<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): APRIL 13, 1999
StarMedia Network, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-15015 06-1461770
- -------------------------------------- -------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
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)
N.A.
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 13, 1999, StarMedia Network, Inc., a Delaware corporation,
("StarMedia" or the "Company") acquired all of the outstanding stock
of KD Sistemas De Informacao Ltda. ("KD" or "KD Sistemas"), a company
organized under the laws of Brazil. As a result of the acquisition,
KD became a wholly-owned subsidiary of StarMedia. The acquisition
was completed pursuant to the terms of a Purchase Agreement, dated
as of March 14, 1999, by and among StarMedia, KD and the
Stockholders of KD. KD operates a free Web-based portal that
provides topical directories of Portuguese-language Web sites. Prior
to the acquisition, all of the outstanding stock of KD was owned by
Gustavo Viberti, Fabio G. de Oliveira, Guillermo Jose Viberti,
Rothco Empreendimentos, Participacoes e Assessoria Ltda., Carlos
Augusto Montenegro, Luis Paulo Montenegro and Jose Caetano Lacerda,
none of whom were affiliated or associated with the Company or its
affiliates prior to the acquisiton. The purchase price consisted of
a cash payment of $5,000,000 at closing, $320,000 payable by March
1, 2000, $570,000 due in March 2000 and additional 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"). Approximately $3,000,000 of the Earn-Out is contingent
upon the continued employment of certain key individuals.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA CONSOLIDATED FINANCIAL INFORMATION AND
EXHIBITS
StarMedia hereby files this Form 8-K to file the financial statements
and related pro forma consolidated financial statements required pursuant to
Item 7 of Form 8-K with respect to the KD acquisition.
(a) Financial Statements of Business Acquired
(b) Pro Forma Consolidated Financial Information
The Pro Forma Consolidated Financial Statements are based on the historical
financial statements of the Company, adjusted to give effect to the following
transactions:
a) the sale of 3,727,272 shares of common stock at $11 per
share to six strategic investors between April 30, 1999 and
May 5, 1999, net of costs;
b) the issuance of 8,050,000 shares of common stock in
connection with the Company's initial public offering
at $15 per share, less related costs, on June 1, 1999 and
the conversion of 31,966,667 shares of redeemable
convertible preferred stock in connection therewith;
and
c) the acquisition of KD on April 13, 1999.
The Pro Forma Consolidated Statements of Operations for the three months
ended March 31, 1999 and for the year ended December 31, 1998 assume that the
KD acquisition occurred as of the first day of January 1, 1998. The
Pro Forma Consolidated Balance Sheet at March 31, 1999 assumes that the three
transactions noted above occurred on March 31, 1999.
The Pro Forma Consolidated Financial Statements should be read in conjunction
with the audited consolidated financial statements of the Company and the
related notes thereto which are included in the Company's Registration
Statement, as amended, dated May 25, 1999, and the Company's Form 8-K filed
on June 10, 1999 (each as filed with the Securities and Exchange Commission)
and the audited financial statements of KD that are filed herewith.
The Pro Forma Consoldiated Financial Information does not purport to present
what the Company's results of operations would actually have been if the
strategic investors, initial public offering, and KD acquisition had
occurred on the assumed dates, as specified above, or to project the Company's
financial condition or results of operations for any future period.
(c) Exhibits
Exhibit Number Description
2.1 Quota Purchase Agreement, dated as of March 14, 1999,
by and among StarMedia, KD and the quotaholders of KD
(incorporated be reference to Exhibit 10.10 to
Amendment No. 2 to the Form S-1 of StarMedia filed
with the Securities and Exchange Commission on May
11, 1999, File No. 333-74659).
23.1 Consent of Arthur Andersen LLP.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Financial Statements Together with
Report of Independent Public Accountants
KD Sistemas de Informacao Ltda.
December 31, 1998
ARTHUR ANDERSEN S/C
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
KD Sistemas de Informacao Ltda.:
(1) We have audited the accompanying balance sheets of KD SISTEMAS DE INFORMACAO
LTDA. (a Brazilian corporation), translated into U.S. dollars, as of December
31, 1998, and the related translated statements of income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
(2) We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
(3) In our opinion, the financial statements referred to in paragraph (1)
present fairly, in all material respects, for the purpose described in the
preceding paragraph, the financial position of KD Sistemas de Informacao Ltda.,
as of December 31, 1998, and the results of its operations, the changes in its
stockholders' equity and its cash flows for the year then ended, in conformity
with generally accepted accounting principles in the United States.
/s/ Arthur Andersen S/C
Rio de Janeiro, Brazil,
June 10, 1999.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
BALANCE SHEET AS OF DECEMBER 31, 1998
(Amounts expressed in U.S. dollars)
A S S E T S
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and banks 8.957
Short-term investments 258.593
Accounts receivable 191.783
Other current assets 3.723
-------
Total current assets 463.056
-------
PROPERTY, PLANT AND EQUIPMENT, net 96.127
-------
Total assets 559.183
-------
-------
</TABLE>
The accompanying notes are an integral
part of this balance sheet.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
BALANCE SHEET AS OF DECEMBER 31, 1998
(Amounts expressed in U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Accounts payable 27.848
Accrued payroll and income taxes 46.391
Accrued salaries 6.246
-------
Total current liabilities 80.485
-------
STOCKHOLDERS' EQUITY:
Capital stock 107.127
Other comprehensive income-
Cumulative translation adjustments (35.962)
Restricted retained earnings 668
Unrestricted retained earnings 406.865
-------
Total stockholders' equity 478.698
-------
Total liabilities and stockholders' equity 559.183
-------
-------
</TABLE>
The accompanying notes are an integral
part of this balance sheet.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
OPERATIONS REVENUES, NET OF DISCOUNTS:
Sales 1,151,948
Value-added tax (69,076)
----------
Net operating revenues 1,082,872
----------
OPERATING COSTS AND EXPENSES:
Costs of services rendered (272,746)
Selling, general and administrative expenses (404,320)
----------
(677,066)
----------
INCOME FROM OPERATIONS 405,806
NONOPERATING INCOME:
Financial income, net 17,165
----------
INCOME BEFORE TAXES 422,971
INCOME TAX AND SOCIAL CONTRIBUTION (82,517)
----------
NET INCOME FOR THE YEAR 340,454
==========
The accompanying notes are an integral part of this statement.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
CAPITAL STOCK:
Initial balance as of January 1 60,347
Change in the year 46,780
--------
Balance December 31 107,127
--------
PAID FOR NOT YET SUBSCRIBED:
Initial balance as of January 1 46,780
Change in the year (46,780)
--------
Balance December 31 -
--------
OTHER COMPREHENSIVE INCOME:
Cumulative translation adjustments-
Initial balance as of January 1 (10,459)
Change in the year (25,503)
--------
Balance December 31 (35,962)
--------
RESTRICTED RETAINED EARNINGS:
Legal reserve 668
--------
UNRESTRICTED RETAINED EARNINGS:
Balance January 1 66,411
Net income for the year 340,454
--------
Balance December 31 406,865
--------
Total stockholders' equity 478,698
========
The accompanying notes are an integral part of these statements.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 340,454
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation 5,450
Cumulative translation adjustments (25,503)
--------
320,401
--------
Decrease (increase) in assets-
Accounts receivable (164,632)
Other (3,723)
--------
(168,355)
--------
Increase (decrease) in liabilities-
Accounts payable 26,358
Accrued payroll and income taxes 39,220
Accrued salaries 6,246
--------
71,824
--------
Net cash provided by operating activities 223,870
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (68,136)
--------
Net cash used in financing activities (68,136)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term investment (157,477)
--------
Net cash used in financing activities (157,477)
--------
DECREASE IN CASH AND EQUIVALENTS (1,743)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 10,700
--------
CASH AND EQUIVALENTS, END OF YEAR 8,957
========
The accompanying notes are an integral part of this statement.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(Amounts expressed in U.S. dollars)
1. BACKGROUND
KD Sistemas de Informacao Ltda. was incorporated on January 2, 1996 under the
laws of the Federative Republic of Brazil. Initially denominated Skynet Sistemas
Ltda., the Company developed and maintains www.cade.com.br, a branded Internet
on-line network ("the network") located in the World Wide Web ("the Web"). The
network develops, trains and provides systems and a search engine for Internet
network purposes. The Company also provides graphic arts, editing of virtual
programs, publicity, consulting, and other community Internet features targeted
to the Brazilian market.
2. BASIS OF PRESENTATION
The Company is required to maintain its books and records in local currency
(Brazilian reais) and in the Portuguese language, based on generally accepted
accounting principles in Brazil. All of the Company's sales and other
transactions are denominated in local currency.
The Company's official financial statements as of December 31, 1998 were
originally prepared in local currency and in the Portuguese language. The
accompanying financial statements herein presented have been translated into
U.S. dollars and adjusted to be in conformity with generally accepted accounting
principles in the United States (U.S. GAAP), in accordance with the criteria set
forth in Statement of Financial Accounting Standards 52 (SFAS 52).
As from July 1, 1997, the Brazilian economy had ceased to be highly inflationary
so the functional currency (U.S. dollars) was changed to the local currency
(Brazilian reais).
The accompanying financial statements stated in U.S. dollars have been
translated at the official exchange rate prevailing at December 31, 1998 of
R$1.2087 to US$1.00. The criteria for translating the revenue and expense
accounts is the average rate of January 31, 1998 and December 31, 1998 or
R$1.1626. The gain or loss resulting from this translation process is included
in the Cumulative Translation Adjustments component of stockholders' equity.
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation and presentation
of the financial statements are summarized as follows:
a. Cash and banks are stated at cost.
b. Short-term investments are stated at cost plus income accrued to the
balance sheet date.
c. Assets and liabilities to be realized or paid within 12 months
following the balance sheet dates are classified as current assets
and current liabilities, respectively.
d. Property, plant and equipment are stated at cost of purchase or
construction less accumulated depreciation. Depreciation is
calculated using the straight-line method. The annual rates used take
into consideration the estimated useful lives of the assets.
e. Revenues, costs and expenses are recognized on the accrual basis. The
Company's revenues are derived from the sale of advertisements.
Advertising revenues are recognized ratably in the period in which
the advertisement is displayed, provided that no significant Company
obligations remain outstanding and collection of the resulting
receivable is probable.
f. Accrued salaries are fully accrued liabilities for future
compensation to employees for vacations vested during the year.
g. The Company pays the corporate income tax and social contribution on
profits based on the Presumed Profit Computation. Such method
consists, basically, of the calculation of the above taxes through
the calculation of 32% and 12%, respectively, on the revenues of the
Company. On this amount, called Presumed Profits, the income tax, at
the rate of 25% plus surtax of 10%, and the social contribution, at
the rate of 8%, apply.
4. SHORT-TERM INVESTMENTS
Short-term investments were comprised of financial investment funds - fixed
income, denominated in Brazilian reais, at the following banks:
<TABLE>
<S> <C>
Banco Brasileiro de Descontos - BRADESCO 207,890
Lloyd's Bank 50,703
-------
258,593
-------
-------
</TABLE>
<PAGE>
5. ACCOUNTS RECEIVABLE
Accounts receivable were comprised of:
<TABLE>
<S> <C>
LG Electronics de Sao Paulo Ltda. 24,952
Itanet Itamarati On Line Ltda. 31,174
Lloyd's Asset Management 19,856
Petroleo Brasileiro S.A. 13,066
Souza Cruz S.A. 13,238
Others 99,499
-------
201,785
-------
Allowance for doubtful accounts (10,002)
-------
191,783
-------
-------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were comprised of:
<TABLE>
<CAPTION>
Annual
rate of
depreciation Accumulated Net
(%) Cost depreciation Balance
------------ ---- ------------ -------
<S> <C> <C> <C> <C>
Computer equipment 20 90,652 (8,545) 82,107
Furniture and fixtures 10 to 20 12,643 (939) 11,704
Telephone lines - 2,316 - 2,316
------- ------ ------
Total 105,611 (9,484) 96,127
------- ------ ------
------- ------ ------
</TABLE>
7. ACCOUNTS PAYABLE
Accounts payable were comprised of:
<TABLE>
<S> <C>
Netgravity 15,293
MM Eventos 8,042
Others 4,513
------
27,848
------
------
</TABLE>
<PAGE>
8. ACCRUED PAYROLL AND INCOME TAXES
Accrued payroll and income taxes were comprised of:
<TABLE>
<CAPTION>
Rate
(%)
-----
<S> <C> <C>
Government Severance Indemnity Fund for
Employees - FGTS 8 1,453
National Institute of Social Security - INSS 27.8 8,129
------
Total of accrued payroll taxes 9,582
------
Tax on gross revenue 4.8 19,362
Social contribution 0.96 2,522
Service Tax - ISS 3 7,964
Tax for Social Security Financing - COFINS 3 5,254
Employees' Profit Participation Program - PIS 0.65 1,707
------
Total of accrued income taxes 36,809
------
46,391
------
------
</TABLE>
9. CAPITAL STOCK
Capital stock is fully paid-in and is comprised of 110,000 quotas, as follows:
<TABLE>
<CAPTION>
Number of quotas
----------------
<S> <C>
Gustavo Guillermo Viberti 23,760
Fabio Goncalves de Oliveira 23,760
Guillermo Jose Viberti 21,780
Carlos Augusto Saade Montenegro 9,900
Luiz Paulo Saade Montenegro 9,900
Jose Caetano Paula de Lacerda 9,900
ROTHKO - Empreendimentos
Participacoes e Assessoria Ltda. 11,000
-------
110,000
-------
-------
</TABLE>
<PAGE>
10. SUBSEQUENT EVENT
Exchange Policy
On January 13, 1999, the Brazilian Central Bank changed its exchange policy,
discontinuing the so-called exchange band through which it controlled the real
fluctuation margin in relation to the U.S. dollar; therefore, the exchange rate
was freely negotiated at the market. As a consequence of such change, the real
had devalued in relation to the U.S. dollar, from R$1.2087 per U.S. dollar at
December 31, 1998 to R$1.7597 per U.S. dollar at June 10, 1999. At this moment,
it is still not possible to determine if the U.S. dollar quotation will remain
at this level and its impact on the Company's transactions and financial
position.
Change in the Controlling
On April 13, 1999 the stockholders' entered into an agreement with StarMedia
Network Inc., an U.S. corporation, and sold all the outstanding equity interest.
* * * * * * * * * * * *
<PAGE>
Financial Statements Together with
Report of Independent Public Accountants
KD Sistemas de Informacao Ltda.
March 31, 1999 and 1998
ARTHUR ANDERSEN S/C
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
KD Sistemas de Informacao Ltda.:
(1) We have reviewed the accompanying balance sheets of KD SISTEMAS DE
INFORMACAO LTDA. (a Brazilian corporation), translated into U.S. dollars, as of
March 31, 1999 and 1998, and the related translated statements of income,
changes in stockholders' equity and cash flows for the three-month periods then
ended. These financial statements are the responsibility of the Company's
management.
(2) We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of person responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of KD Sistemas de Informacao Ltda. for that purpose, as explained in
Note 2.
(4) Based on our review, we are not aware of any material modification that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles in the United States.
/s/ Arthur Andersen S/C
Rio de Janeiro, Brazil,
June 10, 1999.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
UNAUDITED BALANCE SHEETS AS OF MARCH 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
A S S E T S
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and banks 31,804 68,099
Short-term investments 216,091 112,437
Accounts receivable 88,154 42,336
-------- --------
Total current assets 336,049 222,872
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 92,306 34,831
-------- --------
Total assets 428,355 257,703
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
CURRENT LIABILITIES:
Accounts payable 19,908 2,498
Accrued payroll and income taxes 14,563 14,065
Accrued salaries 17,604 5,461
-------- --------
Total current liabilities 52,075 22,024
-------- --------
STOCKHOLDERS' EQUITY:
Capital stock 107,127 60,347
Paid for not yet subscribed - 46,780
Other comprehensive income-
Cumulative translation adjustments (174,438) (14,181)
Restricted retained earnings 668 668
Unrestricted retained earnings 442,923 142,065
-------- --------
Total stockholders' equity 376,280 235,679
-------- --------
Total liabilities and stockholders' equity 428,355 257,703
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
UNAUDITED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(Amounts expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
OPERATIONS REVENUES, NET OF DISCOUNTS:
Sales 247.959 185.618
Value-added tax (23.511) (11.963)
-------- -------
Net operating revenues 224.448 173.655
-------- -------
OPERATING COSTS AND EXPENSES:
Costs of services rendered (59.077) (18.188)
Selling, general and administrative expenses (105.917) (72.245)
-------- -------
(164.994) (90.433)
----------- -----------
INCOME FROM OPERATIONS 59.454 83.222
NONOPERATING INCOME (EXPENSES):
Financial income (expense), net 11.455 (366)
-------- -------
INCOME BEFORE TAXES 70.909 82.856
INCOME TAX AND SOCIAL CONTRIBUTION (34.851) (7.202)
-------- -------
NET INCOME FOR THE PERIOD 36.058 75.654
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral
part of these statements.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
UNAUDITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CAPITAL STOCK 107,127 60,347
-------- --------
PAID FOR NOT YET SUBSCRIBED - 46,780
-------- --------
OTHER COMPREHENSIVE INCOME:
Cumulative translation adjustments-
Initial balance as of January 1 (35,962) (10,459)
Change in the period (138,476) (3,722)
-------- --------
Balance March 31 (174,438) (14,181)
-------- --------
RESTRICTED RETAINED EARNINGS:
Legal reserve 668 668
-------- --------
UNRESTRICTED RETAINED EARNINGS:
Balance January 1 406,865 66,411
Net income for the period 36,058 75,654
-------- --------
Balance March 31 442,923 142,065
-------- --------
Total stockholders' equity 376,280 235,679
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 36,058 75,654
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation 1,263 2,450
Cummulative translation adjustments (138,476) (3,722)
-------- -------
(101,155) 74,382
-------- -------
Decrease (increase) in assets-
Accounts receivable 103,629 (15,185)
Other 3,723 -
-------- -------
107,352 (15,185)
-------- -------
Increase (decrease) in liabilities-
Accounts payable (7,940) 1,008
Accrued payroll and income taxes (31,828) 6,894
Accrued salaries 11,358 5,461
-------- -------
(28,410) 13,363
-------- -------
Net cash provided by operating activities (22,213) 72,560
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment 2,558 (3,840)
-------- -------
Net cash provided by (used in) investing activities 2,558 (3,840)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term investment 42,502 (11,321)
-------- -------
Net cash provided by (used in) financing activities 42,502 (11,321)
-------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 22,847 57,399
CASH AND EQUIVALENTS, BEGINNING OF QUARTER 8,957 10,700
-------- -------
CASH AND EQUIVALENTS, END OF QUARTER 31,804 68,099
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
KD SISTEMAS DE INFORMACAO LTDA.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND 1998
(Amounts expressed in U.S. dollars)
1. BACKGROUND
KD Sistemas de Informacao Ltda. was incorporated on January 2, 1996 under the
laws of the Federative Republic of Brazil. Initially denominated Skynet Sistemas
Ltda., the Company developed and maintains www.cade.com.br, a branded Internet
on-line network ("the network") located in the World Wide Web ("the Web"). The
network develops, trains and provides systems and a search engine for Internet
network purposes. The Company also provides graphic arts, editing of virtual
programs, publicity, consulting, and other community Internet features targeted
to the Brazilian market.
2. BASIS OF PRESENTATION
The Company is required to maintain its books and records in local currency
(Brazilian reais) and in the Portuguese language, based on generally accepted
accounting principles in Brazil.
The Company's official financial statements as of March 31, 1999 and 1998 were
originally prepared in local currency and in the Portuguese language. The
accompanying financial statements herein presented have been translated into
U.S. dollars and adjusted to be in conformity with generally accepted accounting
principles in the United States (U.S. GAAP), in accordance with the criteria set
forth in Statement of Financial Accounting Standards 52 (SFAS 52).
As from July 1, 1997, the Brazilian economy had ceased to be highly inflationary
so the functional currency (U.S. dollars) was changed to the local currency
(Brazilian reais).
The accompanying financial statements stated in U.S. dollars have been
translated at the official exchange rate prevailing at March 31, 1999 (R$1.7220
to US$1.00) and March 31, 1998 (R$1.1374 to US$1.00). The criteria for
translating the revenue and expense accounts are the average rates prevailing
during the period. The gain or loss resulting from this translation process is
included in the Cumulative Translation Adjustment component of stockholders'
equity.
The unaudited financial statements as of March 31, 1999 and 1998 include, in the
opinion of the management, all adjustments (which are of a normal reviewing
nature) necessary for fair presentation thereof. The results of operations for
the three-month period ended March 31, 1999 are not necessarily indicative of
the results for the full fiscal year ending December 31, 1999.
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation and presentation
of the financial statements are summarized as follows:
a. Cash and banks are stated at cost.
b. Short-term investments are stated at cost plus income accrued to the
balance sheet date.
c. Assets and liabilities to be realized or paid within 12 months
following the balance sheet dates are classified as current assets
and current liabilities, respectively.
d. Property, plant and equipment are stated at cost of purchase or
construction less accumulated depreciation. Depreciation is
calculated using the straight-line method. The annual rates used take
into consideration the estimated useful lives of the assets.
e. Revenues, costs and expenses are recognized on the accrual basis. The
Company's revenues are derived from the sale of advertisements.
Advertising revenues are recognized ratably in the period in which
the advertisement is displayed, provided that no significant Company
obligations remain outstanding and collection of the resulting
receivable is probable.
f. Accrued salaries are fully accrued liabilities for future
compensation to employees for vacations vested during the year.
g. The Company pays the corporate income tax and social contribution on
profits based on the Presumed Profit Computation. Such method
consists, basically, of the calculation of the above taxes through
the calculation of 32% and 12%, respectively, on the revenues of the
Company. On this amount, called Presumed Profits, the income tax, at
the rate of 25% plus surtax of 10%, and the social contribution, at
the rate of 8%, apply.
4. SHORT-TERM INVESTMENTS
As of March 31, 1999 and 1998, short-term investments were comprised of
financial investment fund - fixed income, denominated in Brazilian reais at
Banco Brasileiro de Descontos - BRADESCO, at the total amount of US$216,091 and
US$112,437, respectively.
<PAGE>
5. ACCOUNTS RECEIVABLE
Accounts receivable were comprised of:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Centrais Eletricas Brasileiras S.A. 13,141 -
Itanet Itamarati On Line Ltda. 11,614 -
Petroleo Brasileiro S.A. 20,014 -
Souza Cruz S.A. 9,292 -
Wild Tecnologies do Brasil - 4,396
STI Sao Paulo On Line - 3,681
Unisys do Brasil Ltda. - 3,077
Others 41,114 31,182
------ ------
95,175 42,336
Allowance for doubtful accounts (7,021) -
------ ------
88,154 42,336
------ ------
------ ------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were comprised of:
<TABLE>
<CAPTION>
Annual rate of
depreciation
(%) 1999 1998
-------------- ---- ----
<S> <C> <C>
Computer equipment 20 91,973 35,754
Furniture and fixtures 10 to 20 9,454 5,561
Telephone lines - 1,626 -
------- ------
103,053 41,315
Accumulated depreciation (10,747) (6,484)
------- ------
92,306 34,831
------- ------
------- ------
</TABLE>
<PAGE>
7. ACCOUNTS PAYABLE
Accounts payable were comprised of:
<TABLE>
<CAPTION>
1999 1998
---------- ----
<S> <C> <C>
MM Eventos 3,213 -
Bradesco Saude 1,634 -
RM Cine e Video Ltda. 2,613 -
Fund. Parque de Alta Tecnologia de Petropolis 3,194 2,417
Others 9,254 81
------ -----
19,908 2,498
------ -----
------ -----
</TABLE>
8. ACCRUED PAYROLL AND INCOME TAXES
Accrued payroll and income taxes were comprised of:
<TABLE>
<CAPTION>
Rate
(%) 1999 1998
---- ------ ------
<S> <C> <C> <C>
Government Severance Indemnity Fund for
Employees - FGTS 8 1,129 270
National Institute of Social Security - INSS 27.8 5,513 2,232
Income and Tax Withholdings Return - IRRF 9 953
------ ------
Total of accrued payroll taxes 6,651 3,455
------ ------
Tax on gross revenue 4.8 - 5,015
Social contribution 0.96 - 813
Service Tax - ISS 3 3,570 2,540
Tax for Social Security Financing - COFINS 3 3,570 1,692
Employees' Profit Participation Program - PIS 0.65 772 550
------ ------
Total of accrued income taxes 7,912 10,610
------ ------
14,563 14,065
------ ------
------ ------
</TABLE>
<PAGE>
9. CAPITAL STOCK
As of March 31, capital stock is fully paid-in and is comprised of 110,000 and
60,000 quotas, in 1999 and 1998, respectively, as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Gustavo Guillermo Viberti 23,760 15,600
Fabio Goncalves de Oliveira 23,760 13,200
Guillermo Jose Viberti 21,780 13,200
Carlos Augusto Saade Montenegro 9,900 -
Luiz Paulo Saade Montenegro 9,900 9,000
Jose Caetano Paula de Lacerda 9,900 4,500
ROTHKO - Empreendimentos
Participacoes e Assessoria Ltda. 11,000 -
Marcos Spinola Montenegro - 4,500
------- ------
110,000 60,000
------- ------
------- ------
</TABLE>
10. RELEVANT ISSUE
On January 13, 1999, the Brazilian Central Bank changed its exchange policy,
discontinuing the so-called exchange band through which it controlled the real
fluctuation margin in relation to the U.S. dollar; therefore, the exchange rate
was freely negotiated at the market. As a consequence of such change, the real
had devalued in relation to the U.S. dollar, from R$1.2087 per U.S. dollar at
December 31, 1998 to R$1.7597 per U.S. dollar at June 10, 1999. At this moment,
it is still not possible to determine if the U.S. dollar quotation will remain
at this level and its impact on the Company's transactions and financial
position.
11. SUBSEQUENT EVENT
On April 13, 1999 the stockholders' entered into an agreement with StarMedia
Network Inc., an U.S. corporation, and sold all the outstanding equity interest.
* * * * * * * * * * * *
<PAGE>
(b) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
STARMEDIA NETWORK, INC.
PRO FORMA BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
STARMEDIA STRATEGIC PUBLIC KD SISTEMAS PRO FORMA
HISTORICAL INVESTMENT OFFERING HISTORICAL ADJUSTMENTS CONSOLIDATED
----------- ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents and short
term investments $40,588,000 $41,000,000 $111,034,000 $248,000 $(5,250,000) $187,620,000
Accounts receivable, net 973,000 88,000 1,061,000
Other current assets 2,241,000 2,241,000
------------------------------------------------------------------------------
Total current assets 43,802,000 41,000,000 111,034,000 336,000 (5,250,000) 190,922,000
Fixed assets, net 7,308,000 92,000 7,400,000
Intangible assets, net 492,000 492,000
Goodwill, net 920,000 5,764,000 6,684,000
Other assets 1,367,000 (811,000) 556,000
------------------------------------------------------------------------------
$53,889,000 $41,000,000 $110,223,000 $428,000 $ 514,000 $206,054,000
==============================================================================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 3,732,000 $ $ $ 20,000 $ $ 3,752,000
Accrued liabilities 6,845,000 (575,000) 32,000 6,302,000
Loan payable, current portion 1,085,000 1,085,000
Capital lease obligations, current portion 166,000 166,000
Deferred payment for acquisition 890,000 890,000
Deferred revenue 591,000 591,000
------------------------------------------------------------------------------
Total current liabilities 12,419,000 - (575,000) 52,000 890,000 12,786,000
Deferred rent, other long term liabilities 126,000 126,000
Loan payable, long term 2,541,000 2,541,000
Preferred stock, authorized 60,000,000 shares:
Series A Redeemable Convertible Preferred
Stock, $.001 par value, 7,330,000
shares authorized, 7,330,000 shares issued
and outstanding stated at liquidation value,
net of related expenses 4,311,000 (4,311,000) -
Series B Redeemable Convertible Preferred Stock,
$.001 par value, 8,000,000 shares authorized,
8,000,000 shares issued and outstanding
stated at liquidation value, net of related
expenses 13,246,000 (13,246,000) -
Series C Redeemable Convertible Preferred Stock,
$.001 par value, 16,666,667 shares authorized,
16,666,667 shares issued and outstanding stated
at liquidation value, net of related expenses 81,478,000 (81,478,000) -
Stockholders' (deficit) equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 10,427,000 shares issued and
outstanding at March 31, 1999 and
54,350,031 shares outstanding on a
pro forma basis 10,000 4,000 40,000 103,000 (103,000) 54,000
Additional paid-in capital 24,185,000 40,996,000 209,793,000 274,974,000
Deferred compensation (11,854,000) (11,854,000)
Other comprehensive loss (218,000) (165,000) 165,000 (218,000)
Accumulated deficit (72,355,000) 438,000 (438,000) (72,355,000)
------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (60,232,000) 41,000,000 209,833,000 376,000 (376,000) 190,601,000
==============================================================================
Total liabilities and stockholders'
equity $53,889,000 $41,000,000 $110,223,000 $428,000 $ 514,000 $206,054,000
==============================================================================
</TABLE>
<PAGE>
STARMEDIA NETWORK, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
STARMEDIA KD SISTEMAS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues $ 1,541,000 $224,000 $(36,000)(a) $ 1,729,000
Operating expenses:
Product and technology development 3,562,000 58,000 24,000 (d) 3,644,000
Sales and marketing 9,657,000 106,000 (99,000)(a),(d) 9,664,000
General and administrative 2,410,000 38,000 (d) 2,448,000
Depreciation and amortization 467,000 481,000 (b),(d) 948,000
Stock-based compensation expense 1,417,000 1,417,000
-------------------------------------------------------------------
Total operating expenses 17,513,000 164,000 444,000 18,121,000
-------------------------------------------------------------------
Net (loss) income from operations $(15,972,000) 60,000 (480,000) (16,392,000)
Interest income, net 421,000 11,000 432,000
-------------------------------------------------------------------
Net (loss) income before income tax (15,551,000) 71,000 (480,000) $(15,960,000)
Provision for income tax -- (35,000) (35,000)
-------------------------------------------------------------------
Net (loss) income $(15,551,000) $ 36,000 $ (480,000) $(15,995,000)
-------------------------------------------------------------------
-------------------------------------------------------------------
Pro forma basic and diluted net loss per common share (c) $ (0.37) $ (0.38)
------------------------------------------------------------------
------------------------------------------------------------------
Number of shares used in computing pro forma basic
and diluted net loss per share (c) 42,406,167 42,406,167
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
<PAGE>
STARMEDIA NETWORK, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
STARMEDIA KD SISTEMAS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 5,329,000 $1,083,000 $ (100,000)(a) $ 6,312,000
Operating expenses:
Product and technology development 6,816,000 273,000 78,000 (d) 7,167,000
Sales and marketing 29,274,000 404,000 (342,000)(a),(d) 29,336,000
General and administrative 4,600,000 155,000 (d) 4,755,000
Depreciation and amortization 774,000 1,930,000 (b),(d) 2,704,000
Stock-based compensation expense 10,421,000 10,421,000
---------------------------------------------------------------
Total operating expenses 51,885,000 677,000 1,821,000 54,383,000
---------------------------------------------------------------
Net (loss) income from operations (46,556,000) 406,000 (1,921,000) (48,071,000)
Interest income, net 670,000 17,000 687,000
---------------------------------------------------------------
Net (loss) income before income tax (45,886,000) 423,000 (1,921,000) (47,420,000)
Provision for income tax - (83,000) (83,000)
---------------------------------------------------------------
Net (loss) income $(45,886,000) $ 340,000 $(1,921,000) $(47,467,000)
===============================================================
Pro forma basic and diluted net loss
per common share (c) $ (1.09) $ (1.12)
===============================================================
Number of shares used in computing pro forma
basic and diluted net loss per share (c) 42,198,667 42,198,667
===============================================================
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
For purposes of determining the pro forma effect of the KD Sistemas acquisition
on the balance sheet at March 31, 1999, the goodwill is calculated as follows:
Cash consideration paid $5,000,000
Deferred payments 890,000
Expenses of acquisition 250,000
----------
Total consideration 6,140,000
Fair value of net tangible assets acquired 376,000
----------
Goodwill $5,764,000
==========
For purposes of determining the pro forma effects of the KD Acquisition on the
statement of operations for the year ended December 31, 1998 and the
three months ended March, 31, 1999, the following pro forma adjustments have
been made:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
(a) Revenues $(100,000) $(36,000)
Sales and marketing (100,000) (36,000)
--------- --------
Net (loss) income from operations - -
========= ========
To eliminate the inter-company revenue of KD Sistemas earned from the Company.
(b) Amortization of goodwill $1,921,000 $480,000
========== ========
Amortization expense of the goodwill over 3 years.
(c) In conjunction with the Company's initial public offering, all outstanding shares
of Series A, B and C Redeemable Convertible Preferred Stock automatically
converted into Common Stock on a one for one basis. Accordingly, the effect of
the conversions have been reflected in the computation of pro forma basic
and diluted net loss per common share.
(d) Product and technology development $ 78,000 $ 24,000
Sales and marketing (242,000) (63,000)
General and amortization 155,000 38,000
Depreciation and amortization 9,000 1,000
--------- --------
- -
========= ========
</TABLE>
To reclass KD Sistemas historical operating expenses to conform to
StarMedia historical presentation.
<PAGE>
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 hereunto duly authorized.
STARMEDIA NETWORK, INC.
-----------------------------------
(Registrant)
By: /s/ Steven J. Heller
----------------------------
Name: Steven J. Heller
Title: Chief Financial Officer
Dated: June 25, 1999
<PAGE>
ARTHUR ANDERSEN S/C
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent Public Accountants, we hereby consent to the inclusion of
our report dated June 10, 1999, related to the financial statements of KD
Sistemas de Informacao Ltda. as of December 31, 1998, and of our report on
limited review dated June 10, 1999 of KD Sistemas de Informacao Ltda. as of
March 31, 1999 and 1998 in this 8-K.
It should be noted that we have not performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen S/C
Rio de Janeiro, Brazil
June 25, 1999.
