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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/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, 2002
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 August 12, 2002, there were 79,969,230 shares of the Registrant's Common
Stock, $0.001 par value per share, outstanding.
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STARMEDIA NETWORK, INC. AND SUBSIDIARIES
INDEX
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PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 ................................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001 ........................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001 ......................................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements for the six months ended
June 30, 2002..................................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 19
Item 2. Changes In Securities and Use of Proceeds......................................................... 20
Item 3. Defaults upon Senior Securities................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................... 20
Item 5. Other Information................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................................. 21
Item 7. Signatures........................................................................................ 22
</Table>
2
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 8,618,000 $ 21,635,000
Accounts receivable, net of allowance for bad debts of $3,946,000 (2002)
and $4,453,000 (2001) ......................................................... 2,507,000 2,963,000
Unbilled receivables ............................................................. 392,000 2,079,000
Receivables from sale of investment .............................................. -- 13,000,000
Other current assets ............................................................. 3,616,000 3,768,000
------------- -------------
TOTAL CURRENT ASSETS ............................................................... 15,133,000 43,445,000
Fixed assets, net ................................................................ 17,593,000 25,184,000
Intangible assets, net of accumulated amortization of $5,393,000 (2002)
and $5,397,000 (2001) ......................................................... 2,059,000 2,109,000
Goodwill, net of accumulated amortization of $1,111,000 (2002)
and $1,111,000 (2001) ......................................................... 425,000 425,000
Other assets ..................................................................... 1,565,000 573,000
------------- -------------
TOTAL ASSETS ....................................................................... $ 36,775,000 $ 71,736,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 4,928,000 $ 4,419,000
Accrued expenses ................................................................. 8,654,000 15,112,000
Deferred revenue ................................................................. 1,060,000 2,534,000
------------- -------------
TOTAL CURRENT LIABILITIES .......................................................... 14,642,000 22,065,000
Preferred dividends payable ...................................................... 2,373,000 1,278,000
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, 2002 (liquidation preference of $37,778,000 (2001) and $38,873,000
at June 30, 2002)............................................................... 35,349,000 35,204,000
STOCKHOLDERS' EQUITY (DEFICIT):
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, 2002 and
December 31, 2001, respectively ................................................ -- --
Common stock, $.001 par value, 200,000,000 shares
authorized, 80,320,089 shares issued
(2002 and 2001)................................................................. 80,000 80,000
Common stock issuable ............................................................ 1,000,000 1,000,000
Treasury stock--cost of 350,859 shares (2002) and 349,912 shares (2001) .......... (149,000) (143,000)
Additional paid-in capital ....................................................... 542,104,000 542,144,000
Accumulated deficit .............................................................. (555,027,000) (527,116,000)
Deferred compensation ............................................................ (31,000) (87,000)
Accumulated comprehensive loss ................................................... (3,566,000) (2,689,000)
------------- -------------
Total stockholders' equity (deficit) ............................................... (15,589,000) 13,189,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ............................... $ 36,775,000 $ 71,736,000
============= =============
</Table>
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2002.
3
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STARMEDIA NETWORK, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues ........................................................ $ 1,955,000 $ 6,289,000 $ 4,406,000 $ 15,159,000
Operating expenses:
Product and technology development ............................ 5,381,000 14,234,000 12,927,000 28,776,000
Sales and marketing ........................................... 396,000 12,498,000 2,546,000 29,971,000
General and administrative .................................... 2,926,000 7,946,000 7,142,000 17,103,000
Restructuring and other charges ............................... 186,000 15,351,000 533,000 15,351,000
Depreciation and amortization ................................. 3,651,000 6,939,000 7,518,000 12,678,000
Stock-based compensation expense .............................. 1,000 683,000 15,000 1,398,000
Loss on impairment of fixed assets............................. -- -- -- 1,153,000
Loss on sale of fixed assets................................... 163,000 -- 267,000 --
------------- ------------- ------------- -------------
Total operating expenses ...................................... 12,704,000 57,651,000 30,948,000 106,430,000
------------- ------------- ------------- -------------
Loss from operations ............................................ (10,749,000) (51,362,000) (26,542,000) (91,271,000)
Other income (expense):
Interest income ............................................... 99,000 920,000 222,000 2,295,000
Interest expense .............................................. (93,000) (568,000) (93,000) (643,000)
Loss in unconsolidated subsidiary ............................. -- (1,800,000) -- (1,800,000)
Other income / (expenses) ..................................... (38,000) 90,000 (257,000) 55,000
------------- ------------- ------------- -------------
Net loss ........................................................ $ (10,781,000) $ (52,720,000) $ (26,670,000) $ (91,364,000)
Preferred stock dividends and accretion ......................... (620,000) (206,000) (1,240,000) (206,000)
------------- ------------- ------------- -------------
Net loss applicable to common stockholders ...................... $ (11,401,000) $ (52,926,000) $ (27,910,000) $ (91,570,000)
============= ============= ============= =============
Basic and diluted net loss per common share ..................... $ (0.14) $ (0.76) $ (0.35) $ (1.33)
============= ============= ============= =============
Number of shares used in computing basic and diluted net loss per
share ......................................................... 79,969,230 70,001,765 79,969,540 68,693,438
============= ============ ============= =============
</Table>
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2002.
4
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STARMEDIA NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
------------- -------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss .................................................................. $ (26,670,000) $ (91,364,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 7,518,000 12,678,000
Provision for bad debts ................................................. (165,000) 11,316,000
Amortization of stock-based compensation ................................ 15,000 1,398,000
Writedown of officer loans .............................................. -- 10,397,000
Deferred rent expense ................................................... -- 1,261,000
Loss on impairment of fixed assets....................................... -- 1,153,000
Loss on sale of fixed assets............................................. 267,000 --
Changes in operating assets and liabilities:
Accounts receivable ..................................................... 526,000 575,000
Unbilled receivables .................................................... 1,687,000 (666,000)
Other assets ............................................................ (495,000) (1,535,000)
Accounts payable and accrued expenses ................................... (4,562,000) (1,987,000)
Deferred revenues ....................................................... (1,450,000) 2,864,000
------------- -------------
Net cash used in operating activities ..................................... (23,329,000) (53,910,000)
INVESTING ACTIVITIES
Purchase of fixed assets .................................................. (810,000) (9,081,000)
Intangible assets ......................................................... -- (150,000)
Other assets .............................................................. (995,000) 5,661,000
Officer loans ............................................................. -- (6,836,000)
Cash paid for acquisitions ................................................ -- (2,133,000)
------------- -------------
Net cash used in investing activities ..................................... (1,805,000) (12,539,000)
FINANCING ACTIVITIES
Issuance of common stock .................................................. -- 204,000
Purchase of treasury stock................................................. (6,000) --
Proceeds from the sale of investment....................................... 13,000,000 --
Repayment of long-term debt ............................................... -- (4,364,000)
Issuance of convertible preferred stock ................................... -- 36,500,000
------------- -------------
Net cash provided by financing activities ................................. 12,994,000 32,340,000
Effect of exchange rate changes on cash and cash equivalents .............. (877,000) (76,000)
------------- -------------
Net decrease in cash and cash equivalents ................................. (13,017,000) (34,185,000)
Cash and cash equivalents, beginning of period ............................ 21,635,000 93,408,000
------------- -------------
Cash and cash equivalents, end of period .................................. $ 8,618,000 $ 59,223,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................................. $ 93,000 $ 865,000
============= =============
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
============= =============
</Table>
See accompanying notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 2002.
5
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STARMEDIA NETWORK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDED JUNE 30, 2002
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying condensed consolidated financial statements include the
accounts of StarMedia Network, Inc. (d/b/a CycleLogic) and its wholly-owned
subsidiaries (collectively, the "Company"). All intercompany account balances
and transactions have been eliminated in consolidation. StarMedia Network, Inc.
was incorporated under Delaware law in March 1996. The Company, after a
significant change in business strategy during the second half of 2001, is now
principally engaged in providing mobile Internet software and application
solutions to wireless telephone operators businesses targeting Spanish- and
Portuguese-speaking audiences worldwide, described herein as the "mobile
solutions business" or "mobile Internet solutions". 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, sell 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
continued to provide Internet media services during this quarter, these services
are no longer an integral part of the Company's business. On July 3, 2002, the
Company sold a substantial part of their Internet media business. See Note 13.
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 six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. The balance sheet at December 31, 2001 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
The Company has incurred recurring operating losses and may have
insufficient capital to fund all of its obligations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty. Furthermore, there can be no assurances that the Company will be
able to obtain additional financing or be able to generate sufficient revenues
from the operation of the mobile solutions business to meet the Company's
obligations.
2. 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, 2002 and
2001, revenues derived from barter transactions were approximately $162,000 and
$1.7 million, respectively. For the six months ended June 30, 2002 and 2001,
revenues derived from barter transactions were approximately $482,000 and $4.8
million, respectively.
For the three months ended June 30, 2002 and 2001, expenses recognized from
barter transactions were approximately $(898,000) and $992,000, respectively.
For the six months ended June 30, 2002 and 2001, expenses recognized from barter
transactions were approximately $(417,000) and $3.8 million, respectively.
Barter expense for the three and six month periods ended June 30, 2002 includes
a benefit of approximately $1 million related to the final determination of the
value of barter received upon the culmination at June 30, 2002 of certain
underlying barter agreements.
3. ACQUISITION
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 $2,621,000. The stockholders of Obsidiana included entities
managed by J.P. Morgan Partners and Flatiron Partners, which are, or affiliates
of which are, shareholders 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
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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. In September 2001,
the Company as part of the restructuring and change in business strategy, wrote
off the remaining goodwill totaling $2,258,000.
4. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS
The functional currency of the Company's active subsidiaries in Argentina,
Brazil, Chile, Mexico, Spain and Colombia is the local currency in these
countries. 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.
5. STOCKHOLDERS' (DEFICIT) EQUITY
COMMON STOCK
In May 2001, the Company issued 1,431,373 shares of its Series A
Convertible Preferred Stock at a price per share of $25.50 to BellSouth
Enterprises, Inc. ("BellSouth"), About.com, Inc. ("About.com") 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. Dividends accrued at 6% per annum and
totaled approximately $1,095,000 during the six months ended June 30, 2002. 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 $145,000 during the six months ended June 30, 2002.
In addition, in connection with the BellSouth Strategic Agreement (see Note
7), the Company issued 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 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 six months ended June 30, 2002, the Company repurchased 947
shares of its common stock in connection with the termination agreement of a
certain employee.
6. STOCK OPTIONS
Deferred compensation, related to the granting of stock options in 1998
and 1999, is adjusted quarterly for exercises, cancellations and terminations
and is being amortized for financial reporting purposes over the vesting
period of the options. The amounts recognized as expense during the
three-month periods ended June 30, 2002 and 2001 were approximately $1,000
and $683,000, respectively. The amounts recognized as expense during the
six-month periods ended June 30, 2002 and 2001 were approximately $15,000 and
$1,400,000, respectively.
Diluted net loss per share does not include the effect of options and
warrants to purchase 14,526,999 and 25,048,000 shares of common stock at June
30, 2002 and 2001, respectively. Diluted net loss per share at June 30, 2002 and
2001 also does not include the effect of 14,313,730 shares of common stock
issuable upon the conversion of preferred stock on an "as if converted" basis as
the effect of their inclusion is antidilutive.
7. RELATED PARTY TRANSACTIONS
BELLSOUTH
In May 2001, the Company entered into an agreement with BellSouth to create
multi-access portals in Latin America (the "BellSouth Strategic Agreement").
Under the terms of the five-year agreement, the Company will design and service
the multi-access portals and mobile applications and provide content, software
application integration and support to BellSouth's operating companies in Latin
America. BellSouth will supply wireless communications, marketing of services
and billing capabilities. The two companies will share revenues generated by the
new multi-access portals. All revenues associated with design and maintenance
activities and the
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technology licenses are being recognized ratably over the life of the agreement,
while the user fees and transaction revenues are being recognized when the
services are rendered.
During August 2001, the Company issued to JP Morgan Ventures Corporation
251,172 shares of the Company's common stock valued at $500,000 as partial
consideration for services rendered by JP Morgan Securities in connection with
the aforementioned financing. Under the terms of the agreement with JP Morgan
Securities, if the Company did not have in place an effective registration
statement covering these shares by November 30, 2001, JP Morgan Ventures
Corporation would have the right to cause the Company to repurchase such shares
for $500,000. The value of these shares has not been included in stockholders'
deficit due to the fact that the Company has not yet filed such registration
statement.
For the three and six months ended June 30, 2002, the Company recognized
$197,000 and $397,000, respectively, in revenue, net of amortization for the
warrants, in connection with the BellSouth Strategic Agreement.
ABOUT.COM, INC.
In June 2001, the Company entered into a five-year agreement with About.com
to create a jointly operated co-branded website, within the About.com website.
About.com granted the Company certain worldwide license rights to use its
content and proprietary technology in exchange for $2,000,000 in cash and
$3,000,000 in shares of the Company's common stock. As of December 31, 2001,
$2,000,000 of such shares has been issued and $1,000,000 remains in common stock
issuable.
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 Gratis
1, Inc. ("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.
8. 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 were non-recourse, bearing 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 receivable from 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 certain officer's employment and
management's determination that the remaining loans were unrealizable due to
a reduction in value of the supporting collateral, the Company provided a
full reserve and/or fully wrote-off the $11,500,000 plus $600,000 of interest
outstanding as of December 31, 2001, $10,800,000 of such amount was recorded
during the six months ended June 30 2001, and has been included in
restructuring and other charges (see Note 10). In connection with the
termination of employment of the Company's former Chief Financial Officer,
Chief Operating Officer and Senior Vice President of Global Sales, the
Company terminated the lines of credit provided to them and completely
discharged all amounts owed there under. For the termination of the former
Chief Financial Officer's line of credit, 326,000 shares of the Company's
common stock were returned to the Company. Loans to other officers continue
to be outstanding.
9. COMPREHENSIVE LOSS
Total comprehensive loss was approximately $11.2 million and $27.5 million
for the three and six month periods ended June 30, 2002, respectively and
approximately $52.6 million and $91.4 million for the three and six month
periods ended June 30, 2001, respectively.
10. 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 8) that were
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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. The Company recorded during the six months ended June 30, 2002 aggregate
charges of approximately $533,000, which includes severance payments to
employees of the Company. Substantially all restructuring and other charges
previously accrued were paid during the quarter ended March 31, 2002.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and 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. 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. SFAS No. 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
SFAS No. 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized. The adoption of this statement had no material effect on the
Company's financial position and results of operations.
The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company has
performed the first of the required impairment tests of goodwill and indefinite
lived intangible assets and, based on the results, has not recorded any charges
related to the adoption of SFAS 142.
As of June 30, 2002, intangible assets consist primarily of perpetual
license rights and substantially all of the intangible assets are not subject to
amortization. The decrease in intangible assets during the six months ended June
30, 2002 relates to amortization of intangible assets with finite lives.
Net loss and loss per share amounts on an adjusted basis to reflect the add
back of goodwill and other intangible assets amortization would be as follows
(in thousands, except for per share amounts):
<Table>
<Caption>
Three month period ended Six month period ended
---------------------------------- ----------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
--------------- --------------- --------------- ---------------
Reported net loss ........................... $ (11,401) $ (52,926) $ (27,910) $ (91,570)
Add back: goodwill and indefinite lived
intangible asset amortization ............ -- 2,016 -- 3,079
--------------- --------------- --------------- ---------------
Adjusted net loss .......................... $ (11,401) $ (50,910) $ (27,910) $ (88,491)
=============== =============== =============== ===============
Basic and diluted loss per share:
Reported net loss .......................... $ (0.14) $ (0.76) $ (0.35) $ (1.33)
Goodwill and indefinite lived intangible
asset amortization ....................... -- 0.03 -- 0.04
--------------- --------------- --------------- ---------------
Adjusted net loss .......................... $ (0.14) $ (0.73) $ (0.35) $ (1.29)
=============== =============== =============== ===============
</Table>
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of, and the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations for a Disposal of a Segment of a Business. The adoption of this
statement had no material effect on the Company's financial position and results
of operations.
12. LEGAL PROCEEDINGS
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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 the time for all defendants to respond to the
complaints without setting a date by which responses must be filed.
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 its 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. The
United States District Court Judge overseeing the consolidated litigation
recently granted preliminary approval to the proposed settlement and a hearing
has been scheduled for September 30, 2002 to consider granting final approval. A
list of the eleven lawsuits before consolidation follows:
<Table>
<Caption>
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, et al. January 7, 2002
</Table>
In April 2002, AT&T Corp filed a claim in the United States District Court
for the Southern District of New York seeking payment from the Company for
telecommunications services rendered to the Company in the amount of
approximately $337,000, and in June 2002 AT&T amended that complaint to increase
the amounts claimed to approximately $1,400,000. In addition, for over a year
the Company has engaged in periodic discussions with AT&T regarding the
Company's alleged commitments to purchase a variety of services from AT&T, and
in April 2002 had received correspondence from AT&T alleging that approximately
a total of $1,100,000 was payable by the Company. The Company denies that it
owes most of the amounts alleged to be payable by AT&T. The parties have
commenced settlement discussions.
In October 2001, Fausto Zapata, formerly President of SMN de Mexico, S de
RL, filed a notice in the applicable Labor Courts in Mexico City alleging that
the Company failed to make payments due to him under an employment agreement
following his termination by the Company. The amounts claimed by Mr. Zapata
exceed 8.5 million Pesos, or approximately $900,000. The Company maintains that
it owes Mr. Zapata solely the minimum amounts required to be paid following
termination of his at-will employment, which the Company calculates to be
approximately 600,000 Mexico Pesos, or approximately $65,000.
In January 2002 Mr. Carlos Ponce filed a claim in 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
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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 by filing a notice for trial advising the
court that the case is at issue as well as a request to produce documents
directed to the Company. 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.
The Company is subject to legal proceedings and claims in the ordinary
course of business from time to time, including claims of alleged infringement
of trademarks, copyrights and other intellectual property rights, and a variety
of claims arising in connection with our e-mail, message boards and other
communications and community features, such as claims alleging defamation and
invasion of privacy.
The Company intends to vigorously defend the aforementioned claims that are
threatened or pending against it but believes that an adverse outcome with
respect to one or more of these matters could have a material adverse effect on
the financial condition of the Company.
13. SUBSEQUENT EVENT
On July 3, 2002 the Company sold substantially all of the assets
associated with starmedia.com, the Company's Spanish- and Portuguese-language
portal, and LatinRed, the Company's Spanish language online community, to
eresMas Interactive S.A. ("EresMas") for $8,000,000 in cash. In addition, in
order to facilitate the transfer of these assets, the Company agreed to
provide transitional services to EresMas under a Transition Licensing
Agreement. The Company does not expect to realize any significant gain or
loss from the aforementioned sale. The assets sold were 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."
11
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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, 2001 UNDER THE
CAPTION RISK FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN.
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
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<Page>
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. Beginning in July 2002, all of our revenues will be 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.
The Company is considering implementing a reverse stock split and, as a
result, becoming a private company. Should the Company decide to do this, we
will provide additional information about the reverse stock split and its
consequences for the Company, its shareholders, and potential investors.
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.
- 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.
- 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
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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
- free email, promotional email newsletters, user surveys, chats, instant
messaging, and home pages;
- tools and applications, such as games, multimedia players, comprehensive
city guide content, and sophisticated search capabilities;
- local and global editorial content; and
- online shopping in Spanish and Portuguese.
The Company has derived revenues from its Internet media services
principally through sales of advertising and promotions on these services,
including banners, buttons and sponsorships. For the six months ended June 30,
2002, 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.
Following the sale of the Company's starmedia.com and LatinRed services, the
Company does not expect to derive any revenues from the provision of Internet
media services.
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. As a result
of our sale on July 3, 2002 of most of our intellectual property, hardware and
other assets allocated with the operation of starmedia.com and LatinRed to
Eresmas we will no longer generate any revenues from our Internet media services
business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
REVENUES
Total revenues decreased to $2.0 million for the three months ended June
30, 2002 from $6.3 million, for the three months ended June 30, 2001. This
decrease was primarily associated with lower advertising and sponsorship
revenues. Barter revenues for the three months ended June 30, 2002 and 2001
accounted for 8% and 27% of total revenues, respectively. Advertising and
promotion revenues generated directly from our Internet media services business
was approximately $1.0 million for the three months ended June 30, 2002.
For the three months ended June 30, 2002, two advertisers, individually,
accounted for more than 10% of our total revenues. 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, 2002, our top five
advertisers accounted for 57% of our total revenues. For the three months ended
June 30, 2001, our top five advertisers account for 43% of our total revenues.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology development expenses decreased to $5.4 million, or
275% of total revenues, for the three months ended June 30, 2002, from $14.2
million, or 226% of total revenues, for the three months ended June 30, 2001.
This decline was primarily due to decreases of approximately $3.5 million for
compensation-related expense, $1.4 million for consulting and contract
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fees, and $2.7 million in hosting and content acquisition related expense.
SALES AND MARKETING
Sales and marketing expenses decreased to $400,000, or 20% of total
revenues for the three months ended June 30, 2002 from $12.5 million, or 199% of
total revenues, for the three months ended June 30, 2001. This decrease was
primarily due to decreases of approximately $2.6 million in compensation-related
expense, $3.2 million in advertising expense and $5.5 million for bad debt
reserves. Furthermore, included in the three months ended June 30, 2002 was a
benefit of approximately $1 million related to the final determination of the
value of barter received upon the culmination at June 30, 2002 of certain
underlying barter agreements. We believe the Company has ample coverage for bad
debts and we will continue to review the collectibility of our receivables.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $2.9 million, or 150% of
total revenues, for the three months ended June 30, 2002, from $7.9 million, or
126% of total revenues, for the three months ended June 30, 2001. The decrease
in general and administrative expenses was primarily attributed to decreases in
approximately $1.7 million in compensation-related expenses, $800,000 in
business taxes and insurance and approximately $1.7 million in office rent and
utilities due to a significant reduction in our operating lease arrangements.
RESTRUCTURING AND OTHER CHARGES
For the three months ended June 30, 2002, we recorded restructuring charges
totaling approximately $186,000, which was the result of a company-wide
realignment of its business operations and an effort to reduce its operational
overhead. For the three months ended June 30, 2001, we recorded restructuring
charges totaling approximately $15.4 million, including 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 to $3.7 million, or 187%
of total revenues, for the three months ended June 30, 2002, from $6.9 million
or 110% of total revenues, for the three months ended June 30, 2001. This
decrease is attributed to decreases in depreciation expense due to a reduction
in capital purchases, fixed asset impairments in 2001, and the adoption of FASB
Statement 142, which states that goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Goodwill and intangibles were
impaired in 2001. For the period ended June 30, 2002, the Company reviewed and
assessed that there were no impairment for goodwill and intangibles.
STOCK-BASED COMPENSATION EXPENSE
Of the cumulative deferred compensation amount, $1,000 was recorded as an
expense for the three months ended June 30, 2002 compared with $683,000 recorded
as expense for the three months ended June 30, 2001. 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 three months 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 $99,000 for the three months ended June 30, 2002 from
$920,000 for the three months ended June 30, 2001. Interest income decreased as
a result of a decrease in the average invested cash balance for the above
periods.
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For the quarter ended June 30, 2002, the Company recorded $93,000 in
interest expense. For the quarter ended June 30, 2001, $568,000 in interest
expense was recorded.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
REVENUES
Total revenues decreased to $4.4 million for the six months ended June 30,
2002 from $15.2 million, for the six months ended June 30, 2001. 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, 2002 and 2001 accounted for 11% and 32% of total revenues,
respectively. Advertising and promotion revenues generated directly from our
Internet media services business was approximately $2.4 million for the six
months ended June 30, 2002.
For the six months ended June 30, 2002, two advertisers, individually,
accounted for more than 10% of our total revenues. 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, 2002, our top five advertisers accounted for 46%
of our total revenues. For the six months ended June 30, 2001, our top five
advertisers account for 41% of our total revenues.
OPERATING EXPENSES
PRODUCT AND TECHNOLOGY
Product and technology development expenses decreased to $12.9 million, or
293% of total revenues, for the six months ended June 30, 2002, from $28.8
million, or 190% of total revenues, for the six months ended June 30, 2001. This
decrease was primarily due to a decrease of approximately $7.2 million for
compensation-related expense, $2.8 million for consulting and contract fees and
$3.7 million in hosting and content acquisition related expense.
SALES AND MARKETING
Sales and marketing expenses decreased to $2.5 million, or 58% of total
revenues, for the six months ended June 30, 2002 from $30.0 million, or 198%
of total revenues, for the six months ended June 30, 2001. This decrease was
primarily due to decreases of approximately $5.4 million in compensation-
related expense, $8.3 million in advertising expense, $900,000 in travel
expenses and $11.7 million for bad debt reserves. Furthermore, included in
the six month ended June 30, 2002 was a benefit of approximately $1 million
related to the final determination of the value of barter received upon the
termination at June 30, 2002 of certain underlying barter agreements. We
believe the Company has ample coverage for bad debts and we will continue to
review the collectibility of our receivables.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $7.1 million, or 162% of
total revenues, for the six months ended June 30, 2002, from $17.1 million, or
113% of total revenues, for the six months ended June 30, 2001. The decrease in
general and administrative expenses was primarily attributed to decreases in
approximately $3.7 million in compensation-related expenses, $1.2 million in
business taxes and insurance, $1.2 million in telephone and postage and
approximately $3.1 million in office rent and utilities due to a significant
reduction in our operating lease arrangements.
RESTRUCTURING AND OTHER CHARGES
For the six months ended June 30, 2002, we recorded restructuring charges
totaling approximately $533,000, which was the result of a company-wide
realignment of its business operations and an effort to reduce its operational
overhead. For the six months ended June 30, 2001, we recorded restructuring
charges totaling approximately $15.4 million 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 to $7.5 million, or 171%
of total revenues, for the six months ended June 30, 2002, from $12.7 million,
or 84% of total revenues, for the six months ended June 30, 2001. This decrease
is attributed to decreases in depreciation expense due to a reduction in capital
purchases, fixed asset impairment in year 2001, and the adoption of FASB
Statement 142, which states that goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Goodwill and intangibles were
impaired in 2001. For the period ended June 30, 2002, the Company reviewed and
assessed that there were no impairment for goodwill and intangibles.
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STOCK-BASED COMPENSATION EXPENSE
Of the cumulative deferred compensation amount, $15,000 was recorded as an
expense for the six months ended June 30, 2002 compared with $1.4 million
recorded as expense for the six months ended June 30, 2001. 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.
INTEREST
Interest income includes income from our cash and investments. Interest
income decreased to $222,000 for the six months ended June 30, 2002 from $2.3
million for the six months ended June 30, 2001. Interest income decreased as a
result of a decrease in the average invested cash balance for the above periods.
For the six months ended June 30, 2002, the Company recorded $93,000 in
interest expense. For the six months ended June 30, 2001, $643,000 in interest
expense was recorded.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through the sale of our
equity securities. At June 30, 2002, we had $8.6 million in cash and cash
equivalents, a decrease of $13.0 million from December 31, 2001.
We used $23.3 million in operating activities for the six months ended June
30, 2002, a decrease from $53.9 million for the six months ended June 30, 2001
due to reduced operating expenditures. Cash used in operating activities
substantially related to our loss of $26.7 million and $91.4 million during the
periods ended June 30, 2002 and June 30, 2001, respectively. For the six months
ended June 30, 2002, non-cash operating activities included $7.5 million in
depreciation and amortization. For the six months ended June 30, 2001, non-cash
operating activities included $12.7 million for depreciation and amortization,
$11.3 million in bad debt reserve, $1.2 million in loss on asset impairment,
$1.4 million in stock-based compensation and $10.4 million in write down of
officer loans.
For the six months ended June 30, 2002, we used $1.8 million in investing
activities, including $810,000 for purchase of fixed assets and $995,000 in
purchase of other assets. For the six months ended June 30, 2001, we used $12.5
million in investing activities, including $9.1 million in purchase of fixed
assets, $6.8 million in advances to officers and $2.1 million in acquisitions,
offset by $5.7 million increase in other assets.
Net cash provided by financing activities was $13.0 million and $32.3
million for the six months ended June 30, 2002 and 2001, respectively. Net cash
provided by financing activities during the six months ended June 30, 2002
consisted of cash from sale of Cade?, a Brazilian search directory. 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.
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. See
note 6 of the notes to the unaudited condensed consolidated financial
statements.
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
operating leases.
We have experienced a substantial decrease in our capital expenditures this
past year and operating lease arrangements have been reduced significantly due
to a reduction of work force and the restructure of our operations.
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. The Company's working
capital will increase as a result of the sale.
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While we have reduced operating expenses significantly, through a reduction
of our work force and other operating costs, our current cash and cash
equivalents may not be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for the next 12 months. If working capital is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or establish an additional credit facility.
The sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. The incurrence of additional
indebtedness would result in increased fixed obligations and could result in
operating covenants that would restrict our operations. We cannot assure you
that financing will be available in amounts or on terms acceptable to us, if at
all. There can be no assurance that the Company will obtain such additional
capital or that such additional financing will be sufficient for the Company's
continued existence. Furthermore, there can be no assurances that the Company
will be able to generate sufficient revenues from the operation of the mobile
solutions business to meet the Company's obligations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
CRITICAL ACCOUNTING ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based on the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including those related to revenue, bad
debts, intangible assets, restructuring, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
Revenue is recognized when the earnings process is complete, as evidenced
by an agreement between the customer and the Company, when delivery has occurred
or services have been rendered and when collection is probable. The recognition
of revenue in conformity with accounting principles generally accepted in the
United States requires the Company to make estimates and assumptions that affect
the reported amounts of revenue. We recognize revenue when earned as services
are provided throughout the life of each contract with a customer. The majority
of our revenues are invoiced on a monthly basis. Estimates related to the
recognition of revenue include the recognition of barter revenue and the
allocation of revenue across the various deliverables of multiple element
revenue arrangements. We record deferred revenue for billings in excess of
revenues recognized.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. The Company uses the direct write-off method to record bad debt
expense. The Company performs regular analyses on its accounts receivable
balances and determines what accounts receivable to write-off after information
is received and indications exist that the specific account receivable is no
longer collectible. Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future.
The Company assesses the fair value and recoverability of its long-lived
assets, including goodwill, whenever events and circumstances indicate the
carrying value of an asset may not be recoverable from estimated future cash
flows expected to result from its use and eventual disposition. In doing so, we
make assumptions and estimates regarding future cash flows and other factors to
make our determination. The fair value of our long-lived assets and goodwill is
dependent upon the forecasted performance of our business, changes in the mobile
solutions business and the overall economic environment. When the Company
determines that the carrying value of our long-lived assets and goodwill may not
be recoverable, we measure any impairment based upon a forecasted discounted
cash flow method. If these forecasts are not met, we may have to record
additional impairment charges not previously recognized.
The Company periodically records the estimated impact of various
conditions, situations or circumstances involving uncertain outcomes. The
Company accounts for these contingencies as prescribed by SFAS No. 5 "Accounting
for Contingencies". The Company uses its best judgment to determine the estimate
of these contingencies. The Company adjusts these reserves to account for
ongoing issues and changes in circumstances.
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.
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INTEREST RATE RISK
Our investments are classified as cash and cash equivalents with original
maturities of three months or less. Therefore, changes in the market's interest
rates do not affect the value of the investments as recorded by us.
FOREIGN CURRENCY EXCHANGE RISK
We do not hedge our exposure to foreign currency exchange risk. We are
subject to exchange rate fluctuations, which may be a significant risk, because
of our operations in Latin America.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001, the Company, three of its executive officers and each of
the underwriters who participated in the Company's May 25, 1999 initial public
offering were named as defendants in three class action complaints filed in the
United States District Court for the Southern District of New York: Earl Arneson
v. StarMedia Network, Inc, et al; John R. Longman v. StarMedia Network, Inc., et
al; and BH Holdings LLC v. StarMedia Network, Inc., et al. The complaints, which
are substantially identical, each seek unspecified damages for alleged
violations of Sections 11, 12 and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder in connection with the Company's initial public offering.
The complaints allege that the underwriters charged the Company excessive
commissions and inflated transaction fees not disclosed in the registration
statement and allocated shares of the Company's initial public offering to
favored customers in exchange for purported promises by such customers to
purchase additional shares in the aftermarket, thereby allegedly inflating the
market price for the Company's common stock. These actions have been
consolidated with hundreds of other securities class actions commenced against
more than 300 companies and approximately 40 investment banks in which
plaintiffs make substantially similar allegations as those made against the
Company with respect to the initial public offerings at issue in those cases.
All of these actions have been consolidated under the caption In re: Initial
Public Offering Securities Litigation, 21 MC 92 (SAS). The judge in the
consolidated action has adjourned the time for all defendants to respond to the
complaints without setting a date by which responses must be filed.
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 its 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. The
United States District Court Judge overseeing the consolidated litigation
recently granted preliminary approval to the proposed settlement and a hearing
has been scheduled for September 30, 2002 to consider granting final approval. A
list of the eleven lawsuits before consolidation follows:
<Table>
<Caption>
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, et al. January 7, 2002
</Table>
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
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in June 2002 AT&T amended that complaint to increase the amounts claimed to
approximately $1,400,000. In addition, for over a year the Company has engaged
in periodic discussions with AT&T regarding the Company's alleged commitments to
purchase a variety of services from AT&T, and in April 2002 had received
correspondence from AT&T alleging that approximately a total of $1,100,000 was
payable by the Company. The Company denies that it owes most of the amounts
alleged to be payable by AT&T. The parties have commenced settlement
discussions.
In October 2001, Fausto Zapata, formerly President of SMN de Mexico, S de
RL, filed a notice in the applicable Labor Courts in Mexico City alleging that
the Company failed to make payments due to him under an employment agreement
following his termination by the Company. The amounts claimed by Mr. Zapata
exceed 8.5 million Pesos, or approximately $900,000. The Company maintains that
it owes Mr. Zapata solely the minimum amounts required to be paid following
termination of his at-will employment, which the Company calculates to be
approximately 600,000 Mexico Pesos, or approximately $65,000.
In January 2002 Mr. Carlos Ponce filed a claim in 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 by filing a notice for trial advising
the court that the case is at issue as well a request to produce documents
directed to the Company. 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 with 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.
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
None.
COMMON STOCK
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
<Table>
<Caption>
Exhibit
Number Description
------- ------------------------------------------
10.1 Retention Bonus and Severance Agreement, by and
between the Registrant and Jose Manual Tost, dated
May 2, 2002.
10.2 Retention Bonus and Severance Agreement, by and
between the Registrant and Jorge Rincon, dated
May 2, 2002.
10.3 Retention Bonus and Severance Agreement, by and
between the Registrant and Michael Hartman, dated
May 2, 2002.
10.4 Retention Bonus and Severance Agreement, by and
between the Registrant and Ana Maria Lozano-Stickley,
dated May 2, 2002.
</Table>
(b) Reports on Form 8-K:
A Form 8-K was filed on April 19, 2002 reporting the resignation of
Enrique Narciso, the Chief Executive Officer and President and a director of
the Company.
A Form 8-K was filed on July 3, 2002 reporting the sale of the Company's
portal www.starmedia.com and the interactive community Latin Red
(www.latinred.net) to the Spanish company, eresMas Interactiva S.A. for $8.0
million in cash.
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ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2002
STARMEDIA NETWORK, INC.
BY: /s/ ANA M. LOZANO-STICKLEY
---------------------------------
ANA M. LOZANO-STICKLEY
CHIEF FINANCIAL OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL FINANCIAL OFFICER)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his/her capacity as an officer of
StarMedia Network, Inc. (the "Company"), for purposes of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
- the Quarterly Report of the Company on Form 10-Q for the period ended
June 30, 2002 fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
- the information contained in such report fairly presents, in all material
respects, the financial condition and results of operation of the
Company.
Dated: August 12, 2002
/s/ JOSE MANUEL TOST
- --------------------
President
/s/ ANA M. LOZANO-STICKLEY
- --------------------------
Chief Financial Officer
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