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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
1-15015
---------------------------------
(COMMISSION FILE NUMBER)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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STARMEDIA NETWORK, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 06-1461770
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
29 WEST 36TH STREET, NEW YORK, NY 10018
---------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 548-9600
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(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 March 31, 2000, there were 65,109,898 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
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<PAGE>
INDEX
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 2000
(unaudited) and December 31, 1999......................... 2
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999........ 3
Unaudited Condensed Consolidated Statement of Changes in
Stockholders' Equity for the three months ended March 31,
2000...................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999........ 5
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations.................................
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes In Securities and Use of Proceeds................... 26
Item 3. Defaults upon Senior Securities............................. 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
Item 7. Signatures.................................................. 26
</TABLE>
1
<PAGE>
FINANCIAL INFORMATION
PART I
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 230,032,000 $ 274,089,000
Account receivables, net.................................. 11,959,000 7,575,000
Other current assets...................................... 5,200,000 5,506,000
------------- -------------
Total current assets.................................... 247,191,000 287,170,000
------------- -------------
Fixed assets, net........................................... 41,077,000 23,160,000
Intangible assets, net...................................... 4,985,000 4,642,000
Goodwill, net............................................... 22,475,000 18,513,000
Other assets................................................ 30,741,000 22,586,000
------------- -------------
$ 346,469,000 $ 356,071,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,791,000 $ 7,535,000
Accrued expenses.......................................... 30,417,000 17,108,000
Loan payable, current portion............................. 1,657,000 1,602,000
Capital lease obligations, current portion................ 7,000 58,000
Deferred revenues......................................... 1,491,000 632,000
------------- -------------
Total current liabilities............................... 45,363,000 26,935,000
Long term liabilities....................................... 1,973,000 2,380,000
Deferred rent............................................... 1,448,000 395,000
Stockholders' equity:
Preferred Stock, authorized 10,000,000 shares:
Series 1999A Junior Non-Voting Convertible Preferred
Stock, $.001 par value, 2,300,000 shares authorized,
58,140 shares outstanding at March 31, 2000 and at
December 31, 1999
Common stock, $.001 par value, 200,000,000 shares
authorized 65,109,898 and 64,151,283 shares
outstanding at March 31, 2000 and December 31, 1999,
respectively.......................................... 65,000 64,000
Additional paid-in capital................................ 488,615,000 484,465,000
Deferred compensation..................................... (6,351,000) (8,461,000)
Other comprehensive loss.................................. (239,000) (421,000)
Accumulated deficit....................................... (184,405,000) (149,286,000)
------------- -------------
Total stockholders' equity.................................. 297,685,000 326,361,000
------------- -------------
Total liabilities and stockholders' equity.................. $ 346,469,000 $ 356,071,000
============= =============
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
2
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Revenues.................................................... $ 10,056,000 $ 1,594,000
Operating expenses:
Product & technology development.......................... 15,900,000 3,585,000
Sales & marketing......................................... 18,587,000 9,660,000
General & administration.................................. 8,075,000 2,454,000
Depreciation & amortization............................... 4,544,000 474,000
Stock-based compensation expense.......................... 1,212,000 1,417,000
------------ ------------
Total operating expenses.................................... 48,318,000 17,590,000
------------ ------------
Loss from operations........................................ (38,262,000) (15,996,000)
Interest income, net........................................ 3,143,000 421,000
------------ ------------
Net loss.................................................... $(35,119,000) $(15,575,000)
Preferred stock dividends and accretion..................... -- (2,541,000)
------------ ------------
Net loss available to common shareholders................... $(35,119,000) $(18,116,000)
============ ============
Basic and diluted net loss per common share................. $ (0.54) $ (1.47)
============ ============
Number of shares used in computing basic and diluted net
loss per share............................................ 64,639,789 12,327,032
============ ============
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
STARMEDIA NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------- ------------------- ADDITIONAL ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT COMPENSATION
---------- -------- -------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999....... 64,151,283 $64,000 58,140 $ -- $484,465,000 $(149,286,000) $(8,461,000)
Amortization of deferred
compensation, net of
cancellation..................... (898,000) 2,110,000
Exercise of common stock options... 887,091 1,000 1,686,000
Shares issued for acquisition of
Ola Turista...................... 71,524 3,362,000
Net loss for the period............ (35,119,000)
Translation adjustment.............
Comprehensive loss.................
---------- ------- ------ ---- ------------ ------------- -----------
Balance at March 31, 2000.......... 65,109,898 $65,000 58,140 $ -- $488,615,000 $(184,405,000) $(6,351,000)
========== ======= ====== ==== ============ ============= ===========
<CAPTION>
OTHER
COMPREHENSIVE
LOSS TOTAL
------------- ------------
<S> <C> <C>
Balance at December 31, 1999....... $(421,000) $326,361,000
Amortization of deferred
compensation, net of
cancellation..................... 1,212,000
Exercise of common stock options... 1,687,000
Shares issued for acquisition of
Ola Turista...................... 3,362,000
Net loss for the period............ (35,119,000)
Translation adjustment............. 182,000 182,000
------------
Comprehensive loss................. (34,937,000)
--------- ------------
Balance at March 31, 2000.......... $(239,000) $297,685,000
========= ============
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Operating activities
Net loss.................................................... $(35,119,000) $(15,575,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 4,544,000 474,000
Provision for bad debts................................... 19,000 81,000
Amortization of deferred compensation..................... 1,212,000 1,417,000
Deferred rent............................................. 1,053,000 4,000
Changes in operating assets and liabilities:
Accounts receivable..................................... (4,299,000) (599,000)
Other assets............................................ (2,032,000) (1,841,000)
Accounts payable and accrued expenses................... 16,575,000 3,902,000
Deferred revenue........................................ 798,000 (224,000)
------------ ------------
Net cash used in operating activities................. (17,249,000) (12,361,000)
Investing activities:
Purchases of fixed assets................................. (19,692,000) (2,491,000)
Intangible assets......................................... (763,000) (344,000)
Other assets.............................................. (5,712,000) --
Cash paid for acquisitions................................ (2,091,000) (882,000)
------------ ------------
Net cash used in investing activities................. (28,258,000) (3,717,000)
Financing activities:
Issuance of common stock.................................. 1,687,000 66,000
Proceeds from issuance of long term debt.................. -- 3,752,000
Repayment of convertible subordinated notes............... -- (110,000)
Payments under long term debt............................. (352,000) --
Payments under capital lease obligation................... (51,000) (54,000)
------------ ------------
Net cash provided by financing activities............. 1,284,000 3,654,000
Effect of exchange rate changes on cash and cash
equivalents............................................... 166,000 (138,000)
------------ ------------
Net decrease in cash........................................ (44,057,000) (12,552,000)
Cash at beginning of period................................. 274,089,000 53,147,000
------------ ------------
Cash at end of period....................................... $230,032,000 $ 40,585,000
============ ============
Supplemental disclosure of cash flow information
Interest paid............................................... $ 310,000 $ --
============ ============
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
StarMedia Network, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All intercompany account balances and transactions have been
eliminated in consolidation.
The Company is the leading online network targeting Spanish- and
Portuguese-speaking markets worldwide. The Company's network consists of
interest-specific channels, extensive Web-based community features,
sophisticated search capabilities and access to online shopping in Spanish and
Portuguese. These channels cover topics of interest to Spanish- and
Portuguese-speaking markets 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.
The balance sheet at December 31, 1999 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 annual
report on Form 10-K for the year ended December 31, 1999.
The accompanying March 1999 condensed consolidated financial statements have
been restated to reflect the May 1999 merger of Was Net, S.L and the
September 1999 merger with Webcast Solutions, Inc., which were accounted for as
poolings-of-interest.
2. ACQUISITIONS
OLA TURISTA LTDA.
In February 2000, the Company acquired all of the issued and outstanding
shares of Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ,
leading culture and entertainment guides in the cities of Sao Paulo and Rio de
Janeiro, in exchange for 71,524 shares of its common stock and $2,000,000 in
cash. Ola Turista's portals provide users in the Sao Paulo and Rio de Janeiro
metro areas searchable listings of restaurants, theaters, nightclubs, cinemas,
and sports events. This acquisition has been accounted for under the purchase
method of accounting.
The following pro forma unaudited consolidated results of operations assumes
the acquisition of KD Sistemas de Informacao Ltda. ("KD Sistemas") in
April 1999 and the acquisition of PageCell International Holdings, Inc.
("PageCell International") in September 1999 occurred as of January 1, 1999. The
results of KD Sistemas and PageCell are included in the historical results of
operations for the quarter ended March 31, 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999
------------------
<S> <C>
Revenues................................................... $ 2,224,000
Net loss................................................... $(15,627,000)
Net loss available for common shareholders................. $(18,168,000)
Basic and diluted net loss per share....................... $ (1.45)
</TABLE>
6
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
2. ACQUISITIONS (CONTINUED)
The effects of the March 1999 acquisition of Achei Internet
Promotion, Ltda, the June 1999 acquisition of Servicios Interactivos Ltda, the
November 1999 acquisition of Paisas.com and February 2000 acquisition of Ola
Turista are not included in the pro forma unaudited consolidated results of
operations as they are not material.
3. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currency of the Company's active subsidiaries in Argentina,
Brazil, Chile, Mexico, Spain and Colombia 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' equity. The functional currency of
the Company's subsidiaries in highly inflationary economies, 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 nonmonetary assets and liabilities are translated at historical rates.
Operations are generally translated at the weighted average exchange rate in
effect during the period. The resulting foreign exchange gains and losses are
recorded in the consolidated statement of operations. Revenues, net loss and
total assets of the Company's foreign subsidiaries were $4,900,000, $10,500,000
and $33,000,000, respectively, as of and for the period ended March 31, 2000.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
In February, 2000, the Company issued 71,524 shares of its common stock in
connection with its acquisition of Ola Turista, valued at approximately
$3,362,000.
During the three months ended March 31, 2000, the Company issued 887,091
shares of its common stock for $1,687,000 in connection with the exercise of
stock options.
7
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
5. LOSS PER SHARE
The following tables sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Numerator:
Net loss......................................... $(35,119,000) $(15,575,000)
Preferred stock dividends and accretion.......... -- (2,541,000)
------------ ------------
Numerator for basic and diluted loss per
share--net loss available for common
stockholders................................... $(35,119,000) $(18,116,000)
Denominator:
Denominator for basic and dilutive loss per
share--weighted average shares................. 64,639,789 12,327,032
------------ ------------
Basic and diluted net loss per share............. $ (0.54) $ (1.47)
------------ ------------
</TABLE>
Diluted net loss per share does not include the effect of options to
purchase 16,033,136 and 8,229,100 shares of common stock at March 31, 2000 and
1999, respectively.
6. STOCK OPTIONS
In connection with the granting of stock options in 1999 and 1998 and the
exchange of non-qualified options to incentive stock options, the Company
recorded deferred compensation of approximately $25,282,000. Deferred
compensation is adjusted quarterly for cancellations and is being amortized for
financial reporting purposes over the vesting period of the options. The amount
recognized as expense during the three month period ended March 31, 2000 was
approximately $1,212,000.
7. LONG-TERM DEBT
The Company has a $12 million credit line for the acquisition of computer
equipment and furniture and fixtures. At March 31, 2000, approximately
$3.6 million was outstanding under the credit line. Amounts outstanding are
payable in monthly installments of principal and interest of approximately
$170,000, bear interest at approximately 13.6% per annum and are secured by
certain of the Company's computer equipment and furniture and fixtures. The
credit line requires the Company to maintain at least $10,000,000 in cash and
cash equivalents.
8. RELATED PARTY TRANSACTIONS
Revenues for the three months ended March 31, 2000 include approximately
$698,000 from a related party.
9. COMPREHENSIVE LOSS
Total comprehensive loss was $34,937,000 and $15,800,000 for the three month
periods ended March 31, 2000 and 1999.
8
<PAGE>
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
10. SUBSEQUENT EVENT
On April 6, 2000, the Company acquired all of the outstanding equity
interests of Adnet, S. de R.L. de C.V., a leading search portal and Mexico's
largest web directory in a transaction pursuant to a Stock Purchase Agreement,
dated as of January 31, 2000. The Company paid $5.0 million in cash and issued
469,577 shares of common stock. Pursuant to the Agreement, the Company is
obligated to pay additional consideration for Adnet in the form of common stock
over the next five years subject to Adnet meeting certain revenue targets
specified in the Agreement.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS REPORT.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
AND FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW
UNDER THE CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH
HEREIN.
OVERVIEW
StarMedia Network, Inc. was incorporated in Delaware in March 1996. We
commenced operations in September 1996 and launched the StarMedia network in
December 1996. In May 1999, we completed the initial public offering of our
common stock for aggregate net proceeds of approximately $110.4 million and in
October 1999 we completed a follow-on public offering of our common stock for
aggregate net proceeds of approximately $192.1 million.
StarMedia Network is the leading Internet media company targeting Latin
America and other Spanish- and Portuguese-speaking markets worldwide. The
Company is committed to providing Spanish and Portuguese speakers with a
complete selection of services and products that take full advantage of Internet
technologies. StarMedia Network is the owner of 10 leading brands:
StarMedia.com, LatinRed, OpenChile, Panoramas.cl, Zeek!, Cade?, AdNet, Guia SP,
Guia RJ, and Paisas.com. It also operates StarMedia Broadband, StarMedia
Network's broadband services arm, and StarMedia Mobile, the Company's wireless
division. Our page views have grown to 2.1 billion and our active e-mail
accounts have reached approximately 3.3 million for the quarter ended March 31,
2000.
In February 2000, the Company acquired all of the issued and outstanding
shares of Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ,
leading culture and entertainment guides in the cities of Sao Paulo and Rio de
Janeiro in exchange for 71,524 shares of its common stock and $2,000,000 in
cash. Ola Turista's portals provide users in the Sao Paulo and Rio de Janeiro
metro areas searchable listings of restaurants, theaters, nightclubs, cinemas,
and sports events. This acquisition has been accounted for under the purchase
method of accounting.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Revenues increased to $10.1 million for the three months ended March 31,
2000 from $1.6 million for the three months ended March 31, 1999. The increase
in revenues was primarily due to an increase in the volume of advertising
impressions and sponsorships sold. During the three months ended March 31, 2000,
we continued to:
- expand our sales force;
- increase the number of impressions available on our network by adding
channels;
- increase our marketing efforts; and
- expand through acquisitions.
In the three months ended March 31, 2000, we derived approximately
$1.4 million, or 14% of total revenues, from reciprocal advertising
arrangements. We do not receive any cash payments for these arrangements.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
For the three months ended March 31, 2000, product and technology expenses
increased to $15.9 million, or 157% of total revenues, from $3.6 million, or
225% of total revenues, for the three months ended March 31, 1999. The increase
was primarily due to an increase of approximately $3.7 million related to
staffing levels; approximately $3.1 million to enhance the content and features
of the StarMedia network and approximately $1.1 million for additional costs of
consultants, contracts, and fees.
We believe that increased investment in new and enhanced features and
technology is critical to attaining our strategic objectives and remaining
competitive. Accordingly, we intend to continue recruiting and hiring
experienced product and technology personnel and to make additional investments
in product development and technological infrastructure. We expect that product
expenditures will continue to increase in absolute dollars in future periods.
SALES AND MARKETING
Sales and marketing expenses increased to $18.6 million, or 184% of total
revenues, for the three months ended March 31, 2000 from $9.7 million, or 606%
of total revenues, for the three months ended March 31, 1999. The increase in
sales and marketing expenses was primarily attributable to higher personnel
expenses, including sales commissions, of approximately $4.2 million, expansion
of our advertising, public relations and other promotional expenditures related
to an increase in our branding campaign of approximately $3.8 million. We expect
sales and marketing expenses will continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $8.1 million, or 80% of
total revenues, for the three months ended March 31, 2000, from $2.5 million, or
153% of total revenues, for the three months ended March 31, 1999. The increase
in general and administrative expenses was primarily due to increased rental
costs and office-related costs of approximately $1.6 million; increased salaries
and related expenses associated with the hiring of additional personnel of
approximately $1.4 million and additional taxes and insurance charges of
approximately $1.0 million.
11
<PAGE>
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 $4.5 million, or 45% of
total revenues, for the three months ended March 31, 2000 from $474,000, or 30%
of total revenues, for the three months ended March 31, 1999. The dollar
increases were primarily attributable to the increase in fixed assets of
approximately $21.4 million during 1999 and $2.6 million of goodwill
amortization related to acquisitions in 1999 and 2000. 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.
STOCK-BASED COMPENSATION EXPENSE
We recorded additional deferred compensation of $1.2 million during the
three months ended March 31, 2000. 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 generally 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 to $3.1 million for the three months ended March 31,
2000 from $421,000 for the three months ended March 31, 1999. Interest income,
net increased as a result of capital raised from the issuance of 3.7 million
shares of preferred stock to a group of third party investors in April and
May 1999, the initial public offering of shares of our common stock in May 1999
and the follow-on public offering of shares of our common stock in
October 1999.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have primarily financed our operations through the sale of our
equity securities. At March 31, 2000, we had $230.0 million in cash and cash
equivalents, a decrease of $44.1 million from December 31, 1999.
During the three months ended March 31, 2000, we used $17.2 million in
operating activities, mostly related to our $35.1 million loss during the
period, offset by an increase of $16.5 million of accounts payable and other
accrued expenses, and by non-cash activities such as $4.5 million in
depreciation and amortization and $1.2 million in charges related to stock
option grants.
For the three months ended March 31, 2000, we used $28.3 million in
investing activities, including $19.7 million for fixed assets, and
approximately $2.0 million in connection with an acquisition.
Net cash provided by financing activities were $1.3 million and
$3.7 million for the three months ended March 31, 2000 and 1999, respectively.
Net cash provided by financing activities during the three months ended
March 31, 2000 consisted primarily of proceeds from the exercise of stock
options. Net cash provided by financing activities during the three months ended
March 31, 1999 consisted primarily of proceeds from issuance of long term debt.
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 systems
and technical infrastructure.
12
<PAGE>
We have a $12.0 million credit line for the acquisition of computer
equipment and furniture and fixtures. At March 31, 2000, approximately
$3.6 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 13.6% 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 Global Network Services,
formerly IBM Global Network, under which we can offer Internet access services
in Argentina, Brazil, Chile, Colombia and Mexico. Under the agreement, we were
obligated to pay AT&T certain minimum amounts.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and plan to expand our
sales and marketing programs and conduct more aggressive brand promotions.
We believe that our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. If cash generated from operations is insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or establish an additional credit facility. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. The incurrence of additional 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.
INFLATION AND FOREIGN CURRENCY EXCHANGE RATE LOSSES
To date, our results of operations have not been impacted materially by
inflation in the United States 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. Revenues derived from foreign
currencies, however, 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. We may, however, choose to do so in
the future. We may not be able to do this successfully. Accordingly, we may
experience economic loss and a negative impact on earnings and equity as a
result of foreign currency exchange rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standard for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, the FASB
issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of Effective Date of FASB Statement No. 133", which deferred the
effective date of SFAS 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. The statement is not expected to affect us as we currently
do not have any derivative instruments or hedging activities.
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IMPACT OF YEAR 2000
The Company has previously discussed the nature of its plans related to Year
2000 compliance. As a result of those planning efforts, the Company experienced
no significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The costs associated with Year 2000
compliance were nominal. The Company is not aware of any material problems
resulting from Year 2000 issues, whether with its internal systems, or the
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year to ensure that any latent Year 2000 matters that may arise are
addressed properly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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 March 31, 2000, we had an accumulated
deficit of approximately $184.4 million. We expect to continue to incur
significant losses for the foreseeable future. Although our revenues have grown
in recent quarters, our expenses have grown even faster and
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we expect to increase our spending significantly. Accordingly, we will need to
generate significant revenues to achieve profitability. We may not be able to do
so.
WE HAVE DERIVED A PORTION OF OUR REVENUES FROM RECIPROCAL ADVERTISING
AGREEMENTS, WHICH DO NOT GENERATE CASH REVENUE.
We derive a portion of our revenues from reciprocal advertising arrangements
under which we exchange advertising space on our network predominantly for
advertising space on television and radio stations, rather than cash payments.
In the three months ended March 31, 2000, we derived approximately
$1.4 million, or 14% of revenues, from these arrangements. We expect that
revenues from reciprocal advertising arrangements will continue to account for a
portion of our revenues in the foreseeable future. Reciprocal advertising
arrangements do not generate any cash revenues.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Our future revenues and results of operations may significantly fluctuate
due to a combination of factors, including:
- growth and acceptance of the Internet, particularly in Latin America;
- our ability to attract and retain users;
- demand for advertising on the Internet in general and on our network in
particular;
- our ability to upgrade and develop our systems and infrastructure;
- technical difficulties that users may experience on our network;
- technical difficulties or system downtime resulting from the developing-
telecommunications infrastructure in Latin America;
- competition in our markets;
- foreign currency exchange rates that affect our international operations;
and
- general economic conditions, particularly in Latin America.
Accordingly, you should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of our future performance. It is possible
that in future periods our results of operations may be below the expectations
of public market analysts and investors. This could cause the trading price of
our common stock to decline.
OUR OPERATING RESULTS MAY ALSO FLUCTUATE DUE TO SEASONAL FACTORS.
The level of use on our network is highly seasonal. This may cause
fluctuations in our revenues and operating results. Visitor traffic on our
network has historically been significantly lower during the first calendar
quarter of the year because it includes the summer months in much of Latin
America during which:
- our target audience tends to take extended vacations; and
- schools and universities are generally closed.
As a result, advertisers have historically spent less in the first calendar
quarter. We believe that these seasonal trends may continue to affect our
results of operations. If our expenses increase during these periods, we may not
generate sufficient revenue to offset these expenses.
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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.
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;
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- political instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative growth;
- imposition of trade barriers; and
- wage and price controls.
We have no control over these matters. Volatility resulting from these
matters may decrease Internet availability, create uncertainty regarding our
operating climate and adversely affect our customers' advertising budgets, all
of which may adversely impact our business.
CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA MAY
ADVERSELY AFFECT OUR BUSINESS.
The currencies of many countries in Latin America have experienced
substantial depreciation and volatility. The currency fluctuations, as well as
high interest rates, inflation and high unemployment, have materially and
adversely affected the economies of these countries. Poor general economic
conditions in Latin American countries may cause our customers to reduce their
advertising spending, which could adversely impact our business and could cause
our revenue to decline unexpectedly.
WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF LOCAL LATIN AMERICAN CURRENCIES
DEPRECIATE RELATIVE TO THE U.S. DOLLAR.
Our reporting currency is the U.S. dollar. In a number of cases, however,
customers in Latin America may be billed in local currencies. Our accounts
receivable from these customers will decline in value if the local currencies
depreciate relative to the U.S. dollar. To date, we have not tried to reduce our
exposure to exchange rate fluctuations by using hedging transactions. Although
we may enter into hedging transactions in the future, we may not be able to do
so successfully. In addition, our currency exchange losses may be magnified if
we become subject to exchange control regulations restricting our ability to
convert local currencies into U.S. dollars.
IF INTERNET USE IN SPANISH- AND PORTUGUESE-SPEAKING MARKETS DOES NOT GROW, OUR
BUSINESS WILL SUFFER.
The Internet in Spanish- and Portuguese-speaking markets is in an early
stage of development. Our future success depends on the continued growth of the
Internet in these markets. Our business, financial condition and results of
operations will be materially and adversely affected if Internet usage in these
markets does not continue to grow or grows more slowly than we anticipate.
Internet usage in these markets may be inhibited for a number of reasons,
including:
- the cost of Internet access;
- concerns about security, reliability, and privacy;
- ease of use; and
- quality of service.
UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE MAY LIMIT THE GROWTH OF THE
INTERNET IN LATIN AMERICA AND ADVERSELY AFFECT OUR BUSINESS.
Access to the Internet requires a relatively advanced telecommunications
infrastructure. The telecommunications infrastructure in many parts of Latin
America is not as well-developed as in the
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United States or Europe. The quality and continued development of the
telecommunications infrastructure in Latin America will have a substantial
impact on our ability to deliver our services and on the market acceptance of
the Internet in Latin America in general. If further improvements to the Latin
American telecommunications infrastructure are not made, the Internet will not
gain broad market acceptance in Latin America. If access to the Internet in
Latin America does not continue to grow or grows more slowly than we anticipate,
our business, financial condition and results of operations will be materially
and adversely affected.
HIGH COST OF INTERNET ACCESS MAY LIMIT THE GROWTH OF THE INTERNET IN LATIN
AMERICA AND IMPEDE OUR GROWTH.
Each country in Latin America has its own telephone rate structure which, if
too expensive, may cause consumers to be less likely to access and transact
business over the Internet. Although rates charged by Internet service providers
and local telephone companies have been reduced recently in some countries, we
do not know whether this trend will continue. Unfavorable rate developments
could decrease our visitor traffic and our ability to derive revenues from
transactions over the Internet. This could have a material adverse effect on our
business, financial condition and results of operations.
OUR PAN-REGIONAL APPROACH TO CONTENT DELIVERY MAY NOT BE APPEALING TO OUR USERS.
Our target markets are made up of a number of diverse regions that differ
historically, culturally, economically and politically. We generally use a
pan-regional approach to community development and to advertisements. Users,
however, may prefer content and community features which are specifically
created for a local audience using a strictly localized approach over our
pan-regional approach. If users do not find the pan-regional content on our
network appealing, they will decrease in number and advertisers will find our
network an unattractive medium on which to advertise.
WE MAY NOT BE ABLE TO DEVELOP OUR BRANDS AND ATTRACT USERS TO OUR NETWORK.
Maintaining our brands is critical to our ability to expand our user base
and our revenues. We believe that the importance of brand recognition will
increase as the number of Internet sites in our target markets grows. In order
to attract and retain Internet users, advertisers and electronic commerce
partners, we intend to increase substantially our expenditures for creating and
maintaining brand loyalty.
Our success in promoting and enhancing our brands will also depend on our
success in providing high quality content, features and functionality. If we
fail to promote our brands successfully or if visitors to our network or
advertisers do not perceive our services to be of high quality, the value of our
brands could be diminished. This could have a material and adverse effect on our
business, financial condition and results of operations.
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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,
comprises a significant portion 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 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 the three months ended March 31, 2000, our top 5 advertisers accounted
for approximately 29% of our total revenues. Our top 10 advertisers accounted
for approximately 41% 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. Although we expect our advertising sales department to grow,
it can take a relatively long period of time before new sales personnel become
productive.
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WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS.
We have recently experienced a period of rapid growth. This has placed a
significant strain on our managerial, operational and financial resources. To
accommodate this growth, we must implement new or upgraded operating and
financial systems, procedures and controls throughout many different locations.
We may not succeed with these efforts. Our failure to expand and integrate these
areas in an efficient manner could cause our expenses to grow, our revenues to
decline or grow more slowly than expected and could otherwise have a material
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL THAT ARE IN HIGH DEMAND.
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of our
Chairman and Chief Executive Officer, Fernando J. Espuelas, and our President,
Jack C. Chen. The loss of the services of either executive officer or any of our
key management, sales or technical personnel could have a material adverse
effect on our business, financial condition and results of operations. In
addition, our success is largely dependent on our ability to hire highly
qualified managerial, sales and technical personnel. These individuals are in
high demand and we may not be able to attract the staff we need. The
difficulties and costs in connection with our personnel growth are compounded by
the fact that many of our operations are internationally based.
OUR JOINT VENTURES, ACQUISITIONS AND ALLIANCES MAY STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND MAY BE DISRUPTIVE TO OUR BUSINESS.
In the past, we have acquired or developed alliances or joint ventures with
complementary businesses, technologies, services or products. In particular,
during 1999, we made 7 acquisitions. Acquisitions could result in a number of
financial consequences, including:
- potentially dilutive issuances of equity securities;
- large non-recurring write-offs;
- reduced cash balances and related interest income;
- higher fixed expenses which require a higher level of revenues to maintain
gross margins;
- the incurrence of debt and contingent liabilities; and
- amortization expenses related to goodwill and other intangible assets.
Furthermore, acquisitions involve numerous operational risks, including:
- difficulties in the integration of operations, personnel, technologies,
products and the information systems of the acquired companies;
- diversion of management's attention from other business concerns;
- diversion of resources from our existing businesses, products or
technologies;
- risks of entering geographic and business markets in which we have no or
limited prior experience; and
- potential loss of key employees of acquired organizations.
We could have difficulty in effectively assimilating and integrating these,
or any future joint ventures, acquisitions or alliances, into our operations.
Any difficulties in this process could disrupt our
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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 Spanish- and Portuguese-speaking people in general. Competition for
visitors, advertisers and electronic commerce partners is intense and is
expected to increase significantly in the future because there are no
substantial barriers to entry in our market.
Increased competition could result in:
- lower advertising rates;
- price reductions and lower profit margins;
- loss of visitors;
- reduced page views; or
- loss of market share.
Any one of these could materially and adversely affect our business,
financial condition and results of operations.
In addition, our competitors may develop content that is better than ours or
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.
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WE RELY ON THIRD PARTIES FOR OUR CONTENT WHO MAY MAKE THEIR CONTENT AVAILABLE TO
OUR COMPETITORS.
We constantly attempt to determine what content, features and functionality
our target audience wants. We rely to a large extent on third parties for our
content, much of which is easily available from other sources. If other networks
present the same or similar content in a superior manner, it would adversely
affect our visitor traffic.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH CONTENT
PROVIDERS, ELECTRONIC COMMERCE MERCHANTS AND TECHNOLOGY PROVIDERS, WE MAY NOT BE
ABLE TO ATTRACT AND RETAIN USERS.
We have focused on establishing relationships with leading content
providers, electronic commerce merchants, and technology and infrastructure
providers. Our business depends extensively on these relationships. Because most
of our agreements with these third parties are not exclusive, our competitors
may seek to use the same partners as we do and attempt to adversely impact our
relationships with our partners. We might not be able to maintain these
relationships or replace them on financially attractive terms.
If the parties with which we have these relationships do not adequately
perform their obligations, reduce their activities with us, choose to compete
with us or provide their services to a competitor, we may have more difficulty
attracting and maintaining visitors to our network and our business, financial
condition and results of operations could be materially and adversely affected.
Also, we intend to actively seek additional relationships in the future. Our
efforts in this regard may not be successful.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE
UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED
VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION.
In the past, we have experienced:
- system disruptions;
- inaccessibility of our network;
- long response times;
- impaired quality; and
- loss of important reporting data.
Although we are in the process of improving our network, we may not be
successful in implementing these measures. If we experience delays and
interruptions, visitor traffic may decrease and our brand could be adversely
affected. Because our revenues depend on the number of individuals who use our
network, our business may suffer if our improvement efforts are unsuccessful.
We maintain our central production servers at the New Jersey data center of
Exodus Communications. We maintain regional network operating centers in Brazil
and Argentina. A failure by Exodus to protect its systems against damage from
fire, hurricanes, power loss, telecommunications failure, break-ins or other
events, could have a material adverse effect on our business, financial
condition and results of operations.
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CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY
OF INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR NETWORK AND IMPEDE OUR
GROWTH.
A significant barrier to electronic commerce and confidential communications
over the Internet has been the need for security. Internet usage could decline
if any well-publicized compromise of security occurred. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Unauthorized persons could attempt to
penetrate our network security. If successful, they could misappropriate
proprietary information or cause interruptions in our services. As a result, we
may be required to expend capital and resources to protect against or to
alleviate these problems. Security breaches could have a material adverse effect
on our business, financial condition and results of operations.
COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY
ADVERSELY AFFECT OUR BUSINESS.
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
RISKS RELATED TO LEGAL UNCERTAINTY
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL
UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
To date, governmental regulations have not materially restricted use of the
Internet in our markets. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. The growth of the
Internet may also be significantly slowed. This could delay growth in demand for
our network and limit the growth of our revenues.
In addition to new laws and regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may cover issues which include:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- pornography; and
- other claims based on the nature and content of Internet materials.
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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 throughout the
world, we are subject to the laws and the court systems of many jurisdictions.
We may become subject to claims based on foreign jurisdictions for violations of
their laws. In addition, these laws may be changed or new laws may be enacted in
the future. International litigation is often expensive, time consuming and
distracting. Accordingly, any of the foregoing could have a material adverse
effect on our business, financial condition and results of operations.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY
AFFECT OUR BUSINESS.
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO
SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS.
We cannot be certain that our products do not or will not infringe valid
patents, copyrights or other intellectual property rights held by third parties.
We may be subject to legal proceedings and claims from time to time relating to
the intellectual property of others in the ordinary course of our business. We
may incur substantial expenses in defending against these third-party
infringement claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK.
The laws in our target markets relating to the liability of companies which
provide online services, like ours, for activities of their visitors are
currently unsettled. Claims have been made against online service providers and
networks in the past for defamation, negligence, copyright or trademark
infringement, obscenity, personal injury or other theories based on the nature
and content of information that was posted online by their visitors. We could be
subject to similar claims and incur significant costs in their defense. In
addition, we could be exposed to liability for the selection of listings that
may be accessible through our network or through content and materials that our
visitors may post in classifieds, message boards, chat rooms or other
interactive services. It is also possible that if any information provided
through our services contains errors, third parties could make claims against us
for losses incurred in reliance on the information. We offer Web-based e-mail
services, which expose us to potential liabilities or claims resulting from:
- unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
24
<PAGE>
- 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 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 stock market has from time to time experienced significant price and
volume fluctuations that have affected the market prices for the securities of
technology companies, particularly Internet companies. As a result, investors in
our common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION
WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies in our industry have been
subject to this type of litigation in the past. We may also become involved in
this type of litigation. Litigation is often expensive and diverts management's
attention and resources, which could have a material adverse effect upon our
business, financial condition and results of operations.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE.
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could suffer.
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS.
Our directors, executive officers and affiliates currently beneficially own
a substantial percentage 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
25
<PAGE>
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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights, and a variety of
claims arising in connection with the Company's email, message boards, and other
communications and community features, such as claims alleging defamation and
invasion of privacy. The Company is not currently aware of any legal proceedings
or claims that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
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.
<TABLE>
<S> <C> <C>
Date: May 12, 2000 STARMEDIA NETWORK, INC.
By: /s/ STEVEN J. HELLER
-----------------------------------------
Steven J. Heller
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL OFFICER)
</TABLE>
26
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<PAGE>
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<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> MAR-31-2000
<PERIOD-END> DEC-31-2000
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