-----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, CUGtSwAW5GqC0Kz7qW3YGDZYlfSKo8bkLctsZAH3p2M/JrRMtvjtc/YoeUoTurFz ePcwX5gk8DRTSsZGg4mYJw== 0000912057-02-026970.txt : 20020711 0000912057-02-026970.hdr.sgml : 20020711 20020711080801 ACCESSION NUMBER: 0000912057-02-026970 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20020711 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: 02700601 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 a2084091z10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 1-15015 ------- (COMMISSION FILE NUMBER) FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 STARMEDIA NETWORK, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 06-1461770 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number) 999 Brickell Ave., Suite #808, Miami, FL 33131 (Address of Principal Executive Offices) (Zip Code) (305) 938-3000 (Registrant's Telephone Number, Including Area Code) ------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No[ ] As of July 1, 2002, there were 79,970,177 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding. STARMEDIA NETWORK, INC. AND SUBSIDIARIES INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Condensed Consolidated Balance Sheets at June 30, 2001 (restated) and December 31, 2000 (restated) ..................................................................... 6 Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 (restated)and 2000 (restated)............................................................ 7 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 (restated)and 2000 (restated)..................................................................... 8 Notes to Restated and Unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2001..................................................................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................... 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................................. 21 Item 2. Changes In Securities and Use of Proceeds......................................................... 22 Item 3. Defaults upon Senior Securities................................................................... 23 Item 4. Submission of Matters to a Vote of Security Holders............................................... 23 Item 5. Other Information................................................................................. 24 Item 6. Exhibits and Reports on Form 8-K.................................................................. 24 Item 7. Signatures........................................................................................ 24
2 PART I RESTATEMENT INFORMATION We are making this filing to show the effect of the restatement of our consolidated financial statements noted below. The Company, in consultation with its independent accountants, determined to restate its unaudited consolidated financial statements for the fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as well as quarters ended March 31 and June 30, 2001, and its audited consolidated financial statements for the fiscal year ended December 31, 2000. The Company initially announced its intention to restate these consolidated financial statements on November 19, 2001. That announcement related to the preliminary conclusion of a Special Committee of the Board of Directors that approximately $10,000,000 in revenues was improperly recognized by two of the Company's Mexican subsidiaries during the period October 1, 2000 through June 30, 2001. Subsequent to that announcement, the Special Committee authorized the Company's management to undertake an additional investigation in order to confirm whether any additional accounting irregularities occurred during the periods in question. The Company's restated unaudited consolidated financial statements for quarters ended March 31, June 30, September 30, and December 31, 2000, as well as quarters ended March 31 and June 30, 2001, and for the audited fiscal year ended December 31, 2000 contain adjustments that fall into five categories. The first category of adjustments arises from the independent investigation conducted by a Special Committee of the Board of Directors and referred to in the Company's November 19, 2001 announcement. The findings of the Special Committee's investigation indicate that the Company improperly recognized certain revenues and pre-paid expenses. The majority of these revenues and pre-paid expenses were recognized by its Mexican subsidiary, SMN de Mexico (d/b/a StarMedia Mexico). The remainder was recognized by its other Mexican subsidiary, AdNet, S.A. de C.V. ("AdNet"). The other categories of adjustments arise from management's additional investigation to confirm the accuracy of the consolidated financial statements to be restated based on the Special Committee's investigation. The findings of management's investigation indicate that, in addition to the accounting irregularities identified by the Special Committee, the Company improperly (A) recognized certain revenues and related expenses that should have been classified as barter transactions in accordance with US GAAP; (B) recognized revenues from a number of sales that provided for future contingencies, were not appropriately authorized by the customer, or for some other reason should not have been recognized; (C) failed to write down the value of certain assets at March 31, 2001 upon shutting down of a subsidiary; and (D) recognized certain other transactions that management identified in the course of its review of the Company's financial statements. The following is a summary of the cumulative effect of the restatement of the Company's net loss for the quarters ended March 31, 2001 and June 30, 2001:
As previously As restated reported ------------- ------------- Net loss for quarter ended March 31, 2001 $(31,226,000) $(38,643,000) Net loss for quarter ended June 30, 2001 $(47,838,000) $(52,720,000)
Additional information related to the restatements and adjustments made to the Company's financial statements for the periods mentioned above are set forth in Note 2 of the Unaudited Condensed Consolidated Financial Statements. This information includes the amount of the adjustments made during each quarter with respect to which the Company has restated or adjusted previously issued financial statements. RECENT DEVELOPMENTS Since June 30, 2001, the Company has experienced the following developments set forth below. o Gerardo Rosenkrantz resigned from the board of directors in July 2001 and Jack Chen and Marie Jose Kravis resigned from the board of directors in August 2001. o On November 19, 2001, the Company announced that it planned to restate its unaudited financial statements for the quarters ended March 31 and June 30, 2001, and its audited financial statements for the fiscal year ended December 31, 2000 as a result of an investigation by a Special Committee of the Company's Board of Directors into accounting issues with respect to revenue recognition by two of the Company's Mexican subsidiaries, AdNet, S.A. de C.V. and StarMedia Mexico, S.A. de C.V. At that time, the Company had come to a preliminary conclusion that revenues aggregating approximately $10 million 3 were improperly recognized by those subsidiaries during the period from October 1, 2000 through June 30, 2001, and that at that time, the financial statements for those periods should not be relied on. See note 2 of Notes to Unaudited Condensed Consolidated Financial Statements. o Following the foregoing announcement: -- The Nasdaq National Market suspended trading of the Company's common stock effective as of the open of business on November 19, 2001 and delisting procedures commenced as a result of the Company's failure to make a timely filing of its report on Form 10-Q for the quarter ended September 30, 2001. Subsequently, effective as of February 1, 2002, our common stock was delisted from and ceased to be quoted by The Nasdaq National Market. Following delisting by The Nasdaq National Market shares of the Company's common stock have been quoted on the Pink Sheets LLC electronic quotation system for "over the counter" (OTC) securities, a market which is generally not as liquid as The Nasdaq National Market. -- The Securities and Exchange Commission (SEC) informed the Company that it had commenced an investigation into the circumstances leading up to the restatements referred to above. The investigation is on-going. -- In late 2001 and early 2002, eleven lawsuits were filed against the Company in the Southern District of New York in connection with the Company's announcement relating to the Restatement referred to in "Restatement Information" above. A lead plaintiff for the class and lead plaintiff's counsel were subsequently selected and a motion filed to consolidate the various claims. The Consolidated Amended Complaint was filed on May 31, 2002 in the Southern District of New York under the caption In re StarMedia Network, Inc. Securities Litigation 01 Civ. 10556 (S.D.N.Y.). In June 2002, the lead plaintiffs and all defendants executed a settlement agreement that resolves all claims in the consolidated action. The settlement amount will be paid by the Company's directors and officers liability insurance carrier. This settlement agreement is subject to review and ratification by the Honorable Denny Chin of the United States District Court for the Southern District of New York. See "Legal Proceedings". o On November 19, 2001 the Company also announced as follows: -- That Steven J. Heller had resigned as Chief Financial Officer of StarMedia Network, effective November 15, 2001, on terms and conditions previously agreed with StarMedia Network. -- That the Company had terminated the employment of Justin Macedonia as General Counsel. See "Legal Proceedings". -- That the Company and the former stockholders of AdNet entered into a Termination Agreement pursuant to which the Company agreed to issue to the stockholders of AdNet 8,000,000 shares of the Company's common stock, in full satisfaction of the Company's obligations under earn-out and other provisions set forth in the agreement pursuant to which the Company had acquired AdNet. -- That Susan Segal had been appointed to serve as acting Chairman of the Board. She succeeded Fernando Espuelas, co-founder and former Chief Executive Officer of the Company, who, pursuant to his August 2001 agreement with the Company, resigned on November 15, 2001 as Chairman of the Board of Directors, and that Mr. Espuelas continued to serve as a Director on the Company's Board. o In November 2001 the Company vacated its headquarters at 75 Varick Street in New York City. Under terms negotiated with its landlord, the Company was released from any further obligations under the lease. The Company's headquarters are currently located in Miami, Florida, which previously served as the headquarters of the Company's Mobile Solutions business. o In December 2001, the Company sold substantially all of the assets associated with Cade?, a Brazilian online directory, to Yahoo Brasil Ltda. o Effective as of April 19, 2002, Enrique Narciso resigned as CEO, President and director of the Company. As disclosed in the Report on Form 8-K filed by the Company on April 19, 2002, in tendering his resignation Mr. Narciso informed the Company that he needed to focus on a personal matter that has since resulted in his pleading guilty to a tax violation involving his 1998 individual federal tax return. Following Mr. Narciso's resignation, Jose Manuel Tost was appointed President of the Company and Jorge Rincon was appointed Chief Operating Officer of the Company. o Effective as of April 29, 2002, Ana Maria Lozano-Stickley was appointed as Chief Financial Officer of the Company. Prior to that time Ms. Lozano-Stickley had been Acting Vice President of Accounting and Administration of the Company since January 2002. o The Company has continued to undertake a realignment of the Company for the purposes of focusing its resources on its mobile solutions business. As part of this realignment, the Company reduced its number of full-time employees from 520 as of close of business on December 31, 2001 to 391 as of June 21, 2002. In addition, following the Company's change of its headquarters in late 2001 from New York to Miami, Florida, which was previously the headquarters of the Company's mobile solutions business, during 2002, the Company has substantially reduced its presence in New York. As of June 21, 2002, the Company currently had 30 employees based in its New York City offices, as compared to 118 employees based in such office as of close of business on December 31, 2001. 4 o On July 1, 2002, Fernando Espuelas notified the Company that effective as of that date he resigned as a director of the Company. o On July 3, 2002 the Company sold most of its assets associated with starmedia.com, its Spanish- and Portuguese-language portal, and LatinRed, its Spanish language online community, to eresMas Interactive S.A. ("EresMas"). Following the sale of starmedia.com and LatinRed to EresMas, the Company is principally engaged in the business of providing integrated Internet solutions to wireless telephone operators targeting Spanish- and Portuguese-speaking audiences, principally in Latin America, and the Company retains only the following Internet media services: o batepapo.com.br, a Brazilian chat service, which the Company is considering either selling or closing; o the local city guides such as nacidade.com,.br; guiasp.com.br; guiarj.com.br; paisas.com; openchile.cl; panoramas.cl and AdNet.com.mx, which the Company anticipates that it will continue to operate in support of its mobile solutions business. As part of the terms of the sale, the Company has agreed to cease using the "StarMedia" brand commercially and, subject to shareholder approval, to amend its certificate of incorporation to change its name. Following the sale, the Company operates commercially under the name "CycleLogic." 5 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000 ------------- ----------------- (RESTATED) (RESTATED) (UNAUDITED) (Note 1) ASSETS CURRENT ASSETS: Cash and cash equivalents ........................................................ $ 59,223,000 $ 93,408,000 Accounts receivable, net of allowance for bad debts of $6,580,000 (2001) and $1,849,000 (2000) ......................................................... 2,037,000 13,524,000 Unbilled receivables ............................................................. 6,797,000 6,131,000 Other current assets ............................................................. 12,340,000 7,680,000 ------------- ------------- TOTAL CURRENT ASSETS ............................................................... 80,397,000 120,743,000 Fixed assets, net ................................................................ 54,075,000 55,569,000 Intangible assets, net of accumulated amortization of $ 2,353,000 (2001) and $1,676,000 (2000) ......................................................... 4,944,000 5,557,000 Goodwill, net of accumulated amortization of $ 4,156,000 (2001) and $2,435,000 (2000) ........................................................ 15,102,000 6,582,000 Officer loans .................................................................... 800,000 4,563,000 Other assets ..................................................................... 10,520,000 16,091,000 ------------- ------------- TOTAL ASSETS ....................................................................... $ 165,838,000 $ 209,105,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ................................................................. $ 9,417,000 $ 20,737,000 Accrued expenses ................................................................. 21,335,000 15,601,000 Loan payable, current portion .................................................... -- 2,462,000 Deferred revenue ................................................................. 4,184,000 1,128,000 ------------- ------------- TOTAL CURRENT LIABILITIES .......................................................... 34,936,000 39,928,000 Loan payable, long-term portion .................................................. -- 1,902,000 Deferred rent .................................................................... 3,460,000 2,199,000 Preferred dividends payable ...................................................... 183,000 -- SERIES A CONVERTIBLE PREFERRED STOCK Series A Convertible Preferred Stock, $.001 par value, 1,960,784 shares authorized, 1,431,373 shares issued and outstanding at June 30, 2001, liquidation preference of $36,683,000 at June 30, 2001.......................... 35,055,000 -- STOCKHOLDERS' EQUITY: Preferred Stock, authorized 10,000,000 shares: Series 1999A junior-non-voting convertible preferred stock, $.001 par value, 2,300,000 shares authorized, 58,140 shares outstanding at June 30, 2001 and December 31, 2000, respectively ................................................ -- Common stock, $.001 par value, 200,000,000 shares authorized, 70,411,071 and 66,927,883 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively ................................................................... 70,000 67,000 Common stock issuable ............................................................ 17,101,000 12,260,000 Additional paid-in capital ....................................................... 527,861,000 516,311,000 Accumulated deficit .............................................................. (450,842,000) (360,125,000) Deferred compensation ............................................................ (1,135,000) (2,636,000) Accumulated comprehensive loss ................................................... (851,000) (801,000) ------------- ------------- Total stockholders' equity ......................................................... 92,204,000 165,076,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 165,838,000 $ 209,105,000 ============= =============
See accompanying notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2001. 6 STARMEDIA NETWORK, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------- ------------- (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED) Revenues ........................................................ $ 6,289,000 $ 12,021,000 $ 15,159,000 $ 21,882,000 Operating expenses: Product and technology development ............................ 14,234,000 19,458,000 28,776,000 35,358,000 Sales and marketing ........................................... 12,498,000 21,190,000 29,971,000 39,777,000 General and administrative .................................... 7,946,000 7,521,000 17,103,000 15,401,000 Restructuring and other charges ............................... 15,351,000 -- 15,351,000 -- Depreciation and amortization ................................. 6,939,000 7,289,000 12,678,000 11,833,000 Stock-based compensation expense .............................. 683,000 1,108,000 1,398,000 2,320,000 Loss on impairment of fixed assets............................. -- -- 1,153,000 -- ------------ ------------ ------------- ------------- Total operating expenses ...................................... 57,651,000 56,566,000 106,430,000 104,689,000 ------------ ------------ ------------- ------------- Loss from operations ............................................ (51,362,000) (44,545,000) (91,271,000) (82,807,000) Other income (expense): Interest income ............................................... 920,000 3,330,000 2,295,000 6,793,000 Interest expense .............................................. (568,000) (364,000) (643,000) (684,000) Loss in unconsolidated subsidiary ............................. (1,800,000) (2,500,000) (1,800,000) (2,500,000) Other income / (expenses) ..................................... 90,000 (373,000) 55,000 (373,000) ------------ ------------ ------------- ------------- Loss before provision for income taxes .......................... (52,720,000) (44,452,000) (91,364,000) (79,571,000) Provision for income taxes ...................................... -- (7,000) _ (7,000) ------------ ------------ ------------- ------------- Net loss ........................................................ $(52,720,000) $(44,459,000) $ (91,364,000) $ (79,578,000) Preferred stock dividends and accretion ......................... (206,000) -- (206,000) -- ------------ ------------ ------------- ------------- Net loss available to common stockholders ....................... $(52,926,000) $(44,459,000) $ (91,570,000) $ (79,578,000) ============ ============ ============= ============= Basic and diluted net loss per common share ..................... $ (0.76) $ (0.68) $ (1.33) $ (1.22) ============ ============ ============= ============= Number of shares used in computing basic and diluted net loss per share ......................................................... 70,001,765 65,706,679 68,693,438 65,173,234 ============ ============ ============= =============
See accompanying notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2001. 7 STARMEDIA NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 ------------ ------------- (RESTATED) (UNAUDITED) OPERATING ACTIVITIES Net loss .................................................................. $(91,364,000) $ (79,578,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................................... 12,678,000 11,833,000 Provision for bad debts ................................................. 11,316,000 225,000 Amortization of stock-based compensation ................................ 1,398,000 2,320,000 Writedown of officer loans .............................................. 10,397,000 -- Deferred rent expense ................................................... 1,261,000 2,151,000 Loss on impairment of fixed assets....................................... 1,153,000 -- Changes in operating assets and liabilities: Accounts receivable ..................................................... 575,000 (3,081,000) Unbilled receivables .................................................... (666,000) -- Other assets ............................................................ (1,535,000) (9,442,000) Accounts payable and accrued expenses ................................... (1,987,000) 23,173,000 Deferred revenues ....................................................... 2,864,000 (46,000) ------------ ------------- Net cash used in operating activities ..................................... (53,910,000) (52,446,000) INVESTING ACTIVITIES Purchase of fixed assets .................................................. (9,081,000) (33,244,000) Intangible assets ......................................................... (150,000) (1,209,000) Other assets .............................................................. 5,661,000 (12,213,000) Officer loans ............................................................. (6,836,000) -- Cash paid for acquisitions ................................................ (2,133,000) (7,527,000) ------------ ------------- Net cash used in investing activities ..................................... (12,539,000) (54,193,000) FINANCING ACTIVITIES Issuance of common stock .................................................. 204,000 3,139,000 Repayment of long-term debt ............................................... (4,364,000) (752,000) Issuance of convertible preferred stock ................................... 36,500,000 -- Payments under capital leases ............................................. -- (58,000) ------------ ------------- Net cash provided by financing activities ................................. 32,340,000 2,329,000 Effect of exchange rate changes on cash and cash equivalents .............. (76,000) 99,000 ------------ ------------- Net decrease in cash and cash equivalents ................................. (34,185,000) (104,211,000) Cash and cash equivalents, beginning of period ............................ 93,408,000 274,089,000 ------------ ------------- Cash and cash equivalents, end of period .................................. $ 59,223,000 $ 169,878,000 ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid ............................................................. $ 865,000 $ 674,000 ============ ============= Income taxes paid ......................................................... $ 392,000 $ -- ============ ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Acquisition of content through common stock to be issued .................. $ 3,000,000 $ -- ============ ============= Shares issued/issuable for acquisitions ................................... $ 18,635,000 $ -- ============ ============= Accrued purchases of fixed assets ......................................... $ 552,000 $ -- ============ =============
See accompanying notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2001. 8 STARMEDIA NETWORK, INC. AND SUBSIDIARIES NOTES TO RESTATED AND UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS The accompanying condensed consolidated financial statements include the accounts of StarMedia Network, Inc. and its wholly-owned subsidiaries (collectively, the Company). All intercompany account balances and transactions have been eliminated in consolidation. The Company was incorporated under Delaware law in March 1996. The Company, after a significant change in business strategy during the second half of 2001, is now principally engaged in providing mobile Internet software and application solutions to wireless telephone operators businesses targeting Spanish- and Portuguese-speaking audiences worldwide. The Company's mobile Internet solutions allow users to access and receive Internet content, tools and applications through wireless devices, such as pagers, cellular phones, PCS handsets and personal digital assistants, or PDAs. The Company was originally established to develop Internet sites tailored specifically to the interests and needs of Spanish and Portuguese speakers, selling advertising to advertisers seeking to reach its user base, and historically derived a majority of its revenues from fees paid by advertisers on its sites, described herein as the "Internet media business" or "media solutions business". Although the Company continues to provide Internet Media services, these services are no longer an integral part of the Company's business. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 (restated) has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's restated annual report on Form 10-K for the year ended December 31, 2001. Certain amounts in the prior year's financial statements have been reclassified to conform to the current period's presentation. 2. RESTATEMENT OF FINANCIAL STATEMENTS The Company, in consultation with its independent accountants, determined to restate its unaudited consolidated financial statements for the fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as well as quarters ended March 31 and June 30, 2001, and its audited consolidated financial statements for the fiscal year ended December 31, 2000. The Company initially announced its intention to restate these consolidated financial statements on November 19, 2001. That announcement related to the preliminary conclusion of a Special Committee of the Board of Directors that approximately $10,000,000 in revenues was improperly recognized by two of the Company's Mexican subsidiaries during the period October 1, 2000 through June 30, 2001. Subsequent to that announcement, the Special Committee authorized the Company's management to undertake an additional investigation in order to confirm whether any additional accounting irregularities occurred during the periods in question. The Company's restated unaudited consolidated financial statements for quarters ended March 31, June 30, September 30, and December 31, 2000, as well as quarters ended March 31 and June 30, 2001, and for the audited fiscal year ended December 31, 2000 contain adjustments that fall into five categories. The first category of adjustments arises from the independent investigation conducted by a Special Committee of the Board of Directors and referred to in the Company's November 19, 2001 announcement. The findings of the Special Committee's investigation indicate that the Company improperly recognized certain revenues and pre-paid expenses. The majority of these revenues and pre-paid expenses were recognized by its Mexican subsidiary, SMN de Mexico (d/b/a StarMedia Mexico). The remainder was recognized by its other Mexican subsidiary, AdNet, S.A. de C.V. ("AdNet"). The other categories of adjustments arise from management's additional investigation to confirm the accuracy of the consolidated financial statements to be restated based on the Special Committee's investigation. The findings of management's investigation indicate that, in addition to the accounting irregularities identified by the Special Committee, the Company improperly (A) recognized certain revenues and related expenses that should have been classified as barter transactions in accordance with US GAAP; (B) recognized revenues from a number of sales that provided for future contingencies, were not appropriately authorized b 9 y the customer, or for some other reason should not have been recognized; (C) failed to write down the value of certain assets at March 31, 2001 upon shutting down of a subsidiary; and (D) recognized certain other transactions that management identified in the course of its review of the Company's financial statements. As a result of the restatement, the consolidated financial statements of the Company have been restated as summarized below (in thousand except per share amounts):
As of and for June 30, 2001 --------------------------------- As previously reported As restated --------------- -------------- Consolidated Balance Sheet: Accounts receivable, net $ 14,483 $ 2,037 Other current assets 16,642 12,340 Total current assets 97,145 80,397 Goodwill, net 15,962 15,102 Total assets 183,446 165,838 Accounts payable 10,139 9,417 Accrued expenses 22,609 21,335 Deferred revenue 3,555 4,184 Total current liabilities 36,303 34,936 Common stock issuable 15,637 17,101 Accumulated deficit (433,137) (450,842) Total stockholder's equity 108,445 92,204 Total liabilities and Stockholder's equity $ 183,446 $ 165,838
For the six months ended For the three months ended June 30, 2001 June 30, 2001 -------------------------- -------------------------- As previously As previously reported As restated reported As restated ------------- ----------- ------------- ----------- Consolidated Statement of Operations: Revenues $ 30,243 $ 15,159 $ 14,204 $ 6,289 Sales and marketing 35,290 29,971 15,626 12,498 General and administrative 15,146 17,103 7,472 7,946 Depreciation and amortization 12,839 12,678 7,100 6,939 Restructuring and other charges 15,456 15,351 15,456 15,351 Total operating expenses 108,905 106,430 60,571 57,651 Loss from operations (78,662) (91,271) (46,367) (51,362) Interest expense (865) (643) (681) (568) Loss before provision for income taxes (78,977) (91,364) (47,838) (52,720) Provision for income taxes (87) -- -- -- Net loss (79,064) (91,364) (47,838) (52,720) Basic and diluted net loss -- -- per common share $ (1.15) $ (1.33) $ (0.69) $ (0.76)
10
For the six months ended For the three months ended June 30, 2000 June 30, 2000 ---------------------------- -------------------------- As previously As previously reported As restated reported As restated ------------- ----------- ------------- ----------- Consolidated Statement of Operations: Revenue $ 23,820 $ 21,882 $ 13,764 $ 12,021 Sales and marketing 40,861 39,777 22,274 21,190 General and administrative 15,777 15,401 7,702 7,521 Total operating expenses 106,149 104,689 57,831 56,566 Loss from operations (82,329) (82,807) (44,067) (44,545) Loss before provisions for (79,093) (79,571) (43,974) (44,452) income taxes Net loss (79,100) (79,578) (43,981) (44,459) Basic and diluted net loss per common share $ (1.21) $ (1.22) $ (.67) $ (.68)
For additional information concerning the Company's consolidated financial results, as restated, see the Company's selected restated consolidated financial information data and Management's Discussion and Analysis of Financial Condition and Results of Operations. Management believes that it has made all the adjustments considered necessary as a result of the Special Committee's investigation and management's own investigation into prior periods' financial statements. Management further believes that the Company's consolidated financial statements for the fiscal quarters ended March 31, June 30, September 30, and December 31, 2000; March 31 and June 30, 2001 and for the fiscal year ended December 31, 2000, as restated, include all adjustments necessary for a fair presentation of the Company's financial position and results of operations for such periods. 3. BARTER TRANSACTIONS A portion of the Company's revenues is derived from barter transactions (agreements whereby the Company trades advertising on its network or services in exchange for advertising or services from unrelated parties). Barter advertising revenues and expenses are recognized in accordance with Emerging Issues Task Force Issue No. 99-17, Accounting for Barter Advertising. Barter service revenues and expenses are recognized in accordance with Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. Revenues from barter transactions are recognized during the period in which the advertisements are displayed on the Company's network or the services are rendered. Barter expense is recognized when the Company's advertisements are run or services are rendered by the unrelated party. For the three months ended June 30, 2001 and 2000, revenues derived from barter transactions were approximately $1.7 million and $2.1 million, respectively. For the six months ended June 30, 2001 and 2000, revenues derived from barter transactions were approximately $4.8 million and $3.5 million, respectively. 4. IMPAIRMENT OF FIXED ASSETS In the first quarter of 2001, the Company decided to cease operating the Webcast Solutions Company that had been merged in September 1999 with a wholly owned subsidiary of the Company ("Webcast Solutions"). Webcast Solutions was a streaming media company focused on the global delivery of audio, video and other internet based interactive media. The decision to cease operation of this asset mainly resulted from the significant costs that were required to operate and maintain this investment. Furthermore, the penetration rates previously anticipated by the Company were not achieved during the period the asset operated and management did not expect significant short-term nor long-term improvements. The total loss recognized as a result of this decision totaled $1,153,000. 5. ACQUISITIONS In April 2001, the Company acquired certain assets of Obsidiana, Inc. ("Obsidiana"), a premier online destination for Latin American women, in exchange for 1,125,000 shares of the Company's common stock, valued at approximately $2,600,000. The stockholders of Obsidiana included entities managed by J.P. Morgan Partners and Flatiron Partners, each of whom are significant stockholders of the Company. The entire value of the purchase price was attributed to goodwill at the time of purchase. The Company accounted for the Obsidiana acquisition under the purchase method of accounting and the results of operations have been included in the Company's financial statements from the date of acquisition. Pro-forma consolidated results of operations are not included, as the effects of the Obsidiana acquisition were not material to the Company. 11 6. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile, Mexico, Spain and Colombia is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end exchange rates for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of stockholders' equity. The functional currency of the Company's active subsidiary in Venezuela, which is a highly inflationary economy, is the U.S. dollar. Accordingly, monetary assets and liabilities are translated using the current exchange rate in effect at the period-end date, while nonmonetary assets and liabilities are translated at historical rates. Operations are generally translated at the weighted average exchange rate in effect during the period. The resulting foreign exchange gains and losses are recorded in the consolidated statements of operations. 7. EARNOUTS In connection with the acquisitions of AdNet.S.A de C.V. ("AdNet") in April 2000, the Company has accrued approximately $4.6 million as of March 31, 2001 as a result of certain revenue targets being met. Pursuant to the AdNet acquisition agreement, the Company is obligated to pay additional consideration in the form of StarMedia common stock over a five-year period from the acquisition date, subject to AdNet meeting certain specified performance targets. Such earnouts will be accrued as the targets are met. 8. STOCKHOLDERS' EQUITY COMMON STOCK In February 2001, the Company issued 1,058,476 shares of its common stock in connection with its settlement of a guarantee related to the Gratis1 transaction described in Note 9 below, valued at approximately $4.5 million. Also in February of 2001, the Company issued 8,035 shares of its common stock in connection with its November 1999 acquisition of Paisas.com, valued at approximately $139,000. In April 2001, in connection with its February 2000 acquisition of Ola Turista Ltda., the owner of Guia and Guia RJ, and its September 1999 acquisition of PageCell International Holdings, Inc., the Company issued 592,128 shares and 528,787 shares, valued at approximately $2.0 million and $1.4 million, respectively. Also, in April 2001 the Company issued 1,125,000 shares of its common stock in connection with its acquisition of Obsidiana, valued at approximately $2.6 million. In connection with its April 2000 acquisition of AdNet S.A. de C.V. (AdNet), the Company is obligated to pay additional consideration in the form of StarMedia common stock over a five-year period from the acquisition date, subject to AdNet meeting certain specified performance targets. Such earnouts will be accrued as common stock issuable as the targets are met. During the six months ended June 30, 2001, the Company issued 104,627 shares of its common stock for approximately $57,000 in connection with the exercise of stock options. Additionally, the Company sold 66,135 shares of common stock for approximately $147,000 in connection with its Employee Stock Purchase Plan. During the quarter ended June 30, 2001, the Company issued 1,431,373 shares of its Series A Convertible Preferred Stock at a price per share of $25.50 to BellSouth Enterprises, Inc. (BellSouth) and certain other investors resulting in total proceeds of approximately $35.1 million to the Company, net of issuance costs of approximately $1.4 million (the BellSouth Investment). These shares are convertible into 14,313,730 shares of the Company's common stock at any time at the option of the holder. After 60 months from the date of issuance, the Company shall redeem the Series A Preferred Stock for cash or shares of the Company's common stock, in an amount equal to $36.5 million, plus accrued dividends thereon. The carrying value of the Series A Convertible Preferred Stock is being accreted up to its redemption value over 60 months using the effective interest method. Such accretion was $23,000 during the quarter ended June 30, 2001. Dividends accrued at 6% per annum and totaled approximately $183,000 during the quarter ended June 30, 2001. In addition, in connection with the BellSouth Strategic Agreement (see Note 10), the Company agreed to issue warrants to BellSouth to purchase up to 4,500,000 shares of the Company's common stock, with exercise prices ranging from $4.55 to $8.55 per share that vest in May 2002 and expire during the period from May 2005 through May 2007. These warrants were valued, by an independent appraiser, at approximately $2.2 million and will be amortized over 60 months. 9. STOCK OPTIONS In connection with the granting of stock options in 1998 and the exchange of non-qualified options to incentive stock options, the Company recorded deferred compensation of approximately $19.5 million. In connection with the granting of stock options in 1999, the Company recorded additional deferred compensation of approximately $6.4 million. Deferred compensation is adjusted quarterly for exercises, cancellations and terminations and is being amortized for financial reporting purposes over the vesting period of the options. The amounts recognized as expense during the six-month period ended June 30, 2001 and June 30, 2000 were approximately $1.4 million and $2.3 million, respectively. Diluted net loss per share does not include the effect of options and warrants to purchase 25,048,000 and 16,072,000 shares of common stock at June 30, 2001 and 2000, respectively. Diluted net loss per share at June 30, 2001 also does not include the effect of 14,313,730 shares of common stock issuable upon the conversion of preferred stock on a "as if converted" basis, respectively, as the effect of their inclusion is antidilutive. 12 10. RELATED PARTY TRANSACTIONS GRATIS1 During 2000, the Company acquired a non-controlling 50% interest in Gratis1 (G1), which was subsequently reduced to approximately 48%. G1 was formed to provide free unlimited Internet access to users in Latin America. The owners of G1 also included Chase Equity Associates, The Flatiron Fund 2000 LLC, the Flatiron Associates II LLC, and CMGI among others. The Company accounted for its investment in G1 under the equity method of accounting and during the second quarter of 2000, the Company's share of equity losses in G1 exceeded its investment basis of $2.5 million and the investment was written-off. Chase Equity Associates, The Flatiron Fund 2000 LLC and the Flatiron Associates II LLC (the Lenders) purchased debt securities from G1 in an aggregate amount of $17.3 million. Approximately $10.3 million of such securities were backed by a limited guaranty by the Company, payable in its common stock. In January 2001, G1 ceased operations and in February 2001, the Company issued to the Lenders 1,058,476 shares of its common stock with a market value of approximately $4.5 million pursuant to the guaranty of approximately $7.0 million of such securities. In connection with the remaining $3.3 million guaranty, the Company will issue 1,148,000 shares of additional common stock valued at $3.00 per share in full settlement of the guaranty. At June 30, 2001, such amount is included in common stock issuable. With respect to the $7.0 million of such debt securities which were not subject to such limited guaranty, in the event of a change of control of the Company, the Lenders would have the right to put (and the Company would have a corresponding right to call) such securities to the Company for shares of its common stock or merger consideration, as the case may be, at their fair market value for the face amount of such debt securities plus a 25% annualized return. BELLSOUTH On May 30, 2001, the Company entered into an agreement with BellSouth to create multi-access portals in Latin America (the BellSouth Strategic Agreement). Under the terms of the five-year agreement, the Company will design and service the multi-access portals and mobile applications and provide content, software application integration and support to BellSouth's operating companies in Latin America. BellSouth will supply wireless communications, marketing of services and billing capabilities. The two companies will share revenues generated by the new multi-access portals. All revenues associated with design and maintenance activities and the technology licenses will be recognized ratably over the life of the agreement, while the user fees and transaction revenues will be recognized when the services are rendered. For the three months ended June 30, 2001, there was no revenue derived from the BellSouth Strategic Agreement. ABOUT.COM, INC. During the quarter ended June 30, 2001, the Company entered into a five-year agreement with About.com, Inc. (About.com) to create a jointly operated co-branded website, within the About.com website. About.com granted the Company certain worldwide license rights to use its content and proprietary technology in exchange for $2 million in cash and $3 million in shares of the Company's common stock. At June 30, 2001, such shares are included in common stock issuable. The aggregate purchase price of $5 million has been accounted for as a pre-paid expense, consisting of $3 million of content acquisition expenses, which will be expensed on a straight-line basis over the delivery period of four and a half years, $800,000 of advertising expenses, which will be expensed as services are rendered, $700,000 of maintenance expenses, which will be expensed on a straight-line basis over the life of the agreement and $500,000 of capital expenditures, which will be depreciated over an estimated useful life of five years. AT&T During the quarter ended September 30, 2000, an agreement between the Company and AT&T Global Network Services (AT&T) to provide Internet access services in Argentina, Brazil, Chile, Colombia and Mexico was assigned to G1. AT&T was entitled to draw upon a $1.8 million letter of credit, guaranteed by StarMedia, in the event G1 failed to perform under this agreement. At June 30, 2001, AT&T drew down $1.4 million of the letter of credit, the balance of which was drawn upon in July 2001. Accordingly, during the quarter ended June 30, 2001, the Company recognized an expense of $1.8 million related to the guaranty. 11. DUE FROM OFFICERS During the year ended December 31, 2000, the Company provided lines of credit to certain officers totaling $6.4 million, under which $4.6 million was advanced to such officers. Such lines are non-recourse and bear interest at rates ranging from 6.75% to 10.0% per annum. In January 2001, the lines of credit available to the Company's officers were increased to $12.4 million. As of June 30, 2001, the Company had loans receivables to officers under such lines of credit totaling approximately $11.0 million. These loans are secured by shares of the Company's common stock held by its officers to the extent permitted by Regulation U under the Securities Exchange Act of 1934, as amended. In addition, during the year ended December 31, 2000, the Company made an unsecured, recourse loan totaling $500,000 to its Chief Operating Officer. As a result of the termination of the Company's Chief Operating Officer and management's determination that the remaining loans were unrealizable due to a reduction in value of the supporting collateral, the 13 Company reserved approximately $10.8 million against these loans and related interest, which amount is included in restructuring charges (see Note 13) for the period ended June 30, 2001. The portion reserved represents the anticipated unrealizable value of these loans. 12. COMPREHENSIVE LOSS Total comprehensive loss was approximately $52.6 million and $91.4 million for the three and six month periods ended June 30, 2001, respectively and approximately $45.0 million and $80.0 million for the three and six month periods ended June 30, 2000, respectively. 13. RESTRUCTURING AND OTHER CHARGES In May 2001, the Company announced a restructuring, the purpose of which was to realign the Company's business operations and reduce its operational overhead. In connection with such restructuring, the Company recorded aggregate charges of approximately $15.4 million, including approximately $10.8 million of loans and related interest to officers (see Note 11) that were reserved, approximately $3.4 million of severance payments to employees and certain officers of the Company and approximately $1.2 million of other related costs. 14. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an investment-only approach. Thus, amortization of goodwill recorded in past combinations will cease upon adoption of SFAS No. 142, which is effective for the Company on January 1, 2002. The Company has not evaluated the effect, if any, that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements. 15. LEGAL PROCEEDINGS See Part II, Item 1, Legal Proceedings. 16. SUBSEQUENT EVENT On July 3, 2002 the Company sold substantially all of the assets associated with starmedia.com, the Company's Spanish- and Portuguese-language portal, and LatinRed, the Company's Spanish language online community, to eresMas Interactive S.A. ("EresMas") for $8,000,000 in cash. In addition, in order to facilitate the transfer of these assets, the Company agreed to provide transitional services to EresMas under a Transition Licensing Agreement. The Company will record a loss of approximately $500,000 from the aforementioned sale. The assets sold comprised substantially of fixed assets and intangible assets. As part of the terms of the sale of EresMas, the Company has agreed to cease using the "StarMedia" brand commercially and, subject to shareholder approval, to amend its certificate of incorporation to change its name. Henceforth, the Company will operate commercially under the name "CycleLogic." ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS EXPECTS, ANTICIPATES, INTENDS, BELIEVES OR SIMILAR LANGUAGE. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 UNDER THE CAPTION RISK FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. RESTATEMENT The Company, in consultation with its independent accountants, determined to restate its unaudited consolidated financial statements for the fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, as well as quarters ended March 31 and June 30, 2001, and its audited consolidated financial statements for the fiscal year ended December 31, 2000. The Company initially announced its intention to restate these consolidated financial statements on November 19, 2001. That announcement related to the preliminary conclusion of a Special Committee of the Board of Directors that approximately $10,000,000 in revenues was improperly recognized by two of the Company's Mexican subsidiaries during the period October 1, 2000 through June 30, 2001. Subsequent to that announcement, the Special Committee authorized the Company's management to undertake an additional investigation in order to confirm whether any additional accounting irregularities occurred during the periods in question. 14 Additional information related to the restatements and adjustments made to the Company's financial statements for the periods mentioned above are set forth in Note 2 of Notes to Consolidated Financial Statements. This information includes the amount of the adjustments made during the quarter with respect to which the Company has restated or adjusted previously issued financial statements. As a result of the restatement of the Company's consolidated financial statements for June 30, 2001 certain information contained in this item has been changed from that which was reported previously in the Company's Form 10-Q. (see Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements). Since the Company originally filed its Report on Form 10-Q for the fiscal quarter ended June 30, 2001, the Company's business has changed significantly. The following description is accurate as of the date that this Report on Form 10-Q/A was filed: OVERVIEW StarMedia Network, Inc. (d/b/a CycleLogic) was incorporated in Delaware in March 1996. We commenced operations in September 1996 and launched the StarMedia network of websites targeted at Spanish and Portuguese-speaking Internet users in December 1996. In May 1999, we completed the initial public offering of our common stock and in October 1999 we completed a follow-on public offering of our common stock. Our principal executive offices are located at 999 Brickell Ave. Suite 808, Miami, Florida, 33131 and our telephone number is (305) 938-3000. Previously, our principal offices were located at 75 Varick Street, New York, New York, 10013. The Company was established as an Internet media company. The Company was among the first companies to develop Internet sites tailored specifically to the interests and needs of Spanish and Portuguese speakers. In so doing, we were also among the first to attract a broad user base among Spanish- and Portuguese-speaking Internet users. Much like operators of traditional media companies (print, television, radio, etc.), the Company sold advertising to advertisers seeking to reach its user base, and historically derived a majority of its revenues from fees paid to us by advertisers on our sites. The Company subsequently acquired Internet properties and businesses that were deemed to be complementary to this business. One such acquisition was the September 1999 purchase of PageCell International Holdings (PageCell), which formed the basis of our mobile Internet solutions business. These solutions consist of a unique mix of technology and content that allows operators and their end users to take full advantage of the Internet across multiple platforms. Since the acquisition of PageCell the Company has, in addition to its media business, engaged in the business of providing Internet solutions to wireless telephone operators in Latin America. In May 2001, the Company signed a strategic agreement with BellSouth International under which the Company would design and implement "multi-access portals" for BellSouth's subsidiaries in Latin America. At the same time, BellSouth and several other investors invested $35.1 million in the Company. Since the summer of 2001, the Company has undertaken a realignment for the general purpose of reducing the costs of operating our Internet media services business and focusing our resources on the development of our mobile solutions business. Management believes this realignment was necessary in order to preserve the Company's prospects of becoming profitable. The rationale for this realignment was that since the StarMedia network was established, the Company's media business has continued to incur significant operating losses as the costs of providing content, tools and applications necessary to attract and maintain a broad user base continued to significantly exceed the revenues derived from basic advertisers' fees. Also underlying this realignment was the expectation of management and the board of directors that the deterioration of the Internet advertising market in Latin America and the U.S. during 2001 would continue and was unlikely to increase to levels that would support the established levels of operating costs of the Company's media business. In early 2002, the Company's management and board of directors determined that, notwithstanding the realignment undertaken as of that time, the continued operation of the Company's media assets would undermine the Company's prospects for profitability. Accordingly, the Company undertook efforts to sell its remaining media assets, including the starmedia.com portal and its LatinRed community products. On July 3, 2002, the Company sold most of the intellectual property, hardware and other assets associated with the operation of starmedia.com and LatinRed to EresMas, and agreed that it would cease to conduct business under the StarMedia name. Effective as of July 3, 2002, the Company operates commercially under the name "CycleLogic." This change of name has been approved by management and the board of directors, who expect to propose at the next meeting of the Company's shareholders that the Company amend its certificate of incorporation to formally change its name to "CycleLogic, Inc." Any such amendment is subject to the approval by the Company's shareholders. The Company is now principally engaged in providing integrated Internet solutions to wireless telephone operators in Latin America targeting Spanish- and Portuguese-speaking end-users. In addition, we continue to operate several Spanish- and Portuguese- language websites and design and operate portals for third parties. Substantially all of our revenues are currently being generated from our mobile solutions business. Our customers are in Latin America and most of our revenues come from Venezuela, Brazil, Colombia, Argentina, and Chile. 15 MOBILE INTERNET SOLUTIONS. We are one of the leading providers of mobile Internet software and application solutions to wireless telephone operators in Spanish- and Portuguese-speaking markets. We offer comprehensive end-to-end solutions that are comprised of an integrated and customized suite of technology platforms, content and applications. Our mobile Internet solutions enable wireless carriers and enterprises to provide end-users with access to personalized Internet content, email, messaging, secure mobile banking and other mCommerce opportunities through a variety of technologies, including SMS (Short Message Services), WAP (Wireless Application Protocol) and voice telephony. Through our solutions, end users can access this content through a variety of devices, including personal computers, cellular phones, pagers, PDAs and PCS and GSM handsets. By providing their end-users the services enabled by our mobile Internet solutions, wireless operators hope to increase user airtime and subscription fees (thereby increasing their average revenue per user or "ARPU") and reduce their customer turnover rates (referred to in the industry as "churn rates"). Our scalable, proprietary technology is comprised of our Wireless Internet Server (WIS) and "Gen3" wireless portal technology. o WIS TECHNOLOGY. The WIS software is a carrier-class technology that permits mobile operators to deliver short-message services (SMS) and other content from the Internet to their customers in a manner that is fully integrated with the wireless operator's provisioning systems (the systems that determine which customers have elected to receive specific services), billing systems, gateway infrastructure systems, and other back-end systems. Two components of our WIS technology are: -- TRANSACTIONAL-BILLING. This feature of the WIS technology allows wireless operators to apply different business rules to permit flexible billing (for post-paid and pre-paid) based on the type of mobile Internet service accessed by an end-user, the end-user's subscription plan and other variables identified by the operator. -- WIRELESS MARKETPLACE. This feature of the WIS technology allows wireless operators to efficiently and cost-effectively distribute third parties' content and applications (in addition to the Company's own) through the WIS and to integrate such services within their overall mobile Internet service offerings. The WIS software is designed to operate on dedicated servers placed in the wireless operators' premises. o GEN3 WIRELESS PORTAL TECHNOLOGY. Our Gen3 wireless portal technology allows wireless operators to provide to their customers personalized Internet websites that can be viewed through different browser types and devices, including their personal computers and wireless devices (such as WAP-enabled phones and PDAs). Using this technology, the content and services offered on end-users' portals, as well as the branding of the portal, vary based on the user's profile and subscription of services. Although our competitors have been able to develop technologies that are similar to our WIS technology and Gen3 wireless portal technology, the Company believes that its proprietary technologies' ability to interface with wireless operators' back end systems via our Transactional Billing system and Wireless Marketplace gives it a competitive advantage over other solutions providers. This technology allows our customers to better target their end-users by being able to track and identify the services or plans being accessed through the different platforms (personal computer, mobile telephones and PDAs) used by the end-user. We use third-party content and technology to further enhance the services and tools that wireless operators can deliver through our WIS and Gen3 wireless portal technology. In addition, we have integrated third-party voice recognition, text-to-speech and telephony technologies (also known as voice portal technologies), along with our proprietary technologies, to create an integrated access platform, allowing end-users to have seamless interactive access via voice, web, WAP and SMS to a variety of content and applications. This integrated access platform is the basis of the Multiple Access Portal (MAP) services we provide to subsidiaries of BellSouth International in Latin America. The Company derives revenues from its mobile Internet solutions through set up and installation fees, technology licenses fees and usage-based fees. We currently have agreements for the use of our WIS technology with more than 20 wireless operators throughout the region, including subsidiaries of BellSouth International, Verizon, Telefonica and Americas Telecom. INTERNET MEDIA SERVICES. Historically, the Company has also provided extensive services to consumers, including community features such as o free email, promotional email newsletters, user surveys, chats, instant messaging, and home pages; o tools and applications, such as games, multimedia players, comprehensive city guide content, and sophisticated search capabilities; o local and global editorial content; and o online shopping in Spanish and Portuguese. 16 The Company has derived revenues from its Internet media services principally through sales of advertising and promotions on these services, including banners, buttons and sponsorships. For the six months ended June 30, 2001, one advertiser accounted for more than 10% of our total revenues and our top advertisers accounted for 41% of our total revenues. In addition, the Company has used the information derived about users of its services, particularly from user surveys and email usage patterns, to sell targeted direct marketing emails to advertisers seeking to target specific user profiles. As explained above, these revenues are no longer an integral part of the Company's business model. Currently, the Company continues to operate the following media services: o batepapo.com.br, a Brazilian chat services, which the Company may either sell or shut down in the near future; and o local Internet city guides such as nacidade.com.br; guiasp.com.br; guiarj.com.br; paisas.com; yoinvito.com; panoramas.cl and openchile.cl, which the Company expects to continue to operate in connection with its mobile solutions business. PORTAL SOLUTIONS. The Company provides portal development services to enable companies to leverage the power of the Internet to reach their business objectives. We use our content, technology and know-how to create branded, content-rich websites (commonly referred to as "portals") for consumer-oriented businesses that desire to attract and serve customers through the Internet. Through the Company's portal development services enterprises can establish a powerful presence on the World Wide Web, which enables them to improve customer service, conduct further transactions, and increase their service/product offerings, ultimately resulting in increased revenues. In the past we were able to draw on the existing content, tools and applications from our Internet media services and include them as part of our portal solutions. Following the sale or liquidation of our Internet media services business, the Company will continue to develop and access third-party content, tools and applications in order to continue to provide portal solutions to businesses, although we do not expect this to be our principal business and we may not generate significant revenues from this business. The Company derives revenues from its portal solutions principally through development fees and maintenance fees it charges its portal solutions customers. Historically, it has also generated revenues from on-line promotions and advertising it undertakes with respect to the portals it develops. The Company does not anticipate that this will be a significant source of revenues for its portal solutions business in the future. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 REVENUES Total revenues decreased to $6.3 million for the three months ended June 30, 2001 from $12.0 million, for the three months ended June 30, 2000. This decrease was primarily associated with smaller advertising and sponsorship revenues. Barter revenues for the three months ended June 30, 2001 and 2000 accounted for 27% and 17% of total revenues, respectively. For the three months ended June 30, 2001, two advertisers, individually, accounted for more than 10% of our total revenues. For the three months ended June 30, 2000, one advertiser accounted for more than 10% of our total revenues. For the three months ended June 30, 2001, our top five advertisers accounted for 43% of our total revenues. For the three months ended June 30, 2000, our top five advertisers account for 26% of our total revenues. OPERATING EXPENSES PRODUCT AND TECHNOLOGY Product and technology development expenses decreased to $14.2 million, or 226% of total revenues, for the three months ended June 30, 2001, from $19.5 million, or 162% of total revenues, for the three months ended June 30, 2000. This decline was primarily due to decreases of approximately $3.0 million in salaries associated with one-time payments as part of the acquisition of KD Sistemas, the Brazilian online directory, $900,000 in expenses related to content acquisition and $700,000 for hosting costs. SALES AND MARKETING Sales and marketing expenses decreased to $12.5 million, or 199% of total revenues for the three months ended June 30, 2001 from $21.2 million, or 176% of total revenues, for the three months ended June 30, 2000. This decrease was primarily due to decreases in advertising, trade events, consulting, travel and entertainment of $11.7 million and compensation expenses of $1.4 million, partially offset by an increase in bad debt expense of $5.1 million. We believe the Company has ample coverage for bad debt and will continue to review the collectibility of our receivables. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $7.9 million, or 126% of total revenues, for the three months ended June 17 30, 2001, from $7.5 million, or 63% of total revenues, for the three months ended June 30, 2000. This increase is primarily the result of increases in legal, tax and recruiting fees. RESTRUCTURING AND OTHER CHARGES For the three months ended June 30, 2001, we recorded restructuring charges totaling approximately $15.4 million, which was the result of a company-wide realignment of its business operations and an effort to reduce its operational overhead and included the provision of approximately $10.8 million of loans and related interest made to certain officers of the Company, determined by management to be unrealizable due to the impairment in collateral value. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses decreased slightly to $6.9 million, or 110% of total revenues, for the three months ended June 30, 2001, from $7.3 million, or 61% of total revenues, for the three months ended June 30, 2000. This decrease is due to the net effect of an increase in depreciation expense due to additional capital purchases offset by a decrease of goodwill amortization due to an write-down of goodwill in December 2000. Even though depreciation and amortization expenses decreased slightly, we expect that depreciation expenses will increase as additional capital purchases are incurred during 2001. STOCK BASED COMPENSATION EXPENSE Of the cumulative deferred compensation amount, $683,000 was recorded as an expense for the three months ended June 30, 2001 compared with $1.1 million recorded as expense for the three months ended June 30, 2000. The unamortized balance is being amortized over the vesting period for the individual options, which is typically three years for options issued prior to February 1999 and four years for options issued thereafter. LOSS IN UNCONSOLIDATED SUBSIDIARY During 2000 the Company acquired a non-controlling 50% interest in Gratis1 ("G1"), which was subsequently reduced to approximately 48%. G1 was formed to provide free unlimited Internet access to users in Latin America. In September 2000, an agreement between the Company and AT&T Global Network Services ("AT&T") to provide Internet access services in Argentina, Brazil, Chile, Colombia and Mexico was assigned to G1. AT&T was entitled to draw upon a $2,800,000 letter of credit, guaranteed by the Company, in the event G1 failed to perform under this agreement. Following payment by G1 of a $1,000,000 debt to AT&T in December 2000, the amount drawable under letter of credit was reduced to $1,800,000. As of September 30, 2001, AT&T had fully drawn down on the letter of credit. Accordingly, during the period ended June 30, 2001, the Company recognized an expense of $1,800,000 related to the guaranty. INTEREST Interest income includes income from our cash and investments. Interest income decreased to $920,000 for the three months ended June 30, 2001 from $3.3 million for the three months ended June 30, 2000. Interest income decreased as a result of a decrease in the average invested cash balance for the above periods. Interest expense is comprised primarily of interest related to an equipment lease line which was paid in full during the quarter ended June 30, 2001. Interest expense increased to $568,000 for the three months ended June 30, 2001 from $364,000 for the three months ended June 30, 2000. This increase is due to additional borrowings by the Company during December 2000. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 REVENUES Total revenues decreased to $15.2 million for the six months ended June 30, 2001 from $21.9 million, for the six months ended June 30, 2000. This decrease in revenues was primarily due to a decrease in the volume of revenue-producing advertising impressions and sponsorships. Barter revenues for the six months ended June 30, 2001 and 2000 accounted for 32% and 16% of total revenues, respectively. For the six months ended June 30, 2001, one advertiser accounted for more than 10% of our total revenues. For the six months ended June 30, 2000, no single advertiser accounted for more than 10% of our total revenues. For the six months ended June 30, 2001, our top five advertisers accounted for 41% of our total revenues. For the six months ended June 30, 2000, our top five advertisers account for 26% of our total revenues. 18 OPERATING EXPENSES PRODUCT AND TECHNOLOGY Product and technology development expenses decreased to $28.8 million, or 190% of total revenues, for the six months ended June 30, 2001, from $35.4 million, or 162% of total revenues, for the six months ended June 30, 2000. This decrease was primarily due to decreases of approximately $1.6 million expenses related to content acquisition, $1.5 million in hosting related expenses, and $2.0 million in salaries associated with one-time payments as part of the acquisition of Cade?, the Brazilian online directory. SALES AND MARKETING Sales and marketing expenses decreased to $ 30.0 million, or 198% of total revenues, for the six months ended June 30, 2001 from $39.8 million, or 182% of total revenues, for the six months ended June 30, 2000. This decrease was primarily due to the net effect of decreases in advertising, salaries, trade show events, consulting and travel, totaling approximately $20.0 million, partially offset by an increase in bad debt expense of $11.1 million. We believe the Company has ample coverage for bad debt and will continue to review the collectibility of our receivables. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $17.1 million, or 113% of total revenues, for the six months ended June 30, 2001, from $15.4 million, or 70% of total revenues, for the six months ended June 30, 2000. The increase in general and administrative expenses was primarily due to increases in salaries, tax and insurance and miscellaneous expenses in connection with the restatement, partially offset by decreases in legal, tax and audit fees, recruiting and office rent. RESTRUCTURING AND OTHER CHARGES For the six months ended June 30, 2001, we recorded restructuring charges totaling approximately $15.4 million, which was the result of a company-wide realignment of its business operations and an effort to reduce its operational overhead and included the reserving of approximately $10.8 million of loans and related interest made to certain officers of the Company, determined by management to be unrealizable due to the impairment in collateral value. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased to $12.7 million, or 84% of total revenues, for the six months ended June 30, 2001, from $11.8 million, or 54% of total revenues, for the six months ended June 30, 2000. This increase is due to the net effect of an increase in depreciation expense due to additional capital purchases offset by a decrease of goodwill amortization due to an write-down of goodwill in December 2000. We expect that depreciation expenses will continue to increase as additional capital purchases are incurred during 2001. STOCK-BASED COMPENSATION EXPENSE Of the cumulative deferred compensation amount, $1.4 million was recorded as an expense for the six months ended June 30, 2001 compared with $2.3 million recorded as expense for the six months ended June 30, 2000. The unamortized balance is being amortized over the vesting period for the individual options, which is typically three years for options issued prior to February 1999 and four years for options issued thereafter. IMPAIRMENT OF FIXED ASSETS The Company decided to cease operating the Webcast Solutions Company that had been merged in September 1999 with a wholly owned subsidiary of the Company ("Webcast Solutions"). As a result, impairment of fixed assets totaled $1.2 million for the six months ended June 30, 2001. For additional information, see note 4 of notes to unaudited condensed consolidated financial statements. INTEREST Interest income includes income from our cash and investments. Interest income decreased to $2.3 million for the six months ended June 30, 2001 from $6.8 million for the six months ended June 30, 2000. Interest income decreased as a result of a decrease in the average invested cash balance for the above periods. Interest expense is comprised primarily of interest related to an equipment lease line which was paid in full during the quarter 19 ended June 30, 2001. Interest expense decreased to $643,000 for the six months ended June 30, 2001 from $684,000 for the three months ended June 30, 2000. This decrease is due to a lower average loan balance outstanding during the above period. LIQUIDITY AND CAPITAL RESOURCES To date, we have financed our operations primarily through the sale of our equity securities. At June 30, 2001, we had $59.2 million in cash and cash equivalents, a decrease of $34.2 million from December 31, 2000. For the six months ended June 30, 2001, we used $53.9 million in operating activities, substantially related to our $91.4 million loss during the period, which included non-cash activities such as $12.7 million for depreciation and amortization, $11.3 million in provision for bad debts, $1.2 million from the shut-down of Webcast Solutions and $1.4 million for amortization of stock based compensation. In addition, for the six months ended June 30, 2001, we used $12.5 million in investing activities, including $9.1 million for fixed assets. Net cash provided by financing activities were $32.3 million and $ 2.3 million for the six months ended June 30, 2001 and 2000, respectively. Net cash provided by financing activities during the six months ended June 30, 2001 consisted primarily of proceeds of $36.5 million resulting from the issuance of the Company's Series A Convertible Preferred Stock, partially offset by $4.4 million used for the repayment of long-term debt. Net cash provided by financing activities during the six months ended June 30, 2000 consisted primarily of proceeds of $3.1 million resulting from the issuance of the Company's common stock, partially offset by $800,000 used for the repayment of long-term debt. During the quarter ended June 30, 2001, the Company issued 1,431,373 shares of its Series A Convertible Preferred Stock at a price per share of $25.50 to BellSouth and certain other investors resulting in total proceeds of $35.1 million to the Company, net of issuance costs of approximately $1.4 million. The shares are convertible into 14,313,730 shares of the Company's common stock at any time at the option of the holder. After 60 months from the date of issuance, the Company shall redeem the Series A Convertible Preferred Stock for cash or shares of the Company's common stock, in an amount equal to $36.5 million, plus accrued dividends thereon. Dividends accrued at 6% per annum and totaled $182,500 during the quarter ended June 30, 2001. The carrying value of the Series A Convertible Preferred Stock is being accreted up to its redemption value over 60 months using the effective interest method. Such accretion was $23,000 during the quarter ended June 30, 2001. In addition, in connection with the BellSouth Strategic Agreement, the Company agreed to issue warrants to BellSouth to purchase up to 4,500,000 shares of the Company's common stock, with exercise prices ranging from $4.55 to $8.55 per share that vest in May 2002 and expire during the period from May 2005 through May 2007. These warrants were valued, by an independent appraiser, at approximately $2.2 million and are being amortized over 60 months. During the quarter ended June 30, 2001, we used $4.4 million for repayment of our long-term debt. As a result, at June 30, 2001, we had no long-term debt outstanding. Our principal commitments consist of obligations outstanding under capital and operating leases. We have experienced a substantial increase in our capital expenditures and operating lease arrangements since our inception consistent with the growth in our operations and staffing. We will continue to evaluate possible investments in businesses, products and technologies. Despite the proceeds from the financing transaction described above and our steps to reduce operating expenses significantly through a reduction of our work force and other operating costs, our current cash and cash equivalents may not be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. If working capital is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or establish a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK COLLECTION RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. INTEREST RATE RISK Our investments are classified as cash and cash equivalents with original maturities of three months or less. Therefore, 20 changes in the market's interest rates do not affect the value of the investments as recorded by us. FOREIGN CURRENCY EXCHANGE RISK We do not hedge our exposure to foreign currency exchange risk. We are subject to exchange rate fluctuations, which may be a significant risk, because of our operations in Latin America. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August 2001, the Company, three of its executive officers and each of the underwriters who participated in the Company's May 25, 1999 initial public offering were named as defendants in three class action complaints filed in the United States District Court for the Southern District of New York: Earl Arneson v. StarMedia Network, Inc, et al; John R. Longman v. StarMedia Network, Inc., et al; and BH Holdings LLC v. StarMedia Network, Inc., et al. The complaints, which are substantially identical, each seek unspecified damages for alleged violations of Sections 11, 12 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the Company's initial public offering. The complaints allege that the underwriters charged the Company excessive commissions and inflated transaction fees not disclosed in the registration statement and allocated shares of the Company's initial public offering to favored customers in exchange for purported promises by such customers to purchase additional shares in the aftermarket, thereby allegedly inflating the market price for the Company's common stock. These actions have been consolidated with hundreds of other securities class actions commenced against more than 300 companies and approximately 40 investment banks in which plaintiffs make substantially similar allegations as those made against the Company with respect to the initial public offerings at issue in those cases. All of these actions have been consolidated under the caption "In re: Initial Public Offering Securities Litigation, 21 MC 92 (SAS)". The judge in the consolidated action has adjourned without date the time for all defendants to respond to the complaints. On November 19, 2001, the Company announced to the public that it had commenced an investigation into the facts and circumstances related to certain accounting irregularities related to Mexican subsidiaries and that a restatement of its audited financial statements for the year ended December 31, 2000 and its unaudited financial statements for the quarters ended March 31, 2001 and June 30, 2001 would likely be necessary. The Company informed the SEC of this matter concurrently with its public announcement. Subsequently, the SEC has informed the Company that it has opened an investigation into this matter. The SEC investigation is on-going. In late 2001 and early 2002, eleven lawsuits were filed against the Company in the Southern District of New York in connection with the Company's announcement relating to the restatement referred to above. A lead plaintiff for the class and lead plaintiff's counsel were subsequently selected and a motion filed to consolidate the various claims. The Consolidated Amended Complaint was filed on May 31, 2002 in the Southern District of New York under the caption In re StarMedia Network, Inc. Securities Litigation 01 Civ. 10556 (S.D.N.Y.). The lead plaintiffs and all defendants have executed a settlement agreement that resolves all claims in the consolidated action. The settlement amount will be paid by the Company's directors and officers' liability insurance carrier. This settlement agreement is subject to review and ratification by the Honorable Denny Chin of the United States District Court for the Southern District of New York. A list of the eleven lawsuits before consolidation follows:
------------------------------------------------------------------ -------------------------- CASE NAME DATE FILED ------------------------------------------------------------------ -------------------------- Kramon v. StarMedia Network, et al. November 20, 2001 ------------------------------------------------------------------ -------------------------- Stourbridge Ltd., et al. v. StarMedia Network, et al. November 20, 2001 ------------------------------------------------------------------ -------------------------- Rennel Trading Corp. v. StarMedia Network, et al. November 21, 2001 ------------------------------------------------------------------ -------------------------- Ehrenreich v. StarMedia Network, et al. November 27, 2001 ------------------------------------------------------------------ -------------------------- Howe v. StarMedia Network, et al. November 27, 2001 ------------------------------------------------------------------ -------------------------- Mayper v. StarMedia Network, et al. November 28, 2001 ------------------------------------------------------------------ -------------------------- Dorn v. StarMedia Network, et al. December 3, 2001 ------------------------------------------------------------------ -------------------------- Hindo v. StarMedia Network, et al. December 12, 2001 ------------------------------------------------------------------ -------------------------- Mather v. StarMedia Network, et al. December 19, 2001 ------------------------------------------------------------------ -------------------------- Nulf v. StarMedia Network, et al. December 19, 2001 ------------------------------------------------------------------ -------------------------- Vasko v. StarMedia Network, at al. January 7, 2002 ------------------------------------------------------------------ --------------------------
In April 2002, AT&T Corp filed a claim in the United States District Court for the Southern District of New York seeking payment from the Company for telecommunications services rendered to the Company in the amount of approximately $337,000, and in June 2002 AT&T amended that complaint to increase the amounts claimed to approximately $1,400,000. In addition, for over a year the Company has engaged in periodic discussions with AT&T regarding the Company's alleged commitments to purchase a 21 variety of services from AT&T, and in April 2002 had received correspondence from AT&T alleging that approximately a total of $1,100,000 was payable by the Company. The Company denies that it owes most of the amounts alleged to be payable by AT&T. The parties have commenced settlement discussions. In October 2001, Fausto Zapata, formerly President of SMN de Mexico, S de RL, filed a notice in the applicable Labor Courts in Mexico City alleging that the Company failed to make payments due to him under an employment agreement following his termination by the Company. The amounts claimed by Mr. Zapata exceed 8.5 million Pesos, or approximately $900,000. The Company maintains that it owes Mr. Zapata solely the minimum amounts required to be paid following termination of his at-will employment, which the Company calculates to be approximately 600,000 Mexico Pesos, or approximately $65,000. In January 2002 Mr. Carlos Ponce filed a claim in the U.S. District Court in the Southern District Court of Florida in connection with allegations by Mr. Ponce that the Company exceeded the scope of a license to use his image in connection with an advertising campaign. Mr. Ponce claims violations of common law and statutory rights of publicity under Florida law, unfair business practices, misappropriation, and also asserts claims under the Lanham Act. Mr. Ponce seeks damages allegedly in excess of $1,000,000, treble damages, punitive damages, and injunctive and other equitable relief. The Company filed an answer to the complaint in February 2002. In June 2002 the judge in this case issued an order to show cause directing the plaintiff to show cause why the case should not be dismissed. Mr. Ponce has responded and delivered to the Company a request to produce documents. The Company denies Mr. Ponce's claims and believes that even if such claims were proven, the damages sought are grossly overstated, and that the Lanham Act claim may be legally deficient. In May 2002 the Company was notified that Digital Impact has presented a demand for arbitration seeking payment of approximately $594,000 allegedly owed to Digital Impact by the Company in connection with the Company's termination of an agreement between Digital Impact and the Company. In June 2001, the Company commenced an action entitled StarMedia Network, Inc. v. Patagon.com International, Inc. in the Commercial Division of the Supreme Court of the State of New York, New York County against Patagon.com International, Inc. ("Patagon"). The complaint seeks to recover compensatory and consequential damages in an amount not less than $4,250,000 for Patagon's breach of a Web Content Agreement pursuant to which the Company and Patagon hosted a co-branded website linked to the Company's internet property StarMedia.com through its "Money Channel." The complaint alleges that Patagon breached the Web Content Agreement by wrongfully and prematurely terminating the agreement. In August 2001, Patagon filed an Answer and Counterclaim (the "Counterclaim") to the complaint in which Patagon seeks to recover unspecified damages on claims for breach of contract and breach of the duty of good faith and fair dealing premised upon the Company's alleged breach of the Web Content Agreement. Also in August 2001, the Company served its Answer and Affirmative Defenses to the Counterclaim in which it denied all of the material allegations of the Counterclaim and asserted affirmative defenses to the claims asserted therein. Discovery is pending in this case. In September 2001, Justin K. Macedonia, the then General Counsel of the Company, filed a notice of intention to arbitrate against the Company, asserting that the Company was obligated to make tax indemnity payments to him in the amount of $1,700,000. The Company denied any obligation to make such payment and asserted counterclaims against Mr. Macedonia. Mr. Macedonia's employment with the Company terminated in November 2001. The arbitration hearing was concluded in March. In May 2002 the arbitrator issued a final judgment denying Mr. Macedonia's claims, as well as the Company's counterclaims. In December 2000, a consulting company filed suit against the Company in the New York Supreme Court claiming unpaid fees of approximately $2,300,000. In October 2001, pursuant to a Settlement Agreement, the Company and the consulting company agreed to settle the lawsuit. The Company agreed to pay the consulting company an amount within the range that the Company had previously reserved for such lawsuit in its financial statements. The suit was settled for an amount not material to the Company. The Company has paid such amount and such lawsuit has been dismissed with prejudice. The Company intends to vigorously defend the aforementioned claims that are threatened or pending against it but believes that an adverse outcome with respect to one or more of these matters could have a material adverse effect on the financial condition of the Company. The Company is subject to legal proceedings and claims in the ordinary course of business from time to time, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with our e-mail, message boards and other communications and community features, such as claims alleging defamation and invasion of privacy. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS PREFERRED STOCK On May 30, 2001, the Company sold 1,431,373 shares of its Series A Convertible Preferred Stock, par value $0.001 per 22 share, (the Series A Preferred Stock) to BellSouth and certain other investors, at a price per share of $25.50, resulting in total proceeds of approximately $35.1 million to the Company, net of issuance costs of approximately $1.4 million. These shares of Series A Preferred Stock are convertible into 14,313,730 shares (subject to adjustment) of the Company's common stock, par value $0.001 per share, at any time at the option of the holder. After 60 months from May 30, 2001, the Company shall redeem the Series A Preferred Stock for cash or shares of the Company's stock, in an amount equal to $36.5 million. Dividends accrue on the Series A Preferred Stock at a rate of 6% per annum. Pursuant to the terms of the Series A Preferred Stock, the Company may not, without the affirmative vote or written consent of at least a majority of all outstanding shares of Series A Preferred Stock, voting or consenting separately as a class, consummate a transaction constituting a change in control unless prior to such consummation the Company has made arrangements that ensure the payment to each holder of Series A Preferred Stock of an amount per share equal to $25.50, subject to adjustment in the event of stock splits, subdivisions or combination or reclassifications, plus all accrued but unpaid dividends. In connection with the transaction described above, the Company issued to BellSouth Enterprises, Inc. warrants to purchase up to 4,500,000 shares of the Company's common stock, divided into three tranches, at a exercise prices ranging from $4.55 to $8.55 per share. We believe that the issuance of the Company's Series A Preferred Stock described above is exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Regulation D promulgated thereunder. COMMON STOCK In April 2001, in connection with its February 2000 acquisition of Ola Turista Ltda., the owner of Guia and Guia RJ, and its September 1999 acquisition of PageCell International Holdings, Inc., the Company issued 592,128 shares and 528,787 shares, valued at approximately $2.0 million and $1.4 million, respectively. We believe that the issuances of the Company's common stock described above are exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Regulation D promulgated thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of StarMedia was held on June 8, 2001. The following items were presented to the Stockholders with the following results: 1. The following directors were elected to serve a three year term of office to expire at the annual meeting in 2004 or until their successors have been elected and qualified:
DIRECTORS VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES - --------- --------- ------------- ----------- ---------------- Marie-Josee Kravis 49,068,235 170,167 -- -- Frederick R. Wilson 49,008,068 230,334 -- --
Immediately following this Annual Meeting of Stockholders, directors of StarMedia consisted of the following individuals: Fernando J. Espuelas Jack C. Chen Douglas M. Karp Susan L. Segal Gerardo M. Rosenkranz Marie-Josee Kravis Frederick R. Wilson Mr. Rosenkranz subsequently resigned from the Board of Directors of StarMedia on July 25, 2001. Mr. Enrique Narciso, the Company's President and Chief Executive Officer, was appointed as Mr. Rosenkranz's successor to serve out the remainder of his term, which end at the Company's Annual Meeting in 2002. 23 2. The stockholders approved the re-appointment of Ernst & Young LLP as independent auditors of StarMedia for the 2001 fiscal year.
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES - --------- ------------- ----------- ---------------- 49,094,858 170,167 -- --
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.1 Amendment No. 1 to Rights Agreement, dated as of May 28, 2001, between StarMedia Network, Inc. and American Stock Transfer & Trust Company. 10.1 Securities Purchase Agreement, dated as of May 30, 2001, between StarMedia Network, Inc., BellSouth Enterprises, Inc. and the additional investors set forth on Schedule A thereto. 10.2 Internet Content and Services Framework Agreement, dated as of May 30, 2001, by and between StarMedia Network, Inc. and BellSouth Enterprises, Inc.*
* The Company has requested confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. The portions of the exhibit that are subject to this confidential treatment request have been omitted and have been filed separately with the Securities and Exchange Commission. (b) Reports on Form 8-K: None. ITEM 7. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 10, 2002 STARMEDIA NETWORK, INC. BY: /S/ ANA M. LOZANO-STICKLEY --------------------------------- ANA M. LOZANO-STICKLEY CHIEF FINANCIAL OFFICER (DULY AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER) 24 EX-4.1 3 a2084091zex-4_1.txt EX-4.1 Exhibit 4.1 AMENDMENT NO. 1 TO RIGHTS AGREEMENT Amendment No. 1, dated as of May 28, 2001 (the "Amendment"), between STARMEDIA NETWORK, INC., a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York banking corporation, as Rights Agent (the "Rights Agent"). WHEREAS, the Company and the Rights Agent entered into a Rights Agreement, dated as of May 21, 1999 (the "Rights Agreement"); WHEREAS, there is not as of the date hereof any Acquiring Person (as defined in the Rights Agreement); and WHEREAS, the Company desires to amend the Rights Agreement in accordance with Section 27 of the Rights Agreement; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth in the Rights Agreement and this Amendment, the parties hereby agree as follows: Section 1. AMENDMENT TO DEFINITION OF "ACQUIRING PERSON". The definition of "Acquiring Person" in Section 1 of the Rights Agreement is hereby amended to read in its entirety as follows: "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock of the Company then outstanding but shall not include (1) the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan, (2) Chase Venture Capital Associates, L.P. ("Chase") or any Affiliates or Associates of Chase (the "Chase Group") to the extent that the members of the Chase Group shall beneficially own in the aggregate up to, but not exceeding, 25% of the shares of Common Stock of the Company then outstanding, (3) Fernando J. Espuelas or any Affiliates or Associates of Mr. Espuelas (the "Espuelas Group") to the extent that the members of the Espuelas Group shall beneficially own in the aggregate up to, but not exceeding, 20% of the shares of Common Stock of the Company then outstanding, (4) Jack C. Chen or any Affiliates or Associates of Mr. Chen (the "Chen Group") to the extent that the members of the Chen Group shall beneficially own in the aggregate up to, but not exceeding, 20% of the shares of Common Stock of the Company then outstanding, or (5) BellSouth Enterprises, Inc. ("BellSouth") or any Affiliates or Associates of BellSouth (the "BellSouth Group") to the extent that the members of the BellSouth Group shall beneficially 2 own in the aggregate up to, but not exceeding 25% of the shares of Common Stock of the Company then outstanding. Notwithstanding the foregoing: (i) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock of the Company then outstanding (or, in the case of (A) the Chase Group, more than 25% of the shares of Common Stock of the Company then outstanding, (B) either the Espuelas Group or the Chen Group, more than 20% of the shares of Common Stock of the Company then outstanding, or (C) the BellSouth Group, more than 25% of the shares of Common Stock of the Company then outstanding); PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding (or, in the case of (D) the Chase Group, more than 25% of the shares of Common Stock of the Company then outstanding, (E) either the Espuelas Group or the Chen Group, more than 20% of the shares of Common Stock of the Company then outstanding, or (F) the BellSouth Group, more than 25% of the shares of Common Stock of the Company then outstanding) by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock of the Company (or, in the case of the members of any of the Chase Group, the Espuelas Group, the Chen Group or the BellSouth Group, become the Beneficial Owner of any additional shares of Common Stock of the Company), then such Person shall be deemed to be an "Acquiring Person" hereunder; and (ii) if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" (as defined pursuant to the foregoing provisions of this paragraph (a)), then such Person shall not be deemed to be an "Acquiring Person" for any purpose of this Agreement. Section 2. AMENDMENT TO DEFINITIONS OF "BENEFICIAL OWNER" AND "BENEFICIALLY OWN". The definitions of "Beneficial Owner" and "beneficially own" in Section 1 of the Rights Agreement are hereby amended by adding at the end thereof: "Notwithstanding anything in this definition of "Beneficial Ownership" and "beneficially own" to the contrary, no member of the BellSouth Group shall be deemed the "Beneficial Owner" of, or to "beneficially own", any security owned by Fernando J. Espuelas or Jack C. Chen solely by reason of that certain 3 Voting Agreement, dated as of May 30, 2001, by and among BellSouth, Fernando J. Espuelas and Jack C. Chen." Section 3. RIGHTS AGREEMENT AS AMENDED. The term "Agreement" as used in the Rights Agreement shall be deemed to refer to the Rights Agreement as amended hereby. The foregoing amendments shall be effective as of the date hereof and, except as set forth herein, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. Section 4. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and each of such counterparts shall for all purposes be deemed an original, but all such counterparts shall together constitute but one and the same instrument. Section 5. GOVERNING LAW. This Amendment shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. Section 6. HEADINGS. Headings of the several Sections of the Amendment are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. STARMEDIA NETWORKS, INC. By: /s/ Justin K. Macedonia ------------------------------------------- Name: Justin K. Macedonia Title: Senior Vice President and General Counsel AMERICAN STOCK TRANSFER & TRUST COMPANY, as Rights Agent By: /s/ Herbert J. Lemmer ------------------------------------------- Name: Herbert J. Lemmer Title: Vice President EX-10.1 4 a2084091zex-10_1.txt EX-10.1 Exhibit 10.1 STARMEDIA NETWORK, INC. SECURITIES PURCHASE AGREEMENT DATED AS OF MAY 30, 2001 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is entered into as of May 30, 2001, by and among StarMedia Network, Inc., a Delaware corporation (the "Company"), BellSouth Enterprises, Inc., a Georgia corporation ("BellSouth"), and each of the additional investors set forth on Schedule A attached hereto (each, a "Co-Investor" and, collectively, the "Co-Investors"). At times, BellSouth and the Co-Investors may be collectively referred to as the "Purchasers". All capitalized terms included in this Agreement, otherwise not defined in the context thereof, shall have the meaning ascribed to them in Article X hereof. WHEREAS, the Purchasers have indicated a desire to purchase from the Company 1,431,373 shares (the "Purchased Shares") of a newly created series of the Company's convertible preferred stock which is designated as Series A Convertible Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"), which Purchased Shares are convertible into 14,313,730 shares (subject to adjustment, the "Conversion Shares") of the Company's common stock, par value $0.001 per share (the "Common Stock"); and WHEREAS, in connection with BellSouth's participation in this Agreement, the Company, BellSouth and certain Affiliates of the Company and BellSouth intend to enter into certain commercial agreements, setting forth the commercial arrangements among the parties in connection with the development, implementation and maintenance of multi-access Internet portals for the Latin American operations of BellSouth and its Affiliates (collectively, the "Commercial Agreement"). NOW, THEREFORE, for and in consideration of the mutual consents and agreements herein contained, the parties hereto do hereby covenant and agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES 1.1 PURCHASE AND SALE. Subject to the terms and conditions hereinafter set forth, at the Closing (as defined below) the Company shall issue and sell to each Purchaser, severally and not jointly, and the Purchasers shall purchase from the Company, severally and not jointly, the Purchased Shares, at a price per share equal to $25.50. The number of Purchased Shares to be purchased by each Purchaser is set forth opposite each Purchaser's name on SCHEDULE A attached hereto. The Purchased Shares shall have the rights, preferences, privileges and restrictions set forth in the Company's Amended and Restated Certificate of Incorporation (the "Charter") and the Certificate of Designation of the Preferences, Rights and Limitations of the Series A Preferred Stock in the form of EXHIBIT A attached hereto (the "Certificate of Designation"). 1.2 CLOSING. Subject to the satisfaction or waiver of the conditions set forth in Articles V, VI and VII hereof, a closing (the "Closing") of the sale and purchase of the Purchased Shares shall take place at the offices of Hughes Hubbard & Reed LLP, One Battery 2 Park Plaza, New York, New York, at 10:00 A.M., on May 30, 2001, or such other date, time and place as shall be mutually agreed upon by the Company and the Purchasers (the "Closing Date"). At the Closing, subject to the terms and conditions hereof, the Company will deliver to each Purchaser the Purchased Shares being acquired by such Purchaser in the form of a certificate issued in such Purchaser's name upon receipt by the Company of payment of the full purchase price therefor by or on behalf of such Purchaser to the Company by certified check or wire transfer of immediately available funds to a bank account designated in writing by the Company at least three (3) business days prior to Closing. 1.3 SEPARATE SALES. The Company's agreement with each of the Purchasers is a separate agreement, and the sale of Purchased Shares to each of the Purchasers is a separate sale being made severally and not jointly to the Purchasers; PROVIDED, HOWEVER, that this Section 1.3 shall not limit the right of the Company not to consummate the Closing if any of the conditions with respect to any Purchaser set forth in Article V hereof are not satisfied. 1.4 SUBSEQUENT SALES OF SHARES. At any time on or before the 60th day following the Closing, the Company may sell up to the balance of the authorized shares of Series A Preferred Stock not sold at the Closing to such Persons as may be approved by the Board of Directors of the Company. All such sales shall be made on the terms and conditions set forth in this Agreement, including the representations and warranties set forth in Articles II and IV; PROVIDED, HOWEVER, that the purchase price per share shall be not less than the greater of (i) $25.50 and (ii) an amount equal to 1000% of the average closing sale price of the Common Stock on Nasdaq over the thirty trading days immediately preceding the closing of such sale; PROVIDED, FURTHER, that the Company may deliver a revised Disclosure Schedule to such additional purchasers, in which case the representations and warranties made by the Company to such additional purchasers shall be qualified by such revised Disclosure Schedule. Such sales shall be completed by delivery of (1) the required consideration, (2) a counterpart signature page to this Agreement, and (3) counterpart signature pages to any other agreements to which such subsequent purchaser is a party contemplated by this Agreement. Any shares of Series A Preferred Stock sold pursuant to this Section 1.4 shall be deemed to be "Purchased Shares" for all purposes under this Agreement and any purchasers thereof shall be deemed to be "Purchasers" for all purposes under this Agreement and the Schedule of Purchasers shall be amended to reflect such sales. The Company shall amend Schedule A to reflect such subsequent sales. 1.5 USE OF PROCEEDS. Unless otherwise approved in writing by BellSouth, the Company shall use the proceeds from the sale of the Purchased Shares, net of the payments pursuant to the agreements referred to in Section 2.11 and legal and accounting fees and expenses incurred in connection with the transactions contemplated by this Agreement, towards the Company's development, implementation, maintenance and support of its multi-access portals, including its websites located at www.starmedia.com. In addition, the Company shall dedicate such portion of such net proceeds as may be necessary to fulfill its obligations under the Related Agreements. 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as otherwise set forth on the disclosure schedule attached hereto (the "Disclosure Schedule") delivered by the Company to the Purchasers prior to the Closing, the Company makes the following representations and warranties to the Purchasers, understanding and agreeing that the Purchasers are entering into this Agreement in part in reliance on such representations and warranties: 2.1 ORGANIZATION AND CORPORATE POWER. The Company and each of its subsidiaries, a complete list of which is attached hereto as EXHIBIT B, is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own its properties and to carry on its business as presently conducted. The Company and each of its Subsidiaries is duly licensed or qualified to do business as a foreign corporation in each jurisdiction wherein the character of its property or the nature of the activities presently conducted by it makes such qualification necessary and where the failure to so qualify would have a Material Adverse Effect. 2.2 AUTHORIZATION. The Company and each of the Subsidiaries have all necessary corporate power and have taken all necessary corporate action required for the due authorization, execution, delivery and performance by the Company of this Agreement, the Commercial Agreement and any other agreements or instruments executed by the Company and/or the Subsidiaries in connection herewith or therewith (the Commercial Agreement and such other agreements and instruments, collectively, the "Related Agreements"), and the consummation by the Company of the transactions contemplated herein or therein, and for the due authorization, issuance and delivery of the Purchased Shares and the Conversion Shares. Sufficient shares of authorized, but unissued shares of Common Stock have been reserved for issuance upon conversion of the Purchased Shares. The issuance of the Purchased Shares does not, and the Conversion Shares will not, require any further corporate action and is not and, in the case of the Conversion Shares, will not be, subject to any preemptive right, right of first refusal or similar purchase right, and will not cause any outstanding shares of the Company's capital stock to be adjusted, or any additional shares of capital stock to be issued, under any antidilution or similar provision. Assuming that, as of the date of this Agreement and as of the Closing Date, no Purchaser "beneficially owns" (as such term is defined in the Rights Agreement) any shares of the Company's capital stock other than (i) shares of the Company's capital stock contemplated to be issued to any such Person pursuant to this Agreement or any Related Agreement, (ii) as reported on any Schedule 13D or Schedule 13G under the Exchange Act filed with the Commission prior to the date of this Agreement or (iii) shares "beneficially owned" (as such term is defined in the Rights Agreement) by any such Purchaser (other than BellSouth and JP Morgan Partners (SIBC), LLC) with respect to which the filing with the Commission of a Schedule 13D or Schedule 13G under the Exchange Act is not required, the consummation of the transactions contemplated by this Agreement and the Related Agreements to be consummated on the date of this Agreement or on the Closing Date will not result in the triggering of any right or entitlement of the holders of shares of Common Stock under the Rights Agreement. Assuming due execution and delivery hereof by the other parties hereto, this Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its 4 terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (ii) general principles of equity that restrict the availability of equitable remedies, and (iii) to the extent that the enforceability of the indemnification provisions contained in Sections 8.3 and 11.1 may be limited by applicable laws. At the Closing, assuming due execution and delivery thereof by the other Persons contemplated to be a party thereto, the Related Agreements will each constitute a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (ii) general principles of equity that restrict the availability of equitable remedies, and (iii) to the extent that the enforceability of any indemnification provisions contained in the Related Agreements similar to the provisions contained in Sections 8.3 and 11.1 may be limited by applicable laws. 2.3 GOVERNMENT APPROVALS. Assuming the representations and warranties of each Purchaser contained in Section 4.1 are true and correct, no consent, approval, license or authorization of, or designation, declaration or filing with, any court or governmental authority is or will be required on the part of the Company in connection with the execution, delivery and performance by the Company of this Agreement and the Related Agreements, or in connection with the issuance of the Purchased Shares or the Conversion Shares upon conversion of the Purchased Shares, except for (i) those which have already been made or granted, (ii) the filing of registration statements with the Securities and Exchange Commission (the "Commission") pursuant to Section 8.2, (iii) filings with applicable state securities commission, (iv) the listing of the Conversion Shares on the Nasdaq National Market and (v) the filings under the HSR Act, if required. 2.4 AUTHORIZED AND OUTSTANDING STOCK. (a) The authorized capital stock of the Company (immediately prior to the Closing) will consist of 200,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $.001 per share (the "Preferred Stock"), of which (x) 2,300,000 shares of Preferred Stock have been designated as Junior Non-Voting Convertible Preferred Stock, Series 1999A (the "1999 Preferred Stock"), (y) 500,000 shares of Preferred Stock have been designated as Series A Junior Participating Preferred Stock and (z) 1,960,784 shares of Preferred Stock have been designated as Series A Preferred Stock. (b) All of the issued and outstanding shares of capital stock of the Company are, and when issued in accordance with the terms hereof, the Purchased Shares and the Conversion Shares will be, duly authorized and validly issued and fully paid and non-assessable, with no personal liability attaching to the ownership thereof. When issued in accordance with the terms hereof and, in the case of the Conversion Shares in accordance with the terms of the Charter and the Certificate of Designation, the Purchased Shares and the Conversion Shares will be free and clear of all Liens imposed by or through the Company, except for restrictions imposed by Federal or state securities or "blue sky" laws and except for those imposed pursuant to this Agreement or any of the Related Agreements. As of the Closing, the designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of the Purchased Shares will be as set forth in the Charter and Certificate of Designation and all such designations, 5 powers, preferences, rights, qualifications, limitations and restrictions will be valid, binding and enforceable in accordance with their terms and in accordance with applicable law. (c) After giving effect to the transactions contemplated herein to occur at the Closing, if no stock options are exercised between the date of this Agreement and the Closing, there will be (w) 70,245,737 issued and outstanding shares of Common Stock, (x) 234,402 issued and outstanding shares of 1999 Preferred Stock (y) no issued and outstanding shares of Series A Junior Participating Preferred Stock and (z) 1,431,373 issued and outstanding shares of Series A Preferred Stock. (d) Except as provided in this Agreement or any of the Related Agreements, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) issued by the Company to purchase or acquire any shares of capital stock of the Company is authorized or outstanding and (ii) there is not any commitment of the Company to issue any subscription, warrant, option, convertible security or other such right. No person or entity is entitled to any preemptive right, right of first refusal or similar rights granted by the Company with respect to the issuance of the Purchased Shares or the Conversion Shares. 2.5 SUBSIDIARIES. The Company owns directly or indirectly, free and clear of all Liens of any nature, all of the issued and outstanding capital stock of each of the Subsidiaries. 2.6 SECURITIES LAW COMPLIANCE. Assuming the representations and warranties of the Purchasers set forth in Section 4.1 hereof are true and correct, the offer and sale of the Purchased Shares and the Conversion Shares (the "Issuable Securities") pursuant to this Agreement is exempt from the registration requirements of the Securities Act. Neither the Company nor any person acting on its behalf has, in connection with the offering of the Issuable Securities, solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Issuable Securities to any person or persons so as to bring the sale of such Issuable Securities by the Company within the registration provisions of the Securities Act or any state securities laws. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Securities Act. 2.7 COMMISSION DOCUMENTS; FINANCIAL INFORMATION. The Company has made available to the Purchasers true and complete copies of all material SEC Documents filed with the Commission. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Securities Act, the Exchange Act and the rules and regulations of the Commission thereunder applicable to such SEC Documents, and as of their respective dates none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company and its subsidiaries included in the SEC Documents (the "Financial Statements") were prepared in accordance with GAAP (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Form 10-Q) and fairly present in all material respects the financial position of the Company as of the date thereof or the results of operations and cash flows for the period then ended. The Disclosure Schedule will be true, complete and correct in all material respects as of the Closing Date. 6 2.8 ABSENCE OF CERTAIN EVENTS; NO MATERIAL ADVERSE CHANGE. Except as disclosed in the SEC Documents, since March 31, 2001, (i) there has not occurred any event or condition having or, that is reasonably likely to have, a Material Adverse Effect and (ii) the Company has operated in the ordinary course of business. Since March 31, 2001 there has not occurred: (a) any declaration or payment of any dividends, or other distributions in respect of the outstanding shares of capital stock of the Company; or (b) any change in the accounting principles, methods, practices or procedures followed by the Company in connection with the business of the Company except as required by GAAP; or (c) any granting by the Company or any of the Subsidiaries to any employee earning in excess of $200,000 per year of any increase in compensation, severance or termination pay, including bonuses, loans and salary advances. (d) For the purposes of subsection (c), all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same Person (including Persons the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amount specified in such subsection. 2.9 LITIGATION. There is no litigation or governmental proceeding or investigation pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries that would be reasonably likely to result in a Material Adverse Effect. The foregoing includes actions pending or threatened against the Company or any of the Subsidiaries involving the prior employment of any of the Company's employees, the use by such employees in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or the obligations of such employees under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 2.10 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. The Company and the Subsidiaries are in compliance with all of the provisions of this Agreement and their respective charters and by-laws (or comparable organizational instruments with different names), and, except as would not be reasonably likely to result in a Material Adverse Effect, neither the Company nor any of the Subsidiaries are in default under any mortgage, indenture, lease, license, other agreement or instrument to which it is a party. The Company and the Subsidiaries conduct their business in compliance with all applicable laws, except for such non-compliances as would not be reasonably likely to result in a Material Adverse Effect. 2.11 NO BROKERS OR FINDERS. Except for J.P. Morgan Chase & Co., whose fees will be paid by the Company pursuant to certain agreements, copies of which have been provided to BellSouth, no person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or claim against or upon the Company, any of the Subsidiaries or any Purchaser for any commission, fee or other compensation as a finder or broker because of any act or omission by the Company or any of the Subsidiaries. 7 2.12 OBLIGATIONS TO RELATED PARTIES. Except as disclosed in SEC Documents, there are no obligations of the Company and its Subsidiaries to officers, directors, shareholders or employees of the Company or the Subsidiaries other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and the Subsidiaries and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company and the Subsidiaries). The Company is not a guarantor or indemnitor of any indebtedness of any other Person. 2.13 PATENTS AND TRADEMARKS. (a) To the best of its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and as presently proposed to be conducted (the "Intellectual Property"), without any infringement of the rights of others with such exceptions as would not be reasonably likely to result in a Material Adverse Effect. (b) As of the date of this Agreement, the Company has not received any communication in writing (or, to the best of the Company's knowledge, other than in writing) alleging that the software to be licensed to BellSouth pursuant to the Commercial Agreement violates any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other Person. (c) The Company has taken all reasonable action to maintain and protect the Intellectual Property and to protect the secrecy and confidentiality of the Intellectual Property. 2.14 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery and performance by the Company of this Agreement and the Related Agreements do not, and the issuance and delivery of the Purchased Shares and of the Conversion Shares will not, with or without the passage of time or giving of notice, result in any material violation, or be in conflict with or constitute a default under any term of the Company's Charter or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument, contract, judgment, decree, order, or writ to which it is party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties, in each case, with such exceptions as would not be reasonably likely to result in a Material Adverse Effect. 2.15 TAXES. (a) The Company and each of the Subsidiaries has paid all federal, state, county, local, foreign and other taxes, including, without limitation, income taxes, withholding taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, property taxes and import duties, whether or not measured in whole or in part by net income ("Taxes" or, individually, a "Tax") which have come due and 8 are required to be paid by it through the date of this Agreement, and all deficiencies or other additions to Tax, interest and penalties owed by it in connection with any such Taxes. (b) The Company and each of the Subsidiaries has timely filed or caused to be filed all returns for Taxes that it is required to file on and through the date of this Agreement (including all applicable extensions), and all such Tax returns are accurate and complete in all material respects. (c) The Company and each of the Subsidiaries has not received any notice of deficiency with respect to any Tax return and, to the knowledge of the Company, no audit is in progress with respect to any return for Taxes, no extension of time is in force with respect to any date on which any return for Taxes was or is to be filed and no waiver or agreement is in force for the extension of time for the assessment or payment of any Tax. (d) There are no liens for Taxes on the assets of the Company except for liens for current Taxes on the assets of the Company or any of the Subsidiaries not yet due or with respect to Taxes being disputed in good faith by the Company for which the Company or any of the Subsidiaries maintains adequate reserves in its Financial Statements. 2.16 EMPLOYEES. The Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. 2.17 NON-DISCLOSURE AND DEVELOPMENT AGREEMENTS. Each current employee and consultant of the Company responsible for the design, development or maintenance of the software to be licensed to BellSouth or its Affiliates pursuant to the Commercial Agreement has executed a Non-Disclosure and Development Agreement in the form(s) as delivered to BellSouth prior to Closing (or, in the case of each consultant, an agreement containing provisions substantially similar to the provisions contained in such form(s)). 2.18 AGREEMENTS WITH STOCKHOLDERS AND REGISTRATION RIGHTS. (a) Except (i) as provided in this Agreement, the Charter and the Related Agreements or (ii) as disclosed in the SEC Documents, there are no agreements, written or oral, between the Company and any holder of its capital stock (other than employees of the Company and its subsidiaries which are not executive officers of the Company). (b) Except as disclosed in the SEC Documents, the Company is presently not under any obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. 2.19 COMPLIANCE WITH LAWS; PERMITS. To the Company's knowledge, the Company and the Subsidiaries are not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of their respective businesses or the ownership of their respective properties which violation is reasonably likely to result in a 9 Material Adverse Effect. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which is reasonably likely to result in a Material Adverse effect and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 2.20 NETWORK REDUNDANCY AND COMPUTER BACK-UP. (a) The Company server hardware and supporting equipment used in the Company's services network provide redundancy and meet in all material respects industry standards relating to availability. (b) The Company has made back-ups of all material computer software and databases utilized by it and maintains such back-ups at a secure off-site location. 2.21 INSURANCE. The Company maintains, as to its properties and business, with what the Company believes to be reputable insurers, valid policies of insurance against such casualties and contingencies and of the kinds and in the amounts that are commercially reasonable. With respect to each such insurance policy: (i) the policy is in full force and effect; (ii) the Company has paid all premiums when due and given all notices required to be given, and no event has occurred which, with notice or the lapse of time, would constitute a material breach or default or otherwise permit termination, cancellation, modification or denial of coverage, under the policy; and (iii) no party to the policy has repudiated any of its provisions. 2.22 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of its subsidiaries, including the Subsidiaries, has taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules and regulations thereunder. To the best of the Company's knowledge, there is not, and there has never been, any employment by the Company or any of its subsidiaries of, or beneficial ownership in the Company or any of its subsidiaries by, any governmental or political official in any country in the world. ARTICLE III COVENANTS OF THE COMPANY Without limiting any other covenants and provisions hereof or as may be otherwise set forth below, the Company covenants and agrees that it will observe the following covenants in accordance with their terms: 3.1 BOARD OF DIRECTORS. For so long as BellSouth owns at least 5% of the issued and outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock), upon written request by BellSouth, the Company shall, at BellSouth's option, either (i) cause the election of, and to thereafter retain in office until such time as BellSouth owns less than 5% of the then issued and outstanding Common Stock (calculated as provided above) a representative designated by BellSouth (a "BellSouth Representative") as a member of its Board of Directors or (ii) permit the BellSouth Representative to attend all meetings of the Company's Board of Directors as an observer. If at any time (i) a BellSouth Representative is serving as a director of the Company and (ii) BellSouth owns less than 5% of the then issued and outstanding Common Stock (calculated as provided above), then, upon the vote of a majority of the Board of Directors (excluding the BellSouth Representative) requesting the BellSouth Representative to resign, BellSouth shall cause such BellSouth Representative to resign from the Company's 10 Board of Directors or vacate such observer position. Without the prior written consent of BellSouth, excluding the BellSouth Representative, the Company's Board of Directors shall be limited to seven members until such time as BellSouth owns less than 5% of the then issued and outstanding Common Stock (calculated as provided above). 3.2 TELECOMMUNICATIONS ACT. For so long as the Company is deemed to be an "affiliate" of BellSouth under the Telecommunications Act, the Company will not enter into any business activity which, by virtue of the company being deemed to be an "affiliate" under the Telecommunications Act, would cause BellSouth to violate the Telecommunications Act. 3.3 RESTRICTED ACTIONS. Without the prior written consent of BellSouth, from the Closing until the second anniversary of the Closing Date, the Company shall not make, solicit, initiate or encourage offers for a business combination that involves a Change in Control of the Company with any Person that directly or indirectly controls one or more telecommunications service providers in Latin America. With respect to any transaction with BellSouth, effective upon consummation of the Closing, the Company shall waive, and the Board of the Company shall authorize the waiver by the Company of, the application of Section 203 of the Delaware General Corporation Law; provided, however, that such waiver shall not apply to any such transaction after the sale by BellSouth of such number of shares of Common Stock or Preferred Stock that BellSouth no longer owns 5% of the issued and outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock). 3.4 PREEMPTIVE RIGHTS. (a) Except in the case of Excluded Securities (as hereinafter defined), the Company shall not, from the Closing until BellSouth no longer owns 5% of the issued and outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock), issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any (i) capital stock, (ii) any other equity security of the Company, (iii) any debt security of the Company which by its terms is convertible into or exchangeable for any equity security of the Company or has any other equity feature, (iv) any security of the Company that is a combination of a debt and equity security or (v) any warrant or other right to subscribe for, purchase or otherwise acquire any security of the Company specified in the foregoing clauses (i) through (v) (an "Equity Financing") unless the Company shall have first offered (the "Offer") to sell to each Major Holder (x) in the case of an acquisition by the Company of any Person (an "Acquisition"), such number of shares of Common Stock as shall be necessary for such Major Holder to maintain the same percentage interest (disregarding, for purposes of determining such percentage, any shares of Common Stock held by such Major Holder other than Purchased Shares and Conversion Shares) in the Company's Common Stock after the consummation of such Acquisition (calculated as though (I) all shares of Preferred Stock are converted into Common Stock and (II) each Major Holder will accept such Offer) (such number of shares of Common Stock, the "Offered Securities"), at a cash purchase price per share of Common Stock equal to (A) the value of the Person being acquired, divided by (B) the number of shares of Common Stock to be issued in connection with such Acquisition (excluding any shares of Common Stock to be issued pursuant to this Section 3.4) (such purchase price per share to be equitably adjusted if any portion of the purchase price to be paid by the Company in connection with such Acquisition will not consist of shares of Common Stock), and on such 11 other material terms and conditions as shall have been reasonably specified by the Company in writing and delivered to such Major Holder or (y) in any case other than an Acquisition, such Major Holder's proportionate percentage (disregarding, for purposes of determining such percentage, any shares of Common Stock held by such Major Holder other than Purchased Shares and Conversion Shares) of the securities specified in the foregoing clauses (i) through (v), based on the number of outstanding shares of Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock) (such portion of such securities to be offered to such Major Holder, the "Offered Securities"), at a price and on such other material terms and conditions as shall have been specified by the Company in writing and delivered to such Major Holder. Each Offer by its terms shall remain open and irrevocable until the tenth business day after delivery of the Offer to the Major Holders (the "Offer Expiration Date"). (b) Notice of any Major Holder's intention to accept, in whole or in part, an Offer shall be evidenced by a writing signed by such Major Holder and delivered to the Company prior to the applicable Offer Expiration Date, setting forth such portion of the Offered Securities as such Major Holder elects to purchase (the "Notice of Acceptance"). (c) In the case of an Acquisition, in the event that the terms and conditions of the proposed Acquisition change such that the purchase price per share of the Offered Securities as calculated in accordance with Section 3.4(a)(x) above would be reduced by more than 5%, the Company shall make a new Offer to sell the Offered Securities to such Major Holders in accordance with Section 3.4(a)(x). (d) In any case other than an Acquisition, in the event that Notices of Acceptance are not given by the Major Holders in respect of all the Offered Securities, the Company shall have 180 days from the applicable Offer Expiration Date to sell all or any part of such Offered Securities as to which no Notice of Acceptance has been given by any Major Holder (the "Refused Securities") to any other Person or Persons, but only upon terms and conditions in all material respects, including, without limitation, price and interest rates, which are no more favorable, in the aggregate, to such other Person or Persons and no less favorable to the Company than those set forth in the Offer. Simultaneously with the closing of the sale to such other Person or Persons of all the Refused Securities (or, in the case of an Acquisition, simultaneous with the closing of such Acquisition), each Major Holder shall purchase from the Company, and the Company shall sell to such Major Holder, the Offered Securities in respect of which a Notice of Acceptance was delivered to the Company by such Major Holder, on the terms and conditions specified in the Offer; provided, however, that, in the case of an Acquisition, if Notices of Acceptance are not given in respect of all Offered Securities, the number of Offered Securities to be sold by the Company to any Major Holder shall not exceed such number of Offered Securities as shall be necessary for such Major Holder to maintain the same percentage interest (disregarding, for purposes of determining such percentage, any shares of Common Stock held by such Major Holder other than Purchased Shares and Conversion Shares) in the Company's Common Stock after the consummation of such Acquisition (calculated as though all shares of Preferred Stock are converted into Common Stock). The rights of the Major Holders under this Section 3.4 shall not apply to the grant or issuance of the following securities (the "Excluded Securities"): 12 (i) stock options granted to officers, directors, employees and consultants of the Company or its subsidiaries pursuant to stock option plans of the Company and the issuance of shares of Common Stock upon exercise of such stock options; (ii) shares of Common Stock issued upon conversion of shares of Series A Junior Participating Preferred Stock, Series A Preferred Stock or 1999 Preferred Stock; or upon exercise of any warrants or options issued to BellSouth; including in each case, any additional shares of Common Stock that may be issued as a result of antidilution provisions, if any, applicable to such shares, warrants or options, as the case may be; (iii) capital stock issued as a stock dividend or upon any stock split or other subdivision or combination of shares of capital stock; (iv) shares of Common Stock issued pursuant to contractual obligations of the Company currently in effect (including any contractual obligations pursuant to (a) that certain Securities Purchase Agreement, dated as of the date of this Agreement, by and between the Company and Primedia, Inc. and (b) that certain Content License Agreement (Starmedia Web Sites), dated as of the date of this Agreement, by and between the Company, About.com, Inc. and Primedia Magazines Inc.); and (v) shares of Series A Preferred Stock issued pursuant to Section 1.4 of this Agreement. (e) Notwithstanding anything to the contrary contained herein, for purposes of this Agreement, in the event of any determination prior to the third anniversary of the Closing Date that BellSouth does not hold at least 5% of the then issued and outstanding Common Stock of the Company (calculated as though all shares of Preferred Stock are converted into Common Stock), if (i) the Commercial Agreement has not been terminated, and (ii) BellSouth would hold at least 5% of such shares had it been permitted to purchase additional shares of Common Stock pursuant to this Section 3.4, but for the operation of Sections 3.4(d)(iv), BellSouth shall be deemed to hold at least 5% of the issued and outstanding Common Stock of the Company (calculated as provided above). 3.5 EMPLOYEE, OFFICER AND DIRECTOR LOANS. Until the date on which BellSouth no longer holds at least 5% of the issued and outstanding Common Stock of the Company (calculated as though all shares of Preferred Stock are converted into Common Stock), without the prior written consent of BellSouth, the Company shall not make loans to (i) any of the executive officers or directors of the Company or (ii) any employee (other than an executive officer or director) of the Company in an aggregate amount for all such employees of more than $500,000. 3.6 INFORMATION. The Company shall provide BellSouth with such information as BellSouth may reasonably request from time to time to permit BellSouth and its Affiliates to comply with its accounting and tax reporting requirements, including information regarding the Company's foreign subsidiaries. 3.7 OPTIONS. Until the date on which BellSouth no longer holds 5% of the issued and outstanding Common Stock of the Company (calculated as though all shares of Preferred Stock 13 are converted into Common Stock), without the prior written consent of BellSouth, the Company shall not grant any options to purchase shares of Common Stock with an exercise price per share which is less than the fair market value of a share of Common Stock on the date such option is granted. ARTICLE IV INVESTMENT REPRESENTATIONS 4.1 REPRESENTATIONS AND WARRANTIES. (a) Each Purchaser, severally and not jointly, hereby represents and warrants to the Company, understanding and agreeing that the Company is entering into this Agreement in part in reliance on such representations and warranties, as follows: (i) Such Purchaser is an "Accredited Investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act; (ii) Such Purchaser is duly authorized to execute this Agreement and the Related Agreements to which such Purchaser is a party, and assuming due execution and delivery by the Company of the Agreement, this Agreement constitutes legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions contained in Sections 8.3 and 11.1 may be limited by applicable laws; (iii) At the Closing, assuming due execution and delivery thereof by the other Persons contemplated to be a party thereto, the Related Agreements to which such Purchaser is a party will each constitute a valid and binding obligation of the Purchasers enforceable against each Purchaser in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (ii) general principles of equity that restrict the availability of equitable remedies, and (iii) to the extent that the enforceability of any indemnification provisions contained in the Related Agreements similar to the provisions contained in Sections 8.3 and 11.1 may be limited by applicable laws; (iv) Such Purchaser has been advised by the Company that the Purchased Shares and the Conversion Shares have not been registered under the Securities Act, that the Purchased Shares and the Conversion Shares will be issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any federal or state agency or self-regulatory organization where an exemption is being relied upon, and that the Company's reliance thereon is based in part upon the representations made by such Purchaser in this Agreement and the Related Agreements. Such Purchaser acknowledges that it has been informed by the Company 14 of, or is otherwise familiar with, the nature of the limitations imposed by the Securities Act and the rules and regulations thereunder on the transfer of securities; (v) Such Purchaser is purchasing the Purchased Shares and, if applicable, the Conversion Shares for investment purposes, for its own account and not with a view to, or for sale in connection with, any distribution thereof in violation of federal or state securities laws; (vi) Such Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Such Purchaser must bear the economic risk of this investment indefinitely unless the Purchased Shares (or the Conversion Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. Such Purchaser understands that the Company has no present intention of registering the Purchased Shares or the Conversion Shares unless and to the extent it is required to do so pursuant to Article VIII. Such Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow such Purchaser to transfer all or any portion of the Purchased Shares or the Conversion Shares under the circumstances, in the amounts or at the times such Purchaser might propose. Such Purchaser represents that by reason of its, or of its management's, business or financial experience, such Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement and the Related Agreements. Further, such Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement; (vii) Such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. Each Purchaser acknowledges to the Company and BellSouth that it is relying entirely on its own due diligence investigation of the Company and is not relying on any due diligence investigation or representation made by BellSouth or any other Purchaser. Such Purchaser has also had the opportunity to ask questions of, and receive answers to the Purchaser's satisfaction from, the Company and its management regarding the terms and conditions of this investment; (viii) Such Purchaser acknowledges and agrees that the Purchased Shares and, if issued, the Conversion Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Such Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations; 15 (ix) Such Purchaser acknowledges and agrees that the Purchased Shares and, if issued, the Conversion Shares are subject to restrictions on transfer as set forth in this Agreement and the Related Agreements; (x) No person has or will have, as a result of the transaction contemplated by this Agreement, any right, interest or claim against or upon such Purchaser, the Company, or any of its subsidiaries for any commission, fee or other compensation as a finder or broker because of any act or omission by the Purchaser. (b) BellSouth represents and warrants to the Company that, except as contemplated by this Agreement, neither it nor any of its affiliates and associates (as such terms are defined in Rule 12b-2 under the Exchange Act) beneficially owns, directly or indirectly, any shares of Common Stock or Preferred Stock for purposes of Rule 13d-3 under the Exchange Act. 4.2 PERMITTED SALES; LEGENDS. Notwithstanding the foregoing representations, the Company agrees that it will permit a sale or other transfer of any of the Purchased Shares and Conversion Shares if such transaction is exempt from the registration requirements of, or is covered by an effective registration statement under, the Securities Act and applicable state securities or "blue-sky" laws. The certificates representing the Purchased Shares and the Conversion Shares shall bear a legend evidencing such restriction on transfer substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION WITHIN THE UNITED STATES AND ITS TERRITORIES, POSSESSIONS OR THE SECURITIES LAWS OF ANY FOREIGN JURISDICTION. NEITHER THESE SECURITIES NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN OPINION OF COUNSEL SATISFACTORY TO STARMEDIA NETWORK, INC. IS RECEIVED STATING THAT SUCH TRANSACTION IS NOT SUBJECT TO THE REGISTRATION AND/OR PROSPECTUS DELIVERY REQUIREMENTS OF ANY SUCH JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT STARMEDIA NETWORK, INC. MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY SECTION 4(2) THEREUNDER AND/OR THE PROVISIONS OF REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933. ARTICLE V CONDITIONS OF PURCHASERS' OBLIGATION 5.1 EFFECT OF CONDITIONS. The obligation of the Purchasers to purchase and pay for the Purchased Shares at the Closing shall be subject at their election to the satisfaction of each of 16 the conditions stated in the following Sections of this Article V (except, in the case of BellSouth, for the condition set forth in Section 5.5). 5.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on the date of the Closing with the same effect as though made on and as of that date, except for representations and warranties which speak as of a specified date, which shall be true and correct in all material respects as of such specified date. 5.3 PERFORMANCE. The Company shall have performed and complied in all material respects with all of the agreements, covenants and conditions contained in this Agreement required to be performed or complied with by it at or prior to the Closing. 5.4 CERTIFIED DOCUMENTS, ETC. Counsel for the Purchasers shall have received a copy of the Charter, certified by the Secretary of State of the State of Delaware, and copies of the Company's By-Laws and the Certificate of Designation, each certified by its Secretary, as well as any and all other documents, including certificates of incumbency of officers and certificates from appropriate authorities as to the legal existence and good standing of the Company, that the Purchasers or their counsel may reasonably request. 5.5 BELLSOUTH CONDITIONS. Each of the conditions to BellSouth's obligations set forth in this Article V and in Article VI shall be satisfied or waived. ARTICLE VI CONDITIONS OF BELLSOUTH'S OBLIGATION 6.1 EFFECT OF CONDITIONS. In addition to the conditions set forth in Article V (other than Section 5.5), the obligation of BellSouth to purchase and pay for the Purchased Shares at the Closing shall be subject at its election to the satisfaction of each of the conditions stated in the following Sections of this Article VI. 6.2 COMMERCIAL AGREEMENT. The Company shall have executed and delivered to BellSouth the Commercial Agreement, previously executed by BellSouth. 6.3 AGGREGATE INVESTMENT. Purchasers shall have agreed by signing this Agreement, subject to the conditions to Closing contemplated in this Agreement, to purchase Purchased Shares for an aggregate purchase price of no less than $35 million. 6.4 NO MATERIAL ADVERSE EFFECT. From and after the date hereof until the Closing, there shall not have occurred a Material Adverse Effect. 6.5 OPINION. BellSouth shall have received an opinion, dated the Closing Date, from the General Counsel of the Company, in the form of EXHIBIT C. 17 ARTICLE VII CONDITIONS OF THE COMPANY'S OBLIGATION 7.1 EFFECT OF CONDITIONS. The Company's obligation to sell the Purchased Shares shall be subject at its election to the satisfaction of each of the conditions stated in the following Sections of this Article VII. 7.2 REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations and warranties of each Purchaser contained in this Agreement shall be true and correct in all material respects on the date of the Closing with the same effect as though made on and as of that date, except for representations and warranties which speak as of a specified date, which shall be true and correct in all material respects as of such specified date. 7.3 CERTIFIED DOCUMENTS, ETC. Counsel for the Company shall have received from each Purchaser (other than any Purchaser who is an individual) a copy of such Purchaser's certificate of incorporation, certified by the appropriate Secretary of State, and a copy of such Purchaser's By-Laws, certified by such Purchaser's Secretary, as well as any and all other documents, including certificates of incumbency of officers and certificates from appropriate authorities as to the legal existence and good standing of such Purchaser, that the Company or its counsel may reasonably request. 7.4 CONSIDERATION FOR THE SHARES. Each of the Purchasers shall have paid the purchase price of the Purchased Shares to be purchased by such Purchaser in full at the Closing either by certified check or by wire transfer of immediately available funds to an account designated in writing by the Company. 7.5 PERFORMANCE. The Purchasers shall have performed and complied in all material respects with all of the agreements, covenants and conditions contained in this Agreement required to be performed or complied with by them at or prior to the Closing. 7.6 AGGREGATE INVESTMENT. Purchasers shall have agreed by signing this Agreement, subject to the conditions to Closing contemplated in this Agreement, to purchase Purchased Shares for an aggregate purchase price of no less than $35 million. ARTICLE VIII REGISTRATION RIGHTS AGREEMENT 8.1 CERTAIN DEFINITIONS. As used in this Article VIII, the following terms shall have the following meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Registrable Securities" means any of (i) Conversion Shares, (ii) the Other Shares and (iii) any other securities issued or issuable with respect to the Conversion Shares or the Other Shares by way of stock dividend or stock split or in connection with a combination of shares, 18 recapitalization, merger, consolidation or other reorganization or otherwise. Any Registrable Security will cease to be a Registrable Security when (a) a registration statement covering such Registrable Security has been declared effective under the Securities Act by the Commission and such Registrable Security has been disposed of pursuant to such effective registration statement, (b) such Registrable Security may be resold, without any limitation as to volume, pursuant to Rule 144 under the Securities Act (or a comparable successor rule or regulation), or otherwise may be publicly resold without registration under the Securities Act and without any limitation as to volume or other material restriction, or (c) such Registrable Security is no longer held by the Purchaser to which it was issued pursuant to this Agreement. The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registering Purchasers" shall mean those Purchasers and/or Permitted Transferees registering their Registrable Securities under the Securities Act pursuant to this Article VIII. "Registration Expenses" shall mean all expenses, incurred by the Company in complying with Section 8.2.1, 8.2.2 or 8.2.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, stock transfer taxes applicable to the securities registered by each Purchaser and the expense of any special audits incident to or required by any such registration; provided, however, that the Registration Expenses shall not include any and all Selling Expenses or any other expenses of the Purchasers. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts and selling commissions in connection with the sale by the Registering Purchasers of Registrable Securities. 8.2 REGISTRATION. 8.2.1 DEMAND REGISTRATION. (a) Subject to the terms and conditions of this Agreement, on or after the earlier of (i) the first anniversary of the Closing Date or (ii) the registration of shares of Common Stock (other than Broker Shares) held by the Founders or any shareholder holding at least 5% of the Company's then outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock), the Purchasers or their Permitted Transferees holding in the aggregate at least 40% of the outstanding Registrable Securities may make two (2) written request to the Company for registration under the Securities Act of the sale of Registrable Securities held by such Registering Purchasers (the "Demand Registration"); provided that (i) BellSouth shall be one of the Purchasers making such request and (ii) the Company shall not be obligated to effect more than one (1) Demand Registration pursuant to this Agreement within any 12-month period. Promptly following receipt of any request for a Demand Registration under this Section 8.2.1(a), the Company shall immediately notify any holders of Registrable 19 Securities from whom a request for a Demand Registration has not been received and shall include in such Demand Registration such Registrable Securities as such holders may specify in writing within 10 Business Days after receipt of such notice. The Company shall use its reasonable best efforts to cause such registration statement to become effective as soon as possible and remain effective for the period ending on the earlier of (i) 90 days from the date of effectiveness of said registration statement and (ii) the sale of all of Registrable Securities held by such Registering Purchasers. (b) The Company shall have the right to include its securities sold on its behalf or on behalf of any other stockholder in any registration initiated as a Demand Registration; provided that: (i) such securities are of the same class as the Registrable Securities included in such registration; (ii) if any of the Registrable Securities covered by such registration are sold in an underwritten offering, the Company or such other stockholder agrees in writing to sell its securities on the same terms and conditions as apply to the Registrable Securities being sold; and (iii) if any of the Registrable Securities covered by such registration are to be sold in an underwritten offering and the managing underwriter of such underwritten offering reasonably determines in good faith and advises the parties that the inclusion in such underwritten offering of all the securities proposed to be included in such offering would materially and adversely affect the success of the underwritten offering, then the Company shall include in such registration (but only to the extent of the number of securities that the Company is so advised can reasonably be sold in such offering), FIRST all Registrable Securities duly requested to be registered in such Demand Registration, SECOND any securities the Company is required to register pursuant to the Registration Rights Agreement, THIRD any other securities held by Persons who received contractual registration rights with respect thereto prior to the date of this Agreement, FOURTH any securities that the Company wishes to register for its own account and FIFTH any securities held by Persons who received contractual registration rights with respect thereto after the date of this Agreement; in each case, determined on a pro rata basis if there is more than one holder of such Registrable Securities or securities, as the case may be. Whenever a registration requested pursuant to this Section is for an underwritten offering, only securities which are to be distributed by the underwriters may be included in the registration. (c) The Company shall have the right to select the managing underwriter to administer the Demand Registration if such Demand Registration is an underwritten offering, subject to the approval of BellSouth, which approval shall not be unreasonably withheld or delayed. The Registering Purchasers and the Company shall enter into an underwriting agreement in such customary form as shall have been negotiated and agreed to by the Company with the underwriter or underwriters selected for such underwriting, provided that (x) the Registering Purchasers shall have the right to negotiate the economic terms of the offering and (y) such underwriting agreement shall be approved by the Registering Purchasers, such approval not to be unreasonably withheld or delayed. (d) Notwithstanding anything to the contrary in this Agreement, the Company will be entitled to postpone the filing of a registration statement required to be filed by it pursuant to this Agreement for ninety (90) days, if (i) at any time prior to the filing of such registration statement a majority of the Board of Directors of the Company determines, in its good faith business judgment, that such registration and offering is reasonably likely to materially interfere with or otherwise have a material adverse effect on any financing, 20 acquisition, corporate reorganization or other material transaction or development involving the Company or any of its subsidiaries and (ii) the Company gives the Registering Purchasers written notice of such postponement, provided that such postponements may not in any 365-day period occur more than once, and, provided further, that in the event of any such withdrawal or termination of effectiveness, such registration shall not act as a registration effected for purposes of Section 8.2.1(a). Any such notice need not specify the reasons for such suspension if a majority of the Board of Directors of the Company determines, in its good faith business judgment, that doing so would interfere with or adversely affect such transaction or development or would result in the disclosure of material non-public information. In the event of such postponement, the Company will file such registration statement as soon as practicable after it determines, in its good faith business judgment, that such registration and offering will not interfere with the matters described in the first sentence of this Section 8.2.1(d), but in no event more than ninety (90) days after that date that such registration statement would otherwise have been filed, provided that the Registering Purchasers shall have the right to withdraw their request for Demand Registration by giving written notice to the Company within ninety (90) days of receipt of the notice of postponement, and in the event of such withdrawal, the request so withdrawn shall be deemed to have not been made. (e) Each Registration Statement in respect of a Demand Registration will be for the offering and sale of such Registrable Securities on such basis as the Registering Purchasers reasonably request; provided, however, that, except as expressly set forth herein, the Company shall not be required to register such Registrable Securities on a continuous or delayed basis pursuant to Rule 415 under the Securities Act. (f) The Company shall promptly prepare and file with the Commission such amendments to the registration statements as may be necessary to keep such registration statements effective in accordance with this Section 8.2.1. (g) Notwithstanding anything to the contrary in this Agreement, if at any time after the filing of a registration statement, before or after it is declared effective by the Commission, a majority of the Board of Directors of the Company determines, in its good faith business judgment, that such registration and the offering of Registrable Securities covered by such registration statement is reasonably likely to materially interfere with or otherwise have a materially adverse effect on any financing, acquisition, corporate reorganization or other material transaction or development involving the Company or any of its affiliates or require the Company to disclose matters that otherwise would not be required to be disclosed at such time, then the Company may require that no distribution of any Registrable Securities be initiated or continued, as the case may be (a "Blackout Period"), by giving written notice to the Registering Purchasers. Any such notice need not specify the reasons for such suspension if a majority of the Board of Directors of the Company determines, in its good faith business judgment, that doing so would interfere with or adversely affect such transaction or development. In the event that such notice is given, then until a majority of the Board of Directors of the Company has determined, in its good faith business judgment, that such registration and distribution would no longer materially interfere with the matters described in the preceding sentence and has given written notice thereof to the Registering Purchasers, the Company's obligations under this Article VIII will be suspended, provided, that such suspension shall not exceed the first to occur of (x) the filing of the Company's next filing with the Commission and (y) ninety (90) days. The 21 Company shall extend the period of time the Company is required to maintain effective any registration statement required pursuant to Section 8.2.1 by a length of time equal to the aggregate length of the Blackout Periods. In the event of any suspension of a registration pursuant to this Section 8.2.1(g), the Registering Purchasers shall be entitled to withdraw from such registration upon written notice to the Company, and in the event of such withdrawal, the request so withdrawn shall be deemed to have not been made. 8.2.2 S-3 REGISTRATION. (a) Subject to the terms and conditions of this Agreement, on or after the 60th day after the Closing Date (or, in the case of any S-3 Purchaser who purchased Purchased Shares after the Closing Date, the 60th day after the closing of such purchase) until the first anniversary of the Closing Date (or, in the case of any S-3 Purchaser who purchased Purchased Shares after the Closing Date, the first anniversary of the closing of such purchase), any S-3 Purchaser may make one (1) written request to the Company for registration on Form S-3 or any successor thereto under the Securities Act of the sale of Registrable Securities held by such S-3 Purchaser (the "S-3 Registration"); provided that (i) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such Registrable Securities, (ii) the Company shall not be obligated to effect any S-3 Registration unless the proceeds to be realized in connection with such S-3 Registration shall not reasonably be expected to be less than $1,000,000, (iii) the Company shall not be obligated to effect more than two (2) S-3 Registrations pursuant to this Agreement and (iv) the Company shall not be obligated to effect more than one (1) S-3 Registration pursuant to this Agreement within any 4-month period. Promptly following receipt of any request for an S-3 Registration under this Section 8.2.2(a), the Company shall immediately notify any S-3 Purchasers holding Registrable Securities from whom a request for an S-3 Registration has not been received and shall include in such S-3 Registration such Registrable Securities as such S-3 Purchasers may specify in writing within 10 Business Days after receipt of such notice; provided, however, that the Company shall not be obligated to so notify any S-3 Purchaser or to so include such S-3 Purchaser's Registrable Securities after the first year anniversary of the Closing Date (or, in the case of any S-3 Purchaser who purchased Purchased Shares after the Closing Date, the first anniversary of the closing of such purchase). The Company shall use its reasonable best efforts to cause such registration statement to become effective as soon as possible and remain effective for the period ending on the earlier of (i) 90 days from the date of effectiveness of said registration statement and (ii) the sale of all of Registrable Securities held by such Registering Purchasers. (b) The Company shall have the right to include its securities sold on its behalf or on behalf of any other stockholder in any registration initiated as an S-3 Registration; provided that: (i) such securities are of the same class as the Registrable Securities included in such registration; (ii) if any of the Registrable Securities covered by such registration are sold in an underwritten offering, the Company or such other stockholder agrees in writing to sell its securities on the same terms and conditions as apply to the Registrable Securities being sold; and (iii) if any of the Registrable Securities covered by such registration are to be sold in an underwritten offering and the managing underwriter of such underwritten offering reasonably determines in good faith and advises the parties that the inclusion in such underwritten offering of all the securities proposed to be included in such offering would materially and adversely affect the success of the underwritten offering, then the Company shall include in such 22 registration (but only to the extent of the number of securities that the Company is so advised can reasonably be sold in such offering), FIRST all Registrable Securities duly requested to be registered in such S-3 Registration, SECOND any securities the Company is required to register pursuant to the Registration Rights Agreement or Section 8.2.3, THIRD any other securities held by Persons who received contractual registration rights with respect thereto prior to the date of this Agreement, FOURTH any securities that the Company wishes to register for its own account and FIFTH any securities held by Persons who received contractual registration rights with respect thereto after the date of this Agreement; in each case, determined on a pro rata basis if there is more than one holder of such Registrable Securities or securities, as the case may be. Whenever a registration requested pursuant to this Section is for an underwritten offering, only securities which are to be distributed by the underwriters may be included in the registration. (c) The Company shall have the right to select the managing underwriter to administer the S-3 Registration if such S-3 Registration is an underwritten offering. The Registering Purchasers and the Company shall enter into an underwriting agreement in such customary form as shall have been negotiated and agreed to by the Company with the underwriter or underwriters selected for such underwriting, provided that (x) the Registering Purchasers shall have the right to negotiate the economic terms of the offering and (y) such underwriting agreement shall be approved by the Registering Purchasers, such approval not to be unreasonably withheld or delayed. (d) Notwithstanding anything to the contrary in this Agreement, the Company will be entitled to postpone the filing of a registration statement required to be filed by it pursuant to this Agreement for ninety (90) days, if (i) at any time prior to the filing of such registration statement a majority of the Board of Directors of the Company determines, in its good faith business judgment, that such registration and offering is reasonably likely to materially interfere with or otherwise have a material adverse effect on any financing, acquisition, corporate reorganization or other material transaction or development involving the Company or any of its subsidiaries and (ii) the Company gives the Registering Purchasers written notice of such postponement, provided that such postponements may not in any 365-day period occur more than once, and, provided further, that in the event of any such withdrawal or termination of effectiveness, such registration shall not act as a registration effected for purposes of Section 8.2.2(a). Any such notice need not specify the reasons for such suspension if a majority of the Board of Directors of the Company determines, in its good faith business judgment, that doing so would interfere with or adversely affect such transaction or development or would result in the disclosure of material non-public information. In the event of such postponement, the Company will file such registration statement as soon as practicable after it determines, in its good faith business judgment, that such registration and offering will not interfere with the matters described in the first sentence of this Section 8.2.2(d), but in no event more than ninety (90) days after that date that such registration statement would otherwise have been filed, provided that the Registering Purchasers shall have the right to withdraw their request for S-3 Registration by giving written notice to the Company within ninety (90) days of receipt of the notice of postponement, and in the event of such withdrawal, the request so withdrawn shall be deemed to have not been made. (e) Each Registration Statement in respect of an S-3 Registration will be for the offering and sale of such Registrable Securities on such basis as the Registering Purchasers 23 reasonably request; provided, however, that, except as expressly set forth herein, the Company shall not be required to register such Registrable Securities on a continuous or delayed basis pursuant to Rule 415 under the Securities Act. (f) The Company shall promptly prepare and file with the Commission such amendments to the registration statements as may be necessary to keep such registration statements effective in accordance with this Section 8.2.2. (g) Notwithstanding anything to the contrary in this Agreement, if at any time after the filing of a registration statement, before or after it is declared effective by the Commission, a majority of the Board of Directors of the Company determines, in its good faith business judgment, that such registration and the offering of Registrable Securities covered by such registration statement is reasonably likely to materially interfere with or otherwise have a materially adverse effect on any financing, acquisition, corporate reorganization or other material transaction or development involving the Company or any of its affiliates or require the Company to disclose matters that otherwise would not be required to be disclosed at such time, then the Company may require that no distribution of any Registrable Securities be initiated or continued, as the case may be (also, a "Blackout Period"), by giving written notice to the Registering Purchasers. Any such notice need not specify the reasons for such suspension if a majority of the Board of Directors of the Company determines, in its good faith business judgment, that doing so would interfere with or adversely affect such transaction or development. In the event that such notice is given, then until a majority of the Board of Directors of the Company has determined, in its good faith business judgment, that such registration and distribution would no longer materially interfere with the matters described in the preceding sentence and has given written notice thereof to the Registering Purchasers, the Company's obligations under this Article VIII will be suspended, provided, that such suspension shall not exceed the first to occur of (x) the filing of the Company's next filing with the Commission and (y) ninety (90) days. The Company shall extend the period of time the Company is required to maintain effective any registration statement required pursuant to Section 8.2.2 by a length of time equal to the aggregate length of the Blackout Periods. In the event of any suspension of a registration pursuant to this Section 8.2.2(g), the Registering Purchasers shall be entitled to withdraw from such registration upon written notice to the Company, and in the event of such withdrawal, the request so withdrawn shall be deemed to have not been made. 8.2.3 PIGGYBACK REGISTRATION. (a) If at any time during the period commencing on the earlier of (i) the first anniversary of the Closing Date or (ii) the registration of shares of Common Stock (other than Broker Shares) held by the Founders or any shareholder holding at least 5% of the Company's then outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock) and terminating on the fifth anniversary of the Closing Date, during which a registration statement filed pursuant to Section 8.2.1 or (unless the applicable registration is a registration as described in clause (ii) of this Section 8.2.3(a)) Section 8.2.2 above is not effective, the Company proposes to register any shares of Common Stock under the Securities Act in connection with an underwritten offering, either for its own account or the account of a security holder or holders exercising their registration rights (except pursuant to (a) 24 Section 8.2.1 of this Agreement, (b) unless the applicable registration is a registration as described in clause (ii) of this Section 8.2.3(a), Section 8.2.2 of this Agreement or (c) a registration statement filed on Form S-4 or Form S-8 or such other form as shall be prescribed under the Securities Act for the same purposes), the Company will promptly at each such time give written notice to each Purchaser of its intention to do so. Within twenty (20) days after receipt of such notice, each Purchaser may request that the Company register all or part of the Registrable Securities (the "Designated Shares"). Upon receipt of such request, the Company shall use its reasonable best efforts to effect the registration of the Designated Shares identified by including such Designated Shares in such registration statement. (b) In the event that securities of the same class as the Designated Shares are being registered by the Company in such registration statement and such securities as well as any of the Designated Shares are to be distributed in an underwritten offering, such Designated Shares shall be included in such underwritten offering on the same terms and conditions as the securities being issued by the Company or sold by the applicable security holder for distribution pursuant to such underwritten offering; PROVIDED, HOWEVER, that if the managing underwriter of such underwritten offering reasonably determines in good faith and advises the parties that the inclusion in such underwritten offering of all the securities proposed to be included in such offering would materially and adversely affect the success of the underwritten offering, then the Company shall include in such registration (but only to the extent of the number of securities that the Company is so advised can reasonably be sold in such offering) (i) if the Company is registering securities in such offering pursuant to Section 4 or Section 5 of the Registration Rights Agreement, FIRST any securities the Company is required to register pursuant to the Registration Rights Agreement, SECOND (a) any other securities held by Persons who received contractual registration rights with respect thereto prior to the date of this Agreement and (b) any Designated Shares, THIRD any securities that the Company wishes to register for its own account and FOURTH any securities held by Persons who received contractual registration rights with respect thereto after the date of this Agreement, (ii) if the Company is registering securities in such offering pursuant to Section 8.2.2, in accordance with clause (iii) of Section 8.2.2(b), or (iii) otherwise, FIRST any securities that the Company wishes to register for its own account, SECOND (a) any Designated Shares or (b) any securities the Company is required to register pursuant to the Registration Rights Agreement, THIRD any other securities held by Persons who received contractual registration rights with respect thereto prior to the date of this Agreement and FOURTH any securities held by Persons who received contractual registration rights with respect thereto after the date of this Agreement; in the case of clauses (i), (ii) and (iii), determined on a pro rata basis if there is more than one holder of such securities or Designated Shares, as the case may be. 8.2.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with registrations pursuant to Sections 8.2.1, 8.2.2 and 8.2.3 shall be borne by the Company. Subject to Section 11.6, Selling Expenses shall be borne by each Registering Purchaser based upon the number of Registrable Securities registered by each Registering Purchaser on such registration statement. 8.2.5 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep the Registering Purchasers advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. The Company will: 25 (a) Prepare and furnish to each Registering Purchaser and to the underwriters (if any) of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus (any supplements or revisions thereto required under the Securities Act) and such other documents as each Registering Purchaser and underwriters may reasonably request in order to facilitate the public offering of such securities and make the Company's representatives and the Company's counsel available for discussion of such document and make such changes in such document relating to the Registering Purchaser prior to the filing thereof as each Registering Purchaser, counsel for each Registering Purchaser, or underwriters may reasonably request. (b) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by each Registering Purchaser, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (c) Notify each Registering Purchaser at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and to promptly prepare and file all amendments or supplements and related revised prospectuses as shall be required under the Securities Act as a result of such untrue statements or omissions. (d) Use its reasonable best efforts to comply with all applicable federal and state securities laws (including without limitation the rules and regulations of the Commission), and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act no later than forty-five (45) days after the end of a twelve (12) month period after the Closing Date (or within ninety (90) days after the end of a fiscal year). (e) At the request of each Registering Purchaser, use its reasonable best efforts to furnish on the date that the Registrable Securities are delivered to any underwriter for sale in connection with a registration pursuant to this Agreement (i) an opinion of the counsel representing the Company for the purposes of such registration, and (ii) a letter from the independent certified public accountants of the Company, each dated such date and in form and substance as is customarily given by counsel and independent certified public accountants to underwriters in an underwritten public offering, addressed to each Registering Purchaser's underwriter and to each Registering Purchaser. The Registering Purchasers, upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph (c) above, will forthwith discontinue, and cause their respective Affiliates to discontinue, disposition of the Registrable Securities until the Registering Purchasers' receipt of the copies of the supplemented or amended prospectus contemplated by paragraph (c) above or until they are advised in writing by the Company that the use of the prospectus may be resumed and have received copies of any additional or 26 supplemental filings which are incorporated by reference in the prospectus. If so directed by the Company, the Registering Purchasers will deliver to the Company or destroy all copies, other than permanent file copies then in the possession of the Registering Purchasers or their respective Affiliates, of the prospectus required to be supplemented or amended. 8.3 INDEMNIFICATION. (a) With respect to any registration of Registrable Securities, the Company will indemnify each Registering Purchaser, its officers and directors and each person controlling such Registering Purchaser within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act, the Securities Exchange Act, state securities law or any rule or regulation promulgated under such laws applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each Registering Purchaser, each of their officers, directors and partners, and each person controlling such Registering Purchaser, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, whether or not resulting in any liability, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Registering Purchaser, controlling person or underwriter and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus, such indemnity agreement shall not inure to the benefit of any underwriter, or such Registering Purchaser or such controlled persons, if there is no underwriter, if a copy of the final prospectus filed with the Commission pursuant to its Rule 424(b) was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, and if such final prospectus cured the untrue statement, alleged untrue statement, omission or alleged omission giving rise to the loss, liability, claim or damage. (b) With respect to any registration of Registrable Securities, each Registering Purchaser will indemnify, severally and not jointly, the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such registration statement, and each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act against all expenses, claims, losses, damages and liabilities (or 27 actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Registering Purchaser and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Registering Purchaser under this Section 8.3(b) shall be limited to and in proportion to an amount equal to the net proceeds received by such Registering Purchaser from the sale of the Registrable Securities sold by the Registering Purchaser pursuant to such registration statement. In no event will a Registering Purchaser be required to enter into any agreement or undertaking for the benefit of the Company in connection with any registration under this Agreement providing for any indemnification or contribution obligations on the part of the Purchaser greater than the Registering Purchaser's obligations under this Section 8.3(b). (c) Each party entitled to indemnification under this Section 8.3 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably be withheld or delayed), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action, and provided further that the Indemnifying Party shall not assume the defense for matters as to which representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate due to actual or potential differing interests between them, but shall instead in such event pay the fees and costs of separate counsel for the Indemnified Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party shall be entitled to indemnification from any Indemnifying Party for any amounts paid in any settlement effected without the consent of the Indemnifying Party. (d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Party or any officer, director or controlling person of such Indemnified Party. 28 8.4 PURCHASER CONDITIONS. The Company's obligations to the Registering Purchasers under this Article VIII (other than Section 8.3) will be conditioned on compliance with the following: (a) The Registering Purchasers and their respective Affiliates will cooperate with the Company in connection with the preparation of the applicable registration statement, and for so long as the Company is obligated to keep such registration statement effective, the Registering Purchasers and their respective Affiliates will provide to the Company, in writing and in a timely manner, for use in such registration statement (and expressly identified in writing as such), all information regarding themselves and their respective Affiliates and such other information as may be required by applicable law to enable the Company to prepare such registration statement and the related prospectus covering the applicable Registrable Securities owned by the Registering Purchasers and to maintain the currency and effectiveness thereof, so long as the Company executes a confidentiality agreement in form and substance reasonably satisfactory to the Registering Purchasers in the event any confidential information is requested by the Company. (b) During such time as the Registering Purchasers and their respective Affiliates may be engaged in a distribution of the Registrable Securities, the Registering Purchasers and their respective Affiliates will comply with all applicable laws, including Regulation M promulgated under the Securities Exchange Act, and, to the extent required by such laws, will, among other things: (A) not engage in any stabilization activity in connection with the securities of the Company in contravention of such rules; (B) distribute the Registrable Securities acquired by it solely in the manner described in the applicable registration statement; and (C) if required by applicable law, rules or regulations, cause to be furnished to each agent or broker-dealer to or through whom such Registrable Securities may be offered, or to the offeree if an offer is made directly by the Registering Purchasers and their respective Affiliates, such copies of the applicable prospectus (as amended and supplemented to such date) and documents incorporated by reference therein as may be required by such agent, broker-dealer or offeree, provided that the Company shall provide the Registering Purchasers with an adequate number of copies thereof. (c) The Registering Purchasers and their respective Affiliates will permit the Company and its representatives and agents to examine such documents and records as may be reasonably necessary and will supply in a timely manner any information as they may be reasonably requested by the Company to provide in connection with the offering or other distribution of Registrable Securities by the Registering Purchasers. (d) On notice from the Company of the happening of any of the events specified in Section 8.2.5(c), or that requires the suspension by the Registering Purchasers and their respective Affiliates of the distribution of any of the Registrable Securities owned by the Registering Purchasers, then the Registering Purchasers and their respective Affiliates will cease offering or distributing the Registrable Securities owned by the Registering Purchasers until the offering and distribution of the Registrable Securities owned by the Registering Purchasers may recommence in accordance with the terms hereof and applicable law. 29 (e) The Registering Purchasers and their respective Affiliates will enter into such agreements with the Company and any broker-dealer or similar securities industry professional containing representations, warranties, indemnities and agreements as are customarily entered into and made by a seller of securities and such seller's controlling stockholders with respect to secondary distributions under similar circumstances. ARTICLE IX TERMINATION 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing by: (a) the mutual written consent of the Company and BellSouth; or (b) the Company or any Purchaser, if the Closing has not occurred by the close of business on June 30, 2001. 9.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement pursuant to Section 9.1, written notice thereof shall forthwith be given by the terminating party or parties to the other party or parties hereto, and this Agreement and the Related Agreements and all rights, benefits, interests, claims, obligations and liabilities hereunder and thereunder shall thereupon automatically terminate and become void and have no effect, and all representations, warranties and covenants contained herein and therein shall immediately cease to be in effect, and the transactions contemplated hereby shall be abandoned without further action by the parties hereto, except that the provisions of this Section 9.2 and of Sections 11.4, 11.6, 11.9 and 11.12 shall survive the termination of this Agreement; PROVIDED, HOWEVER, that such termination shall not relieve any party hereto of any liability for any willful breach of any of its obligations under this Agreement. ARTICLE X CERTAIN DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" of any Person shall mean any Person, directly or indirectly, controlling, controlled by or under common control with such Person. "Agreement" means this Securities Purchase Agreement as from time to time amended and in effect among the parties. "Acquisition" shall have the meaning set forth in Section 3.4(a). "BellSouth" shall mean BellSouth Enterprises, Inc., a Georgia corporation, its predecessors, successors and permitted assigns. 30 "BellSouth Representative" shall have the meaning set forth in Section 3.1. "Blackout Period" shall have the meaning set forth in Section 8.2.1(g). "Broker Shares" shall mean the shares of Common Stock so designated in Section 2.18 of the Disclosure Schedule. "Certificate of Designation" shall have the meaning set forth in Section 1.1. "Change in Control" shall mean (i) the consummation of any merger, consolidation or reorganization (or series of such related transactions) involving the Company and any Person other than BellSouth and its Affiliates unless both (x) the shareholders of the Company immediately prior to such consummation, shall have beneficial ownership of more than 50% of the voting stock of the Company (or if the Company shall not be the surviving company in such merger, consolidation or reorganization, such surviving company) immediately after such consummation, and (y) the Company is not subject to an agreement that contemplates that individuals who are directors of the Company immediately prior to such consummation (or other persons designated by the Company at or before such consummation) shall constitute less than a majority of the directors of the Company or such surviving company, as the case may be, (ii) a change or changes in the membership of the board of directors of the Company which represent a change of a majority or more of such membership during any 12 month period (unless such change or changes in membership are caused by the actions of the then existing board of directors of the Company and do not occur within 12 months of the commencement, threat or proposal of an election contest (as defined in Rule 14a-11 of Regulation 14A under the Securities Exchange Act of 1934), tender offer or other transaction which would constitute a change of control under clause (i) or (ii) above, in each case, by any Person other than BellSouth and its Affiliates), (iii) a sale to any Person other than BellSouth and its Affiliates of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, (iv) the sale to any Person other than BellSouth and its Affiliates of all or substantially all of either (a) the Corporation's content aggregation and distribution business or (b) the Company's wireless portal business, or (v) any Person other than BellSouth and its Affiliates obtaining the right to vote or direct the voting, directly or indirectly, of securities having more than 50% of the ordinary voting power for the election of directors of the Company. "Charter" shall have the meaning set forth in Section 1.1. "Closing" and "Closing Date" shall the meanings set forth in Section 1.2. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Co-Investor" shall have the meaning set forth in the preamble. "Commercial Agreement" shall have the meaning set forth in the second recital. "Commission" shall have the meaning set forth in Section 2.3. "Common Stock" shall have the meaning set forth in the first recital. 31 "Company" shall mean StarMedia Network, Inc., a Delaware corporation, its predecessors, successors and permitted assigns. "Company Basket Amount" shall have the meaning set forth in Section 11.1(a). "Confidentiality Agreement" shall have the meaning set forth in Section 11.4. "Conversion Shares" shall have the meaning set forth in the first recital. "Demand Registration" shall have the meaning set forth in Section 8.2.1(a). "Designated Shares" shall have the meaning set forth in Section 8.2.3(a). "Disclosure Schedule" shall have the meaning set forth in Article II. "Equity Financing" shall have the meaning set forth in Section 3.4(a). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Excluded Securities" shall have the meaning set forth in Section 3.4(d). "Financial Statements" shall have the meaning set forth in Section 2.7. "Founders" shall mean Fernando J. Espuelas, Jack C. Chen and Enrique Narisco. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party" and "Indemnifying Party" shall have the meanings set forth in Section 7.3(c). "Indemnification Claim" shall have the meaning set forth in Section 11.1(c). "Indemnification Event" shall have the meaning set forth in Section 11.1(c). "Intellectual Property" shall have the meaning set forth in Section 2.13(a). "Issuable Securities" shall have the meaning set forth in Section 2.6. "knowledge" means, as to the Company or any of its subsidiaries, the collective actual knowledge of the directors and executive officers of the Company. "Legal Expenses" shall have the meaning set forth in Section 11.1(a). 32 "Lien" means, with respect to any asset, any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien, charge, restriction on transferability, adverse claim by a third party, title defect or encumbrance of any nature whatsoever on any property or property interest (including any conditional sale or other title retention agreement, any lease in the nature thereof, any assignment or other conveyance of any right to receive income and any assignment of receivables with recourse against assignor), any filing of any financing statement as debtor under the Uniform Commercial Code or comparable law of any jurisdiction and any agreement to give or make any of the foregoing. "Losses" shall have the meaning set forth in Section 11.1(a). "Major Holder" shall mean, with respect to any Offer, any Purchaser who as of the date of such Offer, owns 5% or more of the then issued and outstanding Common Stock (calculated as though all shares of Preferred Stock are converted into Common Stock). "Material Adverse Effect" shall mean a material adverse effect upon the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole; PROVIDED, HOWEVER, that a Material Adverse Effect shall not include any circumstance, change in or effect on the Company or any of its subsidiaries that (A) is not likely to recur and has been substantially remedied without having materially damaged the reputation or goodwill of the Company and its subsidiaries taken as a whole, (B) is attributable to changes in general economic, regulatory or political conditions, (C) arises as a result of this Agreement or the transactions contemplated hereby or the announcement hereof or thereof or (D) arises as a result of a continuing loss from operations. "1999 Preferred Stock" shall have the meaning set forth in Section 2.4(a). "Notice of Acceptance" shall have the meaning set forth in Section 3.4(b). "Offer" shall have the meaning set forth in Section 3.4(a). "Offer Expiration Date" shall have the meaning set forth in Section 3.4(a). "Offered Securities" shall have the meaning set forth in Section 3.4(a) "Other Shares" shall mean any shares of Common Stock specifically designated as such in writing by the Company. "Permitted Transferee" shall have the meaning set forth in the Commercial Agreement. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust or unincorporated organization or a government or agency or political subdivision thereof. "Preferred Stock" shall have the meaning set forth in Section 2.4(a). "Purchased Shares" shall have the meaning set forth in the first recital. 33 "Purchaser Basket Amount" shall have the meaning set forth in Section 11.1(b). "Purchasers" shall have the meaning set forth in the preamble. "Section 11 Indemnified Party" shall have the meaning set forth in Section 11.1(c). "Recovery" shall have the meaning set forth in Section 11.1(f). "Registration Rights Agreement" shall mean that certain Amended and Restated Registration Rights Agreement, dated as of August 31, 1998, by and among the Company and the several Persons named therein, as amended. "Related Agreements" shall have the meaning set forth in Section 2.2. "Rights Agreement" shall mean that certain Rights Agreement, dated as of May 21, 1999, between the Company and American Stock Transfer & Trust Company, a New York banking corporation, as amended. "SEC Documents" means all reports, schedules, registration statements and other documents (including all exhibits and schedules thereto) filed by the Company with the Commission on or after March 18, 1999, and prior to the date of this Agreement. "Section 11 Indemnified Party" shall have the meaning set forth in Section 11.1(c). "Section 11 Indemnifying Party" shall have the meaning set forth in Section 11.1(c). "Securities Act" shall have the meaning set forth in Section 2.4(d). "Securities Exchange Act" shall have the meaning set forth in Section 8.1. "Series A Preferred Stock" shall have the meaning set forth in the first recital. "Subsidiary" shall mean the subsidiaries of the Company listed on EXHIBIT D. "S-3 Purchaser" shall mean any Purchaser who purchased Purchased Shares for an aggregate consideration of less than $4,000,000. "S-3 Registration" shall have the meaning set forth in Section 8.2.2(a). "Tax" or "Taxes" shall have the meaning set forth in Section 2.14. "Telecommunications Act" shall mean the United States Telecommunications Act of 1996. 34 ARTICLE XI MISCELLANEOUS 11.1 SURVIVAL OF REPRESENTATIONS. The representations, warranties, covenants and agreements made herein or in any certificates or documents executed in connection herewith shall survive the execution and delivery hereof and the Closing of the transactions contemplated hereby. Notwithstanding the foregoing, the representations and warranties contained in or made pursuant to this Agreement shall terminate on, and no claim or action with respect thereto may be brought after, the first anniversary of the Closing Date, except that the representations and warranties contained in Sections 2.4(b), 2.6, 2.15 and 4.1 hereof shall survive indefinitely. The parties shall indemnify each other as set forth below: (a) Subject to the immediately preceding two sentences and Section 11.1(e), the Company hereby agrees to indemnify and hold harmless each Purchaser from, and to reimburse each Purchaser for, on a net after-tax basis, any and all losses, damages, liabilities, claims and fees, costs and expenses of any kind related thereto ("Losses") (including, without limitation, any reasonable Legal Expenses (as defined below) but excluding any such Losses to the extent recoverable by Buyer under any applicable insurance policy) which are the direct and proximate result of (i) the inaccuracy or breach as of the Closing Date of any representation or warranty of the Company contained in Article II of this Agreement or (ii) the breach by the Company of or failure by the Company to perform any of its covenants or agreements contained in this Agreement; provided, however, that (A) the Company shall not be responsible for any Losses with respect to the matters referred to in this Section 11.1(a) until the cumulative aggregate amount of such Losses (calculated on a net after-tax basis as described above), exceeds $500,000 (the "Company Basket Amount"), in which case the Company shall then be liable only for such Losses (calculated on a net after-tax basis as described above) in excess of the Company Basket Amount and (B) the cumulative aggregate indemnity obligation of the Company under this Section 11.1 shall in no event exceed $35,000,000. As used herein, "Legal Expenses" shall mean the fees, costs and expenses of any kind incurred by any Person indemnified herein and its counsel in investigating, preparing for, defending against or providing evidence, producing documents or taking other action with respect to any threatened or asserted claim. (b) Subject to the first two sentences of this Section 11.1, each Purchaser hereby severally agrees to indemnify and hold harmless the Company from, and to reimburse the Company for, on a net after-tax basis, any Losses (including, without limitation, any reasonable Legal Expenses), which are the direct and proximate result of (i) the inaccuracy or breach as of the Closing Date of any representation or warranty of such Purchaser contained in Article IV of this Agreement, or (ii) the breach by such Purchaser of or failure by such Purchaser to perform any of its covenants or agreements contained in this Agreement; provided, however, that (A) such Purchaser shall not be responsible for any Losses with respect to the matters referred to in this Section 11.1(b) until the cumulative aggregate amount of such Losses (calculated on a net after-tax basis as described above), exceeds 1% of the purchase price paid by such Purchaser for the Purchased Shares purchased by such Purchaser pursuant to this Agreement (with respect to each Purchaser, the "Purchaser Basket Amount"), in which case such Purchaser shall then be liable only for such Losses (calculated on a net after-tax basis as described above) in excess of 35 such Purchaser's Purchaser Basket Amount and (B) the cumulative aggregate indemnity obligation of such Purchaser under this Section 11.1 shall in no event exceed the purchase price paid by such Purchaser for the Purchased Shares purchased by such Purchaser pursuant to this Agreement. (c) As promptly as practicable after the Company or any of its Affiliates, on the one hand, or any Purchaser or any of its Affiliates, on the other hand, shall receive any notice of, or otherwise become aware of, the commencement of any action, suit or proceeding, the assertion of any claim, the occurrence of any event, the existence of any fact or circumstance or the incurrence of any Loss, for which indemnification is provided for by this Section 11 (an "Indemnification Event"), the party entitled to indemnification (a "Section 11 Indemnified Party") shall give written notice (an "Indemnification Claim") to the party from which indemnification is sought (a "Section 11 Indemnifying Party") describing in reasonable detail the basis of such Indemnification Claim. If the Section 11 Indemnifying Party is not so notified by the Section 11 Indemnified Party within 30 calendar days after the date of the Section 11 Indemnified Party's receipt of notice of, or of the Section 11 Indemnified Party's becoming aware of, any Indemnification Event, the Section 11 Indemnifying Party shall be relieved of all liability hereunder to any Section 11 Indemnified Party in respect of such Indemnification Event (or the facts or circumstances giving rise thereto) to the extent that the Section 11 Indemnifying Party is materially prejudiced by the failure to give such prompt notice. If such Indemnification Claim involves the claim of any third party, the Section 11 Indemnifying Party shall be entitled to participate in, and assume sole control over, the defense and settlement of such claim; provided, however, that (i) the Section 11 Indemnified Party shall be entitled to participate in the defense of such claim and to employ counsel at its own expense to assist in the handling of such claim, and (ii) the Indemnifying Party shall obtain the prior written approval of the Indemnified Party, which shall not be unreasonably withheld or delayed, before entering into any settlement of such claim or ceasing to defend against such claim, if as a result of such settlement injunctive or other equitable relief would be imposed against the Indemnified Party. After written notice by the Section 11 Indemnifying Party to the Section 11 Indemnified Party of its election to assume control of the defense of any such claim, the Section 11 Indemnifying Party shall not be liable to such Section 11 Indemnified Party hereunder for any Legal Expenses subsequently incurred by such Section 11 Indemnified Party in connection therewith. If the Section 11 Indemnifying Party does not assume sole control over the defense or settlement of such claim as provided in this Section 11(c) within a reasonable period of time, the Section 11 Indemnifying Party shall have the right to defend and upon obtaining the written consent of the Indemnifying Party which will not be unreasonably withheld or delayed, settle the claim in such manner as it may deem appropriate, and the Section 11 Indemnifying Party shall promptly reimburse the Section 11 Indemnified Party therefor in accordance with Section 11(a) or (b), as appropriate. The Section 11 Indemnifying Party shall not be liable under this Section 11 for any settlement or compromise effected without its consent. (d) In the event of any Indemnification Claim involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Section 11 Indemnifying Party in the defense of any such claim under this Section 11. Without limiting the generality of the foregoing, the Section 11 Indemnified Party shall furnish the Section 11 Indemnifying Party with such documentary or other evidence as is 36 then in its or any of its Affiliates' possession as may reasonably be requested by the Section 11 Indemnifying Party for the purpose of defending against any such claim. (e) The rights and remedies of the Company and the Purchasers under this Section 11.1 are exclusive and in lieu of any and all other rights and remedies which the Company, on the one hand, or any Purchaser, on the other hand, as the case may be, may have against the other, under this Agreement or otherwise, (i) with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by any Purchaser or the Company in or pursuant to this Agreement, or (y) any breach of, or failure to perform or comply with, any covenant or agreement set forth in this Agreement or (ii) otherwise with respect to the transactions contemplated by this Agreement. All claims for indemnification on account of any inaccuracy of any representation or warranty of the Company and the Purchasers contained in this Agreement (including, without limitation, any claim for indemnification on account of any matter described in clause (i) of Section 11.1(a) or clause (i) of Section 11.1(b)), must be asserted, if at all, in good faith and in accordance with the provisions of Section 11.1(c), on or prior to the first anniversary of the Closing Date. Each Purchaser, on behalf of itself and its Affiliates, hereby (i) waives and releases the Company from any statutory or other right of contribution of indemnity with respect to the operations of, or otherwise relating to, the Company and (ii) waives and releases all rights of subrogation with respect to claims relating thereto. (f) If at any time subsequent to the receipt by a Section 11 Indemnified Party of an indemnity payment hereunder, such Section 11 Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payments with respect to the Loss for which it received such indemnity payment (the "Recovery"), such Section 11 Indemnified Party shall promptly pay to the Section 11 Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Section 11 Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment. 11.2 PARTIES IN INTEREST. All covenants, agreements, representations, warranties and undertakings contained in this Agreement shall be binding on and shall inure to the benefit of the respective successors and permitted assigns of the parties hereto. Except as may be required to be disclosed by order of a court or otherwise required by law including the federal securities laws, the parties agree to maintain in confidence the terms of the purchase of the Purchased Shares hereunder. 11.3 SHARES OWNED BY AFFILIATES. For the purposes of applying all provisions of this Agreement which condition the receipt of information or access to information or exercise of any rights upon ownership of a specified number or percentage of shares, the shares owned of record by any Affiliate of a Purchaser shall be deemed to be owned by such Purchaser. 11.4 AMENDMENTS AND WAIVERS. Amendments or additions to this Agreement may be made and compliance with any term, covenant, agreement, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) upon the written consent of the Company and the Purchasers. This Agreement (including the Schedules and Exhibits annexed hereto, which are an integral part of this 37 Agreement) and the Confidentiality Agreement dated as of July 6, 2000, between BellSouth and the Company (the "Confidentiality Agreement") constitute the full and complete agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof, including without limitation the Letter of Intent among the parties hereto, dated March 22, 2001. Notwithstanding any provision to the contrary in this Agreement, the Confidentiality Agreement shall remain in full force and effect. 11.5 NOTICES. All notices, requests, consents, reports and demands shall be in writing and shall be hand delivered, sent by facsimile or other electronic medium, or mailed, postage prepaid, to the Company or to the Purchasers at the address set forth or referred to below or to such other address as may be furnished in writing to the other parties hereto: The Company: StarMedia Network, Inc. 75 Varick Street, 8th Floor New York, New York 10013 Attention: Justin Macedonia, Esq. Tel: (212) 905-8440 Fax: (212) 905-8420 E-mail: Justin@starmedia.com with copy to: Hughes Hubbard & Reed LLP One Battery Park Plaza New York, New York 10004 Attention: Kenneth A. Lefkowitz, Esq. Tel: (212) 837-6000 Fax: (212) 422-4726 E-mail: lefkowit@hugheshubbard.com BellSouth: BellSouth Enterprises, Inc. c/o BellSouth Corporation 1155 Peachtree Street, N.E., Suite 2000 Atlanta, Georgia 30309 Attention: Charles R. Morgan Tel: (404) 249-2050 Fax: (404) 249-5948 E-mail: charles.morgan@bellsouth.com With a copy to : BellSouth International, Inc. 1100 Peachtree Street, N.E., Suite 1000 Atlanta, Georgia 30309 Attention: Jeffrey A. Dickerson Tel: (404) 249-2621 Fax: (404) 249-0775 E-mail: jeffrey.dickerson@bellsouth.com 38 With a copy to : BellSouth International, Inc. 1100 Peachtree Street, N.E., Suite 1000 Atlanta, Georgia 30309 Attention: Al Gonzalez-Pita Tel: (404) 249-4426 Fax: (404) 249-0562 E-mail: alberto.gonzalez-pita@bellsouth.com If to any Co-Investor: to its address set forth on Schedule A hereto. All such notices, request, demands, consents and other communications shall be deemed to have been duly given or sent seven (7) days following the date on which mailed, or on the date on which delivered by hand, by facsimile transmission or e-mail (receipt confirmed), as the case may be, and addressed as aforesaid. 11.6 EXPENSES. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby. 11.7 COUNTERPARTS. This Agreement and any exhibit hereto may be executed in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Agreement or any exhibit hereto may be delivered via telecopier, with the intention that they shall have the same effect as an original counterpart hereof. 11.8 EFFECT OF HEADINGS. The article and section headings herein are for convenience only and shall not affect the construction or interpretation hereof. 11.9 GOVERNING LAW. The parties hereby agree that this Agreement, and the respective rights, duties and obligations of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law thereunder. Each of the parties hereby (i) irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought exclusively in the Federal or state courts sitting in New York County and any court to which an appeal may be taken in any such litigation, and (ii) by execution and delivery of this Agreement, irrevocably submits to and accepts, with respect to any such action or proceeding, for itself and in respect of its properties and assets, generally and unconditionally, the jurisdiction of the aforesaid courts, and irrevocably waives any and all rights such party may now or hereafter have to object to such jurisdiction. 11.10 ASSIGNMENT. This Agreement may not be assigned by any of the Purchasers without the prior written consent of the Company; provided, however, that each Purchaser may assign this Agreement to such Purchaser's successor. The Company may not assign or transfer any of its rights pursuant to this Agreement except by operation of law unless the Company first obtains the express written consent of the Purchasers. Any assignment in violation of the terms of this Agreement shall be null and void AB INITIO. 39 11.11 NO PRESUMPTION. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. 11.12 WAIVER OF JURY TRIAL. Each of the Company, BellSouth and each other Purchaser hereby expressly waives its respective rights to a jury trial of any claim or cause of action based upon or arising out of this Agreement, any Related Agreement or any dealings between them relating to the subject matter of this Agreement or the Related Agreements. The Company and the Purchasers also waive any bond or surety or security upon such bond which might, but for this waiver, be required of any party. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. The Company and the Purchasers further warrant and represent that each has reviewed this waiver with its legal counsel and that each voluntarily waives its jury rights following consultation with legal counsel. This waiver is irrevocable and may only be modified either orally or in amendments, renewals, supplements or modifications to this agreement, any other related agreement or the purchased shares. In the event of litigation, this agreement may be filed as a written consent to a trial (without a jury) by the court. 11.13 WORD MEANING; SCHEDULES; EXHIBITS. The words such as "herein", "hereinafter", "hereof", and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The word "including" (and grammatical variations thereof) shall be construed to mean "including, without limitation" (and grammatical variations thereof), and shall not be interpreted so as to imply exclusivity or comprehensive listing, unless the context otherwise requires. The singular shall include the plural and masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. References to Articles, Sections, Schedules and Exhibits, shall be construed as references to the Articles and Sections of, and the Schedules and Exhibits to, this Agreement unless the context otherwise requires. All such Schedules and Exhibits shall be deemed to be, and constitute, an integral part hereof for all purposes. * * * * * * IN WITNESS WHEREOF, the Company and the Purchasers have caused this Agreement to be duly executed and delivered as an instrument under seal as of the date first above written. THE COMPANY: STARMEDIA NETWORK, INC. By: /s/ Fernando J. Espuelas ------------------------------ Name: Fernando J. Espuelas Title: Chief Executive Officer PURCHASERS: BELLSOUTH ENTERPRISES, INC. By: /s/ Jeffrey A. Dickerson ------------------------------ Name: Jeffrey A. Dickerson Title: Authorized Signatory PRIMEDIA INC. By: /s/ Beverly C. Chell ------------------------------ Name: Beverly C. Chell Title: Vice Chairman JP MORGAN PARTNERS (SIBC), LLC By: /s/ Susan L. Segal ------------------------------ Name: Susan L. Segal Title: Partner S-1 /s/ Henry Kravis ------------------------------ Henry Kravis /s/ Jorge Etchepare ------------------------------ Jorge Etchepare RUSHCUTTER ENTERPRISES, LLC By: /s/ Gaelle Vasserot ------------------------------ Name: Hazel Altham/ Gaelle Vasserot Title: Authorized Signatories BRENTWOOD CORPORATION By: /s/ Robert K. Hamshaw ------------------------------ Name: Robert K. Hamshaw Title: Attorney-In-Fact S-2 EX-10.2 5 a2084091zex-10_2.txt EX-10.2 Exhibit 10.2 INTERNET CONTENT AND SERVICES FRAMEWORK AGREEMENT THIS INTERNET CONTENT AND SERVICES FRAMEWORK AGREEMENT (the "AGREEMENT") is entered into as of this 30th day of May 2001 (the "EFFECTIVE DATE") by and between BellSouth Enterprises, Inc., a corporation organized and existing under the laws of the State of Georgia, with its principal place of business at 1155 Peachtree Street, Atlanta, Georgia 30309 (the "COMPANY"), and StarMedia Network, Inc., a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 75 Varick Street, New York, New York 10013 ("STARMEDIA"). StarMedia and the Company are occasionally collectively referred to in this Agreement as the "PARTIES" or individually as a "PARTY". RECITALS WHEREAS, simultaneously herewith, the Company and StarMedia are entering into a Securities Purchase Agreement (as defined below), whereby the Company is acquiring certain equity interests and options with respect to StarMedia; WHEREAS, StarMedia owns and operates the StarMedia Websites (as defined below); WHEREAS, the Company's Affiliates provide Wireless Access Services in the Territory (as such terms are defined below); WHEREAS, the Securities Purchase Agreement contemplates that the Company and StarMedia will enter into an agreement pursuant to which StarMedia shall become the exclusive provider of integrated global customized series of co-branded portals available in a multi-access environment ("MAP") for the Subscribers (as such terms are defined below) to the Participating Affiliates' Wireless Access Services; and WHEREAS, certain obligations of Company hereunder may be performed by BellSouth International, Inc., a wholly owned subsidiary of Company, or its successor ("BSI"); NOW, THEREFORE, in consideration of the respective representations and warranties hereinafter set forth and of the mutual covenants and agreements contained herein, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINITIONS The capitalized terms which appear in the recitals and the body of this Agreement shall have the following meanings, unless such term is defined elsewhere in this Agreement, including its recitals (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 2 "ACCESS SERVICES" shall mean the Wireless Access Services and/or any other form of telecommunications access services. "ACTIVE TERRITORY" shall refer to that portion of the Territory in which Participating Affiliates are licensed to conduct operations. "AFFILIATE" of the Company shall mean another Person that, directly or indirectly, controls, is controlled by or is under common control with, Company (other than independent contractors and leased employees) where the Company shall be deemed to have control over any other Person if: (a) the Company directly or indirectly or acting through one or more other Persons owns, controls or has power to vote fifty-one percent (51%) or more of the equity interests of the other Person; (b) the Company controls, in any manner, the election of a majority of the directors, managers or trustees (or persons exercising similar responsibilities) of the other Person; or (c) the Company directly or indirectly controls, either individually or jointly with a third party, the management or policies of the other Person. Affiliate of StarMedia means another Person that, directly or indirectly, controls, is controlled by or is under common control with, StarMedia (other than independent contractors and leased employees) where StarMedia shall be deemed to have control over any other Person if: (a) StarMedia directly or indirectly or acting through one or more other Persons owns, controls or has power to vote ten percent (10%) or more of the equity interests of the other Person; (b) such Person controls, in any manner, the election of a majority of the directors, managers or trustees (or persons exercising similar responsibilities) of the other Person; or (c) such Person directly or indirectly controls the management or policies of the other Person. For the avoidance of doubt, the entities listed on Exhibit A are "Affiliates" of the Company. Notwithstanding the foregoing, neither StarMedia nor any of its Affiliates shall be considered the Company's Affiliate and neither the Company nor any of its Affiliates shall be considered StarMedia's Affiliate. "CHANGE IN CONTROL" of a Person shall mean (i) the consummation of any merger, consolidation or reorganization (or series of such related transactions) involving such Person and any Person other than the other Party to this Agreement and its Affiliates unless both (x) the shareholders of such Person immediately prior to such consummation, shall have beneficial ownership of more than 50% of the voting stock of such Person (or if such Person shall not be the surviving company in such merger, consolidation or reorganization, such surviving company) immediately after such consummation, and (y) such Person is not subject to an agreement that contemplates that individuals who are directors of such Person immediately prior to such consummation (or other persons designated by such Person at or before such consummation) shall constitute less than a majority of the directors of such Person or such surviving company, as the case may be, (ii) a change or changes in the membership of the board of directors of such Person which represent a change of a majority or more of such membership during any 12 month period (unless such change or changes in membership are caused by the actions of the then existing board of directors of such Person and do not occur within 12 months of the commencement, threat or proposal of an election contest (as defined in Rule 14a-11 of 3 Regulation 14A under the Securities Exchange Act of 1934), tender offer or other transaction which would constitute a change of control under clause (i) above, in each case, by any Person other than the other Party to this Agreement and its Affiliates), (iii) a sale to any Person other than the other Party to this Agreement and its Affiliates of all or substantially all of the assets of such Person and its Subsidiaries, taken as a whole, (iv) the sale to any Person other than the other Party to this Agreement and its Affiliates of all or substantially all of either (a) the Person's content aggregation and distribution business or (b) the Person's wireless portal business, or (v) any Person other than the other Party to this Agreement and its Affiliates obtaining the right to vote or direct the voting, directly or indirectly, of securities having more than 50% of the ordinary voting power for the election of directors of such Person. "CLAIMS" shall have the meaning specified in Section 14.1 of this Agreement. "COMPANY COMPETITORS" shall mean such Persons as may be engaged, directly or indirectly, in the provision or sale of wireless telecommunications services, including without limitation, wireless carriers. "COMMON STOCK" shall mean common stock, par value $0.001 per share, of StarMedia. "COMPANY SERVICES" shall mean the services offered by the Company or the applicable Participating Affiliate via the Access Services. "CONFIDENTIAL INFORMATION" of a Party shall mean all information of a technological or business-sensitive nature, including without limitation product or service designs, plans and specifications, business plans, financial data, operating data, lists of customers or suppliers, furnished by such Party to the other Party and if disclosed in writing, is marked confidential, or if disclosed orally or visually, is designated as confidential at the time of disclosure and confirmed in writing within thirty (30) days of disclosure. Notwithstanding the above, Confidential Information shall not include information that the receiving Party can demonstrate (A) is in the public domain and is available at the time of disclosure or which thereafter enters the public domain and is available through no improper action or inaction by the receiving Party or any Affiliate, agent or employee of the receiving Party, or (B) was in its possession or known by the receiving Party, without restriction, prior to receipt from the disclosing Party, as demonstrated by files or records in existence at the time of disclosure, or (C) was disclosed to others by the disclosing Party without restriction on further disclosure, or (D) was rightfully disclosed to the receiving Party by a third party without restriction, or (E) is independently developed by the receiving Party without reference to such Confidential Information of the disclosing Party, as demonstrated by files or records created at the time of such independent development. Information shall not be deemed known to such Party or publicly known for purposes of the above exceptions (x) merely because it is embraced by more general information in the prior possession of such Party 4 or others, or (y) merely because it is expressed in public material in general terms not specifically the same as the Confidential Information. "CURRENT CRITICAL TECHNOLOGY" shall mean those applications included in Third Party Technology which are essential to the continued operation of the MAP Service, including as of the Effective Date, Voice Portal, email, ad serving, PIM and calendar. The foregoing list of applications may be updated on a quarterly basis by the Product Path Planning Team as it determines is reasonably necessary. "DEFAULT" shall have the meaning specified in Section 12.2 of this Agreement. "DEPOSIT MATERIALS" means the Source Code for the StarMedia Technology, including without limitation the Gen3 Technology, the WIS Technology, and the User Registration Database (together with the related data dictionary), together with the Source Code for the Third Party Technology and all modifications to such Third Party Technology, if and to the extent that StarMedia has the right to deposit the Source Code for such Third Party Technology into escrow for the benefit of the Company, and diagrams and explanations reflecting the architecture and components of the MAP Service. "DIAL-UP PORTAL" shall mean a portal scripted so that it is accessible on the Internet by end-users using a wired connection at the users location. "DOMAIN NAMES" shall mean the individual domain names (URL) of the MAP Service, exclusive of any redirects owned by StarMedia which are transparent to the end-user. "ENCODED" is a term that shall be used generically to describe any content that has been prepared in accordance with an authoring language or markup (such as HTML, SGML, XML, WAP, etc. and successor protocols) used to create documents for viewing and/or data exchange on the World Wide Web or any other network portals, situses and facilities. "FIRST PARTY" means, with respect to any payment made under this Agreement, the Party to whom such payment is made. "FULL OWNERSHIP RIGHTS" shall mean, with respect to specified Intellectual Property Rights in specified subject matter, ownership of those rights, exclusive of any underlying rights of either Party or a third party with respect to pre-existing matter incorporated therein (which underlying rights shall in no event be affected by this Agreement except as expressly specified elsewhere herein), including the full right (to the extent such rights exist therein) to make, have made, use, sell, transfer or license anywhere in the world. "GEN3 TECHNOLOGY" shall have the meaning associated with its description in Exhibit D, including enhancements thereof which have been used in the MAP Service. 5 "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "INTELLECTUAL PROPERTY RIGHTS" shall mean any and all now known or hereafter existing rights associated with works of authorship or inventions throughout the world, including without limitation, copyrights, patents, trademarks, service marks, trade secrets, know-how, "look and feel" and all other intellectual and industrial property and proprietary rights relating to intangible property of every kind and nature throughout the world and however designated, and all applications for, and rights and priority to apply for, such rights. "INTERNET USE DATA" shall mean all Subscriber Data that is not Personal Subscriber Data and from which any Personal Subscriber Data has been irreversibly deleted, or generalized so as not to be specific to the Subscriber. "LAUNCH" shall mean the initial commercial availability on a non-beta, non-test or non-preview basis of the MAP Service of the Participating Affiliate in the Active Territory with capacity to service the volume of end-users reasonably anticipated upon the commercial start-up of such Participating Affiliate's MAP Service. "LICENSED TECHNOLOGY" means the StarMedia Technology, excluding the WIS Technology, which is separately licensed under the WIS Software License Agreement. "LINK" shall mean a pointer to an Internet address, page or other service, which can be activated through a user interface to transfer the user to such address, page or other service. "LOCAL CURRENCY" shall mean the generally accepted currency of the applicable Active Territory. "LOCAL LANGUAGE" shall mean the generally accepted written and spoken language of the applicable Active Territory. "MAINTENANCE AND SUPPORT AGREEMENT" shall mean the agreement attached to the Operating Agreements as Exhibit E, as amended, supplemented or otherwise modified from time to time. "MAP SERVICE" shall mean the integrated, global, customized, co-branded portal services available in a multi-access environment provided by StarMedia allowing access to the portals hosted for each Participating Affiliate by StarMedia pursuant to applicable Operating Agreements via Wireless Devices with browsers, via Wireless Devices with SMS, via the dial-in number designated by the Participating Affiliate for Voice Portal usage and via personal computers (e.g., personal computers with dial-up access and/or dedicated access to the Internet) as described further in Exhibit B. 6 "MARKS" shall mean all trademarks, service marks and corporate and brand identification and indicia, including without limitation, word marks, logos and other picture marks, phrases, jingles, composite marks, corporate, commercial and institutional images, product designations and identifications, whether registered or not. "MFN PRICES" for services shall mean prices that are no higher than the lowest price that the provider of such services and/or any of its Affiliates charges for the same services provided by it or such Affiliate in the same country or region to comparable third party customers for comparable usage involving comparable or lesser volumes under similar or less favorable terms and conditions to said service provider or Affiliate. "NET ADVERTISING REVENUE" shall mean all cash receipts of revenue paid by advertisers to StarMedia or its Affiliates (determined in accordance with U.S. generally accepted accounting principles) generated by the sale of advertising on the MAP Services ("GROSS ADVERTISING REVENUE"), less (i) applicable Value Added Tax and (ii) twenty percent (20%) of Gross Advertising Revenue. "NEW TECHNOLOGY" shall mean Technology for providing new or enhanced functionality for a MAP Service. "OPERATING AGREEMENTS" shall mean the Internet Content and Services Agreements in the form of Exhibit E entered into between the Participating Affiliates and StarMedia or its Affiliates pursuant to Section 16.18 hereof. "PAGE" shall mean with respect to any web site, any text, graphic, multimedia or other document or application containing content (whether in-line, Linked or framed, and whether or not Encoded) which can be accessed so as to be viewed, listened to, stored, reproduced or made use of by a user with the aid of a suitable device and software. "PARTICIPATING AFFILIATE" shall mean any Affiliate of the Company in the Territory which enters into an Operating Agreement, for the duration of such Operating Agreement. "PERMITTED TRANSFEREE" shall mean (i) any Affiliate of the Company, (ii) any successor to the Company, or any Affiliate of the Company, by operation of law and (iii) up to ten (10) other Persons that the Company may elect, provided that each such Person is an "Accredited Investor" as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. "PERSON" shall mean a natural person, a corporation, a partnership (general or limited), a joint venture, an association, a trust or any other organization or entity, including without limitation, a government or political subdivision or an agency or instrumentality thereof. "PERSONAL SUBSCRIBER DATA" shall mean any Subscriber Data that could be used by itself or in connection with other data to identify, locate or contact a Subscriber. 7 "PRODUCT PATH PLANNING TEAM" shall have the meaning set forth in Section 6.1 of this Agreement. "RESTRICTED SERVICES" shall mean the provision of a MAP or the same or similar services. "SECOND PARTY" means, with respect to any payment made under this Agreement, the Party making such payment. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SECURITIES PURCHASE AGREEMENT" shall mean the Securities Purchase Agreement by and between the parties hereto dated as of May 30, 2001, as amended, supplemented or otherwise modified from time to time. "SOURCE CODE" for a program or system means a copy of the source code corresponding thereto, including all updates to the source code delivered to the escrow agent from time to time pursuant to Section 4.6 of this Agreement, plus any pertinent available commentary or explanation that may be necessary to render the source code understandable and usable by highly-trained computer programmers. The Source Code shall be provided with all internal comments intact as actually used by StarMedia in development. Insofar as the "development environment" employed by StarMedia for the development, maintenance, and implementation of the Source Code includes any device, programming, or documentation not commercially available to Company on reasonable terms through readily known sources other than StarMedia, the Source Code shall include all such devices, programming, or documentation. The foregoing reference to such "development environment" is intended to apply to any proprietary programs, including compilers, "workbenches," tools, and higher-level languages, used by StarMedia for the development, maintenance, and implementation of the Source Code. "SMS" shall mean the wireless service known as Short Message Service that enables the transmission of alphanumeric messages between mobile subscribers and external systems such as electronic mail, paging, and voice-mail systems. "SPECIFICATIONS" shall mean the applicable technical, operating and functional descriptions which are attached hereto as Exhibits B - D, and/or the applicable functions, interfaces, capabilities, characteristics and/or limitations of any such Participating Affiliate's MAP Service defined by a Participating Affiliate in its Operating Agreement in accordance with the terms and conditions of this Agreement. "STARMEDIA COMPETITORS" are the eleven Persons identified by StarMedia on Exhibit F. StarMedia may update the identification of the StarMedia competitors on Exhibit F no more than once per calendar quarter, upon at least thirty (30) days prior written notice to the Company, but in no event shall the number of such StarMedia Competitors listed in Exhibit F at any time exceed eleven. 8 "STARMEDIA TECHNOLOGY" means Technology that is owned and controlled and licensable on a stand-alone basis by StarMedia that is used by StarMedia to provide MAP Services to the Participating Affiliates under the Operating Agreements, including without limitation, the Gen3 Technology, the WIS Technology, and the User Registration Database. "STARMEDIA WEBSITES" shall mean the collection of Encoded documents and related servers, equipment, software and facilities that are owned, managed, administered or hosted by StarMedia and accessible by the public via the Internet at the URL http://www.starmedia.com and any successor sites, or at such other URL(s) as determined by StarMedia in its sole discretion. "SUBSCRIBER" shall mean any user of Access Services of Company Affiliates located in the Territory. "SUBSCRIBER DATA" shall mean all data and information relating to Company's and its Affiliates' Subscribers, including without limitation user profiles, demographic information, transactional and navigational information regarding the Subscriber. "TECHNOLOGY" shall mean all software, methods of operation, hardware designs, interfaces, specifications and documentation in respect of the foregoing and all Intellectual Property Rights contained therein. "TERM" shall have the meaning specified in Section 12.1 of this Agreement. "TERRITORY" shall mean Mexico, Central America and South America. "THIRD PARTY TECHNOLOGY" means Technology, other than StarMedia Technology or New Technology developed by either Party or the Product Path Planning Team that is (i) owned by third parties, and (ii) used by StarMedia to provide the MAP Service to Company and its Participating Affiliates hereunder. "URL" is an abbreviation of Uniform Resource Locator, the global address of documents and other resources on the World Wide Web. "USER REGISTRATION DATABASE" shall mean the database of identification of all Subscribers. "VALUE ADDED TAX" shall mean value added or similar tax and any sales tax charged to and collected from customers or advertisers, as the case may be, as required by local law. "VOICE PORTAL" shall mean a voice-activated user interface that allows end-users to access information via back-end applications otherwise available via Wireless Portals or Dial-Up Portals. 9 "VOLUME DISCOUNT AMOUNT" of a Participating Affiliate shall mean, with respect to any applicable month, (i) with respect to the Net Advertising Revenues (as defined in the applicable Operating Agreement) that are taken into account in accordance with U.S. generally accepted accounting principles during such month and until such time as the Volume Discount Threshold has been met, zero and (ii) with respect to the Net Advertising Revenues (as defined in the applicable Operating Agreement) that are taken into account in accordance with U.S. generally accepted accounting principles during such month and after such time as the Volume Discount Threshold has been met, 20% of such Net Advertising Revenues (as defined in the applicable Operating Agreement) for such Participating Affiliate. "VOLUME DISCOUNT THRESHOLD" shall mean the aggregate amount of Net Advertising Revenue received by StarMedia and its Affiliates pursuant to the Operating Agreements equal to U.S.$25,000,000. Exclusively for the purposes of calculating the foregoing, any Net Advertising Revenue collected in any currency other than U.S. dollars shall be computed in U.S. dollars using the currency conversion mechanism set forth in Section 10.1(c) of the Operating Agreements. "WAP" shall mean the markup protocol known as Wireless Application Protocol that allows users to access information via handheld wireless devices such as mobile phones, pagers, two-way radios, smartphones and communicators, and any successor or other similar protocols as may be developed from time to time. "WIRELESS ACCESS SERVICES" means any and all services based on providing communications connections for Wireless Devices. "WIRELESS DEVICE" shall mean an SMS- or WAP-enabled cellular device, or any other similar or successor technology that enables end-users to transmit data through the air. "WIRELESS PORTAL" shall mean a portal scripted and configured so that it is accessible on the Internet and/or proprietary networks by end-users using a Wireless Device. "WIS SOFTWARE LICENSE AGREEMENT" shall mean the agreement attached hereto as Exhibit G, as amended, supplemented or otherwise modified from time to time. "WIS TECHNOLOGY" shall mean StarMedia's proprietary wireless Internet server Technology, more specifically described in Exhibit C, and all successor or similar Technologies as may be developed by StarMedia or its licensors from time to time. "WITHHOLDING TAXES" means foreign, federal, and state and local taxes, fees, or charges of the First Party which are imposed on or by reference to gross or net income or gross or net receipts and are required under applicable law to be withheld by the Second Party from payments made to the First Party under this Agreement. 10 ARTICLE II EXCLUSIVITY 2.1 STARMEDIA EXCLUSIVITY AND PREFERRED RELATIONSHIP. (a) During the Term and except as specifically provided for in this Section 2.1, StarMedia and its Affiliates, directly or indirectly, will not provide, any Restricted Services to any third party in the Territory on an exclusive basis. StarMedia further agrees that it will not provide (i) during the first six (6) months of the Term of this Agreement, any Restricted Services to any Company Competitor anywhere in the Territory, and (ii) with respect to each Affiliate of the Company which becomes a Participating Affiliate within the six (6) month period following the Effective Date, during the period beginning on the date six (6) months after the Effective Date and ending twelve (12) months after the Launch of the MAP Service in such Participating Affiliate's Active Territory, Restricted Services to any Company Competitor anywhere in the Active Territory of such Participating Affiliate. The foregoing restrictions shall not apply to any services provided by StarMedia or its Affiliates under agreements entered into with Company Competitors prior to the Effective Date of this Agreement, during the term of such agreements and any renewals thereof expressly provided for in such agreements, as long as such renewals do not provide for the provision of Restricted Services. (b) During the Term the Company will use commercially reasonable efforts to promote the MAP Service to the Company Affiliates in the Territory. If eight Company Affiliates in the Territory (at least two of which must be from Argentina, Brazil or Venezuela) have not executed Operating Agreements within six months after the Effective Date, StarMedia shall have the right to provide any services to any third party in any country in the Territory in which an Affiliate operates, if such Affiliate has not signed an Operating Agreement within such six month period. StarMedia may provide services to any third party where permitted pursuant to the foregoing on an exclusive basis for up to twelve months (excluding Brazil). (c) Notwithstanding anything to the contrary in this Section 2.1, in those countries within the Territory where Company does not have an Affiliate which actively conducts a wireless telecommunications business as of the Effective Date, StarMedia or its Affiliates may for six (6) months after the Effective Date enter into an agreement with any party to offer the Restricted Services on an exclusive basis for no more than twelve (12) months and/or on a non-exclusive basis for any time period, provided that in Mexico, StarMedia or its Affiliate shall have the right to enter into any such agreements at any time. (d) Notwithstanding anything to the contrary contained herein, in the event that the Participating Affiliates have failed to increase the user base for the MAP Services such that the Participating Affiliates, in the aggregate, meet at least 60% of the user base level projections provided by the Company as set forth in Exhibit H, User Base Level Projections, hereto (such projections to be measured first on a twelve-month basis for the period ending on December 31, 2002, and thereafter such projections to be measured on a semi-annual basis), StarMedia may provide Restricted Services to any third party on a non-exclusive basis in those 11 Active Territories where the Participating Affiliate has failed to achieve 60% of User Base Level Projections as set forth in the executed Operating Agreement with the Participating Affiliate. Additionally, in such event, StarMedia shall be entitled to terminate services pursuant to any applicable Operating Agreement on six (6) months' written notice with respect to any Participating Affiliate that has failed to achieve at least 40% of its respective user base level projections provided by the Company as set forth in Exhibit H hereto, as amended from time to time so as not to reduce the combined projections, after which termination StarMedia shall offer to provide the MAP Service to such Affiliate at MFN Prices. (e) During the Term, the Company or its Affiliates shall provide to StarMedia and its Affiliates, and StarMedia and its Affiliates shall purchase exclusively from the Company or its Affiliates, or from any Person that directly or indirectly controls, is controlled by or is under common control with, Company or any such Affiliate, as technically and reasonably feasible for StarMedia and its Affiliates (except for a back-up bandwidth provider, which will be purchased through the Company or its Affiliates if the necessary bandwidth is available) and at MFN Prices, its internet access services, hosting services, wireless services, yellow page and telephone directory services, domestic and international long distance telephone services in the United States and in markets where there is a Participating Affiliate and where the Company or its Affiliates (or any such affiliated companies) provide such services; provided that, as applicable, StarMedia will not need to make a material change to its network configuration to make any such purchase, that the quality of such services is comparable or better than the services currently provided to StarMedia and that at a minimum, six (6) of the Company's Affiliates haveexecuted an Operating Agreement, and that the Company's prices for such services (i) in comparison to agreements between StarMedia and third parties dated on or before the Effective Date, are no higher than prices for comparable services in those agreements for the term of such third party agreements, and (ii) thereafter, no higher than those otherwise available from time to time in the market for comparable services. StarMedia agrees to employ commercially reasonable efforts to terminate existing agreements with third-party vendors of the foregoing services in order to complete such transfer within six (6) months after the signing of the sixth Operating Agreement, it being understood that StarMedia shall not have to breach an agreement with a pre-existing third party vendor of the foregoing services in order to comply with this subsection 2.1(e). (f) As set forth in Section 2.3 of the Operating Agreement, a Participating Affiliate shall have the right to terminate its Operating Agreement in the event of a merger with or acquisition by or of another company that provides wireless telecommunications services. In such an event, the Company shall use its highest commercially reasonable efforts to promote the continued use of the MAP Services by the entity resulting from such merger or acquisition, and provided further that the Company shall use commercially reasonable efforts to cause such Affiliates or successor entity, as applicable, to pay StarMedia the fee set forth in Section 2.3 of the Operating Agreements. (g) StarMedia shall provide all MAP Services to the Company at MFN Prices. 12 (h) For the purposes of this Section 2.1, exclusivity obligations with respect to this Section 2.1 shall apply to joint ventures of the Parties and their respective Affiliates in the Territory. (i) Notwithstanding Section 2.1(e), StarMedia shall transfer all or a substantial portion of its web hosting requirements to an Affiliate of the Company doing business in Miami, Florida (such Affiliate's operation shall hereinafter be referred to as the "E-CENTER") within six (6) months of the Effective Date; provided that StarMedia will not need to make a material change to its network configuration to make any such transfer, that the quality of the services to be provided by the e-Center is comparable or better than the services currently provided to StarMedia at the time of such transfer, and that the prices for such e-Center services (i) in comparison to agreements between StarMedia and third parties dated on or before the Effective Date, are no higher than prices for comparable services in those agreements for the term of such third party agreements, and (ii) thereafter, no higher than those generally available from time to time in the market for comparable services; provided however that the e-Center shall neither be obligated nor entitled to alter its prices more than twice during any twelve (12) month period, and the e-Center shall not be obligated to match promotional discounts or incentives offered by other providers. StarMedia's sole remedies for disputes concerning pricing will be to terminate its obligation to purchase those services for which the e-Center did not meet its pricing obligations. StarMedia may terminate services provided by the e-Center upon the expiration or termination of this Agreement or in the event that six (6) of the Company's Affiliates have not signed Operating Agreements with StarMedia within one year of the Effective Date. StarMedia represents that it does not believe that transferring all or a substantial portion of its web hosting requirements to the e-Center will result in a material change to its network configuration. The Parties shall each designate two representatives within three business days after the Effective Date hereof to form a transfer team (the "TRANSFER TEAM") to design a comprehensive plan, including a milestone schedule for implementation of such plan, to transfer all or a substantial portion of StarMedia's web hosting requirements to such e-Center (the "PLAN"). The Transfer Team shall use its best efforts to agree upon a finalized Plan on or before the first month after the Effective Date hereof.2.2 COMPANY EXCLUSIVITY AND PREFERRED RELATIONSHIP. During the Term, StarMedia shall have the right to procure new wireless Internet applications that have been developed by the Company and/or BSI for StarMedia's use in its other properties outside of the Active Territory, provided the Company or BSI decides to commercialize such wireless Internet applications and further provided that in no event will any Company Competitors be permitted to derive any benefit from access to such applications, directly or indirectly, from or through StarMedia. 2.3 RESALE SERVICES. StarMedia shall have a right of first negotiation to become the provider of any MAP Services that the Company or its Affiliates distributes for resale in the Territory in connection with the sale of wholesale airtime to a reseller operating under the reseller's own brand. 13 ARTICLE III MAP SERVICE DESIGN AND FUNCTIONALITY 3.1 MAP SERVICE DEVELOPMENT AND INTEGRATION. StarMedia shall design, create, serve, host and maintain the MAP service for each Participating Affiliate to use in accordance with the Specifications and with the terms and conditions of this Agreement. 3.2 PRODUCTION WORK. StarMedia will design a unique, integrated, global, customized, co-branded MAP Service "look and feel," site scheme and navigation for portal services available in a multi-access environment in consultation with the Company for use by all Participating Affiliates launching a MAP Service with StarMedia, which will support the Specifications (the "PRODUCTION WORK"). Such Production Work will include branding space for Company and/or its Participating Affiliate, space for Participating Affiliate services, Participating Affiliate colors and two additional local StarMedia content channels which the Participating Affiliate may choose for inclusion in its MAP Service (as such term is defined in the Operating Agreement), and will incorporate StarMedia's expertise in site navigation. Such Production Work will be delivered to Company within two (2) weeks after the Effective Date. Provided that the Company has paid the Production Work Fee set forth in Section 11.1(b) hereof, StarMedia hereby assigns all right, title and interest in the Production Work to the Company. 3.3 ACCEPTANCE TESTING. (a) The Production Work shall be deemed accepted upon the earlier of (i) notification from the Company of acceptance or (ii) two (2) weeks from StarMedia's delivery of such Production Work, unless the Company notifies StarMedia of its reasonable rejection of such Production Work within such time period together with a detailed explanation of how such Production Work needs to be corrected to warrant acceptance from the Company (in which case StarMedia shall have one (1) week to correct any non-conformity as described in such rejection notification). (b) The MAP Service shall be located at such Domain Name(s) as determined by the Company and the applicable Participating Affiliate. The Domain Name(s) shall be the sole and exclusive property of the Company or the particular Participating Affiliate. 3.4 BRANDING AND PLACEMENT. (a) The MAP Service shall be primarily branded with one or more of the Marks designated by the Company and shall include one Mark designated by StarMedia. The placement and size of the StarMedia Mark shall be subject to the Company's approval, but in each case it shall appear either (but not both) (i) above the fold and no smaller than one-fourth the size of the Company or Participating Affiliate's Mark, or (ii) below the fold and no smaller than half the size of the Company or Participating Affiliate's Mark. Each Participating Affiliate may, at its option, include its own branding in the MAP Service provided in such Participating Affiliate's Active Territory. (b) INTENTIONALLY OMITTED. (c) The Voice Portal shall not include audible StarMedia branding unless agreed upon by both Parties. 14 ARTICLE IV TECHNOLOGY 4.1 LICENSED TECHNOLOGY. (a) StarMedia shall enter into the WIS Software License Agreement attached hereto as Exhibit G with the Company on or before the Effective Date hereof. (b) StarMedia shall enter into a WIS Technology Maintenance Agreement attached hereto with the Company to provide maintenance and support to the WIS Technology licensed under the WIS Software License Agreement. (c) StarMedia hereby grants to the Company a nonexclusive, nontransferable, perpetual (subject to the limitation set forth below) license under StarMedia's Intellectual Property Rights to access, use, provide services with, reproduce, maintain, upgrade and install the Licensed Technology within the Territory. Company hereby grants to StarMedia, under and to the full extent of the foregoing license, an exclusive sublicense of said Intellectual Property Rights for the purpose of enabling StarMedia and its Affiliates to provide to the Company and the Participating Affiliates the services contemplated by this Agreement and each Operating Agreement as then being provided from time to time hereunder and thereunder, said exclusive sublicense to remain in effect until the occurrence of a Release Event requiring the release of the Deposit Materials to the Company as described in Section 4.6 hereof, for the purpose of enabling the Company or a contractor on behalf of the Company to provide on the Company's behalf for the Company and/or its Participating Affiliates those services under this Agreement and each Operating Agreement that StarMedia and its Affiliates would have provided hereunder and thereunder but for such Release Event. It is understood and agreed that the license granted to the Company in the first sentence of this Section 4.1 (c) is no broader than that necessary to support the rendition of the then-current services that StarMedia is obligated to provide pursuant to this Agreement and the Operating Agreements, provided, that it is further understood and agreed that after the occurrence of a Release Event, the Company or any contractor on behalf of the Company, to the extent consistent with the next sentence, may begin providing services with the use of the Licensed Technology to Affiliates operating in the Territory that are not Participating Affiliates hereunder. For the avoidance of doubt, it is understood that the Source Code must be protected by the Company and treated as "Confidential Information" of StarMedia and that the foregoing shall in no event be construed so as to authorize the use of StarMedia Technology or access thereto directly or indirectly by or for the benefit of any StarMedia Competitors, unless the only available Persons for the performance of applicable services are StarMedia Competitors. The Company's license granted in the first sentence of this Section 4.1 (c) and its rights to use the Deposit Materials shall terminate in the event that this Agreement is terminated by reason of material breach by the Company based on a violation of StarMedia's Intellectual Property Rights. 4.2 NON-STAND-ALONE TECHNOLOGY. Upon a Release Event, at the Company's and/or a Participating Affiliate's request, StarMedia shall use commercially reasonable efforts to provide the Company or Participating Affiliate, as applicable, with all 15 Technology that is used in the MAP Service that is owned and controlled by StarMedia but not licensable on a stand-alone basis (the "NON-STAND-ALONE TECHNOLOGY") and shall further grant to the Company and/or Participating Affiliate all licenses to such Non-Stand-Alone Technology necessary to ensure continuity of the MAP Service to Subscribers as otherwise provided herein and in the Operating Agreements. 4.3 PRODUCT PATH PLANNING TEAM TECHNOLOGY. (a) In the event either Party develops New Technology or independently acquires any rights with respect to New Technology, it may submit such New Technology to the attention of the Product Path Planning Team, which shall consider it for integration into the MAP Service. If the Product Path Planning Team makes a favorable determination as to such integration, the Parties shall agree on funding of related development costs, revenue sharing and any outstanding questions of ownership, and abide by such agreement. If the Product Path Planning Team makes an unfavorable determination, or fails to make a favorable determination thereon within a reasonable time after such submission, then the Company may: (1) at its sole expense, retain StarMedia on a cost plus 10% profit basis to perform such integration work, in which case StarMedia shall have no right to share the particular revenues associated with the New Technology; or (2) deploy such New Technology outside the Map Service and outside of any restrictions or revenue sharing provisions of this Agreement. In either event (Subsection 4.3(a)(1) or (2) above), the Company shall have Full Ownership Rights with respect to the New Technology. (b) In the event New Technology has been developed jointly by the Product Path Planning Team, and the Product Path Planning Team has made a determination to integrate such New Technology with the MAP Service, the Parties shall agree on funding of related development costs, revenue sharing and any outstanding questions of ownership, and abide by such agreement. (c) If New Technology has been jointly acquired from a third party pursuant to a determination of the Product Path Planning Team, and the Product Path Planning Team has made a determination to integrate such New Technology with the MAP Service, the parties shall agree on funding of related development costs, revenue sharing and any outstanding questions of ownership, and abide by such agreement. 4.4 THIRD PARTY TECHNOLOGY. (a) During the Term, StarMedia shall provide information and cooperation to the Company for the purpose of identifying any Current Critical Technology, provided that such information shall be protected by the Company and treated as "Confidential Information" of StarMedia and used only for the benefit of the Company and Participating Affiliates. Further, StarMedia agrees to use commercially reasonable efforts in conjunction with the Company to secure appropriate licenses for the Company to use the Current Critical Technology in the event of the occurrence of a Release Event, which obligation shall be 16 an ongoing obligation for the duration of the Term as the list of Current Critical Technology may be updated from time to time. In the event that StarMedia and the Company cannot secure the foregoing licenses to any item of Current Critical Technology or a reasonable back-up substitute therefor within three (3) months after the Effective Date, the Company shall have the right to terminate this Agreement pursuant to Section 12.2 hereof. (b) Upon the occurrence of any Release Event, StarMedia shall employ its commercially reasonable efforts to assist the Company to procure from the vendors therefor a license allowing the Company to use such vendors' Third-Party Technology in connection with the exercise of its rights pursuant to Section 4.4(a) hereof. 4.5 CONTINUATION OF RIGHTS PURSUANT TO UNITED STATES BANKRUPTCY CODE. All rights and licenses granted under or pursuant to this Agreement by StarMedia to Company shall be deemed, for purposes of Article 365(n) of the United States Bankruptcy Code (the "CODE"), to be licenses to rights to "intellectual property" as defined under Article 101(35A) of the Code. StarMedia agrees that Company, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Code. StarMedia further agrees that in the event of commencement of bankruptcy proceedings by or against StarMedia, Company shall be entitled to retain all of its rights under this license. 4.6 DEPOSIT MATERIALS. (a) Within thirty (30) days following the Effective Date, StarMedia shall deposit in escrow with Fort Knox Escrow Services, Inc. (or other mutually acceptable escrow agent) pursuant to the Escrow Agreement attached hereto as Exhibit J, a copy of the Deposit Materials. Provided that the Company has paid all applicable maintenance fees due to StarMedia hereunder, if StarMedia corrects any defects in, or provides any revision to, the Deposit Materials, StarMedia shall furnish the escrow agent with a corrected or revised copy of the Deposit Materials within five (5) days. In the event the Deposit Materials are released to the Company, they shall be treated as the confidential information of StarMedia in accordance with the provisions of Section 10 of this Agreement. The Escrow Agreement shall provide that the Deposit Materials are subject to release to the Company if, and only if: (i) StarMedia liquidates, dissolves, or shall be adjudicated insolvent, or files or has filed against it a petition in bankruptcy or for reorganization which is not discharged within 60 days after the filing thereof, or takes advantage of any insolvency act or proceeding, including an assignment for the benefit of creditors, or commits any other act of bankruptcy, (ii) StarMedia ceases to commercially provide an integrated multi-access portal service offering or a content aggregation service offering in the ordinary course without a successor reasonably acceptable to the Company, completely discontinues the MAP Service, or the MAP Service experiences more than two (2) Critical Failures (as such term is defined in the Maintenance and Support Agreements) during each of the Initial Term or Renewal Terms (e.g., one Critical Failure in the Initial Term and one Critical Failure in the next Renewal Term shall not count as two Critical Failures for the purposes of triggering this provision) under any Operating Agreement during the term of such Operating Agreement (it being understood and agreed by the Parties hereto that a Critical Failure that affects more than one Participating Affiliate shall only count as one Critical Failure hereunder), or (iii) StarMedia is acquired by, merges with, or sells all or substantially all of its assets related to its performance under this Agreement to a Company Competitor (each, a "Release Event"). 17 All costs of establishing and maintaining the escrow account(s) described herein shall be borne by the Company. The parties acknowledge and agree that the Escrow Agreement pursuant to which the Deposit Materials are deposited with the escrow agent referred to above is an agreement supplementary to the licenses granted in this Agreement and in connection herewith for purposes of Section 365(n) of the United States Bankruptcy Code. (b) Company may periodically, but not more frequently than once per year, trigger fresh escrow deposits. Company shall reimburse StarMedia and the escrow agent under the Escrow Agreement for the reasonable expenses incurred in the preparation of such fresh escrow deposits. In addition to triggering fresh deposits, Company shall have the right through a reputable third party designated by Company that is not a competitor of StarMedia, to validate the materials on deposit upon thirty (30) calendar days prior written notice to and in the presence of StarMedia, but no more frequently than two (2) times per year. Any third party designated by Company to validate the materials on deposit shall be required to execute a nondisclosure agreement with StarMedia, in a form reasonably satisfactory to StarMedia, which nondisclosure agreement shall require that such third party's report to Company contain only a non-confidential description of results of such validation. Verification shall take place at StarMedia's convenience during normal business hours on mutually designated hardware. Such verification shall be at Company's expense unless the materials on deposit are not current, in which event StarMedia shall bear all costs associated therewith. (c) SUFFICIENCY OF DEPOSIT MATERIALS WARRANTY. StarMedia represents and warrants to the Company that it has used and will use all commercially reasonable efforts to ensure that at all times during the term of this Agreement, included within the Deposit Materials shall be everything necessary (other than commercially or freely available software tools and libraries) to recreate the executable code for the then current versions of the WIS Technology and Gen3 Technology and to identify the Subscribers. 4.7 INFRINGEMENT INDEMNITY. (a) StarMedia agrees, at its own expense, to defend or at its option to settle any claim or action brought by any third party against the Company or any of its Affiliates on the issue of infringement of any Intellectual Property Right by Company's or any such Affiliate's use of any Technology provided by StarMedia (to the extent that Company or such Affiliate has been granted the right to use such Technology hereunder or under the WIS Software License Agreement and Participating Affiliate WIS Software Sublicense Agreement (as defined in the Operating Agreement)) or display of any content furnished by StarMedia (and not provided by the Company or any Participating Affiliates) (including, without limitation, the Production Work), or by StarMedia's use of any such Technology or provision of such content to provide the MAP Service, and to indemnify the Company and its Affiliates against any and all damages and costs, including legal fees, that a court awards against the Company and each such Affiliate, or that are paid in settlement in accordance with this Section 4.7, and any Termination Loss incurred in the event of the applicability of Section 4.7 (b)(2) below (as such term is defined therein), PROVIDED, THAT the Company provides StarMedia with prompt notice of the assertion of any such claim and the opportunity to control the defense and/or settlement thereof, and PROVIDED FURTHER THAT, notwithstanding anything to the contrary set forth in this Agreement, in no event shall the total 18 aggregate liability of StarMedia and its Affiliates to provide indemnification to the Company and its Affiliates pursuant to this Section 4.7 and Section 4.2 of each Operating Agreement, or otherwise, for infringement of third-party intellectual property rights, exceed the amount of fifty million dollars (U.S.$50,000,000) (the "CAP"), except that (A) the amount of any payments made by StarMedia pursuant to Section 4.7 (b)(1) below or withheld from StarMedia pursuant to Section 4.7 (b)(2) below shall not be counted in accounting for the Cap, and (B) the Cap shall not apply with respect to any claim for infringement of third-party Intellectual Property Rights of which StarMedia had knowledge as of the Effective Date but failed to disclose to the Company at or prior to the Effective Date. StarMedia shall not enter into any settlement, admit any liability on behalf of the Company or any Affiliate, or consent to any adverse judgment that would adversely affect the rights, interest or business of the Company or any Affiliate without the prior written consent of the Company and/or the applicable Affiliate(s). (b) If the Technology or content used or displayed as contemplated hereunder, or any part thereof, becomes, or in StarMedia's reasonable opinion is likely to become, unavailable for use in accordance with this Agreement or any Operating Agreement, then StarMedia shall at its sole expense either: (i) procure the right to continue using same as contemplated hereunder; (ii) modify same to render same non-infringing (provided such modification does not materially adversely affect such item); or (iii) replace same with a substantially equally suitable, functionally equivalent, compatible, non-infringing element. Provided, however, if none of the foregoing options are reasonably available and practicable: (1) And the Technology at issue is a single stand alone item of Non-Critical Technology (hereinafter defined), StarMedia shall have the right to immediately discontinue any such potentially infringing use of such item of Non-Critical Technology in connection with the MAP Service and, upon StarMedia's request, Company shall immediately discontinue any such potentially infringing use of such item of Non-Critical Technology in connection with the MAP Service, and StarMedia shall refund Company and its Applicable Affiliates in an amount equal to the lesser of (x) two hundred thousand dollars ($200,000) or (y) all fees previously paid to StarMedia for such infringing Non-Critical Technology, and (as stated in Section 4.7 (a) above) such amount shall not be included in any calculation of the Cap. "NON-CRITICAL TECHNOLOGY", as used herein, shall mean Technology other than (i) Current Critical Technology; (ii) WIS Technology; (iii) Gen3 Technology; or (iv) Technology, which alone or in combination with other Technology, is essential to the continued operation of the MAP Service. For the avoidance of doubt, StarMedia may terminate only one item of Non-Critical Technology as set forth in this Section 4.7(b)(1). (2) And the Technology at issue is any Current Critical Technology, WIS Technology or Gen3 Technology, or Current Critical Technology, WIS Technology or Gen3 Technology combined with any other Technology, then StarMedia may thereafter terminate this Agreement upon six (6) months notice to Company and, in such event, from and after the date such notice is received: (i) all obligations of Company and its Affiliates to pay StarMedia and its Affiliates hereunder and under the Operating Agreements shall terminate; and (ii) Company and its Affiliates shall be entitled to 19 receive the indemnification provided under subsection 4.7(a) hereof, including in such event any and all loss, damages, cost or expense, within the Cap, incurred by the Company or its Affiliates as a proximate result of such termination ("TERMINATION LOSS"). (c) The Company acknowledges and agrees that the remedies provided pursuant to this Section 4.7 shall constitute its exclusive remedy pursuant to this Agreement or otherwise in connection with infringement for violation of third party Intellectual Property Rights. 4.8 COMPANY CONTACT PERSONNEL. Company shall have the right to designate two (2) Company employees or representatives as qualified to contact StarMedia for technical support regarding problems of which Company becomes aware relating to any MAP Service provided by StarMedia to a Participating Affiliate. ARTICLE V MAP SERVICE DELIVERY AND LAUNCH StarMedia shall make MAP Services available for Launch as specified in the applicable Operating Agreement, which MAP Service shall be available for Launch no later than ninety (90) days after the Effective Date of each such Operating Agreement. ARTICLE VI PRODUCT PATH PLANNING TEAM 6.1 PURPOSE. The Parties shall jointly form and maintain an ongoing management team (the "PRODUCT PATH PLANNING TEAM") which shall be responsible for creating the product path and quarterly launch plans and shall work to secure third party applications and to integrate applications provided to the MAP Service by the Company. 6.2 TEAM MEMBERS. Each Party shall designate two individuals who may be appointed from time to time by each Party to participate as members of the Product Path Planning Team and to cooperate on all matters arising pursuant to this Agreement, including without limitation, design, promotions, content priorities and project execution. The Product Path Planning Team will meet on a quarterly basis and shall finalize product path plans, including the determination of Launch dates which shall be deemed part of the Milestone Schedule once finalized, in accordance with the terms and conditions of this Agreement. The Product Path Planning Team shall determine the economic feasibility of integrating new applications for the MAP Service on a case by case basis from time to time under standard business case analysis. 20 6.3 RESOURCES. The Parties shall commit such resources into the development process via the Product Path Planning Team as agreed upon by the parties during the planning phase of any new Product Path Planning Team undertaking. ARTICLE VII SUBSCRIBER DATA All Subscriber Data is, or will be, and shall remain, the sole and exclusive property of the Participating Affiliate and its third party licensors, shall be deemed Confidential Information of the Participating Affiliate and shall not be used by StarMedia except as otherwise provided in the Operating Agreements. ARTICLE VIII INTELLECTUAL PROPERTY RIGHTS 8.1 CONTENT AND PRODUCTION WORK OWNERSHIP. All content, including without limitation, any photos, text, illustrations, graphical elements and animation, appearing on the MAP Service or on the StarMedia Websites, except as expressly provided herein, is and shall remain the sole and exclusive property of the Party (and its third party licensors) that provides such content, and except as otherwise provided hereunder, the other Party shall acquire no right, title or interest therein or thereto. Notwithstanding the foregoing, Company shall own all right, title, and interest in and to the Production Work and to any content created by StarMedia at the request of Company under this Agreement at the Company's cost and expense ("DEVELOPED CONTENT"), including all Intellectual Property Rights therein. StarMedia expressly acknowledges that the Parties have agreed that all aspects of the Production Work and Developed Content and all work in process in connection therewith are to be considered "works made for hire" within the meaning of the Copyright Act of 1976, as amended (the "Act"), and that Company is to be the "author" within the meaning of such Act. In the event (and to the extent) that the Production Work or the Developed Content created by StarMedia hereunder or any part or element thereof is found as a matter of law not to be a "work made for hire" within the meaning of the Act, StarMedia hereby conveys and assigns to Company the sole and exclusive right, title, and interest in the ownership to the Production Work and all such Developed Content, and all copies of any of them, without further consideration. 8.2 TECHNOLOGY OWNERSHIP. (a) All Technology provided by either Party hereto shall remain the sole and exclusive property of its respective owner, and except as otherwise expressly agreed, neither Party hereto acquires any right, title or interest in the Technology provided by the other Party. (b) All New Technology shall be owned as provided in Section 4.3 hereof. 21 8.3 MARKS OWNERSHIP AND LICENSE. All Marks provided by either Party or its Affiliates shall remain the sole and exclusive property of its respective owner, and neither Party nor its Affiliates acquire any right, title or interest in the Marks provided by the other Party. Without limiting the foregoing: (a) StarMedia and its Affiliates hereby grant to Company and its Affiliates, during the Term of this Agreement and subject to its conditions, a non-exclusive, non-transferable, non-sublicensable, royalty-free, worldwide license to use, display, perform, reproduce and distribute StarMedia's Marks solely as set forth in this Agreement. (b) Company's affiliate, BellSouth Corporation, has agreed to grant to StarMedia a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use, display, perform, reproduce and distribute certain of Company's Marks, solely as set forth in this Agreement and pursuant to the Trademark License Agreement attached hereto as Exhibit J and incorporated herein by reference. Certain Participating Affiliate Marks may be owned by the respective Participating Affiliate and will require a separate trademark license agreement between StarMedia and the Participating Affiliate. BellSouth Corporation is the owner of Company's Marks in the Territory. ARTICLE IX MARKETING AND MEDIA RIGHT OF FIRST NEGOTIATION. The Company shall have the right of first negotiation on a pan-regional basis for the purchase of sponsorship and provision of Wireless Access Services on the StarMedia Websites in the Active Territories, such right to be in effect for five (5) business days after written notification by StarMedia, provided that, if after presenting such opportunity to the Company, StarMedia shall offer such opportunity to a third party on terms and conditions more favorable than those offered to the Company, then the Company shall further have a right of first refusal with respect to the terms offered to such third party, which right of first refusal shall be in effect for two (2) business days after written notification by StarMedia. ARTICLE X CONFIDENTIALITY 10.1 CONFIDENTIAL INFORMATION. The Company and StarMedia shall, and shall cause their Affiliates to, (i) hold all Confidential Information in confidence and take all reasonable precautions to protect such Confidential Information (including, without limitation, all precautions such Person employs with respect to its own confidential materials of a similar nature), (ii) not divulge any such Confidential Information of such other Person or any information derived therefrom to any third person except to its employees, independent contractors or Affiliates that have a need to know such information to further the permitted use thereof pursuant to this Agreement, that are bound by appropriate confidentiality obligations and 22 that are informed of such non-disclosure obligations, which measures, however, shall not operate to relieve the applicable Party to this Agreement from liability for such employees', independent contractors' and/or Affiliates' actions in breach of this Section, (iii) not make any use whatsoever, at any time, of any Confidential Information of such other Person except to the extent necessary to exercise any right or license granted, or perform any obligations, under this Agreement, and (iv) not copy (except as reasonably necessary to exercise the rights or obligations under this Agreement) or reverse engineer or reverse compile any Confidential Information of such other Person which is computer code. For purpose of this Article X, Confidential Information of Affiliates of each Party shall be treated as Confidential Information of such Person. The foregoing obligations shall survive (i) as to Confidential Information that constitutes a trade secret for so long as such information remains a trade secret under applicable law and (ii) for all other Confidential Information, for a period of five (5) years from the date of termination or expiration of this Agreement. 10.2 LIMITATION OF CONFIDENTIALITY. Without granting any right or license, the foregoing obligations shall not apply to the extent that the receiving Person can demonstrate that such Confidential Information of the other Person (A) is required to be disclosed pursuant to any statutory or regulatory authority, provided the disclosing Person is given prompt notice of such requirement and the scope of such disclosure is limited to the maximum extent consistent with compliance with such authority, or (B) is required to be disclosed by a court order, provided the disclosing Person is given prompt notice of such order and given the opportunity to contest it and the scope of the disclosure is limited to the maximum extent consistent with compliance with such order. The terms of confidentiality under this Agreement shall not be construed to limit any bound Person's right to independently develop or acquire products without use of the disclosing Person's Confidential Information. Upon termination or expiration of this Agreement for any reason, each bound Person shall return to the disclosing Person (or certify the destruction of) all tangible manifestations (including computer records) of the disclosing Person's Confidential Information and certify the deletion or destruction of any other manifestations of same, in any medium, except that the Company shall not be obligated to return any Confidential Information of StarMedia that may be necessary for the Company to exercise any of its ongoing rights granted under this Agreement or under the WIS Software License Agreement, for so long as and to the extent necessary. 10.3 CONFIDENTIALITY OF AGREEMENT. Except (i) to the extent required by applicable law or regulation, subject to compliance with the requirements of the first sentence of Section 10.2 above in each instance, (ii) to assert its rights hereunder, (iii) in connection with financing where the prospective provider of financing agrees to be bound by the confidentiality provisions of this Agreement, or (iv) for disclosures to its own employees and independent contractors on a "need to know" basis, the Company, StarMedia and their respective Affiliates shall not disclose the terms of this Agreement or the subject matter hereof without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed. For disclosures pursuant to applicable law or regulation, the Parties will cooperate in seeking and jointly produce an acceptable redacted version of this Agreement (including the Exhibits hereto) and the Parties will use good faith reasonable efforts to obtain acceptable confidential treatment from any government agency or self regulatory authority and/or acceptable confidentiality 23 agreements from any applicable non-governmental parties, in each case sufficiently protective of the Confidential Information. 10.4 INJUNCTIVE RELIEF. The Company and StarMedia expressly agree that monetary damages would be inadequate to compensate the other for any breach of this Article X, that any such breach or threatened breach of this Article X shall cause irreparable injury to either the Company or StarMedia (as the case may be) and that, in addition to any other remedies that may be available, at law or in equity, the Company and StarMedia shall be entitled to seek injunctive relief against the threatened breach of any provision of this Article X or the continuation of any such breach without the necessity of proving actual damages or posting a bond. ARTICLE XI PAYMENTS 11.1 STARMEDIA FEES. (a) In consideration for the right to use the WIS Technology granted herein, the Company shall pay U.S. [information has been omitted and filed separately with the Securities and Exchange Commission in connection with a request for confidential treatment] to StarMedia upon the execution hereof. (b) In consideration of StarMedia's creation of the Production Work, the Company shall pay U.S. [information has been omitted and filed separately with the Securities and Exchange Commission in connection with a request for confidential treatment] to StarMedia upon the execution hereof. (c) In consideration of StarMedia's services in maintaining the Licensed Technology, the Company shall pay U.S. [information has been omitted and filed separately with the Securities and Exchange Commission in connection with a request for confidential treatment] per year of the Term, the first installment thereof to be paid upon execution hereof and each successive installment to be paid on each anniversary of this Agreement during the Term. Provided, however, if Company terminates this Agreement pursuant to Section 12.2, 12.3 or 12.4, Company shall be entitled to a pro-rata refund of any such pre-paid maintenance fees. (d) In consideration for the right to use the Licensed Technology granted herein, the Company shall pay U.S. [information has been omitted and filed separately with the Securities and Exchange Commission in connection with a request for confidential treatment] to StarMedia upon the execution hereof (e) Solely for the purpose of determining whether the Volume Discount Threshold has been met, the value of barter goods and services actually received from third party advertisers by StarMedia or its Affiliates in exchange for advertising on the MAP Services shall be considered as "cash receipts" credited at 25% of then prevailing rate card prices in calculating Net Advertising Revenues for such purpose. For the avoidance of doubt, the value of barter goods and services shall not count towards the Volume Discount Amount. 11.2 PAYMENT. All payments made by the Company shall be in U.S. Dollars. All payments made by a Participating Affiliate pursuant to an applicable Operating Agreement may be made in the Local Currency in the Participating Affiliate's discretion. The Company will use reasonable efforts to cause its Participating Affiliates choosing to make payments in Local 24 Currency of amounts denominated in U.S. dollars to determine the amount of Local Currency due in accordance with Section 10.1(c) of the Operating Agreement. The First Party shall be responsible for all Withholding Takes with respect to payments made to it by the Second Party. If the second Party (i) receives notice or other instructions from a taxing authority that such Party is required to withhold Withholding Taxes or (ii) otherwise reasonably believes that it is required under applicable law to withhold Withholding Taxes from payments to the First Party or any Affiliate of the First Party, the Second Party may withhold such Withholding Taxes from such payments. In that event, the Second Party will timely (x) remit such Withholding Taxes to the appropriate taxing authority, and (y) provide to the First Party copies of official tax receipts or other evidence sufficient to establish that any such Withholding Taxes have been remitted to the appropriate taxing authorities. All payments will be made net of Withholding Taxes, and the Second Party will not be required to "gross up" such payments to account for any amounts withheld. If applicable under local law, the First Party may provide to the Second Party an exemption certificate acceptable to the Second Party and the relevant taxing authority, in which case the Second Party will not withhold the Withholding Taxes covered by such certificate. 11.3 VOLUME DISCOUNT. Beginning with the first calendar month in the month with respect to which the Volume Discount Threshold has been reached, each Operating Agreement shall provide that the Usage Commissions (as defined in the Operating Agreements) payable by the Participating Affiliate to StarMedia or its Affiliates shall be reduced by the Volume Discount Amount. StarMedia shall provide prompt written notice to the Company after the Volume Discount Threshold has been reached. 11.4 OPTIONS. (a) Subject to the terms and conditions hereinafter set forth and effective as of the Effective Date and in consideration for entering into this Agreement, StarMedia hereby grants Company options (the "OPTIONS") to purchase from StarMedia up to 4,500,000 shares of Common Stock (the "OPTION SHARES") exercisable on or after the first anniversary date of the Effective Date (the "COMMENCEMENT DATE") until the applicable expiration dates set forth in the table below for each tranche (the "EXPIRATION DATE"), at a corresponding exercise price per Option Share (the "EXERCISE PRICE") as set forth below:
- ------------------------------------------------------------------------------------------- NUMBER OF OPTION SHARES EXPIRATION DATE EXERCISE PRICE (PER SHARE) - ------------------------------------------------------------------------------------------- 1,500,000 48 months after Effective Date U.S.$4.55 - ------------------------------------------------------------------------------------------- 1,500,000 60 months after Effective Date U.S.$6.55 - ------------------------------------------------------------------------------------------- 1,500,000 72 months after Effective Date U.S.$8.55 - -------------------------------------------------------------------------------------------
The Options may be exercised anytime from the Commencement Date until the applicable Expiration Date (the "EXERCISE PERIOD"), subject to extension as provided in the last sentence of Section 11.4(b). Company may not assign or transfer any Option to any Person other than a Permitted Transferee; provided, however, that (i) any such assignment or transfer to a Permitted Transferee shall be in compliance with applicable law (including, without limitation, the Securities Act of 1933, as amended) and the terms and conditions of this Agreement, and (ii) 25 prior to any such assignment or transfer, the Company shall deliver to StarMedia (x) a written notice setting forth the name of such Permitted Transferee and the number of Option Shares subject to the Option proposed to be assigned or transferred and (y) an express written assumption by such Permitted Transferee of the terms and conditions of the Options proposed to be assigned or transferred. No Permitted Transferee may transfer any Option, except to any successor to such Permitted Transferee by operation of law. (b) In order to exercise any Option at any time during the applicable Exercise Period, Company or the Permitted Transferee, as the case may be, shall give written notice to StarMedia of its election to exercise such Option in whole or in part from time to time (the "CALL NOTICE") which notice shall state the number of Option Shares as to which the Option is being exercised and the method of payment of the Exercise Price, as described below. The closing of the purchase and sale of the applicable Option Shares (an "Option Closing") shall take place at the offices of StarMedia within ten (10) business days following StarMedia's receipt of the Call Notice, subject to extension as provided in the last sentence of this Section 11.4(b). At the applicable Option Closing, StarMedia shall deliver the applicable Option Shares in the form of a certificate issued in the name of the Company or the name of any Permitted Transferee who received the applicable Option in accordance with the last sentence of Section 11.4 (a), as the case may be, (bearing the legend required by Section 11.4(f) of this Agreement), upon receipt by StarMedia of (i) payment of the applicable Exercise Price for each Option Share and (ii) written confirmation by the Company or such Permitted Transferee, as the case may be, that the representations and warranties contained in Section 13.3 are true and correct with respect to such Person as if made on the date of such Option Closing. The applicable Exercise Price shall be paid (i) by wire transfer of immediately available funds to a bank account designated by StarMedia at least three (3) business days prior to the date of such payment, (ii) to the extent permitted by (a) applicable law (including federal and state securities laws), (b) StarMedia's certificate of incorporation and by-laws, (c) the terms of any agreement or instrument to which StarMedia is a party and (d) the terms of any security issued by StarMedia, by delivery to StarMedia of certificates representing shares of Common Stock (each such share to be valued at an amount equal to the average closing sale price of the Common Stock on Nasdaq over the thirty trading days immediately preceding the applicable Option Closing) with an aggregate value equal to the applicable Exercise Price, or (iii) by any combination thereof. Notwithstanding the foregoing, if so specified in the applicable Call Notice and to the extent permitted by (a) applicable law (including federal and state securities laws), (b) StarMedia's certificate of incorporation and by-laws, (c) the terms of any agreement or instrument to which StarMedia is a party and (d) the terms of any security issued by StarMedia, the Company or any Permitted Transferee, as the case may be, may consummate the purchase and sale of the applicable Option Shares by irrevocably authorizing a broker acceptable to StarMedia to sell the applicable Option Shares and remit to StarMedia a sufficient portion of the proceeds of such sale to pay the applicable Exercise Price in full. On or before any Option Closing, all required filings (if necessary) under the HSR Act shall have been made by the parties required to do so, and any waiting period (and any extension thereof) under the HSR Act, applicable to the transactions contemplated in connection with such Option Closing shall have expired or shall have terminated and neither StarMedia nor 26 the Company or any Permitted Transferee, as the case may be, shall be subject to any injunction or temporary restraining order against consummation of the transactions contemplated hereby. The obligation of the Company or any Permitted Transferee, as the case may be, and StarMedia to proceed with the Option Closing shall be conditioned upon, and the date scheduled for the Option Closing and, if necessary, the applicable Expiration Date shall be extended to a date up to ten (10) business days following the last to occur of the receipt of all material governmental and regulatory consents, approvals or waivers that are required in connection with the purchase and sale of the applicable Option Shares. (c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, StarMedia shall (x) effect a reorganization, (y) consolidate with or merge into any other Person, or (z) transfer all or substantially all of its properties or assets to any other Person under any plan or arrangement contemplating the dissolution of StarMedia, then, in each such case, the Option shall continue to be in full force and effect and Company or any Permitted Transferee, as the case may be, on the exercise of the Option as provided in Section 11.4(b) at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, if after such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, no shares of Common Stock shall be outstanding that are identical to the shares of Common Stock outstanding immediately prior to such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, in lieu of the Common Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which Company or any Permitted Transferee, as the case may be, would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if Company or any Permitted Transferee, as the case may be, had so exercised its Option immediately prior thereto, all subject to further adjustment thereafter as provided in Section 11.4(d). StarMedia shall cause the issuer of any such stock or other securities, or, in the case of any such transfer, the Person acquiring all or substantially all of the properties or assets of StarMedia, to agree to be bound by the terms and conditions of the Options, whether or not such Person shall have expressly assumed the terms of the Options. (d) In the event that StarMedia shall (i) issue additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the applicable Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then applicable Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 11.4(d). Company or any Permitted Transferee, as the case may be, shall thereafter, on the exercise hereof as provided in Section 11.4(b), be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares 27 of Common Stock which would otherwise (but for the provisions of this Section 11.4(d)) be issuable on such exercise by a fraction of which (i) the numerator is the Exercise Price which would otherwise (but for the provisions of this Section 11.4(d)) be in effect and (ii) the denominator is the Exercise Price in effect on the date of such exercise after the application of this Section 15(d). (e) CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Options, StarMedia at its expense will, within fifteen (15) days following the adjustment or readjustment event, cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the terms of the Options and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of the applicable Exercise Price and the maximum number of shares of Common Stock to be received upon exercise of the Options, in effect immediately prior to such adjustment or readjustment and as adjusted and readjusted as provided herein. StarMedia will forthwith mail a copy of such certificate to Company, and will, on the written request at any time of Company, furnish Company a like certificate setting forth the Exercise Price in effect at such time and showing how it was calculated. (f) LEGEND. The certificates representing the Option Shares shall bear the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION WITHIN THE UNITED STATES AND ITS TERRITORIES, POSSESSIONS OR THE SECURITIES LAWS OF ANY FOREIGN JURISDICTION. NEITHER THESE SECURITIES NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN OPINION OF COUNSEL SATISFACTORY TO STARMEDIA NETWORK, INC. IS RECEIVED STATING THAT SUCH TRANSACTION IS NOT SUBJECT TO THE REGISTRATION AND/OR PROSPECTUS DELIVERY REQUIREMENTS OF ANY SUCH JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT STARMEDIA NETWORK, INC. MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY SECTION 4(2) THEREUNDER AND/OR THE PROVISIONS OF REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933. (g) DESIGNATION. StarMedia hereby specifically designates the Option Shares as "Other Shares" under the Securities Purchase Agreement.] ARTICLE XII 28 TERM AND TERMINATION 12.1 TERM. The term of this Agreement will commence on the Effective Date and, unless earlier terminated pursuant to the provisions of this Article XII, shall continue on for five (5) years (the "INITIAL TERM"). The term of this Agreement shall automatically renew upon the expiration of the Initial Term for successive one (1) year periods (each a "RENEWAL TERM"), unless either Party notifies the other Party to the contrary at least ninety (90) days prior to the expiration of the Initial Term or then-current Renewal Term, as applicable, provided that the first such Renewal Term may be elected unilaterally by the Company by written notice on or before the beginning of such ninety (90) day period. For the purposes hereof, the Initial Term together with all Renewal Terms shall constitute the "TERM." 12.2 BREACH. The Company may terminate this Agreement without prejudice to any other rights it may have hereunder or at law upon thirty (30) days prior written notice, in the event of a material breach of this Agreement (a "DEFAULT") by StarMedia which has not been cured during the 30-day period immediately following such notice of termination. It is understood and agreed by the Parties hereto that more than two (2) Critical Failures (as such term is defined in the Maintenance and Support Agreements) during each of the Initial Term or Renewal Terms (e.g., one Critical Failure in the Initial Term and one Critical Failure in the next Renewal Term shall not count as two Critical Failures for the purposes of triggering this provision) under any Operating Agreement during the term of such Operating Agreement (it being understood and agreed by the Parties hereto that a Critical Failure that affects more than one Participating Affiliate shall only count as one Critical Failure hereunder) shall constitute a material breach of this Agreement. StarMedia may terminate this Agreement without prejudice to any other rights it may have hereunder or at law upon thirty (30) days prior written notice, in the event of a Default arising by reason of violation of StarMedia's Intellectual Property Rights by the Company which has not been cured during the 30-day period immediately following such notice of termination. Notwithstanding Section 16.17, in the event that the Company terminates this Agreement pursuant to this Section 12.2, StarMedia shall provide the Company with a list of key employees and the Company shall be entitled to solicit any StarMedia employees or individual consultants for employment or other contractual engagement. Moreover, in the event that this Agreement is terminated for any reason, StarMedia may terminate the Operating Agreements except where and to the extent that the Active Territory is any portion of Brazil and in the event of such termination shall provide a six (6) month wind-down of the MAP Service as provided in Section 12.5 hereof. 12.3 BANKRUPTCY. Either Party may terminate this Agreement without prejudice to any other rights it may have hereunder or at law immediately upon written notice, in the event the other Party liquidates, dissolves, or shall be adjudicated insolvent, or files or has filed against it a petition in bankruptcy or for reorganization which is not discharged within 60 days after the filing thereof, or takes advantage of any insolvency act or proceeding, including an assignment for the benefit of creditors, or commits any other act of bankruptcy. Notwithstanding Section 16.17, in the event that the Company terminates this Agreement pursuant to this Section 12.3, 29 StarMedia shall provide the Company with a list of key employees and the Company shall be entitled to solicit any StarMedia employees or individual consultants for employment or other contractual engagement. 12.4 CHANGE IN CONTROL. The Company shall be entitled to terminate this Agreement if there is a Change in Control of StarMedia to a Company Competitor on thirty (30) days' written notice to StarMedia delivered within ninety (90) days of the Company's first receiving written notice from StarMedia of such Change in Control. 12.5 PROVISION OF ASSISTANCE. In the event that this Agreement expires or the Company terminates this Agreement pursuant to Sections 12.2, 12.3, or 12.4 at the election of the Company, either (i) StarMedia shall assign up to six (6) StarMedia employees in the following functional capacities: software architecture, database architecture, server cluster architecture, content management, wireless and WIS interface management and operations management, with access to the services and tools reasonably necessary to consult for the Company for up to six months, at reasonable time and materials rates with regard to the use of any software licensed hereunder or under any Operating Agreement or any Deposit Materials, or (ii) StarMedia will provide the MAP Services to those Participating Affiliates as of the date of termination or expiration as provided for under the terms and conditions of this Agreement and each Operating Agreement on a month to month basis for up to six (6) months as determined by each such Participating Affiliate (the "TRANSITION PERIOD"). StarMedia shall have no obligation to further develop the MAP Service during the Transition Period. Notwithstanding anything contained herein to the contrary, in the event that the Company terminates this Agreement pursuant to Section 12.2, the Company cannot concurrently exercise its rights under this Section 12.5 and Section 16.17 hereof. ARTICLE XIII REPRESENTATIONS AND WARRANTIES 13.1 STARMEDIA'S REPRESENTATIONS AND WARRANTIES. StarMedia represents and warrants to the Company that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations hereunder, (ii) the making and performance by it of this Agreement does not and will not violate any law or regulation applicable to it, its certificate of incorporation, by-laws or other organizational documents or any other agreement to which it is a party or by which it is bound, (iii) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it in accordance with the respective terms hereof (except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general applicability affecting enforcement of creditors' rights generally, or by a court's discretion in relation to equitable remedies), (iv) all approvals, authorizations or other actions by, or filings with, any governmental authority or other person or entity necessary for the validity or enforceability of its obligations under this Agreement have been obtained, (v) the MAP Service, the Production Work and all underlying Technology provided by StarMedia shall function and perform in accordance with the Specifications and any product manual documentation provided 30 by StarMedia to the Company, (vi) it has all necessary rights, licenses and approvals required to provide the MAP Service and all other products and services provided hereunder to the Company and its Participating Affiliates, and to their respective Subscribers, in accordance with this Agreement, (vii) neither the MAP Service nor any Technology nor other service provided by StarMedia to the Company and its Participating Affiliates, and to their respective Subscribers, nor any portion or use thereof in accordance with this Agreement, will infringe upon or violate any patent, copyright, trade secret or other proprietary or personal right of any third party, (viii) all obligations owed to third parties with respect to the activities contemplated to be undertaken by StarMedia pursuant to this Agreement are or will be fully satisfied by StarMedia so that neither the Company nor any of its Participating Affiliates will have any obligations (other than obligations set forth in this Agreement and/or in the applicable Operating Agreement) with respect thereto, (ix) StarMedia will comply with the reasonable privacy policies of the Company and each Participating Affiliate (with respect to the applicable Active Territory), as the same are posted from time to time on the Company website or the applicable Participating Affiliate's website, as applicable, in the provision of the MAP Service and in the performance of its other obligations hereunder, (x) the content appearing on the MAP Service and on the StarMedia Websites generated by StarMedia, its Affiliates and its contracted third-party content providers shall not contain libelous, defamatory, obscene, pornographic or profane material or any instructions that may cause harm to any individuals; and (xi) such content may be reproduced, used, converted into digital or other electronic media, displayed, and distributed as contemplated by this Agreement without violating or infringing the rights of any other Person, including infringing any copyright, trademark or right of privacy, or any other intellectual or industrial property right, title or interest of any Person, and without obligating the Company or any of its Participating Affiliates to pay any royalties, fees or other compensation to third parties. 13.2 COMPANY'S REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to StarMedia that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations hereunder, (ii) the making and performance by it of this Agreement does not and will not violate any law or regulation applicable to it, its certificate of incorporation, by-laws or other organizational documents or any other agreement to which it is a party or by which it is bound, (iii) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it in accordance with the respective terms hereof (except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general applicability affecting enforcement of creditors' rights generally, or by a court's discretion in relation to equitable remedies), (iv) the Company is in compliance with all applicable governmental laws and regulations and (v) all approvals, authorizations or other actions by, or filings with, any governmental authority or other person or entity necessary for the validity or enforceability of its obligations under this Agreement have been obtained. 13.3 COMPANY'S INVESTMENT REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to StarMedia, understanding and agreeing that StarMedia is entering into this Agreement in part in reliance on such representations and warranties, as follows: 31 (a) The Company is an "Accredited Investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act; (b) The Company has been advised by StarMedia that the Options and the Option Shares have not been registered under the Securities Act, that the Options and the Option Shares will be issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any federal or state agency or self-regulatory organization where an exemption is being relied upon, and that the StarMedia's reliance thereon is based in part upon the representations made by the Company in this Agreement. The Company acknowledges that it has been informed by StarMedia of, or is otherwise familiar with, the nature of the limitations imposed by the Securities Act and the rules and regulations thereunder on the transfer of securities; (c) The Company is purchasing the Options and, if applicable, the Option Shares for investment purposes, for its own account and not with a view to, or for sale in connection with, any distribution thereof in violation of federal or state securities laws; (d) The Company has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to StarMedia so that it is capable of evaluating the merits and risks of its investment in StarMedia and has the capacity to protect its own interests. The Company must bear the economic risk of this investment indefinitely unless the Options (or the Option Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. The Company understands that StarMedia has no present intention of registering the Options or the Option Shares unless and to the extent it is required to do so pursuant to Article VIII of the Securities Purchase Agreement. The Company also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow the Company to transfer all or any portion of the Options or the Option Shares under the circumstances, in the amounts or at the times the Company might propose. The Company represents that by reason of its, or of its management's, business or financial experience, the Company has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Further, the Company is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement; (e) The Company has had an opportunity to discuss StarMedia's business, management and financial affairs with directors, officers and management of StarMedia and has had the opportunity to review StarMedia's operations and facilities. The Company acknowledges that it is relying entirely on its own due diligence investigation of StarMedia. The Company has also had the opportunity to ask questions of, and receive answers to the Company's satisfaction from, StarMedia and its management regarding the terms and conditions of this investment; 32 (f) The Company acknowledges and agrees that the Options and, if issued, the Option Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Company has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about StarMedia, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations; (g) The Company acknowledges and agrees that the Option Shares and, if issued, the Option Shares are subject to restrictions on transfer as set forth in this Agreement]. 13.4 NO OTHER REPRESENTATIONS AND WARRANTIES. EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR IN THE EXHIBITS HERETO, NEITHER PARTY HERETO MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE TRANSACTIONS CONTEMPLATED HEREBY AND SERVICES PROVIDED HEREUNDER, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ARTICLE XIV INDEMNIFICATION 14.1 STARMEDIA'S INDEMNIFICATION OBLIGATIONS. Subject to Section 14.3, StarMedia shall indemnify, hold harmless and defend the Company from and against any and all claims, liabilities, losses, damages, expenses and costs (including without limitation, legal fees and costs) (collectively, "CLAIMS") arising out of or relating to (i) StarMedia's breach of any of its representations and warranties set forth herein, (ii) the StarMedia Websites, (iii) the efforts of any taxing authority to collect Withholding Taxes from the Company with respect to payments made to StarMedia or its Affiliates, (iv) any gross negligence or willful misconduct by StarMedia or any of its Affiliates, or any of their respective employees or agents or (v) libel or slander by the content of the MAP Service provided by StarMedia and its licensors. For the avoidance of doubt, nothing in this Section 14.1 shall be construed to provide indemnification for any matter which is covered by Section 4.7 hereof. 14.2 COMPANY'S INDEMNIFICATION OBLIGATIONS. Subject to Section 14.3, the Company shall indemnify, hold harmless and defend StarMedia from and against any and all Claims arising out of or relating to (i) the Company's breach of any of its representations and warranties set forth herein, (ii) the Access Services, or (iii) any gross negligence or willful misconduct by the Company, any of its Affiliates, or any of their respective employees or agents. 14.3 INDEMNIFICATION PROCEDURE. The indemnified Party shall give prompt notice to the indemnifying Party of the occurrence of any Claims as to which indemnification 33 may be claimed hereunder. The indemnified Party shall have the right to participate in the defense of any third-party Claim. The indemnifying Party's indemnification obligation hereunder shall also cover the fees and expenses of separate counsel of the indemnified Party's choice in connection with such third-party Claim. The indemnifying Party shall not settle any third-party Claim without the prior written consent of the indemnified Party. In addition, if any third-party Claim is asserted, which impairs the indemnified Party's interests under this Agreement, the indemnified Party shall have the right to terminate this Agreement on written notice as provided herein in the case of Default, without, however, waiving any right to full indemnification hereunder. ARTICLE XV LIMITATION OF LIABILITY EXCEPT WITH RESPECT TO LIABILITY ARISING OUT OF THE OBLIGATIONS CONTAINED IN SECTION 4.7 OR IN ARTICLE X OR XIV HEREOF, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY FORM OF INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS) ARISING FROM ANY CAUSES OF ACTION OF ANY KIND WITH RESPECT TO THIS AGREEMENT, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING WITHOUT LIMITATION, NEGLIGENCE) OR OTHERWISE, AND WHETHER OR NOT THE OTHER PARTY HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. ARTICLE XVI GENERAL 16.1 NOTICES. All notices and other communications between the Parties required or permitted hereunder shall be in writing and shall be deemed to have been duly given upon receipt by (i) hand delivery, (ii) certified or registered mail, return receipt requested, (iii) delivery by reputable overnight delivery service, or (iv) fax transmission, to be supplemented by delivery pursuant to one of the methods set forth in (i) through (iii) herein within two (2) days of such fax transmission, addressed as follows, or to such other address as may be hereafter notified by the Parties: StarMedia: StarMedia Network, Inc. 75 Varick Street New York, New York 10013 Attention: Justin K. Macedonia, General Counsel Fax: (212) 631-9100 Company: BellSouth Enterprises, Inc. c/o BellSouth International, Inc. 1155 Peachtree Street, Suite 2000 34 Atlanta, Georgia 30309 Attention: General Counsel Fax: With a copy to: BellSouth Corporation 1155 Peachtree Street, Suite 2000 Atlanta, Georgia 30309 Attention: General Counsel Fax: (404) 249-5901 16.2 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay in the exercise, by either Party, of any right, remedy, power or privilege hereunder shall operate as a waiver thereof; and no single or partial exercise of any right, remedy, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law or in equity. 16.3 COUNTERPARTS. This Agreement may be executed simultaneously in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. Transmission by fax of an executed counterpart of this Agreement shall be deemed to constitute due and sufficient delivery of such counterpart. 16.4 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In the event that, notwithstanding the foregoing, a tribunal of competent jurisdiction shall refuse to enforce any of the provisions contained in this Agreement, the remaining provisions hereof shall not in any way be impaired or affected thereby, unless the absence of the affected provision materially adversely impairs the substantive rights of the Parties; PROVIDED, HOWEVER, that, in the latter event, the Parties shall use their best efforts to replace the invalidated provision by a valid, legal and enforceable provision, which, insofar as practical, implements the purposes hereof. To the extent that it may effectively do so under applicable law, the Parties hereby waive any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 16.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to the conflict of law principles thereof. 16.6 JURISDICTION. Any judicial proceeding brought with respect to this Agreement must be brought in a court of competent jurisdiction of the State of New York located in New York County or in the United States District Court in and for the Southern District of New York. By execution and delivery of this Agreement, each Party (i) accepts, generally and unconditionally, the exclusive jurisdiction of such courts and any related appellate court, and 35 irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement, (ii) irrevocably waives any objection it may now or hereafter have as to the venue of any such suit, action or proceeding brought in such a court or that such court is an inconvenient forum and (iii) agrees that service of process in any such action or proceeding may be effected (A) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to its address set forth in Section 16.1 or (B) in any other manner permitted by law. StarMedia, if it prevails on any claim based on the failure of the Company or any Participating Affiliate to make any payment required hereunder or under the Operating Agreement, shall in any case be entitled to recover in connection with such award its reasonable attorneys' fees and costs incurred in connection therewith. 16.7 HEADINGS; REFERENCES. The article, section and exhibit headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to "Articles," "Sections" or "Exhibits" shall be deemed to be references to Articles, Sections or Exhibits hereof unless otherwise indicated. 16.8 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding of the Parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and understandings between the Parties with respect to such subject matter. 16.9 AMENDMENTS; WAIVERS; BINDING EFFECT. Any amendments to, or waivers of, this Agreement or any provision hereof shall be in writing and signed by both Parties or, in the case of a waiver, by the Party waiving compliance. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns. 16.10 ASSIGNMENT. Neither Party may assign this Agreement in part or in whole without the prior written consent of the other Party, and any attempt by a Party to assign this Agreement without such consent shall be null and void; PROVIDED, HOWEVER, that (i) Company shall be entitled to assign this Agreement without StarMedia's prior written consent as a result of substantially all Company's direct or indirect interests in the Participating Affiliates being spun-off to form a new entity; provided that in the event such assignment is to a StarMedia Competitor, StarMedia may terminate this Agreement and shall provide the Company such transition assistance as provided in Section 12.6, and (ii) either Party shall be entitled to assign this Agreement without the other Party's prior written consent in connection with a merger of such Party with or into, or sale of all or substantially all of the assets of such Party to, an entity that is not a direct competitor of the other Party. 16.11 NO AGENCY. No agency, partnership, joint venture or employment relationship shall be created or inferred by the existence or performance of this Agreement, and neither Party shall have any authority to bind the other in any respect whatsoever. 16.12 SURVIVAL. In addition to those provisions herein which expressly survive the termination of this Agreement, (i) Sections 4.1(c) (pursuant to its terms), 4.5, 4.6 (pursuant to 36 its terms), 4.7, 11.2, 11.3 and 11.4 and (ii) Articles I, VII, VIII, X, XI, XII, XIII, XIV, XV and XVI. 16.13 FORCE MAJEURE. Either Party hereto shall be excused from any delay or failure in performance hereunder, except the payment of monies due and payable hereunder, caused by reason of any occurrence or contingency beyond its reasonable control, including without limitation, acts of God, fires, floods, wars, civil disturbances, power outages, sabotage, accidents or disputes with organized labor, provided that such delay or failure in performance cannot reasonably be circumvented through the prompt implementation of reasonable disaster recovery or contingency procedures, provided that this is not meant to provide a defense by reason of nonperformance of an Affiliate, subsidiary or independent contractor of such Party. The time for performance (together with the other Party's time of performance of related obligations, including without limitation, related payment obligations) shall be extended for a period equal to the period during which the event of force majeure prevented performance as aforesaid, but in no event for more than sixty (60) days. If any delay or failure in performance on the part of StarMedia continues for more than (a) five (5) consecutive days, or (b) a total of ten (10) days within any thirty (30) day period, then Company, at its option, may terminate this Agreement, in whole or in part, without liability to StarMedia, as of a date specified in a written notice delivered to StarMedia by Company. Each Party shall take all reasonable measures to minimize the delaying effects of any force majeure (including, without limitation, by obtaining substitute services from alternate sources and/or implementing work around plans) and shall notify the other Party in writing (which notice shall include the affected Party's plans and efforts to implement a work-around solution) within ten (10) days of its first becoming aware of any event of force majeure causing a delay or failure of such Party's performance hereunder. 16.14 PUBLICITY. Each Party agrees to make available for all public relations events relating to this Agreement a senior executive of such Party. Neither of the Parties shall issue any press releases regarding the other Party, this Agreement or the relationship of the Parties without the prior written consent of the other in each instance, except to the extent required by law, regulation or stock exchange rule. In any event, the Parties shall mutually agree to both the content and the media of distribution of any press release approved pursuant to the previous sentence. 16.15 INTERPRETATION. All terms set forth in this Agreement and not otherwise defined herein shall be construed to have meanings consistent with the Internet, World Wide Web and telecommunications industries. 16.16 CONFORMANCE WITH LAWS. Notwithstanding anything to the contrary contained herein, neither Party shall have any obligation hereunder to take any actions which will violate any laws, statutes or regulations of the United States or any other jurisdiction in which such actions are to be taken. 16.17 NON-SOLICITATION. Except as otherwise provided herein, during the Term and for one year after the Term neither Party nor any Person that controls or is controlled by a Party shall directly or indirectly solicit the other Party's employees or individual consultants for 37 employment or other contractual engagement without the prior consent of the other Party. The foregoing shall not, however, prohibit one Party or such other Persons from innocently soliciting employment of or contractual relationship with the other Party's employees or contractors in a way where such solicitations were made generically to the world and not directly or indirectly targeted or brought to such individuals attention in a way that could be reasonably interpreted to be an attempt to purposefully solicit the other's employees or contractors working on or related to the provision of the MAP Service hereunder. This provision shall not apply to employees or contractors of a Party whose engagement with the other Party bears no relationship whatsoever to this Agreement, the StarMedia Websites, the Company's Access Services, or the MAP Service. Notwithstanding the foregoing, (i) in the event that the Company terminates this Agreement pursuant to Section 12.2 or 12.3 hereof, StarMedia shall provide the Company with a list of key employees and the Company shall be entitled to solicit any StarMedia employees or individual consultants for employment or other contractual engagement and (ii) in the event that the Company terminates this Agreement pursuant to Section 12.2, 12.3, or 12.4 hereof, StarMedia shall assign up to six (6) StarMedia employees (provided that StarMedia shall not be obligated to assign any employee to the Company which would cause StarMedia to provide in excess of eighteen (18) employees in the aggregate to the Company and the Participating Affiliates) in the following functional capacities software architecture, database architecture, server cluster architecture, content management, wireless and WIS interface management and operations management, to consult for the Company for up to six months, at reasonable time and materials rates with regard to the use of any software licensed by StarMedia hereunder or pursuant to any Operating Agreement or any Deposit Materials. 16.18 PARTICIPATING AFFILIATE AGREEMENTS. (a) The Company shall cause each Company Affiliate conducting an active telecommunications business within the Territory which elects to offer the MAP Service to execute an Operating Agreement with StarMedia or its Affiliate substantially in the form attached hereto as Exhibit E, and StarMedia shall, or shall cause its Affiliate to, execute such Operating Agreement. (b) The form of Operating Agreement shall not be subject to renegotiation by StarMedia, the Company or their respective Affiliates, but may be customized for each Participating Affiliate to provide for custom content selection and to conform to applicable local governmental regulations or as otherwise contemplated herein or in the form of Operating Agreement or as agreed by the parties. If a Participating Affiliate determines that an allocation of the amounts payable under the Operating Agreements among the items of consideration provided by StarMedia or its Affiliate is necessary for such Participating Affiliate to properly determine its obligation to withhold Withholding Taxes, the Company and StarMedia shall cause their respective Affiliates to negotiate in good faith to determine the proper allocation based upon the fair market value of such items of consideration; provided, that if the parties cannot agree as to the proper allocation, the Operating Agreement shall be entered without an allocation and the Participating Affiliate shall take such actions as it reasonably believes necessary to meet its obligation to withhold Withholding Taxes. (c) StarMedia and its Affiliates may enforce each Operating Agreement only against the associated Participating Affiliate. Breach or default by a Participating Affiliate shall 38 not affect the rights or obligations of the Company hereunder or any other Participating Affiliate under its Operating Agreement, or the obligations of StarMedia to the Company and any non-breaching Participating Affiliate. (d) If a StarMedia Affiliate is designated to enter into an Operating Agreement with a Participating Affiliate, StarMedia shall enter into such arrangements with such StarMedia Affiliate as are necessary to assure performance of all of StarMedia's obligations under the Operating Agreement and this Agreement, and StarMedia shall guarantee performance of such obligations. StarMedia shall provide Company with a written description of all such arrangements and copies of all agreements between StarMedia and its Affiliates relating to performance under the Operating Agreements. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 39 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed and delivered by its duly authorized officer or representative as of the date first set forth above. BELLSOUTH ENTERPRISES, INC. STARMEDIA NETWORK, INC. By: /s/ Jeffrey A. Dickerson By: /s/ Fernando J. Espuelas -------------------------------- ------------------------------------- Name: Jeffrey A. Dickerson Name: Fernando J. Espuelas ------------------------------ ----------------------------------- Title: V. P. Corporate and Business Title: Chief Executive Officer ----------------------------- ---------------------------------- Development ----------------------------- -----END PRIVACY-ENHANCED MESSAGE-----