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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
1-15015
(COMMISSION FILE NUMBER)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
STARMEDIA NETWORK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1461770
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
999 Brickell Ave., Suite #808, Miami, Fl 33131
(Address of Principal Executive Offices) (Zip Code)
(305) 938-3000
(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 July 1, 2002, there were 79,970,177 shares of the Registrant's Common
Stock, $0.001 par value per share, outstanding.
STARMEDIA NETWORK, INC. AND SUBSIDIARIES INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets at March 31, 2001 (restated) and December 31,
2000 (restated)................................................................................... 7
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31,
2001 (restated) and 2000 (restated)............................................................... 8
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2001 (restated) and 2000 (restated)............................................................... 9
Notes to Restated and Unaudited Condensed Consolidated Financial Statements for the three months
ended March 31, 2001.............................................................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 20
Item 2. Changes In Securities and Use of Proceeds......................................................... 22
Item 3. Defaults upon Senior Securities................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............................................... 22
Item 5. Other Information................................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................................................. 22
Item 7. Signatures........................................................................................ 23
2
PART I
RESTATEMENT INFORMATION
We are making this filing to show the effect of the restatement
of our consolidated financial statements noted below.
The Company, in consultation with its independent accountants,
determined to restate its unaudited consolidated financial statements for the
fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as
well as quarters ended March 31 and June 30, 2001, and its audited consolidated
financial statements for the fiscal year ended December 31, 2000. The Company
initially announced its intention to restate these consolidated financial
statements on November 19, 2001. That announcement related to the preliminary
conclusion of a Special Committee of the Board of Directors that approximately
$10,000,000 in revenues was improperly recognized by two of the Company's
Mexican subsidiaries during the period October 1, 2000 through June 30, 2001.
Subsequent to that announcement, the Special Committee authorized the Company's
management to undertake an additional investigation in order to confirm whether
any additional accounting irregularities occurred during the periods in
question.
The Company's restated unaudited consolidated financial statements
for quarters ended March 31, June 30, September 30, and December 31, 2000, as
well as quarters ended March 31 and June 30, 2001, and for the audited fiscal
year ended December 31, 2000 contain adjustments that fall into five
categories. The first category of adjustments arises from the independent
investigation conducted by a Special Committee of the Board of Directors and
referred to in the Company's November 19, 2001 announcement. The findings of
the Special Committee's investigation indicate that the Company improperly
recognized certain revenues and pre-paid expenses. The majority of these
revenues and pre-paid expenses were recognized by its Mexican subsidiary, SMN
de Mexico (d/b/a StarMedia Mexico). The remainder was recognized by its other
Mexican subsidiary, AdNet, S.A. de C.V. ("AdNet").
The other categories of adjustments arise from management's additional
investigation to confirm the accuracy of the consolidated financial statements
to be restated based on the Special Committee's investigation. The findings of
management's investigation indicate that, in addition to the accounting
irregularities identified by the Special Committee, the Company improperly (A)
recognized certain revenues and related expenses that should have been
classified as barter transactions in accordance with US GAAP; (B) recognized
revenues from a number of sales that provided for future contingencies, were not
appropriately authorized by the customer, or for some other reason should not
have been recognized; (C) failed to write down the value of certain assets at
March 31, 2001 upon shutting down of a subsidiary; and (D) recognized certain
other transactions that management identified in the course of its review of the
Company's financial statements.
The following is a summary of the cumulative effect of the restatement
of the Company's net loss for the quarter ended March 31, 2001.
As previously
reported As restated
------------- ------------
Net loss for quarter ended March 31, 2001 $(31,226,000) $(38,643,000)
Additional information related to the restatements and adjustments made
to the Company's financial statements for the periods mentioned above are set
forth in Note 2 of the Unaudited Condensed Consolidated Financial Statements.
This information includes the amount of the adjustments made during the quarter
with respect to which the Company has restated or adjusted previously issued
financial statements.
3
RECENT DEVELOPMENTS
Since March 31, 2001, the Company has experienced the following developments set
forth below.
o In May 2001, the Company issued 1,431,373 shares of its Series A
Convertible Preferred Stock at a price per share of $25.50 to Bell
South Enterprises, Inc. ("BellSouth"), About.com, Inc. ("About.com")
and certain other investors resulting in total proceeds of
approximately $35,100,000 to the Company, net of issuance costs of
approximately $1,400,000 (the "BellSouth Investment"). These shares are
convertible into 14,313,730 shares of the Company's common stock at any
time at the option of the holder. After 60 months from the date of
issuance, the Company shall redeem the Series A Convertible Preferred
Stock for cash or shares of the Company's common stock, in an amount
equal to $36,500,000, plus accrued dividends thereon. Dividends
accrue at 6% per annum. In addition, the Company agreed to issue
warrants to BellSouth to purchase up to 4,500,000 shares of the
Company's common stock, with exercise prices ranging from $4.55 to
$8.55 per share that vest in May 2002 and expire during the period
from May 2005 through May 2007. These warrants were valued, by an
independent appraiser, at approximately $2,200,000 and are being
amortized over 60 months.
o In May 2001, the Company entered into an agreement with BellSouth to
create multi-access portals in Latin America (the "BellSouth Strategic
Agreement"). Under the terms of the five-year agreement, the Company
will design and service the multi-access portals and mobile
applications and provide content, software application integration and
support to BellSouth's operating companies in Latin America. BellSouth
will supply wireless communications, marketing of services and billing
capabilities. The two companies will share revenues generated by the
new multi-access portals. All revenues associated with design and
maintenance activities and the technology licenses are being recognized
ratably over the life of the specific agreements with BellSouth's
operating subsidiaries, while the user fees and transaction revenues
are being recognized when the services are rendered.
o In June 2001, the Company entered into a five-year agreement with
About.com to create a jointly operated co-branded website, within the
About.com website. About.com granted the Company certain worldwide
license rights to use its content and proprietary technology in
exchange for $2,000,000 in cash and $3,000,000 in shares of the
Company's common stock. As of December 31, 2001, $2,000,000 of such
shares has been issued and $1,000,000 remains in common stock issuable.
The aggregate purchase price of $5,000,000 was allocated to intangible
assets ($3,500,000), prepaid maintenance ($700,000) and prepaid
advertising expenses ($800,000).
o Gerardo Rosenkrantz resigned from the board of directors in July 2001
and Marie Jose Kravis and Jack Chen resigned from the board of
directors in August 2001.
o In June 2001 Enrique Narciso was appointed as President and a director
of the Company. He replaced Jack Chen as President. Subsequently, in
August 2001 Mr. Narciso was appointed as CEO of the Company, replacing
Fernando Espuelas.
o On November 19, 2001, the Company announced that it planned to restate
its unaudited financial statements for the quarters ended March 31 and
June 30, 2001, and its audited financial statements for the fiscal year
ended December 31, 2000 as a result of an investigation by a Special
Committee of the Company's Board of Directors into accounting issues
with respect to revenue recognition by two of the Company's Mexican
subsidiaries, AdNet, S.A. de C.V. and StarMedia Mexico, S.A. de C.V.
At that time, the Company had come to a preliminary conclusion that
revenues aggregating approximately $10 million were improperly
recognized by those
4
subsidiaries during the period from October 1, 2000 through June 30,
2001, and that at that time, the financial statements for those periods
should not be relied on. See note 2 of Notes to Unaudited Condensed
Consolidated Financial Statements.
o Following the foregoing announcement:
-- The Nasdaq National Market suspended trading of the Company's
common stock effective as of the open of business on November
19, 2001 and delisting procedures commenced as a result of
the Company's failure to make a timely filing of its report
on Form 10-Q for the quarter ended September 30, 2001.
Subsequently, effective as of February 1, 2002, our common
stock was delisted from and ceased to be quoted by The Nasdaq
National Market. Following delisting by The Nasdaq National
Market shares of the Company's common stock have been quoted
on the Pink Sheets LLC electronic quotation system for "over
the counter" (OTC) securities, a market which is generally
not as liquid as The Nasdaq National Market.
-- The Securities and Exchange Commission (SEC) informed the
Company that it had commenced an investigation into the
circumstances leading up to the restatements referred to
above. The investigation is on-going.
-- In late 2001 and early 2002, eleven lawsuits were filed
against the Company in the Southern District of New York in
connection with the Company's announcement relating to the
Restatement referred to in "Restatement Information" above. A
lead plaintiff for the class and lead plaintiff's counsel were
subsequently selected and a motion filed to consolidate the
various claims. The Consolidated Amended Complaint was filed
on May 31, 2002 in the Southern District of New York under the
caption In re StarMedia Network, Inc. Securities Litigation 01
Civ. 10556 (S.D.N.Y.). In June 2002, the lead plaintiffs and
all defendants executed a settlement agreement that resolves
all claims in the consolidated action. The settlement amount
will be paid by the Company's directors and officers liability
insurance carrier. This settlement agreement is subject to
review and ratification by the Honorable Denny Chin of the
United States District Court for the Southern District of New
York. See "Legal Proceedings".
o On November 19, 2001 the Company also announced as follows:
-- That Steven J. Heller had resigned as Chief Financial Officer
of StarMedia Network, effective November 15, 2001, on terms
and conditions previously agreed with StarMedia Network.
-- That the Company had terminated the employment of Justin
Macedonia as General Counsel. See "Legal Proceedings".
-- That the Company and the former stockholders of AdNet entered
into a Termination Agreement pursuant to which the Company
agreed to issue to the stockholders of AdNet 8,000,000 shares
of the Company's common stock, in full satisfaction of the
Company's obligations under earn-out and other provisions set
forth in the agreement pursuant to which the Company had
acquired AdNet.
-- That Susan Segal had been appointed to serve as acting
Chairman of the Board. She succeeded Fernando Espuelas,
co-founder and former Chief Executive Officer of the Company,
who, pursuant to his August 2001 agreement with the Company,
resigned on November 15, 2001 as Chairman of the Board of
Directors, and that Mr. Espuelas continued to serve as a
Director on the Company's Board.
o In November 2001 the Company vacated its headquarters at 75 Varick
Street in New York City. Under terms negotiated with its landlord, the
Company was released from any further obligations under the lease. The
Company's headquarters are currently located in Miami, Florida, which
was previously served as the headquarters of the Company's Mobile
Solutions business.
o In December 2001, the Company sold substantially all of the assets
associated with Cade?, a Brazilian online directory, to Yahoo Brasil
Ltda.
o Effective as of April 19, 2002, Enrique Narciso resigned as CEO,
President and director of the Company. As disclosed in the Report on
Form 8-K filed by the Company on April 19, 2002, in tendering his
resignation Mr. Narciso informed the Company that he needed to focus on
a personal matter that has since resulted in his pleading guilty to a
tax violation involving his 1998 individual federal tax return.
Following Mr. Narciso's resignation, Jose Manuel Tost was appointed
President of the Company and Jorge Rincon was appointed Chief Operating
Officer of the Company.
o Effective as of April 29, 2002, Ana Maria Lozano-Stickley was appointed
as Chief Financial Officer of the Company. Prior to that time Ms.
Lozano-Stickley had been Acting Vice President of Accounting and
5
Administration of the Company since January 2002.
o The Company has continued to undertake a realignment for the purposes
of focusing its resources on its mobile solutions business. As part of
this realignment, the Company reduced its number of full-time employees
from 520 as of close of business on December 31, 2001 to 391 as of
June 21, 2002. In addition, following the Company's change of its
headquarters in late 2001 from New York to Miami, Florida, which was
previously the headquarters of the Company's mobile solutions business,
during 2002, the Company has substantially reduced its presence in New
York. As of June 21, 2002, the Company currently had 30 employees based
in its New York City offices, as compared to 118 employees based in
such office as of close of business on December 31, 2001.
o On July 1, 2002, Fernando Espuelas notified the Company that effective
as of that date he resigned as a director of the Company.
o On July 3, 2002 the Company sold most of its assets associated with
starmedia.com, its Spanish- and Portuguese-language portal, and
LatinRed, its Spanish language online community, to eresMas Interactive
S.A. ("EresMas"). Following the sale of starmedia.com and LatinRed to
EresMas, the Company is principally engaged in the business of
providing integrated Internet solutions to wireless telephone operators
targeting Spanish- and Portuguese-speaking audiences, principally in
Latin America, and the Company retains only the following Internet
media services:
o batepapo.com.br, a Brazilian chat service, which the Company is
considering either selling or closing;
o the local city guides such as nacidade.com,.br; guiasp.com.br;
guiarj.com.br; paisas.com; openchile.cl; panoramas.cl and
AdNet.com.mx, which the Company anticipates that it will continue
to operate in support of its mobile solutions business.
As part of the terms of the sale, the Company has agreed to cease
using the "StarMedia" brand commercially and, subject to shareholder
approval, to amend its certificate of incorporation to change its name.
Following the sale, the Company operates commercially under the name
"CycleLogic."
6
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(RESTATED) (RESTATED)
(UNAUDITED) (NOTE 1)
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 $1,849,000
(2000).................................................................................... 7,458,000 13,524,000
Unbilled receivables...................................................................... 5,988,000 6,131,000
Other current assets...................................................................... 7,171,000 7,680,000
------------- ------------
TOTAL CURRENT ASSETS........................................................................ 82,075,000 120,743,000
Fixed assets, net........................................................................... 56,409,000 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)........ 10,454,000 6,582,000
Officer loans............................................................................... 7,041,000 4,563,000
Other assets................................................................................ 14,139,000 16,091,000
------------- ------------
TOTAL ASSETS................................................................................ $ 175,394,000 $ 209,105,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 19,297,000 $ 20,737,000
Accrued expenses.......................................................................... 21,445,000 15,601,000
Loan payable, current portion............................................................. 2,374,000 2,462,000
Deferred revenue.......................................................................... 1,657,000 1,128,000
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 44,773,000 39,928,000
Loan payable, long-term portion........................................................... 1,259,000 1,902,000
Deferred rent............................................................................. 2,531,000 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..................................................................... 7,760,000 12,260,000
Additional paid-in capital................................................................ 520,940,000 516,311,000
Accumulated deficit....................................................................... (399,069,000) (360,125,000)
Deferred compensation..................................................................... (1,891,000) (2,636,000)
Accumulated comprehensive loss............................................................ (977,000) (801,000)
------------- --------------
Total stockholders' equity.................................................................. 126,831,000 165,076,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $ 175,394,000 $ 209,105,000
============= =============
See accompanying notes to Condensed Consolidated Financial Statements
for the quarterly period ended March 31, 2001.
7
STARMEDIA NETWORK, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
(RESTATED) (RESTATED)
---------- ----------
(UNAUDITED)
Revenues.................................................................................. $ 8,871,000 $ 9,861,000
Operating expenses:
Product and technology development...................................................... 14,542,000 15,900,000
Sales and marketing..................................................................... 17,472,000 18,587,000
General and administrative.............................................................. 9,158,000 7,880,000
Depreciation and amortization........................................................... 5,739,000 4,544,000
Stock-based compensation expense........................................................ 715,000 1,212,000
Loss on impairment of fixed............................................................. 1,153,000 --
------------ -------------
Total operating expenses.............................................................. 48,779,000 48,123,000
------------ -------------
Loss from operations...................................................................... (39,908,000) (38,262,000)
Other income (expense):
Interest income......................................................................... 1,375,000 3,463,000
Interest expense........................................................................ (75,000) (320,000)
Other expenses.......................................................................... (35,000) --
------------ -------------
Loss before provision for income taxes.................................................... $(38,643,000) (35,119,000)
Provision for income taxes................................................................ -- --
------------ -------------
Net loss.................................................................................. $(38,643,000) $(35,119,000)
============ ============
Basic and diluted net loss per common share............................................... $(0.57) $(0.54)
------------ -------------
Number of shares used in computing basic and diluted net loss per share................... 67,467,437 64,639,789
============= =============
8
See accompanying notes to Condensed Consolidated Financial Statements
for the quarterly period ended March 31, 2001.
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
(RESTATED)
---------- ----------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss................................................................................... $(38,643,000) $(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.................................................................. 6,120,000 19,000
Loss on impairment of fixed 1,153,000 --
assets.................................................................................
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............................................................... (11,000) (4,299,000)
Unbilled receivables.............................................................. 143,000 --
Other assets...................................................................... 421,000 (2,032,000)
Accounts payable and accrued expenses............................................. (195,000) 16,575,000
Deferred revenues................................................................. 297,000 798,000
------------ ------------
Net cash used in operating activities...................................................... (23,926,000) (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.................................................. (32,028,000) (44,057,000)
Cash and cash equivalents, beginning of period............................................. 93,408,000 274,089,000
------------ ------------
Cash and cash equivalents, end of period................................................... $ 61,380,000 $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 Condensed Consolidated Financial Statements
for the quarterly period ended March 31, 2001.
9
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO RESTATED AND UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 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, after a significant change in business strategy
during the second half of 2001, is now principally engaged in providing
mobile Internet software and application solutions to wireless telephone
operators businesses targeting Spanish- and Portuguese-speaking audiences
worldwide. The Company's mobile Internet solutions allow users to
access and receive Internet content, tools and applications through wireless
devices, such as pagers, cellular phones, PCS handsets and personal digital
assistants, or PDAs. The Company was originally established to develop
Internet sites tailored specifically to the interests and needs of Spanish
and Portuguese speakers, selling advertising to advertisers seeking to reach
its user base, and historically derived a majority of its revenues from fees
paid by advertisers on its sites. Although the Company continues to
provide Internet Media services, these services are no longer an integral
part of the Company's business.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. The balance sheet at December 31,
2000 (restated) 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, 2001.
2. RESTATEMENT OF FINANCIAL STATEMENTS
The Company, in consultation with its independent accountants,
determined to restate its unaudited consolidated financial statements for the
fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as
well as quarters ended March 31 and June 30, 2001, and its audited consolidated
financial statements for the fiscal year ended December 31, 2000. The Company
initially announced its intention to restate these consolidated financial
statements on November 19, 2001. That announcement related to the preliminary
conclusion of a Special Committee of the Board of Directors that approximately
$10,000,000 in revenues was improperly recognized by two of the Company's
Mexican subsidiaries during the period October 1, 2000 through June 30, 2001.
Subsequent to that announcement, the Special Committee authorized the Company's
management to undertake an additional investigation in order to confirm whether
any additional accounting irregularities occurred during the periods in
question.
The Company's unaudited restated consolidated financial statements
for quarters ended March 31, June 30, September 30, and December 31, 2000, as
well as quarters ended March 31 and June 30, 2001, and for the audited fiscal
year ended December 31, 2000 contain adjustments that fall into five
categories. The first category of adjustments arises from the independent
investigation conducted by a Special Committee of the Board of Directors and
referred to in the Company's November 19, 2001 announcement. The findings of
the Special Committee's investigation indicate that the Company improperly
recognized certain revenues and pre-paid expenses. The majority of these
revenues and pre-paid expenses were recognized by its Mexican subsidiary, SMN
de Mexico (d/b/a StarMedia Mexico). The remainder was recognized by its other
Mexican subsidiary, AdNet, S.A. de C.V. ("AdNet").
The other categories of adjustments arise from management's additional
investigation to confirm the accuracy of the consolidated financial statements
to be restated based on the Special Committee's investigation. The findings of
management's investigation indicate that, in addition to the accounting
irregularities identified by the Special Committee, the Company improperly
(A) recognized certain revenues and related expenses that should have been
classified as barter transactions in accordance with US GAAP; (B) recognized
revenues from a number of sales that provided for future contingencies, were not
appropriately authorized by the customer, or for some other reason should not
have been recognized; (C) failed to write down the value of certain assets at
March 31, 2001 upon shutting down of a subsidiary; and (D) recognized certain
other transactions that management identified in the course of its review of the
Company's financial statements.
10
As a result of the restatement, the consolidated financial statements
of the Company have been restated as summarized below (in thousand except per
share amounts):
As of and for
March 31, 2001
----------------------------
As previously
reported As restated
------------- -----------
Consolidated Balance Sheet:
Accounts receivable, net $ 18,068 $ 7,458
Other current assets 9,633 7,171
Total current assets 95,147 82,075
Fixed assets, net 57,450 56,409
Goodwill, net 11,475 10,454
Other assets 14,216 14,139
Total assets 190,605 175,394
Accounts payable 19,830 19,297
Accrued expenses 25,902 21,445
Deferred revenue 2,359 1,657
Total current liabilities 50,465 44,773
Deferred rent 2,534 2,531
Common stock issuable 3,300 7,760
Accumulated deficit (385,093) (399,069)
Total stockholder's equity 136,347 126,831
Total liabilities and
stockholder's equity $ 190,605 $ 175,394
For the period ended For the period ended
March 31, 2001 March 31, 2000
-------------------- --------------------
As previously As previously
Reported As restated reported As restated
------------- ----------- ------------- -----------
Consolidated Statement
of Operations:
Revenues $ 16,039 $ 8,871 $ 10,056 $ 9,861
Sales and marketing 19,664 17,472 18,587 18,587
General and administrative 7,674 9,158 8,075 7,880
Loss from impairment of fixed assets -- 1,153 -- --
Total operating expenses 48,334 48,779 48,318 48,123
Loss from operations (32,295) (39,908) (38,262) (38,262)
Interest expense (184) (75) (310) (310)
Loss before provision for
income taxes (31,139) (38,643) (35,119) (35,119)
Provision for income taxes (87) -- -- --
Net Loss (31,226) (38,643) (35,119) (35,119)
Basic and diluted net loss
per Common Share $ (0.46) $ (0.57) $ (0.54) $ (0.54)
11
For additional information concerning the Company's consolidated
financial results, as restated, see the Company's selected restated consolidated
financial information data and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management believes that it has made all the adjustments considered
necessary as a result of the Special Committee's investigation and management's
own investigation into prior periods' financial statements. Management further
believes that the Company's consolidated financial statements for the fiscal
quarters ended March 31, June 30, September 30, and December 31, 2000; March 31
and June 30, 2001 and for the fiscal year ended December 31, 2000, as restated,
include all adjustments necessary for a fair presentation of the Company's
financial position and results of operations for such periods.
3. 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. 99-17, "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 $3.1 million, respectively.
4. EARNOUTS
In connection with the acquisitions of AdNet S.A. de C.V. ("AdNet") in
April 2000, the Company has accrued approximately $4.6 million as of March 31,
2001, as a result of certain revenue targets being met. 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.
5. IMPAIRMENT OF FIXED ASSETS
In the first quarter of 2001, the Company decided to cease operating
the Webcast Solutions Company that had been merged in September 1999 with a
wholly owned subsidiary of the company ("Webcast Solutions"). Webcast Solutions
was a streaming media company focused on the global delivery of audio, video and
other internet based interactive media. The reason to no longer operate this
asset mainly resulted from the significant costs that were required to operate
and maintain this investment. Furthermore, the penetration rates previously
anticipated by the company were not achieved during the period the asset
operated and management did not expect significant short-term nor long-term
improvements. The total loss recognized as a result of this decision totaled
$1,153,000.
6. 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 is in a highly inflationary
environment, 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.
12
7. 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 Gratis1
transaction described in Note 10 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.
8. 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 $19,500,000. In connection with
the granting of stock options in 1999, the Company recorded additional deferred
compensation of approximately $6,400,000. 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.
9. 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.
10. 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.
13
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
11 below.
11. 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 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.
12. LEGAL PROCEEDINGS
See Part II, Item 1, Legal Proceedings.
13. SUBSEQUENT EVENT
On July 3, 2002 the Company sold substantially all of the assets
associated with starmedia.com, the Company's Spanish- and Portuguese-language
portal, and LatinRed, the Company's Spanish language online community, to
eresMas Interactive S.A. ("EresMas") for $8,000,000 in cash. In addition, in
order to facilitate the transfer of these assets, the Company agreed to
provide transitional services to EresMas under a Transition Licensing
Agreement. The Company will record a loss of approximately $500,000 from the
aforementioned sale. The assets sold comprised substantially of fixed assets
and intangible assets. As part of the terms of the sale to EresMas, the
Company has agreed to cease using the "StarMedia" brand commercially and,
subject to shareholder approval, to amend its certificate of incorporation to
change its name. Henceforth, the Company will operate commercially under the
name "CycleLogic."
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
14
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.
RESTATEMENT
The Company, in consultation with its independent accountants,
determined to restate its unaudited consolidated financial statements for the
fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as
well as quarters ended March 31 and June 30, 2001, and its audited consolidated
financial statements for the fiscal year ended December 31, 2000. The Company
initially announced its intention to restate these consolidated financial
statements on November 19, 2001. That announcement related to the preliminary
conclusion of a Special Committee of the Board of Directors that approximately
$10,000,000 in revenues was improperly recognized by two of the Company's
Mexican subsidiaries during the period October 1, 2000 through June 30, 2001.
Subsequent to that announcement, the Special Committee authorized the Company's
management to undertake an additional investigation in order to confirm whether
any additional accounting irregularities occurred during the periods in
question.
Additional information related to the restatements and adjustments made
to the Company's financial statements for the periods mentioned above are set
forth in Note 2 of the Unaudited Condensed Consolidated Financial Statements.
This information includes the amount of the adjustments made during the quarter
with respect to which the Company has restated or adjusted previously issued
financial statements.
As a result of the restatement of the Company's consolidated financial
statements for the quarterly period ended March 31, 2001 certain information
contained in this item has been changed from that which was reported previously
in the Company's Form 10-Q. (see Note 2 of Notes to Unaudited Condensed
Consolidated Financial Statements).
Since the Company originally filed its Report on Form 10-Q for the
fiscal quarter ended March 30, 2001, the Company's business has changed
significantly. The following description is accurate as of the date that this
Report on Form 10-Q/A was filed:
OVERVIEW
StarMedia Network, Inc. (d/b/a CycleLogic) was incorporated in Delaware
in March 1996. We commenced operations in September 1996 and launched the
StarMedia network of websites targeted at Spanish and Portuguese-speaking
Internet users 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 999
Brickell Ave. Suite 808, Miami, Florida, 33131 and our telephone number is (305)
938-3000. Previously, our principal offices were located at 75 Varick Street,
New York, New York, 10013.
The Company was established as an Internet media company. The Company
was among the first companies to develop Internet 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 among Spanish- and
Portuguese-speaking Internet users. Much like operators of traditional media
companies (print, television, radio, etc.), the Company sold advertising to
advertisers seeking to reach its user base, and historically derived a majority
of its revenues from fees paid to us by advertisers on our sites.
The Company subsequently acquired Internet properties and businesses
that were deemed to be complementary to this business. One such acquisition was
the September 1999 purchase of PageCell International Holdings (PageCell), which
formed the basis of our mobile Internet solutions business. These solutions
consist of a unique mix of technology and content that allows operators and
their end users to take full advantage of the Internet across multiple
platforms.
Since the acquisition of PageCell the Company has, in addition to its
media business, engaged in the business of providing Internet solutions to
wireless telephone operators in Latin America. In May 2001, the Company signed a
strategic agreement with BellSouth International under which the Company would
design and implement "multi-access
15
portals" for BellSouth's subsidiaries in Latin America. At the same time,
BellSouth and several other investors invested $35.1 million in the Company.
Since the summer of 2001, the Company has undertaken a realignment
for the general purpose of reducing the costs of operating our Internet media
services business and focusing our resources on the development of our mobile
solutions business. Management believes this realignment was necessary in
order to preserve the Company's prospects of becoming profitable. The
rationale for this realignment was that since the StarMedia network was
established, the Company's media business has continued to incur significant
operating losses as the costs of providing content, tools and applications
necessary to attract and maintain a broad user base continued to
significantly exceed the revenues derived from basic advertisers' fees. Also
underlying this realignment was the expectation of management and the board
of directors that the deterioration of the Internet advertising market in
Latin America and the U.S. during 2001 would continue and was unlikely to
increase to levels that would support the established levels of operating
costs of the Company's media business.
In early 2002, the Company's management and board of directors
determined that, notwithstanding the realignment undertaken as of that time,
the continued operation of the Company's media assets would undermine the
Company's prospects for profitability. Accordingly, the Company undertook
efforts to sell its remaining media assets, including the starmedia.com
portal and its LatinRed community products. On July 3, 2002, the Company sold
most of the intellectual property, hardware and other assets associated with
the operation of starmedia.com and LatinRed to EresMas, and agreed that it
would cease to conduct business under the StarMedia name. Effective as of
July 3, 2002, the Company operates under the name "CycleLogic." This change
of name has been approved by management and the board of directors, who
expect to propose at the next meeting of the Company's shareholders that the
Company formally change its name to "CycleLogic, Inc." Any such change of
name is subject to the approval by the Company's shareholders.
The Company is now principally engaged in providing integrated
Internet solutions to wireless telephone operators in Latin America targeting
Spanish-and Portuguese-speaking end-users. In addition, we continue to
operate several Spanish- and Portuguese- language websites and to design and
operate portals for third parties. Substantially all of our revenues are
currently being generated from our mobile solutions business. Our customers
are in Latin America and most of our revenues come from Venezuela, Brazil,
Colombia, Argentina, and Chile.
MOBILE INTERNET SOLUTIONS. We are one of the leading providers of
mobile Internet software and application solutions to wireless telephone
operators in Spanish- and Portuguese-speaking markets. We offer comprehensive
end-to-end solutions that are comprised of an integrated and customized suite
of technology platforms, content and applications. Our mobile Internet
solutions enable wireless carriers and enterprises to provide end-users with
access to personalized Internet content, email, messaging, secure mobile
banking and other mCommerce opportunities through a variety of technologies,
including SMS (Short Message Services), WAP (Wireless Application Protocol)
and voice telephony. Through our solutions, end users can access this content
through a variety of devices, including personal computers, cellular phones,
pagers, PDAs and PCs and GSM handsets. By providing their end-users the
services enabled by our mobile Internet solutions, wireless operators hope to
increase user airtime and subscription fees (thereby increasing their average
revenue per user or "ARPU") and reduce their customer turnover rates
(referred to in the industry as "churn rates").
Our scalable, proprietary technology is comprised of our Wireless
Internet Server (WIS) and "Gen3" wireless portal technology.
o WIS TECHNOLOGY. The WIS software is a carrier-class technology
that permits mobile operators to deliver short-message services
(SMS) and other content from the Internet to their customers in a
manner that is fully integrated with the wireless operator's
provisioning systems (the systems that determine which customers
have elected to receive specific services), billing systems,
gateway infrastructure systems, and other back-end systems. Two
components of our WIS technology are:
-- TRANSACTIONAL-BILLING. This feature of the WIS technology
allows wireless operators to apply different business
rules to permit flexible billing (for post-paid and
pre-paid) based on the type of mobile Internet service
accessed by an end-user, the end-user's subscription plan
and other variables identified by the operator.
-- WIRELESS MARKETPLACE. This feature of the WIS technology
allows wireless operators to efficiently and
cost-effectively distribute third parties' content and
applications (in addition to the Company's
16
own) through the WIS and to integrate such services
within their overall mobile Internet service offerings.
The WIS software is designed to operate on dedicated servers
placed in the wireless operators' premises.
o GEN3 WIRELESS PORTAL TECHNOLOGY. Our Gen3 wireless portal
technology allows wireless operators to provide to their customers
personalized Internet websites that can be viewed through
different browser types and devices, including their personal
computers and wireless devices (such as WAP-enabled phones and
PDAs). Using this technology, the content and services offered on
end-users' portals, as well as the branding of the portal, vary
based on the user's profile and subscription of services.
Although our competitors have been able to develop technologies that
are similar to our WIS technology and Gen3 wireless portal technology, the
Company believes that its proprietary technologies' ability to interface with
wireless operators' back end systems via our Transactional Billing system and
Wireless Marketplace gives it a competitive advantage over other solutions
providers. This technology allows our customers to better target their end-users
by being able to track and identify the services or plans being accessed through
the different platforms (personal computer, mobile telephones and PDAs) used by
the end-user.
We use third-party content and technology to further enhance the
services and tools that wireless operators can deliver through our WIS and Gen3
wireless portal technology. In addition, we have integrated third-party voice
recognition, text-to-speech and telephony technologies (also known as voice
portal technologies), along with our proprietary technologies, to create an
integrated access platform, allowing end-users to have seamless interactive
access via voice, web, WAP and SMS to a variety of content and applications.
This integrated access platform is the basis of the Multiple Access Portal (MAP)
services we provide to subsidiaries of BellSouth International in Latin America.
The Company derives revenues from its mobile Internet solutions through
set up and installation fees, technology licenses fees and usage-based fees. We
currently have agreements for the use of our WIS technology with more than 20
wireless operators throughout the region, including subsidiaries of BellSouth
International, Verizon, Telefonica and Americas Telecom.
INTERNET MEDIA SERVICES. Historically, the Company has also provided
extensive services to consumers, including community features such as
o free email, promotional email newsletters, user surveys, chats,
instant messaging, and home pages;
o tools and applications, such as games, multimedia players,
comprehensive city guide content, and sophisticated search
capabilities;
o local and global editorial content; and
o online shopping in Spanish and Portuguese.
The Company has derived revenues from its Internet media services
principally through sales of advertising and promotions on these services,
including banners, buttons and sponsorships. For the three months ended March
31, 2001, two advertisers, individually, accounted for more than 10% of our
total revenues and our top five advertisers accounted for 49% of our total
revenues. In addition, the Company has used the information derived about
users of its services, particularly from user surveys and email usage
patterns, to sell targeted direct marketing emails to advertisers seeking to
target specific user profiles. As explained above, these revenues are no
longer an integral part of the Company's business model.
Currently, the Company continues to operate the following media
services:
o batepapo.com.br, a Brazilian chat services, which the Company may
either sell or shut down in the near future; and
o local Internet city guides such as nacidade.com.br; guiasp.com.br;
guiarj.com.br; paisas.com; yoinvito.com; panoramas.cl and
openchile.cl, which the Company expects to continue to operate in
connection with its mobile solutions business.
PORTAL SOLUTIONS. The Company provides portal development services to
enable companies to leverage the power of the Internet to reach their business
objectives. We use our content, technology and know-how to create branded,
content-rich websites (commonly referred to as "portals") for consumer-oriented
businesses that desire to attract and
17
serve customers through the Internet. Through the Company's portal development
services enterprises can establish a powerful presence on the World Wide Web,
which enables them to improve customer service, conduct further transactions,
and increase their service/product offerings, ultimately resulting in increased
revenues.
In the past we were able to draw on the existing content, tools and
applications from our Internet media services and include them as part of our
portal solutions. Following the sale or liquidation of our Internet media
services business, the Company will continue to develop and access third-party
content, tools and applications in order to continue to provide portal solutions
to businesses, although we do not expect this to be our principal business and
we may not generate significant revenues from this business
The Company derives revenues from its portal solutions principally
through development fees and maintenance fees it charges its portal solutions
customers. Historically, it has also generated revenues from on-line promotions
and advertising it undertakes with respect to the portals it develops. The
Company does not anticipate that this will be a significant source of revenues
for its portal solutions business in the future.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
MARCH 31, 2000
REVENUES
Total revenues decreased to $8.9 million for the three months ended
March 31, 2001 as compared to $9.9 million, for the three months ended March 31,
2000. This decrease in revenues was primarily due to a decrease in the volume of
revenue-producing advertising impressions and sponsorships. Barter revenue for
the three months ended March 31, 2001 and 2000 accounted for 35% and 14% of
total revenues, respectively.
For the three months ended March 31, 2001, two advertisers,
individually, 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 49% of our total revenues. For the three months ended
March 31, 2000, our top five advertisers account for 30% of our total revenues.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology development expenses decreased to $14.5 million,
or 164% of total revenues, for the three months ended March 31, 2001, from $15.9
million, or 161% of total revenues, for the three months ended March 31, 2000.
This decrease was primarily due to decreases of approximately $700,000 in
expenses related to content acquisition and $800,000 for hosting costs.
SALES AND MARKETING
Sales and marketing expenses decreased to $17.5 million, or 197% of
total revenues for the three months ended March 31, 2001 from $18.6 million, or
188% of total revenues for the three months ended March 31, 2000. This decrease
was primarily due to the net effect of decreases in advertising, salaries, trade
show events, marketing, legal, consulting and contract fees, totaling
approximately $7.2 million offset by an increase for bad debt reserve of $6.1
million. We believe the Company has ample coverage for bad debts and will
continue to review the collectibility of our receivables.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $9.2 million, or
103% of total revenues, for the three months ended March 31, 2001, from $7.9
million, or 80% of total revenues, for the three months ended March 31, 2000.
The increase in general and administrative expenses was primarily due to
increases in compensation-related expense and miscellaneous expenses in
connection the restatement, partially offset by decreases in legal, tax,
audit, and rent expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $5.7 million, or
65% of total revenues, for the three months
18
ended March 31, 2001, from $4.5 million or 46% 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.
IMPAIRMENT OF FIXED ASSETS
In the first quarter of 2001, the company decided to cease operating
the Webcast Solutions Company that had been merged in September 1999 with a
wholly owned subsidiary of the company ("Webcast Solutions"). Webcast Solutions
was a streaming media Company focused on the global delivery of audio, video and
other internet based interactive media. The decision to cease operation of this
asset mainly resulted from the significant costs that were required to operate
and maintain this investment. Furthermore, the penetration rates previously
anticipated by the company were not achieved during the period the asset
operated and management did not expect significant short-term nor long-term
improvements. As a result, the total loss recognized as a result of this
decision totaled $1,153,000 for the three months ended March 31, 2001.
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 $75,000 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.
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 $61.4 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 $23.9 million in
operating activities, substantially related to our $38.6 million loss during the
period, which included non-cash activities such as $5.7 million for depreciation
and amortization, $6.1 million in provision for bad debts, a loss of $1.2
million that resulted from the shut-down of Webcast Solutions 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 the purchase of 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 in 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.
19
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 may seek to sell additional equity or debt securities or
establish an additional credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. The incurrence of additional indebtedness would result in
increased fixed obligations and could result in operating covenants that would
restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
COLLECTION 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.
FOREIGN CURRENCY EXCHANGE RISK
We do not hedge our exposure to foreign currency exchange risk. We are
subject to exchange rate fluctuations, which may be a significant risk because
of our operations in Latin America.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001, the Company, three of its executive officers and each
of the underwriters who participated in the Company's May 25, 1999 initial
public offering were named as defendants in three class action complaints filed
in the United States District Court for the Southern District of New York: Earl
Arneson v. StarMedia Network, Inc, et al; John R. Longman v. StarMedia Network,
Inc., et al; and BH Holdings LLC v. StarMedia Network, Inc., et al. The
complaints, which are substantially identical, each seek unspecified damages for
alleged violations of Sections 11, 12 and 15 of the Securities Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder in connection with the Company's initial public offering.
The complaints allege that the underwriters charged the Company excessive
commissions and inflated transaction fees not disclosed in the registration
statement and allocated shares of the Company's initial public offering to
favored customers in exchange for purported promises by such customers to
purchase additional shares in the aftermarket, thereby allegedly inflating the
market price for the Company's common stock. These actions have been
consolidated with hundreds of other securities class actions commenced against
more than 300 companies and approximately 40 investment banks in which
plaintiffs make substantially similar allegations as those made against the
Company with respect to the initial public offerings at issue in those cases.
All of these actions have been consolidated under the caption "In re: Initial
Public Offering Securities Litigation, 21 MC 92 (SAS)". The judge in the
consolidated action has adjourned without date the time for all defendants to
respond to the complaints.
On November 19, 2001, the Company announced to the public that it had
commenced an investigation into the facts and circumstances related to certain
accounting irregularities related to Mexican subsidiaries and that a restatement
(the "Restatement") of its audited financial statements for the year ended
December 31, 2000 and its unaudited financial
20
statements for the quarters ended March 31, 2001 and June 30, 2001 would likely
be necessary. The Company informed the SEC of this matter concurrently with its
public announcement. Subsequently, the SEC has informed the Company that it has
opened an investigation into this matter. The SEC investigation is on-going.
In late 2001 and early 2002, eleven lawsuits were filed against the
Company in the Southern District of New York in connection with the Company's
announcement relating to the restatement referred to above. A lead plaintiff for
the class and lead plaintiff's counsel were subsequently selected and a motion
filed to consolidate the various claims. The Consolidated Amended Complaint was
filed on May 31, 2002 in the Southern District of New York under the caption In
re StarMedia Network, Inc. Securities Litigation 01 Civ. 10556 (S.D.N.Y.). The
lead plaintiffs and all defendants have executed a settlement agreement that
resolves all claims in the consolidated action. The settlement amount will be
paid by the Company's directors and officers' liability insurance carrier. This
settlement agreement is subject to review and ratification by the Honorable
Denny Chin of the United States District Court for the Southern District of New
York. A list of the eleven lawsuits before consolidation follows:
CASE NAME DATE FILED
- --------- -----------------
Kramon v. StarMedia Network, et al. November 20, 2001
Stourbridge Ltd., et al. v. StarMedia Network, et al. November 20, 2001
Rennel Trading Corp. v. StarMedia Network, et al. November 21, 2001
Ehrenreich v. StarMedia Network, et al. November 27, 2001
Howe v. StarMedia Network, et al. November 27, 2001
Mayper v. StarMedia Network, et al. November 28, 2001
Dorn v. StarMedia Network, et al. December 3, 2001
Hindo v. StarMedia Network, et al. December 12, 2001
Mather v. StarMedia Network, et al. December 19, 2001
Nulf v. StarMedia Network, et al. December 19, 2001
Vasko v. StarMedia Network, at al. January 7, 2002
In April 2002, AT&T Corp filed a claim in the United States District
Court for the Southern District of New York seeking payment from the Company for
telecommunications services rendered to the Company in the amount of
approximately $337,000, and in June 2002 AT&T amended that complaint to increase
the amounts claimed to approximately $1,400,000. In addition, for over a year
the Company has engaged in periodic discussions with AT&T regarding the
Company's alleged commitments to purchase a variety of services from AT&T, and
in April 2002 had received correspondence from AT&T alleging that approximately
a total of $1,100,000 was payable by the Company. The Company denies that it
owes most of the amounts alleged to be payable by AT&T. The parties have
commenced settlement discussions.
In October 2001, Fausto Zapata, formerly President of SMN de Mexico, S
de RL, filed a notice in the applicable Labor Courts in Mexico City alleging
that the Company failed to make payments due to him under an employment
agreement following his termination by the Company. The amounts claimed by Mr.
Zapata exceed 8.5 million Pesos, or approximately $900,000. The Company
maintains that it owes Mr. Zapata solely the minimum amounts required to be paid
following termination of his at-will employment, which the Company calculates to
be approximately 600,000 Mexico Pesos, or approximately $65,000.
In January 2002 Mr. Carlos Ponce filed a claim in U.S. District Court
in the Southern District Court of Florida in connection with allegations by Mr.
Ponce that the Company exceeded the scope of a license to use his image in
connection with an advertising campaign. Mr. Ponce claims violations of common
law and statutory rights of publicity under Florida law, unfair business
practices, misappropriation, and also asserts claims under the Lanham Act. Mr.
Ponce seeks damages allegedly in excess of $1,000,000, treble damages, punitive
damages, and injunctive and other equitable relief. The Company filed an answer
to the complaint in February 2002. In June 2002 the judge in this case issued an
order to show cause directing the plaintiff to show cause why the case should
not be dismissed. Mr. Ponce has responded and delivered to the Company a request
to produce documents. The Company denies Mr. Ponce's claims and believes that
even if such claims were proven, the damages sought are grossly overstated, and
that the Lanham Act claim may be legally deficient.
In May 2002 the Company was notified that Digital Impact has presented
a demand for arbitration seeking payment
21
of approximately $594,000 allegedly owed to Digital Impact by the Company in
connection with the Company's termination of an agreement between Digital Impact
and the Company.
In June 2001, the Company commenced an action entitled StarMedia
Network, Inc. v. Patagon.com International, Inc. in the Commercial Division of
the Supreme Court of the State of New York, New York County against Patagon.com
International, Inc. ("Patagon"). The complaint seeks to recover compensatory and
consequential damages in an amount not less than $4,250,000 for Patagon's breach
of a Web Content Agreement pursuant to which the Company and Patagon hosted a
co-branded website linked to the Company's internet property StarMedia.com
through its "Money Channel." The complaint alleges that Patagon breached the Web
Content Agreement by wrongfully and prematurely terminating the agreement. In
August 2001, Patagon filed an Answer and Counterclaim (the "Counterclaim") to
the complaint in which Patagon seeks to recover unspecified damages on claims
for breach of contract and breach of the duty of good faith and fair dealing
premised upon the Company's alleged breach of the Web Content Agreement. Also in
August 2001, the Company served its Answer and Affirmative Defenses to the
Counterclaim in which it denied all of the material allegations of the
Counterclaim and asserted affirmative defenses to the claims asserted therein.
Discovery is pending in this case.
In September 2001, Justin K. Macedonia, the then General Counsel of the
Company, filed a notice of intention to arbitrate against the Company, asserting
that the Company was obligated to make tax indemnity payments to him in the
amount of $1,700,000. The Company denied any obligation to make such payment and
asserted counterclaims against Mr. Macedonia. Mr. Macedonia's employment with
the Company terminated in November 2001. The arbitration hearing was concluded
in March 2002. In May 2002 the arbitrator issued a final judgment denying Mr.
Macedonia's claims, as well as the Company's counterclaims.
In December 2000, a consulting company filed suit against the Company
in the New York Supreme Court claiming unpaid fees of approximately $2,300,000.
In October 2001, pursuant to a Settlement Agreement, the Company and the
consulting company agreed to settle the lawsuit. The Company agreed to pay the
consulting company an amount within the range that the Company had previously
reserved for such lawsuit in its financial statements. The suit was settled for
an amount not material to the Company. The Company has paid such amount and such
lawsuit has been dismissed with prejudice.
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.
The Company intends to vigorously defend the aforementioned claims
that are threatened or pending against it but believes that an adverse
outcome with respect to one or more of these matters could have a material
adverse effect on the financial condition 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
22
(a) The following Exhibits are filed with this report:
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.
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: July 10, 2002
STARMEDIA NETWORK, INC.
/s/ Ana M. Lozano-Stickley
------------------------------------------
By: Ana M. Lozano-Stickley
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL OFFICER)
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