-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UesXG7UyHc0NyKABxmOrqENNjz3jpF9OVVzznd1eL+EdilSYUXI6OiCVhXq79ybH /B8y6T/WhbEvPvWX0lxybg== 0000912057-00-039495.txt : 20020722 0000912057-00-039495.hdr.sgml : 20020722 20000829162400 ACCESSION NUMBER: 0000912057-00-039495 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000829 DATE AS OF CHANGE: 20020720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARMEDIA NETWORK INC CENTRAL INDEX KEY: 0001057334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 061461770 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-31138 FILM NUMBER: 00712754 BUSINESS ADDRESS: STREET 1: 29 WEST 36TH STREET 5TH FL CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125489600 MAIL ADDRESS: STREET 1: 29 WEST 36TH STREET FIFTH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 10-Q/A 1 a10-qa.txt 10-Q/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
1-15015 (COMMISSION FILE NUMBER) FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------ STARMEDIA NETWORK, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 06-1461770 (State or Other (I.R.S. Employer Jurisdiction of Incorporation) Identification Number)
75 VARICK STREET, NEW YORK, NY 10013 (Address of Principal Executive Offices) (Zip Code) (212) 905-8200 (Registrant's Telephone Number, Including Area Code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ No / / As of June 30, 2000, there were 65,818,853 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Amendment is filed to correct Item 4 of the Form 10-Q filed August 14, 2000 by StarMedia with respect to its fiscal quarter ended June 30, 2000. The entire item as corrected, appears below. No other provisions of the Form 10-Q for the fiscal quarter ended June 30, 2000 are amended hereby. 1 INDEX STARMEDIA NETWORK, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999........................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2000 and the three months ended June 30, 1999 (unaudited) and Condensed Consolidated Statement of Operations for the six months ended June 30, 1999......................................... 4 Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2000........................................................ 5 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 (unaudited) and 1999........................................................ 6 Notes to Unaudited Condensed Consolidated Financial Statements.................................................. 7 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 10 Quantitative and Qualitative Disclosures About Market Item 3. Risk........................................................ 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 27 Item 2. Changes In Securities and Use of Proceeds................... 27 Item 3. Defaults upon Senior Securities............................. 27 Item 4. Submission of Matters to a Vote of Security Holders......... 27 Item 5. Other Information........................................... 27 Item 6. Exhibits and Reports on Form 8-K............................ 27 Item 7. Signatures.................................................. 28
2 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash and cash equivalents................................. $169,878,000 $274,089,000 Account receivables, net.................................. 12,315,000 7,575,000 Other current assets...................................... 15,656,000 5,506,000 ------------ ------------ Total current assets...................................... 197,849,000 287,170,000 Fixed assets, net........................................... 51,423,000 23,160,000 Intangible assets, net...................................... 4,974,000 4,642,000 Goodwill, net............................................... 41,777,000 18,513,000 Other assets................................................ 35,475,000 22,586,000 ------------ ------------ $331,498,000 $356,071,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 14,961,000 $ 7,535,000 Accrued expenses.......................................... 38,744,000 17,108,000 Loan payable, current portion............................. 1,715,000 1,602,000 Capital lease obligations, current portion................ -- 58,000 Deferred revenues......................................... 1,273,000 632,000 ------------ ------------ Total current liabilities................................. 56,693,000 26,935,000 Long term liabilities: Loan Payable long term.................................... 1,515,000 2,380,000 Deferred rent............................................. 2,546,000 395,000 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 June 30, 2000 and December 31, 1999.................................................... Common stock, $.001 par value, 200,000,000 shares authorized shares 65,818,853 and 64,151,283 shares outstanding at June 30, 2000 and December 31, 1999, respectively............................................ 66,000 64,000 Additional paid-in capital 504,958,000 484,465,000 Deferred compensation..................................... (5,136,000) (8,461,000) Other comprehensive loss.................................. (758,000) (421,000) Accumulated deficit....................................... (228,386,000) (149,286,000) ------------ ------------ Total stockholders' equity.................................. 270,744,000 326,361,000 ============ ============ Total liabilities and stockholders' equity.................. $331,498,000 $356,071,000 ============ ============
See accompanying notes to Unaudited Condensed Consolidated Financial Statements. 3 STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ----------------------------- JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 ------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) Revenues............................... $ 13,764,000 $ 3,880,000 $ 23,820,000 $ 5,474,000 Operating expenses: Product & technology development..... 19,458,000 6,434,000 35,358,000 10,019,000 Sales & marketing.................... 22,274,000 13,266,000 40,861,000 22,926,000 General & administration............. 7,702,000 3,188,000 15,777,000 5,642,000 Non-recurring merger charges......... -- 1,023,000 -- 1,023,000 Depreciation & amortization.......... 7,289,000 1,170,000 11,833,000 1,644,000 Stock-based compensation expense..... 1,108,000 1,595,000 2,320,000 3,012,000 ------------ ------------ ------------ ------------ Total operating expenses............. 57,831,000 26,676,000 106,149,000 44,266,000 ------------ ------------ ------------ ------------ Loss from operations................... (44,067,000) (22,796,000) (82,329,000) (38,792,000) Interest income........................ 3,330,000 945,000 6,793,000 1,404,000 Interest expense....................... (364,000) (231,000) (684,000) (269,000) Loss in unconsolidated subsidiary...... (2,500,000) -- (2,500,000) -- Other expenses......................... (373,000) -- (373,000) -- ------------ ------------ ------------ ------------ Net loss before provision for income taxes................................ (43,974,000) (22,082,000) (79,093,000) (37,657,000) Provision for income taxes............. (7,000) -- (7,000) ------------ ------------ ------------ ------------ Net loss............................... (43,981,000) (22,082,000) (79,100,000) (37,657,000) Preferred stock dividends and accretion............................ -- (1,725,000) -- (4,266,000) ------------ ------------ ------------ ------------ Net loss available to common shareholders......................... $(43,981,000) $(23,807,000) $(79,100,000) $(41,923,000) ============ ============ ============ ============ Basic and diluted net loss per common share................................ $ (0.67) $ (0.76) $ (1.21) $ (1.91) ============ ============ ============ ============ Number of shares used in computing basic and diluted net loss per share................................ 65,706,679 31,187,100 65,173,234 21,927,102 ============ ============ ============ ============
See accompanying notes to Unaudited Condensed Consolidated Financial Statements. 4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000
COMMON STOCK PREFERRED STOCK ADDITIONAL --------------------- -------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ---------- -------- -------- --------- ------------ ------------- Balance at December 31, 1999................... 64,151,283 $64,000 58,140 $ -- $484,465,000 $(149,286,000) Deferred compensation related to stock options, net of cancellations......................... (1,005,000) Amortization of deferred compensation.......... Exercise of common stock options............... 1,073,153 1,000 2,410,000 Employee Stock Purchase Plan................... 53,316 -- 728,000 Shares issued for acquisition of Ola Turista... 71,524 3,362,000 Shares issued for acquisition of Adnet......... 469,577 1,000 14,998,000 Net loss for the period........................ (79,100,000) Translation adjustment......................... Comprehensive loss............................. ---------- ------- ------ --------- ------------ ------------- Balance at June 30, 2000....................... 65,818,853 $66,000 58,140 $ -- $504,958,000 $(228,386,000) ========== ======= ====== ========= ============ ============= OTHER DEFERRED COMPREHENSIVE COMPENSATION LOSS TOTAL ------------ ----------------- ------------ Balance at December 31, 1999................... $(8,461,000) $ (421,000) $326,361,000 Deferred compensation related to stock options, net of cancellations......................... 1,005,000 -- Amortization of deferred compensation.......... 2,320,000 2,320,000 Exercise of common stock options............... 2,411,000 Employee Stock Purchase Plan................... 728,000 Shares issued for acquisition of Ola Turista... 3,362,000 Shares issued for acquisition of Adnet......... 14,999,000 Net loss for the period........................ (79,100,000) Translation adjustment......................... (337,000) (337,000) ------------ Comprehensive loss............................. (79,437,000) ----------- ----------------- ------------ Balance at June 30, 2000....................... $(5,136,000) $ (758,000) $270,744,000 =========== ================= ============
See notes to Unaudited Condensed Consolidated Financial Statements. 5 STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ----------------------------- JUNE 30, 2000 JUNE 30, 1999 ------------- ------------- Operating activities Net loss.................................................... $(79,100,000) $(37,657,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 11,833,000 1,643,000 Provision for bad debts................................... 225,000 179,000 Amortization of deferred compensation..................... 2,320,000 3,012,000 Stock option issued for service........................... -- 31,000 Deferred rent............................................. 2,151,000 2,000 Transaction expenses related to Wass Net, S. L............ -- 732,000 Changes in operating assets and liabilities: Accounts receivable..................................... (4,194,000) (1,851,000) Other assets............................................ (9,442,000) (1,261,000) Accounts payable and accrued expenses................... 23,173,000 3,081,000 Deferred revenue........................................ 588,000 128,000 ------------ ------------ Net cash used in operating activities....................... (52,446,000) (31,961,000) Investing activities: Purchases of fixed assets............................... (33,244,000) (6,044,000) Intangible assets....................................... (1,209,000) (360,000) Other assets............................................ (12,213,000) (4,000,000) Cash paid for acquisitions.............................. (7,527,000) (4,711,000) ------------ ------------ Net cash used in investing activities....................... (54,193,000) (15,115,000) Financing activities: Issuance of common stock................................ 3,139,000 154,458,000 Proceeds from issuance of long term debt................ -- 5,074,000 Repayment of convertible subordinated notes............. -- (369,000) Loans from stockholders................................. -- 122,000 Payments under long term debt........................... (752,000) -- Payments under capital lease obligation................. (58,000) (110,000) ------------ ------------ Net cash provided by financing activities................... 2,329,000 159,175,000 Effect of exchange rate changes on cash and cash equivalents............................................... 99,000 (527,000) ------------ ------------ Net (decrease)/increase in cash............................. (104,211,000) 111,572,000 Cash at beginning of period................................. 274,089,000 53,147,000 ------------ ------------ Cash at end of period....................................... $169,878,000 $164,719,000 ============ ============ Supplemental disclosure of cash flow information Interest paid............................................... $ 674,000 $ 66,000 ============ ============ Income taxes paid........................................... $ -- $ -- ============ ============
See notes to Unaudited Condensed Consolidated Financial Statements 6 STARMEDIA NETWORK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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, among other services, 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 June 1999 condensed consolidated financial statements have been restated to reflect the May 1999 merger with WassNet, S.L. ("WassNet") 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 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. Other offerings include columns on issues of interest to the region such as sporting, fitness, psychology, and a special teen area. This acquisition has been accounted for under the purchase method of accounting. ADNET, S. DE R.L. DE C.V. In April 2000, the Company acquired all of the outstanding equity interests of Adnet. S. de R.L. de C.V. ("Adnet"), a leading Mexican 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 to acquire all of the outstanding equity of Adnet. This acquisition has been accounted for under the purchase method of accounting. The following pro forma unaudited consolidated result of operations assumes the consummation, of the April 1999 acquisition of KD Sistemas de Informacao Ltda., the September 1999 acquisition of 7 STARMEDIA NETWORK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (CONTINUED) PageCell International Holdings, Inc., the February 2000 acquisition of Ola Turista and the April 2000 acquisition of Adnet S. de R. L. de CV as of the beginning of the respective periods:
SIX MONTHS ENDED JUNE 30 --------------------------- 2000 1999 ------------ ------------ Revenues......................................... $ 25,321,000 $ 6,575,000 Net loss......................................... $(80,053,000) $(41,540,000) Net loss available for common shareholders....... $(80,053,000) $(45,806,000) Basic and diluted net loss per share............. $ (1.22) $ (2.02)
The effects of the March 1999 acquisition of Achei Internet Promotion, Ltda. the June 1999 acquisition of Servicios Interactivos Ltda., and the November 1999 acquisition of Paisas.com are not included in the pro forma unaudited consolidated results of operations as they are not material. 3. 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 in each nation. 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 the highly inflationary economies of 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 $7,183,000, $22,186,000 and $50,295,000, respectively, as of and for the six months ended June 30, 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. In April 2000, the Company issued 469,577 shares of its common stock in connection with its acquisition of Adnet, S. de R.L. de C.V., valued at approximately $14,999,000. During the six months ended June 30, 2000, the Company issued 1,126,469 shares of its common stock for approximately $3,139,000 in connection with the exercise of stock options and pursuant to the Employees Stock Purchase Plan. 8 STARMEDIA NETWORK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (CONTINUED) 5. LOSS PER SHARE The following tables sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Numerator: Net loss............................... (43,981,000) (22,082,000) (79,100,000) (37,657,000) Preferred stock dividends and accretion............................ -- (1,725,000) -- (4,266,000) ------------ ------------ ------------ ------------ Numerator for basic and diluted loss per share net loss available for common stockholders.................. $(43,981,000) $(23,807,000) $(79,100,000) $(41,923,000) ============ ============ ============ ============ Denominator: Denominator for basic and dilutive loss per share--weighted average shares... 65,706,679 31,187,100 65,173,234 21,927,102 ------------ ------------ ------------ ------------ Basic and diluted net loss per share... $ (0.67) $ (0.76) $ (1.21) $ (1.91) ============ ============ ============ ============
Diluted net loss per share does not include the effect of options to purchase 16,072,000 and 7,214,000 shares of common stock at June 30, 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 and six month periods ended June 30, 2000 were approximately $1,108,000 and $2,320,000 respectively. 7. LONG-TERM DEBT The Company has a $12.0 million credit line for the acquisition of computer equipment and furniture and fixtures. At June 30, 2000, approximately $3.2 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 $10.0 million in cash and cash equivalents at all times. 8. RELATED PARTY TRANSACTIONS Revenue for the three and six months ended June 30, 2000 includes approximately $1,309,000 and $2,008,000 respectively from a related party. 9. COMPREHENSIVE LOSS Total comprehensive loss was $44,500,000 and $79,437,000 for the three and six month periods ended June 30, 2000 and $22,145,000 and $37,945,000 for the three and six month periods ended June 30, 1999. 9 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. ("StarMedia Network" or the "Company") 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 Spanish- and Portuguese-speaking audiences 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 2.7 billion and our active e-mail accounts have reached approximately 4.4 million for the quarter ended June 30, 2000. Unique user and page view figures have been audited by ABC Interactive, in compliance with Internet Advertising Bureau ("IAB") standards. ABC Interactive is the interactive auditing unit of the Audit Bureau of Circulations ("ABC") that provides online auditing services for leading Internet companies worldwide. In February 2000, the Company acquired all of the 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 Jeneiro in exchange for 71,524 shares of its common stock and $2,000,000 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. Other offerings include columns on issues of interest to the region such as sports, fitness, psychology, and a special teen area. We accounted for this acquisition under the purchase method of accounting. 10 In April 2000, the company acquired all of the outstanding equity interests of Adnet, a leading search portal and Mexico's largest web directory in exchange for 469,577 shares of common stock and $5,000,000 in cash. We accounted for this acquisition under the purchase method of accounting. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 REVENUE Revenues increased to $13.8 million for the three months ended June 30, 2000 from $3.9 million, for the three months ended June 30, 1999. Revenues increased to $23.8 million for the six months ended June 30, 2000 from $5.5 million for the six months ended June 30, 1999. The increase in revenues was primarily due to an increase in the volume of revenue-producing advertising impressions and sponsorships. During 2000, we continued to: - expand our sales force; - increase the number of impressions available on our network; - increase our marketing efforts; and - expand through acquisitions. For the three months ended June 30, 1999 and 2000, no single advertiser accounted for more than 10% of our revenue. For the three months ended June 30, 1999, our top five advertisers accounted for 31% of our revenue. For the three months ended June 30, 2000, our top five advertisers accounted for 23% of our revenue. For the six months ended June 30, 1999 and 2000, no single advertiser accounted for more than 10% of our revenue. For the six months ended June 30, 1999, our top five advertisers accounted for 34% of our revenue. For the six months ended June 30, 2000, our top five advertisers accounted for 24% of our revenue. OPERATING EXPENSES PRODUCT AND TECHNOLOGY Product and technology expenses increased to $19.5 million, or 141% of total revenues, for the three months ended June 30, 2000, from $6.4 million, or 166% of total revenues, for the three months ended June 30, 1999. This increase was primarily due to an increase of approximately $7.3 million in expenses related to additional staffing levels required to support the StarMedia network and related systems, increased hosting costs of approximately $1.8 million and approximately $1.9 million in expenses to enhance the content and features of the StarMedia network. For the six months ended June 30, 2000, product and technology expenses increased to $35.4 million, or 148% of total revenues, from $10.0 million, or 183% of total revenues, for the six months ended June 30, 1999. This increase was primarily due to an increase of approximately $12.4 million related to staffing levels, approximately $3.5 million to enhance the content and features of the StarMedia network, increased hosting costs of approximately $4.9 million and additional costs related to consultants, contracts, and fees of $1.8 million. 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. 11 SALES AND MARKETING Sales and marketing expenses increased to $22.3 million, or 162% of total revenues, for the three months ended June 30, 2000, from $13.3 million, or 342% of total revenues, for the three months ended June 30, 1999. Sales and marketing expense increased to $40.9 million, or 172% of total revenues, for the six months ended June 30, 2000 from $22.9 million, or 419% of total revenues, for the six months ended June 30, 1999. This increase in sales and marketing expenses was primarily attributable to higher personnel expenses, including sales commissions, of approximately $6.1 million, expansion of our advertising, public relations and other promotional expenditures related to an increase in our branding campaign of approximately $9.2 million. We expect sales and marketing expenses will continue to increase in absolute dollars. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $7.7 million, or 56% of total revenues, for the three months ended June 30, 2000, from $3.2 million, or 82% of total revenues, for the three months ended June 30, 1999. The increase in general and administrative expenses was primarily due to additional salary and related charges of $1.1 million and additional rent and related costs of $1.6 million to support the growth of our business. General and administrative expenses increased to $15.8 million, or 66% of total revenues, for the six months ended June 30, 2000, from $5.6 million, or 103% of total revenues, for the six months ended June 30, 1999. The increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with the hiring of additional personnel of approximately $3.3 million, additional rental costs of approximately $3.2 million, additional professional fees and consulting charges of $1.0 million and additional business taxes and insurance of $900,000. Non-recurring merger charges of $1.0 million for the three and six months ended June 30, 1999 were incurred as part of the merger with WassNet. 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 $7.3 million, or 53% of total revenues, for the three months ended June 30, 2000, from $1.2 million, or 30% of total revenues, for the three months ended June 30, 1999. Depreciation and amortization expenses increased to $11.8 million, or 50% of total revenues, in the six months ended June 30, 2000 from $1.6 million, or 30% of total revenues, for the six months ended June 30, 1999. The dollar increases were primarily attributable to the increase in fixed assets of approximately $33.2 million in the six months ended June 30, 2000 and $6.1 million during the six months ended June 30, 1999 and goodwill amortization expense of $3.7 million and $5.8 million in the three months and six months ended June 30, 2000, respectively, related to acquisitions. We expect that depreciation and amortization expenses will continue to increase as we build the structure necessary to improve StarMedia's product and acquire other businesses. STOCK-BASED COMPENSATION EXPENSE Of the cumulative deferred compensation amount, $2.3 million was recorded as an expense during the six months ended June 30, 2000 and $1.1 million was recorded as expense in the three months ended June 30, 2000. The unamortized balance is being amortized over the vesting period for the individual options, which is typically three years for options issued prior to February 1999 and four years for options issued thereafter. 12 INTEREST INCOME, NET Interest income, net includes income from our cash and investments. Net interest income increased from $700,000 in the three months ended June 30, 1999 to $3.0 million for the three months ended June 30, 2000. Net interest income increased from $1.1 million for the six months ended June 30, 1999 to $6.1 million for the six months ended June 30, 2000. Interest income increased as a result of capital raised from the issuance of 3,727,272 shares of common stock to a group of third party investors in April and May 1999, and the initial public offering of shares of our common stock in May 1999 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 June 30, 2000, we had $169.9 million in cash and cash equivalents, a decrease of $104.2 million from December 31, 1999. In the six months ended June 30, 2000, we used $52.4 million in operating activities, substantially related to our $79.1 million loss during the period, which included non-cash activities such as $11.8 million in depreciation and amortization and $2.3 million in non-cash charges related to stock option grants and $2.2 million of deferred rent. For the six months ended June 30, 2000, we used $54.2 million in investing activities, including $33.2 million for fixed assets, $12.2 million for investments and other long-term assets and $7.5 million in connection with acquisitions and related costs. Net cash provided by financing activities were $2.3 million and $159.2 million for the six months ended June 30, 2000 and 1999, respectively. Net cash provided by financing activities during the six months ended June 30, 2000 consisted of proceeds from the exercise of stock options and the sale of stock under our Employee Stock Purchase Plan offset by long-term debt payments. Net proceeds during the six months ended June 30, 1999 consisted primarily of proceeds from issuance of common stock. We have a $12.0 million credit line for the acquisition of computer equipment and furniture and fixtures. At June 30, 2000, approximately $3.2 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 terms of the credit line requires us to maintain at least $10 million in cash and cash equivalents at all times. 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. Subsequently, this agreement has been assigned to Gratis1 with StarMedia providing AT&T a $2.8 million Letter of Credit. Our principal commitments consist of obligations outstanding under capital and operating leases. We expect that our capital expenditures will increase significantly in the future as we make technological improvements to our system and technical infrastructure and make acquisitions. 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. 13 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes an accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133", which deferred the effective date of SFAS No. 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. 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. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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, 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. 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 from which 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 strategic relationships, and develop new ones; -- 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. 15 WE HAVE NEVER MADE MONEY AND EXPECT OUR LOSSES TO CONTINUE. We have never been profitable. As of June 30, 2000, we had an accumulated deficit of approximately $228.4 million. We expect to continue to incur significant losses for the foreseeable future. Although our revenues have grown in recent quarters, our expenses have grown even faster and we expect to increase our spending significantly. Accordingly, we will need to generate significant revenues to achieve profitability. We may not be able to do so. WE HAVE DERIVED A PORTION OF OUR REVENUES FROM RECIPROCAL ADVERTISING AGREEMENTS, WHICH DO NOT GENERATE CASH REVENUE. We derive a portion of our revenues from reciprocal advertising arrangements under which we exchange advertising space on our network predominantly for advertising space on television and radio stations, rather than cash payments. In the three months ended June 30, 2000, we derived approximately $1.9 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 ANNUAL OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Our future revenues and results of operations may fluctuate significantly 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 year-to-year 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. 16 As a result, advertisers have historically spent less in the first calendar quarter. We believe that these seasonal trends will continue to affect our results of operations. If our expenses increase during these periods, we may not generate sufficient revenue to offset these expenses. WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS. We intend to continue to grow our business. Because we expect to generate losses for the foreseeable future, we do not expect that income from our operations will be sufficient to meet these needs. 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 on our network specifically. 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 MAY ADVERSELY AFFECT OUR BUSINESS. We have and expect to continue to derive substantially all of our revenues from 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 17 earnings, which could have an adverse effect on our stock price. Historically, volatility in Latin America has been caused by: -- significant governmental influence over many aspects of local economies; -- political instability; -- unexpected changes in regulatory requirements; -- social unrest; -- slow or negative growth; -- imposition of trade barriers; and -- wage and price controls. We have no control over these matters. Volatility resulting from these matters may decrease Internet availability, create uncertainty regarding our operating climate and adversely affect our customers' advertising budgets, all of which may adversely impact our business. CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA MAY ADVERSELY AFFECT OUR BUSINESS. The currencies of many countries in Latin America have experienced substantial depreciation and volatility. The currency fluctuations, as well as high interest rates, inflation and high unemployment, have materially and adversely affected the economies of these countries. Poor general economic conditions in Latin American countries may cause our customers to reduce their advertising spending, which could adversely impact our business and could cause our revenue to decline unexpectedly. WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF LOCAL LATIN AMERICAN CURRENCIES DEPRECIATE RELATIVE TO THE U.S. DOLLAR. Our reporting currency is the U.S. dollar. In a number of cases, however, customers in Latin America may be billed in local currencies. Our accounts receivable from these customers will decline in value if the local currencies depreciate relative to the U.S. dollar. To date, we have not tried to reduce our exposure to exchange rate fluctuations by using hedging transactions. Although we may enter into hedging transactions in the future, we may not be able to do so successfully. In addition, our currency exchange losses may be magnified if we become subject to exchange control regulations restricting our ability to convert local currencies into U.S. dollars. IF INTERNET USE IN 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 by a number of factors, including: -- the cost of Internet access; -- concerns about security, reliability, and privacy; -- ease of use; and -- quality of service. 18 UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE MAY LIMIT THE GROWTH OF THE INTERNET IN LATIN AMERICA AND ADVERSELY AFFECT OUR BUSINESS. Access to the Internet requires a relatively advanced telecommunications infrastructure. The telecommunications infrastructure in many parts of Latin America is not as well-developed as in the United States or Europe. The quality and continued development of the telecommunications infrastructure in Latin America will have a substantial impact on our ability to deliver our services and on the market acceptance of the Internet in Latin America in general. If further improvements to the Latin American telecommunications infrastructure are not made, the Internet will not gain broad market acceptance in Latin America. If access to the Internet in Latin America does not continue to grow or grows more slowly than we anticipate, our business, financial condition and results of operations will be materially and adversely affected. THE 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. 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 19 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 June 30, 2000, our top 5 advertisers accounted for approximately 23% of our total revenues. Our top 10 advertisers accounted for approximately 35% of our total revenues. Our business, financial condition and results of operations could be materially and adversely affected by the loss of one or more of our top advertisers. WE EXPECT TO CONTINUE TO RELY HEAVILY ON ADVERTISING REVENUES AND IF WE DO NOT INCREASE OUR ADVERTISING SALES, OUR BUSINESS WILL NOT GROW AS EXPECTED. We depend on our advertising sales department to maintain and increase our advertising sales. Our business, financial condition and results of operations could be materially and adversely affected if our advertising sales department is not effective. As of June 30, 2000, our advertising sales department consisted of 77 employees. Although we expect our advertising sales department to grow, it can take a relatively long period of time before new sales personnel become productive. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS. We have recently experienced a period of rapid growth. This has placed a significant strain on our managerial, operational and financial resources. To accommodate this growth, we must implement new or upgraded operating and financial systems, procedures and controls throughout many different locations. We may not succeed with these efforts. Our failure to expand and integrate these areas in an efficient manner could cause our expenses to grow, our revenues to decline or grow more slowly than expected and could otherwise have a material adverse effect on our business, financial condition and results of operations. 20 OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL. 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. Acquisitions could result in a number of adverse 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 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 21 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 websites 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. WE RELY FOR OUR CONTENT ON THIRD PARTIES WHO MAY MAKE THEIR CONTENT AVAILABLE TO OUR COMPETITORS. We constantly attempt to determine what content, features and functionality our target audience wants. We rely to a large extent on third parties for our content, much of which is easily available from other sources. If other networks present the same or similar content in a superior manner, it could adversely affect our visitor traffic. 22 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 favorable 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. 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. 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 occurrs. 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. 23 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. 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 24 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 -- 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. 25 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 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. 26 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 The Annual Meeting of Stockholders of StarMedia was held on April 28, 2000. The following items were presented to the Stockholders with the following results: 1. The following directors were elected to serve a three year term of office to expire at the annual meeting in 2003 or until their successors have been elected and qualified: Directors Votes For Votes Against Abstentions Broker Non-Votes - --------- --------- ------------- ----------- ---------------- Jack C. Chen 45,139,659 31,940 0 0 Douglas M. Karp 45,139,659 31,940 0 0 Immediately following the meeting, the directors of StarMedia consisted of the following individuals: Jack C. Chen Fernando J. Espuelas Marie-Josee Kravis Douglas M. Karp Gerardo M. Rosenkranz Susan L. Segal Frederick R. Wilson 2. The Stockholders approved the adoption of the StarMedia 2000 Stock Incentive Plan, which provides for the grant of Stock Options, Stock Appreciation Rights, Stock Units and Restricted Stock Employees, directors and consultants of StarMedia. Votes For Votes Against Abstentions Broker Non-Votes - --------- ------------- ----------- ---------------- 32,294,201 4,386,469 26,491 8,464,438 3. The Stockholders approved the re-appointment of Ernst & Young LLP as independent auditors of StarMedia for the 2000 fiscal year. Votes For Votes Against Abstentions Broker Non-Votes - --------- ------------- ----------- ---------------- 45,139,110 17,877 14,612 0 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: 10.1 StarMedia Network, Inc. 2000 Stock Incentive Plan 27.1 Financial Data Schedule 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 29, 2000 StarMedia Network, Inc. By: /s/ Steven J. Heller ----------------------------------- Steven J. Heller Chief Financial Officer (duly authorized officer and principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----