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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
1-15015
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(COMMISSION FILE NUMBER)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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STARMEDIA NETWORK, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1461770
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation) Number)
75 VARICK STREET, NEW YORK, NY 10013
(Address of Principal Executive (Zip Code)
Offices)
(212) 905-8200
(Registrant's Telephone Number, Including Area Code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No[ ]
As of March 31, 2001, there were 68,030,224 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
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STARMEDIA NETWORK, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 2001
(unaudited) and December 31, 2000......................... 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000........ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000........ 5
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes In Securities and Use of Proceeds................... 14
Item 3. Defaults upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
Item 7. Signatures.................................................. 15
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED) (AUDITED)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 61,458,000 $ 93,408,000
Accounts receivable, net of allowance for bad debts of
$6,711,000 (2001) and $1,959,000 (2000)................. 18,068,000 20,082,000
Unbilled receivables...................................... 5,988,000 6,131,000
Other current assets...................................... 9,633,000 7,680,000
------------ ------------
TOTAL CURRENT ASSETS........................................ 95,147,000 127,301,000
Fixed assets, net........................................... 57,450,000 55,569,000
Intangible assets, net of accumulated amortization of
$2,033,000 (2001) and $1,676,000 (2000)................... 5,276,000 5,557,000
Goodwill, net of accumulated amortization of $3,118,000
(2001) and $2,435,000 (2000).............................. 11,475,000 6,582,000
Officer loans............................................... 7,041,000 4,563,000
Other assets................................................ 14,216,000 16,091,000
------------ ------------
TOTAL ASSETS................................................ $190,605,000 $215,663,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 19,830,000 $ 20,737,000
Accrued expenses.......................................... 25,902,000 20,061,000
Loan payable, current portion............................. 2,374,000 2,462,000
Deferred revenue.......................................... 2,359,000 1,428,000
------------ ------------
TOTAL CURRENT LIABILITIES................................... 50,465,000 44,688,000
LONG TERM LIABILITIES
Loan payable, long term portion........................... 1,259,000 1,902,000
Deferred rent............................................. 2,534,000 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 outstanding at March 31, 2001 and
December 31, 2000....................................... -- --
Common stock, $.001 par value, 200,000,000 shares
authorized 68,030,224 and 66,927,883 shares issued and
outstanding at March 31, 2001 and December 31, 2000,
respectively............................................ 68,000 67,000
Common stock issuable..................................... 3,300,000 7,800,000
Additional paid-in-capital................................ 520,940,000 516,311,000
Accumulated deficit....................................... (385,093,000) (353,867,000)
Deferred compensation..................................... (1,891,000) (2,636,000)
Other comprehensive loss.................................. (977,000) (801,000)
------------ ------------
Total stockholders' equity.................................. 136,347,000 166,874,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $190,605,000 $215,663,000
============ ============
See accompanying notes to financial statements.
3
STARMEDIA NETWORK, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
------------- -------------
(UNAUDITED)
Revenues.................................................... $ 16,039,000 $ 10,056,000
Operating expenses:
Product and technology development........................ 14,542,000 15,900,000
Sales and marketing....................................... 19,664,000 18,587,000
General and administrative................................ 7,674,000 8,075,000
Depreciation and amortization............................. 5,739,000 4,544,000
Stock-based compensation expense.......................... 715,000 1,212,000
------------ ------------
Total operating expenses.................................. 48,334,000 48,318,000
------------ ------------
Loss from operations........................................ (32,295,000) (38,262,000)
Other income (expense):
Interest income........................................... 1,375,000 3,463,000
Interest expense.......................................... (184,000) (320,000)
Other expenses............................................ (35,000) --
------------ ------------
Loss before provision for income taxes...................... (31,139,000) (35,119,000)
Provision for income taxes.................................. (87,000) --
------------ ------------
Net loss.................................................... $(31,226,000) $(35,119,000)
============ ============
Basic and diluted net loss per common share................. $ (0.46) $ (0.54)
============ ============
Number of shares used in computing basic and diluted net
loss per share............................................ 67,467,437 64,639,789
============ ============
See accompanying notes to financial statements.
4
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
------------ ------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss.................................................... $(31,226,000) $(35,119,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
operating activities:
Depreciation and amortization............................. 5,739,000 4,544,000
Provision for bad debts................................... 6,280,000 19,000
Amortization of stock-based compensation.................. 715,000 1,212,000
Deferred rent expense..................................... 335,000 1,053,000
Changes in operating assets and liabilities:
Accounts receivable..................................... (4,206,000) (4,299,000)
Unbilled receivables.................................... 143,000 --
Other assets............................................ (1,960,000) (2,032,000)
Accounts payable and accrued expenses................... (667,000) 16,575,000
Deferred revenues....................................... 999,000 798,000
------------ ------------
Net cash used in operating activities....................... (23,848,000) (17,249,000)
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (7,186,000) (19,692,000)
Intangible assets........................................... (104,000) (763,000)
Other assets................................................ 1,918,000 (5,712,000)
Officer loans............................................... (2,478,000) --
Cash paid for acquisitions.................................. -- (2,091,000)
------------ ------------
Net cash used in investing activities....................... (7,850,000) (28,258,000)
FINANCING ACTIVITIES
Issuance of common stock.................................... 22,000 1,687,000
Repayment of long-term debt................................. (731,000) (352,000)
Payments under capital leases............................... -- (51,000)
------------ ------------
Net cash (used in) provided by financing activities......... (709,000) 1,284,000
Effect of exchange rate changes on cash and cash
equivalents............................................... 457,000 166,000
Net decrease in cash and cash equivalents................... (31,950,000) (44,057,000)
Cash and cash equivalents, beginning of period.............. 93,408,000 274,089,000
------------ ------------
Cash and cash equivalents, end of period.................... $ 61,458,000 $230,032,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 184,000 $ 310,000
============ ============
Income taxes paid........................................... $ 392,000 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Accrued costs for acquisitions.............................. $ 5,576,000 $ --
============ ============
Shares issued for acquisitions.............................. $ 4,639,000 $ --
============ ============
See accompanying notes to financial statements.
5
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying condensed 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.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2000.
2. BARTER TRANSACTIONS
A portion of the Company's revenues are derived from barter transactions
(agreements whereby the Company trades advertising on its Network or services in
exchange for advertising from unrelated parties). Barter advertising revenues
and expenses are recognized in accordance with Emerging Issues Task Force Issue
No. 97-17, "Accounting for Barter Advertising". Barter service revenues and
expenses are recognized in accordance with Accounting Principals Board Opinion
No. 29, "Accounting for Nonmonetary Transactions". Revenues from barter
transactions are recognized during the period in which the advertisements are
displayed on the Company's Network or the services are rendered. Barter expense
is recognized when the Company's advertisements are run by the unrelated party,
which is typically the same period when the barter revenues are recognized. For
the three months ended March 31, 2000 and 2001, revenue derived from advertising
barter transactions were approximately $1.4 million and $2.1 million,
respectively. For the three months ended March 31, 2000 and 2001, revenue
derived from service barter transactions were approximately $0 and
$1.3 million, respectively.
3. EARNOUTS
In connection with the acquisitions of PageCell International Holdings Inc.
("PageCell") in September 1999 and the acquisition of Adnet.S.A. de C.V.
("Adnet") in April 2000, the Company has accrued approximately $1.0 million and
$4.5 million as of March 31, 2001, respectively, as a result of certain revenue
targets being met. The PageCell earnout is the final earnout pursuant to the
agreement. Pursuant to the Adnet acquisition agreement, the Company is obligated
to pay additional consideration in the form of StarMedia common stock over a
five-year period from the acquisition date, subject to Adnet meeting certain
specified performance targets. Such earnouts will be accrued as the targets are
met.
6
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
4. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currency of the Company's active subsidiaries in Argentina,
Brazil, Chile, Mexico, Spain and Colombia is the local currency. The financial
statements of these subsidiaries are translated to U.S. dollars using period-end
exchange rates 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 in a highly inflationary, 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.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
In February 2001, the Company issued 1,058,476 shares of its common stock in
connection with its settlement of a guarantee related to the Gratis 1
transaction described in Note 8 below, valued at approximately $4,500,000. Also
in February of 2001, the Company issued 8,035 shares of its common stock in
connection with its November 1999 acquisition of Paisas, valued at approximately
$139,000.
During the three months ended March 31, 2001, the Company issued 35,830
shares of its common stock for approximately $22,000 in connection with the
exercise of stock options.
6. STOCK OPTIONS
In connection with the granting of stock options in 1998 and the exchange of
non-qualified options to incentive stock options, the Company recorded deferred
compensation of approximately $19,087,000. In connection with the granting of
stock options in 1999, the Company recorded additional deferred compensation of
approximately $6,195,000. Deferred compensation is adjusted quarterly for
exercises, cancellations and terminations and is being amortized for financial
reporting purposes over the vesting period of the options. The amounts
recognized as expense during the three month period ended March 31, 2001 and
March 31, 2000 were approximately $715,000 and $1,212,000, respectively.
Diluted net loss per share does not include the effect of options to
purchase 23,399,356 and 16,033,136 shares of common stock at March 31, 2001 and
2000, respectively.
7. LONG-TERM DEBT
At March 31, 2001, approximately $3.6 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 $240,000, bear
interest ranging from 13.6% to 15.7% per annum and are secured by certain of the
Company's computer equipment and furniture and fixtures.
7
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
8. RELATED PARTY TRANSACTIONS
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 1,058,476 shares of its 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 March 31,
2000, the Company has a remaining accrual of $3,300,000. With respect to the
$7,000,000 of such debt securities which were not subject to such limited
guarantee, 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 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 March 31, 2001,
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.
On January 31, 2001 the Company entered into Letter Agreements with Fernando
J. Espuelas and Jack C. Chen, which amended their existing letter agreements,
dated as of December 28, 2000. These agreements are attached hereto as Exhibits
10.1 and 10.2, respectively and descriptions thereof appear in Note 9 below.
9. DUE FROM OFFICERS
During the year ended December 31, 2000, the Company provided lines of
credit to certain employees. Such lines, aggregating $6.9 million are
non-recourse and bear interest at rates ranging from 6.75% to 10.0% per annum.
In January 2001 the $1.0 million lines available to the Company's Chairman and
Chief Executive and President were increased to $4.0 million each. At March 31,
2001, the Company had loans receivable from officers totaling approximately
$7.0 million. 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 letter
agreements, the loans provided to the Chairman and Chief Executive Officer and
the President will
8
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001
9. DUE FROM OFFICERS (CONTINUED)
become due and payable within 30 days of the occurrence of certain events. Under
the respective terms of their loan and employment agreements, the loans provided
to 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 up to $1,000,000 of the loans to the Chairman and Chief Executive
Officer and the President if the Company terminates either of their employment
without cause or either of them terminates his employment with good reason, or
in the event of a change in control of the Company, provided that they are
employed with the Company on the date of such event. 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.
In connection with the amendments in January 2001, in the event of a change
of control of the Company, pursuant to the terms of their respective letter
agreements, the Chairman and Chief Executive Officer and the President have the
right, within 60 days of such change of control, to put to the Company 1,000,000
shares of common stock at a price equal to the market value of such shares on
the date of the change of control and if on May 31, 2002, any amounts borrowed
under their respective lines of credit and any interest thereon remain
outstanding, the Company has a right to call 1,000,000 shares of common stock
owned by them, at a price per share equal to the greater of $6.00 or the fair
market value on the date of the call notice. Proceeds from any such sale must be
used to repay amounts borrowed under the respective line of credit.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS REPORT.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
AND FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED
ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN OUR
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 UNDER THE
CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN.
OVERVIEW
StarMedia Network, Inc. was incorporated in Delaware in March 1996. We
commenced operations in September 1996 and launched the StarMedia network in
December 1996. In May 1999, we completed the initial public offering of our
common stock 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 a leading Internet media company targeting Spanish- and
Portuguese-speaking markets worldwide. Our network consists of 14 branded
Internet properties:
- STARMEDIA (www.starmedia.com), a 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), a leading Chilean guide for Santiago;
- PAISAS.COM (www.paisas.com) and YOINVITO (www.yoinvito.com), leading
online Colombian city guides;
10
- 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, 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.
On March 30, 2001, the Company entered into an agreement to acquire certain
assets of Obsidiana, Inc., a premier on-line destination for Latin American
women, in exchange for 1,125,000 shares of the Company's common stock. The
acquired assets include Obsidiana's content library, its key trademarks and
domain names, and certain fixed assets located in the United States, Mexico and
Argentina. The transaction is subject to customary closing conditions and is
expected to close during the second fiscal quarter. The stockholders of
Obsidiana include J.P. Morgan Partners (SBIC), LLC and The Flatiron Fund 2000
LLC.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31,
2000
REVENUES
Total revenues increased to $16.0 million for the three months ended
March 31, 2001 from $10.1 million, for the three months ended March 31, 2000.
This increase in revenues was primarily due to an increase in the volume of
revenue-producing advertising impressions and sponsorships. Barter revenue for
the three months ended March 31, 2001 and 2000 were 21% and 14%, respectively.
11
For the three months ended March 31, 2001, no single advertiser accounted
for more than 10% of our total revenues. For the three months ended March 31,
2000, one single advertiser accounted for more than 10% of our total revenues.
For the three months ended March 31, 2001, our top five advertisers accounted
for 34% of our total revenues. For the three months ended March 31, 2000, our
top five advertisers account for 29% of our total revenues.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology expenses decreased to $14.5 million, or 91% of total
revenues, for the three months ended March 31, 2001, from $15.9 million, or 158%
of total revenues, for the three months ended March 31, 2000. This decrease was
primarily due to a decrease of approximately $700,000 in expenses related to
content acquisition and $800,000 for hosting costs.
SALES AND MARKETING
Sales and marketing expenses increased from $18.6 million, or 185% of total
revenues for the three months ended March 31, 2000 to $19.7 million, or 123% of
total revenues for the three months ended March 31, 2001. This increase was
primarily due to the net effect of decreases in advertising, salaries, trade
show events, marketing, legal, consulting and contract fees, totaling
approximately $5.2 million offset by an increase for bad debt reserve of
$6.3 million. We believe the Company has ample coverage for bad debt and will
continue to review the collectibility of our receivables.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $7.7 million, or 48% of
total revenues, for the three months ended March 31, 2001, from $8.1 million, or
80% of total revenues, for the three months ended March 31, 2000. The decrease
in general and administrative expenses was primarily due to decreases in legal,
tax, audit, and rent expense, offset by an increase in salaries and related
charges.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $5.7 million, or 36% of
total revenues, for the three months ended March 31, 2001, from $4.5 million or
45% of total revenues, for the three months ended March 31, 2000. This increase
is due to the net effect of an increase in depreciation expense due to
additional capital purchases offset by a decrease of goodwill amortization due
to an impairment of goodwill in December 2000. We expect that depreciation and
amortization expenses will continue to increase as additional capital purchases
are incurred during 2001.
STOCK-BASED COMPENSATION EXPENSE
Of the cumulative deferred compensation amount, $715,000 was recorded as an
expense for the three months ended March 31, 2001 compared with $1.2 million
recorded as expense for the three months ended March 31, 2000. The unamortized
balance is being amortized over the vesting period for the individual options,
which is typically three years for options issued prior to February 1999 and
four years for options issued thereafter.
INTEREST
Interest income includes income from our cash and investments. Interest
income decreased to $1.4 million for the three months ended March 31, 2001 from
$3.5 million for the three months ended March 31, 2000. Interest income
decreased as a result of a decrease in the average invested cash balance for the
above periods.
Interest expense decreased to $184,000 for the three months ended March 31,
2001 from $320,000 for the three months ended March 31, 2000. Interest expense
decreased as a result of a decrease in the average loan balance outstanding for
the above periods.
12
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through the sale of our
equity securities. At March 31, 2001, we had $61.5 million in cash and cash
equivalents, a decrease of $32.0 million from December 31, 2000.
For the three months ended March 31, 2001, we used $23.8 million in
operating activities, substantially related to our $31.2 million loss during the
period, which included non-cash activities such as $5.7 million for depreciation
and amortization, $6.3 million in provision for bad debts and $715,000 for
amortization of stock based compensation. In addition, for the three months
ended March 31, 2001, we used $7.9 million in investing activities, including
$7.2 million for fixed assets.
Net cash (used in) provided by financing activities were ($709,000) and
$1.3 million for the three months ended March 31, 2001 and 2000, respectively.
Net cash used on financing activities during the three months ended March 31,
2001 consisted primarily of repayment of long-term debt, offset by proceeds from
issuance of common stock. Net cash provided by financing activities during the
three months ended March 31, 2000 consisted primarily of proceeds from issuance
of common stock.
At March 31, 2001, approximately $3.6 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 $240,000, bear
interest ranging from 13.6% to 15.7% per annum and are secured by certain
computer equipment and furniture and fixtures.
Our principal commitments consist of obligations outstanding under capital
and operating leases.
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 will continue to evaluate possible investments
in businesses, products and technologies.
While we recently announced our intent to reduce operating expenses
significantly, through a reduction of our work force and other operating costs,
our current cash and cash equivalents may not be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the next
12 months. If working capital is insufficient to satisfy our liquidity
requirements, we will seek to sell additional equity or debt securities or
establish an additional credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. The incurrence of additional indebtedness would result in
increased fixed obligations and could result in operating covenants that would
restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed with this report (numbered in
accordance with Item 601 of Regulation S-K).
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.1 Letter Agreement, dated as of January 31, 2001, between the
Company and Fernando J. Espuelas.
10.2 Letter Agreement, dated as of January 31, 2001, between the
Company and Jack C. Chen.
10.3 Lease Agreement, dated as of November 22, 1999 between The
Rector, Church-Wardens And Vestrymen Of Trinity Church In
The City Of New York, as Landlord and the Company, as
Tenant.
10.4 First Amendment Of Lease, dated as of October 1, 2000 by and
between The Rector, Church-Wardens And Vestrymen Of Trinity
Church In The City Of New York, as Landlord and the Company,
as Tenant.
(b) Reports on Form 8-K:
NONE.
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ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2001
STARMEDIA NETWORK, INC.
By: /s/ STEVEN J. HELLER
-----------------------------------------
Steven J. Heller
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL OFFICER)
15