UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
1-15015
-------
(COMMISSION FILE NUMBER)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 of Incorporation) (I.R.S. Employer 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 June 30, 2001 (restated) and
December 31, 2000 (restated) ..................................................................... 6
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June
30, 2001 (restated)and 2000 (restated)............................................................ 7
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001
(restated)and 2000 (restated)..................................................................... 8
Notes to Restated and Unaudited Condensed Consolidated Financial Statements for the six months ended
June 30, 2001..................................................................................... 9
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................................................................................. 21
Item 2. Changes In Securities and Use of Proceeds......................................................... 22
Item 3. Defaults upon Senior Securities................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............................................... 23
Item 5. Other Information................................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
Item 7. Signatures........................................................................................ 24
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 quarters ended March 31, 2001 and June 30,
2001:
As previously As restated
reported
------------- -------------
Net loss for quarter ended March 31, 2001 $(31,226,000) $(38,643,000)
Net loss for quarter ended June 30, 2001 $(47,838,000) $(52,720,000)
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 each quarter
with respect to which the Company has restated or adjusted previously issued
financial statements.
RECENT DEVELOPMENTS
Since June 30, 2001, the Company has experienced the following developments set
forth below.
o Gerardo Rosenkrantz resigned from the board of directors in July 2001
and Jack Chen and Marie Jose Kravis resigned from the board of
directors in August 2001.
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
3
were improperly recognized by those 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
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 Administration of the Company since January 2002.
o The Company has continued to undertake a realignment of the Company
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.
4
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."
5
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(RESTATED) (RESTATED)
(UNAUDITED) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 59,223,000 $ 93,408,000
Accounts receivable, net of allowance for bad debts of $6,580,000 (2001)
and $1,849,000 (2000) ......................................................... 2,037,000 13,524,000
Unbilled receivables ............................................................. 6,797,000 6,131,000
Other current assets ............................................................. 12,340,000 7,680,000
------------- -------------
TOTAL CURRENT ASSETS ............................................................... 80,397,000 120,743,000
Fixed assets, net ................................................................ 54,075,000 55,569,000
Intangible assets, net of accumulated amortization of $ 2,353,000 (2001)
and $1,676,000 (2000) ......................................................... 4,944,000 5,557,000
Goodwill, net of accumulated amortization of $ 4,156,000 (2001)
and $2,435,000 (2000) ........................................................ 15,102,000 6,582,000
Officer loans .................................................................... 800,000 4,563,000
Other assets ..................................................................... 10,520,000 16,091,000
------------- -------------
TOTAL ASSETS ....................................................................... $ 165,838,000 $ 209,105,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 9,417,000 $ 20,737,000
Accrued expenses ................................................................. 21,335,000 15,601,000
Loan payable, current portion .................................................... -- 2,462,000
Deferred revenue ................................................................. 4,184,000 1,128,000
------------- -------------
TOTAL CURRENT LIABILITIES .......................................................... 34,936,000 39,928,000
Loan payable, long-term portion .................................................. -- 1,902,000
Deferred rent .................................................................... 3,460,000 2,199,000
Preferred dividends payable ...................................................... 183,000 --
SERIES A CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred Stock, $.001 par value, 1,960,784 shares
authorized, 1,431,373 shares issued and outstanding at June 30, 2001,
liquidation preference of $36,683,000 at June 30, 2001.......................... 35,055,000 --
STOCKHOLDERS' EQUITY:
Preferred Stock, authorized 10,000,000 shares:
Series 1999A junior-non-voting convertible preferred stock, $.001 par value,
2,300,000 shares authorized, 58,140 shares outstanding at June 30, 2001 and
December 31, 2000, respectively ................................................ --
Common stock, $.001 par value, 200,000,000 shares authorized, 70,411,071 and
66,927,883 shares issued and outstanding at June 30, 2001 and December 31, 2000,
respectively ................................................................... 70,000 67,000
Common stock issuable ............................................................ 17,101,000 12,260,000
Additional paid-in capital ....................................................... 527,861,000 516,311,000
Accumulated deficit .............................................................. (450,842,000) (360,125,000)
Deferred compensation ............................................................ (1,135,000) (2,636,000)
Accumulated comprehensive loss ................................................... (851,000) (801,000)
------------- -------------
Total stockholders' equity ......................................................... 92,204,000 165,076,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 165,838,000 $ 209,105,000
============= =============
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2001.
6
STARMEDIA NETWORK, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------- -------------
(RESTATED) (RESTATED)
(UNAUDITED) (UNAUDITED)
Revenues ........................................................ $ 6,289,000 $ 12,021,000 $ 15,159,000 $ 21,882,000
Operating expenses:
Product and technology development ............................ 14,234,000 19,458,000 28,776,000 35,358,000
Sales and marketing ........................................... 12,498,000 21,190,000 29,971,000 39,777,000
General and administrative .................................... 7,946,000 7,521,000 17,103,000 15,401,000
Restructuring and other charges ............................... 15,351,000 -- 15,351,000 --
Depreciation and amortization ................................. 6,939,000 7,289,000 12,678,000 11,833,000
Stock-based compensation expense .............................. 683,000 1,108,000 1,398,000 2,320,000
Loss on impairment of fixed assets............................. -- -- 1,153,000 --
------------ ------------ ------------- -------------
Total operating expenses ...................................... 57,651,000 56,566,000 106,430,000 104,689,000
------------ ------------ ------------- -------------
Loss from operations ............................................ (51,362,000) (44,545,000) (91,271,000) (82,807,000)
Other income (expense):
Interest income ............................................... 920,000 3,330,000 2,295,000 6,793,000
Interest expense .............................................. (568,000) (364,000) (643,000) (684,000)
Loss in unconsolidated subsidiary ............................. (1,800,000) (2,500,000) (1,800,000) (2,500,000)
Other income / (expenses) ..................................... 90,000 (373,000) 55,000 (373,000)
------------ ------------ ------------- -------------
Loss before provision for income taxes .......................... (52,720,000) (44,452,000) (91,364,000) (79,571,000)
Provision for income taxes ...................................... -- (7,000) _ (7,000)
------------ ------------ ------------- -------------
Net loss ........................................................ $(52,720,000) $(44,459,000) $ (91,364,000) $ (79,578,000)
Preferred stock dividends and accretion ......................... (206,000) -- (206,000) --
------------ ------------ ------------- -------------
Net loss available to common stockholders ....................... $(52,926,000) $(44,459,000) $ (91,570,000) $ (79,578,000)
============ ============ ============= =============
Basic and diluted net loss per common share ..................... $ (0.76) $ (0.68) $ (1.33) $ (1.22)
============ ============ ============= =============
Number of shares used in computing basic and diluted net loss per
share ......................................................... 70,001,765 65,706,679 68,693,438 65,173,234
============ ============ ============= =============
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2001.
7
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
------------ -------------
(RESTATED)
(UNAUDITED)
OPERATING ACTIVITIES
Net loss .................................................................. $(91,364,000) $ (79,578,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 12,678,000 11,833,000
Provision for bad debts ................................................. 11,316,000 225,000
Amortization of stock-based compensation ................................ 1,398,000 2,320,000
Writedown of officer loans .............................................. 10,397,000 --
Deferred rent expense ................................................... 1,261,000 2,151,000
Loss on impairment of fixed assets....................................... 1,153,000 --
Changes in operating assets and liabilities:
Accounts receivable ..................................................... 575,000 (3,081,000)
Unbilled receivables .................................................... (666,000) --
Other assets ............................................................ (1,535,000) (9,442,000)
Accounts payable and accrued expenses ................................... (1,987,000) 23,173,000
Deferred revenues ....................................................... 2,864,000 (46,000)
------------ -------------
Net cash used in operating activities ..................................... (53,910,000) (52,446,000)
INVESTING ACTIVITIES
Purchase of fixed assets .................................................. (9,081,000) (33,244,000)
Intangible assets ......................................................... (150,000) (1,209,000)
Other assets .............................................................. 5,661,000 (12,213,000)
Officer loans ............................................................. (6,836,000) --
Cash paid for acquisitions ................................................ (2,133,000) (7,527,000)
------------ -------------
Net cash used in investing activities ..................................... (12,539,000) (54,193,000)
FINANCING ACTIVITIES
Issuance of common stock .................................................. 204,000 3,139,000
Repayment of long-term debt ............................................... (4,364,000) (752,000)
Issuance of convertible preferred stock ................................... 36,500,000 --
Payments under capital leases ............................................. -- (58,000)
------------ -------------
Net cash provided by financing activities ................................. 32,340,000 2,329,000
Effect of exchange rate changes on cash and cash equivalents .............. (76,000) 99,000
------------ -------------
Net decrease in cash and cash equivalents ................................. (34,185,000) (104,211,000)
Cash and cash equivalents, beginning of period ............................ 93,408,000 274,089,000
------------ -------------
Cash and cash equivalents, end of period .................................. $ 59,223,000 $ 169,878,000
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................................. $ 865,000 $ 674,000
============ =============
Income taxes paid ......................................................... $ 392,000 $ --
============ =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of content through common stock to be issued .................. $ 3,000,000 $ --
============ =============
Shares issued/issuable for acquisitions ................................... $ 18,635,000 $ --
============ =============
Accrued purchases of fixed assets ......................................... $ 552,000 $ --
============ =============
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2001.
8
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO RESTATED AND UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDED JUNE 30, 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.
The Company 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, described herein as the "Internet media business" or "media solutions
business". 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- and six-month
periods ended June 30, 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 restated
annual report on Form 10-K for the year ended December 31, 2001.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current period's presentation.
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 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 b
9
y 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.
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
June 30, 2001
---------------------------------
As previously
reported As restated
--------------- --------------
Consolidated Balance Sheet:
Accounts receivable, net $ 14,483 $ 2,037
Other current assets 16,642 12,340
Total current assets 97,145 80,397
Goodwill, net 15,962 15,102
Total assets 183,446 165,838
Accounts payable 10,139 9,417
Accrued expenses 22,609 21,335
Deferred revenue 3,555 4,184
Total current liabilities 36,303 34,936
Common stock issuable 15,637 17,101
Accumulated deficit (433,137) (450,842)
Total stockholder's equity 108,445 92,204
Total liabilities and
Stockholder's equity $ 183,446 $ 165,838
For the six months ended For the three months ended
June 30, 2001 June 30, 2001
-------------------------- --------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
Consolidated Statement
of Operations:
Revenues $ 30,243 $ 15,159 $ 14,204 $ 6,289
Sales and marketing 35,290 29,971 15,626 12,498
General and administrative 15,146 17,103 7,472 7,946
Depreciation and amortization 12,839 12,678 7,100 6,939
Restructuring and other charges 15,456 15,351 15,456 15,351
Total operating expenses 108,905 106,430 60,571 57,651
Loss from operations (78,662) (91,271) (46,367) (51,362)
Interest expense (865) (643) (681) (568)
Loss before provision for
income taxes (78,977) (91,364) (47,838) (52,720)
Provision for income taxes (87) -- -- --
Net loss (79,064) (91,364) (47,838) (52,720)
Basic and diluted net loss -- --
per common share $ (1.15) $ (1.33) $ (0.69) $ (0.76)
10
For the six months ended For the three months ended
June 30, 2000 June 30, 2000
---------------------------- --------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
Consolidated Statement
of Operations:
Revenue $ 23,820 $ 21,882 $ 13,764 $ 12,021
Sales and marketing 40,861 39,777 22,274 21,190
General and administrative 15,777 15,401 7,702 7,521
Total operating expenses 106,149 104,689 57,831 56,566
Loss from operations (82,329) (82,807) (44,067) (44,545)
Loss before provisions for (79,093) (79,571) (43,974) (44,452)
income taxes
Net loss (79,100) (79,578) (43,981) (44,459)
Basic and diluted net loss
per common share $ (1.21) $ (1.22) $ (.67) $ (.68)
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 is derived from barter transactions
(agreements whereby the Company trades advertising on its network or services in
exchange for advertising or services 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 Principles
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 or services are
rendered by the unrelated party. For the three months ended June 30, 2001 and
2000, revenues derived from barter transactions were approximately $1.7 million
and $2.1 million, respectively. For the six months ended June 30, 2001 and 2000,
revenues derived from barter transactions were approximately $4.8 million and
$3.5 million, respectively.
4. 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. The total loss recognized as a result of this decision totaled
$1,153,000.
5. ACQUISITIONS
In April 2001, the Company acquired certain assets of Obsidiana, Inc.
("Obsidiana"), a premier online destination for Latin American women, in
exchange for 1,125,000 shares of the Company's common stock, valued at
approximately $2,600,000. The stockholders of Obsidiana included entities
managed by J.P. Morgan Partners and Flatiron Partners, each of whom are
significant stockholders of the Company. The entire value of the purchase
price was attributed to goodwill at the time of purchase. The Company
accounted for the Obsidiana acquisition under the purchase method of
accounting and the results of operations have been included in the Company's
financial statements from the date of acquisition. Pro-forma consolidated
results of operations are not included, as the effects of the Obsidiana
acquisition were not material to the Company.
11
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 active subsidiary in Venezuela, which is a highly inflationary
economy, is the U.S. dollar. Accordingly, 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 statements of operations.
7. 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.
8. 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 9 below, valued at approximately $4.5 million.
Also in February of 2001, the Company issued 8,035 shares of its common stock in
connection with its November 1999 acquisition of Paisas.com, valued at
approximately $139,000. In April 2001, in connection with its February 2000
acquisition of Ola Turista Ltda., the owner of Guia and Guia RJ, and its
September 1999 acquisition of PageCell International Holdings, Inc., the Company
issued 592,128 shares and 528,787 shares, valued at approximately $2.0 million
and $1.4 million, respectively. Also, in April 2001 the Company issued
1,125,000 shares of its common stock in connection with its acquisition of
Obsidiana, valued at approximately $2.6 million.
In connection with its April 2000 acquisition of AdNet S.A. de C.V.
(AdNet), 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 common stock issuable as the targets are met.
During the six months ended June 30, 2001, the Company issued 104,627
shares of its common stock for approximately $57,000 in connection with the
exercise of stock options. Additionally, the Company sold 66,135 shares of
common stock for approximately $147,000 in connection with its Employee Stock
Purchase Plan.
During the quarter ended June 30, 2001, the Company issued 1,431,373
shares of its Series A Convertible Preferred Stock at a price per share of
$25.50 to BellSouth Enterprises, Inc. (BellSouth) and certain other investors
resulting in total proceeds of approximately $35.1 million to the Company, net
of issuance costs of approximately $1.4 million (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 Preferred Stock for cash or
shares of the Company's common stock, in an amount equal to $36.5 million, plus
accrued dividends thereon. The carrying value of the Series A Convertible
Preferred Stock is being accreted up to its redemption value over 60 months
using the effective interest method. Such accretion was $23,000 during the
quarter ended June 30, 2001. Dividends accrued at 6% per annum and totaled
approximately $183,000 during the quarter ended June 30, 2001.
In addition, in connection with the BellSouth Strategic Agreement (see
Note 10), 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 $2.2 million and will be amortized over 60 months.
9. 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 $19.5 million. In connection
with the granting of stock options in 1999, the Company recorded additional
deferred compensation of approximately $6.4 million. 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 six-month period ended
June 30, 2001 and June 30, 2000 were approximately $1.4 million and $2.3
million, respectively.
Diluted net loss per share does not include the effect of options and
warrants to purchase 25,048,000 and 16,072,000 shares of common stock at June
30, 2001 and 2000, respectively. Diluted net loss per share at June 30, 2001
also does not include the effect of 14,313,730 shares of common stock issuable
upon the conversion of preferred stock on a "as if converted" basis,
respectively, as the effect of their inclusion is antidilutive.
12
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 $17.3 million. Approximately $10.3 million 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 $4.5 million pursuant to the guaranty of approximately
$7.0 million of such securities. In connection with the remaining $3.3 million
guaranty, the Company will issue 1,148,000 shares of additional common stock
valued at $3.00 per share in full settlement of the guaranty. At June 30, 2001,
such amount is included in common stock issuable. With respect to the $7.0
million of such debt securities which were not subject to such limited guaranty,
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.
BELLSOUTH
On May 30, 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 will be recognized
ratably over the life of the agreement, while the user fees and transaction
revenues will be recognized when the services are rendered. For the three months
ended June 30, 2001, there was no revenue derived from the BellSouth Strategic
Agreement.
ABOUT.COM, INC.
During the quarter ended June 30, 2001, the Company entered into a
five-year agreement with About.com, Inc. (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 million in cash and $3 million in shares of the
Company's common stock. At June 30, 2001, such shares are included in common
stock issuable. The aggregate purchase price of $5 million has been accounted
for as a pre-paid expense, consisting of $3 million of content acquisition
expenses, which will be expensed on a straight-line basis over the delivery
period of four and a half years, $800,000 of advertising expenses, which will be
expensed as services are rendered, $700,000 of maintenance expenses, which will
be expensed on a straight-line basis over the life of the agreement and $500,000
of capital expenditures, which will be depreciated over an estimated useful life
of five years.
AT&T
During the quarter ended September 30, 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.
AT&T was entitled to draw upon a $1.8 million letter of credit, guaranteed by
StarMedia, in the event G1 failed to perform under this agreement. At June 30,
2001, AT&T drew down $1.4 million of the letter of credit, the balance of which
was drawn upon in July 2001. Accordingly, during the quarter ended June 30,
2001, the Company recognized an expense of $1.8 million related to the guaranty.
11. DUE FROM OFFICERS
During the year ended December 31, 2000, the Company provided lines of
credit to certain officers totaling $6.4 million, under which $4.6 million was
advanced to such officers. Such lines are non-recourse and bear interest at
rates ranging from 6.75% to 10.0% per annum. In January 2001, the lines of
credit available to the Company's officers were increased to $12.4 million. As
of June 30, 2001, the Company had loans receivables to officers under such lines
of credit totaling approximately $11.0 million. These loans are secured by
shares of the Company's common stock held by its officers to the extent
permitted by Regulation U under the Securities Exchange Act of 1934, as amended.
In addition, during the year ended December 31, 2000, the Company made an
unsecured, recourse loan totaling $500,000 to its Chief Operating Officer. As a
result of the termination of the Company's Chief Operating Officer and
management's determination that the remaining loans were unrealizable due to a
reduction in value of the supporting collateral, the
13
Company reserved approximately $10.8 million against these loans and related
interest, which amount is included in restructuring charges (see Note 13) for
the period ended June 30, 2001. The portion reserved represents the anticipated
unrealizable value of these loans.
12. COMPREHENSIVE LOSS
Total comprehensive loss was approximately $52.6 million and $91.4
million for the three and six month periods ended June 30, 2001, respectively
and approximately $45.0 million and $80.0 million for the three and six month
periods ended June 30, 2000, respectively.
13. RESTRUCTURING AND OTHER CHARGES
In May 2001, the Company announced a restructuring, the purpose of
which was to realign the Company's business operations and reduce its
operational overhead. In connection with such restructuring, the Company
recorded aggregate charges of approximately $15.4 million, including
approximately $10.8 million of loans and related interest to officers (see Note
11) that were reserved, approximately $3.4 million of severance payments to
employees and certain officers of the Company and approximately $1.2 million of
other related costs.
14. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting
for goodwill from an amortization method to an investment-only approach. Thus,
amortization of goodwill recorded in past combinations will cease upon adoption
of SFAS No. 142, which is effective for the Company on January 1, 2002. The
Company has not evaluated the effect, if any, that the adoption of SFAS No. 142
will have on the Company's consolidated financial statements.
15. LEGAL PROCEEDINGS
See Part II, Item 1, Legal Proceedings.
16. 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 of 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 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.
14
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 Notes to 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 June 30, 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 June 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 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 commercially 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 amend its
certificate of incorporation to formally change its name to "CycleLogic,
Inc." Any such amendment 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 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.
15
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 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.
16
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 six months ended June
30, 2001, one advertiser accounted for more than 10% of our total revenues
and our top advertisers accounted for 41% 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 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 JUNE 30, 2001 AND JUNE 30, 2000
REVENUES
Total revenues decreased to $6.3 million for the three months ended
June 30, 2001 from $12.0 million, for the three months ended June 30, 2000. This
decrease was primarily associated with smaller advertising and sponsorship
revenues. Barter revenues for the three months ended June 30, 2001 and 2000
accounted for 27% and 17% of total revenues, respectively.
For the three months ended June 30, 2001, two advertisers,
individually, accounted for more than 10% of our total revenues. For the three
months ended June 30, 2000, one advertiser accounted for more than 10% of our
total revenues. For the three months ended June 30, 2001, our top five
advertisers accounted for 43% of our total revenues. For the three months ended
June 30, 2000, our top five advertisers account for 26% of our total revenues.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology development expenses decreased to $14.2 million,
or 226% of total revenues, for the three months ended June 30, 2001, from $19.5
million, or 162% of total revenues, for the three months ended June 30, 2000.
This decline was primarily due to decreases of approximately $3.0 million in
salaries associated with one-time payments as part of the acquisition of KD
Sistemas, the Brazilian online directory, $900,000 in expenses related to
content acquisition and $700,000 for hosting costs.
SALES AND MARKETING
Sales and marketing expenses decreased to $12.5 million, or 199% of
total revenues for the three months ended June 30, 2001 from $21.2 million, or
176% of total revenues, for the three months ended June 30, 2000. This decrease
was primarily due to decreases in advertising, trade events, consulting, travel
and entertainment of $11.7 million and compensation expenses of $1.4 million,
partially offset by an increase in bad debt expense of $5.1 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 increased to $7.9 million, or 126%
of total revenues, for the three months ended June
17
30, 2001, from $7.5 million, or 63% of total revenues, for the three months
ended June 30, 2000. This increase is primarily the result of increases in
legal, tax and recruiting fees.
RESTRUCTURING AND OTHER CHARGES
For the three months ended June 30, 2001, we recorded restructuring
charges totaling approximately $15.4 million, which was the result of a
company-wide realignment of its business operations and an effort to reduce its
operational overhead and included the provision of approximately $10.8 million
of loans and related interest made to certain officers of the Company,
determined by management to be unrealizable due to the impairment in collateral
value.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased slightly to $6.9
million, or 110% of total revenues, for the three months ended June 30, 2001,
from $7.3 million, or 61% of total revenues, for the three months ended June 30,
2000. This decrease 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 write-down of goodwill in December 2000. Even though
depreciation and amortization expenses decreased slightly, we expect that
depreciation expenses will increase as additional capital purchases are incurred
during 2001.
STOCK BASED COMPENSATION EXPENSE
Of the cumulative deferred compensation amount, $683,000 was recorded
as an expense for the three months ended June 30, 2001 compared with $1.1
million recorded as expense for the three months ended June 30, 2000. The
unamortized balance is being amortized over the vesting period for the
individual options, which is typically three years for options issued prior to
February 1999 and four years for options issued thereafter.
LOSS IN UNCONSOLIDATED SUBSIDIARY
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.
In September 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. AT&T was entitled to draw
upon a $2,800,000 letter of credit, guaranteed by the Company, in the event G1
failed to perform under this agreement. Following payment by G1 of a $1,000,000
debt to AT&T in December 2000, the amount drawable under letter of credit was
reduced to $1,800,000. As of September 30, 2001, AT&T had fully drawn down on
the letter of credit. Accordingly, during the period ended June 30, 2001, the
Company recognized an expense of $1,800,000 related to the guaranty.
INTEREST
Interest income includes income from our cash and investments. Interest
income decreased to $920,000 for the three months ended June 30, 2001 from $3.3
million for the three months ended June 30, 2000. Interest income decreased as a
result of a decrease in the average invested cash balance for the above periods.
Interest expense is comprised primarily of interest related to an
equipment lease line which was paid in full during the quarter ended June 30,
2001. Interest expense increased to $568,000 for the three months ended June 30,
2001 from $364,000 for the three months ended June 30, 2000. This increase is
due to additional borrowings by the Company during December 2000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
REVENUES
Total revenues decreased to $15.2 million for the six months ended June
30, 2001 from $21.9 million, for the six months ended June 30, 2000. This
decrease in revenues was primarily due to a decrease in the volume of
revenue-producing advertising impressions and sponsorships. Barter revenues for
the six months ended June 30, 2001 and 2000 accounted for 32% and 16% of total
revenues, respectively.
For the six months ended June 30, 2001, one advertiser accounted for
more than 10% of our total revenues. For the six months ended June 30, 2000, no
single advertiser accounted for more than 10% of our total revenues. For the six
months ended June 30, 2001, our top five advertisers accounted for 41% of our
total revenues. For the six months ended June 30, 2000, our top five advertisers
account for 26% of our total revenues.
18
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology development expenses decreased to $28.8 million,
or 190% of total revenues, for the six months ended June 30, 2001, from $35.4
million, or 162% of total revenues, for the six months ended June 30, 2000. This
decrease was primarily due to decreases of approximately $1.6 million expenses
related to content acquisition, $1.5 million in hosting related expenses, and
$2.0 million in salaries associated with one-time payments as part of the
acquisition of Cade?, the Brazilian online directory.
SALES AND MARKETING
Sales and marketing expenses decreased to $ 30.0 million, or 198% of
total revenues, for the six months ended June 30, 2001 from $39.8 million, or
182% of total revenues, for the six months ended June 30, 2000. This decrease
was primarily due to the net effect of decreases in advertising, salaries, trade
show events, consulting and travel, totaling approximately $20.0 million,
partially offset by an increase in bad debt expense of $11.1 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 increased to $17.1 million, or 113%
of total revenues, for the six months ended June 30, 2001, from $15.4 million,
or 70% of total revenues, for the six months ended June 30, 2000. The increase
in general and administrative expenses was primarily due to increases in
salaries, tax and insurance and miscellaneous expenses in connection with the
restatement, partially offset by decreases in legal, tax and audit fees,
recruiting and office rent.
RESTRUCTURING AND OTHER CHARGES
For the six months ended June 30, 2001, we recorded restructuring
charges totaling approximately $15.4 million, which was the result of a
company-wide realignment of its business operations and an effort to reduce its
operational overhead and included the reserving of approximately $10.8 million
of loans and related interest made to certain officers of the Company,
determined by management to be unrealizable due to the impairment in collateral
value.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $12.7 million, or
84% of total revenues, for the six months ended June 30, 2001, from $11.8
million, or 54% of total revenues, for the six months ended June 30, 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 write-down of goodwill in December 2000. We expect that depreciation
expenses will continue to increase as additional capital purchases are incurred
during 2001.
STOCK-BASED COMPENSATION EXPENSE
Of the cumulative deferred compensation amount, $1.4 million was
recorded as an expense for the six months ended June 30, 2001 compared with $2.3
million recorded as expense for the six months ended June 30, 2000. The
unamortized balance is being amortized over the vesting period for the
individual options, which is typically three years for options issued prior to
February 1999 and four years for options issued thereafter.
IMPAIRMENT OF FIXED ASSETS
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"). As a result, impairment of fixed assets totaled
$1.2 million for the six months ended June 30, 2001. For additional information,
see note 4 of notes to unaudited condensed consolidated financial statements.
INTEREST
Interest income includes income from our cash and investments. Interest
income decreased to $2.3 million for the six months ended June 30, 2001 from
$6.8 million for the six months ended June 30, 2000. Interest income decreased
as a result of a decrease in the average invested cash balance for the above
periods.
Interest expense is comprised primarily of interest related to an
equipment lease line which was paid in full during the quarter
19
ended June 30, 2001. Interest expense decreased to $643,000 for the six months
ended June 30, 2001 from $684,000 for the three months ended June 30, 2000. This
decrease is due to a lower average loan balance outstanding during the above
period.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through the sale of
our equity securities. At June 30, 2001, we had $59.2 million in cash and cash
equivalents, a decrease of $34.2 million from December 31, 2000.
For the six months ended June 30, 2001, we used $53.9 million in
operating activities, substantially related to our $91.4 million loss during the
period, which included non-cash activities such as $12.7 million for
depreciation and amortization, $11.3 million in provision for bad debts, $1.2
million from the shut-down of Webcast Solutions and $1.4 million for
amortization of stock based compensation. In addition, for the six months ended
June 30, 2001, we used $12.5 million in investing activities, including $9.1
million for fixed assets.
Net cash provided by financing activities were $32.3 million and $ 2.3
million for the six months ended June 30, 2001 and 2000, respectively. Net cash
provided by financing activities during the six months ended June 30, 2001
consisted primarily of proceeds of $36.5 million resulting from the issuance of
the Company's Series A Convertible Preferred Stock, partially offset by $4.4
million used for the repayment of long-term debt. Net cash provided by financing
activities during the six months ended June 30, 2000 consisted primarily of
proceeds of $3.1 million resulting from the issuance of the Company's common
stock, partially offset by $800,000 used for the repayment of long-term debt.
During the quarter ended June 30, 2001, the Company issued 1,431,373
shares of its Series A Convertible Preferred Stock at a price per share of
$25.50 to BellSouth and certain other investors resulting in total proceeds of
$35.1 million to the Company, net of issuance costs of approximately $1.4
million. The 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
$36.5 million, plus accrued dividends thereon. Dividends accrued at 6% per annum
and totaled $182,500 during the quarter ended June 30, 2001. The carrying value
of the Series A Convertible Preferred Stock is being accreted up to its
redemption value over 60 months using the effective interest method. Such
accretion was $23,000 during the quarter ended June 30, 2001. In addition, in
connection with the BellSouth Strategic Agreement, 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 $2.2 million
and are being amortized over 60 months.
During the quarter ended June 30, 2001, we used $4.4 million for
repayment of our long-term debt. As a result, at June 30, 2001, we had no
long-term debt outstanding.
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.
Despite the proceeds from the financing transaction described above and
our steps 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 a 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,
20
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
of its audited financial statements for the year ended December 31, 2000 and
its unaudited financial 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
21
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 the 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 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. 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 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.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
PREFERRED STOCK
On May 30, 2001, the Company sold 1,431,373 shares of its Series A
Convertible Preferred Stock, par value $0.001 per
22
share, (the Series A Preferred Stock) to BellSouth and certain other investors,
at a price per share of $25.50, resulting in total proceeds of approximately
$35.1 million to the Company, net of issuance costs of approximately $1.4
million. These shares of Series A Preferred Stock are convertible into
14,313,730 shares (subject to adjustment) of the Company's common stock, par
value $0.001 per share, at any time at the option of the holder. After 60 months
from May 30, 2001, the Company shall redeem the Series A Preferred Stock for
cash or shares of the Company's stock, in an amount equal to $36.5 million.
Dividends accrue on the Series A Preferred Stock at a rate of 6% per annum.
Pursuant to the terms of the Series A Preferred Stock, the Company may not,
without the affirmative vote or written consent of at least a majority of all
outstanding shares of Series A Preferred Stock, voting or consenting separately
as a class, consummate a transaction constituting a change in control unless
prior to such consummation the Company has made arrangements that ensure the
payment to each holder of Series A Preferred Stock of an amount per share equal
to $25.50, subject to adjustment in the event of stock splits, subdivisions or
combination or reclassifications, plus all accrued but unpaid dividends. In
connection with the transaction described above, the Company issued to BellSouth
Enterprises, Inc. warrants to purchase up to 4,500,000 shares of the Company's
common stock, divided into three tranches, at a exercise prices ranging from
$4.55 to $8.55 per share.
We believe that the issuance of the Company's Series A Preferred Stock
described above is exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof or Regulation D promulgated thereunder.
COMMON STOCK
In April 2001, in connection with its February 2000 acquisition of Ola
Turista Ltda., the owner of Guia and Guia RJ, and its September 1999 acquisition
of PageCell International Holdings, Inc., the Company issued 592,128 shares and
528,787 shares, valued at approximately $2.0 million and $1.4 million,
respectively.
We believe that the issuances of the Company's common stock described
above are exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof or Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of StarMedia was held on June 8,
2001. The following items were presented to the Stockholders with the following
results:
1. The following directors were elected to serve a three year term of office to
expire at the annual meeting in 2004 or until their successors have been elected
and qualified:
DIRECTORS VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- --------- --------- ------------- ----------- ----------------
Marie-Josee Kravis 49,068,235 170,167 -- --
Frederick R. Wilson 49,008,068 230,334 -- --
Immediately following this Annual Meeting of Stockholders, directors of
StarMedia consisted of the following individuals:
Fernando J. Espuelas
Jack C. Chen
Douglas M. Karp
Susan L. Segal
Gerardo M. Rosenkranz
Marie-Josee Kravis
Frederick R. Wilson
Mr. Rosenkranz subsequently resigned from the Board of Directors of StarMedia on
July 25, 2001. Mr. Enrique Narciso, the Company's President and Chief Executive
Officer, was appointed as Mr. Rosenkranz's successor to serve out the remainder
of his term, which end at the Company's Annual Meeting in 2002.
23
2. The stockholders approved the re-appointment of Ernst & Young LLP as
independent auditors of StarMedia for the 2001 fiscal year.
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- --------- ------------- ----------- ----------------
49,094,858 170,167 -- --
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 Amendment No. 1 to Rights Agreement, dated as of May 28, 2001, between
StarMedia Network, Inc. and American Stock Transfer & Trust Company.
10.1 Securities Purchase Agreement, dated as of May 30, 2001, between
StarMedia Network, Inc., BellSouth Enterprises, Inc. and the additional
investors set forth on Schedule A thereto.
10.2 Internet Content and Services Framework Agreement, dated as of May 30,
2001, by and between StarMedia Network, Inc. and BellSouth Enterprises,
Inc.*
* The Company has requested confidential treatment for certain portions of this
exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended. The portions of the exhibit that are subject to this
confidential treatment request have been omitted and have been filed separately
with the Securities and Exchange Commission.
(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.
BY: /S/ ANA M. LOZANO-STICKLEY
---------------------------------
ANA M. LOZANO-STICKLEY
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL OFFICER)
24