10-K 1 a2043693z10-k.txt 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 1-5015 ------------------------ STARMEDIA NETWORK, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 06-1461770 (State of Incorporation) (I.R.S. Employer Identification No.) 75 VARICK STREET NEW YORK, NEW YORK 10013 (212) 905-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes / / No /X/ The aggregate market value of voting stock held by non-affiliates of the registrant as of December 31, 2000 was $79,354,230 (based on the last reported sale price on the Nasdaq National Market on December 29, 2000). The number of shares of the registrant's common stock outstanding as of December 31, 2000 was 66,927,883. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the 2001 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Part III. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- STARMEDIA NETWORK, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I.................................................................. 3 ITEM 1. Business.................................................... 3 ITEM 2. Properties.................................................. 21 ITEM 3. Legal Proceedings........................................... 21 ITEM 4. Submission of Matters to a Vote of Security Holders......... 21 PART II................................................................. 22 ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 22 ITEM 6. Selected Consolidated Financial Data........................ 22 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 31 ITEM 8. Financial Statements and Supplementary Data................. 31 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 31 PART III................................................................ 31 ITEM 10. Directors and Executive Officers of the Registrant.......... 31 ITEM 11. Executive Compensation...................................... 32 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................ 32 ITEM 13. Certain Relationships and Related Transactions.............. 32 PART IV................................................................. 32 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 32
2 THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT STARMEDIA AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. STARMEDIA'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. STARMEDIA UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. PART I ITEM 1. BUSINESS 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 and in October 1999 we completed a follow-on public offering of our common stock. Our principal executive offices are located at 75 Varick Street, New York, New York 10013 and our telephone number is (212) 905-8200. StarMedia Network is the leading Internet media company targeting Spanish- and Portuguese-speaking markets worldwide. Our network consists of 14 branded Internet properties: - STARMEDIA (www.starmedia.com), the leading portal for Spanish and Portuguese speakers; - LATINRED (www.latinred.net), one of the largest Spanish language online communities; - CADE? (www.cade.com.br), a premiere online directory in Brazil; - ZEEK! (www.zeek.com.br), a major online directory of Portuguese language sites; - ADNET (www.adnet.com.mx), Mexico's largest Web directory; - OPENCHILE (www.openchile.cl), a comprehensive Chilean directory and guide; - BATEPAPO (www.batepapo.com.br), one of Brazil's leading chat portals; - GUIA SP (www.guiasp.com.br), GUIA RJ (www.guiarj.com.br) and GUIA NACIDADE (www.nacidade.com), Brazil's largest metropolitan Web directories; - PANORAMAS (www.panoramas.cl), the leading Chilean guide for Santiago; - PAISAS.COM (www.paisas.com) and YOINVITO (www.yoinvito.com), leading online Colombian city guides; - PERISCOPIO (www.periscopio.com), a powerful information portal for Spanish speakers worldwide. It also operates StarMedia Mobile, the Company's wireless division. Through these properties, we offer our users a variety of in-language interest-specific areas or channels, extensive Web-based community features, sophisticated search capabilities and online shopping. Our content covers a broad array of topics of interest to Spanish- and Portuguese-speaking audiences, including local and regional news, business and sports. We promote user affinity to the StarMedia community by providing tools and services such as Spanish and Portuguese language e-mail, 3 chat rooms, instant messaging and personal homepages. We provide our content and community features to our users free of charge. At a time when content on the Internet is overwhelmingly in English, we offer our users an in-language community experience, combined with a broad array of Spanish and Portuguese content tailored for regional dialects and local cultural norms. As a result, we provide advertisers and merchants targeted access to Spanish- and Portuguese-speaking Internet users, an audience with a highly desirable demographic profile. Despite the rapid growth of non-English speaking Internet users worldwide, approximately 80 to 85% of the content on the Internet remains in English. We believe that an increasing number of Spanish- and Portuguese-speaking Internet users are seeking a full-service Internet offering in their local language that provides them with: - a social interactive experience across the entire Spanish- and Portuguese-speaking world; - a variety of in-depth and focused local content; - a broad array of compelling content at the regional and international level; - sophisticated Internet applications and tools like e-mail, chat, instant messaging, bulletin boards, personal homepages and search capabilities; and - the ability to easily and securely buy goods and services online. StarMedia was among the first sites tailored specifically to the interests and needs of Spanish and Portuguese speakers. In so doing, we were also among the first to attract a broad user base and to provide advertisers with an attractive platform to effectively reach this highly desirable Spanish-and Portuguese-speaking Internet user base. THE STARMEDIA SOLUTION We believe that our success to date is attributable to the following key factors: FOCUS ON SPANISH- AND PORTUGUESE-SPEAKING MARKETS. We focus on Spanish- and Portuguese-speaking markets, through the development of a product infrastructure that provides customized content and an extensive range of in-language community features and a business infrastructure staffed primarily with Spanish- and Portuguese-speaking employees. In addition to our offices located in the United States, we have offices in Puerto Rico, Brazil, Mexico, Argentina, Chile, Columbia, Uruguay, Venezuela and Spain. MARKET LEADERSHIP THROUGH BRAND DEVELOPMENT. We believe that StarMedia is the most recognized Internet brand in Latin America. We believe that many of our regular users first visited our network in response to our marketing efforts. We have continued to invest in building the StarMedia brands through our extensive marketing, advertising and public relations programs. Our brand recognition has enabled us to attract a growing user audience and leading companies as advertisers and electronic commerce partners. EXTENSIVE COMMUNITY AND CONTENT OFFERINGS. We believe that our extensive local and pan-regional content, combined with our community of Internet users, is key to our continued leadership as the Internet destinations of choice in the region. We provide our users with a broad array of local content. In addition, our network serves as a virtual "central plaza" to access region-specific information and transact electronic commerce across boundaries. DEDICATION TO USER CARE. We believe that high-quality user care and technical support is essential to our continued success and brand development efforts. We have local user care support teams that rapidly respond to e-mail inquiries and provide technical advice in Spanish or Portuguese. 4 HIGHLY ATTRACTIVE PLATFORM FOR ADVERTISING AND COMMERCE. We believe that the StarMedia network is a highly attractive platform for advertisers and businesses because it gives them access to leading Internet brands in Spanish- and Portuguese-speaking markets, a user base with a highly desirable demographic profile and users with a high degree of affinity and involvement with the Internet. We have developed a client services team that is dedicated to enhancing our relationship with advertisers and maximizing the effectiveness of their advertising campaigns. We use our knowledge about the needs and sensitivities of our user base to help advertisers create more effective advertising campaigns. In addition, we use leading advertising techniques and tracking technologies to target advertising to users with specific demographic profiles, gather extensive data to create an intelligence profile for each campaign and use daily tracking data to analyze the campaign's effectiveness. We provide advertisers with detailed and timely feedback on the effectiveness of campaigns, as well as recommendations on how to improve their campaigns. As a result, we have been able to attract high-profile advertisers, including IBM, Ford Motor Company, AT&T, Sony and Visa. STRATEGY Our objective is to strengthen our position as the leading Internet media company targeting Spanish- and Portuguese-speaking markets worldwide. In order to accomplish this, we intend to: EXTEND THE RECOGNITION OF OUR BRANDS. We intend to continue to build our brands through television, radio, print, Internet and outdoor advertising, public relations programs, conference sponsorships, new strategic alliances, and additional distribution relationships. ENHANCE AND EXPAND OUR SPANISH AND PORTUGUESE CONTENT AND COMMUNITY FEATURES. We intend to continue to add new content and features to the StarMedia network. We believe that this will further differentiate our brands from competing sites, provide users with a more comprehensive and satisfying Internet experience and result in users visiting the StarMedia network more often and remaining there longer. We currently have relationships with leading content providers, including Reuters, Ziff-Davis, Notimex and Ricardo Rocha. We are continually seeking new content relationships in order to further increase the breadth and depth of our content and community features without incurring the significant additional costs associated with internal development of editorial content. We are also expanding our country-specific content to further penetrate local markets. During 2000, we entered into strategic alliances with various content providers, by which these online companies' offerings are integrated into the StarMedia network. The content providers pay StarMedia a fee, and at the same time StarMedia's production costs are reduced. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We will seek to expand our user base, revenues and competitive position through strategic acquisitions and alliances. In 2000, we made two strategic acquisitions, which were targeted toward expanding our local presence. In February 2000, the Company acquired Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ, leading cultural and entertainment guides in the cities of Sao Paulo and Rio de Janeiro, Brazil. 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. In April 2000, the Company acquired AdNet. S.A. de R.L. de C.V. ("AdNet"), a leading Mexican search portal and Mexico's largest web directory. We believe that these acquisitions have enhanced and will continue to enhance significantly our presence in our markets and enable us to reach a broader base of users and advertisers. 5 DEVELOP AND DEPLOY NEXT GENERATION CONTENT AND SERVICE DISTRIBUTION PLATFORMS. We intend to seek opportunities to extend our brands beyond personal computers to wireless products. To that end, our StarMedia Mobile division provides our users worldwide with a richer Internet experience by allowing them to access Internet content and applications through wireless devices. We believe this strategy will augment our user base by enabling access to StarMedia's content and services by users offline, enhance our brand recognition by extending our presence to new viewership, increase our revenues by providing new advertising, sponsorship and software licensing opportunities to our clients and further distinguish our network from traditional Internet portals. ADVERTISING AND BRAND AWARENESS We have built a direct sales organization of professionals located in all of the major cities in which we operate. SALES ORGANIZATION Our sales organization is dedicated to maintaining close relationships with top advertisers and leading advertising agencies throughout our target markets. It is structured on a regional basis, consults regularly with advertisers and agencies on their Web-based advertising, and provides customers with advertising measurement analysis ADVERTISING PROGRAMS Currently, advertisers and advertising agencies enter into agreements which range from one month to multiple years. The majority of the advertising on our network currently consists of banner-style advertisements, buttons and sponsorships from which viewers can hyperlink directly to the advertiser's own Web site. Our standard cost per thousand impressions, commonly referred to as CPMs, for banner advertisements varies depending on location of the advertisements on the network, the targeted country and the extent to which advertisements are targeted for a particular audience. We also offer promotional advertising programs in order to build brand awareness, generate leads and drive traffic to an advertiser's site. ADVERTISING CUSTOMERS We had over a thousand advertisers and sponsors on our network during the year ended December 31, 2000. The following is a selected list of our current advertising customers: Nokia Johnson & Johnson AT&T Sony Ericsson Sprint IBM Toyota Ford Motor Company United Airlines
6 We have derived substantially all of our revenues to date from the sale of advertisements, sponsorships, direct marketing campaigns and software licensing. In the years ended December 31, 2000 and December 31, 1999, no single advertiser accounted for greater than 10% of total revenues. TECHNOLOGY INFRASTRUCTURE Our technology infrastructure is built and maintained for reliability, security, and flexibility and is administered by our technical staff. We maintain our production servers at multiple locations inside and outside the U.S., including but not limited to Brazil, Argentina and Chile. Our operations depend upon the ability of the owners of our co-location facilities to protect our systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins and other events. Our main U.S. co-location facility provides comprehensive facilities management services, including human and technical monitoring of all production servers, and also provides connectivity for our U.S. servers through multiple high-speed connections. In Brazil and Argentina, our servers are connected to the leading Internet network bandwidth providers in each country. All facilities are serviced by multiple backup power supplies. For reliability, availability, and serviceability, we have implemented an environment in which each server can function separately. Key components of our server architecture are served by multiple redundant machines. We employ in-house and third-party software to monitor access to our production and development servers. Reporting and tracking systems generate daily traffic, demographic, and advertising reports. Our production data is copied to backup tapes each night. Our network must accommodate a high volume of traffic and deliver frequently updated information. Components or features of our network have in the past suffered outages or experienced slower response times because of equipment or software downtime. These events did not have a material adverse effect on our business. LATIN AMERICAN TELECOMMUNICATION INFRASTRUCTURE Many of the largest markets in Latin America, including Argentina, Brazil, Chile, Colombia and Mexico, have privatized and begun to deregulate their telephone industries. As a result of the significant investment many Latin American telephone companies have recently undertaken there has been an improvement in the quality of telephone service in these countries. In addition, deregulation has directly impacted the cost and quality of Internet access as competition has driven down both monthly access fees and per minute usage charges. In the past, Internet service providers, or ISPs, in Latin America charged an average of more than $80 per month for basic Internet access. Today, monthly Internet access fees have decreased to as low as $9 in Peru and under $20 in Brazil, Chile, Colombia, Puerto Rico and Venezuela. A significant number of free access providers have entered the region as well. In addition to access charges, local calls to connect to the ISP range in cost from less than $0.02 to $0.04 per minute in the major markets in Latin America. These per minute charges may make the total cost of Internet access substantially greater in Latin America than in the United States, where users typically only pay a monthly access fee and nominal local charges, if any. Long distance charges, if required, would make the total cost of Internet access in Latin America even greater. Because our target market consists of a relatively affluent part of the population across Latin America, we do not believe that Internet access costs are a significant deterrent for many of our users. However, if rates were to increase substantially or fail to decline in the future, the number of visitors to our network may decline or fail to grow. The majority of Latin Americans access the Internet via traditional analog dial-up accounts. Digital access is still relatively expensive and is not widely available throughout Latin America. We do not 7 believe that the quality of telephone service has to date been a significant deterrent to the number of users that visit our network. COMPETITION There are many companies that provide Web sites and online destinations targeted to Spanish- and Portuguese-speaking people. All of these companies compete with us for visitor traffic, advertising dollars and electronic commerce partners. The market for Internet content companies in Latin America is new and rapidly evolving. 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. We compete with providers of Spanish- and Portuguese-language content and services over the Internet, including Web directories, search engines, content sites, Internet service providers and sites maintained by government and educational institutions. Our current and anticipated competitors include: - America Online Latin America; - Terra Lycos; - Telmex/Microsoft; - Universo Online; and - Yahoo! en espanol/Yahoo! Brasil. Many of our competitors and potential new competitors have longer operating histories, greater name recognition in some markets, larger customer bases worldwide and significantly greater financial, technical and marketing resources. These competitors may also be able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies, use superior technology platforms to deliver their products and services and make more attractive offers to potential employees, distribution partners and commerce companies, advertisers and third-party content providers. This could have a material and adverse effect on our business, financial condition and results of operations. We also compete with traditional forms of media, like newspapers, magazines, radio and television for advertisers and advertising revenue. If advertisers perceive the Internet or our network to be a limited or an ineffective advertising medium, they may be reluctant to devote a portion of their advertising budget to Internet advertising or to advertising on our network. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES To date, 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. New laws and regulations may be adopted. Existing laws may be applied to the Internet and new forms of electronic commerce. Uncertainty and new regulations could increase our costs and prevent us from delivering our products and services over the Internet. It could also slow the growth of the Internet significantly. This could delay growth in demand for our network and limit the growth of our revenues. New and existing laws may cover issues such as 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. 8 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. 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 do not protect intellectual property to the same extent as do the laws of the United States. We pursue the registration of our trademarks in the United States and internationally. We may not be able to secure adequate protection for our trademarks in the United States and other countries. In addition, there have been oppositions filed against our applications in other countries for some of our marks. We currently hold service mark or trademark registrations in the United States, Argentina, Chile, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Mexico, Portugal, Spain, Peru, Uruguay, Colombia and Paraguay for the StarMedia mark and registrations for other marks in some of these and other countries. Effective trademark protection may not be available in all the countries in which we conduct business. Policing unauthorized use of our marks is also difficult and expensive. In addition, it is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. We actively seek to protect our marks against similar and confusing marks of third parties by using a watch service, which identifies applications to register trademarks, filing oppositions to third parties' applications for trademarks and bringing lawsuits against infringers. Many parties are actively developing chat, homepage, search and related Web technologies. We expect these developers to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and that cover significant parts of our technology, business methods or services. For example, we are aware that a number of patents have been issued in the areas of electronic commerce, Web-based information indexing and retrieval and online direct marketing. Disputes over rights to these technologies are likely to arise in the future. 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. In the event that we determine that licensing this intellectual property is appropriate, we may not be able to obtain a license on reasonable terms or at all. We may also incur substantial expenses in defending against third-party infringement claims, regardless of the merit of these claims. Successful infringement claims against us may result in substantial monetary liability or may prevent us from conducting all or a part of our business. We also intend to continue to license technology from third parties, including our Web-server and encryption technology. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until alternative technologies can be identified, licensed and integrated. EMPLOYEES As of December 31, 2000, we had 779 full-time employees, of whom 191 worked in sales, 70 in editorial, 35 in marketing, 366 in product and technology and 117 in finance and administration. From 9 time to time, we employ independent contractors to support our research and development, marketing, sales and editorial departments. We consider our relations with our employees to be good. RISK FACTORS THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT STARMEDIA AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. 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 OUR LOSSES MAY CONTINUE. We have never been profitable. As of December 31, 2000, we had an accumulated deficit of approximately $353.9 million. We will need to generate significant revenues to achieve profitability and we may not be able to do so. 10 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 year ended December 31, 2000, we derived approximately $7.2 million, or 12% of revenues, from these arrangements. In the year ended December 31, 1999, we derived approximately $5.5 million, or 27% 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 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 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 seasonal. This may cause fluctuations in our revenues and operating results. Growth of visitor traffic on our network has historically been significantly lower or declined during the first calendar quarter of the year because it includes the summer months in much of Latin America during which: - our target audience tends to take extended vacations; and - schools and universities are generally closed. As a result, advertisers have historically spent less in the first calendar quarter. We believe that these seasonal trends will continue to affect our results of operations. We may not generate sufficient revenue to offset our expenses during these periods. 11 WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS. We intend to continue to grow our business. We expect to generate losses in the near term. Therefore, we may have 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 or we may be unable to continue to operate. 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 mobile distribution enablement. 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 Spanish- and Portuguese-speaking markets, including the hispanic U.S. Social and political conditions in Latin America have historically been volatile and may cause our operations to fluctuate. This volatility could make it difficult for us to sustain our expected growth in revenues and earnings, which could have an adverse effect on our stock price. Historically, volatility has been caused by: - significant governmental influence over many aspects of local economies; - political instability; 12 - unexpected changes in regulatory requirements; - social unrest; - slow or negative growth; - imposition of trade barriers; and - wage and price controls. We have little or 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, U.S. OR SPAIN MAY ADVERSELY AFFECT OUR BUSINESS. The currencies of many of the countries that we operate in 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 some of the countries we operate in could cause our revenues and expenses to fluctuation in dollar terms. 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 addition, there may be cash balances that are held in currencies other than the U.S. dollar. In a number of cases, however, customers in countries we do business in 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. Conversely, depreciation of local currencies reduces our expenses in dollar terms. 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 United States or Europe. The quality and continued development of the telecommunications 13 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 may decrease in number and advertisers may 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 invest in 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 MODELS 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. 14 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 1999, our top five advertisers accounted for approximately 16% of our total revenues. In 2000, our top five advertisers accounted for approximately 22% 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. 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. We believe our systems are adequate, but we may have to 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. We depend on the services of our senior management and key technical personnel. The loss of the services of key executive officers 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. 15 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 with complementary businesses, technologies, services or products. In particular, during 2000, we made two acquisitions. Acquisitions, even if successfully integrated, 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 or successes in this process could disrupt our ongoing business, distract our management and employees, increase our expenses and otherwise adversely affect our business. FINANCING FOR FUTURE JOINT VENTURES, ACQUISITIONS OR ALLIANCES MAY NOT BE AVAILABLE OR MAY DILUTE EXISTING STOCKHOLDERS. We do not know if we will be able to identify any future joint ventures, acquisitions or alliances or that we will be able to successfully finance these transactions. A failure to identify or finance future transactions may impair our growth. In addition, to finance these transactions, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may impact our operations and, in the case of equity financings, may result in dilution to existing stockholders. WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS. There are many companies that provide Web sites and online destinations targeted to 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. 16 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 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 MAY NOT BE ABLE TO ATTRACT VISITORS OR ADVERTISERS IF WE DO NOT 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: - 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 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 may 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. 17 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 continually improving our network, we may not be successful in implementing new 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 production servers at multiple locations inside and outside the U.S. including but not limited to Brazil, Argentina and Chile. Our operations depend upon the ability of the owners of our co-location facilities to protect their systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins and other events. 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 18 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 numerous issues, including: - 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 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. 19 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. 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 HAS BEEN 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. 20 IF OUR STOCK PRICE REMAINS 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. A SMALL GROUP OF OUR EXISTING STOCKHOLDERS OWN A SIGNIFICANT NUMBER OF SHARES AND THEIR INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS. Our directors, executive officers and affiliates currently beneficially own approximately 44.12% 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. The interests of these stockholders may differ from the interests of the other stockholders. ITEM 2. PROPERTIES Our principal executive offices are located in approximately 140,000 square feet of office space in New York, New York, under a lease that expires in November 2011. We also lease sales and business development office space in all of the major cities in which we operate. ITEM 3. LEGAL PROCEEDINGS. We are subject to legal proceedings and claims in the ordinary course of business from time to time, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with our e-mail, message boards, and other communications and community features, such as claims alleging defamation and invasion of privacy. In December 2000, a consulting company filed suit against us, claiming unpaid fess of approximately $2,322,000. We have denied all material allegations since, among other things, the consulting company rendered services to an unfunded subsidiary and we had notified them that we would not be liable for such fees. We believe that this matter will be resolved without any material adverse impact to our financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol STRM since our initial public offering on May 26, 1999. The following table sets forth, for the periods indicated, the high and low close prices per share of the common stock as reported on the Nasdaq National Market:
2000: HIGH LOW ----- -------- -------- Fourth Quarter.............................................. $ 8.47 $ 1.50 Third Quarter............................................... $19.50 $ 6.56 Second Quarter.............................................. $30.50 $14.13 First Quarter............................................... $61.00 $28.63
HOLDERS As of March 9, 2001, there were approximately 403 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends for the foreseeable future. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below with respect to our consolidated statements of operations for the years ended December 31, 2000, 1999, 1998, 1997 and the period from March 5, 1996 (inception) to December 31, 1996 and balance sheets as of December 31, 2000, 1999, 1998, 1997 and 1996 are derived from our audited consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with "Management's 22 Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes to those statements included elsewhere in this report.
PERIOD FROM MARCH 5, 1996 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------- 1996 1997 1998 1999 2000 -------------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................... $ -- $ 472 $ 5,758 $ 20,089 $ 61,028 Operating expenses: Product and technology development... 36 1,233 7,101 33,192 67,670 Sales and marketing.................. 12 2,110 29,281 53,399 79,794 General and administrative........... 78 650 4,810 15,318 31,743 Non-recurring charges................ -- -- -- 1,613 3,935 Depreciation and amortization........ 2 38 785 6,500 28,295 Stock-based compensation expense..... -- -- 10,421 6,400 4,519 Impairment of goodwill............... -- -- -- -- 37,170 ------ ------- -------- --------- --------- Total operating expenses............... 128 4,031 52,398 116,422 253,126 ------ ------- -------- --------- --------- Operating loss......................... (128) (3,559) (46,640) (96,333) (192,098) ------ ------- -------- --------- --------- Impairment of other assets............. -- -- -- -- (19,378) Loss in unconsolidated subsidiary...... -- -- -- -- (2,500) Interest income, net................... -- 34 667 5,891 9,871 Other expenses......................... -- -- -- -- (318) ------ ------- -------- --------- --------- Loss before provision for income taxes................................ (128) (3,525) (45,973) (90,442) (204,423) Provision for income taxes............. -- -- -- (231) (158) ------ ------- -------- --------- --------- Net loss............................... (128) (3,525) (45,973) (90,673) (204,581) Preferred stock dividends and accretion............................ -- (185) (4,536) (4,266) -- ------ ------- -------- --------- --------- Net loss available to common shareholders......................... $ (128) $(3,710) $(50,509) $ (94,939) $(204,581) ====== ======= ======== ========= ========= Basic and diluted net loss per share... $(0.01) $ (0.37) $ (4.51) $ (2.31) $ (3.10) ====== ======= ======== ========= ========= Shares used in computing basic and diluted net loss per share........... 9,147 10,040 11,204 41,171 65,920 ====== ======= ======== ========= =========
AS OF DECEMBER 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS) SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...................... $230 $ 443 $ 53,147 $274,089 $ 93,408 Working capital................................ 284 149 47,500 260,235 82,613 Total assets................................... 313 810 61,156 356,071 215,663 Capital lease obligations...................... -- 18 229 58 1 Total current liabilities...................... -- 342 7,870 26,935 44,688 Long-term debt, noncurrent..................... -- -- -- 2,380 1,902 Redeemable convertible preferred stock......... -- 3,833 96,494 -- -- Total stockholders' (deficit) equity........... 313 (3,394) (43,339) 326,361 166,874
23 ITEM 7. 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. StarMedia is the leading Internet media company targeting Spanish- and Portuguese- speaking audiences worldwide. We were incorporated in March 1996 and commenced operations in September 1996. During 2000, we continued the development of the StarMedia network and related technology infrastructure and also focused on recruiting personnel, and developing content to attract and retain users. In 2000, we: - improved and upgraded our services; - expanded our production staff; - expanded our direct sales force; - increased our marketing activities in order to build the StarMedia brand; and - added services via internal development and acquisitions. ACQUISITIONS OLA TURISTA LTDA. In February 2000, the Company acquired Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ, leading cultural and entertainment guides in the cities of Sao Paulo and Rio de Janeiro, Brazil in exchange for 71,524 shares of its common stock and $2.0 million 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. Pursuant to the purchase agreement, StarMedia is obligated to pay additional consideration in the form of StarMedia common stock, subject to Ola Turista meeting certain specified performance targets. This acquisition was accounted for under the purchase method of accounting. ADNET S.A. In April 2000, the Company acquired AdNet. S.A. de R.L. de C.V. ("AdNet"), a leading Mexican search portal and Mexico's largest web directory. 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. Pursuant to the purchase agreement, StarMedia is obligated to pay additional consideration in the form of StarMedia common stock over a five year period, subject to AdNet meeting certain specified performance targets. This acquisition was accounted for under the purchase method of accounting. To date, we have derived substantially all of our revenues from the sale of advertising. Advertising revenues are derived principally from: - advertising arrangements under which we receive revenues based on a cost-per-thousand-impressions basis, commonly referred to as CPMs; - sponsorship arrangements which allow advertisers to sponsor an area on our network in exchange for a fixed payment; - reciprocal advertising arrangements, under which we exchange advertising space on our network predominantly for advertising time on television and radio stations; 24 - design, coordination and integration of advertising campaigns and sponsorships to be placed on our network; and - direct marketing campaigns. Advertising and sponsorship rates depend primarily on: - whether the impressions are for general audiences or targeted audiences; - the size and placement of the advertisement; and - the number of guaranteed impressions, if any. We have entered into reciprocal advertising arrangements with various media companies. We do not receive any cash payments for these arrangements. To date, we have engaged in no reciprocal advertising arrangements under which we have received online advertising. We have a limited operating history for you to use as a basis for evaluating our business. You must consider the risks and difficulties frequently encountered by early stage companies like us in new and rapidly evolving markets, including the Internet advertising market. These risks are set forth under the caption "Risk Factors" beginning on page 10 of this report. We have incurred significant net losses and negative cash flows from operations since our inception. At December 31, 2000, we had an accumulated deficit of $353.9 million. These losses have been funded primarily through the issuance of our equity securities. We recorded deferred compensation of approximately $19.1 million in 1998 and $6.2 million in 1999. There were no additional deferred compensation charges for the year ended December 31, 2000. The deferred compensation recorded in 1998 and 1999 represents the difference between the exercise price of stock options granted in 1998 and 1999 and the fair market value of the underlying common stock at the date of grant. The difference is recorded as a reduction of stockholders' equity and amortized over the vesting period of the applicable options. Of the total deferred compensation amount, approximately $10.4 million, $6.4 million and $4.5 million was amortized during the years ended December 31, 1998, 1999 and 2000, respectively. The amortization of deferred compensation is recorded as an operating expense. As a result, we currently expect to amortize $2,084,000, $516,000 and $36,000 of deferred compensation annually in 2001, 2002 and 2003, respectively. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 REVENUES Revenues increased to $61.0 million for the year ended December 31, 2000 from $20.1 million for the year ended December 31, 1999. The increase in revenues was primarily due to an increase in the volume of advertising impressions and sponsorships sold. During 2000, we continued to expand our sales force; increase the number of impressions available on our network by adding channels and by increasing our marketing efforts; and expand through acquisitions. For the year ended December 31, 2000, no single advertiser accounted for more than 10% of total revenues. For the year ended December 31, 1999, no advertiser accounted for more than 10% of our total revenues. For the year ended December 31, 2000, our top five advertisers accounted for 22% of our total revenues. For the year ended December 31, 1999, our top five advertisers accounted for 16% of our total revenues. For the year ended December 31, 2000, we derived approximately $7.2 million, or 12% of total revenues, from reciprocal advertising arrangements. For the year ended December 31, 1999, we derived approximately $5.5 million, or 27% of total revenues, from reciprocal advertising arrangements. We do not receive any cash payments for these arrangements. 25 OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include personnel costs; hosting and telecommunication costs; and content acquisition fees and revenue sharing arrangements related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. For the year ended December 31, 2000, product and technology expenses increased to $67.7 million, or 111% of total revenues, from $33.2 million, or 165% of total revenues, for the year ended December 31, 1999. This increase was primarily due to an increase of approximately $18.3 million related to increased staffing levels, approximately $5.6 million to enhance the content and features of the StarMedia network and approximately $6.9 million for hosting costs. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, including the costs of advertisements placed on various television networks under our reciprocal advertising arrangements, salaries and commissions of sales and marketing personnel, public relations costs, and other marketing-related expenses. Sales and marketing expenses increased to $79.8 million, or 131% of total revenues, for the year ended December 31, 2000 from $53.4 million, or 266% of total revenues, for the year ended December 31, 1999. The increase in sales and marketing expenses was primarily attributable to expansion of our advertising, public relations and other promotional expenditures related to our branding campaign of approximately $8.7 million, and higher personnel expenses, including sales commissions, of approximately $9.7 million. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries and benefits, costs for general corporate functions, including finance, accounting and facilities, and fees for professional services. General and administrative expenses increased to $31.7 million, or 52% of total revenues, for the year ended December 31, 2000, from $15.3 million, or 76% of total revenues, for the year ended December 31, 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 $5.9 million, additional rental costs and office-related costs of approximately $5.0 million, additional taxes and insurance charges of approximately $1.8 million and additional legal, tax and audit fees of approximately $2.5 million. NON-RECURRING CHARGES Non-recurring charges for the year ended December 31, 2000 consisted of a one-time charge of $3.9 million associated with the integration of our subsidiaries and a company-wide realignment of business operations. Non-recurring charges for the year ended December 31, 1999 include a one-time charge of $1.6 million related to the acquisitions of Wass Net and Webcast Solutions. Since the acquisitions were each accounted for as pooling of interests, these costs were expensed at the close of the transactions. IMPAIRMENT OF GOODWILL In the fourth quarter of 2000, the Company determined that the fair market value of certain acquired assets was below their respective carrying values (inclusive of the related goodwill). As a result, the Company recorded a goodwill impairment charge of $37.2 million. 26 DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased to $28.3 million, or 46% of total revenues, for the year ended December 31, 2000 from $6.5 million, or 32% of total revenues, for the year ended December 31, 2000. The increase was attributable to both the addition of $46 million in fixed assets during 2000 and the full-year amortization of goodwill relating to acquisitions made in 1999. As a result of the impairment of goodwill charge, amortization expense for goodwill is expected to be reduced in future periods. STOCK-BASED COMPENSATION EXPENSE Deferred compensation of $4.5 million was recorded as an expense during the year ended December 31, 2000. The unamortized balance is being amortized over the vesting period for the individual options. IMPAIRMENT OF OTHER ASSETS In the fourth quarter of 2000, the Company determined that certain long-term assets, principally minority investments in other companies were permanently impaired and recorded an additional impairment charge of $19.4 million. NET INTEREST INCOME Net interest income includes income from our cash and investments. Net interest income increased from $5.9 million for the year ended December 31, 1999 to $9.9 million for the year ended December 31, 2000. The increase is primarily a result of an increase in the average cash balances for the year ended December 31, 2000 as compared to December 31, 1999. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES Revenues increased to $20.1 million for the year ended December 31, 1999 from $5.8 million for the year ended December 31, 1998. The increase in revenues was primarily due to an increase in the volume of advertising impressions and sponsorships sold. During 1999, we expanded our sales force, and increased the number of impressions available on our network by adding channels and by increasing our marketing efforts and expanded through acquisitions. For the year ended December 31, 1998, two advertisers each accounted for greater than 10% of total revenues. For the year ended December 31, 1999, no single advertiser accounted for more than 10% of our revenue. For the year ended December 31, 1998, our top five advertisers accounted for 57% of our total revenues. For the year ended December 1999, our top five advertisers accounted for 16% of our total revenues. For the year ended December 31, 1999, we derived approximately $5.5 million or 27% of total revenues, from reciprocal advertising arrangements. We do not receive any cash payments for these arrangements. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include personnel costs, hosting and telecommunications costs, and content acquisition fees and revenue sharing arrangements related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. 27 For the year ended December 31, 1999, product and technology expenses increased to $33.2 million, or 165% of total revenues, from $7.1 million, or 122% of total revenues, for the year ended December 31, 1998. The increase was primarily due to an increase of approximately $8.7 million related to staffing levels and approximately $5.5 million to enhance the content and features of the StarMedia network. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, including the costs of advertisements placed on various television networks under our reciprocal advertising arrangements, salaries and commissions of sales and marketing personnel, public relations costs, and other marketing-related expenses. Sales and marketing expenses increased to $53.4 million, or 266% of total revenues, for the year ended December 31, 1999 from $29.3 million, or 505% of total revenues, for the year ended December 31, 1998. The increase in sales and marketing expenses was primarily attributable to expansion of our advertising, public relations and other promotional expenditures related to our branding campaign of approximately $10.1 million, and higher personnel expenses, including sales commissions, of approximately $7.3 million. GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily consist of salaries and benefits, costs for general corporate functions, including finance, accounting and facilities, and fees for professional services. General and administrative expenses increased to $15.3 million, or 76% of total revenues, for the year ended December 31, 1999, from $4.8 million, or 83% of total revenues, for the year ended December 31, 1998. The increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with the hiring of additional personnel of approximately $4.3 million, additional rental costs and office-related costs of approximately $2.2 million and additional taxes and insurance charges of approximately $1.1 million. NON-RECURRING CHARGES Non-recurring charges for the year ended December 31, 1999 include a one-time charge of $1.6 million related to the acquisitions of Wass Net and Webcast Solutions. Since the acquisitions were each accounted for as pooling of interests, these costs were expensed at the close of the transactions. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased to $3.9 million, or 19% of total revenues, for the year ended December 31, 1999 from $785,000, or 14% of total revenues, for the year ended December 31, 1998. The dollar increases were primarily attributable to the increase in fixed assets of approximately $21.4 million during 1999. We also incurred goodwill amortization expenses of $2.6 million related to acquisitions completed in 1999. STOCK-BASED COMPENSATION EXPENSE We recorded additional deferred compensation of $6.2 million for the year ended December 31, 1999. Deferred compensation of $6.4 million was recorded as an expense for the year ended December 31, 1999. The unamortized balance is being amortized over the vesting period for the individual options. NET INTEREST INCOME Net interest income includes income from our cash and investments. Net interest income increased from $667,000 for the year ended December 31, 1998 to $5.9 million for the year ended December 31, 28 1999. Net interest income increased as a result of an increase in the average cash balance for the year ended December 31, 1999 as compared to the year ended December 31, 1998. QUARTERLY RESULTS The following table sets forth certain unaudited quarterly operation information for the most recent eight quarters ending with the quarter ended December 31, 2000. This information has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the periods presented. This information should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto. Results of operations for any previous fiscal quarter are not indicative of results for the full year or any future quarter.
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, 1999 1999 1999 1999 2000 2000 2000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Statement of Income Data: Revenues............. $ 1,594,000 $ 3,880,000 $ 5,618,000 $ 8,997,000 $ 10,056,000 $ 13,764,000 $ 17,146,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Product & technology......... 3,585,000 6,434,000 9,987,000 13,186,000 15,900,000 19,458,000 16,654,000 Sales & marketing.... 9,660,000 13,266,000 14,274,000 16,199,000 18,587,000 22,274,000 17,348,000 General & administration..... 2,454,000 3,188,000 3,902,000 5,774,000 8,075,000 7,702,000 8,163,000 Restructuring charges............ -- 1,023,000 590,000 -- -- -- 3,935,000 Depreciation and amortization....... 474,000 1,170,000 1,684,000 3,172,000 4,544,000 7,289,000 8,120,000 Stock-based compensation expense............ 1,417,000 1,595,000 1,848,000 1,540,000 1,212,000 1,108,000 1,149,000 Impairment of goodwill........... -- -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Loss from operations......... $(15,996,000) $(22,796,000) $(26,667,000) $(30,874,000) $(38,262,000) $(44,067,000) $(38,223,000) ============ ============ ============ ============ ============ ============ ============ DEC 31, 2000 ------------ Statement of Income Data: Revenues............. $ 20,062,000 ------------ Product & technology......... 15,658,000 Sales & marketing.... 21,585,000 General & administration..... 7,803,000 Restructuring charges............ -- Depreciation and amortization....... 8,342,000 Stock-based compensation expense............ 1,050,000 Impairment of goodwill........... 37,170,000 ------------ Loss from operations......... $(71,546,000) ============
LIQUIDITY AND CAPITAL RESOURCES To date, we have financed our operations primarily through the sale of our equity securities. As of December 31, 2000, we had $93.4 million in cash and cash equivalents, a decrease of $180.7 million from December 31, 1999. During the year ended December 31, 2000, we used $118.1 million in operating activities, mostly related to our $204.6 million loss during 2000 which included non-cash activities such as $56.5 million in impairments of goodwill and other assets, $28.3 million in depreciation and amortization and $4.5 million in non-cash charges related to stock option grants. During the year ended December 31, 1999, we used $80.0 million in operating activities, mostly related to our $90.7 million loss during 1999 which included non-cash activities such as $6.5 million in depreciation and amortization and $6.4 million in non-cash charges related to stock option grants. During the year ended December 31, 1998, we used $30.7 million in operating activities, mostly related to our $46.0 million loss during the period which included a $10.4 million in non-cash charges related to stock option grants and $5.4 million in additional liabilities. 29 For the year ended December 31, 2000, we used $66.5 million in investing activities, including $4.1 million for investments and other long-term assets, $47.3 million for fixed assets and $10.6 million in connection with acquisitions and related costs. For the year ended December 31, 1999, we used $48.8 million in investing activities, including $21.6 million for investments and other long-term assets, $18.7 million for fixed assets and $6.4 million in connection with acquisitions and related costs. Net cash used in investing activities was $4.7 million for the year ended December 31, 1998. Net cash used in investing activities during 1998 resulted primarily from the purchase of fixed assets. Net cash provided by financing activities was $4.2 million for the year ended December 31, 2000, $350.7 million for the year ended December 31, 1999, and $88.1 million for the year ended December 31, 1998. In April and May 1999, we completed the sale of 3,727,272 shares of our common stock for $41 million. In May 1999, we raised approximately $110.4 million, net of underwriting discounts and commissions and related expenses, from the initial public offering of shares of our common stock. In October 1999, we raised approximately $192.1 million net of underwriting discounts and commissions and related expenses, from a follow-on public offering of our common stock. We obtained a $12 million line of credit in 1999. Net cash provided by financing activities during 1998 consisted primarily of proceeds from the sale of shares of our preferred stock. Our principal commitments consist of obligations outstanding under capital and operating leases. In March 1999, we obtained a line of credit for the acquisition of computer equipment and furniture and fixtures. In November 2000, we borrowed $2.0 million under this line of credit. At December 31, 2000, approximately $4.3 million (of which $2.4 million is current) of long-term debt was outstanding. 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. No additional amounts are available to be borrowed under this line of credit. Our capital requirements depend on numerous factors, including market acceptance of our services, the amount of resources we devote to investments in the StarMedia network, marketing and selling our services, and promoting our brand. We have experienced a substantial increase in our capital expenditures and operating lease arrangements since our inception, consistent with the growth in our operations and staffing. We 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 or favorable to us, if at all. 30 INFLATION AND FOREIGN CURRENCY EXCHANGE RATE LOSSES To date, our results of operations have not been impacted materially by inflation in countries we do business in. 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 The Company continues to assess the effects of recently issued accounting standards. The impact of all recently adopted and issued accounting standards has been disclosed in the footnotes to the audited Consolidated Condensed Financial Statements. ITEM 7A. 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements listed under the heading "(a)(1) Consolidated Financial Statements" of the Item 14 hereof, which financial statements are incorporated herein by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders to be mailed to our stockholders on or about April 30, 2001. 31 ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders to be mailed to our stockholders on or about April 30, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders to be mailed to our stockholders on or about April 30, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated by reference from the information in our proxy statement for the 2001 Annual Meeting of Stockholders to be mailed to our stockholders on or about April 30, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. CONSOLIDATED FINANCIAL STATEMENTS. The following consolidated financial statements of StarMedia Network, Inc. and the Report of Independent Auditors thereon are included in Item 8 above: CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. -------- Report of Independent Auditors.............................. F-38 Consolidated Balance Sheets as of December 31, 1999 and 2000...................................................... F-39 Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000............................................. F-40 Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the years ended December 31, 1998, 1999 and 2000............................................. F-41 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000............................................. F-42 Notes to Consolidated Financial Statements.................. F-43 The following consolidated financial statement schedule of StarMedia Network, Inc. is included in Item 14(a): Schedule II: Valuation and qualifying accounts.............. F-61
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 2. FINANCIAL STATEMENT SCHEDULES. See index to financial statements at page F-1. 32 3. EXHIBITS. The following Exhibits are incorporated herein by reference or are filed with this report as indicated below.
EXHIBIT NUMBER DESCRIPTION --------------------- ------------------------------------------------------------ 3.1 Amended and restated certificate of incorporation (Incorporated by reference to exhibit 3.1 of StarMedia's Registration Statement on Form S-1 No. 333-87169 ("Registration Statement No. 333-87169")). 3.2 Amended and restated bylaws (Incorporated by reference to exhibit 3.2 of Registration Statement No. 333-87169). 10.1 1997 stock option plan (Incorporated by reference to exhibit 10.1 of Registration Statement No. 333-87169). 10.2 1998 stock plan (Incorporated by reference to exhibit 10.2 of Registration Statement No. 333-87169). 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and StarMedia, as amended (Incorporated by reference to exhibit 10.3 of Registration Statement No. 333-87169). 10.4 Amended and restated registration rights agreement (Incorporated by reference to exhibit 10.4 of Registration Statement No. 333-87169). 10.5 Amendment No. 1 to amended and restated registration rights agreement (Incorporated by reference to exhibit 10.5 of Registration Statement No. 333-87169). 10.6 Quota Purchase Agreement, dated as of April 13, 1999, by and between StarMedia, StarMedia do Brasil Ltda., Quotaholders of KD Sistemas de Informacao Ltda. and KD Sistemas de Informacao Ltda. (Incorporated by reference to exhibit 10.7 of Registration Statement No. 333-87169). 10.7 Master Loan and Security Agreement No. 4231, dated as of March 31, 1999, by and between StarMedia and Charter Financial, Inc. (Incorporated by reference to exhibit 10.8 of Registration Statement No. 333-87169). 10.8 StarMedia 1999 Employee Stock Purchase Plan (Incorporated by reference to exhibit 10.9 of Registration Statement No. 333-87169). 10.9 Registration Rights Agreement between StarMedia and Hearst Communications, Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.18 of Registration Statement No. 333-87169). 10.10 Registration Rights Agreement between StarMedia and Reuters Holding Switzerland SA dated as of April 30, 1999 (Incorporated by reference to exhibit 10.19 of Registration Statement No. 333-87169). 10.11 Registration Rights Agreement between StarMedia and eBay Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.20 of Registration Statement No. 333-87169). 10.12 Registration Rights Agreement between StarMedia and Europortal Holding S.A. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.21 of Registration Statement No. 333-74659). 10.13 Registration Rights Agreement between StarMedia and Critical Path, Inc. dated as of May 3, 1999 (Incorporated by reference to exhibit 10.22 of Registration Statement No. 333-87169).
33 10.14 Registration Rights Agreement between StarMedia and Europortal Holding S.A. dated as of May 5, 1999 (Incorporated by reference to exhibit 10.23 of Registration Statement No. 333-87169). 10.15 Registration Rights Agreement dated as of May 4, 1999 between StarMedia and Geradons, S.L. (Incorporated by reference to Exhibit 10.24 of Registration Statement No. 333-87169). 10.16 Registration Rights Agreement between StarMedia and National Broadcasting Company, Inc. dated as of May 4, 1999 (Incorporated by reference to exhibit 10.25 of Registration Statement No. 333-87169). 10.17 Employment Agreement dated as of December 28, 2000 by and between StarMedia and Fernando J. Espuelas. 10.18 Employment Agreement dated as of December 28, 2000 by and between StarMedia and Jack C. Chen. 10.19 Employment Agreement dated as of December 28, 2000 by and between StarMedia and Justin K. Macedonia. 10.20 Employment Agreement dated as of December 28, 2000 by and between StarMedia and Steven J. Heller. 10.21 Loan Agreement, dated as of December 28, 2000 by and between StarMedia and Fernando J. Espuelas. 10.22 Loan Agreement, dated as of December 28, 2000 by and between StarMedia and Jack C. Chen. 10.23 Loan Agreement, dated as of December 28, 2000 by and between StarMedia and Justin K. Macedonia. 10.24 Loan Agreement, dated as of December 28, 2000 by and between StarMedia and Steven J. Heller. 10.25 Loan Agreement, dated as of December 28, 2000 by and between StarMedia and Adriana J. Kampfner. 10.26 Employment Agreement dated as of September 26, 2000 by and between StarMedia and Francisco A. Loureiro. 10.27 Promissory Note, dated as of May 23, 2000, issued by Francisco Loureiro in favor of StarMedia. 10.28 Form of Rights Agreement (Incorporated by reference to exhibit 10.28 of Registration Statement No. 333-87169). 10.29 StarMedia Network, Inc. 2000 Stock Incentive Plan (Incorporated by reference to exhibit 10.1 of the Registrants' Form 10-Q for the quarterly period ended June 30, 2000). 10.30 Amended and Restated Stock Purchase Agreement, dated as of September 30, 2000, by and among Chase Equity Associates LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis 1, Inc. 10.31 Stock Purchase Agreement, dated as of December 22, 2000, by and among Chase Equity Associates LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis 1, Inc.
34 10.32 Stock Purchase Agreement, dated as of January 31, 2000, by and among StarMedia Network, Inc., Group MVS, S.A. de C.V. Harry Moller Publicidad, S.A. de C.V. and the Representative named therein (Incorporated by reference to exhibit 1.1 of the Registrants' Form 8-K filed April 6, 2000). 10.33 Put and Call Agreement, dated as of September 28, 2000, by and among StarMedia Network, Inc., Chase Equity Associates, LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis 1, Inc........................................... 10.34 Amendment No. 1 dated as of December 29, 2000, to the Put and Call Agreement, dated as of September 28, 2000, by and among StarMedia Network, Inc., Chase Equity Associates, LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis 1, Inc............................................... 21.1 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 The Consent of the incorporation by reference of the report of Deloitte & Touche in the Registration statement No. 333-79255 of the Registrant on Form S-8.
------------------------ (b) Reports on Form 8-K On April 20, 2000, we filed a Current Report on Form 8-K in connection with our acquisition of AdNet described elsewhere in this report. On June 20, 2000, we filed a Current Report on Form 8-K/A in connection with our acquisition of AdNet described elsewhere in this report. (c) Financial Statement Schedules. See pages 37-61. 35 INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE NO. --------------------------------- -------- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 1999 and 2000...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000.......................... F-4 Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the years ended December 31, 1998, 1999 and 2000............................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 The following consolidated financial statement schedule of StarMedia Network, Inc. is included in Item 14(a): Schedule II: Valuation and qualifying accounts.............. S-2
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the accompanying consolidated balance sheets of StarMedia Network, Inc. (the "Company") as of December 31, 1999 and 2000, and the related consolidated statements of operations, changes in stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarMedia Network, Inc. at December 31, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP New York, New York February 16, 2001 F-2 STARMEDIA NETWORK, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1999 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 274,089,000 $ 93,408,000 Accounts receivable, net of allowance for bad debts of $458,000 (1999) and $1,959,000 (2000)................... 5,401,000 20,082,000 Unbilled receivables...................................... 2,174,000 6,131,000 Other current assets...................................... 5,506,000 7,680,000 ------------- ------------- Total current assets........................................ 287,170,000 127,301,000 Fixed assets, net........................................... 23,160,000 55,569,000 Intangible assets, net of accumulated amortization of $456,000 (1999) and $1,676,000 (2000)..................... 4,642,000 5,557,000 Goodwill, net of accumulated amortization of $2,622,000 (1999) and $2,435,000 (2000).............................. 18,513,000 6,582,000 Officers loans.............................................. -- 4,563,000 Other assets................................................ 22,586,000 16,091,000 ------------- ------------- Total assets................................................ $ 356,071,000 $ 215,663,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 7,535,000 $ 20,737,000 Accrued expenses.......................................... 17,108,000 20,061,000 Loan payable, current portion............................. 1,602,000 2,462,000 Capital lease obligations, current portion................ 58,000 -- Deferred revenues......................................... 632,000 1,428,000 ------------- ------------- Total current liabilities................................... 26,935,000 44,688,000 Loan payable, long term..................................... 2,380,000 1,902,000 Deferred rent............................................... 395,000 2,199,000 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 issued and outstanding (1999 and 2000). Common stock, $.001 par value, 200,000,000 shares authorized, 64,151,283 shares issued and outstanding (1999) and 66,927,883 shares issued and outstanding (2000).................................................. 64,000 67,000 Common stock issuable..................................... -- 7,800,000 Additional paid-in capital................................ 484,465,000 516,311,000 Accumulated deficit....................................... (149,286,000) (353,867,000) Deferred compensation..................................... (8,461,000) (2,636,000) Other comprehensive loss.................................. (421,000) (801,000) ------------- ------------- Total stockholders' equity.................................. 326,361,000 166,874,000 ------------- ------------- Total liabilities and stockholders' equity.................. $ 356,071,000 $ 215,663,000 ============= =============
See accompanying notes. F-3 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1999 2000 ------------ ------------ ------------- Revenues........................................... $ 5,758,000 $ 20,089,000 $ 61,028,000 Operating expenses: Product and technology development............... 7,101,000 33,192,000 67,670,000 Sales and marketing.............................. 29,281,000 53,399,000 79,794,000 General and administrative....................... 4,810,000 15,318,000 31,743,000 Non-recurring charges............................ -- 1,613,000 3,935,000 Depreciation and amortization.................... 785,000 6,500,000 28,295,000 Stock-based compensation expense................. 10,421,000 6,400,000 4,519,000 Impairment of goodwill........................... -- -- 37,170,000 ------------ ------------ ------------- Total operating expenses........................... 52,398,000 116,422,000 253,126,000 ------------ ------------ ------------- Loss from operations............................... (46,640,000) (96,333,000) (192,098,000) Other income (expense): Impairment of other assets....................... -- -- (19,378,000) Interest income.................................. 715,000 6,517,000 11,092,000 Loss in unconsolidated subsidiary................ -- -- (2,500,000) Interest expense................................. (48,000) (626,000) (1,221,000) Other expenses................................... -- -- (318,000) ------------ ------------ ------------- Loss before provision for other income taxes....... (45,973,000) (90,442,000) (204,423,000) Provision for income taxes......................... -- (231,000) (158,000) ------------ ------------ ------------- Net loss........................................... (45,973,000) (90,673,000) (204,581,000) Preferred stock dividends and accretion............ (4,536,000) (4,266,000) -- ------------ ------------ ------------- Net loss available to common stockholders.......... $(50,509,000) $(94,939,000) $(204,581,000) ============ ============ ============= Basic and diluted net loss per common share........ $ (4.51) $ (2.31) $ (3.10) ============ ============ ============= Number of shares used in computing basic and diluted net loss per share....................... 11,203,749 41,170,602 65,919,685 ============ ============ =============
See accompanying notes. F-4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
COMMON STOCK PREFERRED STOCK ADDITIONAL ------------------------------------- ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT ISSUABLE SHARES AMOUNT CAPITAL DEFICIT ---------- ----------- ---------- -------- ----------- ------------ ------------- Balance at December 31, 1997..... 10,092,952 11,000 -- -- -- 433,000 (3,838,000) Deferred compensation related to stock options, net of cancellations.................. 19,087,000 Amortization of deferred compensation................... Exercise of common stock options........................ 380,000 45,000 Issuance of common stock -- WassNet S.L. .................. 1,052,382 1,000 93,000 Issuance of common stock -- Webcast Solutions.............. 784,198 1,000 35,000 Preferred stock dividends and accretion...................... (4,536,000) Net loss for the year............ (45,973,000) Translation adjustment........... Comprehensive loss............... ---------- ----------- ---------- ------ ----------- ------------ ------------- Balance at December 31, 1998..... 12,309,532 13,000 -- -- -- 19,693,000 (54,347,000) Deferred compensation related to stock options, net of cancellations.................. 6,195,000 Amortization of deferred compensation................... Issuance of common stock, net of offering costs................. 17,926,363 18,000 343,449,000 Shares issued for acquisition of Servicios Interactivos Limitada....................... 20,000 1,000,000 Issuance of common stock--Webcast Solutions...................... 58,689 949,000 Shares issued for acquisition of PageCell International......... 174,418 58,140 8,846,000 Shares issued for acquisition of Paisas......................... 8,728 346,000 Conversion of redeemable convertible preferred stock.... 31,996,667 31,000 100,728,000 Exercise of common stock options........................ 1,618,729 2,000 2,009,000 Stock options issued for services....................... 31,000 Transactions expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders................... 732,000 Shares issued pursuant to the Employee Stock Purchase Plan... 38,157 487,000 Preferred stock dividends and accretion...................... (4,266,000) Net loss for the period.......... (90,673,000) Translation adjustment........... Comprehensive loss............... ---------- ----------- ---------- ------ ----------- ------------ ------------- Balance at December 31, 1999..... 64,151,283 64,000 -- 58,140 -- 484,465,000 (149,286,000) Deferred compensation related to stock options cancellations.... (1,306,000) Amortization of deferred compensation................... Exercise of common stock options........................ 1,482,009 1,000 3,002,000 Rescission of common stock option exercises...................... (327,524) (307,000) Shares issued pursuant to the Employee Stock Purchase Plan... 132,638 1,154,000 Shares issued for acquisition of Guia........................... 71,524 3,362,000 Shares issued for acquisition of AdNet.......................... 1,417,953 2,000 25,941,000 Common stock issuable pursuant to Gratis 1 loan guarantee........ 7,800,000 Net loss for the period.......... (204,581,000) Translation adjustment........... Comprehensive loss............... ---------- ----------- ---------- ------ ----------- ------------ ------------- Balance at December 31, 2000..... 66,927,883 $ 67,000 $7,800,000 58,140 -- $516,311,000 $(353,867,000) ========== =========== ========== ====== =========== ============ ============= OTHER DEFERRED COMPREHENSIVE COMPENSATION INCOME TOTAL ------------ ------------- ------------- Balance at December 31, 1997..... -- $ (3,394,000) Deferred compensation related to stock options, net of cancellations.................. (19,087,000) Amortization of deferred compensation................... 10,421,000 10,421,000 Exercise of common stock options........................ 45,000 Issuance of common stock -- WassNet S.L. .................. 94,000 Issuance of common stock -- Webcast Solutions.............. 36,000 Preferred stock dividends and accretion...................... (4,536,000) Net loss for the year............ (45,973,000) Translation adjustment........... (32,000) (32,000) ------------- Comprehensive loss............... (46,005,000) ----------- --------- ------------- Balance at December 31, 1998..... (8,666,000) (32,000) (43,339,000) Deferred compensation related to stock options, net of cancellations.................. (6,195,000) Amortization of deferred compensation................... 6,400,000 6,400,000 Issuance of common stock, net of offering costs................. 343,467,000 Shares issued for acquisition of Servicios Interactivos Limitada....................... 1,000,000 Issuance of common stock--Webcast Solutions...................... 949,000 Shares issued for acquisition of PageCell International......... 8,846,000 Shares issued for acquisition of Paisas......................... 346,000 Conversion of redeemable convertible preferred stock.... 100,759,000 Exercise of common stock options........................ 2,011,000 Stock options issued for services....................... 31,000 Transactions expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders................... 732,000 Shares issued pursuant to the Employee Stock Purchase Plan... 487,000 Preferred stock dividends and accretion...................... (4,266,000) Net loss for the period.......... (90,673,000) Translation adjustment........... (389,000) (389,000) ------------- Comprehensive loss............... (91,062,000) ----------- --------- ------------- Balance at December 31, 1999..... (8,461,000) (421,000) 326,361,000 Deferred compensation related to stock options cancellations.... 1,306,000 Amortization of deferred compensation................... 4,519,000 4,519,000 Exercise of common stock options........................ 3,003,000 Rescission of common stock option exercises...................... (307,000) Shares issued pursuant to the Employee Stock Purchase Plan... 1,154,000 Shares issued for acquisition of Guia........................... 3,362,000 Shares issued for acquisition of AdNet.......................... 25,943,000 Common stock issuable pursuant to Gratis 1 loan guarantee........ 7,800,000 Net loss for the period.......... (204,581,000) Translation adjustment........... (380,000) (380,000) ------------- Comprehensive loss............... (204,961,000) ----------- --------- ------------- Balance at December 31, 2000..... $(2,636,000) $(801,000) $ 166,874,000 =========== ========= =============
See accompanying notes. F-5 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1999 2000 ------------ ------------- ------------- OPERATING ACTIVITIES Net loss.................................................... $(45,973,000) $ (90,673,000) $(204,581,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 785,000 6,500,000 28,295,000 Impairment of goodwill and other assets................... 56,548,000 Provision for bad debts................................... 65,000 393,000 6,797,000 Amortization of stock based compensation.................. 10,421,000 6,400,000 4,519,000 Stock options issued for services......................... 31,000 Deferred rent expense..................................... 101,000 273,000 1,804,000 Transaction expenses related to Wass Net, S.L. ........... 732,000 Changes in operating assets and liabilities: Accounts receivable..................................... (541,000) (7,305,000) (20,643,000) Unbilled receivables.................................... (3,957,000) Other assets............................................ (1,772,000) (4,853,000) (508,000) Accounts payable and accrued expenses................... 5,448,000 8,672,000 12,789,000 Deferred revenues....................................... 795,000 (183,000) 824,000 ------------ ------------- ------------- Net cash used in operating activities....................... (30,671,000) (80,013,000) (118,113,000) INVESTING ACTIVITIES Purchase of fixed assets.................................... (4,478,000) (18,661,000) (45,200,000) Intangible assets........................................... (241,000) (2,094,000) (2,059,000) Other assets................................................ (21,640,000) (4,140,000) Due from officers........................................... (4,563,000) Cash paid for acquisitions.................................. (6,411,000) (10,565,000) ------------ ------------- ------------- Net cash used in investing activities....................... (4,719,000) (48,806,000) (66,527,000) FINANCING ACTIVITIES Issuance of common stock.................................... 87,000 346,871,000 3,850,000 Issuance of redeemable convertible preferred stock, net of related expenses.......................................... 88,125,000 Capital contribution--Wass Net, S.L. ....................... 51,000 Issuance of convertible subordinated notes.................. 6,000,000 Proceeds from long-term debt................................ 5,074,000 2,054,000 Repayment of long-term debt................................. (1,092,000) (1,672,000) Repayment of convertible subordinated notes................. (6,000,000) Loans (to) from stockholders................................ 9,000 Repayments (to) from stockholders........................... (67,000) Payments under capital leases............................... (112,000) (171,000) (58,000) ------------ ------------- ------------- Net cash provided by financing activities................... 88,093,000 350,682,000 4,174,000 Effect of exchange rate changes on cash and cash equivalents............................................... 1,000 (921,000) (215,000) ------------ ------------- ------------- Net increase/decrease in cash and cash equivalents.......... 52,704,000 220,942,000 (180,681,000) Cash and cash equivalents, beginning of period.............. 443,000 53,147,000 274,089,000 ------------ ------------- ------------- Cash and cash equivalents, end of period.................... $ 53,147,000 $ 274,089,000 $ 93,408,000 ============ ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid............................................... $ 45,000 $ 581,000 $ 1,221,000 ============ ============= ============= Income taxes paid........................................... $ 569,000 ============ ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of fixed assets and intangible assets... $ $ 5,151,000 $ 777,000 ============ ============= ============= Accrued costs for acquisitions............................ $ $ 4,583,000 $ 8,481,000 ============ ============= ============= Common stock issuable..................................... $ $ $ 7,800,000 ============ ============= ============= Accrued costs related to issuance of common stock......... $ $ 43,000 $ ============ ============= ============= Acquisition of fixed assets through capital leases........ $ 314,000 $ $ ============ ============= =============
See accompanying notes. F-6 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION 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. StarMedia Network, Inc. was incorporated under Delaware law in March 1996. The Company is an Internet media company 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 speakers online, including local and regional news, business and sports. The Company promotes user affinity to the StarMedia community by providing tools and services such as Spanish- and Portuguese-language e-mail, chat rooms, instant messaging and personal homepages. REVENUE RECOGNITION The Company's revenues are derived principally from the sale of banner advertisements, email campaigns and sponsorships, some of which also involve some integration, design and coordination of the customer's content with the Company's services, such as the placement of sponsor buttons in specific areas of the Network. The sponsor buttons generally provide users with direct links to sponsor homepages that exist within the Network which are usually focused on selling sponsor merchandise and services to users of the Network. Advertising revenues on both banner and sponsorship contracts, which range from one day to multiple years, are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of minimum number of "impressions." To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the remaining guaranteed impression levels are achieved. Revenue related to e-mail campaigns is recognized as the e-mails are delivered. The Company also earns revenues on sponsorship contracts for fees relating to the design, coordination, and integration of the customer's content. Revenue related to the design, coordination and integration of the customers' content are recognized ratably over the term of the contract or using the percentage of completion method if the fee for such services is fixed. Several of the Company's agreements contain multiple revenue elements. The Company allocates the total agreement fee among each deliverable based on the fair value of each of the deliverables. A portion of the Company's revenues are from barter advertisements (agreement whereby the Company trades advertisements on its Network in exchange for advertisement from third parties). Barter advertising revenues and expenses are recognized in accordance with Emerging Issues Task Force Issue No. 99-17, "Accounting for Barter Advertising." Revenues from barter transactions are recognized during the period in which the advertisements are displayed on the Company's Network. Barter expense is recognized when the Company's advertisements are run by the third-party, which is typically in the same period when barter revenues is recognized. For the years ended December 31, 1998, 1999 and 2000, revenues derived from barter transactions, were approximately $2,400,000, $5,500,000, and $7,200,000 respectively. F-7 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues related to consulting and technical services from time and material contracts are recognized during the period in which the related services are provided and revenue from fixed price contracts is recognized using the percentage-of-completion method. The Company also owns proprietary wireless software products, including SMS and WAP technology. These platforms allow wireless devices, such as cellular phones, to receive, send and access information. The Company either directly licenses this technology to its customers or enters into application service provider (ASP) agreements for the product's use over a specified period of time. Licensing revenue is generally recognized upon delivery. ASP revenue is recognized at predetermined rates based on monthly usage. Additional revenue for transactional and user fees are also recognized based on monthly usage. If additional professional services, such as installation, are required revenue for such additional professional services is recognized at completion. The revenue from any maintenance or support services included in a contract is recognized ratably over the life of the contract. Deferred revenues are primarily comprised of billings in excess of recognized revenues relating to sponsorship and banner advertising contracts. PRODUCT DEVELOPMENT The Company's product development expenses consist of expenses incurred in the classification and organization of listings within the Network and the development of new production enhancements to existing products. Product development costs are expensed as incurred or capitalized in accordance with Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that costs incurred in the preliminary project and post implementation stages of an internal use software project are expensed as incurred and that certain costs incurred in the application development state of the project be capitalized. In March 2000, the Emerging Issue Task Force issued its consensus on Issue No. 00-2, "Accounting for Website Development Costs," (EITF 00-2). EITF 00-2 requires either capitalizing or expensing costs as incurred on specific Web site development costs based on the nature of each cost. The adoption of EITF 00-2 did not have a material impact on the Company's financial position and results of operations. CASH AND CASH EQUIVALENTS The Company considers all financial instruments with an original maturity of three months or less to be cash equivalents. Such amounts are stated at cost which approximates market value. FIXED ASSETS Fixed assets, including those acquired under capital leases, are stated at cost and depreciated by the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining period of the lease. F-8 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS Intangible assets consist of trademarks, trade names and the rights to use certain technology, and are being amortized on a straight-line basis, generally over a period of five years. Goodwill consists of the excess of the purchase price paid over the tangible net assets of acquired companies. Goodwill is amortized using the straight-line method over three years. Amortization expense and accumulated amortization as of December 31, 2000 and for the year then ended were approximately $13,612,000 and $2,435,000, respectively. Amortization expense and accumulated amortization as of December 31, 1999 and for the year then ended were approximately $2,622,000. The Company assesses the recoverability of its goodwill and other intangible assets by determining whether the unamortized balance can be recovered through forecasted cash flows over its remaining life. If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce the net amounts to an amount consistent with forecasted future cash flows discounted at the Company's incremental borrowing rate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. As of December 31, 2000, the Company determined that the fair market value of certain acquired assets was below their respective carrying values (inclusive of the related goodwill). As a result, the Company recorded a goodwill impairment charge of $37,170,000. The Company also determined that certain long-term assets, principally minority investments in other companies were permanently impaired and recorded an additional impairment charge of $19,378,000. INCOME TAXES The Company uses the liability method of accounting for income taxes, whereby deferred income taxes are provided on items recognized for financial reporting purposes over different periods than for income tax purposes. Valuation allowances are provided when the expected realization of tax assets does not meet a more likely than not criteria. ADVERTISING COSTS Advertising costs are expensed as incurred. For the years ended December 31, 1998, 1999 and 2000, advertising expense amounted to approximately $21,246,000, $29,076,000, and $33,131,000 respectively. For the years ended December 31, 1998, 1999 and 2000, advertising expense includes approximately $2,400,000, $5,500,000 and $7,200,000 of charges related to barter advertising transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. F-9 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company grants stock options generally for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes compensation expense only if the fair value of the underlying Common Stock exceeds the exercise price of the stock option on the date of grant. As permitted by SFAS No. 123, the Company continues to account for stock-based compensation in accordance with APB Opinion No. 25 and has elected the pro forma disclosure alternative of SFAS No. 123 (See Note 6). COMPUTATION OF NET LOSS PER SHARE The Company calculates earnings per share in accordance with SFAS No. 128, "Computation of Earnings Per Share." Accordingly, basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Dilutive shares consist of the incremental common shares issuable upon the conversion of the Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options (using the treasury stock method); such additional shares are excluded from the calculation if their effect is anti-dilutive. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2000, the majority of cash and cash equivalents were held by two different financial institutions. The Company's sales are primarily to companies located in the United States and Latin American region. The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. Accounts receivable are under stated contract terms and the Company provides for estimated credit losses at the time of sale. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and loan payable approximate their fair values. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile, Mexico, Spain, Uruguay 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 Venezuelan subsidiary, which is in a highly inflationary economy, is the U.S. dollar. Accordingly, the U.S. dollar is the functional currency, and 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. F-10 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires foreign currency translation adjustments to be included in other comprehensive loss. SEGMENT INFORMATION The Company discloses information regarding segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting of financial information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports. The Company operates in only one business segment. RECLASSIFICATIONS Certain reclassifications were made to the prior year's financial statements to conform with the current year presentation. 2. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, -------------------------- 1999 2000 ----------- ------------ Computer equipment................................ $23,544,000 $ 48,415,000 Furniture and fixtures............................ 966,000 3,181,000 Transportation equipment.......................... 96,000 80,000 Construction in progress.......................... 1,036,000 -- Leasehold improvements............................ 1,923,000 17,795,000 ----------- ------------ 27,565,000 69,471,000 Less accumulated depreciation and amortization.... (4,405,000) (13,902,000) ----------- ------------ $23,160,000 $ 55,569,000 =========== ============
3. STOCKHOLDERS' (DEFICIT) EQUITY COMMON STOCK In April and May 1999, a group of third party investors purchased an aggregate of 3,727,272 shares of the Company's common stock at $11 per share, or approximately $41,000,000, less fees and commissions of $1,640,000 paid by issuing 149,091 shares of the Company's common stock. These investors were subject to a one-year restriction on the sale or transfer of such shares, after which such investors were granted certain registration rights. F-11 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 3. STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED) In May 1999, the Company completed its initial public offering ("IPO") and realized proceeds of approximately $110,400,000, net of underwriting discounts and commissions and related expenses, from the sale of 8,050,000 shares of its common stock. In May 1999, the Company issued 1,133,334 shares of its common stock in connection with the Wass Net merger. In June 1999, the Company issued 20,000 shares of its common stock in connection with the acquisition of Servicios Interactivos Limitada valued at $1,000,000. In September 1999, the Company issued 842,887 shares of its common stock in connection with its merger with Webcast Solutions, which was accounted for as a pooling of interests. In September 1999, the Company issued 174,418 shares of its common stock and 58,140 shares of junior non-voting convertible preferred stock in connection with its acquisition of PageCell International, valued at approximately $8,846,000. In October 1999, the Company realized proceeds of approximately $192,100,000, net of underwriting discounts and commissions and related expenses, from the public offering of 6,000,000 shares of its common stock. In November 1999, the Company issued 8,728 shares of its common stock in connection with its acquisition of Paisas, valued at approximately $346,000. 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. ("AdNet"), valued at approximately $15,000,000. During 2000, the Company issued an additional 948,376 shares, valued at $10,943,000, of its common stock as additional consideration related to AdNet meeting certain revenue targets specified in the purchase agreement. REDEEMABLE CONVERTIBLE PREFERRED STOCK In February 1998, the Company sold 8,000,000 shares of Series B Redeemable Convertible Stock (the "Series B Preferred") for $12,000,000, or $1.50 per share. In August and September 1998, the Company sold 16,666,667 shares of Series C Redeemable Convertible Preferred Stock (the "Series C Preferred") for $80,000,000, or $4.80 per share. The Series A Redeemable Convertible Preferred, Series B Preferred and the Series C Preferred (collectively, the "Preferred Stock") were convertible into common stock on a one for one basis. The holders of the Preferred Stock were entitled to the number of votes equal to the number of common shares that could be obtained upon conversion on the date of the vote and were entitled to a discretionary noncumulative dividend. No Preferred Stock dividends had been declared or paid. At December 31, 1998 and at the date of conversion, total cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $4,233,000 and $8,499,000, respectively. The Preferred Stock was converted into 31,996,667 shares common stocks on a one-for-one basis, upon the consummation of the IPO. F-12 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 3. STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED) JUNIOR NON-VOTING CONVERTIBLE PREFERRED STOCK In connection with the PageCell International acquisition, the Company issued 58,140 shares of Series 1999A, Junior Non-Voting Convertible Preferred Stock (the "Series 1999A Preferred"). After the first anniversary date of the issue of the Series 1999A Preferred, the Series 1999A Preferred is convertible into common stock on a one for one basis subject to certain anti-dilution provisions, at any time at the option of the holder. CONVERTIBLE SUBORDINATED NOTES In January 1998, the Company issued $4,000,000, 8% convertible subordinated notes due at the earlier of the closing of the Series B Preferred financing, or in July 1998. In August 1998 the Company issued $2,000,000 8% convertible subordinated notes due at the earlier of the closing of the Series C Preferred financing or on December 31, 1998. All amounts outstanding were repaid during 1998 in accordance with their terms. WEBCAST As of June 30, 1999 Webcast had 7,237,500 shares of common stock outstanding. On July 1, 1999 Webcast Solutions issued 541,650 shares of Series A Preferred Stock for $1.80 per share. The Series A Preferred Stock was convertible into Webcast Solutions common stock at $1.80 per share at any time. In connection with the Webcast Solutions Merger, all the outstanding Webcast Solutions common stock and Series A Preferred Stock were exchanged for 842,887 shares of the Company's common stock. 4. ACQUISITIONS In February 2000, the Company acquired Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ, leading cultural and entertainment guides in the cities of Sao Paulo and Rio de Janeiro, Brazil in exchange for 71,524 shares of its common stock and $2,000,000 in cash. Pursuant to the purchase agreement, StarMedia is obligated to pay additional consideration in the form of StarMedia common stock, subject to Ola Turista meeting certain specified performance targets. As of December 2000, $1,675,000 of such earnout has been accrued. In April 2000, the Company acquired AdNet. S.A. de R.L. de C.V. ("AdNet"), a leading Mexican search portal and Mexico's largest web directory. 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. Pursuant to the purchase agreement, StarMedia is obligated to pay additional consideration in the form of StarMedia common stock over a five year period, subject to AdNet meeting certain specified performance targets. In 2000 an additional 948,376 shares, valued at $10,943,000 based on the fair market value of the common stock upon issuance, were issued as additional consideration. An additional $1,464,000 has been accrued for targets met in the fourth quarter of 2000. In March 1999, the Company acquired all of the outstanding stock of Achei Internet Promotion Ltda., ("Achei") a Brazilian company in exchange for cash of $810,000. In April 1999, the Company acquired all of the outstanding stock of KD Sistemas de Informacao Ltda. ("KD Sistemas"), a Brazilian company, in exchange for a cash payment of $5,000,000 at closing, $320,000 paid during 1999, $3,490,000 during 2000 and additional estimated cash payments of up to F-13 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 4. ACQUISITIONS (CONTINUED) $4,890,000, in the aggregate, due in March 2001 and 2002 upon the achievement of certain performance targets. The financial performance goals were met prior to December 31, 1999 and approximately $4,500,000 was accrued as additional goodwill at that time. The remaining $3,200,000, for which the performance targets were also met, was contingent upon the continued employment of certain key individuals. As such, during 2000, the Company recorded the remaining $3,200,000 as compensation expense upon the completion of the required employment period. In June 1999, the Company acquired all of the outstanding stock of Servicios Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock valued at $1,000,000. In September 1999, the Company purchased substantially all of the assets of PageCell International Holdings, Inc. ("PageCell International"), a provider of advanced mobile technologies and services, in exchange for 174,418 shares of common stock and 58,140 shares of Series 1999A Junior Non-Voting Convertible Preferred Stock, valued at approximately $8.8 million at the closing date and additional equity consideration valued at up to $15,000,000 upon the achievement of certain specified quarterly performance related targets through December 2000. The actual additional equity consideration earned was approximately $1,380,000, which was accrued at December 31, 2000. The Company accounted for the aforementioned acquisitions under the purchase method of accounting and the results of the operations have been included in the financial statements of the Company from the respective dates of acquisition. The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. The following pro forma unaudited consolidated results of operations assumes the consummation of Ola Turista and AdNet, KD Sistemas, and PageCell International acquisitions as of January 1, 1999:
YEAR ENDED DECEMBER 31, ----------------------------- 1999 2000 ------------- ------------- Revenues....................................... $ 23,229,000 $ 62,529,000 Net loss....................................... $ (97,355,000) $(205,534,000) Net loss available for common shareholders..... $(101,621,100) $(205,534,000) Basic and diluted net loss per share........... $ (2.44) $ (3.08)
The effects of the Achei, SIL and Paisas acquisitions were not included in the proforma unaudited consolidated results of operations as they are not material. In May 1999, the Company acquired all of the outstanding stock of Wass Net, a company organized under the laws of Spain. Wass Net became a wholly-owned subsidiary of the Company and the Wass Net shareholders received 161.9 shares of the Company's common stock for each outstanding Wass Net share. Accordingly, the Company issued 1,133,334 shares of its common stock for all the outstanding shares of Wass Net stock. Wass Net is a Spanish-language online community offering e-mail, chat, classifieds, bulletin boards, home pages and search capabilities. In connection with the merger, Wass Net recorded a one-time charge of $773,000 for transaction costs and StarMedia recorded a one-time charge of $294,000 in transaction costs. In September 1999, Webcast Solutions merged with and into a newly formed wholly-owned subsidiary of the Company (the "Webcast Solutions Merger"). Under the terms of the Webcast F-14 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 4. ACQUISITIONS (CONTINUED) Solutions Merger, 842,887 shares of the Company's common stock were issued in exchange for all of the outstanding WebcastSolutions common stock based on an exchange ratio of .1084 shares of the Company's common stock for each share of Webcast Solutions common stock. Webcast Solutions is a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. In connection with the Webcast Solutions Merger, the Company recorded a one-time charge of $546,000 in transaction costs. The Wass Net acquisition and Webcast Solutions Merger were each accounted for as a pooling of interests. Combined and separate results of StarMedia, Webcast Solutions and Wass Net during the periods preceding the acquisitions were as follows:
WEBCAST STARMEDIA WASS NET SOLUTIONS INTERCOMPANY COMBINED ------------ ----------- ----------- --------------- ------------ Year Ended December 31, 1999 Revenues........................ $ 19,601,000 $ 11,000 $ 499,000 $(22,000) $ 20,089,000 Net Loss........................ $(86,812,000) $(1,459,000) $(2,402,000) -- (90,673,000) Year Ended December 31, 1998 Revenues........................ $ 5,329,000 $ 21,000 $ 411,000 $ (3,000) $ 5,758,000 Net Loss........................ $(45,886,000) $ (72,000) $ (15,000) -- $(45,973,000)
5. LOSS PER SHARE The following tables set forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1999 2000 ------------ ------------ ------------- Numerator: Net loss......................................... $(45,973,000) $(90,673,000) $(204,581,000) Preferred stock dividends and accretion.......... (4,536,000) (4,266,000) -- ------------ ------------ ------------- Numerator for basic and diluted loss per share--net loss available for common stockholders................................... $(50,509,000) $(94,939,000) $(204,581,000) ============ ============ ============= Denominator: Denominator for basic and dilutive loss per share--weighted average shares................. 11,203,749 41,170,602 65,919,685 ============ ============ ============= Basic and diluted net loss per share............. $ (4.51) $ (2.31) $ (3.10) ============ ============ =============
Pro forma unaudited net loss per share assuming the conversion of the preferred stock at the beginning of the respective period was approximately $(1.09) and $(1.68) for the years ended December 31, 1998 and 1999, respectively. Diluted net loss per share does not include the effect of options to purchase 6,131,933, 11,860,970 and 23,716,014 shares of common stock at December 31, 1998, 1999 and 2000, respectively. Diluted net loss per share for the year ended December 31, 1998 also does not include the effect of 31,996,667 F-15 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 5. LOSS PER SHARE (CONTINUED) shares of common stock issuable upon the conversion of Preferred Stock on an "as if converted" basis, respectively, as the effect of their inclusion is antidilutive. 6. STOCK OPTIONS In January 1997, the Company adopted the 1997 Stock Option Plan, in July 1998, the company adopted the 1998 Stock Option Plan and in March 2000, the company adopted the 2000 Stock Incentive Plan (collectively, the "Option Plans"). All options granted under the 1997 plan were cancelled, with the exception of options to purchase 2,000,000 shares. The 1998 Stock Option Plan provided for the authorization of 10,000,000 shares. In February 1999, an additional 7,000,000 shares were added. An annual increase is to be added each July 1 beginning with July 1, 2000 equal to the lesser of $4,000,000 or 4% of the outstanding shares on that date. In July 2000 an additional 2,639,632 shares were reserved for issuance pursuant to the 1998 Stock Option Plan. The 2000 Stock Incentive Plan provides for an initial authorization of 20,000,000 shares, with an annual increase equal to the lesser of 4,000,000 shares or 5% of the then outstanding shares. The Option Plans provide for the granting of incentive stock options and non-qualified stock options to purchase common stock to eligible participants. Options granted under the Option Plans are for periods not to exceed ten years. The 2000 Stock Incentive Plan also provides for the granting of stock appreciation rights, common stock and common stock equivalents to eligible participants. In July 1998, approximately 1,400,000 non-qualified options outstanding were exchanged for incentive stock options having generally equivalent terms as the non-qualified options. Options issued prior to February 1999 generally vest one-third after the first year of service and ratably each month thereafter over the next two years. Options issued beginning February 1999 generally vest one-fourth after the first year of service and ratably each month thereafter over the next three years. Certain options, including options to purchase 2,000,000 shares granted in April 1998, options to purchase 1,500,000 shares granted in December 1998, and options to purchase 2,000,000 shares granted in October 1999, were immediately vested. In connection with the granting of stock options in 1998 and the exchange of non-qualified options to incentive stock options, the Company recorded deferred compensation of approximately $19,087,000. In connection with the granting of stock options in 1999, the Company recorded additional deferred compensation of approximately $6,195,000. Deferred compensation is being amortized for financial reporting purposes over the vesting period of the options. The amount recognized as expense during the year ended December 31, 1998, 1999 and 2000 amounted to approximately $10,421,000, $6,400,000 and $4,519,000 respectively. In connection with the Webcast Solutions Merger, all the Webcast Solutions options outstanding at the time of the merger were exchanged for options to purchase 101,132 shares of the Company's common stock at an exchange ratio of .1084 shares of the Company's common stock for each option outstanding. F-16 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 6. STOCK OPTIONS (CONTINUED) The following transactions occurred with respect to the Option Plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ---------------- Outstanding, December 31, 1997................... 1,804,933 .42 Granted.......................................... 6,792,000 .78 Canceled......................................... (2,085,000) .50 Exercised........................................ (380,000) .12 ----------- ------ Outstanding, December 31, 1998................... 6,131,933 .81 Granted.......................................... 7,607,230 21.26 Canceled......................................... (259,464) 16.65 Exercised........................................ (1,618,729) 1.26 ----------- ------ Outstanding, December 31, 1999................... 11,860,970 13.50 Granted.......................................... 16,340,050 14.16 Canceled......................................... (3,330,521) 25.01 Exercised, net of rescissions.................... (1,154,485) 2.34 ----------- ------ Outstanding, December 31, 2000................... 23,716,014 $12.88 =========== ======
In December 2000, several employees of the Company were given the right to rescind 327,524 options exercised earlier in the year. Such rescissions were permitted to allow the employees to avoid adverse personal tax issues. Upon the rescission of the option exercises, the employees returned the 327,524 shares to the Company and the Company returned 327,524 options, with the original terms, and the cash received upon exercise of the options. Such rescissions resulted in $48,000 in expenses to the Company and the shares were returned to authorized and unissued as of December 31, 2000. The following table summarizes information concerning outstanding options at December 31, 2000:
OPTION OUTSTANDING ---------------------------------- WEIGHTED AVERAGE NUMBER REMAINING NUMBER EXERCISE PRICE RANGE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE --------------------- ----------- ---------------- ----------- $ 0.50--$ 0.50 2,629,475 7.4 2,629,475 $ 1.60--$ 1.66 1,655,320 8.1 1,655,320 $ 3.00--$ 3.13 3,055,000 9.9 405,000 $ 4.88--$ 6.88 7,841,165 9.6 1,088,580 $11.00--$15.00 321,750 8.6 321,750 $18.00--$21.56 399,700 9.4 -- $29.18--$31.50 7,165,250 9.0 3,006,970 $35.43--$48.19 648,354 8.8 168,188 ---------- --------- 23,716,014 9,275,283 ========== =========
The weighted average fair value of options granted during the years ended December 31, 1998, 1999 and 2000 was $3.04, $13.32, and $12.31 respectively. F-17 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 6. STOCK OPTIONS (CONTINUED) Pro forma information regarding net loss is required by SFAS No. 123 which also requires that the information be determined as if the Company has accounted for its stock options under the fair value method of the statement. The fair value for these options was estimated using the minimum value method prior to the Company's IPO and the Black-Scholes option pricing model thereafter with the following assumptions:
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 --------- -------- -------- Average risk-free interest rate............................. 4.44-5.70% 5.00% 4.75% Dividend yield.............................................. 0.0% 0.0% 0.0% Average life................................................ 5 years 5 years 4 years Volatility.................................................. -- .70 1.30
Because the determination of fair value of all options granted after the Company became a public entity include an expected volatility factor in addition to the factors described in the preceding paragraph, the above results may not be representative of future periods. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1999 2000 ------------ ------------- ------------- Pro forma net loss available to common stockholders............. $(51,327,000) $(136,827,000) $(273,058,000) Pro forma basic and diluted loss per share....................... $ (4.58) $ (3.32) $ (4.14)
In May 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees to purchase shares of common stock of the Company through payroll deductions at 85% of the fair market value during specific purchase periods, as defined. A total of 1,500,000 shares of common stock has been reserved for issuance under this plan. During the year ended December 31, 1999, 38,157 shares of common stock were issued to employees for total proceeds of $487,000. During the year ending December 31, 2000, 132,638 shares of common stock were issued to employees for total proceeds of $1,154,000. 7. INCOME TAXES The income tax provision of $231,000 and $158,000 for the years ended December 31, 1999 and 2000, respectively, is comprised of foreign income taxes. F-18 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 7. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. At December 31, 1999 and 2000, significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- Federal net operating loss carryforward............ $32,057,000 $79,882,000 Depreciation and amortization...................... 322,000 (1,360,000) Deferred rent...................................... 179,000 1,121,000 Restructuring charges.............................. 407,000 Other.............................................. 234,000 2,137,000 ----------- ----------- 32,792,000 82,187,000 Valuation allowance................................ (32,792,000) (82,187,000) ----------- ----------- $ -- $ -- =========== ===========
For US Federal income tax purposes, at December 31, 2000 the Company had net operating loss carryforwards of approximately $180,000,000 which expire from 2011 through 2020. A valuation allowance has been recognized to fully offset the deferred tax assets, as it has been determined that it is more likely than not that all or a portion of the deferred tax assets may not be realizable. The reconciliation of the U.S. federal statutory rate to the effective tax rate for the years ended December 31, 1998, 1999 and 2000 is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- U.S. statutory rate..................................... (35%) (35%) (35%) Foreign losses with no U.S. benefit..................... 2 10 11 Expenses not deductible for U.S. tax purposes........... 8 2 9 U.S. losses with no benefit............................. 24 23 15 Foreign taxes........................................... -- 1 1 Other................................................... 1 -- -- --- --- --- Effective tax rate...................................... -% 1% 1% === === ===
8. LONG-TERM DEBT At December 31, 2000, approximately $4.3 million was outstanding under the company's computer equipment, furniture and fixture 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. At December 31, 2000, no additional borrowings were available under the credit line. F-19 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 8. LONG-TERM DEBT (CONTINUED) At December 31, 2000, the aggregate amounts of long-term debt due during the next three years are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 2001........................................................ $2,462,000 2002........................................................ 1,240,000 2003........................................................ 662,000 ---------- $4,364,000 ==========
9. ACCRUED EXPENSES Accrued expenses consist of the following:
YEAR ENDED DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- Product and technology development................. $ 1,655,000 $ 1,173,000 Sales and marketing................................ 3,164,000 4,854,000 General and administrative......................... 1,927,000 3,548,000 Accrued fixed asset and intangible purchases....... 5,068,000 777,000 Acquisitions related expenses and earn-outs........ 5,151,000 9,499,000 Other.............................................. 143,000 210,000 ----------- ----------- $17,108,000 $20,061,000 =========== ===========
10. COMMITMENTS OPERATING LEASES The Company rents office space under noncancelable lease agreements. The minimum annual rental commitments under noncancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2000 are as follows: Year Ended December 31 ------------------------------------------------------------ 2001........................................................ $ 5,330,000 2002........................................................ 4,882,000 2003........................................................ 4,938,000 2004........................................................ 4,877,000 Thereafter.................................................. 40,111,000 ----------- $60,138,000 ===========
Rent expense amounted to approximately $392,000, $1,633,000 and $7,177,000 for the years ended December 31, 1998, 1999 and 2000, respectively. F-20 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 11. LETTERS OF CREDIT The Company has entered into several letter of credit arrangements with banks in connection with an office lease agreement, the KD Sistemes acquisition and the Gratis1 AT&T guarantee (see note 16). At December 31, 2000 the amount of the letters of credit, in the aggregate, is $12,030,000 which is fully secured by an equal amount of cash which is restricted as to its use and included in non-current other assets. 12. RETIREMENT PLAN The Company has a 401(k) plan that covers its eligible domestic employees. The plan does not require a matching contribution by the Company. 13. SIGNIFICANT CUSTOMERS, GEOGRAPHICAL CONCENTRATION AND SEGMENT REPORTING In the year ended December 31, 2000, no advertiser accounted for greater than 10% of total revenues. For the year ended December 31, 1999, no advertiser accounted for greater than 10% of our revenue. For the year ended December 31, 1998, two customers each accounted for approximately 21% and 14% of the Company's total revenue. Geographical information is as follows:
1998 1999 2000 ----------------------- ------------------------- ------------------------- LONG-LIVED LONG-LIVED LONG-LIVED REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS ---------- ---------- ----------- ----------- ----------- ----------- United States........ $5,454,000 $4,572,000 $12,477,000 $19,091,000 $31,654,000 $46,396,000 Latin America........ 304,000 906,000 7,612,000 4,069,000 29,374,000 9,173,000 ---------- ---------- ----------- ----------- ----------- ----------- Consolidated Totals.. $5,758,000 $5,478,000 $20,089,000 $23,160,000 $61,028,000 $55,569,000 ========== ========== =========== =========== =========== ===========
The Company's revenues are allocated to the country in which the invoice for the related service is generated. Although most invoices are issued to customers in the same country in which the invoice is generated, some or all of the related service may be delivered in or targeted to users in another country. 14. DUE FROM OFFICERS During the year ended December 31, 2000, the Company provided loans to certain employees. Balances outstanding at December 31, 2000 are as follows: Due from the Chairman and Chief Executive Officer, bearing interest at 6.75%......................................... $ 649,000 Due from the Chief Financial Officer, bearing interest at 7.0%, up to $500,000 of loan balance and interest will be forgiven by the Company ratably over three years.......... 1,991,000 Due from President, StarMedia de Mexico and President, Global Sales, bearing interest at 7.0%, due in December 2001...................................................... 1,058,000 Due from the Chief Operating Officer, bearing interest at 10%, due on May 22, 2001.................................. 500,000 Due from the Senior Vice President, General Counsel, bearing interest at 7.0%, up to $500,000 of loan balance and interest will be forgiven by the Company ratably over three years............................................... 365,000 ---------- $4,563,000 ==========
F-21 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 14. DUE FROM OFFICERS (CONTINUED) These loans are secured to the extent permitted by Regulation U under the Securities Exchange Act of 1934, as amended, and are otherwise non-recourse to the borrower. Under the respective terms of their loan and employment agreements, the loans provided to the Chairman and Chief Executive Officer, the Chief Financial Officer, and the Senior Vice President, General Counsel will become due and payable within 30 days if the Company terminates their employment for cause or they terminate their employment without good reason, or within 60 days if their employment is terminated due to disability. The Company will forgive the loan to the Chairman and Chief Executive Officer in full if the Company terminates his employment without cause or he terminates his employment with good reason, or in the event of a change in control of the Company. In the case of the Chief Financial Officer or the Senior Vice President, General Counsel, the Company will forgive half of the loan amounts made if the Company terminates their employment without cause or they terminate their employment with good reason. The loan provided to the President, StarMedia de Mexico and President, Global Sales becomes due and payable within 30 days of the termination, for any reason, of her employment with the Company. Loans that are intended to be forgiven over the term of employment are being charged to compensation expense on a straight-line basis over the forgiveness period. 15. RESTRUCTURING CHARGE In September 2000, the Company recorded a one-time charge of $3,935,000 associated with the integration of acquisitions and a company-wide realignment of business operations. As of December 31, 2000 the Company had incurred $3,095,000 of related expenses. 16. RELATED PARTIES GRATIS1 During 2000 the Company acquired a non-controlling 50% interest in Gratis1 ("G1"), which was subsequently reduced to approximately 48%. G1 was formed to provide free unlimited internet access to users in Latin America. The owners of G1 also included Chase Equity Associates, The Flatiron Fund 2000 LLC, the Flatiron Associates II LLC and CMGI, among others. The Company accounted for its investment in G1 under the equity method of accounting and during the second quarter of 2000, the Company's share of equity losses in G1 exceeded its investment basis of $2.5 million and the investment was written-off. Chase Equity Associates, The Flatiron Fund 2000 LLC and the Flatiron Associates II LLC (the "Lenders") purchased debt securities from G1 in an aggregate amount of $17,300,000. Approximately $10,300,000 of such securities were backed by a limited guaranty by the Company, payable in its common stock. In January 2001, G1 ceased operations and in February 2001, the Company issued to the Lenders common stock with a market value of approximately $4,500,000 pursuant to the guaranty of $7,000,000 of such securities. The Lenders have not yet requested payment under the guaranty with respect to the remaining $3,300,000 of such debt securities, however the Company estimates that it will issue additional common stock with a market value of approximately $3,300,000 in connection therewith. Accordingly, at December 31, 2000, the Company has accrued $7,800,000. With respect to the remaining $7,000,000 of such debt securities, in the event of a change of control of the Company, the Lenders would have the right to put (and the Company would have a corresponding right to call) such securities to the Company for shares of its common stock or merger consideration, as the case F-22 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 16. RELATED PARTIES (CONTINUED) may be, at their fair market value for the face amount of such debt securities plus a 25% annualized return. During the third quarter of 2000, an agreement between the Company and AT&T Global Network Services (AT&T) to provide Internet access services in Argentina, Brazil, Chile, Colombia and Mexico was assigned to G1. As of December 31, 2000 AT&T was entitled to draw upon a $1.8 million letter of credit, guaranteed by StarMedia, in the event G1 fails to perform under this agreement. Despite the status of G1, no action to date has been taken by AT&T. During 2000, the Company generated approximately $2.6 million of advertising revenue and $1.4 million of software and consulting services revenue from G1. 17. LITIGATION In December 2000, a consulting company filed suit against the Company claiming unpaid fees of approximately $2,322,000. The Company has denied all material allegations since, among other things, the services were rendered to an unfunded subsidiary and the consulting company was notified that the Company would not be liable for such fees. Management believes that the above matter will be resolved without any material adverse impact to the Company's financial position, results of operations or cash flows. The Company is subject to legal proceedings and claims in the ordinary course of business from time to time, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with our e-mail, message boards and other communications and community features, such as claims alleging defamation and invasion of privacy. At this time, in the opinion of management, there are no pending claims, including the above-mentioned lawsuit, the outcome of which are expected to result in a material adverse effect or the consolidated financial position or results of operations of the Company. F-23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, StarMedia Network, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on this 30th day of March 2001. STARMEDIA NETWORK, INC. By: /s/ FERNANDO J. ESPUELAS ----------------------------------------- Fernando J. Espuelas CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2001:
SIGNATURE TITLE(S) --------- -------- Chief Executive Officer and /s/ FERNANDO J. ESPUELAS Chairman of the Board of ------------------------------------------- Directors (Principal Fernando J. Espuelas Executive Officer) /s/ JACK C. CHEN ------------------------------------------- President and Director Jack C. Chen /s/ STEVEN J. HELLER Chief Financial Officer ------------------------------------------- (Principal Financial and Jack C. Chen Accounting Officer) /s/ DOUGLAS M. KARP ------------------------------------------- Director Douglas M. Karp /s/ MARIE-JOSEE KRAVIS ------------------------------------------- Director Marie-Josee Kravis /s/ GERARDO M. ROSENKRANZ ------------------------------------------- Director Gerardo M. Rosenkranz /s/ SUSAN L. SEGAL ------------------------------------------- Director Susan L. Segal /s/ FREDERICK R. WILSON ------------------------------------------- Director Frederick R. Wilson
I-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the consolidated financial statements of StarMedia Network, Inc., as of December 31, 1999 and 2000, and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated February 16, 2001. Our audits also included the financial statement schedule listed in Item 14(a) of this Annual Report. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP New York, New York February 16, 2001 S-1 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS STARMEDIA NETWORK, INC.
CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ----------- ---------- ---------- ---------- ------------ ---------- YEAR ENDED DECEMBER 31, 2000 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts.... $458,000 $6,797,000 $ -- $5,296,000 $1,959,000 YEAR ENDED DECEMBER 31, 1999 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts.... $ 65,000 $ 393,000 $ -- $ -- $ 458,000 YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts.... $ 65,000 $ -- $ -- $ 65,000
S-2