110,000) 285,000
Repayment to stockholders -- (67,000)
------------- ------------
Net cash provided by financing activities 159,749,000 12,196,000
Effect of exchange rate changes on
cash and cash equivalents (527,000) --
------------- ------------
Net increase in cash 111,575,000 2,479,000
Cash at beginning of period 53,141,000 443,000
------------- ------------
Cash at end of period $ 164,716,000 $ 2,922,000
============= ============
Supplemental disclosure of non-cash investing and financing activities:
Accrued purchases of fixed assets and intangible assets $ 477,000 $ --
============= ============
Accrued costs for acquisitions $ 1,174,000 $ --
============= ============
Accrued costs related to issuance of common stock $ 959,000 $ --
============= ============
Supplemental disclosure of cash flow information
Interest paid $ 66,000 $ 29,000
============= ============
Income taxes paid $ -- $ --
============= ============
</TABLE>
See notes to Unaudited Condensed Consolidated Financial Statements.
-6-
<PAGE>
STARMEDIA NETWORK, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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,
"StarMedia" or the "Company"). All intercompany account balances and
transactions have been eliminated in consolidation.
StarMedia is the leading online network targeting Latin America. 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 also 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 six months ended June 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
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 consolidated financial statements and
footnotes thereto included in the Company's Form S-1 as filed with the
Securities and Exchange Commission.
The accompanying condensed consolidated financial statements have been restated
to reflect the May 26, 1999 acquisition of Wass Net, S.L. ("Wass Net"), which
was accounted for as a pooling of interests.
-7-
<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
approximately $250,000. 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.
SERVICES INTERACTIVOS LIMITADA
In June 1999, the Company acquired all the outstanding stock of Services
Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock.
The Company accounted for the acquisition under the purchase method of
accounting and the results of the operations have been included in the
financial statements of the Company from the dates of the 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 the acquisition of approximately $7,967,000 is being
amortized using the straight-line method over three years.
The pro forma unaudited consolidated results of operations, assuming the
consummation of the KD Sistemas acquisition as of January 1, 1998, are as
follows:
SIX MONTHS ENDED
JUNE 30
--------------------------------
1999 1998
---- ----
Revenues $ 5,555,000 $ 1,250,000
Net loss $(37,812,000) $(13,553,000)
Net loss available for
common shareholders $(42,078,000) $(14,273,000)
============ ============
Basic and diluted
net loss per share $ (1.99) $ (1.40)
============ ============
The effect of the Achei and SIL acquisitions were not included in the pro forma
unaudited consolidated results of operations due to immateriality.
-8-
<PAGE>
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, the 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. The acquisition was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated to include
the results of Wass Net for all periods presented.
Unaudited combined and separate results of StarMedia and Wass Net during the
periods preceding the merger were as follows:
<TABLE>
<CAPTION>
STARMEDIA WASS NET INTERCOMPANY COMBINED
--------- -------- ------------ --------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenues $ 5,293,000 $ 11,000 $(5,000) $ 5,299,000
Net Loss $ 36,560,000 $ 885,000 $ - $ 37,445,000
SIX MONTHS ENDED JUNE 30, 1998
Revenues $ 845,000 $ 5,000 $ - $ 850,000
Net Loss $ 12,779,000 $ 5,000 $ - $ 12,784,000
THREE MONTHS ENDED JUNE 30, 1999
Revenues $ 3,751,000 $ - $ - $ 3,751,000
Net Loss $ 21,009,000 $ 872,000 $ - $ 21,881,000
THREE MONTHS ENDED JUNE 30, 1998
Revenues $ 589,000 $ - $ - $ 589,000
Net Loss $ 9,922,000 $ 6,000 $ - $ 9,928,000
</TABLE>
In connection with the acquisition, Wass Net recorded a one-time charge of
$773,000 for transaction costs. In addition, the Company recorded a one-time
charge of approximately $250,000 in transaction costs.
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
-9-
<PAGE>
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
COMMON STOCK
Between April 30 and May 5, 1999, a group of third party investors purchased
an aggregate of 3,727,272 shares of the Company's common stock at $11 per
share, or approximately $41,000,000, less fees and commissions of $1,640,000
paid by issuing 149,091 shares of the Company's common stock. The new
investors are subject to a one-year restriction on the sale or transfer of
such shares, after which such investors have been granted certain
registration rights.
On May 25, 1999, the Company's initial public offering Registration Statement
on Form S-1, SEC Registration No. 333-74659, was declared effective by the
SEC. 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.
On June 26, 1999, the Company issued 20,000 shares of its common stock in
connection with its acquisition of SIL, valued at $1,000,000.
During the six months ended June 30, 1999, the Company issued 1,753,636 shares
of its common stock for $2,016,000 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 IPO.
-10-
<PAGE>
5. LOSS PER SHARE
The following tables sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(21,881,000) $ (9,928,000) $(37,445,000) $(12,784,000)
Preferred stock dividends and accretion (1,725,000) (425,000) (4,266,000) (720,000)
------------ ------------ ------------ ------------
Numerator for basic and diluted loss
per share - net loss available
for common stockholders $(23,606,000) $(10,353,000) $(41,711,000) $(13,504,000)
------------ ------------ ------------ ------------
Denominator:
Denominator for basic and dilutive
loss per share - weighted average
shares 30,637,863 10,347,374 21,142,904 10,220,866
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.77) $ (1.00) $ (1.97) $ (1.32)
------------ ------------ ------------ ------------
</TABLE>
Diluted net loss per share does not include the effect of options to purchase
7,214,000 and 4,117,000 shares of common stock at June 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 to incentive stock options, the Company recorded deferred
compensation of approximately $19,087,000. In connection with the granting of
stock options in 1999, the Company recorded additional deferred compensation of
approximately $5,955,000. 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 six-month periods ended June 30, 1999 was
approximately $1,595,000 and $3,012,000. The amount recognized as expense was
approximately $3,248,000 and $3,250,000 during the three- and six-month periods
ended June 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 June 30, 1999, approximately
$4.7 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.
-11-
<PAGE>
8. COMPREHENSIVE LOSS
Total comprehensive loss was $21,986,000 and $37,733,000 for the three- and
six-month periods ended June 30, 1999 and $9,928,000 and $12,784,000 for the
three- and six-month periods ended June 30, 1998.
-12-
<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 AND ELSEWHERE IN THE COMPANY'S OTHER PUBLIC FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
StarMedia is the leading online network targeting Latin America. We were
incorporated in March 1996 and commenced operations in September 1996. For the
period from our inception through December 1996, we did not generate any
revenues, incurred minimal operating expenses and focused our operating
activities on the development of the StarMedia network.
We launched our network in December 1996. During 1997, we continued the
development of the StarMedia network and related technology infrastructure
and also focused on recruiting personnel, raising capital and developing
content to attract and retain users. In 1998, we:
- improved and upgraded our services;
- expanded our production staff;
- built a direct sales force; and
- increased our marketing activities in order to build the StarMedia
brand.
In 1999, we expanded our operations in Latin America by acquiring two leading
Brazilian Internet guides, Achei and 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,
-13-
<PAGE>
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. Effective May 26, 1999, we acquired Wass Net 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 common stock for each Wass Net
share. Accordingly, we issued 1,133,334 shares of our 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. The acquisition was accounted for as a pooling
of interests and, accordingly, our financial statements have been restated to
include the results of Wass Net for all periods presented.
In addition, in April and May 1999, we completed the sale of 3,727,272 shares
of our common stock to a number of strategic investors for $41 million, less
fees and commissions of $1,640,000 which were paid by issuing 149,091 shares
of our common stock. On May 25, 1999, the Company's initial public offering
Registration Statement on Form S-1, SEC Registration Number 333-74659, was
declared effective by the SEC. 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.
In June 1999, we acquired all the outstanding stock of Services Interactivos
Limitada for 20,000 shares of our common stock.
During 1999, the Company also 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.
To date, we have derived substantially all of our revenues from the sale of
advertisements and sponsorships on our network.
Advertising revenues are derived principally from:
- advertising arrangements under which we receive revenues based on a
cost-per-thousand-impressions basis, commonly referred to as CPMs;
- sponsorship arrangements which allow advertisers to sponsor an area on
our network in exchange for a fixed payment;
- reciprocal advertising arrangements, under which we exchange
advertising space on our network predominantly for advertising on
television and radio stations; and
- design, coordination and integration of advertising campaigns and
sponsorships to be placed on our network.
Advertising and sponsorship rates depend on:
- whether the impressions are for general audiences or targeted
audiences;
-14-
<PAGE>
- 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 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 Latin 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.
-15-
<PAGE>
We have incurred significant net losses and negative cash flows from
operations since our inception. At June 30, 1999, we had an accumulated
deficit of $96 million. These losses were 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 $25.1 million
through June 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, either immediately or
generally over three years. Of the total deferred compensation amount,
approximately $10.4 million and $3.0 million was amortized during the year ended
December 31, 1998 and the six months ended June 30, 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--$6.15 million;
- 2000--$5.0 million;
- 2001--$2.8 million;
- 2002--$700,000; and
- 2003--$50,000.
RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUE
Revenues increased to $3.8 million for the three months ended June 30, 1999 from
$589,000 for the three months ended June 30, 1998. Revenues increased to $5.3
million for the six months ended June 30, 1999 from $850,000 for the six months
ended June 30, 1998. The increase in revenues was primarily due to an increase
in the volume of advertising impressions and sponsorships. During 1999, we
continued to:
-16-
<PAGE>
- 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 June 30, 1998, four advertisers each accounted for
greater than 10% of total revenues. For the three months ended June 30, 1999,
one advertiser accounted for more than 10% of our revenue. For the three
months ended June 1998, our top five advertisers accounted for 79% of our
revenue.
In the six months ended June 30, 1998, four advertisers each accounted for
greater than 10% of total revenues. For the six months ended June 30, 1999,
no advertiser accounted for more than 10% of our revenue. For the six months
ended June 1998, our top five advertisers accounted for 81% of our revenue.
For the six months ended June 1999, the top five advertisers account for 34%
of our revenue. For the three months ended June 1999, the top five
advertisers account for 32% of our revenue. In the three months ended June
30, 1999, we derived approximately $1.5 million or 38% of total revenues from
reciprocal advertising arrangements. In the six months ended June 30, 1999,
we derived approximately $1.9 million, or 35% of total revenues, from these
arrangements. We do not receive any cash payments for these arrangements.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY. 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 $6.4 million, or 170% of total
revenues, for the three months ended June 30, 1999, from $2.4 million, or 405%
of total revenues, for the three months ended June 30, 1998. The increase was
primarily due to an increase of approximately $2.1 million related to additional
staffing levels required to support the StarMedia network and related systems
and approximately $1.0 million to enhance the content and features of the
StarMedia network. For the six months ended June 30, 1999, product and
technology expenses increased to $9.9 million, or 187% of total revenues, from
$3.2 million, or 373% of total revenues, for the six months ended June 30, 1998.
The increase was primarily due to an increase of approximately $2.9 million
related to staffing levels and approximately $1.3 million to enhance the content
and features of the StarMedia network.
We have, to date, expensed all product and technology costs as incurred. We
believe that increased investment in new and enhanced features and technology is
critical to attaining our
-17-
<PAGE>
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
- other marketing-related expenses.
Sales and marketing expenses increased to $13.3 million, or 354% of total
revenues, for the three months ended June 30, 1999, from $4.2 million, or 713%
of total revenues, for the three months ended June 30, 1998. Sales and marketing
expense increased to $22.9 million, or 433% of total revenues, for the six
months ended June 30, 1999 from $6.0 million, or 708% of total revenues, for the
six months ended June 30, 1998.
For the three- and six-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 $5.9 million and $11.1 million, respectively; and
- higher personnel expenses, including sales commissions, of
approximately $1.8 million and $3.4 million, respectively.
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.
-18-
<PAGE>
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 $4.0 million, or 106% of total
revenues, for the three months ended June 30, 1999, from $583,000, or 99% of
total revenues, for the three months ended June 30, 1998. The increase in
general and administrative expenses was primarily due to additional salary and
related charges of $0.8 million and additional rent and related costs of $0.3
million to support the growth of our business. General and administrative
expenses increased to $6.4 million, or 120% of total revenues, for the six
months ended June 30, 1999, from $1.0 million, or 122% of total revenues, for
the six months ended June 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 $1.4 million and
additional rental costs of $0.6 million.
General and administrative expenses for the three months and six months ended
June 30,1999 include one-time charges of $1.0 million related to the
acquisition of Wass Net. Since the acquisition was accounted for as a pooling
of interests, these costs were expensed at the consummation of the
acquisition.
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 $1.2 million, or 31% of
total revenues, for the three months ended June 30, 1999, from $169,000, or
29% of total revenues, for the three months ended June 30, 1998. Depreciation
and amortization expenses increased to $1.6 million, or 31% of total
revenues, for the six months ended June 30, 1999 from $248,000, or 29% of
total revenues, for the six months ended June 30, 1998. The dollar increases
were primarily attributable to the increase in fixed assets of approximately
$6.4 million during 1999 and $5.8 million during 1998. We also incurred
goodwill amortization expense of $0.5 million related to the acquisitions of
Achei and KD Sistemas. We expect that depreciation and amortization expenses
will continue to increase as we build the structure necessary to improve our
products and acquire other businesses.
-19-
<PAGE>
STOCK-BASED COMPENSATION EXPENSE
We recorded additional deferred compensation of $6.0 million during the six
months ended June 30, 1999. Of the cumulative deferred compensation amount,
$3.0 million was recorded as an expense during the six months ended June 30,
1999 and $1.6 million was recorded as an expense during the three months
ended June 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 $63,000 in the three months ended June 30,
1998 to $714,000 for the three months ended June 30, 1999. Net interest
income increased from $90,000 for the six months ended June 30, 1998 to $1.1
million for the six months ended June 30, 1999. Interest income increased as
a result of capital raised from the sale of preferred shares in 1998, the
issuance of 3.7 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 our
equity securities. At June 30, 1999, we had $164.7 million in cash and
cash equivalents, an increase of $111.6 million from December 31, 1998.
In the six months ended June 30, 1999, we used $36.6 million in operating
activities, mostly related to our $37.4 million loss during the period which
included non-cash activities such as $1.6 million in depreciation and
amortization and $3.0 million in non-cash charges related to stock option
grants. In the six months ended June 30, 1998, we used $6.9 million in
operating activities, consisting mostly of $12.8 million for the Company's
net loss, partly offset by $3.2 million in non-cash charges related to stock
option grants and $3.1 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 six months ended June 30, 1999, we used $11.1 million in investing
activities, including $6.0 million for fixed assets and $5.0 million for the
acquisitions of KD Sistemas,
-20-
<PAGE>
Achei and Wass Net and the related costs of these transactions. For the six
months ended June 30, 1998, we used $2.8 million for investing activities,
mostly for the purchase of fixed assets.
Net cash provided by financing activities was $159.7 million for the six
months ended June 30, 1999 and $12.2 million for the six months ended June
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 fees and commissions of $1,640,000 paid by issuing 149,041
shares of our common stock. In May 1999, we raised approximately
$110,400,000, net of underwriting discounts and commissions and related
expenses, from the initial public offering of shares of our common stock. We
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.
In March 1999, we entered into a $12 million credit line for the acquisition
of computer equipment and furniture and fixtures. At June 30, 1999,
approximately $4.7 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. 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 (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 $7.6 million in 1999 and approximately $16.6 million in 2000.
Our capital requirements depend on numerous factors, including:
- market acceptance of our services;
- the amount of resources we devote to investments in the StarMedia
network;
- marketing and selling our services; and
- promoting our brand.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products 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
-21-
<PAGE>
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities or to obtain a credit
facility. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and could result in
operating covenants that would restrict our operations. We cannot assure you
that financing will be available in amounts or on terms acceptable to us, if at
all.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers to the potential for system and processing failures
of date-related calculations, and is the result of computer-controlled systems
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
STATE OF READINESS
We have made a preliminary assessment of the Year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. As part of our assessment plan, we are
evaluating our date-dependent code, internally-developed software, software
developed by third parties and hardware. We plan to complete this evaluation by
October 1999. All internally-developed code will be checked, and any problematic
code identified, fixed and tested by November 1999. All material
externally-developed software that is not Year 2000 compliant will be upgraded
or replaced by November 1999.
More specifically:
- We are quality assurance testing our internally-developed proprietary
software and systems related to the delivery of our service to our
users. We plan to complete this testing by November 1999.
- We have contacted our principal third-party vendors and licensors of
material hardware, software, and services that are related to the
delivery of our services to our users, and requested their
confirmation of our Year 2000 compliance of the software, hardware and
services they provide to us. All of these contacted vendors and
licensors have notified us that the hardware, software and services
that they have provided to us are Year 2000 compliant.
- We have contacted our principal vendors of material non-information
technology systems and services used by us, and requested their
confirmation of the Year 2000 compliance of their systems and
services. We have received notification from the majority of these
vendors that the systems and services that they have provided to us
are Year 2000 compliant. By the end of the third quarter of 1999, we
will either have received this confirmation from the remaining vendors
or have replaced the systems and services they provide with compliant
systems and services.
- We are formulating repair or replacement requirements and implementing
corrective measures. These requirements will be completed by October
1999, and, if necessary,
-22-
<PAGE>
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.
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:
-23-
<PAGE>
- 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.
-24-
<PAGE>
RISK FACTORS
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
We were incorporated in March 1996. We commenced operations in September 1996
and launched the StarMedia network in December 1996. Accordingly, we have only a
limited operating history for you to evaluate our business. You must consider
the risks, expenses and uncertainties that an early stage company like ours
faces. These risks include our ability to:
- increase awareness of 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 June 30, 1999, we had an accumulated
deficit of approximately $96.0 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 June 30, 1999, we derived approximately $1.5 million,
or 38% of total revenues, from these arrangements. In the six months ended June
30, 1999, we derived approximately $1.9 million, or 35% of total revenue, from
these arrangements. We expect that revenues from reciprocal advertising
-25-
<PAGE>
arrangements will continue to account for a portion of our revenues in the
foreseeable future. Reciprocal advertising arrangements do not generate any cash
revenues.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our future revenues and results of operations may significantly fluctuate due to
a combination of factors. Accordingly, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that in future periods our results of operations may
be below the expectations of public market analysts and investors. This could
cause the trading price of our common stock to decline.
OUR OPERATING RESULTS MAY ALSO FLUCTUATE DUE TO SEASONAL FACTORS
The level of use on our network is highly seasonal. This may cause fluctuations
in our revenues and operating results. Visitor traffic on our network has
historically been significantly lower during the first calendar quarter of the
year because:
- it includes the summer months in much of Latin America;
- our target audience tends to take extended vacations during these
months; and
- schools and universities are generally closed.
As a result, advertisers have historically spent less in the first and second
calendar quarters. We believe that these seasonal trends will continue to affect
our results of operations. If our expenses increase during these periods, we may
not generate sufficient revenue to offset these expenses.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS
We intend to continue to grow our business. Because we expect to generate losses
for the foreseeable future, we do not expect that income from our operations
will be sufficient to meet these needs. Therefore, we will likely have
substantial future capital requirements. 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.
-26-
<PAGE>
RISKS RELATED TO OUR MARKETS AND STRATEGY
IF THE INTERNET IS NOT WIDELY ACCEPTED AS A MEDIUM FOR ADVERTISING AND COMMERCE,
OUR BUSINESS WILL SUFFER
We expect to derive most of our revenue for the foreseeable future from Internet
advertising, and to a lesser extent, from electronic commerce. If the Internet
is not accepted as a medium for advertising and commerce, our business will
suffer. The Internet advertising market is new and rapidly evolving,
particularly in Latin America. As a result, we cannot gauge its effectiveness or
long term market acceptance as compared with traditional media.
Advertisers and advertising agencies must direct a portion of their budgets to
the Internet and, specifically, to our network. Many of our current or potential
advertising and electronic commerce partners have limited experience using the
Internet for advertising purposes and historically have not devoted a
significant portion of their advertising budgets to Internet-based advertising.
Advertisers that have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts.
In addition, companies may choose not to advertise on the StarMedia network if
they do not perceive our audience demographic to be desirable or advertising on
our network to be effective.
THE ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ADVERTISING DEPENDS ON THE
DEVELOPMENT OF A MEASUREMENT STANDARD
No standards have been widely accepted for the measurement of the effectiveness
of Internet advertising. Standards may not develop sufficiently to support the
Internet as an effective advertising medium. If these standards do not develop,
advertisers may choose not to advertise on the Internet in general or,
specifically, on our network. This would have a material adverse effect on our
business, financial condition and results of operations.
SOCIAL AND POLITICAL CONDITIONS IN LATIN AMERICA MAY CAUSE VOLATILITY IN OUR
OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS
We have and expect to continue to derive substantially all of our revenues from
the Latin American markets. Social and political conditions in Latin America are
volatile and may cause our operations to fluctuate. This volatility could make
it difficult for us to sustain our expected growth in revenues and earnings,
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;
-27-
<PAGE>
- slow or negative growth;
- imposition of trade barriers; and
- wage and price controls.
We have no control over these matters. Volatility resulting from these matters
may decrease Internet availability, create uncertainty regarding our operating
climate and adversely affect our customers' advertising budgets, all of which
may adversely impact our business.
CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA MAY
ADVERSELY AFFECT OUR BUSINESS
The currencies of many countries in Latin America, including Brazil and
Argentina, have experienced substantial depreciation and volatility. The
currency fluctuations, as well as high interest rates, inflation and high
unemployment, have materially and adversely affected the economies of these
countries. Poor general economic conditions in Latin American countries may
cause our customers to reduce their advertising spending, which could adversely
impact our business and could cause our revenue to decline unexpectedly.
WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF LOCAL LATIN AMERICAN CURRENCIES
DEPRECIATE RELATIVE TO THE U.S. DOLLAR
Our reporting currency is the U.S. dollar. In a number of cases, however,
customers in Latin America may be billed in local currencies. Our accounts
receivable from these customers will decline in value if the local currencies
depreciate relative to the U.S. dollar. To date, we have not tried to reduce our
exposure to exchange rate fluctuations by using hedging transactions. Although
we may enter into hedging transactions in the future, we may not be able to do
so successfully. In addition, our currency exchange losses may be magnified if
we become subject to exchange control regulations restricting our ability to
convert local currencies into U.S. dollars.
IF INTERNET USE IN LATIN AMERICA DOES NOT GROW, OUR BUSINESS WILL SUFFER
The Latin American Internet market is in an early stage of development. Our
future success depends on the continued growth of the Internet in Latin America.
Our business, financial condition and results of operations will be materially
and adversely affected if Internet usage in Latin America does not continue to
grow or grows more slowly than we anticipate. Internet usage in Latin America
may be inhibited for a number of reasons, including:
- the cost of Internet access;
- concerns about security, reliability, and privacy;
- ease of use; and
-28-
<PAGE>
- 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 LATIN
AMERICAN USERS
Latin America is made up of a number of diverse markets that differ
historically, culturally, economically and politically. We use a pan-regional
approach of customizing some of our content and advertisements to a
particular user based on the user's location. Users, however, may prefer
content which is specifically created for a local audience within Latin
America using a strictly localized approach over our pan-regional approach.
If users do not find the pan-regional content on our network appealing, they
will decrease in number and advertisers will find our network an unattractive
medium on which to advertise.
WE MAY NOT BE ABLE TO SUCCESSFULLY PROVIDE INTERNET ACCESS SERVICES IN LATIN
AMERICA
We intend to offer Internet access services beginning in the second half of
1999. We have contracted with AT&T 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
-29-
<PAGE>
Internet access service, and we may not be able to do so successfully. If we are
not able to successfully develop, market or operate our Internet access
services, our expenses could increase substantially without generating
significant additional revenue, our management's time may be wasted and our
business may otherwise be materially and adversely affected.
WE MAY NOT BE ABLE TO DEVELOP 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 Latin America grows. In order to
attract and retain Internet users, advertisers and electronic commerce partners,
we intend to increase substantially our expenditures for creating and
maintaining brand loyalty.
Our success in promoting and enhancing 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 the business, financial condition and results of operations.
OUR ADVERTISING PRICING MODEL, THAT IS BASED ON THE NUMBER OF TIMES AN
ADVERTISEMENT IS DELIVERED TO USERS, MAY NOT BE SUCCESSFUL
Different pricing models are used to sell advertising on the Internet, and the
models we adopt may prove to not be the most profitable. Advertising based on
impressions, or the number of times an advertisement is delivered to users,
currently comprises substantially all of our revenues. To the extent that
minimum guaranteed impression levels are not met, we defer recognition of the
corresponding revenues until guaranteed impression levels are achieved. To the
extent that minimum impression levels are not achieved, we may be required to
provide additional impressions after the contract term, which would reduce our
advertising inventory. This could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT TO NEW INTERNET ADVERTISING PRICING
MODELS
It is difficult to predict which pricing model, if any, will emerge as the
industry standard. 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
-30-
<PAGE>
measure the delivery of advertisements to be reliable. We depend on third
parties to provide us with some of these measurement services. If they are
unable to provide these services in the future, we would need to perform them
ourselves or obtain them from another provider. This could cause us to incur
additional costs or cause interruptions in our business during the time we are
replacing these services. We are currently implementing additional systems
designed to record information on our users. If we do not implement these
systems successfully, we may not be able to accurately evaluate the demographic
characteristics of our users.
THE LOSS OF ONE OF OUR TOP ADVERTISERS COULD SIGNIFICANTLY REDUCE OUR
ADVERTISING REVENUE AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS
In 1998, our top advertiser, Fox Latin America, accounted for approximately 23%
of our total advertising revenues. In 1998, our top five advertisers accounted
for approximately 62% of our total revenues. In the six months ended June 30,
1999, our top advertiser, Netscape, accounted for approximately 8% of our
total revenues. In six months ended June 30, 1999, our top 5 advertisers
accounted for approximately 34% 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 June 30, 1999, our advertising sales department
consisted of over 95 employees. Although we expect our advertising sales
department to grow, it can take a relatively long period of time before new
sales personnel become productive.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS
We have recently experienced a period of rapid growth. This has placed a
significant strain on our managerial, operational and financial resources. To
accommodate this growth, we must implement new or upgraded operating and
financial systems, procedures and controls throughout many different locations.
We may not succeed with these efforts. Our failure to expand and integrate these
areas in an efficient manner could cause our expenses to grow, our revenues to
decline or grow more slowly than expected and could otherwise have a material
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL THAT ARE IN HIGH DEMAND
-31-
<PAGE>
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,
in the first and second quarter of 1999, we acquired four Internet companies
in Brazil, Chile and Spain. We could have difficulty in effectively
assimilating and integrating these properties 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
-32-
<PAGE>
- loss of market share.
Any one of these could materially and adversely affect our business, financial
condition and results of operations.
In addition, our competitors may develop content that is better than ours or
that achieves greater market acceptance. It is also possible that new
competitors may emerge and acquire significant market share. A loss of users to
our competitors may have a material and adverse effect on our business,
financial condition and results of operations.
WE WILL NOT BE ABLE TO ATTRACT VISITORS OR ADVERTISERS IF WE DO NOT CONTINUALLY
ENHANCE AND DEVELOP THE CONTENT AND FEATURES OF OUR NETWORK
To remain competitive, we must continue to enhance and improve our content. In
addition, we must:
- continually improve the responsiveness, functionality and features of
our network; and
- develop other products and services that are attractive to users and
advertisers.
We may not succeed in developing or introducing features, functions, products
and services that visitors and advertisers find attractive in a timely manner.
This would likely reduce our visitor traffic and materially and adversely affect
our business, financial condition and results of operations.
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
-33-
<PAGE>
these relationships do not adequately perform their obligations, reduce their
activities with us, choose to compete with us or provide their services to a
competitor, we may have more difficulty attracting and maintaining visitors to
our network and our business, financial condition and results of operations
could be materially and adversely affected. Also, we intend to actively seek
additional relationships in the future. Our efforts in this regard may not be
successful.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE
UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED
VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION
In the past, we have experienced:
- system disruptions;
- inaccessibility of our network;
- long response times;
- impaired quality; and
- loss of important reporting data.
Although we are in the process of improving our network, we may not be
successful in implementing these measures. If we experience delays and
interruptions, visitor traffic may decrease and our brand could be adversely
affected. Because our revenues depend on the number of individuals who use our
network, our business may suffer if our improvement efforts are unsuccessful.
We maintain our central production servers at the New Jersey data center of
Exodus Communications. We also have facilities at Digital Island in New York. We
maintain regional network operating centers in Brazil and Argentina. A failure
by Exodus or our other locations to protect their systems against damage from
fire, hurricanes, power loss, telecommunications failure, break-ins or other
events, could have a material adverse effect on our business, financial
condition and results of operations.
CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY
OF INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR NETWORK AND IMPEDE OUR
GROWTH
A significant barrier to electronic commerce and confidential communications
over the Internet has been the need for security. Internet usage could decline
if any well-publicized compromise of security occurred. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Unauthorized persons could attempt
-34-
<PAGE>
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.
-35-
<PAGE>
COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY
ADVERSELY AFFECT OUR BUSINESS
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
YEAR 2000 PROBLEMS MAY DISRUPT OUR INTERNAL OPERATIONS
Many currently installed computer systems and software products only accept two
digits to identify the year in any date. Therefore, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. Our failure to correct a material Year 2000
problem could have a material adverse effect on our business, financial
condition and results of operations.
We 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
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;
-36-
<PAGE>
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- pornography; and
- other claims based on the nature and content of Internet materials.
WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS WHICH MAY
BE EXPENSIVE, TIME CONSUMING AND DISTRACTING
Because we have employees, property and business operations in the United States
and throughout Latin America, we are subject to the laws and the court systems
of many jurisdictions. We may become subject to claims based on foreign
jurisdictions for violations of their laws. In addition, these laws may be
changed or new laws may be enacted in the future. International litigation is
often expensive, time consuming and distracting. Accordingly, any of the
foregoing could have a material adverse effect on our business, financial
condition and results of operations.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY
AFFECT OUR BUSINESS
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO
SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS
-37-
<PAGE>
We cannot be certain that our products do not or will not infringe valid
patents, copyrights or other intellectual property rights held by third parties.
We may be subject to legal proceedings and claims from time to time relating to
the intellectual property of others in the ordinary course of our business. We
may incur substantial expenses in defending against these third-party
infringement claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK
The laws in the United States and in Latin American countries relating to the
liability of companies which provide online services, like ours, for activities
of their visitors are currently unsettled. Claims have been made against online
service providers and networks in the past for defamation, negligence, copyright
or trademark infringement, obscenity, personal injury or other theories based on
the nature and content of information that was posted online by their visitors.
We could be subject to similar claims and incur significant costs in their
defense. In addition, we could be exposed to liability for the selection of
listings that may be accessible through our network or through content and
materials that our visitors may post in classifieds, message boards, chat rooms
or other interactive services. It is also possible that if any information
provided through our services contains errors, third parties could make claims
against us for losses incurred in reliance on the information. We offer
Web-based e-mail services, which expose us to potential liabilities or claims
resulting from:
- unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
Investigating and defending these claims is expensive, even if they do not
result in liability.
WE MAY BE SUBJECT TO CLAIMS BASED ON PRODUCTS SOLD ON OUR NETWORK
We have entered into arrangements to offer third-party products and services on
our network under which we may be entitled to receive a share of revenues
generated from these transactions. These arrangements may subject us to
additional claims including product liability or personal injury from the
products and services, even if we do not ourselves provide the products or
services. These claims may require us to incur significant expenses in their
defense or satisfaction. While our agreements with these parties often provide
that we will be 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
-38-
<PAGE>
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.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THE INITIAL PUBLIC OFFERING COULD
ADVERSELY AFFECT OUR STOCK PRICE
The market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market after the
initial public offering, or the perception that these sales could occur.
These sales also might make it difficult for us to sell equity securities in
the future at a time and at a price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could suffer.
-39-
<PAGE>
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS
Our directors, executive officers and affiliates currently beneficially own
approximately 19.5% 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
-40-
<PAGE>
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
In May 1999, the Company completed the sale of 3,727,272 shares of
its common stock at $11.00 per share to six accredited investors for an
aggregate purchase price of $41,000,000. The transaction was exempt from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended. Goldman Sachs & Co. acted as placement agent for this private
placement.
(b) Use of Proceeds
On May 25, 1999, the Company's initial public offering Registration
Statement on Form S-1, SEC Registration Number 333-74659, was declared
effective by the SEC. The Company realized net proceeds of $110,400,000 from
the initial public offering. During the three months ended June 30, 1999, the
Company did not use any of the proceeds from the initial public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May 1999, in a Written Consent in Lieu of a Special Meeting of the
Stockholders of the Company, a majority of the holders of the then
outstanding shares of common stock of the Company (which majority included
the majority of holders of the preferred stock of the Company, voting on an
as-converted basis) approved:
(1) the adoption of the Amended and Restated Certificate of
Incorporation of the Company;
(2) the adoption of the Amended and Restated By-Laws of the Company;
(3) the naming of the following persons to the Company's staggered
Board of Directors: Jack C. Chen and Douglas M. Karp as Class I directors,
whose terms will initially be up for re-election at the Annual Meeting of
Stockholders in the Year 2000, Christopher T. Linen and Frederick R. Wilson
as Class II directors, whose terms will initially be up for re-election at
the Annual Meeting of Stockholders in the Year 2001, and Fernando J.
Espuelas, Gerardo M. Rosenkranz, and Susan L. Segal as Class III directors,
whose terms will initially be up for re-election at the Annual Meeting of
Stockholders in the Year 2002;
(4) the adoption of the 1999 Employee Stock Purchase Plan,
including the reservation of 1,500,000 shares thereunder; and
(5) an increase in the number of shares of common stock from
15,000,000 to 17,000,000 authorized for issuance under the Company's 1998
Stock Plan.
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 8K
1) On June 10, 1999, the Company filed Form 8-K in connection with its acquiring
all of the outstanding stock of Wass Net, a company organized under the laws of
Spain.
2) On June 25, 1999, the Company filed Form 8-K in connection with its
acquiring all of the outstanding stock of KD Sistemas, a company organized
under the laws of Brazil.
3) On August 10, 1999, the Company filed Form 8-K/A amending its Form 8-K filed
on June 10 concerning the acquisition of Wass Net. The amended form contained
certain audited financial information for Wass Net and pro forma financial
information for the Company.
-41-
<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: August 16, 1999 StarMedia Network, Inc.
----------------------------
(Registrant)
By: /s/ Steven J. Heller
-----------------------------------------
Steven J. Heller
Chief Financial Officer (duly authorized
officer and principal financial officer)
-42-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 164,716,000
<SECURITIES> 0
<RECEIVABLES> 2,360,000
<ALLOWANCES> 238,000
<INVENTORY> 0
<CURRENT-ASSETS> 169,241,000
<PP&E> 12,434,000
<DEPRECIATION> 1,818,000
<TOTAL-ASSETS> 192,336,000
<CURRENT-LIABILITIES> 14,985,000
<BONDS> 0
0
0
<COMMON> 57,000
<OTHER-SE> 173,579,000
<TOTAL-LIABILITY-AND-EQUITY> 192,336,000
<SALES> 5,299,000
<TOTAL-REVENUES> 5,299,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,879,000
<LOSS-PROVISION> 179,000
<INTEREST-EXPENSE> 269,000
<INCOME-PRETAX> (37,445,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,445,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,445,000)
<EPS-BASIC> 1.97
<EPS-DILUTED> 1.97
</TABLE>
