-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtHbG7Z+wvSyeifRGz1T7LhX54I9dTgi8txa0y5XwpP/WV57yvkfzYeblr5ZpTuh paF1YQTPgmdhj7SMXAkx8w== 0001047469-03-005000.txt : 20030212 0001047469-03-005000.hdr.sgml : 20030212 20030212163756 ACCESSION NUMBER: 0001047469-03-005000 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20030212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARMEDIA NETWORK INC CENTRAL INDEX KEY: 0001057334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 061461770 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-31138 FILM NUMBER: 03554980 BUSINESS ADDRESS: STREET 1: 29 WEST 36TH STREET 5TH FL CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125489600 MAIL ADDRESS: STREET 1: 29 WEST 36TH STREET FIFTH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 10-Q/A 1 a2102857z10-qa.htm 10-Q/A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

(Mark One)
ý	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
o	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 (State or Other Jurisdiction of Incorporation)		06-1461770 (I.R.S. Employer Identification Number)
999 Brickell Ave., Miami, FL 33131 (Address of Principal Executive Offices)		33131 (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 ý No o

As of August 12, 2002, there were 79,969,230 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding.

STARMEDIA NETWORK, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) 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	17
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 2.	Changes In Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	31
Item 7.	Signatures	31

EXPLANATORY NOTE

This Amendment is being filed to include additional disclosure and information in certain sections in response to comments received by the SEC and after consultation with the Company's auditors. In order to preserve the nature and character of the disclosures set forth in the Quarterly Report on Form 10-Q as originally filed, this Amendment continues to speak as of the date of the original filing with the SEC on August 14, 2002, and the Company has not updated the disclosures in this report to speak as of a later date. All information contained in this Amendment is subject to update and supplement by the Company's reports filed with the SEC for periods subsequent to the date of the original filing of the Quarterly Report on Form 10-Q.

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STARMEDIA NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements
for the six months ended June 30, 2002.

STARMEDIA NETWORK, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
	Mobile Solutions	$	1,100,000		$	634,000		$	2,118,000		$	1,327,000
	Internet Media Services		855,000			5,655,000			2,288,000			13,832,000

Total revenues		$	1,955,000		$	6,289,000		$	4,406,000		$	15,159,000
Operating expenses:
	Product and technology development, (exclusive of $0; $83,000; $1,000; and $170,000, respectively, reported below as stock-based compensation)		5,381,000			14,234,000			12,927,000			28,776,000
	Sales and marketing, (exclusive of $0; $127,000; $12,000; and $260,000, respectively, reported below as stock-based compensation)		554,000			7,132,000			2,711,000			18,485,000
	General and administrative, (exclusive of $1,000; $473,000; and $2,000; $968,000, respectively, reported below as stock-based compensation)		2,926,000			7,946,000			7,142,000			17,103,000
	Restructuring and other charges		186,000			4,536,000			533,000			4,536,000
	Bad debt (recoveries) expense		(158,000	)		5,366,000			(165,000	)		11,486,000
	Write-off of officer loans		—			10,815,000			—			10,815,000
	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/(expense)		(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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements
for the six months ended June 30, 2002.

STARMEDIA NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		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 (recoveries of) bad debt		(165,000	)		11,486,000
	Amortization of stock-based compensation		15,000			1,398,000
	Write-off of officer loans		—			10,815,000
	Deferred rent expense		—			1,261,000
	Loss on impairment of fixed assets		—			1,153,000
	Loss on sale of fixed assets		267,000			—
	Realized loss on foreign currency exchange		339,000			55,000
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		(4,901,000	)		(2,630,000	)
	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	)
Proceeds from the sale of investment			13,000,000			—

Cash paid for acquisitions			—			(2,133,000	)
Net cash provided by (used in) in investing activities			11,195,000			(12,539,000	)
FINANCING ACTIVITIES
Issuance of common stock			—			204,000
Purchase of treasury stock			(6,000	)		—
Repayment of long-term debt			—			(4,364,000	)
Issuance of convertible preferred stock			—			36,500,000

Net cash (used in) provided by financing activities			(6,000	)		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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements
for the six months ended June 30, 2002.

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 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. REDEEMABLE CONVERTIBLE PREFERRED 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 8), 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 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 been treated as a reduction of the carrying value of the Series A Convertible Preferred Stock and, since the Company has not yet filed such registration statement, has been included in accrued expenses in the accompanying balance sheet.

6. STOCKHOLDERS' (DEFICIT) EQUITY

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.

7. 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 and 923,529 shares of common stock issuable upon the conversion of preferred stock and accrued dividends on preferred stock, respectively, on an "as if converted" basis as the effect of their inclusion is antidilutive.

8. 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 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.

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.

9. DUE FROM OFFICERS

During the year ended December 31, 2000, the Company provided lines of credit to certain officers totaling $6,400,000, under which a total of $4,600,000 was advanced to such officers, including an advance of an unsecured, recourse loan totaling $500,000 to its then Chief Operating Officer. In January 2001, the lines of credit available to the Company's officers were increased to $12,400,000. During 2001, the Company had made loans to officers under such lines of credit totaling approximately $6,900,000. All of the loans to officers made during 2000 and 2001 bore interest rates ranging from 6.75% to 10.0% per annum. In addition, with the exception of the $500,000 loan to the Company's former Chief Operating Officer, which was unsecured, all other loans to officers were non-recourse to the borrower and were secured solely 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. Consequently, holders of non-recourse loans had no personal liability for repayment of the loans beyond the delivery of the shares pledged by them to secure the loans.

As a result of the termination of the former Chief Operating Officer's employment, which management considered would make collection of his loan unlikely, and management's determination that the other, nonrecourse 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 loan plus $800,000 of interest outstanding as of December 31, 2001, of which $11.6 million was included in officer loan write-off, $292,000 was included in compensation expense as this portion was earned based on employment service provided under the loan agreement, and $398,000 was reduced against interest income for current year's interest. For the six months ended June 30, 2001, officer loan write-off included approximately $10.8 million of loans and related interest to officers.

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. Such shares were recorded as treasury stock with a value of $114,000, the value of such shares on the day they were returned to the Company. Loans to other officers continue to be outstanding.

10. 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.

11. 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 $4.5 million, including approximately $2.3 million of severance payments to employees and certain officers of the Company and approximately $2.2 million of other restructuring related costs for the six months ended June 30,

2001. 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. The following tables detail the changes in restructuring costs during the six months ended June 30, 2002 and 2001.

For the Six Months ended June 30, 2002

		Changes during the six month period
		Accrual bal at 12/31/01		Restructuring Charge		Cash Payment		Non -Cash Adjustment		Accrual bal at 6/30/02
Severance Costs		1,000,000		533,000		(1,508,000	)	—		25,000

For the Six Months ended June 30, 2001

	Changes during the six month period
	Accrual bal at 12/31/00	Restructuring Charge	Cash Payment		Non-Cash Adjustment		Accrual bal at 6/30/01
Severance Costs	—	2,356,000	(1,992,000	)	—		364,000
Other	840,000	2,180,000	(987,000	)	(1,633,000	)	400,000

	840,000	4,536,000	(2,979,000	)	(1,633,000	)	764,000

The following tables detail the number of employees terminated during the six months ended June 30, 2002, and 2001, their location and department.

For the six months ended June 30, 2002

	Argentina	Brazil	Chile	Colombia	Mexico	Uruguay	USA	Venezuela	Total
Product & technology	2	43	1	3	13	5	27	—	94
Sales & marketing	1	8	2	2	14	—	14	3	44
General & administrative	2	8	1	—	3	2	12	—	28

	5	59	4	5	30	7	53	3	166

For the six months ended June 30, 2001

	Argentina	Brazil	Chile	Colombia	Mexico	Uruguay	USA	Venezuela	Total
Product & technology	1	29	15	2	1	1	23	—	72
Sales & marketing	1	15	5	7	12	—	14	—	54
General & administrative	—	4	—	—	3	—	12	—	19

	2	48	20	9	16	1	49	—	145

12. 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):

	Three month period ended						Six month period ended
	June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Reported net loss applicable to common stockholders	$	(11,401	)	$	(52,926	)	$	(27,910	)	$	(91,570	)
Add back: goodwill and indefinite lived intangible asset amortization		—			2,016			—			3,079

Adjusted net loss applicable to common stockholders	$	(11,401	)	$	(50,910	)	$	(27,910	)	$	(88,491	)

Basic and diluted loss per share:
Reported net loss applicable to common stockholders	$	(0.14	)	$	(0.76	)	$	(0.35	)	$	(1.33	)
Goodwill and indefinite lived intangible asset amortization		—			0.03			—			0.04

Adjusted net loss applicable to common stockholders	$	(0.14	)	$	(0.73	)	$	(0.35	)	$	(1.29	)

	For the Year ended December 31,
	2001			2000			1999
Reported net loss applicable to common stockholders	$	(166,991	)	$	(210,839	)	$	(94,939	)
Add back: goodwill and indefinite lived intangible asset amortization		5,700			13,612			2,622

Adjusted net loss applicable to common stockholders	$	(161,291	)	$	(197,227	)	$	(92,317	)

Basic and diluted loss per share:
Reported net loss applicable to common stockholders	$	(2.35	)	$	(3.20	)	$	(2.31	)
Goodwill and indefinite lived intangible asset amortization		.08			0.21			.07

Adjusted net loss applicable to common stockholders	$	(2.27	)	$	(2.99	)	$	(2.24	)

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.

13. 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.

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:

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

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 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.

14. 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."

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 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 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 a decline in Internet media service revenues to $855,000 for the three months ended June 30, 2002 from $5.7 million for the three months ended June 30, 2001 due to lower advertising and sponsorship revenues. The decrease was partially offset by increases in Mobile solutions revenue to $1.1 million for the three months ended June 30, 2002 from $634,000 for the three months ended June 30, 2001.

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, a mobile operator and advertiser, 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 mobile operators and advertisers combined 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

Management believes that as part of the realignment of the Company's resources and the sale of our media assets, our operating expense structure will be reduced. These reductions, in conjunction with our objective of furthering our mobile solutions business, will provide a better opportunity for the company to reach profitability. However, there can be no assurances that these reductions will result in the company becoming profitable and continuing as a going concern.

In general, management estimates that as a result of the realignment and it ceasing to engage in the Internet media business, the Company's operating expenses will be reduced to $10 million for the three months ended September 30, 2002 and approximately $7 million for the three months ended December 31, 2002, as compared to approximately $13 million for the three months ended June 30, 2002.

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 fees, and $2.7 million in hosting and content acquisition related expense.

SALES AND MARKETING

Sales and marketing expenses decreased to $554,000, or 28% of total revenues for the three months ended June 30, 2002 from $7.1 million, or 113% 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, and $3.2 million in advertising expense. 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.

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, the Company 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 $4.5 million, including approximately $2.3 million of severance payments to employees and certain officers of the Company and approximately $2.2 million of other restructuring related costs.

BAD DEBT (RECOVERIES) EXPENSE

Bad debt (recoveries) expense for the three months ended June 30, 2002 was a net recovery of $158,000 as a result of a reversal of account receivables that had been previously reserved for and were subsequently collected. Bad debt expense for the three months ended June 30, 2001 totaled $5.4 million as a result of the write-off/reserve of accounts receivables that have deteriorated and or became un-collectible during the period. Additionally, a great majority of this write-off relates to accounts from Internet customers whom suffered a significant setback to their business as a result of the deterioration of the advertising market. The Company believes that all potential uncollectible accounts receivables have been fully reserved for and as such the Company does not expect any future collectibility or billing problems from the accounts currently reported in the financial statements.

WRITE-OFF OF OFFICER LOANS

Officer loan write-off for the three months ended June 30, 2001 approximated $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.

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 was primarily associated with a decline in Internet media service revenue to $2.3 million for the six months ended June 30, 2002 from $13.8 million for the six months ended June 30, 2001 due to lower revenue-producing advertising impressions and sponsorships sold. Barter revenues for the six months ended June 30, 2002 and 2001 accounted for 11% and 32% of total revenues, respectively.

For the six months ended June 30, 2002, one mobile operator and advertiser, 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 mobile operators and advertisers combined 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 $2.7 million, or 62% of total revenues, for the six months ended June 30, 2002 from $18.5 million, or 122% 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, and $900,000 in travel expenses. 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.

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 $4.5 million including approximately $2.3 million of severance payments to employees and certain officers of the Company and approximately $2.2 million of other restructuring related costs.

BAD DEBT (RECOVERIES) EXPENSE

Bad debt (recoveries) expense for the six months ended June 30, 2002 was a net recovery of $165,000 as a result of a reversal of account receivables that had been previously reserved for and were subsequently collected. Bad debt expense for the six months ended June 30, 2001 totaled $11.5 million as a result of the write-off/reserve of accounts receivables that have deteriorated and or became un-collectible during the period. Additionally, a great majority of this write-off relates to accounts from Internet customers whom suffered a significant setback to their business as a result of the deterioration of the advertising market. The Company believes that all potential uncollectible accounts receivables have been fully reserved for and as such the Company does not expect any future collectibility or billing problems from the accounts currently reported in the financial statements.

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.

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, $11.5 million in bad debt reserve, $1.2 million in loss on asset impairment, $1.4 million in stock-based compensation and $10.8 million in write down of officer loans.

For the six months ended June 30, 2002, we received net cash of $11.2 million from investing activities, including $13.0 million in cash from sale of Cade?, a Brazilian search directory, partially offset by $810,000 used 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 (used in) provided by financing activities was ($6,000) and $32.3 million for the six months ended June 30, 2002 and 2001, respectively. Net cash used in financing activities during the six months ended June 30, 2002 was for acquisition of treasury shares. 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.

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 has significant tangible and intangible assets on its balance sheet, primarily fixed assets and goodwill. The assignment of useful lives to the fixed assets and the valuation and classification of intangible assets involves significant judgments and the use of estimates. The testing of these tangible and intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. The Company's assets are tested and reviewed for impairment on an ongoing basis under the established accounting guidelines. Changes in business conditions or changes in the decisions of management as to how assets will be deployed in the Company's operations could potentially require future adjustments to asset valuations.

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.

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

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.

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:

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

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 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 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.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): The following exhibits are filed with this report:

Exhibit Number		Description
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.
99.1		Certification of CEO/CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(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.

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: February 12, 2003

		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 RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jose Manuel Tost, certify that:

1. I have reviewed this amended quarterly report on Form 10-Q/A of StarMedia Network, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: February 12, 2003

/s/

Jose Manuel Tost

Jose Manuel Tost
President
StarMedia Network, Inc.

CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ana M. Lozano-Stickley, certify that:

1. I have reviewed this amended quarterly report on Form 10-Q/A of StarMedia Network, Inc.;

Date: February 12, 2003

/s/

Ana M. Lozano-Stickley

Ana M. Lozano-Stickley
Chief Financial Officer
StarMedia Network, Inc.

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STARMEDIA NETWORK, INC. AND SUBSIDIARIES INDEX
EXPLANATORY NOTE
PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
STARMEDIA NETWORK, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
STARMEDIA NETWORK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EX-10.1 3 a2102857zex-10_1.htm EXHIBIT 10.1
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EXHIBIT 10.1

RETENTION BONUS AND SEVERANCE AGREEMENT

THIS AGREEMENT (the "Agreement"), dated as of May 2, 2002, is between StarMedia Network, Inc. ("StarMedia"), and Jose Manuel Tost, an individual ("Executive").

WHEREAS, Executive is employed by StarMedia and StarMedia recognizes Executive's past service and continued commitment to StarMedia.

NOW, THEREFORE, the parties agree as follows:

1. AT-WILL EMPLOYMENT.

Executive acknowledges and agrees that his employment status is that of an employee-at-will and that Executive's employment may be terminated by StarMedia or Executive at any time with or without cause and with or without notice. Executive has not relied, and will not rely, on any statements or representations, whether oral or in writing, by any officers, employees or agents of StarMedia concerning the duration or term of employment, grounds and procedures for discharge or termination of employment, or any other terms and conditions of employment except those specifically stated in writing and signed by both Executive and an authorized director of StarMedia.

2. PERFORMANCE AND RETENTION BONUS.

For the year 2002 only, Executive will receive a performance and retention bonus. To receive the bonus, Executive must be employed by StarMedia on the date that the bonus is paid. The bonus will be paid in two equal installments: July 10, 2002 and January 10, 2003, each installment in the amount of Forty Seven Thousand Five Hundred Dollars ($47,500), less standard deductions and withholdings.

3. TERMINATION AND SEVERANCE.

3.1 TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION BY EXECUTIVE. In the event that Executive is terminated For Cause (as defined below) or if Executive voluntarily terminates his employment and is not Constructively Discharged (as defined below), StarMedia shall pay Executive all compensation due and owing through the last day actually worked and thereafter all of StarMedia's obligations under this Agreement shall cease.

3.2 TERMINATION NOT FOR CAUSE OR CONSTRUCTIVE DISCHARGE. (a) If within one year from the date hereof, StarMedia terminates Executive's employment for any reason other than For Cause or if Executive is Constructively Discharged, StarMedia shall pay Executive all compensation due and owing through the last day actually worked. In addition, if Executive signs a release substantially in the form attached as Annex A, Executive will receive a severance payment of Ninety Five Thousand Dollars ($95,000) (the "Severance Payment"), less applicable and authorized deductions.

(b) For purposes hereof, any rejection of this Agreement under Section 365 of the Bankruptcy Code or any other termination of this Agreement other than as expressly contemplated herein or mutually agreed by StarMedia and Executive shall be deemed to be a termination of Executive's employment other than For Cause.

3.3 DEFINITION OF FOR CAUSE. StarMedia's termination of Executive's employment with StarMedia shall be "For Cause" if, in the reasonable opinion of the Board: (i) Executive breached the terms of this Agreement and such breach is not cured within ten (10) days after Executive has received written notice from StarMedia of such breach, (ii) Executive exhibits dishonesty, habitual neglect, persistent and serious deficiencies in performance, or gross incompetence in the performance of his duties under this Agreement, (iii) Executive is convicted of a crime other than a minor traffic violation, or (iv) Executive refuses or fails to act on any lawful directive or order from the Board.

3.4 DEFINITION OF CONSTRUCTIVE DISCHARGE. Executive's resignation from employment with StarMedia shall be a "constructive discharge" if (i) Executive resigns because

StarMedia has made a material reduction in Executive's salary or benefits or otherwise has breached the terms of this Agreement and such breach has not been cured within ten (10) days after Executive has provided notice thereof to StarMedia, or (ii) the Executive's office is relocated more than 50 miles from the Executive's present office.

3.5 LETTER OF CREDIT. StarMedia shall use its best efforts furnish to Executive a mutually acceptable letter of credit issued by a major United States bank in the amount of the Severance Payment. Executive is hereby authorized draw down the amount of the Severance Payment in the event that StarMedia fails to make timely payment thereof in accordance with this Agreement.

4. TERM.

This Agreement shall be valid for a term of one year from the date hereof.

5. GOVERNING LAW.

This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York without reference to conflict of law principal.

6. ENTIRE AGREEMENT.

This Agreement contains all the understandings and representations between the parties pertaining to the subject matter of this Agreement and supersedes all undertakings and agreement, whether oral or in writing, previously entered into by them on this subject.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

		STARMEDIA NETWORK, INC.
		By:	/s/ SUSAN L. SEGAL Name: Susan L. Segal Title: Acting Chair Person of the Board
		JOSE MANUEL TOST
			/s/ JOSE MANUEL TOST

RELEASE AND WAIVER OF CLAIMS

In exchange for the Severance Payments and other benefits to which I would not otherwise be entitled, I hereby furnish StarMedia Network, Inc., ("StarMedia") with the following release and waiver.

I hereby release, and forever discharge StarMedia, its officers, directors, agents, employees, stockholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed ("Claims"), arising at any time prior to and including the date I sign this Release with respect to any claims relating to my employment and the termination of my employment, including but not limited to: any and all such claims and demands directly or indirectly arising out of or in any way connected with my employment with StarMedia or the termination of that employment; claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in StarMedia, vacation pay, fringe benefits, expense reimbursements, sabbatical benefits, severance benefits, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination Act of 1990; the New York Human Rights Law, the Florida Civil Rights Law as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; emotional distress; and breach of the implied covenant of good faith and fair dealing.

[IF OVER 40 YEARS OLD] I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this waiver and release is knowing and voluntary, and that the consideration given for this waiver and release is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that: (a) the waiver and release granted herein does not relate to claims which may arise after this agreement is executed; (b) I have the right to consult with an attorney prior to executing this agreement (although I may choose voluntarily not to do so); (c) I have twenty-one (21) days from the date I receive this agreement, in which to consider this agreement (although I may choose voluntarily to execute this agreement earlier); (d) I have seven (7) days following the execution of this agreement to revoke my consent to the agreement; and (e) this agreement shall not be effective until the seven (7) day revocation period has expired.

Notwithstanding the foregoing, this Release shall not apply to any Claims to enforce (i) any of Company's obligations under the terms or provisions of the Performance and Retention Bonus and Severance Agreement, dated May , 2002, between me and Company, (ii) any of Company's obligation to indemnify me pursuant to any indemnification arrangements for directors and officers as in effect from time to time during my employment or otherwise or (iii) the release executed and delivered to me by Company on the date hereof.

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EXHIBIT 10.1

RETENTION BONUS AND SEVERANCE AGREEMENT
RELEASE AND WAIVER OF CLAIMS
EX-10.2 4 a2102857zex-10_2.htm EXHIBIT 10.2
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EXHIBIT 10.2

RETENTION BONUS AND SEVERANCE AGREEMENT

THIS AGREEMENT (the "Agreement"), dated as of May 2, 2002, is between StarMedia Network, Inc. ("StarMedia"), and Jorge Rincon, an individual ("Executive").

WHEREAS, Executive is employed by StarMedia and StarMedia recognizes Executive's past service and continued commitment to StarMedia.

NOW, THEREFORE, the parties agree as follows:

1. AT-WILL EMPLOYMENT.

2. PERFORMANCE AND RETENTION BONUS.

3. TERMINATION AND SEVERANCE.

3.4 DEFINITION OF CONSTRUCTIVE DISCHARGE. Executive's resignation from employment with StarMedia shall be a "constructive discharge" if (i) Executive resigns because

4. TERM.

This Agreement shall be valid for a term of one year from the date hereof.

5. GOVERNING LAW.

This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York without reference to conflict of law principal.

6. ENTIRE AGREEMENT.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

		STARMEDIA NETWORK, INC.
		By:	/s/ SUSAN L. SEGAL Name: Susan L. Segal Title: Acting Chair Person of the Board
		JORGE RINCON
			/s/ JORGE RINCON

RELEASE AND WAIVER OF CLAIMS

In exchange for the Severance Payments and other benefits to which I would not otherwise be entitled, I hereby furnish StarMedia Network, Inc., ("StarMedia") with the following release and waiver.

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EXHIBIT 10.2

RETENTION BONUS AND SEVERANCE AGREEMENT
RELEASE AND WAIVER OF CLAIMS
EX-10.3 5 a2102857zex-10_3.htm EXHIBIT 10.3
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EXHIBIT 10.3

RETENTION BONUS AND SEVERANCE AGREEMENT

THIS AGREEMENT (the "Agreement"), dated as of May 2, 2002, is between StarMedia Network, Inc. ("StarMedia"), and Michael Hartman, an individual ("Executive").

WHEREAS, Executive is employed by StarMedia and StarMedia recognizes Executive's past service and continued commitment to StarMedia.

NOW, THEREFORE, the parties agree as follows:

1. AT-WILL EMPLOYMENT.

2. PERFORMANCE AND RETENTION BONUS.

For the year 2002 only, Executive will receive a performance and retention bonus. To receive the bonus, Executive must be employed by StarMedia on the date that the bonus is paid. The bonus will be paid in two equal installments: July 10, 2002 and January 10, 2003, each installment in the amount of Forty Five Thousand Dollars ($45,000), less standard deductions and withholdings.

3. TERMINATION AND SEVERANCE.

3.2 TERMINATION NOT FOR CAUSE OR CONSTRUCTIVE DISCHARGE. (a) If within one year from the date hereof, StarMedia terminates Executive's employment for any reason other than For Cause or if Executive is Constructively Discharged, StarMedia shall pay Executive all compensation due and owing through the last day actually worked. In addition, if Executive signs a release substantially in the form attached as Annex A, Executive will receive a severance payment of Ninety Thousand Dollars ($90,000) (the "Severance Payment"), less applicable and authorized deductions.

3.4 DEFINITION OF CONSTRUCTIVE DISCHARGE. Executive's resignation from employment with StarMedia shall be a "constructive discharge" if (i) Executive resigns because

4. TERM.

This Agreement shall be valid for a term of one year from the date hereof.

5. GOVERNING LAW.

This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York without reference to conflict of law principal.

6. ENTIRE AGREEMENT.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

		STARMEDIA NETWORK, INC.
		By:	/s/ SUSAN L. SEGAL Name: Susan L. Segal Title: Acting Chair Person of the Board
		MICHAEL HARTMAN
			/s/ MICHAEL HARTMAN

RELEASE AND WAIVER OF CLAIMS

In exchange for the Severance Payments and other benefits to which I would not otherwise be entitled, I hereby furnish StarMedia Network, Inc., ("StarMedia") with the following release and waiver.

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EXHIBIT 10.3

RETENTION BONUS AND SEVERANCE AGREEMENT
RELEASE AND WAIVER OF CLAIMS
EX-10.4 6 a2102857zex-10_4.htm EXHIBIT 10.4
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EXHIBIT 10.4

RETENTION BONUS AND SEVERANCE AGREEMENT

THIS AGREEMENT (the "Agreement"), dated as of May 2, 2002, is between StarMedia Network, Inc. ("StarMedia"), and Ana Maria Lozano-Stickley, an individual ("Executive").

WHEREAS, Executive is employed by StarMedia and StarMedia recognizes Executive's past service and continued commitment to StarMedia.

NOW, THEREFORE, the parties agree as follows:

1. AT-WILL EMPLOYMENT.

2. PERFORMANCE AND RETENTION BONUS.

For the year 2002 only, Executive will receive a performance and retention bonus. To receive the bonus, Executive must be employed by StarMedia on the date that the bonus is paid. The bonus will be paid in two equal installments: July 10, 2002 and January 10, 2003, each installment in the amount of Forty Thousand Dollars ($40,000), less standard deductions and withholdings.

3. TERMINATION AND SEVERANCE.

3.2 TERMINATION NOT FOR CAUSE OR CONSTRUCTIVE DISCHARGE. (a) If within one year from the date hereof, StarMedia terminates Executive's employment for any reason other than For Cause or if Executive is Constructively Discharged, StarMedia shall pay Executive all compensation due and owing through the last day actually worked. In addition, if Executive signs a release substantially in the form attached as Annex A, Executive will receive a severance payment of Eighty Thousand Dollars ($80,000) (the "Severance Payment"), less applicable and authorized deductions.

3.4 DEFINITION OF CONSTRUCTIVE DISCHARGE. Executive's resignation from employment with StarMedia shall be a "constructive discharge" if (i) Executive resigns because

4. TERM.

This Agreement shall be valid for a term of one year from the date hereof.

5. GOVERNING LAW.

This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York without reference to conflict of law principal.

6. ENTIRE AGREEMENT.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

		STARMEDIA NETWORK, INC.
		By:	/s/ SUSAN L. SEGAL Name: Susan L. Segal Title: Acting Chair Person of the Board
		ANA MARIA LOZANO-STICKLEY
			/S/ ANA MARIA LOZANO-STICKLEY

RELEASE AND WAIVER OF CLAIMS

In exchange for the Severance Payments and other benefits to which I would not otherwise be entitled, I hereby furnish StarMedia Network, Inc., ("StarMedia") with the following release and waiver.

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EXHIBIT 10.4

RETENTION BONUS AND SEVERANCE AGREEMENT
RELEASE AND WAIVER OF CLAIMS
EX-99.1 7 a2102857zex-99_1.htm EXHIBIT 99.1
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Exhibit 99.1

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/A 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: February 12, 2003

			/s/ JOSE MANUEL TOST President
			/s/ ANA M. LOZANO-STICKLEY Chief Financial Officer

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Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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