-----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, M4CuGk5so0U/yig+JbIH7bXuVHuiKLz2Mtby5e+BMCQ2tspYZItYng+vAeTWGdnY x4zMBuWanOruzY6W4gx3SA== 0000912057-02-026973.txt : 20020711 0000912057-02-026973.hdr.sgml : 20020711 20020711081347 ACCESSION NUMBER: 0000912057-02-026973 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31138 FILM NUMBER: 02700607 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-K 1 a2084088z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 1-5015 ------------------------ STARMEDIA NETWORK, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 06-1461770 (State of Incorporation) (I.R.S. Employer Identification No.)
999 BRICKELL AVE. SUITE #808 MIAMI, FL 33131 (305) 938-3000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes / / No /X/ The aggregate market value of voting stock held by non-affiliates of the registrant as of July 2, 2002 was $630,166 (based on the last reported sale price on Pink Sheets, LLC of $0.015 per share on July 2, 2002). The number of shares of the registrant's common stock outstanding as of July 1, 2002 was 79,970,177. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STARMEDIA NETWORK, INC. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I.................................................................. 3 ITEM 1. Business.................................................... 5 ITEM 2. Properties.................................................. 24 ITEM 3. Legal Proceedings........................................... 24 ITEM 4. Submission of Matters to a Vote of Security Holders......... 26 PART II................................................................. 27 ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 27 ITEM 6. Selected Consolidated Financial Data........................ 27 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 29 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 40 ITEM 8. Financial Statements and Supplementary Data................. 41 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 41 PART III................................................................ 42 ITEM 10. Directors and Executive Officers of the Registrant.......... 42 ITEM 11. Executive Compensation...................................... 44 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................ 51 ITEM 13. Certain Relationships and Related Transactions.............. 53 PART IV................................................................. 57 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 57
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. 2 PART I RESTATEMENT INFORMATION The Company, in consultation with its independent accountants, determined to restate its audited consolidated financial statements for the year ended December 31, 2000, which includes adjustments to the fiscal quarters ended March 31, June 30, September 30 and December 31, 2000, and its unaudited consolidated financial statements for the quarters ended March 31 and June 30, 2001, respectively. The Company initially announced its intention to restate its 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 restatements of its audited consolidated financial statements for the fiscal year ended December 31, 2000 and the quarters therein and its unaudited consolidated financial statements for the quarters ended March 31, 2001 and June 30, 2001 contain adjustments that fall into five categories. The first category of adjustments arise 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 U.S. 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 year ended December 31, 2000 and for the quarters ended March 31, 2001 and June 30, 2001:
AS PREVIOUSLY REPORTED AS RESTATED ------------- ------------- Net loss for year ended December 31, 2000...... $(204,581,000) $(210,839,000) 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 Notes to Consolidated Financial Statements. This information includes the amount of the adjustments made during each quarter and year with respect to which the Company has restated or adjusted previously issued financial statements. Immediately prior to filing this Report on Form 10-K for the year ended December 31, 2001, the Company filed Reports on Form 10-Q/A for the quarters ended March 31, 2001 and June 30, 2001 for 3 the purpose of amending the Reports on Form 10-Q previously filed with respect to such periods. In addition, the Company has also filed Reports on Form 10-Q for the quarters ended September 30, 2001 and March 31, 2002, which the Company had withheld from filing until such time as the investigations conducted by the Special Committee and by management had been completed. RECENT DEVELOPMENTS Since December 31, 2001, the Company has experienced the following developments: - Effective as of February 1, 2002, our common stock was delisted from and ceased to be quoted by The Nasdaq National Market. Previously, trading of our common stock had been suspended effective as of 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. 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 less liquid than The Nasdaq National Market. SEE "Risk Factors". - 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 resulted in his pleading guilty to a tax violation involving his 1998 individual federal tax return. Mr. Narciso joined the Company in October 1999. 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. - 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. SEE "Item 10, Directors and Executive Officers of the Registrant". - The Company has continued to undertake a realignment for the purposes of focusing its resources on its mobile solutions business. As part of this realignment, the Company reduced its number of full-time employees from 520 as of close of business on December 31, 2001 to 391 as of June 21, 2002. In addition, following the Company's change of its headquarters in late 2001 from New York to Miami, Florida, which was previously the headquarters of the Company's mobile solutions business, the Company has substantially reduced its presence in New York. As of June 21, 2002, the Company 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. SEE "Item 1. Business--Employees". - 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". 4 - On July 1, 2002, Fernando Espuelas notified the Company that, effective as of that date, he resigned as a director of the Company. - 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: - batepapo.com.br, a Brazilian chat service, which the Company is considering either selling or closing; - local Internet 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 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." SEE "Item 1, Business--Overview" and "--Strategy", as well as Note 23 of Notes to Consolidated Financial Statements. ITEM 1. BUSINESS 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. SEE Note 8 of Notes to Consolidated Financial Statements. 5 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 approval by the Company's shareholders. The Company is now principally engaged in providing integrated Internet solutions to wireless telephone operators in Latin America targeting Spanish- and Portuguese-speaking end-users. In addition, we continue to operate several Spanish- and Portuguese- language websites and to design and operate portals for third parties. Substantially all of our revenues are currently being generated from our mobile solutions business. Our customers are in Latin America and most of our revenues come from Venezuela, Brazil, Colombia, Argentina, and Chile. MOBILE INTERNET SOLUTIONS. We are one of the leading providers of mobile Internet software and application solutions to wireless telephone operators in Spanish- and Portuguese-speaking markets. We offer comprehensive end-to-end solutions that are comprised of an integrated and customized suite of technology platforms, content and applications. Our mobile Internet solutions enable wireless carriers and enterprises to provide end-users with access to personalized Internet content, email, messaging, secure mobile banking and other mCommerce opportunities through a variety of technologies, including SMS (Short Message Services), WAP (Wireless Application Protocol) and voice telephony. Through our solutions, end users can access this content through a variety of devices, including personal computers, cellular phones, pagers, PDAs and PCs and GSM handsets. By providing their end-users the services enabled by our mobile Internet solutions, wireless operators hope to increase user airtime and subscription fees (thereby increasing their average revenue per user or "ARPU") and reduce their customer turnover rates (referred to in the industry as "churn rates"). Our scalable, proprietary technology is comprised of our Wireless Internet Server (WIS) and "Gen3" wireless portal technology. - 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 6 determine which customers have elected to receive specific services), billing systems, gateway infrastructure systems, and other back-end systems. Two components of our WIS technology are: - TRANSACTIONAL-BILLING. This feature of the WIS technology allows wireless operators to apply different business rules to permit flexible billing (for post-paid and pre-paid) based on the type of mobile Internet service accessed by an end-user, the end-user's subscription plan and other variables identified by the operator. - WIRELESS MARKETPLACE. This feature of the WIS technology allows wireless operators to efficiently and cost-effectively distribute third parties' content and applications (in addition to the Company's own) through the WIS and to integrate such services within their overall mobile Internet service offerings. The WIS software is designed to operate on dedicated servers placed in the wireless operators' premises. - GEN3 WIRELESS PORTAL TECHNOLOGY. Our Gen3 wireless portal technology allows wireless operators to provide to their customers personalized Internet websites that can be viewed through different browser types and devices, including their personal computers and wireless devices (such as WAP-enabled phones and PDAs). Using this technology, the content and services offered on end-users' portals, as well as the branding of the portal, vary based on the user's profile and subscription of services. Although our competitors have been able to develop technologies that are similar to our WIS technology and Gen3 wireless portal technology, the Company believes that its proprietary technologies' ability to interface with wireless operators' back end systems via our Transactional-Billing system and Wireless Marketplace gives it a competitive advantage over other solutions providers. This technology allows our customers to better target their end-users by being able to track and identify the services or plans being accessed through the different platforms (personal computer, mobile telephones and PDAs) used by the end-user. We use third-party content and technology to further enhance the services and tools that wireless operators can deliver through our WIS and Gen3 wireless portal technology. In addition, we have integrated third-party voice recognition, text-to-speech and telephony technologies (also known as voice portal technologies), along with our proprietary technologies, to create an integrated access platform, allowing end-users to have seamless interactive access via voice, web, WAP and SMS to a variety of content and applications. This integrated access platform is the basis of the Multiple Access Portal (MAP) services we provide to subsidiaries of BellSouth International in Latin America. The Company derives revenues from its mobile Internet solutions through set up and installation fees, technology licenses fees and usage-based fees. We currently have agreements for the use of our WIS technology with more than 20 wireless operators throughout the region, including subsidiaries of BellSouth International, Verizon, Telefonica and Americas Telecom. INTERNET MEDIA SERVICES. Historically, the Company has also provided extensive services to consumers, including community features such as - free email, promotional email newsletters, user surveys, chats, instant messaging, and home pages; - tools and applications, such as games, multimedia players, comprehensive city guide content, and sophisticated search capabilities; - local and global editorial content; and - online shopping in Spanish and Portuguese. 7 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 year ended December 31, 2001, two advertisers, individually, accounted for more than 10% of total revenues of the Company and our top five advertisers accounted for 39% 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: - batepapo.com.br, a Brazilian chat service, which the Company may either sell or shut down in the near future; and - 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. SEE "--Strategy" below. 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. STRATEGY Management and our board of directors currently have two principal strategic objectives. The first is to complete the realignment of the Company's resources by selling and/or disposing of most of the Company's remaining assets related to its media business (other than its city guide sites, which will be retained to support our mobile solutions business), and continuing to reduce and reorganize our workforce in a manner consistent with our focus on the mobile solutions business. We consider that this realignment is necessary in order to preserve the Company's prospects for profitability. Our second objective is to develop further our mobile solutions business. Management believes that the Company's mobile Internet solutions business is well positioned to take advantage of current market needs, industry trends, and the competitive opportunity in the wireless technology sector in Latin America. It is our belief that as the wireless telephone market matures in Latin America, wireless operators have sought and will continue to seek to increase usage of their services and develop customer loyalty by enabling their customers to access content, tools and applications from their wireless devices through the Internet. We currently have agreements for the use of our WIS technology 8 with more than 20 wireless operators throughout the region, including subsidiaries of BellSouth International, Verizon, Telefonica and Americas Telecom. In order to develop our mobile solutions business, we expect to endeavor to: - Expand the number of wireless operators that use our solutions, particularly in larger Latin America markets; - Increase the end user penetration rates of our content and applications on existing wireless operators who use our solutions; and - Increase the variety and amount of content, tools and applications that wireless operators deliver to their end users by means of our solutions. GOING CONCERN The Company has incurred recurring operating losses and may have insufficient capital to fund all of its obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Although we have undertaken a realignment of the Company for the purpose of reducing our costs and focusing on our mobile Internet solutions business, this business is not currently profitable and we cannot be sure that it will become profitable or that we will have sufficient resources to operate this business until it becomes profitable. If at any time we determine that the Company does not have sufficient cash in order to execute the foregoing strategy, then we intend to endeavor to obtain additional equity or other funding, if we are able do so. However, there can be no assurance that we will be able to raise additional funding necessary to operate until we become profitable. SEE "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES". TECHNOLOGY INFRASTRUCTURE Our technology infrastructure is built and maintained for reliability, security and flexibility and is administered by our technical staff. We maintain our production servers at multiple locations inside and outside the U.S. Our operations depend upon the ability of the owners of our co-location facilities to protect our systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins and other events. Our main U.S. co-location facilities provide comprehensive facilities management services, including human and technical monitoring of all production servers, and also provide connectivity for our U.S. servers through multiple high-speed connections. Outside the U.S., our servers are connected to the leading Internet network bandwidth providers in each country. Multiple backup power supplies all facilities. For reliability, availability and serviceability we have implemented an environment in which each server can function separately. Multiple redundant machines serve key components of our server architecture. Our WIS technology is operated from servers located at wireless operators' facilities. Although wireless operators in Latin America generally implement customary mechanisms to protect their technology infrastructure from damage and maintain redundant systems, any outage at one of our carrier customer's facilities could result in a temporary loss of the services they provide to end-users through our mobile Internet solutions. This could adversely affect our revenues. We employ in-house and third-party software to monitor access to our production and development servers. Reporting and tracking systems generate daily traffic, demographic, and 9 advertising reports. Our production data is copied to backup tapes each night. Our network must accommodate a high volume of traffic and deliver frequently updated information. Components or features of our network have in the past suffered outages or experienced slower response times because of equipment or software downtime. These events did not have a material adverse effect on our business. THE MARKET Global Internet usage continues to grow at a rapid rate as it becomes an increasingly integral part of daily life. Similarly, mobile communications have expanded in recent years as a result of the build out of wireless infrastructure, development of new wireless technologies and standards, declining service costs and access fees, and an increasingly mobile workforce. Today, the principal method for performing Internet-based activities is the desktop computer. However, mobile devices may be better suited than personal computers ("PCs") for performing many popular Internet activities that are time-sensitive, location-sensitive and/or require frequent connectivity, such as sending and receiving emails, accessing contact information, conducting eCommerce, and receiving financial and traffic information. According to a report published by International Data Corporation (IDC) in April 2002, the number of users of mobile telephony services in Latin America is expected to grow from 102 million (19.1% of the total population) in 2002 to 153 million (27.3% of the total population) in 2006. Several region-specific factors are driving the fast-growing wireless Internet opportunity in Latin America, including a fast-growing Internet user base generally, limited fixed-line phone and Internet access due to relatively limited fixed line infrastructure in the region, high wireless device penetration, and low penetration of personal computers as compared to the United States and Western Europe. The following are several current and projected trends in Internet and wireless telephony usage in Latin America that have been identified by IDC and which in management's view may be relevant in evaluating the prospects of the Company's mobile solutions business: - The total number of users of mobile data services (which includes text messaging and wireless Web navigation users) in Latin America is projected by IDC to increase from 15.8 million in 2001 to 97.2 million by 2006, which represents a 43.8% compound growth rate. - IDC estimates that in 2001 18.3% of total mobile subscribers in Latin America used mobile data services, and that by 2006 63.5% of all Latin American wireless subscribers will use mobile data services. - According to IDC, revenues derived from mobile data services in Latin America are expected to grow from $435 million (less than 2% of total mobile telephony revenues) in 2001 to $2.2 billion (approximately 5.7% of total projected mobile telephony revenues) as of the end of 2006. This increase represents a 38.4% compound growth rate. Until recently, wireless carriers were focused primarily on voice transmission and had only limited data transmission capabilities. Today, however, increased competition--especially in Latin America, due to industry deregulation, flattening average revenue per user ("ARPU") levels due to declining access fees, and high rates of customer turn over (known as "churn rates") have created pressure on carriers to offer more differentiated, higher margin, value-added services and products which require data transmission capabilities. Wireless Internet services are attractive to carriers because they offer the promise of increased airtime and subscription fees. In addition, carriers can achieve reduced churn rates by offering wireless Internet services that have enhanced personalization and value-added applications built into devices and services. For carriers in highly fragmented markets, such as Latin America, developing and managing data transmission capabilities in-house may be inefficient because they require a relatively high level of investment in terms of cost, infrastructure and know-how and, at the same time, lower efficiencies of 10 scale than, for example, in the United States. As a result, we believe that there is a significant opportunity for a third-party provider of proven and comprehensive wireless Internet technologies and services that can be deployed on a pan-regional basis in Latin America. THE COMPETITION Traditionally, the Company's principal competitors were other companies that provided Internet media services to users in Latin America. These included the most visible international Internet service providers (ISPs) and/or global portals such as AOL Latin America, Yahoo! and Terra/Lycos, and local players in specific countries such as UOL in Brazil. As the Company realigns its business to focus primarily on mobile Internet solutions, its main competitors include a variety of companies, ranging from large companies trying to develop inroads into Latin America such as Infospace and Terra Mobile to smaller, local solutions providers that provide services through established local business networks and physical proximity to, and relationships with, wireless carriers. In addition, the Company faces competition in the provisioning of mobile Internet solutions from both systems and technology integration companies that are trying to serve the demand for mobile Internet services and applications, as well as from wireless telephone operators who elect to develop mobile Internet solutions internally rather than relying on a third-party provider such as the Company. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES To date, regulations have not materially restricted use of the Internet in our markets. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. New laws and regulations may be adopted. Existing laws may be applied to the Internet and new forms of electronic commerce. Uncertainty and new regulations could increase our costs and impede our ability to deliver our products and services over the Internet. It could also slow the growth of the Internet significantly. This could delay growth in demand for our network and limit the growth of our revenues. New and existing laws may cover issues such as sales and other taxes, user privacy, pricing controls, characteristics and quality of products and services, consumer protection, cross-border commerce, libel and defamation, copyright, trademark and patent infringement, pornography and other claims based on the nature and content of Internet materials. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries are uncertain and still evolving. The laws of some foreign countries do not protect intellectual property to the same extent as do the laws of the United States. TRADEMARKS AND OTHER MARKS. We actively seek to protect our marks against similar and confusing marks of third parties. For those trademarks that we consider to be most significant to our business, we pursue registration in the United States and, in the case of some trademarks, internationally in our target markets. We may not be able to secure adequate protection for our trademarks in the United States and other countries. In addition, there have been oppositions filed against our applications in other countries for some of our marks. We use a watch service to identify applications to register trademarks, filing oppositions to third parties' applications for trademarks and bringing lawsuits against infringers. However, effective 11 trademark protection may not be available in all the countries in which we conduct business. Policing unauthorized use of our marks is also difficult and expensive. It is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. RIGHTS WITH RESPECT TO PROPRIETARY TECHNOLOGY. From time to time we evaluate whether to undertake to obtain copyrights and/or patents with respect to our proprietary technologies. Currently we have a patent application pending with respect to a multi-lingual wireless messaging component of our proprietary WIS technology. Many parties are actively developing technologies for the provision of content, tools and applications through the Internet, including technologies for delivery through the Internet to mobile devices. There may be patents issued or pending that are held by others and that cover significant parts of our technology, business methods or services, and we cannot be certain that our products and technologies do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. In the event that we determine that licensing this intellectual property is appropriate, we may not be able to obtain a license on reasonable terms or at all. We may also incur substantial expenses in defending against third-party infringement claims, regardless of the merit of these claims. Successful infringement claims against us may result in substantial monetary liability or may prevent us from conducting all or a part of our business. THIRD-PARTY TECHNOLOGY AND CONTENT. We also intend to continue to license content and technology from third parties. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license this content and technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed intellectual property into our services. Our inability to obtain any of these licenses could delay product and service development until alternative content and technologies can be identified, licensed and integrated. EMPLOYEES During the year 2001 and throughout the beginning of 2002, we have significantly reduced the number of the Company's full-time employees. At the close of business on December 31, 2001, the Company had approximately 520 full time employees, as compared to 779 employees as of December 31, 2000. Of these employees, 67 worked in sales, 33 worked in marketing, 328 worked in product and technology and 92 worked in finance and administration. As of June 21, 2002, we had approximately 391 full-time employees. Of these employees, 38 work in sales, 6 work in marketing, 299 work in product and technology and 48 work in finance and administration. 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, the Company has substantially reduced its presence in New York. As of June 21, 2002, the Company had 30 employees based in its New York offices, as compared to 118 employees based in such office as of close of business on December 31, 2001. As part of the realignment the Company is undertaking and as a result of the sale of certain assets to EresMas, the Company expects to terminate and/or transfer approximately 63 additional full-time employees whose services the Company will no longer require once it has completed the full transition of the starmedia.com portal to EresMas. From time to time, we employ independent contractors to support our research and development, marketing, sales and editorial departments. We consider our relations with our employees to be good. 12 RISK FACTORS IN ADDITION TO OTHER INFORMATION IN THIS REPORT, YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS. THESE RISKS MAY IMPAIR OUR OPERATING RESULTS AND BUSINESS PROSPECTS AND THE MARKET PRICE OF OUR STOCK. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND PROSPECTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL WE HAVE A LIMITED OPERATING HISTORY AND OPERATE IN A NEW AND RAPIDLY DEVELOPING MARKET, WHICH MAKES EVALUATING OUR BUSINESS AND FUTURE PROSPECTS DIFFICULT. We were incorporated in March 1996. We commenced operations in September 1996. Accordingly, we have a relatively short operating history upon which you may evaluate our business and prospects compared to many companies in more established industries. Since inception, our business model has evolved significantly. As a result, our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by growing companies in new and/or rapidly evolving markets and continuing to innovate with new and unproven technologies. Some of these risks relate to our potential inability to: - develop and successfully integrate new features with our existing services; - manage our growth, control expenditures and align costs with revenues; - expand successfully in international markets; - attract, retain and motivate qualified personnel; and - successfully respond to competitive developments, including rapid technological change, changes in customer requirements and new products introduced into our markets by our competitors. If we do not effectively address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability. WE HAVE NEVER MADE MONEY AND MAY NOT BECOME PROFITABLE. We have never been profitable and we expect to continue to incur operating losses in the future. As of December 31, 2001, we had an accumulated deficit of approximately $527.1 million. We will need to generate significant revenues to achieve profitability and we may not be able to do so. If we do achieve profitability, we may not be able to sustain it. OUR LIQUIDITY IS LIMITED AND WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO FUND OUR BUSINESS. Our cash is currently very limited and may not be sufficient to fund future operations. Although we have undertaken a realignment of the Company for the purpose of reducing our costs and focusing 13 on our mobile Internet solutions business, this business is not currently profitable and we cannot be sure that it will become profitable or that we will have sufficient resources to operate this business until it becomes profitable. Therefore, we may have future capital requirements. Obtaining additional financing will be subject to a number of factors, including: - market conditions; - our operating performance; and - investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive for us. If we are unable to raise additional capital, our growth could be impeded or we may be unable to continue to operate. If we do obtain additional funding, the issuance of additional capital stock may be dilutive to shareholders of the Company. WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS. The Company's consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. The Company's independent auditors have issued their report dated June 21, 2002 that includes an explanatory paragraph stating that the Company's recurring losses and accumulated deficit, among other things, raise substantial doubt about their ability to continue as a going concern. The Company's historical sales are limited and it has been necessary to rely upon financing from sale of equity securities to sustain operations. YOU SHOULD NOT RELY ON OUR ANNUAL OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE WE HAVE RESTRUCTURED OUR BUSINESS. Historically, we have earned most of our revenues from the sale of advertising on our Internet media services. However, as a result of the Company's sale of most of its media assets and the focus of our business on the provision of wireless Internet solutions and, to a lesser extent, portal solutions, you should not rely on year-to-year comparisons of our results of operations as an indication of our future performance. FUTURE REVENUES AND RESULTS OF OPERATION OF OUR SOLUTIONS BUSINESS DEPEND ON MANY FACTORS, AND THIS BUSINESS MAY NOT BE PROFITABLE. Future results from the provision of wireless Internet solutions depend a combination of many factors, including: - growth and acceptance of the Internet, particularly in Latin America; - growth and acceptance of wireless communications, as well as the use of wireless Internet content and services, in Latin America; - our ability to maintain the costs of providing wireless Internet solutions at levels that do not exceed the revenues generated from these businesses; - our ability to continue to enhance, maintain, upgrade and develop our systems and infrastructure; - technical difficulties that users may experience on our network; - technical difficulties, system downtime, system failures or Internet brown-outs resulting from the developing telecommunications infrastructure in Latin America; - the introduction of new or enhanced services by us, our affiliates or distribution partners, or other companies that compete with us or our affiliates; 14 - price competition or pricing changes in Internet information infrastructure services, such as ours; - competition in our markets; - foreign currency exchange rates that affect our international operations; and - political or economic events and governmental actions in or affecting Latin America; - general economic conditions, particularly in Latin America. It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to decline. OUR RESTRUCTURING MAY NOT BE EFFECTIVE. We have undertaken a significant realignment for the purpose of focusing our resources on the development of our mobile solutions business. There is no guarantee that we have reduced our costs sufficiently or soon enough to ensure the future success of our wireless Internet solutions business. If we do not reduce our costs sufficiently or quickly enough, we may not have sufficient cash available to operate our wireless solutions business until it can become profitable. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR RESTRUCTURED OPERATIONS. We have recently experienced a period of rapid growth, accompanied by continued significant operating losses, followed by a significant realignment of our business. As part of this realignment, we have reduced our workforce, replaced top management and realigned the Company's resources. This has placed a significant strain on our managerial, operational and financial resources. We believe our systems are adequate, but we must continue to maintain and improve or replace existing operational accounting and information systems, procedures and controls. Further, we must manage effectively our relationships with various content providers, wireless carriers, distribution partners, affiliates and other third parties necessary to do our business. We may not succeed with these efforts. Our failure to realign our resources and integrate these areas in an efficient manner could cause our expenses to grow, our revenues to decline or grow more slowly than expected and could otherwise have a material adverse effect on our business, financial condition and results of operations. OUR BUSINESS HAS BEEN ADVERSELY AFFECTED BY RESTATEMENT OF FINANCIAL STATEMENTS. In November 2001, the Company announced its intention to restate its consolidated financial statements for fiscal year 2000 and the first and second quarters of fiscal 2001. Management's subsequent investigations have uncovered additional accounting irregularities that require restatement. These restatements have resulted in increased reported losses from operations for those periods. The Company's public announcement of the pending restatement of its financial statements, the delay in reporting its results for subsequent fiscal periods while the restatements were compiled, and the related uncertainty regarding the Company's business have adversely affected the Company's financial condition. These factors and other matters described herein have had, and will continue to have, a material adverse effect on the Company's business, including its financial condition and results of operations. RISKS RELATED TO OUR MARKETS AND STRATEGY IF USAGE OF CONTENT, TOOLS AND APPLICATIONS DELIVERED TO MOBILE DEVICES OVER THE INTERNET DOES NOT GROW SUFFICIENTLY, OUR BUSINESS WILL SUFFER. We expect to derive most of our revenue for the foreseeable future from usage fees paid by Latin American wireless carriers based on the amount end users use and pay for the delivery of wireless 15 Internet content, tools and applications using our solutions. The wireless Internet in Spanish- and Portuguese-speaking markets is in an early stage of development. Our future success depends on the continued growth of the wireless Internet in these markets. Our business, financial condition and results of operations will be materially and adversely affected if wireless Internet usage in these markets does not continue to grow or grows more slowly than we anticipate. Wireless Internet usage in these markets may be inhibited for a number of reasons, including: - the cost of wireless communications services generally, as well as the specific costs charged for wireless Internet services and content; - the adoption of our wireless services by end users of the wireless telephone carriers that use our wireless solutions; - concerns about security, reliability, and privacy; - failure of wireless carriers to market and promote content, tools and applications available through mobile devices; - ease of use; and - quality of service. WE WILL DEPEND ON THIRD PARTIES FOR CONTENT, TOOLS AND APPLICATIONS, THE LOSS OF ACCESS TO WHICH COULD CAUSE US TO REDUCE OUR SERVICE OFFERINGS TO CUSTOMERS. Under our business plan, we expect to generate a significant portion of revenues by providing wireless carriers with third-party content, tools and applications that can be distributed to end users through our proprietary technology platforms. As such, our future success is highly dependent upon our ability to maintain relationships with these content providers and to enter into new relationships with other providers of content, tools and applications that wireless carriers desire to distribute to their end users. We typically license content, tools and applications under arrangements that do not require us to provide a share of the revenues we generate through the distribution of such content, tools and applications. In addition, we pay certain providers a one-time set up fee. If we fail to enter into and maintain satisfactory arrangements with providers of content, tools and applications our ability to provide a variety of services to our customers would be severely limited, thus harming our business reputation and operating results. SOCIAL AND POLITICAL CONDITIONS IN LATIN AMERICA MAY CAUSE VOLATILITY IN OUR OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS. We have and expect to continue to derive substantially all of our revenues from the Spanish- and Portuguese-speaking markets. Social and political conditions in Latin America have historically been volatile and may cause our operations to fluctuate. This volatility could make it difficult for us to sustain our expected growth in revenues and earnings, which could have an adverse effect on our stock price. Historically, volatility has been caused by: - significant governmental influence over many aspects of local economies; - political instability; - unexpected changes in regulatory requirements; - social unrest; - slow or negative growth; 16 - imposition of trade barriers; and - wage and price controls. We have little or no control over these matters. Volatility resulting from these matters may decrease Internet availability, create uncertainty regarding our operating climate and adversely affect our customers' advertising budgets, all of which may adversely impact our business. CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA, U.S. OR SPAIN MAY ADVERSELY AFFECT OUR BUSINESS. The currencies of many of the countries that we operate in have experienced substantial depreciation and volatility. The currency fluctuations, as well as high interest rates, inflation and high unemployment, have materially and adversely affected the economies of these countries. Poor general economic conditions in some of the countries we operate in could cause our revenues and expenses to fluctuate adversely in dollar terms. WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF LOCAL LATIN AMERICAN CURRENCIES DEPRECIATE RELATIVE TO THE U.S. DOLLAR. Our reporting currency is the U.S. dollar. However, the end users of our wireless Internet solutions generally pay for them in local currencies, and the amount of our revenues from the usage of these solutions is based on usage and the amount charged for them. In addition, there may be cash balances that are held in currencies other than the U.S. dollar. Consequently, our revenues and accounts receivable from these customers will decline in value if the local currencies depreciate relative to the U.S. dollar. To date, we have not tried to reduce our exposure to exchange rate fluctuations by using hedging transactions. Although we may enter into hedging transactions in the future, we may not be able to do so successfully. In addition, our currency exchange losses may be magnified if we become subject to exchange control regulations restricting our ability to convert local currencies into U.S. dollars. WE RELY ON A SMALL NUMBER OF CUSTOMERS; THE LOSS OF ONE OF OUR TOP CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUE AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS. Our top five advertisers accounted for approximately 39% of our total revenues for the year ended 2001, and approximately 26% of our total revenues for the year ended 2000. Our business, results of operations and financial condition could be materially and adversely affected by the loss of one or more of our top customers, or their refusal to pay us amounts owed to us. In addition, in May 2001 the Company entered into an agreement with BellSouth Enterprises under which the Company is required to provide substantial mobile business solution to BellSouth's affiliates in Latin America. The Company expects to derive a substantial portion of our future revenues from BellSouth affiliates. Any disruption in this relationship could have a material adverse effect on the Company and its prospects for profitability. OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL. We depend on the services of our senior management and key technical personnel. The loss of the services of key executive officers or any of our key management, sales or technical personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our success is largely dependent on our ability to hire highly qualified managerial, sales and technical personnel. These individuals are in high demand and we may not be able to attract the staff we need. The difficulties and costs in connection with our personnel growth are compounded by the fact that many of our operations are internationally based. 17 WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS. There are many companies that provide technologies and solutions for the delivery of content and services by means of the wireless Internet. At the same time, in our principal markets, there are relatively few wireless carriers who could potentially be our customers. Competition to provide wireless Internet solutions and technologies to these carriers is intense and is expected to increase significantly in the future. In addition, our customers are potential competitors: the carriers themselves could decide to develop and implement their own wireless Internet solutions. They may also have greater resources than we have to allocate to this business. Increased competition could result in price reductions, lower profit margins or loss of market share. Any one of these could materially and adversely affect our business, financial condition and results of operations. OUR INTERNATIONAL BUSINESS PLAN INVOLVES RISKS. Our business plan is to provide our mobile Internet solutions to wireless carriers in Spanish- and Portuguese-speaking markets, which are principally in Latin America and the Iberian Peninsula. We may not be able to successfully implement our business model in these markets. As compared to the United States, these markets experience lower levels of Internet usage and different patterns of wireless telephone usage, such as the prevalence of pre-paid calling plans. Some of the risks inherent in doing business in these markets include, among others: - unexpected changes in regulatory requirements; - potentially adverse tax consequences; - difficulties in staffing and managing operations in diverse countries; - changing economic conditions; - burdens of complying with a variety of different legal regimes, particularly with respect to taxation, intellectual property and the distribution of information over the Internet; and - seasonal fluctuations in business activity and consumer spending. RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE OUR BUSINESS RELIES ON THE PERFORMANCE OF OUR SYSTEMS. Our success depends, in part, on the performance, reliability and availability of wireless Internet solutions. Our revenues depend on the number of users that access content, tools and applications through our solutions. Our network infrastructure is currently located principally at the BellSouth eCenter, in Miami, Florida for our mobile Internet solutions business. We also have Internet media products running in equipment located at Exodus, a third-party provider of hosting services. These companies guarantee us uptime and reliability of 99.98% under service level agreements. Our success will depend in part on our ability to create carrier class infrastructure systems and build network operations centers that can support the delivery of integrated content, tools and applications and the expected growth of these services. We may be unable to develop or successfully manage the infrastructure necessary to meet current demands for reliability and scalability of our systems. We base our software development environment mostly on Microsoft products such as Net Studio, SQL Database, Windows 2000 server operating system, among others. We rely on the scalability and reliability of these software development environments, code and infrastructure. 18 UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION. In the past, we have experienced: - system disruptions; - inaccessibility of our network; - long response times; - impaired quality; and - loss of important reporting data. Although we are continually improving our network, we may not be successful in implementing new measures. If we experience delays and interruptions, visitor traffic may decrease and our brand could be adversely affected. Because our revenues depend on the number of individuals who use our network, our business may suffer if our improvement efforts are unsuccessful. We maintain our production servers at multiple locations inside and outside the U.S. including but not limited to Brazil and Argentina. Our operations depend upon the ability of the owners of our co-location facilities to protect their systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins and other events. CONCERNS ABOUT SECURITY OF ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY OF INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR NETWORK AND IMPEDE OUR GROWTH. A significant barrier to electronic commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. Unauthorized persons could attempt to penetrate our network security. If successful, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations. OUR OPERATIONS COULD BE SIGNIFICANTLY HINDERED BY THE OCCURRENCE OF A NATURAL DISASTER OR OTHER CATASTROPHIC EVENT. Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. In the recent past, some cities in Latin America have experienced repeated episodes of diminished electrical power supply. As a result of these episodes, certain of our operations or facilities may be subject to "rolling blackouts" or other unscheduled interruptions of electrical power. The prospect of such unscheduled interruptions may continue for the foreseeable future and we are unable to predict either their occurrence, duration or cessation. We do not have multiple site capacity for all of our services in the event of any such occurrence. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. In addition, we are vulnerable to coordinated attempts to overload our systems with data, resulting in denial or reduction of service to some or all of our users for a period of time. We have experienced such a coordinated denial of service attack in the past, and may experience such attempts in the future. We do not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events. Any such event could have a material adverse effect on our business, operating results, and financial condition. 19 WE RELY ON INTERNALLY DEVELOPED SOFTWARE AND SYSTEMS. We have developed custom software for our network services and mobile Internet solutions. This software may contain undetected errors, defects or bugs. Although we have not suffered significant harm from any errors or defects to date, we may discover significant errors or defects in the future that we may or may not be able to fix. We must expand and upgrade our technology, transaction-processing systems and network infrastructure if the volume of traffic on our or our customers' websites or servers used in connection with the services we provide increases substantially. In addition, as we continue to expand our services, we could experience periodic temporary capacity constraints, which may cause unanticipated system disruptions, slower response times and lower levels of customer services. We may be unable to accurately project the rate or timing of increases, if any, in the use of our services or expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner. Any inability to do so would harm our business. RAPID TECHNOLOGICAL CHANGE AFFECTS OUR BUSINESS. Rapidly changing technology, evolving industry standards, evolving customer demands and frequent new product and service introductions characterize our market. Our market's early stage of development exacerbates these characteristics. Our future depends in significant part on our ability to develop and introduce compelling services on a timely and competitive basis and to improve the performance, content and reliability of our services in response to both the evolving demands of the market and competitive product offerings. Our efforts in these areas may not be successful. WE RELY ON THE INTERNET SYSTEM INFRASTRUCTURE. Our success depends in large part on other companies maintaining the Internet system infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security to develop products that enable reliable Internet access and services. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure may be unable to support the demands placed on it, and the Internet's performance or reliability may suffer as a result. In addition, the Internet could lose its commercial viability for purposes of our business due to delays in the development or adoption of new standards and protocols to process increased levels of Internet activity. Any such degradation of Internet performance or reliability could limit its attractiveness as a medium for accessing content, tools and applications. This could have an adverse impact on our business. OUR NETWORK FACES SECURITY RISKS. Even though we have implemented security measures, our networks may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems. Someone who is able to circumvent security measures could misappropriate our proprietary information or cause interruptions in our Internet operations. Internet and online service providers have in the past experienced, and may in the future experience, interruptions in service as a result of accidental or intentional actions of Internet users, current and former employees or others. We may need to expend significant capital or other resources for protection against the threat of security breaches or alleviating problems caused by breaches. Although we intend to continue to implement industry-standard security measures, third parties may be able to circumvent the measures that we implement. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing our services through the Internet. Users of online commerce services are highly concerned about the security of transmissions over public networks. Concerns over security and the privacy of users may inhibit the growth of the Internet 20 and other online services generally, especially as a means of conducting commercial transactions. We intend to rely on encryption and authentication technology licensed from third parties to securely transmit confidential information, such as personal profiles or financial information. However, users could possibly circumvent such measures. If security breaches do occur, they could damage our reputation and expose us to a risk of loss or litigation and possible liability. Any compromise of security could harm our business. RISKS RELATED TO LEGAL UNCERTAINTY WE ARE SUBJECT TO CLASS ACTION LITIGATION AND ARE UNDER INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION REGARDING PAST ACCOUNTING IRREGULARITIES. The U.S. Securities and Exchange Commission (the "SEC") is currently conducting an investigation into certain alleged accounting irregularities with respect to our audited financial statements for the year ended December 31, 2000 and our unaudited quarterly consolidated financial statements for the quarters ended March 31, 2001 and June 30, 2001. In addition, we are currently the defendant in a class action lawsuit relating to the same matter. SEE "Legal Proceedings". We could be subject to actions or other penalties in connection with the SEC's investigation, as well as damages with respect to the class action litigation. The costs of complying with the SEC's investigation and defense of the class action claims, as well as with any penalty, fine or damages resulting from the investigation or litigation could have a material adverse effect on our business and the Company. WE ARE SUBJECT TO LEGAL PROCEEDINGS THAT COULD RESULT IN JUDGMENTS THAT WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We are subject to a variety of litigation, including two class action lawsuits. SEE "Legal Proceedings". An adverse judgment in one or more of these cases could have a material adverse effect on our business and the Company. WE ARE SUBJECT TO GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES AFFECTING THE INTERNET, WHICH COULD ADVERSELY AFFECT OUR BUSINESS IN WAYS THAT ARE DIFFICULT TO PREDICT. To date, governmental regulations have not materially restricted use of the Internet in our markets. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. Uncertainty and new regulations could increase our costs of doing business and prevent us from delivering our products and services over the Internet. The growth of the Internet may also be significantly slowed. This could delay growth in demand for our network and limit the growth of our revenues. In addition to new laws and regulations being adopted, existing laws may be applied to the Internet. New and existing laws may cover numerous issues, including: - sales and other taxes; - user privacy; - pricing controls; - characteristics and quality of products and services; - consumer protection; - cross-border commerce; - libel and defamation; - copyright, trademark and patent infringement; 21 - pornography; and - other claims based on the nature and content of Internet materials. We operate in numerous Latin American countries. As a general matter, the legal and regulatory environment that pertains to the Internet is more uncertain and subject to change than in the United States, and we may not be able to monitor and comply with regulatory developments in each country in which we operate. In addition, due to the global nature of the Internet, it is possible that the governments of other states and foreign countries--in which we do not have operations--might attempt to regulate Internet transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could have a material adverse effect on our business, operating results and financial condition. WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS WHICH MAY BE EXPENSIVE, TIME CONSUMING AND DISTRACTING. Because we have employees, property and business operations throughout the world, we are subject to the laws and the court systems of many jurisdictions. We may become subject to claims based on foreign jurisdictions for violations of their laws. In addition, these laws may be changed or new laws may be enacted in the future. International litigation is often expensive, time consuming and distracting. Accordingly, any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. WE RECEIVE INFORMATION THAT MAY SUBJECT US TO LIABILITY. We obtain content and other information from third parties, including end users of wireless telephone services. When we integrate and distribute this information over the Internet, we may be liable for the data that is contained in that content. This could subject us to legal liability for things such as misuse of personal information, negligence, defamation, intellectual property infringement and product or service liability. Many of the agreements by which we obtain or are provided content do not contain indemnity provisions in favor of use. Even if a given contract does contain indemnity provisions, these provisions may not cover a particular claim. We carry general business insurance, although it may not be adequate to cover all claims fully. UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY AFFECT OUR BUSINESS. We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property, including our rights to certain domain names, as critical to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and our reputation. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. 22 DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS. We cannot be certain that our products do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business. WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK. The laws in our target markets relating to the liability of companies which provide online services, like ours, for activities of their visitors are currently unsettled. Claims have been made against online service providers and networks in the past for defamation, negligence, copyright or trademark infringement, obscenity, personal injury or other theories based on the nature and content of information that was posted online by their visitors. We could be subject to similar claims and incur significant costs in their defense. In addition, we could be exposed to liability for the selection of listings that may be accessible through our network or through content and materials that our visitors may post in classifieds, message boards, chat rooms or other interactive services. It is also possible that if any information provided through our services contains errors, third parties could make claims against us for losses incurred in reliance on the information. We offer Web-based e-mail services, which expose us to potential liabilities or claims resulting from: - unsolicited e-mail; - lost or misdirected messages; - illegal or fraudulent use of e-mail; or - interruptions or delays in e-mail service. Investigating and defending these claims is expensive, even if they do not result in liability. OTHER RISKS OUR SHARES HAVE BEEN DE-LISTED FROM THE NASDAQ NATIONAL MARKET. By a determination of The Nasdaq National Market listing qualifications panel, effective as of the open of business on February 1, 2002 our shares were de-listed from The Nasdaq National Market due to failure to make timely filings of period reports in accordance with applicable U.S. securities laws. As such, this may adversely affect our stock price and the ability of our shareholders to sell their shares. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND IS LIKELY TO CONTINUE TO BE VOLATILE. The trading price of our common stock historically has been highly volatile and has declined significantly since the spring of 2000. Our stock price could continue to decline or to be subject to wide fluctuations in response to factors such as the following: - actual or anticipated variations in quarterly results of operations; - announcements of technological innovations, new products or services by us or our competitors; - changes in financial estimates or recommendations by securities analysts; - conditions or trends in the Internet and online commerce industries; - announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our customers or our competitors; and - additions or departures of key personnel. 23 In addition, the stock market in general, and The Nasdaq National Market and the market for Internet and technology stocks in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors and general economic conditions may materially and adversely affect our stock price. OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE. Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that stockholders consider favorable or beneficial. If a change of control or change in management is delayed or prevented, the market price of our common stock could suffer. A SMALL GROUP OF OUR EXISTING STOCKHOLDERS OWN A SIGNIFICANT NUMBER OF SHARES AND THEIR INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS. Our directors, executive officers and affiliates currently beneficially own approximately 47.2% of the outstanding shares of our common stock. SEE "Item 12, Security Ownership of Certain Beneficial Owners and Management". Accordingly, they will have significant influence in determining the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets. The interests of these stockholders may differ from the interests of the other stockholders. ITEM 2. PROPERTIES Our principal executive offices are located 999 Brickell Ave., Suite 808, Miami, Florida 33131 under a lease that expires in February 2006. We also lease office space in major cities in Mexico, Columbia, Chile, Argentina, Venezuela and Brazil. Previously, our principal offices were located at 75 Varick Street, New York, New York, 10013. ITEM 3. 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 24 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.). 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. 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 $1.4 million. In addition, for over a year the Company has engaged in periodic discussions with AT&T regarding the Company's alleged commitments to purchase a variety of services from AT&T, and in April 2002 had received correspondence from AT&T alleging that approximately a total of $1.1 million was payable by the Company. The Company denies that it owes most of the amounts alleged to be payable by AT&T. The parties have commenced settlement discussions. In October 2001, Fausto Zapata, formerly President of SMN de Mexico, S de RL, filed a notice in the applicable Labor Courts in Mexico City alleging that the Company failed to make payments due to him under an employment agreement following his termination by the Company. The amounts claimed by Mr. Zapata exceed 8.5 million Pesos, or approximately $900,000. The Company maintains that it owes Mr. Zapata solely the minimum amounts required to be paid following termination of his at-will employment, which the Company calculates to be approximately 600,000 Mexico Pesos, or approximately $65,000. In January 2002 Mr. Carlos Ponce filed a claim in U.S. District Court in the Southern District Court of Florida in connection with allegations by Mr. Ponce that the Company exceeded the scope of a license to use his image in connection with an advertising campaign. Mr. Ponce claims violations of common law and statutory rights of publicity under Florida law, unfair business practices, misappropriation, and also asserts claims under the Lanham Act. Mr. Ponce seeks damages allegedly in 25 excess of $1 million, 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 $4.25 million 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 $1.7 million. The Company denied any obligation to make such payment and asserted counterclaims against Mr. Macedonia. Mr. Macedonia's employment with the Company terminated in November 2001. The arbitration hearing was concluded in March 2002. In May 2002 the arbitrator issued a final judgment denying Mr. Macedonia's claims, as well as the Company's counterclaims. In December 2000, a consulting company filed suit against the Company in the New York Supreme Court claiming unpaid fees of approximately $2.3 million. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE OF COMMON STOCK Our common stock was quoted on The Nasdaq National Market under the symbol STRM beginning upon our initial public offering on May 26, 1999 and ending on January 31, 2002. Following our announcement of plans to restate our financial statements, The Nasdaq Listing Qualifications Department determined to halt trading of our common stock on The Nasdaq National Market prior to the market opening on November 19, 2001. Subsequently, de-listing proceedings were commenced due to our failure to file a Report on Form 10-Q for the period ended September 30, 2001, and effective as of the opening of business on February 1, 2002, our common stock was delisted from The Nasdaq National Market. Since the delisting, the Company's shares of common stock have been traded on the over-the-counter securities market (OTC). The Company has used Pink Sheets LLC's electronic quotation system occasionally to obtain stock price information for its common stock. However, there are limited historical quotations provided by Pink Sheets LLC with respect to the price per share of the Company's common stock during the first and second quarters of 2002 and the Company has not collected daily quotations. The following table sets forth the high and low close prices per share of the common stock as reported on The Nasdaq National Market through November 16, 2001, the last date on which shares of our common stock were traded prior to the suspension of trading. For subsequent periods, the Company does not have reliable daily information about the price of its common stock. As of July 2, 2002 the last reported sale price on Pink Sheets LLC was $0.015.
HIGH LOW -------- -------- 2001(1) Fourth Quarter (through November 16, 2001).................. $0.37 $0.13 Third Quarter............................................... $1.84 $0.16 Second Quarter.............................................. $2.94 $1.64 First Quarter............................................... $5.19 $1.63
- ------------------------ (1) Source: The Nasdaq National Market HOLDERS As of July 2, 2002, there were approximately 424 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends for the foreseeable future. ITEM 6. SELECTED RESTATED CONSOLIDATED FINANCIAL DATA As a result of the restatement of the Company's consolidated financial statements for the fiscal year ended December 31, 2000 and the quarters therein and for the periods ended March 31 and June 30, 2001, respectively, certain information contained in this item has been changed from that which was reported previously in the Company's Reports on Forms 10-K and 10-Q for these periods (SEE Note 2 of Notes to Consolidated Financial Statements). The selected consolidated financial data set forth below with respect to the Company's consolidated statements of operations for the years ended December 31, 2001, 2000 (Restated), 1999, 27 1998 and 1997 and balance sheets as of December 31, 2001, 2000 (Restated), 1999, 1998 and 1997 are derived from the Company's audited consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes to those statements included elsewhere in this report.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ RESTATED 1997 1998 1999 2000 2001 -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................. $ 472 $ 5,758 $ 20,089 $ 52,320 $ 23,374 Operating expenses: Product and technology development...... 1,233 7,101 33,192 67,670 51,303 Sales and marketing..................... 2,110 29,281 53,399 77,641 45,326 General and administrative.............. 650 4,810 15,318 31,446 28,219 Restructuring and other charges......... -- -- 1,613 3,935 26,230 Depreciation and amortization........... 38 785 6,500 28,295 25,055 Stock-based compensation expense........ -- 10,421 6,400 4,519 2,218 Impairment of fixed assets.............. -- -- -- -- 4,087 Impairment of goodwill and intangibles........................... -- -- -- 37,170 17,062 ------- -------- -------- --------- --------- Total operating expenses.................. 4,031 52,398 116,422 250,676 199,500 ------- -------- -------- --------- --------- Operating loss............................ (3,559) (46,640) (96,333) (198,356) (176,126) Impairment of other assets................ -- -- -- (19,378) (2,049) Gain on sale of investment................ -- -- -- -- 12,412 Loss in unconsolidated subsidiary......... -- -- -- (2,500) (1,800) Interest income, net...................... 34 667 5,891 9,871 2,084 Other expenses............................ -- -- -- (318) (30) ------- -------- -------- --------- --------- Loss before provision for income taxes.... (3,525) (45,973) (90,442) (210,681) (165,509) Provision for income taxes................ -- -- (231) (158) (60) ------- -------- -------- --------- --------- Net loss.................................. (3,525) (45,973) (90,673) (210,839) (165,569) Preferred stock dividends and accretion... (185) (4,536) (4,266) -- (1,422) ------- -------- -------- --------- --------- Net loss applicable to common shareholders............................ $(3,710) $(50,509) $(94,939) $(210,839) $(166,991) ======= ======== ======== ========= ========= Basic and diluted net loss per share...... $ (0.37) $ (4.51) $ (2.31) $ (3.20) $ (2.35) ======= ======== ======== ========= ========= Shares used in computing basic and diluted net loss per share...................... 10,040 11,204 41,171 65,920 71,181 ======= ======== ======== ========= =========
AS OF DECEMBER 31, ---------------------------------------------------- RESTATED 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- (IN THOUSANDS) SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...................... $ 443 $53,147 $274,089 $93,408 $21,635 Working capital................................ 149 47,500 260,235 80,815 21,380 Total assets................................... 810 61,156 356,071 209,105 71,736 Capital lease obligations...................... 18 229 58 -- -- Total current liabilities...................... 342 7,870 26,935 39,928 22,065 Long-term debt, noncurrent..................... -- -- 2,380 1,902 -- Redeemable convertible preferred stock......... 3,833 96,494 -- -- 35,204 Total stockholders' (deficit) equity........... (3,394) (43,339) 326,361 165,076 13,189
28 ITEM 7. 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 NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT. The Company is principally engaged in providing integrated Internet solutions to wireless telephone operators Latin America targeting Spanish- and Portuguese-speaking end-users. The Company provides a unique mix of technology and content to allow wireless operators and their end-users to take full advantage of the Internet across multiple platforms. In addition, we also offer portal solutions to businesses, as well as limited Internet media services to the Spanish- and Portuguese-speaking public. The Company was initially established as an Internet media company. However, the business of providing Internet media services has incurred very significant operating losses. Therefore, during the second half of 2001, the Company undertook a realignment of its business strategy 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, which has incurred much smaller operating losses to date. Management believes that this realignment was necessary in order to preserve the Company's prospects of becoming profitable. Subsequently, in early 2002, the Company's management and board of directors determined that 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." Commercial use of this 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 change of name is subject to the approval of the Company's shareholders. SEE "Recent Developments" and "Business" above. RESTATEMENT The Company, in consultation with its independent accountants, has determined to restate its audited consolidated financial statements for the year ended December 31, 2000, which includes adjustments to the unaudited consolidated fiscal quarters included therein, and its unaudited consolidated financial statements for the quarters ended March 31 and June 30, 2001, respectively. The Company initially announced its intention to restate its 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. SEE "Part 1--Restatement Information" 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 each quarter and year with respect to which the Company has restated or adjusted previously issued financial statements. Prior to the filing of this Report on Form 10-K for the year ended December 31, 2001, the Company has filed Reports on Form 10-Q/A for the quarters ended March 31, 2001 and June 30, 2001 29 for the purpose of amending the Reports on Form 10-Q previously filed with respect to such periods. In addition, the Company has also filed Reports on Form 10-Q for the quarters ended September 30, 2001 and March 31, 2002, which the Company had withheld from filing until such time as the investigations conducted by the Special Committee and by management had been completed. ACQUISITIONS AND DISPOSITIONS CADE? In December 2001, the Company sold substantially all of the assets associated with the operation of Cade?, its Brazilian online directory, to Yahoo Brasil Ltda for approximately $13,000,000 in cash. Such amount is included in other current assets at December 31, 2001 and was received in January 2002. The Company realized a gain from this sale of approximately $12,400,000. The Company acquired Cade? in its purchase of KD Sistemas de Informacao Ltda. in April 1999. At the time of the sale to Yahoo Brazil, the carrying value of Cade? had been reduced to reflect both amortization of the goodwill recorded upon acquisition and a write-down taken in 2000 in connection with the Company's overall assessment of the fair market value of assets acquired. SEE Notes 6 and 7 of Notes to Consolidated Financial Statements. OBSIDIANA, INC. 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 $2.6 million. The stockholders of Obsidiana included entities managed by J.P. Morgan Partners and Flatiron Partners. The entire value of the purchase price was attributed to goodwill and is currently being amortized over a three-year period. The Company accounted for the Obsidiana acquisition under the purchase method of accounting. In September 2001, as part of the realignment and change in business strategy, the Company wrote off $2,258,000 in goodwill that remained unamortized. SEE Note 10 of Notes to Consolidated Financial Statements. OLA TURISTA LTDA. In February 2000, the Company acquired Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ, leading Internet cultural and entertainment guides in the cities of Sao Paulo and Rio de Janeiro, Brazil in exchange for 71,524 shares of its common stock and $2.0 million in cash. Ola Turista's portals provide users in the Sao Paulo and Rio de Janeiro metro areas searchable listings of restaurants, theaters, nightclubs, cinemas and sports events. Pursuant to the purchase agreement, StarMedia was obligated to pay additional consideration in the form of StarMedia common stock, subject to Ola Turista meeting certain specified performance targets. Such targets were met and, as such, the Company accrued $1,625,000 and $375,000 of common stock issuable at December 31, 2000 and April 30, 2001, respectively. In April 2001, the Company issued 592,128 shares of its common stock in full satisfaction of the common stock issuable. In September 2001, the Company wrote off $335,000 of goodwill charges related to this transaction as part of the realignment of its business. This acquisition was accounted for under the purchase method of accounting. SEE Note 10 of Notes to Consolidated Financial Statements. ADNET S.A. In April 2000, the Company acquired AdNet. S.A. de R.L. de C.V. ("AdNet"), a leading Mexican search portal and Mexico's largest web directory. The Company paid $5.0 million in cash and issued 469,577 shares of common stock to acquire all of the outstanding equity of AdNet. Pursuant to the purchase agreement, StarMedia was obligated to pay additional consideration in the form of StarMedia common stock over a five-year period, subject to AdNet meeting certain specified performance targets. 30 This acquisition was accounted for under the purchase method of accounting. In November 2001, the Company, AdNet 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 the purchase agreement and certain other related agreements between the Company and the former stockholders of AdNet. As of December 31, 2001, the Company had issued a total of 7,600,000 shares. The Company has not issued the remaining 400,000 shares pending resolution of outstanding claims that the Company has against the former stockholders. In September 2001, the Company decided to shutdown the AdNet operations as part of the realignment of the business and it wrote off a total of $8,738,000 in remaining goodwill. SEE Note 10 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 REVENUES Total revenues decreased to $23.4 million for the year ended December 31, 2001 from $52.3 million for the year ended December 31, 2000. This decrease was mainly attributed to a decrease in the volume of revenue-producing advertising impressions and sponsorships sold. For the year ended December 31, 2001, two advertisers, individually, accounted for more than 10% of total revenues of the Company. For the year ended December 31, 2000, no single advertiser accounted for more than 10% of our total revenues. For the year ended December 31, 2001, our top five advertisers accounted for 39% of our total revenues. For the year ended December 31, 2000, our top five advertisers accounted for 26% of our total revenues. For the year ended December 31, 2001, we derived approximately $6.5 million, or 28% of total revenues, from barter advertising arrangements. For the year ended December 31, 2000, we derived approximately $7.7 million, or 15% of total revenues, from barter advertising arrangements, also known as barter transactions. We do not receive any cash payments for these arrangements. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include personnel costs; hosting and telecommunication costs; and content acquisition fees and revenue sharing arrangements related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. For the year ended December 31, 2001, product and technology expenses decreased to $51.3 million, or 219% of total revenues, from $67.7 million, or 129% of total revenues, for the year ended December 31, 2000. This decrease was primarily due to a decrease of approximately $5.2 million in personnel costs, approximately $4.2 million in content expenses and approximately $5.1 million for hosting costs. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, including the costs of advertisements placed on various television networks under our barter advertising arrangements, salaries and commissions of sales and marketing personnel, public relations costs, and other marketing-related expenses. Sales and marketing expenses decreased to $45.3 million, or 194% of total revenues, for the year ended December 31, 2001 from $77.6 million, or 148% of total revenues, for the year ended December 31, 2000. The decrease in sales and marketing expenses was primarily attributable to a contraction of advertising, public relations and other promotional expenditures of approximately 31 $24.5 million, lower personnel expenses of approximately $9.1 million, which included sales commissions, as well as travel expenses of approximately $2.8 million, and were partially offset by an increase in bad debt expense of $6.0 million. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries and benefits, costs for general corporate functions, including finance, accounting and facilities, and fees for professional services. General and administrative expenses decreased to $28.2 million, or 121% of total revenues, for the year ended December 31, 2001, from $31.4 million, or 60% of total revenues, for the year ended December 31, 2000. The decrease in general and administrative expenses was primarily due to decreased salaries and related expenses of approximately $2.1 million, reduced rental costs and office-related costs of approximately $2.2 million, offset by additional taxes and insurance charges of approximately $1.5 million. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges for the year ended December 31, 2001 consisted of a one-time charge of $26.2 million, which resulted from a company-wide realignment of its business operations and an effort to reduce its operational overhead. The total charge includes a reserve of $11.5 million for loans and related interest made to certain officers of the Company, determined by management to be unrealizable due to the impairment in collateral value. Additionally, as a result of the Company vacating the premises of its New York headquarters and the related settlement pursuant to which the Company transferred certain of its fixed assets, furniture and fixtures and leasehold improvements to the new tenant at the vacated premises, the Company incurred a loss of $8.2 million. SEE Note 4 of Notes to Consolidated Financial Statements. Restructuring and other charges for the year ended December 31, 2000 consisted of a one-time charge of $3.9 million associated with the integration of our subsidiaries and a company-wide realignment of business operations. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses decreased to $25.1 million, or 107% of total revenues, for the year ended December 31, 2001 from $28.3 million, or 54% of total revenues, for the year ended December 31, 2000. The decrease was attributed to the impairment of fixed assets, goodwill and intangible assets during the period. STOCK-BASED COMPENSATION EXPENSE Deferred compensation of $2.2 million and $4.5 million was recorded as an expense during the years ended December 31, 2001 and 2000, respectively. The unamortized balance is being charged to operations over the vesting period of the individual options. IMPAIRMENT OF FIXED ASSETS In the first quarter of 2001, the Company decided to cease operating Webcast Solutions Company, which in September 1999 had been merged with a wholly owned subsidiary of the Company. Webcast Solutions was a streaming media company focused on the global delivery of audio, video and other Internet based interactive media. The total loss recognized as a result of this decision totaled $1.2 million, primarily related to fixed assets deemed to be impaired. In February 2000, the Company entered into a software license agreement with Software.com Inc. to purchase for $9 million a non-exclusive and non-transferable license to use Software.com Inc.'s Intermail Mx electronic messaging software during a period of three years. As part of the change in 32 business strategy and focus and to reduce operating costs, the Company decided in September 2001 to terminate the usage of the software and return the license to Software.com Inc. The Company reached an agreement with Software.com Inc. in March 2002. The terms of the settlement require the Company to return all copies of the software by July 2002. A settlement payment of $1.3 million was made in March 2002 to finalize the agreement. As of September 2001, an impairment loss of $2.9 million was recognized to write-off the carrying value of the software. SEE Note 5 of Notes to Consolidated Financial Statements. IMPAIRMENT OF GOODWILL AND INTANGIBLES As of December 31, 2000, the Company determined that the fair market value of certain acquired assets was below their respective carrying values (inclusive of the related goodwill). As a result, the Company recorded a goodwill impairment charge of $37.2 million. As of December 31, 2001, the Company determined that all goodwill and intangible assets related to the Internet media business were impaired. The Company recorded a goodwill impairment charge of $11.4 million and an intangible impairment charge of $5.7 million. SEE Note 6 of Notes to Consolidated Financial Statements. GAIN ON SALE OF INVESTMENT In December 2001, the Company sold substantially all of the assets of Cade?, its Brazilian online directory, to Yahoo Brasil Ltda for approximately $13 million in cash. The Company purchased KD Sistemas (including Cade?) in April 1999. Such amount is included in other current assets at December 31, 2001 and was received in January 2002. The Company realized a gain from this sale of approximately $12.4 million. LOSS IN UNCONSOLIDATED SUBSIDIARY During 2000 the Company acquired a non-controlling 50% interest in Gratis1, Inc. ("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 December 31, 2001, the Company recognized an expense of $1,800,000 related to the guaranty. IMPAIRMENT OF OTHER ASSETS In the fourth quarter of 2001, the Company determined that the long-term investments it had in its books, principally minority investments in other companies, were permanently impaired and recorded an impairment charge of $2 million. In the fourth quarter of 2000, the Company determined that certain long-term assets, principally minority investments in other companies were permanently impaired and recorded an impairment charge of $19.4 million. INTEREST Interest income includes income from our cash and investments. Interest income decreased from $11.1 million for the year ended December 31, 2000 to $3.0 million for the year ended December 31, 33 2001. The decrease is primarily a result of a decrease in the average cash balances for the year ended December 31, 2001 as compared to December 31, 2000. Interest expense decreased from $1.2 million for year ended December 31, 2000 to $925,000 for the year ended December 31, 2001. This decrease is due to the net effect of the decrease in interest related to an equipment lease line that was paid in full during the second quarter of 2001 and the interest expense resulting from the issuance of the Company's common stock in connection with the Gratis 1 transaction. SEE Note 21 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 REVENUES Revenues increased to $52.3 million for the year ended December 31, 2000 from $20.1 million for the year ended December 31, 1999. The increase in revenues was primarily due to an increase in the volume of advertising impressions and sponsorships sold. During 2000, we continued to expand our sales force; increase the number of impressions available on our network by adding channels and by increasing our marketing efforts; and expand through acquisitions. For the year ended December 31, 2000, no single advertiser accounted for more than 10% of total revenues. For the year ended December 31, 1999, no single advertiser accounted for more than 10% of our total revenues. For the year ended December 31, 2000, our top five advertisers accounted for 26% of our total revenues. For the year ended December 31, 1999, our top five advertisers accounted for 16% of our total revenues. For the year ended December 31, 2000, we derived approximately $7.7 million, or 15% of total revenues, from barter advertising arrangements. For the year ended December 31, 1999, we derived approximately $5.5 million, or 27% of total revenues, from barter advertising arrangements. We do not receive any cash payments for these arrangements. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include personnel costs; hosting and telecommunication costs; and content acquisition fees and revenue sharing arrangements related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. For the year ended December 31, 2000, product and technology expenses increased to $67.7 million, or 129% of total revenues, from $33.2 million, or 165% of total revenues, for the year ended December 31, 1999. This increase was primarily due to an increase of approximately $18.3 million related to increased staffing levels, approximately $5.6 million to enhance the content and features of the StarMedia network and approximately $6.9 million for hosting costs. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, including the costs of advertisements placed on various television networks under our reciprocal advertising arrangements, salaries and commissions of sales and marketing personnel, public relations costs, and other marketing-related expenses. Sales and marketing expenses increased to $77.6 million, or 148% of total revenues, for the year ended December 31, 2000 from $53.4 million, or 266% of total revenues, for the year ended December 31, 1999. The increase in sales and marketing expenses was primarily attributable to expansion of our advertising, public relations and other promotional expenditures related to our 34 branding campaign of approximately $6.1 million, higher personnel expenses, including sales commissions of approximately $9.7 million and an increase in bad debt expense of $6.3 million. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries and benefits, costs for general corporate functions, including finance, accounting and facilities, and fees for professional services. General and administrative expenses increased to $31.4 million, or 60% of total revenues, for the year ended December 31, 2000, from $15.3 million, or 76% of total revenues, for the year ended December 31, 1999. The increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with the hiring of additional personnel of approximately $5.9 million, additional rental costs and office-related costs of approximately $5.0 million, additional taxes and insurance charges of approximately $2.2 million and additional legal, tax and audit fees of approximately $2.5 million. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges for the year ended December 31, 2000 consisted of a charge of $3.9 million associated with the integration of our subsidiaries and a company-wide realignment of business operations. Restructuring and other charges for the year ended December 31, 1999 include a one-time charge of $1.6 million related to the acquisitions of WassNet and Webcast Solutions. Since the acquisitions were each accounted for as pooling of interests, these costs were expensed at the close of the transactions. IMPAIRMENT OF GOODWILL In the fourth quarter of 2000, the Company determined that the fair market value of certain acquired assets was below their respective carrying values (inclusive of the related goodwill). As a result, the Company recorded a goodwill impairment charge of $37.2 million. SEE Note 6 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased to $28.3 million, or 54% of total revenues, for the year ended December 31, 2000 from $6.5 million, or 32% of total revenues, for the year ended December 31, 1999. The increase was attributable to both the addition of $46 million in fixed assets during 2000 and the full-year amortization of goodwill relating to acquisitions made in 1999. As a result of the impairment of goodwill charge, amortization expense for goodwill is expected to be reduced in future periods. STOCK-BASED COMPENSATION EXPENSE Deferred compensation of $4.5 million and $6.4 million was recorded as an expense during the years ended December 31, 2000 and 1999, respectively. The unamortized balance is being charged to the operations over the vesting period of the individual options. IMPAIRMENT OF OTHER ASSETS In the fourth quarter of 2000, the Company determined that certain long-term assets, principally minority investments in other companies were permanently impaired and recorded an additional impairment charge of $19.4 million. 35 NET INTEREST INCOME Net interest income includes income from our cash and investments. Net interest income increased from $5.9 million for the year ended December 31, 1999 to $9.9 million for the year ended December 31, 2000. The increase is primarily a result of an increase in the average cash balances for the year ended December 31, 2000 as compared to December 31, 1999. QUARTERLY RESULTS The following table sets forth certain unaudited quarterly information for the most recent eight quarters ending with the quarter ended December 31, 2001. This information has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the periods presented. This information should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto. Results of operations for any previous fiscal quarter are not indicative of results for the full year or any future quarter.
MAR 31, 2000 MAR 31, 2000 JUNE 30, 2000 JUNE 30, 2000 SEPT 30, 2000 SEPT 30, 2000 ------------- ------------- -------------- -------------- -------------- -------------- AS PREVIOUSLY AS RESTATED AS PREVIOUSLY AS RESTATED AS PREVIOUSLY AS RESTATED REPORTED REPORTED REPORTED Statement of Income Data: Revenues....................... $ 10,056,000 $ 9,861,000 $ 13,764,000 $ 12,021,000 $ 17,146,000 $ 15,929,000 Product & technology........... 15,900,000 15,900,000 19,458,000 19,458,000 16,654,000 16,654,000 Sales & marketing.............. 18,587,000 18,587,000 22,274,000 21,190,000 17,348,000 16,971,000 General & administration....... 8,075,000 7,880,000 7,702,000 7,521,000 8,163,000 7,966,000 Restructuring charges.......... -- -- -- -- 3,935,000 3,935,000 Depreciation and amortization................. 4,544,000 4,544,000 7,289,000 7,289,000 8,120,000 8,120,000 Stock-based compensation expense...................... 1,212,000 1,212,000 1,108,000 1,108,000 1,149,000 1,149,000 Impairment of goodwill......... -- -- -- -- -- -- Loss on impairment of fixed assets....................... -- -- -- -- -- -- Loss from operations........... $(38,262,000) $(38,262,000) $(44,067,000) $(44,545,000) $(38,223,000) $(38,866,000) DEC 31, 2000 DEC 31, 2000 ------------- ------------- AS PREVIOUSLY AS RESTATED REPORTED Statement of Income Data: Revenues....................... $ 20,062,000 $ 14,509,000 Product & technology........... 15,658,000 15,658,000 Sales & marketing.............. 21,585,000 20,893,000 General & administration....... 7,803,000 8,079,000 Restructuring charges.......... -- -- Depreciation and amortization................. 8,342,000 8,342,000 Stock-based compensation expense...................... 1,050,000 1,050,000 Impairment of goodwill......... 37,170,000 37,170,000 Loss on impairment of fixed assets....................... -- -- Loss from operations........... $(71,546,000) $(76,683,000)
MAR 31, 2001 MAR 31, 2001 JUNE 30, 2001 JUNE 30, 2001 SEPT 30, 2001 DEC 31, 2001 ------------- ------------- -------------- -------------- -------------- ------------- AS PREVIOUSLY AS RESTATED AS PREVIOUSLY AS RESTATED REPORTED REPORTED Statement of Income Data: Revenues....................... $ 16,039,000 $ 8,871,000 $ 14,204,000 $ 6,289,000 $ 4,600,000 $ 3,614,000 Product & technology........... 14,542,000 14,542,000 14,234,000 14,234,000 11,468,000 11,059,000 Sales & marketing.............. 19,664,000 17,472,000 15,626,000 12,498,000 8,558,000 6,798,000 General & administration....... 7,674,000 9,158,000 7,472,000 7,946,000 6,197,000 4,918,000 Restructuring charges.......... -- -- 15,456,000 15,351,000 9,251,000 1,628,000 Depreciation and amortization................. 5,739,000 5,739,000 7,100,000 6,939,000 7,383,000 4,994,000 Stock-based compensation expense...................... 715,000 715,000 683,000 683,000 491,000 329,000 Impairment of goodwill......... -- -- -- -- 11,405,000 5,657,000 Loss on impairment of fixed assets....................... -- 1,153,000 -- -- 2,934,000 -- Loss from operations........... $(32,295,000) $(39,908,000) $(46,367,000) $(51,362,000) $(53,087,000) $(31,769,000)
LIQUIDITY AND CAPITAL RESOURCES To date, we have financed our operations primarily through the sale of our equity securities. As of December 31, 2001, we had $21.6 million in cash and cash equivalents, a decrease of $71.8 million from December 31, 2000. We have never been profitable and we expect to continue to incur operating losses in the future. We will need to generate significant revenues to achieve profitability and to be able to continue to operate. The Company's consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. The Company's independent auditors have issued their report dated June 21, 2002 that includes an explanatory paragraph stating that the Company's recurring losses and accumulated deficit, among other things, raise substantial doubt about the Company's ability to continue as a going concern. The Company's historical sales are limited and it has been necessary to rely upon financing from sale of equity securities to sustain operations. The 36 Company might find it necessary to rely upon financing from debt, if made available, or on the sale of equity securities to continue to sustain its operations and to be able to meet its cash demands. There can be no assurance that the Company will obtain such additional capital or that such additional financing will be sufficient for the Company's continued existence. Furthermore, there can be no assurances that the Company will be able to generate sufficient revenues from the operation of the mobile solutions business to meet the Company's obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. SEE "Item 1, Business--Going Concern". During the year ended December 31, 2001, we used $88.4 million cash in operating activities, mostly related to our $165.6 million loss during 2001, which included non-cash activities such as $23.2 million in impairments of goodwill and other assets, $25.1 million for depreciation and amortization, $12.5 million in loss on disposal of assets, $12.7 million in provision for bad debts, $2.2 million for amortization of stock-based compensation and $11.4 million for write-off of officer loans. During the year ended December 31, 2000, we used $118.1 million in operating activities, mostly related to our $210.8 million loss during 2000 which included non-cash activities such as $56.5 million in impairments of goodwill and other assets, $28.3 million in depreciation and amortization and $4.5 million for amortization of stock-based compensation. During the year ended December 31, 1999, we used $80.0 million in operating activities, mostly related to our $90.7 million loss during 1999 which included non-cash activities such as $6.5 million in depreciation and amortization and $6.4 million for amortization of stock-based compensation. For the year ended December 31, 2001, we used $12.4 million in investing activities, including $8.1 million for the purchase of fixed assets, $4.9 million in connection with acquisitions and related costs, $6.9 million in loans to officers, offset by a release of a restricted security deposit of $5 million. For the year ended December 31, 2000, we used $66.5 million in investing activities, including $4.1 million for investments and other long-term assets, $45.2 million for fixed assets, $10.6 million in connection with acquisitions and related costs and $4.6 million in loans to officers. For the year ended December 31, 1999, we used $48.8 million in investing activities, including $21.6 million for investments and other long-term assets, $18.7 million for fixed assets and $6.4 million in connection with acquisitions and related costs. Net cash provided by financing activities was $30.9 million for the year ended December 31, 2001, $4.2 million for the year ended December 31, 2000 and $350.7 million for the year ended December 31, 1999. In April and May 1999, we completed the sale of 3,727,272 shares of our common stock for $41 million. In May 1999, we raised approximately $110.4 million, net of underwriting discounts and commissions and related expenses, from the initial public offering of shares of our common stock. In October 1999, we raised approximately $192.1 million net of underwriting discounts and commissions and related expenses, from a follow-on public offering of our common stock. We obtained a $12 million line of credit in 1999. During the quarter ended June 30, 2001, the Company issued 1,431,373 shares of its Series A Convertible Preferred Stock at a price of $25.50 per preferred share 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 $1.3 million during the year ended December 31, 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 $144,000 during the year ended December 31, 2001. In addition, in connection with the BellSouth Strategic Agreement entered into concurrently with the sale of Series A Convertible Preferred Stock, 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 37 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. SEE Note 8 of Notes to Consolidated Financial Statements. Our principal commitments consist of obligations outstanding under operating leases. Our capital requirements depend on our revenue growth, our operating structure and the amount of resources we devote to investments in the growth of our integrated mobile operations. We have experienced a substantial decrease in our capital expenditures and operating lease arrangements during the year, consistent with the realignment of our operations. Following the Company's announcement of plans to restate its financial statements, The Nasdaq Listing Qualifications Department determined to halt trading of the Company's common stock on The Nasdaq National Market prior to the market opening on November 19, 2001. Subsequently, delisting proceedings were commenced due to the Company's failure to file a Report on Form 10-Q for the period ended September 30, 2001, and effective as of the opening of business on February 1, 2002, the Company's common stock was de-listed from The Nasdaq Stock Market. Since the delisting, the Company's shares of common stock have been traded on the over-the-counter securities market (OTC). The Company has used Pink Sheets LLC's electronic quotation system occasionally to obtain stock price information for its common stock. However, there are limited historical quotations provided by Pink Sheets LLC with respect to the price per share of the Company's common stock during the first and second quarters of 2002 and the Company has not collected daily quotations. ADDITIONAL UNCERTAINTIES In May 2001, the Company entered into a Grant Disbursement Agreement with the New York State Urban Development Corporation d/b/a/ Empire State Development Corporation (ESDC) whereby the Company received a grant of up to $500,000 to be used for acquisition of machinery and equipment associated with office expansion. Under this grant, the Company had to achieve certain employment goals from January 1, 2002 throughout January 1, 2007 in order to be in full compliance with the agreement. The Company is currently in default of the agreement and has commenced communications with the ESDC to be able to determine how to cure this default. In December 1999 the Company entered into a into a lease agreement with the New York City Industrial Development Agency (NYCIDA) for the purposes of obtaining financial assistance in the form of sales tax exemptions to be able to acquire and install machinery and equipment free of sales tax in certain leased premises maintained by the Company. Under this agreement, the Company had to maintain a certain number of employees in order to avoid forfeiture and recapture of sales tax benefits previously used. The Company is currently in default of the agreement and has commenced communications with the NYCIDA to be able to determine how to cure this default. As part of its efforts to reduce its costs and scale back its operations, the Company has engaged and continues to engage in discussions to terminate relationships with a number of its suppliers. Generally the Company proposes to make a settlement payment in exchange for receipt of a full release from future obligations from the supplier. In some cases the Company withholds payments due under the contracts in question pending agreement on a final settlement. In response its suppliers may commence or threatened to commence legal proceedings. The amounts paid by the Company vary by supplier depending on the underlying contractual commitments and performance. Within the past twelve months the Company has reached settlement agreements of this nature with a number of such suppliers. The Company is currently engaged in discussions of this nature with several other suppliers. 38 FUTURE OUTLOOK The realignment that the Company has been undertaking has significantly impacted the Company's operations and business strategy. Currently, the Company's focus is on the development of its mobile solutions business. The Company's revenues in the future will be generated principally from this business. As a result, historical financial data will not be relevant and should not be used as an indication of our future performance. Management believes that the realignment was necessary in order to preserve the Company's prospects for profitability. However, the success of our mobile business solutions strategy is contingent on the success of our realignment and on other market factors that are out of the control of the Company. We expect to continue to generate losses. Currently our cash is very limited and it may not be sufficient to fund future operations. Therefore, we may have future capital requirements. SEE "Risk Factors". INFLATION AND FOREIGN CURRENCY EXCHANGE RATE LOSSES To date, our results of operations have not been impacted materially by inflation in countries in which we do business. Although a substantial portion of our revenues is denominated in U.S. dollars, an increasing percentage of our revenues are denominated in foreign currencies. As a result, our revenues may be impacted by fluctuations in these currencies and the value of these currencies relative to the U.S. dollar. In addition, a portion of our monetary assets and liabilities and our accounts payable and operating expenses are denominated in foreign currencies. Therefore, we are exposed to foreign currency exchange risks. Revenues derived from foreign currencies, however, historically have not comprised a material portion of our revenues. As a result, we have not tried to reduce our exposure to exchange rate fluctuations by using hedging transactions. We may, however, choose to do so in the future. We may not be able to do this successfully. Accordingly, we may experience economic loss and a negative impact on earnings and equity as a result of foreign currency exchange rate fluctuations. RECENT ACCOUNTING PRONOUNCEMENTS The Company continues to assess the effects of recently issued accounting standards. The impact of all recently adopted and issued accounting standards has been disclosed in the footnotes to the audited Consolidated Condensed Financial Statements. CRITICAL ACCOUNTING ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue, bad debts, intangible assets, restructuring, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenue is recognized when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered and when collection is probable. The Company's revenue recognition policy is discussed in Note 1 of the Notes to Consolidated Financial Statements. The recognition of revenue in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of revenue. We recognize revenue when earned as 39 services are provided throughout the life of each contract with a customer. The majority of our revenues are invoiced on a monthly basis. Estimates related to the recognition of revenue include the recognition of barter revenue and the allocation of revenue across the various deliverables of multiple element revenue arrangements. We record deferred revenue for billings in excess of revenues recognized. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company uses the direct write-off method to record bad debt expense. The Company performs regular analyses on its accounts receivable balances and determines what accounts receivable to write-off after information is received and indications exist that the specific account receivable is no longer collectible. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. The Company assesses the fair value and recoverability of its long-lived assets, including goodwill, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets and goodwill is dependent upon the forecasted performance of our business, changes in the mobile solutions business and the overall economic environment. When the Company determines that the carrying value of our long-lived assets and goodwill may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not previously recognized. For the period ended December 31, 2001, all goodwill related to the Internet media business was written-off by the Company. The impairment charge recognized by the Company totaled $11.4 million. SEE Note 6 of Notes to Consolidated Financial Statements. The Company periodically records the estimated impact of various conditions, situations or circumstances involving uncertain outcomes. The Company accounts for these contingencies as prescribed by SFAS No. 5 "Accounting for Contingencies". The Company uses its best judgment to determine the estimate of these contingencies. The Company adjusts these reserves to account for ongoing issues and changes in circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK COLLECTION RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. INTEREST RATE RISK Our investments are classified as cash and cash equivalents with original maturities of three months or less. Therefore, changes in the market's interest rates do not affect the value of the investments as recorded by us. FOREIGN CURRENCY EXCHANGE RISK We do not hedge our exposure to foreign currency exchange risk. We are subject to exchange rate fluctuations, which may be a significant risk, because of our operations in Latin America. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements listed under the heading "(a)(1) Consolidated Financial Statements" of the Item 14 hereof, which financial statements are incorporated herein by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Our Board of Directors currently consists of three persons. The following information with respect to the principal occupation or employment, other affiliations and business experience during the last five years of the directors has been furnished to the Company by such directors. Except as indicated, the directors have had the same principal occupation for the last five years. DOUGLAS M. KARP, 47, has been a director of the Company since September 1998. Mr. Karp has served as the managing partner of Pacific Partners LLC, a private equity and advisory firm, since August 2000. Prior to joining Pacific Partners, he was a Managing Director and a member of the Operating Committee of E.M. Warburg, Pincus & Co., LLC from 1991 to 2000. Prior to joining Warburg, Pincus, Mr. Karp was a Managing Director of Mergers and Acquisitions at Salomon Brothers Inc. from 1989 to 1991 and a manager with the Boston Consulting Group and founder of its New York office. Mr. Karp is a member of the Boards of Directors of Primus Telecommunications Group and several private companies. Mr. Karp received a B.A. from Yale University and a J.D. from Harvard Law School. SUSAN L. SEGAL, 49, has been a director of the Company since July 1997 and has been acting Chairman of the Board since November 2001. Ms. Segal is currently the Managing Member of Inspiration Partners LLC and a consultant for J.P. Morgan Partners. Ms. Segal previously served as Partner of J.P. Morgan Partners from 1996 until June 2002. At that firm, she was the Latin American Group Head from December 1996 until January 2001. From 1992 to 1996, Ms. Segal was a Senior Managing Director at Chase Securities Inc. responsible for Emerging Markets Investment Banking. She has more than 20 years of experience in emerging markets, particularly Latin America, where her responsibilities have included trading, capital markets and sovereign debt rescheduling. Ms. Segal is a member of the Council on Foreign Relations, the Advisory Board of Endeavor and the boards of directors of the Tinker Foundation and the Americas Society. Ms. Segal received an M.B.A. from Columbia University and a B.A. from Sarah Lawrence College. FREDERICK R. WILSON, 40, has been a director of the Company since July 1997. Mr. Wilson is currently Managing Partner of Flatiron Partners, a venture capital firm focused on early-stage, Internet-focused investments, as well as the Flatiron Fund 1998/99, Flatiron Fund, Flatiron Fund 2000, Flatiron Associates and is a general partner in F.J. Wilson Partners. Prior to founding Flatiron Partners in July 1996, Mr. Wilson was associated with Euclid Partners from 1986 to 1996. Mr. Wilson is a member of the Board of Directors of TheStreet.com, ITXC Corporation and a number of privately held companies. He received an M.B.A. from The Wharton School of Business at The University of Pennsylvania and a S.B. from the Massachusetts Institute of Technology. Directors currently do not receive a stated salary from the Company for their service as members of the Board of Directors. By resolution of the Board, they may (but do not) receive a fixed sum and reimbursement for expenses in connection with their attendance at Board and committee meetings. We currently do not provide additional compensation for committee participation or special assignments of the Board of Directors. Our Directors typically are granted options to purchase shares of common stock each fiscal year. However, during the 2001 Fiscal Year, our non-management directors did not receive any grants of options to purchase shares of common stock. 42 EXECUTIVE OFFICERS The following individuals were serving as executive officers of the Company on July 1, 2002:
NAME AGE POSITION WITH THE COMPANY - ---- -------- ------------------------------------- Jose Manuel Tost............. 41 President Jorge Rincon................. 31 Chief Operating Officer Ana Maria Lozano-Stickley.... 38 Chief Financial Officer Michael Hartman.............. 38 General Counsel and Secretary
JOSE MANUEL TOST, 41, has been President of the Company since April 2002. Prior to his appointment as President, Mr. Tost served as the Company's Chief Operating Officer from December 2001 until April 2002 and Senior Vice President, Product Marketing and Operations from July 2001 until December 2001. Mr. Tost joined the Company in July 2001. Prior to that time, Mr. Tost spent over five years, from 1996 until 2001, at TelCel/BellSouth working in a variety of management roles, the most recent of which was General Manager of Technology. In addition, Mr. Tost was General Manager of T-NET, an Internet service provider, and T-DATA, a private network operator, each of which is a division of TelCel/BellSouth. Mr. Tost previously served as Vice President of Operations of Cadtronic Consulting Services, a management and engineering consulting firm, advisor to an investment banking firm, and General Manager for a consulting firm that specializes in high-tech industries. Mr. Tost holds a Bachelor of Science and a Master of Science in Engineering Technology from the University of Central Florida. JORGE RINCON, 31, has been Chief Operating Officer of the Company since April 2002. Prior to his appointment as Chief Operating Officer, Mr. Rincon has served as Chief Technology Officer of the Company from December 2001 until April 2002 and as Senior Vice President, Product Engineering Solutions from July to December 2001; prior to that he served as Senior Director, Product Development of StarMedia Mobile (USA), from October 1999 until July 2001, and was responsible for overseeing The Company's mobile technologies. Mr. Rincon joined the Company in October 1999. Prior to joining the Company, from January 1996 Mr. Rincon was a founding member and Vice President of Operations for PageCell International Holdings, Inc., a company acquired by the Company to be the cornerstone of its mobile solutions business. Mr. Rincon studied Systems Engineering at the Universidad Metropolitana in Caracas, Venezuela, and holds an Industrial Engineering and Information Systems degree from Northeastern University. ANA MARIA LOZANO-STICKLEY, 38, has been Chief Financial Officer of the Company since May 2002. In January 2002, Ms. Lozano-Stickley joined the Company as a consultant acting as its Vice President of Accounting and Administration. From August 2000 to December 2002, Ms. Lozano-Stickley was Vice President of Finance for SportsYa!, a sports media company focused on the Hispanic market in the U.S., Latin America and Spain. From May 1999 to June 2000, Ms. Lozano-Stickley was Vice President of Finance for Espanol.com, Inc., a B2C e-commerce site targeting its products to the Hispanic market in the U.S. and Latin America. From May 1998 to April 1999, Ms. Lozano-Stickley was International Controller for General Cinemas Corporation, a leading motion picture exhibitor in the U.S. and Latin America. Ms. Lozano-Stickley is a Certified Public Accountant and holds a Bachelor of Science in Business Administration from Boston University with a dual concentration in accounting and finance. MICHAEL HARTMAN, 38, has been General Counsel and Secretary of the Company since November 2001. Prior to his appointment, Mr. Hartman had been the Company's Assistant General Counsel since joining the Company in July 2000. From November 1994 to June 2000 Mr. Hartman was an associate in the Corporate Department of Debevoise & Plimpton, where he focused in transactions in Latin America and the Iberian Peninsula. He received a J.D. from the Columbia University School of Law, an M.A. from the University of California at Berkeley, and a B.A. from the University of Michigan. 43 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid for each of the three years ended December 31, 1999, 2000 and 2001, respectively, to the individuals who served as our chief executive officer in 2001. The table also includes information regarding each of our other most highly compensated executive officers in 2001 who were executive officers as of the end of fiscal year 2001 and who earned greater than $100,000, of which there were two officers. In addition, we have included information regarding two individuals who would have been among our most highly compensated officers except that they were not serving as executives at the end of fiscal year 2001. Finally, we have voluntarily disclosed this information for our current President. We refer to these individuals collectively as our "Named Executive Officers". SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION(1) COMPENSATION ------------------- AWARDS: SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION - --------------------------- -------- -------- -------- ------------------ ------------ Jose Manual Tost, President(2)......................... 2001 $ 46,753 $ 50,000 -- -- 2000 -- -- -- -- 1999 -- -- -- -- Enrique Narciso, Chief Executive Officer and President(3)....................... 2001 207,483 200,000 -- -- 2000 164,074 -- 350,000 -- 1999 29,593 -- 35,000 -- Fernando Espuelas, Chief Executive Officer(4)........... 2001 209,168 -- -- $ 653,746(5) 2000 165,000 300,000 1,000,000 -- 1999 98,152 300,000 1,687,500 -- Jorge Rincon, Chief Operating Officer(6)........... 2001 156,969 50,000 -- -- 2000 123,008 3,382 55,000 -- 1999 22,443 -- 10,000 -- Michael Hartman, General Counsel(7)................... 2001 136,093 45,000 25,000 -- 2000 57,291 30,000 125,000 -- 1999 -- -- -- -- Adriana Kampfner, Senior Vice President, Global Sales(8)........................... 2001 220,000 -- -- 1,233,311(9) 2000 200,804 -- 330,000 -- 1999 155,833 50,000 171,000 -- Betsy Scolnik, Executive Vice President(10)......... 2001 218,302 -- -- -- 2000 214,420 -- 375,000 -- 1999 149,166 50,000 186,000 --
- ------------------------ (1) In accordance with the rules of the Securities and Exchange Commission, compensation in the form of perquisites and other personal benefits has been omitted for our Named Executive Officers because the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for each Named Executive Officer in 2001. 44 (2) Mr. Tost joined the Company in July 2001. He was appointed President of the Company in April 2002. (3) Mr. Narciso joined the Company in October 1999. He was appointed President in June 2001 and Chief Executive Officer in August 2001. He resigned from the Company in April 2002. (4) Mr. Espuelas is a founder of the Company. He was Chief Executive Officer of the Company until August 2001, at which time he resigned from the Company. (5) This amount includes: (i) a one-time payment of $650,000 by the Company to Mr. Espuelas in connection with the termination of his employment in August 2001; and (ii) payment of post-termination medical and dental premiums totaling $3,746. (6) Mr. Rincon joined the Company in October 1999. He was appointed Chief Technology Officer of the Company in December 2001 and subsequently appointed Chief Operating Officer of the Company in April 2002. (7) Mr. Hartman joined the Company in July 2000. He was appointed General Counsel in November 2001. (8) Ms. Kampfner served as Senior Vice President, Global Sales and Strategy and President of StarMedia Mexico until her departure in December 2001. (9) This amount includes: (i) $1,144,197, inclusive of interest, on the line of credit forgiven by the Company; (ii) $24,947 associated with the Company's forgiveness of the remaining balance of Ms. Kampfner's American Express Corporate Credit Card; and (iii) a one-time payment of $64,167 by the Company to Ms. Kampfner in connection with the termination of her employment in December 2001. (10) Ms. Scolnik served as the Company's Executive Vice President at the time of her departure in December 2001. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth grants of stock options for the year ended December 31, 2001 to our Named Executive Officers. We have never granted any stock appreciation rights. The potential realizable value is calculated based on the term of the option at the time of grant. It is calculated assuming that the fair market value of common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect our estimate of future stock price growth. The percentage of total options granted to employees in 2001 is based on options 45 to purchase an aggregate of 289,500 shares of common stock granted during 2001 under our 1998 Plan and 2000 Plan to our employees, consultants and directors.
OPTION GRANTS IN LAST FISCAL YEAR: INDIVIDUAL GRANTS ------------------------------------------------ PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT NUMBER OF OPTIONS EXERCISE ASSUMED ANNUAL RATES OF SECURITIES GRANTED TO PRICE STOCK PRICE APPRECIATION FOR UNDERLYING EMPLOYEES PER OPTION TERM OPTIONS IN FISCAL SHARE EXPIRATION ----------------------------- NAME GRANTED YEAR (%) ($/SHARE) DATE 5% 10% - ---- ---------- ---------- --------- ---------- ------------- ------------- Jose Manual Tost............ -- -- -- -- -- -- Enrique Narciso............. -- -- -- -- -- -- Fernando Espuelas........... -- -- -- -- -- -- Jorge Rincon................ -- -- -- -- -- -- Michael Hartman............. 25,000 8.63557 $1.91 1/10/11 $30,750 $81,500 Adriana Kampfner............ -- -- -- -- -- -- Betsy Scolnik............... -- -- -- -- -- --
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides information about stock options held as of December 31, 2001 by our Named Executive Officers. The value of unexercised in-the-money options at fiscal year-end is based on the market price of $.36 per share, which was the average of the high and low selling price per share of the Company's common stock on The Nasdaq National Stock Market on November 16, 2001, the last day our shares were traded in the 2001 Fiscal Year, less the exercise price payable for such shares.
NUMBER OF NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR END($)(1) ON VALUE ------------------------------ ------------------------------ NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------- -------- ----------- ------------- ----------- ------------- Jose Manual Tost.......... -- -- -- -- -- -- Enrique Narciso........... -- -- 208,528 176,472 -- -- Fernando Espuelas......... -- -- 3,437,500 -- -- -- Jorge Rincon.............. -- -- 36,456 28,544 -- -- Michael Hartman........... -- -- 68,748 81,252 -- -- Adriana Kampfner.......... -- -- 302,152 -- -- -- Betsy Scolnik............. -- -- 300,484 -- -- --
- ------------------------ (1) None of the options were in-the-money as of December 31, 2001. EMPLOYMENT AND SEPARATION AGREEMENTS On January 31, 2001, the Company amended the letter of credit agreement with Fernando J. Espuelas, the Company's former Chief Executive Officer. This amendment increased the line of credit granted to him to the lesser of $4,000,000 or the market value of shares of the Company's common stock held as collateral. Interest accrued at 6.75% per annum. SEE "Certain Relationships and Related Transactions" for more information. On August 7, 2001, the Company entered into a separation and release agreement with Fernando J. Espuelas, the Company's former Chief Executive Officer, under which he ceased his 46 employment with the Company. The separation and release agreement superceded Mr. Espuelas' employment agreement with the Company. Under the agreement, (i) Mr. Espuelas received a one-time payment of $650,000, which was paid in August 2001, and payment of medical and dental premiums through February 2003, and (iii) the Line of Credit provided to Mr. Espuelas under certain agreements dated December 28, 2000 (as amended on January 31, 2001) remained in full force and effect in accordance with its terms. Even though the Line of Credit remained intact under the agreement, Mr. Espuelas agreed not to draw down any additional amounts thereunder. Mr. Espuelas agreed to remain the Chairman of the Company's Board of Directors, until November 15, 2001, at which time he resigned from such position. Mr. Espuelas remained as a director of the Company until July 1, 2002, at which time he resigned. In September 2001 the Company entered into an employment agreement with Mr. Enrique Narciso, who had previously been appointed as President and CEO of the Company. Under the terms of this agreement, Mr. Narciso was to be paid an initial annual base salary of $250,000, as well as signing bonus of $100,000 and a performance bonus of $100,000 payable on December 31, 2001 if Mr. Narciso continued to be employed by the Company on that date. In addition, under the agreement Mr. Narciso would be paid a bonus payable in the event of a "company sale" (as defined in the agreement) in the amount of 0.5-1.0% of the proceeds from the sale, depending on a number of factors, and subject to a minimum bonus payment of $425,000. The agreement also obligated the Company to issue to Mr. Narciso options to purchase up to 1,500,000 shares of the Company's common stock, one-third of which options would vest on the first three anniversaries of the agreement. In the event of a company sale, 50% of the unvested options granted to Mr. Narciso would vest. In the event that Mr. Narciso was terminated other than for cause or constructively discharged (as defined in the agreement), Mr. Narciso would be entitled to a severance payment of $425,000. On December 27, 2001, the Company entered into a separation agreement with Ms. Kampfner covering the terms of her resignation as Senior Vice President, Global Sales and Strategy on December 31, 2001. This agreement provided that (1) the Company would pay Ms. Kampfner a one-time payment of $64,167, (2) the Company was obligated to pay Ms. Kampfner any unpaid salary through the date of separation and all reasonable unpaid expenses incurred in connection with service on or prior to the separation date, and (3) on the separation date, the Company would forgive the remaining balance of her American Express Corporate Credit Card balance pursuant to the Capital Reimbursement Agreement of July 6, 2001. On the separation date, that amount was $24,947.33. The agreement also provided that the line of credit provided pursuant to the letter of credit agreement dated December 28, 2000 between Ms. Kampfner and the Company was terminated as of the separation date. On April 19, 2002 the Company and Enrique Narciso entered into an agreement setting out the terms on conditions of Mr. Narciso's resignation as CEO, President and director of the Company. Under this agreement, the Company paid Mr. Narciso $75,000 and agreed to provide continued health insurance coverage for one year in consideration for Mr. Narciso's cooperation in transitioning to a new management team and contacting existing customers and vendors of the Company in order to facilitate the transition. On May 2, 2002, the Company entered into bonus and severance retention agreements (the "Severance Agreements") with various executive officers, including Mr. Tost, Mr. Rincon and Mr. Hartman (each an "Executive"). The general terms of the Severance Agreements provide that (1) if the Executive is terminated "For Cause," as defined in the Severance Agreements or if the Executive voluntarily terminates his or her employment and is not "Constructively Discharged," as defined in the Severance Agreements, the Company is only responsible for payment of compensation due to the Executive through the last day worked; and (2) the Severance Agreements are valid for a term of one year after May 2, 2002. The Severance Agreements also provide for performance and retention bonuses to be paid on July 10, 2002 and January 10, 2003 in the amount of (1) $47,500 for Mr. Tost; (2) $47,500 for Mr. Rincon and (3) $45,000 for Mr. Hartman, provided that the Executive is 47 employed by the Company on the date of payment. Additionally, the Severance Agreements provide for a severance payment if the Executive is terminated for a reason other than For Cause or Constructive Discharge in the amount of (1) $95,000 for Mr. Tost; (2) $95,000 for Mr. Rincon and (3) $90,000 for Mr. Hartman. COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board of Directors reviews and makes recommendations to the Board of Directors regarding the Company's compensation policies and all terms of compensation to be provided to our executive officers and directors. In addition, the Compensation Committee reviews the policies underlying bonuses and stock compensation arrangements for all of our other employees. The Board of Directors has reviewed and is in accord with the compensation paid to executive officers in the 2001 Fiscal Year and with the Company's other compensation policies. GENERAL COMPENSATION POLICY. The Company's compensation philosophy and policy is intended to attract and retain top managerial talent to lead the Company through the use of competitive compensation packages that seek to motivate superior performance. In addition, the Compensation Committee believes that it is appropriate to align the financial interests of management with those of stockholders of the Company by offering employees equity-based incentives under appropriate circumstances. In determining the level of executive compensation, the Compensation Committee evaluates whether the compensation awarded to an executive is competitive with compensation awarded to executives holding similar positions within and outside the industry, combined with an evaluation of the executive's individual performance. The elements of total compensation for the Company's executive officers include annual salary, annual performance bonus and long-term stock-based incentives. In general, each year the Compensation Committee reviews base salaries for executive officers for appropriateness, establishes performance factors, based on individual and Company-wide performance. The Committee believes that the use of long-term incentives provided through stock options grants to incentivise senior executives and further link the interests of these individuals who lead the Company with those of the Company's stockholders is crucial to the future success of the Company and the long-term creation of stockholder value. However, given the decline in the Company's stock price and the suspension of trading and delisting of the Company's common shares on Nasdaq National Market, the Compensation Committee generally placed less emphasis on the granting of long-term stock-based incentives than in prior years. To this end, the Company granted stock options covering 25,000 shares of the Company's Common Stock to executive officers in the 2001 Fiscal Year. In considering the number of options to be granted, the Compensation Committee may consider a number of factors, including unvested options held by an executive officer, although it does not adhere to specific guidelines as to the relative option holdings of the Company's executive officers. In recognition of the significant contribution of the officers to the success of the Company, and in order to ensure the continued retention of these key employees into the future, in May 2002 the Company has entered into retention and severance agreements with certain of our executive officers. The compensation package set forth in each agreement reflects the Compensation Committee's compensation philosophy and policy as described above. See "Employment and Separation Agreements." CEO COMPENSATION. Consistent with the Compensation Committee's general compensation philosophy for the Company's executives, the Compensation Committee seeks to achieve two objectives: (i) establish a level of base salary competitive with that paid by companies within the industry which are of comparable size to the Company and by companies outside of the industry with which the Company competes for executive talent, and (ii) make a significant percentage of the total compensation package contingent upon the Company's performance and stock price appreciation, where appropriate. 48 FERNANDO ESPUELAS. Fernando Espuelas was CEO of the Company until his resignation in August 2001. Under the terms of his December 27, 2000 employment agreement with the Company, Mr. Espuelas was granted a base salary of $350,000 per annum and a performance bonus of at least $150,000 payable after the end of the year if he satisfied mutually agreed on performance criteria. In addition, Mr. Espuelas was granted a $1,000,000 Line of Credit, which was required to be guaranteed to the extent permitted by Regulation U by shares of the Company's common stock, and was otherwise non-recourse to him. On January 31, 2001 the amount of the available line of credit was extended to $4,000,000. As of Mr. Espuelas' resignation as CEO, he had received a total of $209,168 in base salary payments in 2001 and approximately $2,875,216 (principal and interest) was outstanding under his Line of Credit. He was not paid any portion of the performance bonus. During the 2001 Fiscal Year, the Committee reviewed the status of Mr. Espuelas' option holdings based on a review of option holdings by individuals in comparable positions in comparable companies. There were no options granted to Mr. Espuelas in 2001. ENRIQUE NARCISO. In August 2001 the board of directors appointed Mr. Enrique Narciso as CEO of the Company in replacement of Mr. Fernando Espuelas. In recognition of the significant contribution of Mr. Narciso to the success of the Company, and in order to ensure the continued retention of Mr. Narciso into the future, the Company entered into an employment agreement with him at the time he was appointed CEO. The compensation package set forth in the agreement reflects the Compensation Committee's compensation philosophy and policy as described above. See "Employment and Severance Agreements." The base salary established for Mr. Narciso on the basis of the foregoing criteria was intended to provide a level of stability and certainty each year. Accordingly, this element of compensation was not affected to any significant degree by Company performance factors. In accordance with these objectives, under his employment agreement with the Company Mr. Narciso was granted a base salary of $250,000, a one-time signing bonus of $100,000 payable within five days of the execution of his employment agreement and a discretionary employment bonus of $100,000 payable if he continued to be employed by the Company as of December 31, 2002. During 2001, the Company paid him $207,483 of salary. The Company also paid him the agreed signing and performance bonuses in respect of 2001. Upon Mr. Narciso's appointment as CEO, the Committee reviewed the status of his option holdings based on a review of option holdings by individuals in comparable positions in comparable companies, and based on a desire to maximize stockholder value by directly linking Mr. Narciso's compensation to the achievement of a higher stock price for the Company's common stock. Accordingly, the Company agreed to grant Mr. Narciso options to purchase 1,500,000 shares of the Company's common stock that would vest ratably over a three-year period. However, such options were not granted to him as of the date of his resignation from the Company in April 2002. In addition, in light of the possibility of a restructuring or sale of the Company following Mr. Narciso's appointment, Mr. Narciso was guaranteed certain compensation in the event of a "change of control" and certain other circumstances, none of which occurred during the term of his employment agreement. COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). Section 162(m) of the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to publicly held companies for compensation exceeding $1 million paid to certain of the corporation's executive officers. The limitation applies only to compensation which is not considered to be performance-based. The non-performance based compensation paid to the Company's executive officers for the 2001 Fiscal Year did not exceed the $1 million limit per officer, nor is it expected that the non-performance based compensation to be paid to the Company's executive officers for fiscal year 2001 will exceed that limit. Because it is very unlikely that the cash compensation payable to any of the Company's executive officers in the foreseeable future will approach the $1 million limit, the Compensation Committee has decided at this time not to take any other action to limit or restructure the elements of cash compensation payable to the Company's executive officers. The Compensation Committee has stated that it will reconsider this decision should the individual compensation of any executive officer ever approach the $1 million level. 49 The directors who currently comprise the Compensation Committee are Frederick R. Wilson, Susan Segal, who joined the Committee in August 2001, and Douglas M. Karp, who joined the Committee in November 2001. Respectfully submitted, Frederick R. Wilson Susan Segal Douglas M. Karp PERFORMANCE GRAPH The following graph compares the cumulative return on shares of the Company's Common Stock to such return for The Nasdaq National Market (U.S.) Index and the J.P. Morgan H&Q Internet Index, for the period commencing on May 25, 1999, the date on which the Company's Common Stock first traded on The Nasdaq National Market through December 31, 2001, except that information provided with respect to the Company's common stock is provided only through November 16, 2001, the date on which trading of shares of the Company's Common Stock on The Nasdaq National Market was suspended. SEE "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". This chart assumes (i) $100 was invested on May 25, 1999 and (ii) reinvestment of dividends. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DATE STARMEDIA NETWORK, INC. JP MORGAN H&Q INTERNET NASDAQ NATIONAL MARKET - U.S. 5/25/99 100 100 100 May-99 392.5 108.12 103.76 Jun-99 427.5 116.88 112.82 Jul-99 287.5 103.09 110.82 Aug-99 257.92 108.53 115.06 Sep-99 244.79 120.14 115.34 Oct-99 191.67 132.84 124.59 Nov-99 198.33 167.42 140.12 Dec-99 267.08 232.57 170.91 Jan-00 214.17 218.05 165.5 Feb-00 313.33 277.22 197.27 Mar-00 200.42 242.92 192.06 Apr-00 145.83 183.07 162.15 May-00 119.58 154.01 142.84 Jun-00 125.83 180.21 166.58 Jul-00 100.83 168.96 158.22 Aug-00 56.67 196.03 176.67 Sep-00 50 173.36 154.26 Oct-00 40.83 146.88 141.53 Nov-00 20.83 97.94 109.12 Dec-00 12.6 89.48 103.76 1-Jan 30.42 100.27 116.46 1-Feb 20 70.8 90.38 1-Mar 20 55.33 77.29 1-Apr 16.33 69.31 88.88 1-May 18.47 70.59 88.64 1-Jun 12.4 69.69 90.77 1-Jul 4.47 61.24 85.14 1-Aug 2.13 50.82 75.83 1-Sep 1.07 40.48 62.95 1-Oct 1.73 46.67 70.99 11/16/2001* 2.53 54.43 79.74 1-Nov 55.48 81.09 1-Dec 57.58 83.47
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than ten percent of the Common Stock to file with the Securities Exchange Commission, The Nasdaq Stock Market (if applicable) and the Company reports on Forms 4 and Forms 5 reflecting transactions affecting beneficial ownership. Based solely upon its review of the 50 copies of such forms received by it, the Company believes that, during fiscal year 2001, all persons complied with such filing requirements except that Jose Manual Tost, Jorge Rincon, Michael Hartman and Ana Maria Lozano-Stickley each did not timely file a Form 3 reporting their initial beneficial ownership. Furthermore, to the Company's knowledge neither Betsy Scolnik nor Adriana Kampfner filed a Form 3 although each of them ceased to be an executive officer upon her departure from the Company in December 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT To StarMedia's knowledge, the following table sets forth information with respect to beneficial ownership of our outstanding common stock as of July 1, 2002 by: - each person known by us to beneficially own more than 5% of our common stock; - each of our Named Executive Officers; - each of our directors; and - all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Unless otherwise indicated, the address for those listed below is c/o StarMedia Network, Inc. (d/b/a CycleLogic), 999 Brickell Avenue, Suite 808, Miami, Florida, 33131. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options held by such persons that are exercisable within 60 days of July 1, 2002, but excludes shares of common stock underlying options held by any other person. The number of shares of the Company's common stock outstanding as of July 1, 2002 was 79,970,177. Except as noted otherwise, the amounts reflected below are based upon information provided to the Company and filings with the Securities and Exchange Commission.
SHARES BENEFICIALLY OWNED --------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT - ------------------------ ---------- -------- Fernando J. Espuelas(1).................................. 8,000,000 9.5 Jack C. Chen(2).......................................... 3,944,000 4.9 Douglas M. Karp(3)....................................... 60,000 * Susan L. Segal(4)........................................ 0 -- Frederick R. Wilson(5)................................... 1,193,845 1.5 Jose Manuel Tost......................................... 0 -- Jorge Rincon(6).......................................... 65,067 * Ana Maria Lozano-Stickley................................ 0 -- Michael Hartman(7)....................................... 68,748 * Enrique Narciso(8)....................................... 0 0 Adriana Kampfner(8)...................................... 215,000 * Betsy Scolnik(8)......................................... 4,167 * J.P. Morgan Partners (SBIC), L.L.C(9).................... 12,999,803 16.2 J.P. Morgan Partners (BHCA), L.L.C(9).................... 2,857,955 3.5 Quetzal/J.P. Morgan Partners, L.P.(9).................... 98,361 * BellSouth Enterprises, Inc.(10).......................... 14,303,920 15.1 Warburg, Pincus Equity Partners, L.P.(11)................ 1,692,709 2.1 Warburg, Pincus Ventures International, L.P.(11)......... 1,692,708 2.1 Grupo MVS, S.A. de C.V.(12).............................. 4,288,797 5.3 Harry Moller Publicidad, S.A. de C.V.(13)................ 4,599,156 5.7 All directors and executive officers as a group (10 persons)........................................... 1,606,827 2.0
- ------------------------ * Indicates less than one percent of the common stock. 51 (1) Includes (a) 3,437,500 shares issuable upon the exercise of currently exercisable stock options and (b) 160,614 shares held by a trust, of which Mr. Chen and the spouse of Mr. Espuelas are trustees. This information is based on holdings reported by Mr. Espuelas to the Company in connection with previous Company periodic reports. (2) Includes (a) 1,201,368 shares directly owned by Mr. Chen and (b) an aggregate of 2,742,632 shares held by Mr. Chen's spouse and various trusts for which Mr. Chen is trustee. (3) Includes options to purchase 60,000 shares of common stock that are immediately exercisable. (4) Ms. Segal is no longer an employee of JPMorgan Partners and, even though she is a consultant of JPMorgan Partners, the Company does not view her as beneficially owning JPMorgan Partners' shares. The address of Ms. Segal is c/o JPMorgan Partners 1221 Avenue of the Americas, New York, NY 10020. (5) Holdings include (a) 50,000 shares owned by the Flatiron Fund, LLC, which are controlled by Mr. Wilson, (b) 208,739 shares owned by The Flatiron Fund 1998/99, LLC which are controlled by Mr. Wilson, (c) 252,478 shares owned by The Flatiron Fund 2000, LLC, which are controlled by Mr. Wilson, (d) 66,157 shares owned by The Flatiron Fund 2001, LLC, which are controlled by Mr. Wilson, (e) 35,772 shares owned by Flatiron Associates II, which are controlled by Mr. Wilson, (f) 118,294 shares owned by The Frederick R. Wilson 1999 Irrevocable Trust, (g) 357,405 shares held directly and (h) options to purchase 105,000 shares of common stock that are immediately exercisable. Mr. Wilson's address is c/o Flatiron Partners, 1221 Avenue of the Americas, 40th Floor, New York, NY 10020. (6) Includes (a) 67 shares held directly, and (b) options to purchase 65,000 shares of common stock that are immediately exercisable. (7) Includes options to purchase 68,748 shares of common stock that are immediately exercisable. (8) This Named Executive Officer is no longer is employed by the Company and, to the best of the Company's knowledge, the holdings reported reflect the Named Executive Officer's ownership of Company common stock and right to acquire Company common stock within 60 days of July 1, 2002. (9) Holdings by J.P. Morgan Partners (SBIC), L.L.C. include (a) 85,000 options to purchase shares of the Company's Series A Preferred Stock, which are immediately convertible into the Company's common stock, (b) 11,738,333 shares of common stock and (c) 117,647 shares of the Company's Series A Convertible Preferred Stock, which is immediately convertible into 1,176,470 shares of common stock. Each holder has sole investment and voting control over the number of shares reported. However, J.P. Morgan Partners (SBIC), L.L.C., J.P. Morgan Partners (BHCA), L.P. and Quetzal/J.P. Morgan Partners, L.P. filed a Schedule 13D as a group. The address of J.P. Morgan Partners (SBIC), L.L.C., J.P. Morgan Partners (BHCA), L.P. and Quetzal/J.P. Morgan Partners, L.P. is 1221 Avenue of the Americas, New York, NY 10020. (10) Holdings include 980,392 shares of the Company's Series A Convertible Preferred Stock, which is immediately convertible into 9,803,920 shares of the Company's common stock. In addition, BellSouth holds warrants to purchase up to 4,500,000 shares of the Company's common stock. These warrants vested in May 2002. The address of BellSouth Enterprises, Inc. is 15G03 Campanile Building, 1155 Peachtree Street, Atlanta, Georgia 30309. (11) The Warburg, Pincus stockholders are comprised of Warburg, Pincus Equity Partners, L.P., including three related limited partnerships, and Warburg, Pincus Ventures International, L.P. Warburg, Pincus & Co. is the sole general partner of each of these entities. The Warburg, Pincus stockholders are each managed by E.M. Warburg, Pincus & Co., LLC. Lionel I. Pincus is the managing partner of Warburg, Pincus & Co. and the managing member of E.M. Warburg, Pincus & Co., LLC, and may be deemed to control both entities. The address of the Warburg, Pincus entities is 466 Lexington Avenue, New York, NY 10017. (12) Holdings reported as beneficially owned for Grupo MVS, S.A. de C.V. are based on information obtained from the Company's transfer agent as of June 28, 2002. The address of Grupo 52 MVS, S.A. de C.V. is c/o AdNet, Reforma No. 3009 Colonia, Lomas De Mentla Cuajimalpa, Mexico, D.F. 05130. (13) Holdings reported as beneficially owned for Harry Moller Publicidad, S.A. de C.V. are based on information obtained from the Company's transfer agent as of June 28, 2002. The address of Harry Moller Publicidad, S.A. de C.V. is c/o AdNet, Reforma No. 3009 Colonia, Lomas De Mentla Cuajimalpa, Mexico, D.F. 05130. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS It is our current policy that all transactions with officers, directors, 5% stockholders and their affiliates be entered into only if they are approved by a majority of the disinterested directors, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us. Each of the transactions described below was approved in accordance with this policy. OBSIDIANA On April 30, 2001, the Company agreed to acquire certain assets of Obsidiana, Inc. in exchange for 1,125,000 shares of the Company's common stock. The acquired assets include Obsidiana's content library, its key trademarks and domain names, and certain fixed assets located in the United States, Mexico and Argentina. The stockholders of Obsidiana included entities managed by J.P. Morgan Partners and Flatiron Partners. BELLSOUTH In May 2001, the Company entered into an agreement with BellSouth to create multi-access portals in Latin America (the "BellSouth Strategic Agreement"). Under the terms of the five-year agreement, the Company will design and service the multi-access portals and mobile applications and provide content, software application integration and support to BellSouth's operating companies in Latin America. BellSouth will supply wireless communications, marketing of services and billing capabilities. The two companies will share revenues generated by the new multi-access portals. All revenues associated with design and maintenance activities and the technology licenses are being recognized ratably over the life of the specific agreements with BellSouth's operating subsidiaries, while the user fees and transaction revenues are being recognized when the services are rendered. For the year ended December 31, 2001, the Company recognized $551,000 in revenue, net of amortization for warrants, in connection with the BellSouth Strategic Agreement. LOANS TO FORMER OFFICERS AND DIRECTORS During the year ended December 31, 2001, the Company provided loans to certain employees and, in addition, had balances outstanding with respect to loans previously granted to these same employees. 53 The largest amount of indebtedness outstanding since January 1, 2001 and the balance outstanding as of June 30, 2002 were as follows:
LARGEST AMOUNT OF INDEBTEDNESS OUTSTANDING SINCE BALANCE AS OF JANUARY 1, 2001 JUNE 30, 2002 ----------------- -------------- Due from Fernando Espuelas, bearing interest at 6.75%.......................................... $2,928,014 $2,928,014 Due from Jack Chen, bearing interest at 6.75%.... $4,361,818 $4,361,818 Due from Steve Heller, bearing interest at 7.0%........................................... $2,142,205 $ -- Due from Adriana Kampfner, bearing interest at 7.0%........................................... $1,144,197 $ -- Due from Francisco Loureiro, bearing interest at 10%............................................ $ 506,267 $ -- Due from Justin Macedonia, bearing interest at 7.0%........................................... $1,436,504 $1,436,504
- ------------------------ (1) Mr. Espuelas was Chief Executive Officer until August 2001, Chairman of the Company's Board of Directors until November 2001, and a director of the Company until July 1, 2002. (2) Mr. Chen was President of the Company until June 2001 and Vice Chairman of the Board of Directors of the Company until August 2001. (3) Mr. Heller was Chief Financial Officer of the Company until November 2001. (4) Ms. Kampfner was President of StarMedia Network and Senior Vice President, Global Sales of the Company until December 2001. (5) Mr. Loureiro was Chief Operating Officer of the Company until May 2001. (6) Mr. Macedonia was Senior Vice President, General Counsel of the Company until November 2001. Loans to Mssrs. Espuelas, Chen, Heller and Macedonia were made pursuant to lines of credit granted to them in accordance with their employment agreements and related line of credit agreements dated December 2000 and, in the case of Mssrs. Espuelas and Chen, amended in January 2001. The loan to Ms. Kampfner was made pursuant to a line of credit agreement dated December 2000. The loan to Mr. Loureiro was made pursuant to a promissory note dated May 2000. The agreements with Messrs. Espuelas, Chen, Macedonia, Heller and Ms. Kampfner made available lines of credit from the Company to each executive, up to (i) $4,000,000 for each of Messrs. Espuelas and Chen, with interest accruing at 6.75% per annum, (ii) $1.3 million for Mr. Macedonia, with interest accruing at 7% per annum, (iii) $2 million for Mr. Heller, with interest accruing at 7% per annum, and (iv) $1.1 million of Ms. Kampfner, with interest accruing at 7% per annum. Under the terms of their respective loans, each of Mssrs. Espuelas and Chen granted the Company a security interest in one million shares of the Company's common stock owned by him, but the loans were otherwise non-recourse to the borrower. Under the terms of their respective loans, each of Mr. Heller, Mr. Macedonia and Ms. Kampfner granted the Company a security interest in all shares of common stock owned by them as of the date of the borrower's line of credit agreement or subsequently acquired by the borrower, but the loans were otherwise non-recourse to the borrower. All of the foregoing loans and the securities interests granted thereby were required to be made subject to and in accordance with Regulation U under the Securities Exchange Act of 1934. Under the agreements with Messrs. Espuelas and Chen, (i) the Company agreed to forgive up to $1,000,000 in outstanding principal, together with accrued but unpaid interest thereon, if the Company experiences a change of control in its ownership, (ii) if the Company experiences a change of control in its ownership, each executive has the right to require the Company to purchase 1,000,000 shares of common stock at a price per share equal to the fair market value on the date of such change of control, (iii) as of May 31, 2002, the Company has the right to require each executive to sell to the 54 Company a sufficient number of shares of common stock, at a price per share of the greater of $6 and the fair market value on the date of the call notice, to pay off outstanding principal amounts. Under the agreements with Messrs. Macedonia and Heller, the Company agreed to forgive up to $500,000 and any interest thereon under each line of credit, with one-third of such amount to be forgiven by the Company in each of the next three years to the extent he continued to be employed by the Company. Under the respective terms of their loan and employment agreements, as well as their separation agreements, the loans provided to Mr. Espuelas and Mr. Chen remain outstanding. Under the terms of his separation agreement, Mr. Heller's loan was discharged in full by means of delivery of approximately 326,000 shares of the Company's common stock. Under the terms of his loan and employment agreement, the loans provided to Mr. Macedonia are outstanding, although Mr. Macedonia has advised the Company that he does not own a significant number of shares of the Company's common stock. Under the terms of her separation agreement, the loan provided to Ms. Kampfner was forgiven in full based on inability to pay. Mr. Loureiro's promissory note was forgiven. The Company has fully reserved against all amounts outstanding under the foregoing loans. SEPARATION AGREEMENT In August 2001, the Company entered into a separation and release agreement with Mr. Jack C. Chen, the Company's former President and Vice Chairman of the Company's Board of Directors under which he would cease his employment with the Company. This separation and release agreement supercedes the executive's respective employment agreement with the Company. Under the agreement, (i) Mr. Chen is entitled to a one time payment of $650,000, which was paid to him in August 2001, and to payment of medical and dental premiums through February 2003, (iii) the line of credit provided to Mr. Chen under certain agreements dated December 28, 2000 (as amended on January 31, 2001) will remain in full force and effect in accordance with its terms, and (iv) he received limited administrative support through December 31, 2001. Even though Mr. Chen's line of credit remains intact under the agreement, he agreed not to draw down any additional amounts thereunder. In October 2001, the Company entered into a separation and release agreement with Mr. Steven J. Heller, the Company's Chief Financial Officer, under which Mr. Heller ceased his employment with the Company on November 15, 2001. Under the agreement, the executive's employment agreement expired and became null and void. Under the agreement, the Company agreed to terminate the line of credit provided to the executive under a letter agreement dated December 28, 2000, and completely discharged all amounts owed thereunder, and in consideration for such termination of the line of credit, the executive agreed to deliver to the Company 326,000 shares of the Company's common stock which has been accounted for as treasury stock using the value on the date the agreement was finalized of $114,000. In addition, the executive was entitled to a one-time payment of $350,000, which was paid to him in November 2001. TRANSACTIONS WITH FORMER SHAREHOLDERS OF ADNET In connection with the Company's purchase of AdNet S.A. de C.V. from Grupo MVS, S.A. de C.V. ("Grupo MVS") and Harry Moller Publicidad, S.A. de C.V. ("HMP") in April 2000 MVS and HMP were paid in part with shares of the Company's common stock, and thereby became shareholders of the Company. In addition, under the AdNet purchase agreement, each of Grupo MVS and HMP entered into long-term services agreements with AdNet pursuant to which each of them would provide to AdNet certain advertising and promotional services in consideration for fees to be mutually agreed, subject to agreed parameters. It was further contemplated under the AdNet purchase agreement that Grupo MVS and HMP would act as agents of AdNet in selling advertising. The revenues and expenses 55 of the Company from this arrangement were restated and, as restated, are not material. SEE "Part I--Restatement Information." In addition, in December 2000 SMN de Mexico, S.A. de C.V. entered into arrangements with Grupo MVS and HMP that were similar to those already in place with AdNet. The revenues and expenses of the Company associated with these arrangements were restated in their entirety, and the Company's restated financial statements reflect no such revenues or expenses. SEE "Part I-- Restatement Information." In November 2001, the Company, AdNet 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 the stock purchase agreement and certain other related agreements between the Company and the former stockholders of AdNet. As of December 31, 2001, the Company had issued a total of 7,600,000 shares. The Company has not issued the remaining 400,000 shares pending resolution of outstanding claims that the Company has against the former stockholders of AdNet. 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (1) and (2) CONSOLIDATED FINANCIAL STATEMENTS. The following consolidated financial statements and financial statement schedule of StarMedia Network, Inc. and the Report of Independent Auditors thereon are included in Item 8 above:
PAGE NO. -------- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31 2000 (restated) and 2001....................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 2000 (restated) and 2001............... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 2000 (restated) and 2001...................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 (restated) and 2001............... F-6 Notes to Consolidated Financial Statements.................. F-7 Schedule II: Valuation and qualifying accounts.............. F-32
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) EXHIBITS. The following Exhibits are incorporated herein by reference or are filed with this report as indicated below.
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 Amended and restated certificate of incorporation (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 No. 333-87169 ("Registration Statement No. 333-87169")). 3.2 Amended and restated bylaws (Incorporated by reference to Exhibit 3.2 of Registration Statement No. 333-87169). 4.1 Amendment No. 1 to Rights Agreement, dated as of May 28, 2001, between StarMedia Network, Inc. and American Stock Transfer & Trust Company (Incorporated by reference to the Company's Form 10-Q filed on August 14, 2001). 10.1 1997 stock option plan (Incorporated by reference to Exhibit 10.1 of Registration Statement No. 333-87169). 10.2 1998 stock plan (Incorporated by reference to Exhibit 10.2 of Registration Statement No. 333-87169). 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and the Company, as amended (Incorporated by reference to Exhibit 10.3 of Registration Statement No. 333-87169). 10.4 Amended and restated registration rights agreement (Incorporated by reference to Exhibit 10.4 of Registration Statement No. 333-87169).
57
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.5 Amendment No. 1 to amended and restated registration rights agreement (Incorporated by reference to Exhibit 10.5 of Registration Statement No. 333-87169). 10.6 Quota Purchase Agreement, dated as of April 13, 1999, by and between the Company, StarMedia do Brasil Ltda., Quotaholders of KD Sistemas de Informacao Ltda. and KD Sistemas de Informacao Ltda. (Incorporated by reference to Exhibit 10.7 of Registration Statement No. 333-87169). 10.7 The Company 1999 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.9 of Registration Statement No. 333-87169). 10.8 Registration Rights Agreement between the Company and Hearst Communications, Inc. dated as of April 30, 1999 (Incorporated by reference to Exhibit 10.18 of Registration Statement No. 333-87169). 10.9 Registration Rights Agreement between the Company and Reuters Holding Switzerland SA dated as of April 30, 1999 (Incorporated by reference to Exhibit 10.19 of Registration Statement No. 333-87169). 10.10 Registration Rights Agreement between the Company and eBay Inc. dated as of April 30, 1999 (Incorporated by reference to Exhibit 10.20 of Registration Statement No. 333-87169). 10.11 Registration Rights Agreement between the Company and Europortal Holding S.A. dated as of April 30, 1999 (Incorporated by reference to Exhibit 10.21 of Registration Statement No. 333-74659). 10.12 Registration Rights Agreement between the Company and Critical Path, Inc. dated as of May 3, 1999 (Incorporated by reference to Exhibit 10.22 of Registration Statement No. 333-87169). 10.13 Registration Rights Agreement between the Company and Europortal Holding S.A. dated as of May 5, 1999 (Incorporated by reference to Exhibit 10.23 of Registration Statement No. 333-87169). 10.14 Registration Rights Agreement dated as of May 4, 1999 between the Company and Geradons, S.L. (Incorporated by reference to Exhibit 10.24 of Registration Statement No. 333-87169). 10.15 Registration Rights Agreement between the Company and National Broadcasting Company, Inc. dated as of May 4, 1999 (Incorporated by reference to Exhibit 10.25 of Registration Statement No. 333-87169). 10.16 Employment Agreement dated as of December 28, 2000 by and between the Company and Fernando J. Espuelas (Incorporated by reference to Exhibit 10.17 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.17 Employment Agreement dated as of December 28, 2000 by and between the Company and Jack C. Chen (Incorporated by reference to Exhibit 10.18 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.18 Employment Agreement dated as of December 28, 2000 by and between the Company and Justin K. Macedonia (Incorporated by reference to Exhibit 10.19 of the Company's Form 10-K for the annual period ended December 31, 2000).
58
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.19 Employment Agreement dated as of December 28, 2000 by and between the Company and Steven J. Heller (Incorporated by reference to Exhibit 10.20 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.20 Loan Agreement, dated as of December 28, 2000 by and between the Company and Fernando J. Espuelas (Incorporated by reference to Exhibit 10.21 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.21 Loan Agreement, dated as of December 28, 2000 by and between the Company and Jack C. Chen (Incorporated by reference to Exhibit 10.22 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.22 Loan Agreement, dated as of December 28, 2000 by and between the Company and Justin K. Macedonia (Incorporated by reference to Exhibit 10.23 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.23 Loan Agreement, dated as of December 28, 2000 by and between the Company and Steven J. Heller (Incorporated by reference to Exhibit 10.24 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.24 Loan Agreement, dated as of December 28, 2000 by and between the Company and Adriana J. Kampfner (Incorporated by reference to Exhibit 10.25 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.25 Employment Agreement dated as of September 26, 2000 by and between the Company and Francisco A. Loureiro (Incorporated by reference to Exhibit 10.26 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.26 Promissory Note, dated as of May 23, 2000, issued by Francisco Loureiro in favor of The Company. (Incorporated by reference to Exhibit 10.27 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.27 Form of Rights Agreement (Incorporated by reference to Exhibit 10.28 of Registration Statement No. 333-87169). 10.28 The Company Network, Inc. 2000 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Form 10-Q for the quarterly period ended June 30, 2000). 10.29 Amended and Restated Stock Purchase Agreement, dated as of September 30, 2000, by and among Chase Equity Associates LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis1, Inc. (Incorporated by reference to Exhibit 10.30 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.30* Stock Purchase Agreement, dated as of December 22, 2000, by and among Chase Equity Associates LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis1, Inc. (Incorporated by reference to Exhibit 10.31 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.31 Stock Purchase Agreement, dated as of January 31, 2000, by and among the Company, Grupo MVS, S.A. de C.V. Harry Moller Publicidad, S.A. de C.V. and the Representative named therein (Incorporated by reference to Exhibit 1.1 of the Company's Form 8-K filed April 6, 2000).
59
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.32* Put and Call Agreement, dated as of September 28, 2000, by and among the Company, Chase Equity Associates, LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis1, Inc. (Incorporated by reference to Exhibit 10.33 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.33* Amendment No. 1 dated as of December 29, 2000, to the Put and Call Agreement, dated as of September 28, 2000, by and among the Company, Chase Equity Associates, LP, the Flatiron Fund 2000 LLC, Flatiron Associates II LLC and Gratis1, Inc. (Incorporated by reference to Exhibit 10.34 of the Company's Form 10-K for the annual period ended December 31, 2000). 10.34 Employment Agreement dated as of September 21, 2001, by and between the Company and Enrique Narciso (Incorporated by reference to Exhibit 99.7 of the Company's Form 8-K filed on November 19, 2001). 10.35 Separation Agreement dated as of April 19, 2002, by and between the Company and Enrique Narciso. 10.36 Lease Agreement dated November 2000, by and between the Company and Uccello Immobilien GMBH. 10.37 Form of Bonus and Severance Retention Agreement, by and between the Company and certain executive officers. 10.38 Amended and Restated Asset purchase agreement, dated as of July 1, 2002, by and between the Company and eresMas Interactiva S.A. 10.39 Stock purchase agreement, dated as of June 18, 2002, by and between the Company and eresMas Interactiva S.A. 10.40 Separation Agreement Including A General Release, dated as of August 7, 2001, between the Registrant and Fernando J. Espuelas (Incorporated by reference to Exhibit 99.3 of the Company's Form 8-K filed on November 19, 2001)*. 10.41 Separation Agreement Including A General Release, dated as of August 7, 2001, between the Registrant and Jack C. Chen (Incorporated by reference to Exhibit 99.4 of the Company's Form 8-K filed on November 19, 2001)*. 10.42 Separation Agreement Including A General Release, dated as of August 7, 2001, between the Registrant and Steven J. Heller (Incorporated by reference to Exhibit 99.5 of the Company's Form 8-K filed on November 19, 2001)*. 10.43 Lease Termination Agreement, dated as of October 4, 2001, between StarMedia Network, Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York (Incorporated by reference to Exhibit 99.1 of the Company's Form 8-K filed on November 19, 2001). 10.44 Amendment to Lease, dated as of October 24, 2001, between StarMedia Network, Inc. and Clemons Management Corp. c/o Bernstein Real Estate (Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K filed on November 19, 2001). 10.45 Termination Agreement, dated as of November 7, 2001, by and among StarMedia Network, Inc., AdNet, S. de R.L. de C.V., Grupo MVS, S.A. de C.V., Harry Moller Publicidad, S.A. de C.V. and Walther Moller (Incorporated by reference to Exhibit 99.6 of the Company's Form 8-K filed on November 19, 2001).
60
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.46 Letter Agreement, dated as of January 31, 2001, between the Company and Fernando J. Espuelas (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed on May 15, 2001). 10.47 Letter Agreement, dated as of January 31, 2001, between the Company and Jack C. Chen (Incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q filed on May 15, 2001). 10.48 Separation Agreement Including A General Release, dated as of December 27, 2001, between the Company and Adriana Kampfner. 10.49 Lease Agreement, dated as of November 22, 1999 between The Rector, Church-Wardens And Vestrymen of Trinity Church In The City of New York, as Landlord and the Company, as Tenant (Incorporated by reference to the Company's Form 10-Q filed on May 15, 2001). 10.50 First Amendment Of Lease, dated as of October 1, 2000 by and between The Rector, Church-Wardens And Vestrymen of Trinity Church In The City of New York, as Landlord and the Company, as Tenant (Incorporated by reference to the Company's Form 10-Q filed on May 15, 2001). 10.51 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 (Incorporated by reference to the Company's Form 10-Q filed on August 14, 2001). 10.52 Internet Content and Services Framework Agreement, dated as of May 30, 2001, by and between StarMedia Networks, Inc. and BellSouth Enterprises, Inc. (Incorporated by reference to the Company's Form 10-Q filed on August 14, 2001). 21.1 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP.
- ------------------------ * 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 this 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 On November 28, 2001, the Company filed a Current Report on Form 8-K in connection with the suspension in trading of our shares on The Nasdaq National Market. (c) Financial Statement Schedules. See pages F-1 through F-33. 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, StarMedia Network, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Miami, Florida, on this 10th day of July 2002. STARMEDIA NETWORK, INC. By: /s/ JOSE MANUAL TOST ----------------------------------------- Jose Manual Tost PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on July 10, 2002:
SIGNATURE TITLE(S) --------- -------- /s/ JOSE MANUAL TOST President (Principal Executive Officer) July 10, 2002 - ---------------------------------- Jose Manual Tost /s/ SUSAN L. SEGAL Interim Chairman of the Board of Directors, July 10, 2002 - ---------------------------------- Director Susan L. Segal /s/ DOUGLAS M. KARP Director July 10, 2002 - ---------------------------------- Douglas M. Karp /s/ FREDERICK R. WILSON Director July 10, 2002 - ---------------------------------- Frederick R. Wilson /s/ ANA MARIA LOZANO-STICKLEY Chief Financial Officer July 10, 2002 - ---------------------------------- (Principal Financial Officer) Ana Maria Lozano-Stickley
62 INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of December 31, 2000 (restated) and 2001....................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 2000 (restated) and 2001............... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 2000 (restated) and 2001...................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 (restated and 2001................ F-6 Notes to Consolidated Financial Statements.................. F-7 The following consolidated financial statement schedule of StarMedia Network, Inc. is included in Item 14(a): Schedule II: Valuation and qualifying accounts.............. F-30
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the accompanying consolidated balance sheets of StarMedia Network, Inc. (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarMedia Network, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2, the previously issued financial statements and schedule for the year ended December 31, 2000 have been restated. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and may have insufficient capital to fund all of its obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP New York, New York June 21, 2002 F-2 STARMEDIA NETWORK, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 2000 2001 ------------- ------------- (RESTATED) ASSETS Current assets: Cash and cash equivalents................................. $ 93,408,000 $ 21,635,000 Accounts receivable, net of allowance for bad debts of $1,849,000 (2000) and $4,453,000 (2001)................. 13,524,000 2,963,000 Unbilled receivables...................................... 6,131,000 2,079,000 Receivables from sale of investment....................... -- 13,000,000 Other current assets...................................... 7,680,000 3,768,000 ------------- ------------- Total current assets........................................ 120,743,000 43,445,000 Fixed assets, net........................................... 55,569,000 25,184,000 Intangible assets, net of accumulated amortization of $1,676,000 (2000) and $5,397,000 (2001)................... 5,557,000 2,109,000 Goodwill, net of accumulated amortization of $2,435,000 (2000) and $1,111,000 (2001).............................. 6,582,000 425,000 Officers loans.............................................. 4,563,000 -- Other assets................................................ 16,091,000 573,000 ------------- ------------- Total assets................................................ $ 209,105,000 $ 71,736,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 20,737,000 $ 4,419,000 Accrued expenses.......................................... 15,601,000 15,112,000 Loan payable, current portion............................. 2,462,000 -- Deferred revenues......................................... 1,128,000 2,534,000 ------------- ------------- Total current liabilities................................... 39,928,000 22,065,000 Loan payable, long-term..................................... 1,902,000 -- Deferred rent............................................... 2,199,000 -- Preferred dividends payable................................. -- 1,278,000 Series A Convertible Preferred Stock Series A Convertible Preferred Stock, $.001 par value, 1,960,784 shares authorized, 1,431,373 shares issued and outstanding at December 31, 2001 (Liquidation preference of $37,778,000 at December 31, 2001).................... -- 35,204,000 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 issued and outstanding (2000 and 2001).... Common stock, $.001 par value, 200,000,000 shares authorized, 66,927,883 shares issued and outstanding (2000) and 80,320,089 shares issued (2001).............. 67,000 80,000 Common stock issuable..................................... 12,260,000 1,000,000 Treasury stock--cost of 349,912 shares (2001)............. -- (143,000) Additional paid-in capital................................ 516,311,000 542,144,000 Accumulated deficit....................................... (360,125,000) (527,116,000) Deferred compensation..................................... (2,636,000) (87,000) Accumulated comprehensive loss............................ (801,000) (2,689,000) ------------- ------------- Total stockholders' equity.................................. 165,076,000 13,189,000 ------------- ------------- Total liabilities and stockholders' equity.................. $ 209,105,000 $ 71,736,000 ============= =============
See accompanying notes. F-3 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------------ ------------- ------------- (RESTATED) Revenues.......................................... $ 20,089,000 $ 52,320,000 $ 23,374,000 Operating expenses: Product and technology development.............. 33,192,000 67,670,000 51,303,000 Sales and marketing............................. 53,399,000 77,641,000 45,326,000 General and administrative...................... 15,318,000 31,446,000 28,219,000 Restructuring and other charges................. 1,613,000 3,935,000 26,230,000 Depreciation and amortization................... 6,500,000 28,295,000 25,055,000 Stock-based compensation expense................ 6,400,000 4,519,000 2,218,000 Impairment of fixed assets...................... -- -- 4,087,000 Impairment of goodwill and intangibles.......... -- 37,170,000 17,062,000 ------------ ------------- ------------- Total operating expenses.......................... 116,422,000 250,676,000 199,500,000 ------------ ------------- ------------- Loss from operations.............................. (96,333,000) (198,356,000) (176,126,000) Other income (expense): Impairment of other assets...................... -- (19,378,000) (2,049,000) Gain on sale of investment...................... -- -- 12,412,000 Loss in unconsolidated subsidiary............... -- (2,500,000) (1,800,000) Interest income................................. 6,517,000 11,092,000 3,009,000 Interest expense................................ (626,000) (1,221,000) (925,000) Other expenses.................................. -- (318,000) (30,000) ------------ ------------- ------------- Loss before provision for income taxes............ (90,442,000) (210,681,000) (165,509,000) Provision for income taxes........................ (231,000) (158,000) (60,000) ------------ ------------- ------------- Net loss.......................................... (90,673,000) (210,839,000) (165,569,000) Preferred stock dividends and accretion........... (4,266,000) -- (1,422,000) ------------ ------------- ------------- Net loss applicable to common stockholders........ $(94,939,000) $(210,839,000) $(166,991,000) ============ ============= ============= Basic and diluted net loss per common share....... $ (2.31) $ (3.20) $ (2.35) ============ ============= ============= Number of shares used in computing basic and diluted net loss per share...................... 41,170,602 65,919,685 71,181,377 ============ ============= =============
See accompanying notes. F-4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
PREFERRED STOCK COMMON STOCK --------------------- ----------------------------------- SHARES AMOUNT SHARES AMOUNT ISSUABLE -------- ---------- ---------- -------- ----------- Balance at December 31, 1998................................ -- $ -- 12,309,532 $13,000 $ -- Deferred compensation related to stock options, net of cancellations............................................. Amortization of deferred compensation....................... Issuance of common stock, net of offering costs............. 17,926,363 18,000 Shares issued for acquisition of Servicios Interactivos Limitada.................................................. 20,000 Issuance of common stock--Webcast Solutions................. 58,689 Shares issued for acquisition of PageCell International..... 58,140 174,418 Shares issued for acquisition of Paisas..................... 8,728 Conversion of redeemable convertible preferred stock........ 31,996,667 31,000 Exercise of common stock options............................ 1,618,729 2,000 Stock options issued for services........................... Transactions expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders.......................... Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 38,157 Preferred stock dividends and accretion..................... Net loss for the period..................................... Translation adjustment...................................... Comprehensive loss.......................................... ------ ---------- ---------- ------- ----------- Balance at December 31, 1999................................ 58,140 -- 64,151,283 64,000 -- Deferred compensation related to stock options cancellations............................................. Amortization of deferred compensation....................... Exercise of common stock options............................ 1,482,009 1,000 Rescission of common stock option exercises................. (327,524) Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 132,638 Shares issued for acquisition of Ola Turista................ 71,524 Shares issued for acquisition of AdNet...................... 1,417,953 2,000 Common stock issuable pursuant to Gratis1 loan guarantee.... 7,800,000 Common stock issuable pursuant to PageCell acquisition agreement................................................. 1,371,000 Common stock issuable pursuant to Ola Turista acquisition agreement................................................. 1,625,000 Common stock issuable pursuant to Adnet acquisition agreement................................................. 1,464,000 Net loss for the period..................................... Translation adjustment...................................... Comprehensive loss.......................................... ------ ---------- ---------- ------- ----------- Balance at December 31, 2000................................ 58,140 $ -- 66,927,883 $67,000 $12,260,000 Deferred compensation related to stock options cancellations............................................. Amortization of deferred compensation....................... Exercise of common stock options............................ 204,627 Shares issued pursuant to the Employee Stock Purchase Plan and other................................................. 91,232 Preferred stock dividends and accretion..................... Shares issued for Paisas earnouts........................... 8,035 Shares issued for Gratis.................................... 2,206,911 2,000 (7,800,000) Shares issued for Ola Turista earnouts...................... 592,128 1,000 (1,625,000) Shares issued for Obsidiana................................. 1,125,000 1,000 Shares issued for PageCell.................................. 528,787 1,000 (1,371,000) Shares issued and issuable pursuant to Primedia agreement... 784,314 1,000 1,000,000 Shares issued for services.................................. 251,172 Shares issued and issuable pursuant to Adnet agreement...... 7,600,000 7,000 (1,464,000) Treasury shares............................................. Issuance of warrants........................................ Net loss for the period..................................... Translation adjustment...................................... Comprehensive loss.......................................... ------ ---------- ---------- ------- ----------- Balance at December 31, 2001................................ 58,140 $ -- 80,320,089 $80,000 $ 1,000,000 ====== ========== ========== ======= =========== TREASURY STOCK ADDITIONAL --------- PAID-IN ACCUMULATED DEFERRED AMOUNT CAPITAL DEFICIT COMPENSATION --------- ------------ ------------- ------------- Balance at December 31, 1998................................ $ -- $ 19,693,000 $ (54,347,000) $(8,666,000) Deferred compensation related to stock options, net of cancellations............................................. 6,195,000 (6,195,000) Amortization of deferred compensation....................... 6,400,000 Issuance of common stock, net of offering costs............. 343,449,000 Shares issued for acquisition of Servicios Interactivos Limitada.................................................. 1,000,000 Issuance of common stock--Webcast Solutions................. 949,000 Shares issued for acquisition of PageCell International..... 8,846,000 Shares issued for acquisition of Paisas..................... 346,000 Conversion of redeemable convertible preferred stock........ 100,728,000 Exercise of common stock options............................ 2,009,000 Stock options issued for services........................... 31,000 Transactions expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders.......................... 732,000 Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 487,000 Preferred stock dividends and accretion..................... (4,266,000) Net loss for the period..................................... (90,673,000) Translation adjustment...................................... Comprehensive loss.......................................... --------- ------------ ------------- ----------- Balance at December 31, 1999................................ -- 484,465,000 (149,286,000) (8,461,000) Deferred compensation related to stock options cancellations............................................. (1,306,000) 1,306,000 Amortization of deferred compensation....................... 4,519,000 Exercise of common stock options............................ 3,002,000 Rescission of common stock option exercises................. (307,000) Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 1,154,000 Shares issued for acquisition of Ola Turista................ 3,362,000 Shares issued for acquisition of AdNet...................... 25,941,000 Common stock issuable pursuant to Gratis1 loan guarantee.... Common stock issuable pursuant to PageCell acquisition agreement................................................. Common stock issuable pursuant to Ola Turista acquisition agreement................................................. Common stock issuable pursuant to Adnet acquisition agreement................................................. Net loss for the period..................................... (210,839,000) Translation adjustment...................................... Comprehensive loss.......................................... --------- ------------ ------------- ----------- Balance at December 31, 2000................................ -- $516,311,000 $(360,125,000) $(2,636,000) Deferred compensation related to stock options cancellations............................................. (331,000) 331,000 Amortization of deferred compensation....................... 2,218,000 Exercise of common stock options............................ 106,000 Shares issued pursuant to the Employee Stock Purchase Plan and other................................................. 154,000 Preferred stock dividends and accretion..................... (1,422,000) Shares issued for Paisas earnouts........................... 139,000 Shares issued for Gratis.................................... 7,943,000 Shares issued for Ola Turista earnouts...................... 1,999,000 Shares issued for Obsidiana................................. 2,620,000 Shares issued for PageCell.................................. 1,370,000 Shares issued and issuable pursuant to Primedia agreement... 1,999,000 Shares issued for services.................................. Shares issued and issuable pursuant to Adnet agreement...... 7,682,000 Treasury shares............................................. (143,000) Issuance of warrants........................................ 2,152,000 Net loss for the period..................................... (165,569,000) Translation adjustment...................................... Comprehensive loss.......................................... --------- ------------ ------------- ----------- Balance at December 31, 2001................................ $(143,000) $542,144,000 $(527,116,000) $ (87,000) ========= ============ ============= =========== ACCUMULATED COMPREHENSIVE LOSS TOTAL -------------- ------------- Balance at December 31, 1998................................ $ (32,000) $ (43,339,000) Deferred compensation related to stock options, net of cancellations............................................. -- Amortization of deferred compensation....................... 6,400,000 Issuance of common stock, net of offering costs............. 343,467,000 Shares issued for acquisition of Servicios Interactivos Limitada.................................................. 1,000,000 Issuance of common stock--Webcast Solutions................. 949,000 Shares issued for acquisition of PageCell International..... 8,846,000 Shares issued for acquisition of Paisas..................... 346,000 Conversion of redeemable convertible preferred stock........ 100,759,000 Exercise of common stock options............................ 2,011,000 Stock options issued for services........................... 31,000 Transactions expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders.......................... 732,000 Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 487,000 Preferred stock dividends and accretion..................... (4,266,000) Net loss for the period..................................... (90,673,000) Translation adjustment...................................... (389,000) (389,000) ------------- Comprehensive loss.......................................... (91,062,000) ----------- ------------- Balance at December 31, 1999................................ (421,000) 326,361,000 Deferred compensation related to stock options cancellations............................................. -- Amortization of deferred compensation....................... 4,519,000 Exercise of common stock options............................ 3,003,000 Rescission of common stock option exercises................. (307,000) Shares issued pursuant to the Employee Stock Purchase Plan...................................................... 1,154,000 Shares issued for acquisition of Ola Turista................ 3,362,000 Shares issued for acquisition of AdNet...................... 25,943,000 Common stock issuable pursuant to Gratis1 loan guarantee.... 7,800,000 Common stock issuable pursuant to PageCell acquisition agreement................................................. 1,371,000 Common stock issuable pursuant to Ola Turista acquisition agreement................................................. 1,625,000 Common stock issuable pursuant to Adnet acquisition agreement................................................. 1,464,000 Net loss for the period..................................... (210,839,000) Translation adjustment...................................... (380,000) (380,000) ------------- Comprehensive loss.......................................... (211,219,000) ----------- ------------- Balance at December 31, 2000................................ $ (801,000) $ 165,076,000 Deferred compensation related to stock options cancellations............................................. -- Amortization of deferred compensation....................... 2,218,000 Exercise of common stock options............................ 106,000 Shares issued pursuant to the Employee Stock Purchase Plan and other................................................. 154,000 Preferred stock dividends and accretion..................... (1,422,000) Shares issued for Paisas earnouts........................... 139,000 Shares issued for Gratis.................................... 145,000 Shares issued for Ola Turista earnouts...................... 375,000 Shares issued for Obsidiana................................. 2,621,000 Shares issued for PageCell.................................. -- Shares issued and issuable pursuant to Primedia agreement... 3,000,000 Shares issued for services.................................. -- Shares issued and issuable pursuant to Adnet agreement...... 6,225,000 Treasury shares............................................. (143,000) Issuance of warrants........................................ 2,152,000 Net loss for the period..................................... (165,569,000) Translation adjustment...................................... (1,888,000) (1,888,000) ------------- Comprehensive loss.......................................... (167,457,000) ----------- ------------- Balance at December 31, 2001................................ $(2,689,000) $ 13,189,000 =========== =============
See accompanying notes. F-5 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------------ ------------- ------------- (RESTATED) OPERATING ACTIVITIES Net loss.................................................... $(90,673,000) $(210,839,000) $(165,569,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 6,500,000 28,295,000 25,055,000 Impairment of goodwill, other assets and fixed assets..... -- 56,548,000 23,198,000 Loss on disposal of assets................................ -- -- 12,504,000 Provision for bad debts................................... 393,000 6,687,000 12,669,000 Amortization of stock based compensation.................. 6,400,000 4,519,000 2,218,000 Write-off of officer loans................................ -- -- 11,385,000 Stock options issued for services......................... 31,000 -- -- Deferred rent expense..................................... 273,000 1,804,000 (2,199,000) Transaction expenses related to WassNet, S.L.............. 732,000 -- -- Changes in operating assets and liabilities: Accounts receivable..................................... (7,305,000) (13,975,000) (2,344,000) Unbilled receivables.................................... -- (3,957,000) 4,052,000 Other assets............................................ (4,853,000) (508,000) (1,999,000) Accounts payable and accrued expenses................... 8,672,000 12,789,000 (8,882,000) Deferred revenues....................................... (183,000) 524,000 1,546,000 ------------ ------------- ------------- Net cash used in operating activities....................... (80,013,000) (118,113,000) (88,366,000) INVESTING ACTIVITIES Purchase of fixed assets.................................... (18,661,000) (45,200,000) (8,095,000) Intangible assets........................................... (2,094,000) (2,059,000) (700,000) Other assets................................................ (21,640,000) (4,140,000) 8,176,000 Due from officers, net...................................... -- (4,563,000) (6,936,000) Cash paid for acquisitions.................................. (6,411,000) (10,565,000) (4,891,000) ------------ ------------- ------------- Net cash used in investing activities....................... (48,806,000) (66,527,000) (12,446,000) FINANCING ACTIVITIES Issuance of common stock.................................... 346,871,000 3,850,000 260,000 Issuance of redeemable convertible preferred stock, net of related expenses.......................................... -- -- 35,060,000 Acquisition of treasury stock............................... -- -- (29,000) Proceeds from long-term debt................................ 5,074,000 2,054,000 -- Repayment of long-term debt................................. (1,092,000) (1,672,000) (4,364,000) Payments under capital leases............................... (171,000) (58,000) -- ------------ ------------- ------------- Net cash provided by financing activities................... 350,682,000 4,174,000 30,927,000 Effect of exchange rate changes on cash and cash equivalents............................................... (921,000) (215,000) (1,888,000) ------------ ------------- ------------- Net increase/decrease in cash and cash equivalents.......... 220,942,000 (180,681,000) (71,773,000) Cash and cash equivalents, beginning of period.............. 53,147,000 274,089,000 93,408,000 ------------ ------------- ------------- Cash and cash equivalents, end of period.................... $274,089,000 $ 93,408,000 $ 21,635,000 ============ ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid............................................... $ 581,000 $ 1,221,000 $ 925,000 Income taxes paid........................................... -- $ 569,000 $ 392,000 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of fixed assets and intangible assets... $ 5,151,000 $ 777,000 -- Accrued costs for acquisitions............................ $ 4,583,000 $ 4,021,000 -- Common stock issuable..................................... -- $ 12,260,000 $ 1,000,000 Accrued costs related to issuance of common stock......... $ 43,000 -- -- Issuance of common stock for the acquisition of content... -- -- $ 3,000,000
See accompanying notes. F-6 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND DESCRIPTION OF BUSINESS The accompanying consolidated financial statements include the accounts of StarMedia Network, Inc. (d/b/a CycleLogic) and its wholly-owned subsidiaries (collectively, the "Company"). All intercompany account balances and transactions have been eliminated in consolidation. The Company was incorporated under Delaware law in March 1996. After a significant change in business strategy during the second half of 2001, the Company is now principally engaged in providing mobile Internet software and application solutions to wireless telephone operators targeting Spanish and Portuguese speaking audiences, described herein as the "mobile solutions business" or "mobile Internet solutions". The Company's mobile Internet solutions allow users to access and receive Internet content, tools and applications through wireless devices, such as pagers, cellular phones, PCS handsets and personal digital assistants, or PDAs. The Company was originally established to develop Internet sites tailored specifically to the interests and needs of Spanish and Portuguese speakers, selling advertising to advertisers seeking to reach its user base, and historically derived a majority of its revenues from fees charged to 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. FINANCIAL STATEMENT PRESENTATION The Company has incurred recurring operating losses since its inception and as of December 31, 2001 had an accumulated deficit of $527,116,000 and may have insufficient capital to fund all of its obligations. During the second half of 2001, management commenced a realignment of the Company for the general purpose of reducing the costs of operating their Internet media business and focusing the Company resources on the development of their mobile solutions business, which has incurred smaller losses to date. Management believes that this realignment was necessary in order to preserve the Company's prospects of becoming profitable. 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. While management believes that additional financing or proceeds from the sale of the Company's Internet media services business may be available, there can be no assurance that the Company will obtain such additional capital or that such additional financing will be sufficient for the Company's continued existence. Furthermore, there can be no assurances that the Company will be able to generate sufficient revenues from the operation of the mobile solutions business to meet the Company's obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect of the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. REVENUE RECOGNITION Until early 2002, the Company's revenues were derived principally from the sale of banner advertisements, email campaigns and sponsorships, some of which also involve some integration, design and coordination of the customer's content with the Company's services, such as the placement of sponsor buttons in specific areas of the Company's network. The sponsor buttons generally provide users with direct links to sponsor homepages that exist within the Company's network which are usually focused on selling sponsor merchandise and services to users of the network. Advertising revenues on F-7 both banner and sponsorship contracts, which range from one day to multiple years, are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of minimum number of "impressions." To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the remaining guaranteed impression levels are achieved. Revenue related to e-mail campaigns is recognized as the e-mails are delivered. The Company also earns revenues on sponsorship contracts for fees relating to the design, coordination, and integration of the customer's content. Revenue related to the design, coordination and integration of the customers' content are recognized ratably over the term of the contract or using the percentage of completion method if the fee for such services is fixed. Several of the Company's agreements contain multiple revenue elements. The Company allocates the total agreement fee among each deliverable based on the fair value of each of the deliverables. A portion of the Company's revenues is derived from barter advertisements (agreements whereby the Company trades advertisements on its network or service in exchange for advertisement or service from third 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 Non-monetary 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 the unrelated party renders services. For the years ended December 31, 1999, 2000 and 2001, revenues derived from barter transactions, were approximately $5,500,000, $7,700,000, and $6,500,000 respectively. Revenues related to consulting and technical services from time and material contracts are recognized during the period in which the related services are provided and revenue from fixed price contracts is recognized using the percentage-of-completion method. The Company either directly licenses its mobile Internet solutions to its customers or enters into application service provider ("ASP") agreements for the solutions' use over a specified period of time. Licensing revenue is recognized ratably over the life of the contract. ASP revenue is recognized at predetermined contracted rates. Additional revenue for transactional and user fees are also recognized based on monthly usage. If additional professional services, such as installation, are required, revenue for such additional professional services is recognized at completion. The revenue from any maintenance or support services included in a contract is recognized ratably over the life of the contract. Deferred revenues at December 31, 2001 are primarily comprised of billings in excess of recognized revenues relating to the mobile Internet solutions business. PRODUCT DEVELOPMENT The Company's product development expenses consist primarily of hosting costs and personnel costs for product and content management, engineering, systems and network maintenance of the Company's proprietary technology and Internet properties. Product development costs are expensed as incurred or capitalized in accordance with Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that costs incurred in the preliminary project and post implementation stages of an internal use software project are expensed as incurred and that certain costs incurred in the application development state of the project be capitalized. In March 2000, the Emerging Issue Task Force issued its consensus on Issue No. 00-2, "Accounting for Website Development Costs," (EITF 00-2). EITF 00-2 requires either capitalizing or expensing costs as incurred on specific Web site development costs based on the nature of each cost. The adoption of F-8 EITF 00-2 did not have a material impact on the Company's financial position and results of operations. CASH AND CASH EQUIVALENTS The Company considers all financial instruments with an original maturity of three months or less to be cash equivalents. Such amounts are stated at cost, which approximates market value. FIXED ASSETS Fixed assets, including those acquired under capital leases, are stated at cost and depreciated by the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining period of the lease. INTANGIBLE ASSETS Intangible assets consist of trademarks, trade names and the rights to use certain technology, and are being amortized on a straight-line basis, generally over a period of five years. Goodwill consists of the excess of the purchase price paid over the tangible net assets and identifiable intangible assets of acquired companies. Goodwill is amortized using the straight-line method over three years. Amortization expense for the years ended December 31, 1999, 2000 and 2001 were approximately $2,622,000, $13,612,000 and $5,700,000, respectively. The Company assesses the recoverability of its goodwill and other intangible assets by determining whether the unamortized balance can be recovered through forecasted cash flows over its remaining life. If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce the net amounts to an amount consistent with forecasted future cash flows discounted at the Company's incremental borrowing rate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions (SEE Note 6). INCOME TAXES The Company uses the liability method of accounting for income taxes, whereby deferred income taxes are provided on items recognized for financial reporting purposes over different periods than for income tax purposes. Valuation allowances are provided when the expected realization of tax assets does not meet a more likely than not criteria. ADVERTISING COSTS Advertising costs are expensed as incurred. For the years ended December 31, 1999, 2000 and 2001, advertising expense amounted to approximately $29,076,000, $31,090,000 and $14,771,000, respectively. For the years ended December 31, 1999, 2000 and 2001, advertising expense includes approximately $5,500,000, $5,157,000 and $6,251,000, respectively, of charges related to barter advertising transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. F-9 STOCK-BASED COMPENSATION The Company grants stock options generally for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes compensation expense only if the fair value of the underlying Common Stock exceeds the exercise price of the stock option on the date of grant. As permitted by SFAS No. 123, the Company continues to account for stock-based compensation in accordance with APB Opinion No. 25 and has elected the pro forma disclosure alternative of SFAS No. 123 (SEE Note 12). COMPUTATION OF NET LOSS PER SHARE The Company calculates earnings per share in accordance with SFAS No. 128, "Computation of Earnings Per Share." Accordingly, basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Dilutive shares consist of the incremental common shares issuable upon the conversion of the Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options (using the treasury stock method); such additional shares are excluded from the calculation if their effect is anti-dilutive. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2001, the majority of cash and cash equivalents were held by two different financial institutions. The Company's sales are primarily to companies located in the United States and Latin American region. The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. Accounts receivable are under stated contract terms and the Company provides for estimated credit losses at the time of sale. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and loan payable approximate their fair values. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile, Mexico, Spain, Uruguay and Colombia is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of stockholders' equity. The functional currency of the Company's Venezuelan subsidiary, which is in a highly inflationary 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, which amounts are not material, are recorded in the consolidated statement of operations. COMPREHENSIVE INCOME The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires foreign currency translation adjustments to be included in other comprehensive loss. F-10 SEGMENT INFORMATION The Company discloses information regarding segments in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting of financial information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports. Although the Company has realigned its business to focus on its mobile solutions, a substantial portion of the Company's efforts and resources supported both its mobile solutions and Internet media business. Accordingly, the Company has continued to report in only one business segment. RECLASSIFICATIONS Certain reclassifications were made to the prior year's financial statements to conform with the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, Statement 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. The Company will apply Statement 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of Statement 142 is expected to result in a decrease in net loss of $1,164,000 ($0.02 per share) in 2002. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 during the first six months of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle. The Company does not expect the adoption of this statement to have a material effect on its financial position and results of operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. The Company is required to adopt SFAS 144 in the first quarter of 2002. The Company does not expect the adoption of this statement to have a material effect on its financial position and results of operations. 2. RESTATEMENT OF FINANCIAL STATEMENTS The Company, in consultation with its independent accountants, determined to restate its audited consolidated financial statements for the year ended December 31, 2000, which includes adjustments to the fiscal quarters ended March 31, June 30, September 30, and December 31, 2000, and its unaudited consolidated financial statements for the quarters ended March 31 and June 30, 2001, respectively. The F-11 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 restatements of its audited consolidated financial statements for the fiscal year ended December 31, 2000 and the quarters therein and its unaudited consolidated financial statements for the quarters ended March 31, 2001 and June 30, 2001 contain adjustments that fall into five categories. The first category of adjustments arise 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 U.S. 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. As a result of the restatement, the consolidated financial statements of the Company have been restated as summarized below (in thousands except per share amounts):
AS OF DECEMBER 31, 2000 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- Consolidated Balance Sheets: Accounts receivable, net............................. $ 20,082 $ 13,524 Total current assets................................. 127,301 120,743 Total assets......................................... 215,663 209,105 Accrued expenses..................................... 20,061 15,601* Deferred revenues.................................... 1,428 1,128 Common stock issuable................................ 7,800 12,260* Accumulated deficit.................................. (353,867) (360,125) Total stockholders' equity........................... 166,874 165,076* Total liabilities and stockholders' equity........... $ 215,663 $ 209,105
- ------------------------ * Includes the effect of amounts reclassified to give effect to common stock issuable to satisfy an outstanding obligation previously included in accrued expenses. F-12
FOR THE YEAR ENDED DECEMBER 31, 2000 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- Consolidated Statement of Operations Data: Revenues............................................. $ 61,028 $ 52,320 Sales and marketing.................................. 79,794 77,641 General and administrative........................... 31,743 31,446 Total operating expenses............................. 253,126 250,676 Loss from operations................................. (192,098) (198,356) Net loss applicable to common stockholders........... (204,581) (210,839) Basic and diluted net loss per common share.......... $ (3.10) $ (3.20)
FOR QUARTER ENDED FOR QUARTER ENDED FOR QUARTER ENDED FOR QUARTER ENDED MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000 --------------------- --------------------- ------------------------ ------------------------ AS AS AS AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY PREVIOUSLY REPORTED RESTATED REPORTED RESTATED REPORTED AS RESTATED REPORTED AS RESTATED ---------- -------- ---------- -------- ---------- ----------- ---------- ----------- Consolidated Statement of Operations: Revenues.................... $ 10,056 $ 9,861 $ 13,764 $ 12,021 $ 17,146 $ 15,929 $ 20,062 $ 14,510 Sales and marketing......... 18,587 18,587 22,274 21,190 17,348 16,971 21,585 20,894 General and administrative............ 8,075 7,880 7,702 7,521 8,163 7,966 7,803 8,079 Depreciation and amortization.............. 4,544 4,544 7,289 7,289 8,120 8,120 8,342 8,342 Total operating expenses.... 48,318 48,123 57,831 56,566 55,369 54,795 91,608 91,193 Loss from operations........ (38,262) (38,262) (44,067) (44,545) (38,223) (38,866) (71,546) (76,683) Net loss applicable to common stockholders....... (35,119) (35,119) (43,981) (44,459) (35,983) (36,626) (89,498) (94,651) Basic and diluted net loss per common share.......... $ (0.54) $ (0.54) $ (0.67) $ (0.68) $ (0.54) $ (0.55) $ (1.36) $ (1.44)
FOR QUARTER ENDED FOR QUARTER ENDED MARCH 31, 2001 JUNE 30, 2001 --------------------- --------------------- AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- Consolidated Statement of Operations: Revenues.................................................... $ 16,039 $ 8,871 $ 14,204 $ 6,289 Sales and marketing......................................... 19,664 17,472 15,626 12,498 General and administrative.................................. 7,674 9,158 7,472 7,946 Depreciation and amortization............................... 5,739 5,739 7,100 6,939 Total operating expenses.................................... 48,334 48,779 60,571 57,651 Loss from operations........................................ (32,295) (39,908) (46,367) (51,362) Net loss applicable to common stockholders.................. (31,226) (38,643) (47,838) (52,926) Basic and diluted net loss per common share................. $ (0.46) $ (0.57) $ (0.69) $ (0.76)
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. F-13 Prior to the filing of this Report on Form 10-K for the year ended December 31, 2001, the Company has filed Reports on Form 10-Q/A for the quarters ended March 31, 2001 and June 30, 2001 for the purpose of amending the Reports on Form 10-Q previously filed with respect to such periods. In addition, the Company has also filed Reports on Form 10-Q for the quarters ended September 30, 2001 and March 31, 2002, which the Company had withheld from filing until such time as the investigations conducted by the Special Committee and by management had been completed. 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 year ended December 31, 2000 and for the fiscal quarters ended March 31 and June 30, 2001, as restated, include all adjustments necessary for a fair presentation of the Company's financial position and results of operations for such periods. 3. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, --------------------------- 2000 2001 ------------ ------------ Computer equipment and software.................. $ 48,415,000 $ 49,774,000 Furniture and fixtures........................... 3,181,000 1,780,000 Transportation equipment......................... 80,000 -- Leasehold improvements........................... 17,795,000 1,949,000 ------------ ------------ 69,471,000 53,503,000 Less accumulated depreciation and amortization... (13,902,000) (28,319,000) ------------ ------------ $ 55,569,000 $ 25,184,000 ============ ============
4. RESTRUCTURING AND OTHER CHARGES In September 2000, the Company recorded a one-time charge of $3,935,000 associated with the integration of acquisitions and a company-wide realignment of business operations. As of December 31, 2000 the Company had incurred $3,095,000 of related expenses and the balance was paid in 2001. In May 2001, the Company announced a restructuring, the purpose of which was to reduce the Company's business operations and reduce its operational overhead. In connection with such restructuring and in the late 2001's realignment, the Company recorded during the year ended December 31, 2001 aggregate charges of approximately $26,200,000. The total charge includes approximately $11,500,000 of loans and related interest to officers (see Note 20), approximately $5,300,000 of severance payments to employees and certain officers of the Company and approximately $1,000,000 of other costs related to the restructuring. Additionally, in September 2001, the Company negotiated a settlement to terminate the lease of the Company's former offices at 75 Varick Street in New York City. The Company agreed to leave a substantial portion of its fixed assets and leasehold improvements at the location to the new tenant resulting in a loss on disposal of assets of $8,500,000. The settlement required the Company to vacate the premises by November 9, 2001 in exchange for its release from any further obligations under the lease. Additionally, a $5,000,000 letter of credit in favor of the landlord at the vacated premises was released. As such, $5,000,000 of restricted cash became unrestricted at the time the settlement was executed. As of December 31, 2001, the Company had paid approximately $25,200,000 of restructuring related expenses. F-14 5. IMPAIRMENT OF FIXED ASSETS In the first quarter of 2001, the Company decided to cease operating Webcast Solutions which in September 1999 had been merged with a wholly owned subsidiary of the company. Webcast Solutions was a streaming media company focused on the global delivery of audio, video and other Internet based interactive media. The total loss recognized as a result of this decision totaled $1,153,000, primarily related to fixed assets deemed to be impaired. In February 2000, the Company entered into a software license agreement with Software.com. to purchase for $9,000,000 a non-exclusive and non-transferable license to use Software.com's Intermail Mx electronic messaging software during a period of three years. As part of the change in business strategy and focus and to reduce operating costs, the Company decided in September 2001 to terminate the usage of the software and return the license to Software.com. The Company reached an agreement with Software.com. in March 31, 2002. The terms of the settlement require the Company to return all copies of the software in July 2002. A settlement payment of $1,250,000 was made on March 2002 to finalize the agreement. In September 2001, an impairment loss of $2,934,000 was recognized to write-off the carrying value of the software. 6. IMPAIRMENT OF GOODWILL AND INTANGIBLES As of December 31, 2000, the Company determined that the fair market value of certain acquired assets was below their respective carrying values (inclusive of the related goodwill). As a result, the Company recorded a goodwill impairment charge of $37,170,000. The Company also determined that certain long-term assets, principally minority investments in other companies were permanently impaired and recorded an additional impairment charge of $19,378,000. During the third and fourth quarter of 2001, the Company determined that all goodwill and intangible assets related to the Internet media business were impaired. The Company recorded a goodwill impairment charge of $11,405,000 and an intangible impairment charge of $5,657,000. The Company also determined that certain long-term assets, principally minority investments in other companies, were permanently impaired and recorded an impairment charge of $2,049,000. 7. GAIN ON SALE OF INVESTMENT In December 2001, the Company sold substantially all of the assets associated with the operation of Cade?, its Brazilian online directory, to Yahoo Brasil Ltda for approximately $13,000,000 in cash. Such amount is included in other current assets at December 31, 2001 and was received in January 2002. The Company realized a gain from this sale of approximately $12,400,000. The Company acquired Cade? through its acquisition of KD Sistemas de Informacao Ltda. in April 1999. At the time of sale the carrying value of the Cade? business had been reduced to reflect both amortization of the goodwill recorded upon acquisition and a write-down taken in 2000 in connection with the Company's overall assessment of the fair market value of assets acquired (SEE Note 6). 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK In February 1998, the Company sold 8,000,000 shares of Series B Redeemable Convertible Stock (the "Series B Preferred") for $12,000,000, or $1.50 per share. In August and September 1998, the Company sold 16,666,667 shares of Series C Redeemable Convertible Preferred Stock (the "Series C Preferred") for $80,000,000, or $4.80 per share. The Series A Redeemable Convertible Preferred, Series B Preferred and the Series C Preferred (collectively, the "Preferred Stock") were convertible into common stock on a one for one basis. The holders of the Preferred Stock were entitled to the number of votes equal to the number of common shares that could be obtained upon conversion on the date of the vote and were entitled to a discretionary noncumulative dividend. No Preferred Stock dividends had been declared or paid. At December 31, 1998 and at the date of conversion, total F-15 cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $4,233,000 and $8,499,000, respectively. The Preferred Stock was converted into 31,996,667 shares common stock on a one-for-one basis, upon the consummation of the Company's initial public offering of its common stock. In May 2001, the Company issued 1,431,373 shares of its Series A Convertible Preferred Stock at a price per share of $25.50 to BellSouth Enterprises, Inc. ("BellSouth"), About.com, Inc. ("About.com") and certain other investors resulting in total proceeds of approximately $35,100,000 to the Company, net of issuance costs of approximately $1,400,000 (the "BellSouth Investment"). These shares are convertible into 14,313,730 shares of the Company's common stock at any time at the option of the holder. After 60 months from the date of issuance, the Company shall redeem the Series A Convertible Preferred Stock for cash or shares of the Company's common stock, in an amount equal to $36,500,000, plus accrued dividends thereon. 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 $144,000 during the year ended December 31, 2001. Dividends accrue at 6% per annum and totaled $1,278,000 during the year ended December 31, 2001. In addition, in connection with the BellSouth Strategic Agreement (see Note 21), the Company agreed to issue warrants to BellSouth to purchase up to 4,500,000 shares of the Company's common stock, with exercise prices ranging from $4.55 to $8.55 per share that vest in May 2002 and expire during the period from May 2005 through May 2007. These warrants were valued, by an independent appraiser, at approximately $2,200,000 and are being amortized over 60 months. In August 2001, the Company issued 251,172 shares of the Company's common stock valued at $500,000 to JP Morgan Ventures Corporation as partial consideration for services rendered by JP Morgan Securities in connection with the aforementioned financing. Under the terms of the agreement with JP Morgan Securities, if the Company does not have in place an effective registration statement covering these shares by November 30, 2001, JP Morgan Ventures Corporation will have the right to cause the Company to repurchase such shares for $500,000. The value of these shares has been treated as a reduction of the carrying value of the Series A Convertible Preferred Stock and, since the Company has not yet filed such registration statement, has been included in accrued expenses in the accompanying balance sheet. 9. STOCKHOLDERS' EQUITY COMMON STOCK In April and May 1999, a group of third-party investors purchased an aggregate of 3,727,272 shares of the Company's common stock at $11 per share, or approximately $41,000,000, less fees and commissions of $1,640,000 paid by issuing 149,091 shares of the Company's common stock. These investors were subject to a one-year restriction on the sale or transfer of such shares, after which such investors were granted certain registration rights. In May 1999, the Company completed its initial public offering ("IPO") and realized proceeds of approximately $110,400,000, net of underwriting discounts and commissions and related expenses, from the sale of 8,050,000 shares of its common stock. In October 1999, the Company realized proceeds of approximately $192,100,000, net of underwriting discounts and commissions and related expenses, from the public offering of 6,000,000 shares of its common stock. In February and September 2001, the Company issued 1,058,476 and 1,148,435, shares of common stock, respectively to Gratis1, valued at $7,945,000 pursuant to a Gratis1 loan guarantee. As of December 31, 2000, the company had already recognized common stock issuable to Gratis1 of $7,800,000. F-16 In July 2001, the Company issued 784,314 shares of its common stock to Primedia, Inc. valued at $2,000,000 in connection with the execution of a content license agreement with Primedia, Inc., Primedia Magazines Inc., and About.com, Inc. In August 2001, the Company issued 251,172 shares of the Company's common stock valued at $500,000 to its placement agent "JP Morgan Ventures Corporation" in connection with the Company's financing in May 2001 (SEE Note 8). During 1999, 2000 and 2001 the Company issued 2,179,367 shares, 1,489,477 shares and 9,853,950 shares, respectively, for various acquisitions and earnout provisions (SEE Note 10). During the year ended December 31, 2001, the Company issued 204,627 shares of its common stock for approximately $106,000 in connection with the exercise of stock options. Additionally, the Company sold 88,107 shares of common stock for approximately $154,000 in connection with its Employee Stock Purchase Plan and issued 3,125 shares of common shares related to a prior conversion of Preferred Stock issued in 1998. During the year ended December 31, 2001, the Company repurchased 349,912 of its common shares, primarily in connection with the termination of certain officer employment (SEE Note 20). JUNIOR NON-VOTING CONVERTIBLE PREFERRED STOCK In connection with the PageCell International acquisition, the Company issued 58,140 shares of Series 1999A, Junior Non-Voting Convertible Preferred Stock (the "Series 1999A Preferred"). After the first anniversary date of the issue of the Series 1999A Preferred, the Series 1999A Preferred became convertible into common stock on a one for one basis subject to certain anti-dilution provisions, at any time at the option of the holder. 10. 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 $2,621,000. The stockholders of Obsidiana included entities managed by J.P. Morgan Partners and Flatiron Partners. The entire value of the purchase price was attributed to goodwill at the time of purchase. The results of operations have been included in the Company's financial statements from the date of acquisition. Pro-forma consolidated results of operations are not included, as the effects of the Obsidiana acquisition were not material to the Company. In September 2001, the Company as part of the restructuring and change in business strategy, wrote off the remaining goodwill totaling $2,258,000. In February 2000, the Company acquired Ola Turista Ltda. ("Ola Turista"), the owner of Guia SP and Guia RJ, leading cultural and entertainment guides in the cities of Sao Paulo and Rio de Janeiro, Brazil in exchange for 71,524 shares of its common stock, valued at approximately $3,362,000 and $2,000,000 in cash. Pursuant to the purchase agreement, the Company was obligated to pay additional consideration in the form of the Company common stock, subject to Ola Turista meeting certain specified performance targets. Such targets were met and, as such, the Company accrued $1,625,000 and $375,000 of common stock issuable at December 31, 2000 and April 30, 2001, respectively. In April 2001, the Company issued 592,128 shares of its common stock in full satisfaction of the common stock issuable. In September 2001, the Company wrote off $335,000 of goodwill charges related to this transaction as part of the realignment of its business. In April 2000, the Company acquired AdNet, a leading Mexican search portal and Mexico's largest web directory. The Company paid $5,000,000 in cash and issued 469,577 shares of common stock, valued at approximately $15,000,000, to acquire all of the outstanding equity of AdNet. Pursuant to the purchase agreement, the Company was obligated to pay additional consideration in the form of the Company common stock over a five-year period, subject to AdNet meeting certain specified F-17 performance targets. In 2000 an additional 948,376 shares, valued at $10,943,000 based on the fair market value of the common stock upon issuance, were issued as additional consideration and an additional $1,464,000 was recorded as common stock issuable for targets met in the fourth quarter of 2000. In connection with this acquisition, the Company was obligated under its agreements with respect to such acquisition to pay additional consideration in the form of the Company's common stock over a five-year period from the acquisition date, subject to AdNet meeting certain specified performance targets. In November 2001, the Company, AdNet 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 the stock purchase agreement and certain other related agreements between the Company and the former stockholders of AdNet. As of December 31, 2001, the Company had issued a total of 7,600,000 shares. The Company has not issued the remaining 400,000 shares pending resolution of outstanding claims that the Company has against the former stockholders. In September 2001, the Company decided to shutdown the operations as part of the realignment of the business and it wrote off a total of $8,738,000 in remaining goodwill. In March 1999, the Company acquired all of the outstanding stock of Achei Internet Promotion Ltda., ("Achei") a Brazilian company in exchange for cash of $810,000. In April 1999, the Company acquired all of the outstanding stock of KD Sistemas de Informacao Ltda. ("KD Sistemas"), a Brazilian company, in exchange for a cash payment of $5,000,000 at closing, $320,000 paid during 1999, $3,490,000 during 2000 and additional estimated cash payments of up to $4,890,000, in the aggregate, due in March 2001 and 2002 upon the achievement of certain performance targets. The financial performance goals were met prior to December 31, 1999 and approximately $4,500,000 was accrued as additional goodwill at that time. The remaining $3,200,000, for which the performance targets were also met, was contingent upon the continued employment of certain key individuals. As such, during 2000, the Company recorded the remaining $3,200,000 as compensation expense upon the completion of the required employment period. In June 1999, the Company acquired all of the outstanding stock of Servicios Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock valued at $1,000,000. In September 1999, the Company purchased substantially all of the assets of PageCell International Holdings, Inc. ("PageCell International"), a provider of advanced mobile technologies and services, in exchange for 174,418 shares of common stock and 58,140 shares of Series 1999A Junior Non-Voting Convertible Preferred Stock, valued at approximately $8,800,000 at the closing date and additional equity consideration valued at up to $15,000,000 upon the achievement of certain specified quarterly performance related targets through December 2000. The actual additional equity consideration earned was approximately $1,371,000, which was accrued as common stock issuable at December 31, 2000. In April 2001, the Company issued 528,787 shares, in full settlement of such common stock issuable. In November 1999, the Company acquired Paisas for 8,728 shares of its common stock valued at $346,000. In March 2001, the Company issued an additional 8,035 shares of its common stock to Paisas, valued at $139,000 as additional consideration related to revenue targets specified in the original purchase agreement. The Company accounted for the aforementioned acquisitions under the purchase method of accounting and the results of the operations have been included in the financial statements of the Company from the respective dates of acquisition. The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. In May 1999, the Company acquired all of the outstanding stock of WassNet, a company organized under the laws of Spain. WassNet (subsequently renamed LatinRed S.L.) became a wholly-owned subsidiary of the Company and the WassNet shareholders received 161.9 shares of the Company's common stock for each outstanding WassNet share. Accordingly, the Company issued 1,133,334 shares F-18 of its common stock for all the outstanding shares of WassNet stock. WassNet is a Spanish-language online community offering e-mail, chat, classifieds, bulletin boards, home pages and search capabilities. In connection with the merger, WassNet recorded a one-time charge of $773,000 for transaction costs and the Company recorded a one-time charge of $294,000 in transaction costs. In September 1999, Webcast Solutions merged with and into a newly formed wholly-owned subsidiary of the Company (the "Webcast Solutions Merger"). Under the terms of the Webcast Solutions Merger, 842,887 shares of the Company's common stock were issued in exchange for all of the outstanding Webcast Solutions common stock based on an exchange ratio of .1084 shares of the Company's common stock for each share of Webcast Solutions common stock. Webcast Solutions is a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. In connection with the Webcast Solutions Merger, the Company recorded a one-time charge of $546,000 in transaction costs. The WassNet acquisition and Webcast Solutions Merger were each accounted for as a pooling of interests. 11. LOSS PER SHARE The following tables set forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------------ ------------- ------------- (RESTATED) Numerator: Net loss........................................ $(90,673,000) $(210,839,000) $(165,569,000) Preferred stock dividends and accretion......... (4,266,000) -- (1,422,000) ------------ ------------- ------------- Numerator for basic and diluted loss per share-net loss available for common stockholders.................................. $(94,939,000) $(210,839,000) $(166,991,000) ============ ============= ============= Denominator: Denominator for basic and dilutive loss per share-weighted average shares................. 41,170,602 65,919,685 71,181,377 ============ ============= ============= Basic and diluted net loss per share............ $ (2.31) $ (3.20) $ (2.35) ============ ============= =============
Diluted net loss per share does not include the effect of options and warrants to purchase 11,860,970, 23,716,014 and 17,653,546 shares of common stock at December 31, 1999, 2000 and 2001, respectively. Diluted net loss per share for the year ended December 31, 2001 also does not include the effect of 14,313,730 shares of common stock issuable upon the conversion of Preferred Stock on an "as if converted" basis, respectively, as the effect of their inclusion is antidilutive. 12. STOCK OPTIONS In January 1997 the Company adopted the 1997 Stock Option Plan, in July 1998 the company adopted the 1998 Stock Option Plan and in March 2000 the company adopted the 2000 Stock Incentive Plan (collectively, the "Option Plans"). All options granted under the 1997 plan were cancelled, with the exception of options to purchase 2,000,000 shares. The 1998 Stock Option Plan provided for the authorization of 10,000,000 shares. In February 1999, an additional 7,000,000 shares were added. An annual increase is to be added each July 1 beginning with July 1, 2000 equal to the lesser of 4,000,000 shares or 4% of the outstanding shares on that date. In July 2000 an additional 2,639,632 shares were reserved for issuance pursuant to the 1998 Stock Option Plan. The 2000 Stock Incentive Plan provides for an initial authorization of 20,000,000 shares, with an annual increase equal to the lesser of 4,000,000 shares or 5% of the then outstanding shares. The Option Plans provide for the granting of incentive F-19 stock options and non-qualified stock options to purchase common stock to eligible participants. Options granted under the Option Plans are for periods not to exceed ten years. The 2000 Stock Incentive Plan also provides for the granting of stock appreciation rights, common stock and common stock equivalents to eligible participants. In July 1998, approximately 1,400,000 non-qualified options outstanding were exchanged for incentive stock options having terms generally equivalent to the non-qualified options. Options issued prior to February 1999 generally vest one-third after the first year of service and ratably each month thereafter over the next two years. Options issued beginning February 1999 generally vest one-fourth after the first year of service and ratably each month thereafter over the next three years. Certain options, including options to purchase 2,000,000 shares granted in April 1998, options to purchase 1,500,000 shares granted in December 1998, and options to purchase 2,000,000 shares granted in October 1999, were immediately vested. In connection with the granting of stock options in 1998 and the exchange of non-qualified options to incentive stock options, the Company recorded deferred compensation of approximately $19,500,000. In connection with the granting of stock options in 1999, the Company recorded additional deferred compensation of approximately $6,400,000. Deferred compensation is being amortized for financial reporting purposes over the vesting period of the options. The amount recognized as expense during the year ended December 31, 1999, 2000 and 2001 amounted to approximately $6,400,000, $4,519,000 and $2,218,000 respectively. In connection with the Webcast Solutions Merger, all the Webcast Solutions options outstanding at the time of the merger were exchanged for options to purchase 101,132 shares of the Company's common stock at an exchange ratio of ...1084 shares of the Company's common stock for each option outstanding. The following transactions occurred with respect to the Option Plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ---------------- Outstanding, December 31, 1998................... 6,131,933 $ .81 Transactions in 1999 Granted.......................................... 7,607,230 21.26 Canceled......................................... (259,464) 16.65 Exercised........................................ (1,618,729) 1.26 ----------- Outstanding, December 31, 1999................... 11,860,970 13.50 Transactions in 2000 Granted.......................................... 16,340,050 14.16 Canceled......................................... (3,330,521) 25.01 Exercised, net of rescissions.................... (1,154,485) 2.34 ----------- Outstanding, December 31, 2000................... 23,716,014 12.88 Transactions in 2001 Granted.......................................... 289,500 2.72 Canceled......................................... (10,647,341) 15.37 Exercised........................................ (204,627) .52 ----------- Outstanding, December 31, 2001................... 13,153,546 $10.63 ===========
In December 2000, several employees of the Company were given the right to rescind 327,524 options exercised earlier in the year. Such rescissions were permitted to allow the employees to avoid adverse personal tax issues. Upon the rescission of the option exercises, the employees returned the F-20 327,524 shares to the Company and the Company returned 327,524 options, with the original terms, and the cash received upon exercise of the options. Such rescissions resulted in $48,000 in expenses to the Company and the shares were returned to authorized and unissued as of December 31, 2000. There was no rescission in 2001. The following table summarizes information concerning outstanding options at December 31, 2001:
WEIGHTED AVERAGE REMAINING NUMBER CONTRACTUAL LIFE NUMBER EXERCISE PRICE RANGE OUTSTANDING OPTION OUTSTANDING EXERCISABLE - -------------------- ----------- ------------------ ----------- $0.50 - $0.50....................... 2,246,843 6.1 2,246,843 $1.60 - $2.19....................... 1,477,669 7.9 1,448,981 $3.00 - $4.19....................... 2,096,500 9.0 1,920,375 $4.88 - $6.88....................... 3,533,527 8.4 2,362,509 $11.00 - $15.00..................... 95,500 7.7 85,199 $18.00 - $21.56..................... 172,709 8.4 82,072 $29.18 - $31.50..................... 3,325,611 7.9 2,783,413 $35.43 - $48.19..................... 205,187 7.8 115,768 ---------- ---------- 13,153,546 11,045,160 ========== ==========
The weighted average fair value of options granted during the years ended December 31, 1999, 2000 and 2001 was $13.32, $12.31 and $2.18, respectively. Pro forma information regarding net loss is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its stock options under the fair value method of the statement. The fair value for these options was estimated using the minimum value method prior to the Company's IPO and the Black-Scholes option pricing model thereafter with the following assumptions:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 2000 2001 ---------- ---------- ---------- Average risk-free interest rate................... 5.00% 4.75% 5.00% Dividend yield.................................... 0.0% 0.0% 0.0% Average life...................................... 5 years 4 years 3 years Volatility........................................ .70 1.30 2.82
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 2000 2001 ------------- ------------- ------------- (RESTATED) Pro forma net loss available to common stockholders............ $(136,827,000) $(279,316,000) $(192,544,000) Pro forma basic and diluted loss per share...................... $ (3.32) $ (4.24) $ (2.70)
F-21 In May 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees to purchase shares of common stock of the Company through payroll deductions at 85% of the fair market value during specific purchase periods, as defined. A total of 1,500,000 shares of common stock have been reserved for issuance under this plan. During the year ended December 31, 1999, 38,157 shares of common stock were issued to employees for total proceeds of $487,000. During the year ending December 31, 2000, 132,638 shares of common stock were issued to employees for total proceeds of $1,154,000. During the year ended December 31, 2001, 88,107 shares of common stock were issued to employees for total proceeds of $154,000. 13. INCOME TAXES The income tax provision of $231,000, $158,000 and $60,000 for the years ended December 31, 1999, 2000 and 2001, respectively, is comprised of foreign income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. At December 31, 1999, 2000 and 2001 significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------------------------- 1999 2000 2001 ------------ ------------ ------------- (RESTATED) Federal net operating loss carryforward..................... $ 32,057,000 $ 78,676,000 $ 132,116,000 Depreciation and amortization...... 322,000 (1,360,000) 5,639,000 Deferred rent...................... 179,000 1,121,000 (90,000) Restructuring charges.............. -- 407,000 -- Other.............................. 234,000 2,137,000 1,965,000 ------------ ------------ ------------- 32,792,000 80,981,000 139,630,000 Valuation allowance................ (32,792,000) (80,981,000) (139,630,000) ------------ ------------ ------------- $ -- $ -- $ -- ============ ============ =============
For U.S. federal income tax purposes, at December 31, 2001 the Company had net operating loss carryforwards of approximately $290,000,000 which expire from 2011 through 2022. A valuation allowance has been recognized to fully offset the deferred tax assets, as it has been determined that it is more likely than not that all or a portion of the deferred tax assets may not be realizable. The Company's valuation allowance increased by $20,515,000, $48,189,000, and $58,649,000 in 1999, 2000 and 2001, respectively. The reconciliation of the U.S. federal statutory rate to the effective tax rate for the years ended December 31, 1999, 2000 and 2001 is as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1999 2000 2001 -------- ---------- -------- (RESTATED) U.S. statutory rate................................... (35)% (35)% (35)% Foreign losses with no U.S. benefit................... 10 12 4 Expenses not deductible for U.S. tax purposes......... 2 9 4 U.S. losses with no benefit........................... 23 14 27 Foreign taxes......................................... 1 1 1 Other................................................. -- -- -- Effective tax rate.................................... 1% 1% 1%
F-22 14. LONG-TERM DEBT At December 31, 2000, approximately $4.3 million was outstanding under the Company's computer equipment, furniture and fixture credit line. Amounts outstanding were payable in monthly installments of principal and interest of approximately $170,000, bearing interest at approximately 13.6% per annum and secured by certain of the Company's computer equipment and furniture and fixtures. At December 31, 2000, no additional borrowings were available under the credit line. As of December 31, 2001 the Company had repaid all amounts outstanding. Interest expense is comprised primarily of interest related to the equipment lease line that was paid in full in 2001. 15. ACCRUED EXPENSES Accrued expenses consist of the following:
YEAR ENDED DECEMBER 31, ------------------------- 2000 2001 ----------- ----------- (RESTATED) Product and technology development................. $ 1,173,000 $ 3,182,000 Sales and marketing................................ 4,854,000 1,654,000 General and administrative......................... 3,548,000 6,090,000 Accrued fixed asset and intangible purchases....... 777,000 2,500,000 Acquisitions related expenses and earn-outs........ 5,039,000 672,000 Other.............................................. 210,000 1,014,000 ----------- ----------- $15,601,000 $15,112,000 =========== ===========
16. COMMITMENTS OPERATING LEASES The Company rents office space under non-cancelable lease agreements. The minimum annual rental commitments under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2001 are as follows:
YEAR ENDED DECEMBER 31 2002........................................................ $ 692,000 2003........................................................ 624,000 2004........................................................ 543,000 2005........................................................ 464,000 Thereafter.................................................. 79,000 ---------- Total....................................................... $2,402,000 ==========
Rent expense amounted to approximately $1,633,000, $7,177,000 and $5,657,000 for the years ended December 31, 1999, 2000 and 2001, respectively. 17. LETTERS OF CREDIT The Company has entered into several letter of credit arrangements with banks in connection with an office lease agreement, the KD Sistemas acquisition and the Gratis1 AT&T guarantee (see note 21). At December 31, 2000 and 2001, the amount of the letters of credit, in the aggregate, is $12,000,000 and $162,000, respectively, which are fully secured by an equal amount of cash that is restricted as to its use and included in non-current other assets. F-23 18. RETIREMENT PLAN The Company has a 401(k) plan that covers its eligible domestic employees. The plan does not require a matching contribution by the Company. 19. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION For the year ended December 31, 2001, two advertisers, accounted for approximately 14% and 11% of the Company's total revenue, respectively. For the year ended December 31, 2000 and 1999, no single advertiser accounted for more than 10% of our total revenues. Geographical information is as follows:
1999 2000 2001 ------------------------- ------------------------- ------------------------- FIXED FIXED FIXED REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS ----------- ----------- ----------- ----------- ----------- ----------- (RESTATED) United States........ $12,477,000 $19,091,000 $29,362,000 $46,396,000 $13,047,000 $20,188,000 Latin America........ 7,612,000 4,069,000 22,958,000 9,173,000 10,327,000 4,996,000 ----------- ----------- ----------- ----------- ----------- ----------- Consolidated Totals............. $20,089,000 $23,160,000 $52,320,000 $55,569,000 $23,374,000 $25,184,000 =========== =========== =========== =========== =========== ===========
The Company's revenues are allocated to the country in which the invoice for the related service is generated. Although most invoices are issued to customers in the same country in which the invoice is generated, some or all of the related service may be delivered in or targeted to users in another country. 20. DUE FROM OFFICERS During the year ended December 31, 2000, the Company provided lines of credit to certain officers totaling $6,400,000, under which $4,600,000 was advanced to such officers. Such lines were non-recourse, bearing interest at rates ranging from 6.75% to 10.0% per annum. In January 2001, the lines of credit available to the Company's officers were increased to $12,400,000. During 2001, the Company had made loans to officers under such lines of credit totaling approximately $11,000,000. 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 then Chief Operating Officer. As a result of the termination of certain officer's employment and management's determination that the loans were unrealizable due to a reduction in value of the supporting collateral, the Company provided a full reserve and/or fully wrote-off the $11,500,000 plus $600,000 of interest outstanding as of June 30, 2001, which amount is included in restructuring and other charges (see Note 4). In connection with the termination of employment of the Company's former Chief Financial Officer, Chief Operating Officer and Senior Vice President of Global Sales, the Company terminated the lines of credit provided to them and completely discharged all amounts owed there under. For the termination of the former Chief Financial Officer's line of credit, 326,000 shares of the Company's common stock was returned to the Company. Loans to other officers continue to be outstanding. 21. RELATED PARTIES 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 F-24 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 $2,500,000 and the investment was written-off. J.P. Morgan Partners (SBIC) LLC (formerly Chase Equity Associates), The Flatiron Fund 2000 LLC and the Flatiron Associates II LLC (the "Lenders") purchased debt securities from G1 in an aggregate amount of $17,300,000. Approximately $10,300,000 of such securities was 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 its common stock with a market value of approximately $4,500,000 to the Lenders pursuant to the guaranty of $7,000,000 of such securities. In connection with the remaining $3,300,000 guaranty, the Company issued an additional 1,148,435 shares of its common stock in September 2001, valued at approximately $3,400,000, representing the final settlement of this obligation plus accrued interest. With respect to the $7,000,000 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. 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 $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 December 31, 2001, the Company recognized an expense of $1,800,000 related to the guaranty. During 2000, the Company generated approximately $2,600,000 of advertising revenue and $1,400,000 of software and consulting services revenue from G1. BELLSOUTH In May 2001, the Company entered into an agreement with BellSouth to create multi-access portals in Latin America (the "BellSouth Strategic Agreement"). Under the terms of the five-year agreement, the Company will design and service the multi-access portals and mobile applications and provide content, software application integration and support to BellSouth's operating companies in Latin America. BellSouth will supply wireless communications, marketing of services and billing capabilities. The two companies will share revenues generated by the new multi-access portals. All revenues associated with design and maintenance activities and the technology licenses are being recognized ratably over the life of the agreement, while the user fees and transaction revenues are being recognized when the services are rendered. For the year ended December 31, 2001, the Company recognized $551,000 in revenue, net of amortization for warrants, in connection with the BellSouth Strategic Agreement. ABOUT.COM, INC. In June 2001, the Company entered into a five-year agreement with About.com to create a jointly operated co-branded website, within the About.com website. About.com granted the Company certain worldwide license rights to use its content and proprietary technology in exchange for $2,000,000 in cash and $3,000,000 in shares of the Company's common stock. As of December 31, 2001, $2,000,000 of F-25 such shares has been issued and $1,000,000 remains in common stock issuable. The aggregate purchase price of $5,000,000 was allocated to intangible assets ($3,500,000), pre-paid maintenance ($700,000) and pre-paid advertising expenses ($800,000). During December 2001, the Company wrote-off the unamortized balance of approximately $3,100,000 of the amount allocated to intangible assets and approximately $600,000 of the amount allocated to pre-paid maintenance as part of the realignment and change in business strategy the Company implemented. The advertising expenses of $800,000 were fully rendered during the period ended December 31, 2001. TERMINATION AGREEMENTS In August 2001, the Company entered into separation and release agreements with Messrs. Jack C. Chen, the Company's former President and Vice Chairman of the Company's Board of Directors, and Fernando J. Espuelas, the Company's former Chief Executive Officer, under which each ceased his employment with the Company. Each of these separation and release agreements superceded each executive's respective employment agreement with the Company. Under the agreements, (i) each executive was entitled to a one time payment of $650,000, which was paid to the executives in August 2001, and to payment of medical and dental premiums through February 2003, (ii) the Line of Credit provided to each executive under certain agreements dated December 28, 2000 (as amended on January 31, 2001) remained in full force and effect in accordance with its terms, and (iii) in the case of Mr. Chen, he received limited administrative support through December 31, 2001. Even though each executive's Line of Credit remained intact under the agreement, each executive agreed not to draw down any additional amounts there under. Mr. Espuelas agreed to remain the Chairman of the Company's Board of Directors, until November 15, 2001, at which time he resigned from such position, remaining thereafter as a director of the Company until July 1, 2002, at which time he resigned. In October 2001, the Company entered into a separation and release agreement with Mr. Steven J. Heller, the Company's Chief Financial Officer, under which Mr. Heller ceased his employment with the Company on November 15, 2001. Under the agreement, the executive's employment agreement expired and became null and void. Under the agreement, the Company agreed to terminate the Line of Credit provided to the executive under a letter agreement dated December 28, 2000, and completely discharged all amounts owed there under, and in consideration for such termination of the Line of Credit, the executive agreed to deliver to the Company 326,000 shares of the Company's common stock which has been accounted for as treasury stock using the value on the date the agreement was finalized of $114,000. In addition, the executive is entitled to a one-time payment of $350,000, which was paid to him in November 2001. On April 19, 2002 the Company and Enrique Narciso entered into an agreement (the "Narciso Separation Agreement") setting out the terms on conditions of Mr. Narciso's resignation as CEO, President and director of the Company. Under the Narciso Separation Agreement, the Company paid Mr. Narciso $75,000 and agreed to provide continued health insurance coverage for one year in consideration for Mr. Narciso's cooperation in transitioning to a new management team and contacting existing customers and vendors of the Company in order to facilitate the transition. TRANSACTIONS WITH FORMER SHAREHOLDERS OF ADNET In connection with the Company's purchase of AdNet from Grupo MVS S.A. de C.V. ("Grupo MVS") and Harry Moller Publicidad S.A. de C.V. ("HMP") in April 2000 Grupo MVS and HMP were paid in part with shares of the Company's common stock, and thereby became shareholders of the Company. In addition, under the AdNet purchase agreement, each of Grupo MVS and HMP entered into long-term services agreements with AdNet pursuant to which each of them would provide to AdNet certain advertising and promotional services in consideration for fees to be mutually agreed, subject to agreed parameters. It was further contemplated under the AdNet purchase agreement that F-26 Grupo MVS and HMP would act as agents of AdNet in selling advertising. The revenues and expenses of the Company from this arrangement were restated and, as restated, are not material. In addition, in December 2000 SMN de Mexico, S.A. de C.V. entered into arrangements with Grupo MVS and HMP that were similar to those already in place with AdNet. The revenues and expenses of the Company associated with these arrangements were restated in their entirety, and the Company's restated financial statements reflect no such revenues or expenses. (SEE Note 10.) 22. LITIGATION 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, 2002 and June 30, 2002 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 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 F-27 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 $1.4 million. In addition, for over a year the Company has engaged in periodic discussions with AT&T regarding the Company's alleged commitments to purchase a variety of services from AT&T, and in April 2002 had received correspondence from AT&T alleging that approximately $1.1 million 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. The Company's estimate of such settlement has been provided for in the accompanying financial statements. 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. On January 2002 Mr. Carlos Ponce filed a claim in U.S. District Court in the Southern District Court of Florida in connection with allegations by Mr. Ponce that the Company exceeded the scope of a license to use his image in connection with an advertising campaign. Mr. Ponce claims violations of common law and statutory rights of publicity under Florida law, unfair business practices, misappropriation, and also asserts claims under the Lanham Act. Mr. Ponce seeks damages allegedly in excess of $1 million, 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 F-28 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 $4.25 million 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 $1.7 million. The Company denied any obligation to make such payment and asserted counterclaims against Mr. Macedonia. Mr. Macedonia's employment with the Company terminated in November 2001. The arbitration hearing was concluded in March 2002. In May 2002 the arbitrator issued a final judgment denying Mr. Macedonia's claims, as well as the Company's counterclaims. In December 2000, a consulting company filed suit against the Company in the New York Supreme Court claiming unpaid fees of approximately $2.3 million. In October 2001, pursuant to a Settlement Agreement, the Company and the consulting company agreed to settle the lawsuit. The Company agreed to pay the consulting company an amount within the range that the Company had previously reserved for such lawsuit in its financial statements. The suit was settled for an amount not material to the Company. The Company has paid such amount and such lawsuit has been dismissed with prejudice. The Company is subject to legal proceedings and claims in the ordinary course of business from time to time, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with our e-mail, message boards and other communications and community features, such as claims alleging defamation and invasion of privacy. The Company intends to vigorously defend the aforementioned claims that are threatened or pending against it but believes that an adverse outcome with respect to one or more of these matters could have a material adverse effect on the financial condition of the Company. 23. SUBSEQUENT EVENT--UNAUDITED 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 recognize a loss of approximately $500,000 from the aforementioned sale. The assets sold comprised substantially of fixed assets and intangible assets. As part of the terms of the sale to Eresmas, the Company has agreed to cease using the "StarMedia" brand commercially and, subject to shareholder approval, to amend its certificate of incorporation to change its name. Since the sale, the Company operates commercially under the name "CycleLogic." F-29 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS STARMEDIA NETWORK, INC.
CHARGED TO BALANCE AT CHARGED TO OTHER BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD - ----------- ---------- ----------- ---------- ------------ ------------- YEAR ENDED DECEMBER 31, 2001 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts........ $1,849,000 $12,669,000 $ -- $10,065,000 $4,453,000 YEAR ENDED DECEMBER 31, 2000 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts........ $ 458,000 $ 6,687,000 $ -- $ 5,296,000 $1,849,000 YEAR ENDED DECEMBER 31, 1999 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts........ $ 65,000 $ 393,000 $ -- $ -- $ 458,000
F-30 EX-10.35 3 a2084088zex-10_35.txt EX 10.35 Exhibit 10.35 April 19, 2002 I, Enrique Narciso hereby tender my resignation as an officer and director of StarMedia Network, Inc. Such resignation shall be effective immediately. In connection with my resignation, the Company and I have agreed as follows: o The Company shall provide me with a lump sum cash payment of $75,000, less legally required deductions. Such payment shall be deposited with a mutually acceptable escrow agent no later than close of business April 23, 2002. Provided that I have otherwise complied with the terms and conditions set forth below, such amount shall be delivered to me by such escrow agent no later than April 29, 2002. o I will retain possession of my laptop computer (provided that not later than April 23, 2002 I will provide the laptop to the Company for the purposes of making a copy of its hard drive and will certify in writing that I have not deleted any files therefrom since April 18, 2002). o The Company will continue to pay for the health insurance coverage currently being provided to me by the Company for a period of twelve (12) months, which twelve (12) month period shall end on April 30, 2003. o The Company will allow me to use the Company cell phone and cell service through May 31, 2002. o The Company will allow me to remove all my personal possessions from the Company. o The Company and I agree that neither party nor the Company's officers or directors will make any disparaging statements about the other. o I will cooperate with the Company in its transition to a new management team, including but not limited to, contacting current customers and venders of the Company and providing such other assistance as the Company's President and/or COO may reasonably request in connection with the transition. o The Company and I will enter into a customary mutual release with respect to all obligations between the parties other than the enforcement of the terms described herein. o The Company will continue to provide me D&O insurance as described in my employment agreement. o I will cooperate with the Company related to any third party action against the Company. The Company will pay for any expenses I incur related to such cooperation, including but not limited to, reasonable attorney fees and costs. In the event that I am contacted by any third party to provide information about the Company in connection with a threatened or pending investigation, claim or lawsuit against the Company, I will promptly advise the Company of the details of such contact and will not cooperate with such party except to the extent otherwise required by law. The parties agree to enter into and execute, no later than April 23, 2002, definitive agreements reflecting the foregoing and such other customary terms and conditions as the parties may agree. However, the above terms and conditions shall be binding upon the parties until such time as the definitive agreements are prepared and executed. I further acknowledge and agree that the Company intends to file on Form 8-K information about my resignation substantially in the form attached hereto. If the foregoing comports with your understanding, please execute this letter in the space provided below and return a copy to my attention. Sincerely, /s/ Enrique Narciso Enrique Narciso Agreed to and accepted this 19 day of April, 2002 StarMedia Network, Inc. By: /s/ Michael Hartman -------------------- Print Name: Michael Hartman Title: General Counsel EX-10.36 4 a2084088zex-10_36.txt EXHIBIT 10.36 Exhibit 10.36 OFFICE LEASE This Lease is made this __ day of November __, 2000 by and between UCCELLO IMMOBILIEN GMBH, a German corporation, represented by its agent WELSH COMPANIES, SE., INC., a Florida corporation ("Landlord") and STARMEDIA NETWORK, INC., a New York corporation, with corporate headquarters at 75 Varick Street, New York, New York 10013 ("Tenant"). WITNESSETH: 1. BASIC LEASE PROVISIONS:
1.1. PROJECT: "Legal Description" SEE SCHEDULE I ------- -------------- The Project includes: An office building ("Building"), a parking garage, and/or surface parking lot, the land and other improvements within the Project boundaries Address: 999 Brickell Avenue, Miami, Florida 33131 Unit/Suite No.: 900 and 808 Floor: 9th and 8th Guaranty of Lease: INTENTIONALLY OMITTED Rules and Regulations: SEE SCHEDULE III
Landlord may change the Building and/or Project name and/or address without notice to or consent of Tenant, subject to the terms of Section 3.2 below. 1.2. AREA OF PREMISES: Approximately 13,511 rentable square feet, as reflected on the floor plans attached hereto as composite Exhibit "A" ("Premises"), subject to re-measurement by Landlord's architect pursuant to BOMA standard, upon completion of the Tenant Improvements under paragraph 1.15 below and as provided in paragraph 1.19. below, and including a Building common area factor of 1.175. The Premises as so remeasured shall thereafter not be subject to dispute. The rentable area of the Premises includes a corridor in suite 808, which is crosshatched on Exhibit "A" of approximately 235 rentable square feet. Tenant obligations to pay Base Rent and Building Operating Expenses under this Lease shall exclude this corridor and shall be based on approximately 13,276 rentable square feet, as adjusted upon re-measurement under this paragraph 1.2. In the event of a change of the rentable area of the Premises as a result of this remeasurement, all lease provisions relating to measurements of the Premises and the parties' rights and obligations resulting therefrom shall be adjusted accordingly, including but not limited to Tenant's obligation to pay Rent and Tenant's Percentage Share as defined herein. 1.2.1 SATELLITE DISH ANTENNA; SHAFT USE. --------------------------------- A. RIGHT TO USE. Tenant shall have the right during the term hereof, at Tenant's sole cost and expense, to install and operate two (2) satellite dish antennae on the roof of the Building per the attached plan of the intended installation (Exhibit "A1"), subject to space availability and provided there is no interference with existing equipment. The installation of such antennae shall be subject to Landlord's prior written approval of all technical and construction plans and specifications, which approval shall not be unreasonably withheld or delayed. Tenant shall obtain all governmental approvals and permits and shall comply with all applicable codes, laws and regulations, and specifically all applicable FCC regulations and requirements in connection with the installation and operation of said equipment. Tenant agrees to remove all equipment so installed upon termination of the Lease and agrees to restore the Building, including but not limited to the affected roof area, to its original condition. Tenant shall be responsible for all damages caused to the Building and/or Landlord's property or that of other tenants as a result of the installation, maintenance or removal of the equipment. Tenant agrees that access to the satellite dish antenna shall be provided by Landlord's maintenance staff at the Building during regular working hours and upon call for, emergency purposes. Landlord shall provide access to the building risers, shafts and common areas as necessary for the installation and maintenance of fiber optics, telecom, data cabling, and other related equipment to the Premises as well as for Tenant's Satellite Dish Antenna. B. MISCELLANEOUS. Tenant will at all times maintain comprehensive general and commercial liability insurance for its equipment and its operation. If it is determined in the future that any health hazard may result from the operation of this equipment, or if any governmental agencies determine new regulations for such installations, then Tenant agrees to comply immediately 2 or remove the equipment, without terminating the Lease and/or its Right To Use under this Paragraph, until such non-complying condition is remedied. Tenant shall be liable for all claims which may arise out of the installation and operation of its equipment. 1.2.2. ELEVATOR ACCESS CONTROL. Landlord, subject to Landlord's review of the proposed system and provided all zoning and governmental regulations are complied with, shall permit Tenant to install a controlled access system for the 9th floor. 1.3. TENANT'S PERCENTAGE SHARE. 14.04%. Tenant's' Percentage Share shall be adjusted if the rentable area of the Building or the Project is increased or decreased. 1.4. COMMENCEMENT DATE OF LEASE. On the Rent Commencement Date as defined in paragraph 1.6 below. 1.5. LEASE TERM/EXPIRATION DATE OF LEASE: The Lease Term ("Lease Term") shall commence on the Commencement Date and shall expire the last day of the 60th month after Rent Commencement Date ("Expiration Date"). 1.5.1. RENEWAL OPTIONS. Tenant shall have two (2) consecutive options (the "Renewal Options") to extend the Lease Term for consecutive periods of five (5) years each (the "First and Second Renewal Periods" respectively). The rental rate for each Renewal Period shall be equal to the prevailing market rent for properties similar to the Building in quality, size, location and use in Miami Florida on the date of the exercise of the Renewal Option, taking into account size and location of the Premises, any rent concessions, moving concessions, tenant allowances, and brokerage commissions prevailing in the market at such time, as well as Tenant's creditworthiness, length of the term, and extent of services provided or to be provided. Tenant shall exercise its option rights not later than one hundred eighty (180) days before the expiration date of the then current Lease Term. Landlord shall provide Tenant with its determination of the prevailing market rent within ten (10) days after receipt of Tenant's notice to exercise its Renewal Option. Tenant shall have twenty (20) days after receipt of Landlord's notice in which to notify Landlord of any objection thereto. In the event Tenant notifies Landlord of its objection to `the computation of such rental rate, then the parties shall negotiate in good faith for a period not to exceed thirty (30) days in order to come to agreement thereon. In the event the parties are unable to agree upon such rate within' such thirty (30) day period, then Tenant shall have the right, via written notice to Landlord within 10 days thereafter, to either revoke its exercise of the Renewal Option or to have the 3 matter submitted to arbitration as follows: Each party shall select at its sole cost and expense, within ten (10) days thereafter, an arbitrator with at least five (5) years of experience in the valuation of office buildings in the Miami area. Each such arbitrator shall submit its valuation of the prevailing market rental rate in accordance herewith within ten (10) days after selection, and if the valuations are within ten percent (10%) of each other, then the valuations shall be averaged together to arrive at the prevailing market rent of the Premises. In the event the valuations have a disparity greater than ten percent (10%), then the arbitrators shall select a third arbitrator, who shall submit his/her valuation in accordance with the foregoing within ten (10) days after selection. The two valuations which are the closest to each other shall then be averaged together to arrive at the prevailing market rate. The cost of the third arbitrator shall be shared by the parties. 1.5.2. RIGHT OF FIRST OFFER. If Tenant is not in default under the Lease beyond any grace or cure period, as may be applicable, Tenant shall have one time Right of First Offer to lease Suite 800, which is contiguous to Suite 808 and marked on Exhibit "A" and any part or all of the 7th floor space, and other space in the building ("Expansion Space"), during the Lease Term as the space becomes available, subject to any encumbrances which may exist at the time this Lease Agreement is signed or at the time the space becomes available, at Market Rent, as defined below. The Landlord shall offer such space to Tenant when it becomes available and Tenant shall exercise its right under this paragraph by giving written notice to Landlord of its exercise of this right and acceptance of Landlord's offer not later than twenty (20) days following its receipt of Landlord's offer. Expansion Space shall be deemed available when it is vacant and broom clean and not subject to any tenant rights other than Tenant's right herein. Upon exercise of Tenant's right under this paragraph, the parties shall execute an amendment to the Lease whereby the Expansion Space shall be included in the definition of the "Premises" under the Lease and shall be subject to the terms of Landlord's offer accepted by Tenant. If not accepted, Tenant's right under this paragraph shall terminate as to the offered space, except that, if Tenant does not exercise its right hereunder only because the. parties were unable to agree on the Market Rent, Tenant's right hereunder shall continue if Landlord markets the Expansion Space to third parties at less than 95% of the Market Rent offered to Tenant. Market Rent shall be defined as the rental rate which is equal to the' prevailing market rent for properties similar to the Building in quality, size, location and use in Miami Florida on the date of the exercise of the Right of First Offer, taking into account size and location of the Premises, any rent concessions, moving concessions, tenant allowances, and brokerage commissions prevailing in the market at such time, as well as Tenant's creditworthiness, 4 length of the term, and extent of services provided or to be provided. Tenant's Flight of First Offer shall be limited to a total area of Expansion Space of 31,638 square feet in the Building and shall automatically terminate when size has been reached. 1.6. RENT COMMENCEMENT DATE. On the Completion Date as defined in Paragraph 5.3.4 of the Building Standard Workletter attached as Exhibit "C" and pursuant to Landlord's written notice to Tenant that the Tenant Improvements as described in Paragraph 1.15 hereof have been substantially completed and that the Premises are ready for occupancy and that a permanent or temporary certificate of Occupancy or equivalent has been issued for the Premises by Miami-Dade County, with or without actual entry by Tenant subject to the adjustments provided in Paragraph V of Exhibit "C". The parties shall execute a Rent Commencement Date Certificate in the form attached as Exhibit "B." 1.7. RENT. From and after the Rent Commencement Date, and throughout the Lease Term, Term shall pay as Rent to Landlord. (1) Base Rent shall be $139,398.00 per year or $10.50 per rentable square foot per year, payable in equal monthly installments of $11,316.5 per month, during the first year of the Least Term and thereafter subject to annual adjustment as hereinafter provided. (2) Operating Expenses Rent in the amount of Taxes and Operating Expenses, as these terms are defined in paragraph 2 of this Lease, and payable pursuant to paragraph 6 of the Lease. Operating Expenses Rent is herein also called "CAM". The Common Area Maintenance (CAM) charge for the calendar year 2000 is estimated as $10.50 per rentable square foot. Rent is due on the first day of each calendar month at Landlord's address stated in this paragraph 1., together with all applicable sales and/or rent taxes thereon, without demand, deduction or setoff during the Lease Term. Any payments of sums required hereunder to be made to Landlord by Tenant, other than Rent as designated herein, shall be deemed Additional Rent, whether or not designated as such. The collection of Rent and Additional Rent may be enforced in the same manner permitted for the collection of Base Rent as allowed in the jurisdiction in which the Building is located. If the Lease Term commenced during a calendar month, Rent shall be prorated on a thirty (30) day basis for such month. 5 1.7.1. RENT ADJUSTMENT(S) DURING THE LEASE TERM FROM RENT COMMENCEMENT DATE:
ADJUSTED BASE RENT PER MONTHLY MONTHLY ADJUSTMENT MON. RENTABLE SQ. FT. BASE RENT CAM --------------- ---------------- --------- ------- 01-12 $10.50 $11,616.50 $11,616.50 (2000 est.) 13-24 $11 .50 $12,722.83 to be determ. 25-36 $12.50 $13,829.17 to be determ 37-48 $14.00 $15,488.67 to be determ 49-60 $15.50 $17,148.17 to be determ
Tenant's monthly Base Rent and CAM excluding sales tax/ charges during the calendar year 2000: $23,233.00.00 1.8. SECURITY DEPOSIT: $11,616.50 which is the amount of one (1) month of Base Rent and the amount of $11,616.50 which is the amount of one (1) month of estimated CAM charge for the calendar year 2000, excluding Florida Sales Taxes. The amount of the Security Deposit is due upon execution of this Lease together with the first month's Rent, including sales tax, in the total amount of $47,976.15. As an additional Security Deposit, Tenant shall provide to Landlord at the time of execution of this Lease a decreasing value standby irrevocable letter of credit ("LC"), confirmed by a reputable local US bank reasonably acceptable to Landlord in the amount of $100,000.00 and valid for the initial Lease Tern, and in compliance with any renewal requirements of the bank, as further security to ensure the financial obligations of Tenant under this Lease. The face amount of the LC shall automatically reduce by $20,000.00 to $80,000.00 on the 3rd anniversary of' the Lease Commencement Date and by an additional $20,000.00 to $60,000.00 on the 4th anniversary of the Lease Commencement Date. The LC shall be payable to Landlord. Tenant's failure to maintain the LC for the Lease Term shall be a material default under this Lease. In such event or any other event of default hereunder, which default is not cured within the applicable grace and/or cure period, Landlord shall be authorized to draw the full face amount of the LC (or such lesser amount as may be sufficient to remedy such default) by notice to the issuing bank that Tenant is in default (beyond any applicable grace and/or cure period) under this Lease and that Landlord requests payment to it of the face amount of the LC. Said notice does not have to be in a particular form, but shall be certified by an officer of Landlord or Landlord's managing agent. 6 1.9. PERMITTED USE: General Office. 1.10. TRADE NAME: N/A. 1.11. PARKING SPACES: Tenant shall be entitled to up to five (5) reserved parking spaces per 1,000 rentable square feet of leased Premises up to 10,000 and four (4) reserved spaces per 1,000 rentable square feet of leased Premises from 10,000 to 15,000 rentable square feet in the garage tower of the Building at a monthly charge of Sixty and 00/100 Dollars ($60.00) per space plus Florida sales tax and/or any other governmental charges, or in the basement of the Building at a monthly charge of Seventy and 00/100 Dollars ($70.00) per space plus Florida sales tax, and/or any other governmental charges. On any extension of the Lease, Landlord, at its option, may adjust the monthly charge to the then prevailing market rental. Additional parking is available subject to availability at market rates. 1.12. LATE CHARGES: The parties agree that late payment by Tenant to Landlord of Rent will cause Landlord to incur costs not contemplated by this Lease, the amount of which is extremely difficult to ascertain. Therefore, the parties agree that if any installment of Rent is not received by Landlord within ten (10) days after Rent is due, Tenant will pay to Landlord a sum equal to 5% of the monthly Rent as a late charge. In addition, all other charges due hereunder which are not paid when due shall bear interest from the due date until paid at the Default Rate. 1.13. CALCULATION OF OPERATING EXPENSE RENT: See paragraph 6. 1.14. GUARANTOR(S): Omitted. 1 .15. TENANT IMPROVEMENTS. 1.15.1 PREMISES. Landlord at its expense shall build out the Premises pursuant to the layout shown on the attached Exhibit "C(1)". The respective obligations, covenants and agreements of Landlord and Tenant to construct the Premises, including the division of responsibilities and procedures for design and construction and for payment of costs and expenses are more specifically set forth in Exhibit "C" (Building Standard Workletter). Landlord agrees to provide to Tenant a Tenant Improvement Allowance in an amount equal to the number of square feet of Net Useable Area within the Premises multiplied by $27.00 ("Tenant Improvement Allowance"), of which $2.00 per useable square foot shall be applied to architectural fees. 7 1.15.2 POSSESSION. Taking possession of all or any portion of the Premises by Tenant after Landlord's notice of the Rent Commencement Date shall be conclusive evidence as against Tenant that the Premises or such portion thereof are in satisfactory condition on such date of possession, subject only to any deficiencies listed in writing in a notice delivered by Tenant to Landlord not more than thirty (30) days after the Rent Commencement Date. 1.15.3 NET USEABLE AREA. Net Useable Area shall mean the total area within the Premises as measured from the interior surface of exterior walls, windows and doors to the mid-point of all interior demising walls, windows and doors, without deduction for columns or projections. For the purpose of this Lease, the Net Useable Area of the Premises shall be 11,299 useable square feet subject to adjustment by re-measurement as provided in paragraph 1.2. hereof. 1.15.4 SUPPLEMENTAL AIR CONDITIONING. Upon Landlord's review and written approval of Tenant's plans and at the same time as Landlord performs the Tenant improvements on the ninth (9th) floor Premises, Tenant may install supplemental air conditioning equipment on the ninth (9th) floor to cool Tenant's computer equipment on said floor. If Tenant is not intending to install such equipment at the time of its initial occupancy, then Tenant must later comply with Landlord's rules and regulations governing approval of such alteration, which approval shall not be unreasonably withheld or delayed. 1.15.5 EARLY ENTRY. Tenant shall be permitted to enter the Premises before the Commencement Date in order to prepare the Premises for occupancy, and install Tenant's workstations and cabling. Tenant's early entry shall be at Tenant's solo risk and subject to all the terms and provisions of this Lease as if the Commencement Date had occurred, except for the payment of Rent, as this term is defined in paragraph 1.7 below, which shall commence on the Commencement Date. Tenant, its agents, or employees will not interfere with or delay Landlord's completion of Landlord's work. All rights of Tenant hereunder will be subject to the requirements, of all applicable building codes, zoning requirements, and federal, state, and local laws, rules, and regulations, so as not to interfere with Landlord's compliance with all laws, including the obtaining of a certificate of occupancy for the Premises. Landlord has the right to impose additional conditions on the Tenant's early entry that Landlord, in its reasonable discretion, deems appropriate including, without limitation, indemnification of Landlord and proof of insurance, and will further have the right, to require that Tenant execute an early entry agreement containing those conditions prior to Tenant's early entry. 1.16. ADDRESS FOR PAYMENT/NOTICES. Address for payment of rent and notices, 8 which is subject to change by written notice to the other party at its then current address: Landlord: Tenant: Uccello Immobilien, GmbH StarMedia Network, Inc. c/o Welsh Companies, S.E. 999 Brickell Avenue 999 Brickell Ave., Suite 101 Suite 900 Miami, Florida 33131 Miami, Florida 33131 Tel. (305) 372-8828 Tel. (305) 374-0100 Fax (305) 372-9767 Fax (305) 374-8181 With copy to: StarMedia Network, Inc. Attn: General Counsel 75 Varick Street New York, New York 10013 1.17. BROKER: The Broker[s] [is] OR [are]: Welsh Companies, S.E., Inc. as Landlord's Broker, and The Langhorne Company as Tenant's Broker. Landlord will bear the cost of the commission payable to Brokers in connection with this Lease, if any. The commission payable to The Langhorne Company by the Landlord is 4% of the net Base Rent; payable by Tenant to Landlord for the initial term of the Lease, excluding any renewals or expansions, except that Landlord shall pay a commission of 4% of the net Base Rent on expansions that occur within 36 months of' the Lease Commencement Date. All commission payments are due upon Tenant's occupancy of the Premises. Landlord and Tenant warrant and represent to each other that they have not consulted or negotiated with any broker or finder with regard to the Premises or this Lease other than Brokers identified herein. If either party shall be in breach of the foregoing warranty, such party shall indemnify the other against any loss, liability and expense (including attorneys' fees and court costs) arising out of claims for fees or commissions from anyone having dealt with such party in breach. 1.18. BUILDING OPERATING HOURS: Current Building Operating Hours are from 7:00 a.m. to 7:00 p.m., Monday through Friday except on legal holidays. Upon Tenant's prior written request to be received by Landlord not later than by 5:00 p.m. on the preceding business day, Landlord will provide at no charge to Tenant HVAC services on Saturdays from 9:00 a.m. to 1:00 p.m., legal holidays excluded. The Building Operating Hours as set forth above shall not be reduced during the term of this Lease, as the same may be extended. 9 Tenant shall have 24 hour, 7 day a week, 365 day a year access to the Premises although during non-Building Operating Hours, Tenant may need to present a pass or comply with other reasonable rules and regulations. 1 .19. REDESIGN OF ELEVATOR LOBBIES: If Tenant does not exercise its Right of First Offer to lease Suite 800 pursuant to paragraph 1.5.2 hereof, Landlord reserves the right to redesign the elevator lobby by Landlord's architect on the eighth (8th) Building floor, in order to provide an enlarged new lobby design pursuant to Building standard, as outlined on the attached Exhibit "D." Such redesign will increase the lobby area by moving the frontage line of the Premises to the existing elevator lobby by approximately 3 to 4 feet into the area of the Premises as defined in paragraph 1.2 above. In such event, the rentable area of the Premises shall be adjusted and remeasured by Landlord's architect pursuant to B.O.M.A. standards and the Lease provisions and financial terms which are affected or determined by the measurements of the Premises shall be adjusted accordingly. Tenant hereby consents to the required construction work affecting the Premises. Landlord shall make diligent efforts to ensure that such work does not unreasonably interfere with Tenant's use of the Premises and provide Tenant with at least thirty (30) days of prior written notice of commencement of construction ("Redesign Commencement Date"). In said notice, Landlord shall specify the area of the Premises which must be made available by Tenant by the Redesign Commencement Date. The parties shall cooperate during the notice period to prepare for the redesign work in order to ensure that the Redesign Commencement Date is kept. Tenant acknowledges and agrees that the plans and specifications for Tenant's improvements and/or alterations to the Premises to be performed under the Lease shall duly consider the possibility of such redesign. 1.20. JANITORIAL SPECIFICATIONS. The following janitorial specifications shall apply to the Premises: Monday - Friday: Vacuum carpets and mop vinyl and tile floors Empty trash cans Clean bathroom fixtures, restock all paper and soap Mop bathroom floors Clean elevator and elevator lobby Weekly: Wipe down desks, glass walls and doors Monthly: Buff vinyl floors, kitchen floors Clean interior of building windows Clean air vents, dust furniture and filing cabinets 2. DEFINITIONS: Unless the context otherwise specifies or requires, the following 10 terms will have the meanings set forth below: 2.1. COMMON AREAS: All areas and facilities outside the Premises and within the exterior boundaries of the Project that are not leased to other tenants and that are provided and designated by Landlord, in its sole discretion from time to time, for the general use and convenience of Tenant and other tenants of the Project and their authorized representatives, invitees and the general public. Common Areas are areas within and outside of the Building in the Project, such as common entrances, lobbies, pedestrian walkways, patios, landscaped areas, sidewalks, service corridors, elevators, restrooms (other than those within any tenant's leased premises), stairways, decorative walls, plazas, loading areas, parking areas, and roads. 2.2. OPERATING EXPENSES: All costs of operating, servicing, administering, repairing and maintaining the Project (excluding costs paid directly by Tenant and other tenants in the Project or otherwise reimbursable to Landlord), the landscaping of Common Areas of the Project and the parking areas within the Project boundaries. Such costs include Taxes, as this term is defined in paragraph 2.5 below and any reasonable and necessary costs of operation, maintenance and repair, computed in accordance with generally accepted accounting principles applied on a consistent basis ("GAAP"), and will include, by way of illustration, but not limitation: (i) All costs of managing, operating and maintaining the Project, including, without limitation, management fees, wages, salaries, fringe benefits and payroll burden for employees utilized in the day to day operation of the Project; public liability, flood, windstorm property damage, rent loss, all risk and all other insurance premiums paid by Landlord with respect to the Project; water, sewer, heating, air conditioning, ventilating and all other utility charges (other than with respect to utilities separately metered and paid directly by Tenant or other tenants); the cost of contesting the validity or amount of real estate and personal property taxes; janitorial services; access control; window cleaning; elevator maintenance; fire detection and security devices and services; gardening and landscape maintenance; trash, rubbish, garbage and other refuse removal; pest control; painting; facade maintenance; lighting; exterior and partition (demising) wall repairs; roof repairs; maintenance of all steam, water and other water retention and discharging piping, lakes, culverts, fountains, pumps, weirs, lift stations, catch basins and other areas and facilities whether or not on-site; canal embankment and related maintenance repair and repainting of sidewalks and roads due to settlement and pothoIes and general resurfacing and maintenance of parking areas; sanitary control; 11 depreciation of machinery and equipment used in any of such maintenance and repair activities; management fees; road sidewalk and driveway maintenance; and all other Project maintenance, repairs and insurance. The controllable costs (all costs except Utilities, Taxes, and Insurance) will be capped at a 5% per year increase. (ii) The costs (amortized together with a reasonable finance charge in accordance with GAAP) of any capital improvements or investment items which are for the sole purpose of reducing (or minimizing increases of) Operating Costs or improving the security of the Building or are or may be required by Governmental agencies, including but not limited to improvements prescribed by the Americans wit Disabilities Act ("ADA") and other such mandated programs, which may occur from time to time. All such costs shall be amortized on a straight-line basis over the reasonable life of the capital investment item(s), determined in accordance with generally accepted accounting principles and in no event to extend beyond the reasonable life of the Building. (iii) The costs of all supplies, materials and equipment used in operation and/or maintenance of the Building and Land; Except as provided above, Operating Expenses shall not include: (a) Depreciation on the Project or any Common Areas; (b) costs of space planning, tenant improvements, marketing expenses, finders fees and real estate broker commissions; (c) any and all expenses for which Landlord is reimbursed (either by an insurer, condemnor or other person or entity), but only to the extent of such reimbursement, and any and all expenses for which Landlord is reimbursed or entitled to reimbursement by a tenant in the Project pursuant to a lease provision in such tenant's lease; (d) salaries for personnel above the grade of senior property manager, senior controller, senior accountant and senior engineer; (e) costs in connection with services or benefits of a type which are not provided to Tenant, but are provided to another tenant or occupant; (f) mark-ups on electricity and condenser cooling water for heat pumps in excess of Landlord's costs therefor; 12 (g) Landlord's general overhead and administrative expenses not directly allocable to the operation of the Project; (h) cost of repair or other work necessitated by the gross negligence or willful misconduct of Landlord or Landlord's employees contractors or agents; (1) Landlord's federal and state income taxes, inheritance taxes, gift taxes and similar taxes not directly attributable to the operation of the Building and the Project; (j) any costs or expenses incurred to bring the Building or any part thereof, and the property on which the Building is located, into compliance with applicable laws (including, without limitation, the Americans With Disabilities Act), or to remove or remediate hazardous materials and waste, except as provided in paragraphs 2.2(ii) hereof. 2.3 RENTABLE SQUARE FEET: The number of square feet of net rentabIe area as computed in accordance with BOMA standard as exists on the date of this Lease. 2.4 DEFAULT RATE: The lower of the maximum lawful rate of interest or 16%. 2.5 TAXES: All impositions, taxes, assessments (special or otherwise, water and sewer charges and rents, and other governmental liens or charge of any and every kind, nature and sort whatsoever, ordinary and extraordinary, foreseen and unforeseen, and substitute therefore including all taxes whatsoever (except only those taxes of the following categories: any inheritance, estate, transfer, or gift taxes imposed upon Landlord or any income taxes specifically payable by Landlord as a separate tax paying entity without regard to Landlord's income source as arising from or out of the Building and/or the land on which it is located) attributable in any manner to the Building and/or the Land (however the term may be defined) receivable therefrom or any part thereof, or any use thereof, or any facility located therein or thereon or used in conjunction therewith or any charge or other payment require to be paid to any governmental authority, whether or not any of the foregoing shall be designated "real estate tax", "sales tax", "rental tax", "excise tax", or "business tax" or designated in any other manner. 3. PREMISES: 13 3.1. LEASE OF PREMISES: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the agreements, covenants, conditions and provisions set forth in this Lease, to which Landlord and Tenant hereby mutually agree, the premises (the "Premises") described in paragraphs 1.1 and 1.2 above. 3.2. PROJECT: The Premises are a part of the office project (the "Project") described in paragraph 1. Landlord may increase, reduce or change the number, dimensions or locations of the walks, buildings, lobbies, parking and other Common Areas and other improvements located in the Project in any manner that Landlord, in its sole discretion shall deem proper. Landlord further reserves the right to make alterations and/or additions to and to build or cause to be built additional stories on the Building in which the Premises are situated and to add any buildings within the Project site. Landlord reserves the right to install, maintain, use, repair and replace, pipes, ducts, conduits and wires leading through the Premises and serving other parts of the Project in a manner that will not materially interfere with Tenant's use of the Premises. Landlord will also have the right to increase and expand the size of the Project and/or the Project site by adding additional land, buildings and other structures to the Project. Landlord shall have the right to grant easements for ingress, egress or other purposes within or across the Project or the Project site. Landlord shall have the right to change the Project's name without notice, to change the Project's street address upon 9 days prior notice, to grant to any person or entity the exclusive right to conduct any business or render any service in or to the Project, (provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purpose set forth in paragraph 1., to retain at all times master keys or passkeys to the Premises, and to place such signs, notices or displays as Landlord reasonably deems necessary or desirable upon the roof and exterior of the Project. Landlord shall not exercise its rights under this Section in sue manner as would reduce Tenant's allocable parking, affect in a material way Tenant's access, or increase Tenant's costs under this Lease, or reduce Landlord's services. 3.3. RELOCATION OF TENANT: [Intentionally Omitted] 4. COMMON AREAS: 4.1. TENANT'S RIGHT TO USE COMMON AREAS: Landlord grants Tenant and its authorized representatives and invitees the non-exclusive right to use the Common Areas with others who are entitled to use the Common Areas 14 subject to Landlord's rights as set forth in this Lease. 4.2. LANDLORD'S CONTROL: Landlord has the right to: (a) establish and enforce reasonable rules and regulations applicable to all tenants concerning the maintenance, management, use and operation of the Common Areas; (b) close, if necessary, any of the Common Areas to prevent dedication of any of the Common Areas or the accrual of any rights of any person or of the public to the Common Areas; (c) close temporarily any of the Common Areas for maintenance purposes; (d) select a person, firm or corporation which may be an entity related to Landlord to maintain, manage, and/or operate any of the Common Areas; and (e) designate other lands outside the exterior boundaries of the Project to become part of the Common Areas. Notwithstanding the provisions of this Subparagraph, in exercising its rights hereunder, Landlord will provide reasonable access to and from the Premises. 5. RENT: 5.1. BASE RENT: Tenant will pay to Landlord as rent for the use and occupancy of the Premises at the times and in the manner provided below, Base Rent in the amount specified in Paragraph 1 above payable in advance on the Commencement Date and on or before the first day of each and every successive calendar month during the term hereof without demand, setoff or deduction. 5.2. SALES TAX; ADDITIONAL RENT; DEFINITION OF RENT: In addition to the Base Rent, Tenant agrees to pay Landlord monthly all sales or use taxes or excise taxes imposed or levied by the State of Florida or any other governmental body or agency against any rent or any other charge or payment require hereunder to be made by Tenant to Landlord. All sums of money as shall become due and payable by Tenant to Landlord under this Lease, including but not limited to Base Rent, Operating Expenses Rent pursuant to paragraph 6 below and sales tax, shall be defined as and payable as Rent under this Lease which Tenant shall be obligated to pay. Landlord's remedies for default in the payment of additional Rent shall be the same as are available to Landlord in the case of a default in the payment of Base Rent. 15 5.3 PRORATION: If the Lease Term shall begin during a calendar month, then in order that the Base Rent, Operating Expenses Rent pursuant to Paragraph 6 below, and all related amounts described herein, may be placed on a calendar month basis, the amounts due for such portion of the particular calendar month shall be apportioned and paid on the basis of a month of thirty (30) days. 6. OPERATING EXPENSES: 6.1. OPERATING EXPENSES RENT: In addition to Base Rent, Tenant shall ay Tenant's Percentage Share, as specified in paragraph 1 above, of the Operating Expenses paid or incurred by Landlord in each year ("Operating Expenses Rent"). 6.2. Payment: Prior to the Commencement Date and thereafter during December of each calendar year or as soon thereafter as practicable, Landlord will give Tenant written notice of its estimate (line item and detailed support, included) of Operating Expenses Rent for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year, Tenant will pay to Landlord 1/12th of such estimated amounts, provided that if such notice is not given in December, Tenant will continue to pay on the basis of the prior year's estimate until the month after such notice is given. If at any time or times it appears to Landlord that the amounts payable for Operating Expenses Rent for the current calendar year will vary from its estimate by more than 10%, Landlord, by written notice to Tenant, will revise its estimate for such year, and subsequent payments by Tenant for such year will be in an amount so that by the end of such year Tenant will have paid a total sum equal to such revised estimate. Landlord will indicate in its notice to Tenant the reasons Landlord believes its estimate is low by more than 10%. Landlord agrees to maintain accounting books and record reflecting Operating Expenses of the Building and Land in accordance with generally accepted accounting principles. Within one hundred twenty (120) days following the end of each calendar year during the Term hereof, Landlord shall submit to Tenant statement showing the actual amount of Operating Expenses and Taxes or the past calendar year, the amount thereof actually paid during that year by Tenant and the amount of the resulting balance due thereon, or overpayment thereof, as the case may be. Within thirty (30) days after receipt by Tenant of said statement, Tenant shall have the right to inspect Landlord's books 16 and records, at Landlord's office, during normal business hours, after four (4) business days prior written notice, showing the Operating Expenses and Taxes for the Building for the calendar year covered by said statement. Said statement shall become final and conclusive unless Landlord receives written objections with respect thereto within said thirty (30) day period. Any balance shown to be due pursuant to said statement shall be paid by Tenant to Landlord within thirty (30) days following Tenant's receipt thereof. Any overpayment shall be credited against Tenant's obligation to pay expected Operating Expenses Rent, or if by reason of any termination of the Lease no such future obligation exists, refunded to Tenant. Anything herein to the contrary notwithstanding, Tenant shall not delay or withhold payment of any balance shown to be due pursuant to the statement rendered by Landlord to Tenant, pursuant to the terms hereof, because of any objection that Tenant may raise with respect thereto. The provisions of this paragraph hail survive the expiration or termination of this Lease. 6.3 PRORATION: If for any reason other than the default of Tenant this Lease terminates on a day other than the last day of a calendar year, th amount of Operating Expenses Rent payable by Tenant applicable to the calendar year in which such termination occurs will be prorated on the basis which the number of days from the commencement of such calendar year to and including such termination date bears to 365. 6.4 TAXES PAYABLE BY TENANT: Tenant shall be directly responsible for taxes upon, measured by, or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant other than the initial improvements to be installed at Landlord's expense regardless of whether title to such improvements is in Tenant or Landlord. 7. USE OF PREMISES: 7.1. EFFECT ON INSURANCE: Tenant shall not use any portion of the Premises for purposes other than those specified in paragraph 1 no other use shall be made or permitted to be made upon the Premises, nor acts done which will increase the existing rate of insurance upon the Project, or cause cancellation of insurance policies covering said Project, provided, however, that mere use in accordance with the permitted use shall not cause Tenant to be in violation hereof. 7.2. CONTINUOUS OPERATION: Tenant will not leave the Premises unoccupied or vacant and will continuously conduct and carry on in the Premises the type 17 of business for which the Premises are leased. Tenant shall not be in default hereof if the Premises is vacant or not continuously utilized for less than ninety (90) days, or is vacant or not continuously utilized pending Tenant's completion of its active efforts to sublease the Premises and/or assign the Lease, provided Tenant at all times continues to maintain the Premises and provides full access to the Premises to Landlord, and further provided that Tenant's failure to comply with its maintenance and access obligations during such period shall be an Event of Default pursuant to paragraph 21 hereof and entitles Landlord to all its default remedies under this ease. Notwithstanding Landlord's other rights and remedies under this Lease, Landlord may terminate the Lease or Tenant's right to possession and recapture the Premises effective upon ten (10) days prior written notice to Tenant, in the event Tenant has discontinued its operations on the Premises for more than ninety (90) days, and re-lease the Premises for Landlord's own account or on behalf of Tenant. 7.3. MISCELLANEOUS RESTRICTIONS: Tenant will operate from the Premises using the Trade Name set forth in paragraph 1, if any or any other trade name in lieu of such Trade Name which Tenant or any of its affiliates or any permitted sublessees or assignees may use. Tenant will not use the Premises for or permit in the Premises any offensive, noisy, or dangerous trade, business, manufacture or occupation or interfere with the business of any other tenant in the Project. Tenant agrees not to cause, permit or suffer any waste or damage, disfigurement or injury to the Premises or the fixtures or equipment thereof or the Common Areas. Tenant will not use the Premises for washing clothes or cooking and nothing will be prepared, manufactured or mixed in the Premises which might emit any offensive odor into the Project. Tenant will not obstruct the sidewalks or Common Areas in the Project or use the same for business operations or advertising. Tenant will not use the Premises for any purpose which would create unreasonable elevator loads, cause structural loads to be exceeded or adversely affect the mechanical, electrical, plumbing or other base building systems. Tenant will at all times comply with the Rules and Regulations of the Project attached hereto as Schedule III and with such additional rules and regulations as may be adopted by Landlord from time to time. Provided that said rules and regulations shall be enforced in a uniform and non-discriminatory manner. 8. PARKING: 8.1. TENANT'S PARKING RIGHTS: Subject to the rules and regulations of he Project, 18 Tenant shall be entitled to use of the Building's surface parking lot set forth in Paragraph 1 above. Only automobiles, motorcycles and pickup trucks will be permitted on the parking areas. 8.2. LANDLORD'S CONTROL OVER PARKING: Tenant and its authorized representatives shall park their cars only in the surface parking lot ("Designated Parking Areas") which are specifically designated for that purpose by Landlord. Within 5 days after written request by Landlord, Tenant will furnish to Landlord the license numbers assigned to its cars and the cars of all of its authorized representatives. If Tenant or its authorized representatives fails to park their cars in the Designated Parking Areas in compliance with this Lease, Landlord may charge Tenant as and for liquidated damages $45.00 per each day or partial day for each car parked in areas other than those designated. Tenant will not park or permit the parking of any vehicles adjacent to loading areas so as to interfere in any way with the use of such areas. Landlord shall have the right, in Landlord's sole discretion, to designate portions of or spaces in the Designated Parking Areas for the exclusive use of a particular tenant or particular tenants, but not in any manner which unreasonably discriminates against Tenant as to location. Landlord will have the right to institute reasonable procedures and/or methods to enforce the terms of this Subparagraph or otherwise regulate parking, including the use of a towing or booting service to tow or boot improperly parked vehicles. 8.3 The Designated Parking Areas are provided by Landlord as a convenience to Tenant only and not to Tenant's guests or visitors, except as expressly permitted in this Lease, and shall be used at the sole and exclusive risk of the Tenant. Landlord does not accept any responsibility for injury to any persons, damage or loss of any automobiles or other property, while in the parking facility and common and other areas of the Building, whether under the control of the Landlord or some third party. Landlord accepts no responsibility for the regulation of the parking area nor for persons who improperly park automobiles in spaces assigned to another tenant or operate automobiles in an improper manner. Landlord is under no obligation to provide a parking attendant, doorman or valet, and is under no obligation to provide security for automobiles parked in the Designated Parking Areas. 9. GRAPHICS: Landlord, at Tenant's sole cost and expense, will install and maintain all letters or numerals on the entrance doors for the Premises. All such letters and numerals shall be in the form specified by Landlord, and no other shall be used or permitted on the Premises. Tenant shall not place any signs within the Premises which are visible from the outside of the Premises without Landlord's prior written 19 approval. However, Tenant may install an exterior monument sign subject to code compliance and permitting, and subject to Landlord's review and prior written approval of Tenant's design and construction plans, which shall not be unreasonably denied or delayed. In the event that Tenant leases a total of 3 full floors at the Building within the initial Lease Term, Landlord agrees not to unreasonably withhold consent to Tenant's request for exterior Building signage rights in an area that will not conflict with signage rights which are inherent to the "bank" or "retail" space on the first four floors of the Building. Any exterior signage shall be constructed and installed at Tenant's cost and subject to Landlord's prior written approval of the design, location and installation. Tenant shall be responsible for all costs of maintenance and power consumption of all signs and shall at all times maintain such signs in good condition and repair and in operation. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, demands, suits, or actions whatsoever which may arise as a result of the existence, maintenance and operation of such signs. Upon termination or expiration of the Lease, Tenant shall, at its cost, remove all signs an restore the area of their installation to the original condition, ordinary wear and tear excepted. 10. ASSIGNMENT AND SUBLETTING; ENCUMBRANCE: 10.1 NO TRANSFERS. Tenant shall not assign this Lease or sublet any portion of the Premises without prior written consent of the Landlord, which Landlord shall not unreasonably withhold or delay. Any change in the ownership of Tenant, if Tenant is a corporation or partnership, shall constitute an assignment for purposes of this paragraph, except as herein provided. Notwithstanding any consent by Landlord, Tenant and Guarantor(s), if any, shall remain jointly and severally liable (along with each approved assignee and sublessee, which shall automatically become liable for all obligations of Tenant hereunder with respect to that portion of the remises so transferred), and Landlord shall be permitted to enforce the provisions of this Lease directly against Tenant or any assignee or sublessee without proceeding in any way against any other party. In the vent of an assignment, contemporaneously with the granting of Landlord's consent, Tenant shall cause the assignee to expressly assume in writing and agree to perform all of the covenants, duties and obligations of Tenant hereunder and such assignee shall be jointly and severally liable therefor along with Tenant (but any assignee who does not expressly assume such obligations in writing shall nevertheless be deemed to have assumed such obligations by 20 acceptance of any such assignment). No usage of the Premises different from the usage provided for in paragraph 1 above shall be permitted, and all other terms and provisions of the Lease shall continue to apply after such assignment or sublease. Tenant shall not make or consent to any conditional, contingent or deferred assignment of some or all of Tenant's interest in this Lease without the prior written consent of Landlord, which Landlord may unreasonably withhold in its sole and absolute discretion. Tenant shall not enter into, execute or deliver any financing or security agreement that can be given priority over any mortgage given by Landlord or its successors, and, in the event Tenant does so execute or deliver such financing or security agreement, such action on the part of Tenant shall be considered a breach of the terms and conditions of this Lease and a default by Tenant entitling Landlord to such remedies as are provided for in this Lease. In the event of any assignment or sublease (other than permitted assignments and sublettings as hereinafter provided), Tenant shall pay to Landlord 50% of any "Transfer Premium" received by Tenant in connection therewith. As used herein, "Transfer Premium" shall mean all payments required to be paid by the assignee or sublessee in excess of the Base Rental, Operating Expenses and other amounts due from Tenant hereunder. If Tenant provides notice and has authorization to assign or sublet the lease, Tenant shall pay all legal and administrative costs related to such assignment or sublease, including the cost to redraft the lease document, and to process any consent. Landlord's consent shall be given or refused within thirty (30) days after Tenant's submission to Landlord of the proposed assignment or sublease together with all information about the proposed transferee which is reasonably requested by Landlord. Landlord's consent shall be deemed given if not refused within such thirty (30) day period. 10.2 RIGHT OF RECAPTURE. Notwithstanding anything contained in 10.1 to the contrary, in the event Tenant desires to assign or sublet or seek permission for any assignment or subletting of all or any portion of the Premises, then Landlord shall have the right of recapture or of first refusal, as applicable, with respect to said space, and shall have the right, by notice to Tenant, to either recapture or to receive an assignment of the Lease or a sublease of the Premises on the same terms and conditions as the terms and conditions of the assignment or subletting proposed by Tenant. In the event Landlord should decide to exercise its rights pursuant to this paragraph, Landlord shall give to Tenant written notice exercising its right of first refusal herein contained within ten (10) business days from the date of Tenant's written notice to Landlord or written application to Landlord for consent to the assignment or subletting, in which event, in the case of a recapture, the Lease shall terminate, and in the case of an assignment or full subletting, Tenant shall be released from all obligations, rights and liabilities from and 21 after the recapture date. In the event Landlord does not give such written notice within the ten (10) day period specified, then Landlord's right of first refusal herein contained shall be null and void, and of no further force and effect as to the space covered by the proposed assignment or sublease only. However, nothing contained herein shall in any way constitute an approval of the assignment or subletting by Landlord, nor shall anything herein contained be construed to impair, hinder or otherwise modify the required approval of Landlord as provided herein to any such assignment or subletting. The recapture date shall be the date as of which tenant intends to assign or sublease or the commencement date of the proposed assignment or sublease, as applicable. 10.3 PERMITTED ASSIGNMENTS AND SUBLETTINGS. Tenant shall have the right, without Landlord's consent, to assign this Lease or sublease all or a portion of the Premises to any entity controlled by Tenant or which control Tenant, or which is under common control with Tenant, as well as any entity with which Tenant is merged or consolidated, or any entity which succeeds to Tenant's business by way of sale of all or substantially all of Tenant's stock or assets (or all or substantially all of Tenant's business at the Premises). In addition, since Tenant is a public company traded on a recognized exchange, the transfer of the shares of Tenant shall not be deemed an assignment of this Lease. Lastly, Tenant shall have the right, without Landlord's consent, to sublease up to one-half (1/2) of the Premises to another internet, wireless or computer related company, provided that Tenant or its affiliates remain in occupancy of the Premises. The transactions set forth in this paragraph are referred to as permitted assignments and sublettings. The provisions of 10.1 and 10.2 shall not apply to the permitted assignments and sublettings under this subparagraph 10.3. 10.4 LANDLORD TRANSFERS. Landlord shall have the right to assign or transfer, in whole or in part, Landlord's rights and obligations hereunder and in the Project and the Premises and subsequent to any such assignment Landlord shall have no further obligations to Tenant. 11. ORDINANCES AND STATUTES: At Tenant's sole cost, Tenant will comply with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, occasioned by or affecting the use thereof by Tenant, (not its mere use as office space) including, but not limited to the Americans With Disabilities Act, to the extent Tenant makes any alterations to the Premises following the Commencement Date. The commencement or pendency of any state or federal court abatement proceeding affecting the use of the Premises against Tenant shall, at the option of the Landlord, be deemed an Event of Default pursuant to paragraph 21 of this Lease. Further, Tenant agrees to comply with the Building Rules and Regulations 22 and such other nondiscriminatory rules as are published from time to time by Landlord for the operation of the building and the facility serving it. The current Building Rules and Regulations in effect as of the date of this Lease are attached hereto as Schedule III. 12. MAINTENANCE, REPAIRS, ALTERATIONS: 12.1 TENANT'S OBLIGATIONS: Tenant acknowledges that the Premises are in good order and repair, unless otherwise indicated herein. Tenant shall, at its own expense and at all times, maintain the Premises in good and safe condition and shall surrender the same, at termination hereof, in as good condition as received, normal wear and tear excepted. Tenant shall promptly repair any damage done to the Premises and to the Building, or any art thereof, including replacement of damaged portions items, caused by Tenant or Tenant's agent, contractors, subcontractors, employees, invitees, or visitors. All such work or repairs by Tenant shall be effected in compliance will all applicable laws. If Tenant fails to make such repairs or replacements promptly, Landlord many, at its option, make the repairs or replacements, and Tenant shall pay the cost thereof to the Landlord within ten (10) days of Landlord's demand therefor. Tenant shall not make or allow to be made any alteration to or install any vending machines on the Premises without the prior written consent of the Landlord, except as permitted in the Building Rules and Regulations attached hereto. Any and all alterations to the Premises shall become the property of Landlord upon termination of this Lease (except movable equipment or furniture owned by the Tenant). Landlord may, nonetheless, require Tenant to remove any and all fixtures, equipment and other improvements installed on the Premises by giving notice to Tenant of such requirement at the time it approves such alteration. lf Tenant fails to do so, Landlord may remove the same and Tenant agrees to pay Landlord on demand the cost of making repairs to the premises caused by such removal. Tenant shall not use or permit the use of the Premises for the generation, storage, treatment, use, transportation or disposal of any chemical, material, or substance which is regulated as toxic or hazardous or exposure to which is prohibited, limited, or regulated by any federal, state, county, regional, local, or other governmental authority or which, even if not so regulated, may or could pose a hazard to the health and safety of the other tenants and occupants of the Landlord's property or adjacent property. If any such chemical, material, or substance is used upon the Premises in the ordinary course of Tenant's permitted business, Tenant shall not use such chemical, material, or substance in hazardous manner. In the event of any use in violation of this provision Tenant will remove, or cause to be removed, such material at its own expense and will indemnify Landlord for any loss or expense, including reasonable attorney 23 fees, it suffers as a result of the violation. Tenant's liability for such indemnification is not limited by any exculpatory provision in this Lease, and shall survive any expiration, cancellation, or termination of this lease or transfer of Landlord's interest in the Premises. 12.2 LIMITS ON ALTERATIONS: Tenant may not make any structural improvement or alteration to the Premises or which may affect building systems without the prior written consent of Landlord. Prior to the commencement of any repair, improvement, or alteration, Tenant shall give Landlord at least 2 days written notice. All alterations will be made by a licensed contractor consented to by Landlord (in the exercise of its reasonable discretion) and performed in a good and workmanlike manner. All materials shall be of a quality comparable to or better than those in the Premises and shall be in accordance with plans and specifications approved by Landlord. Landlord may condition its consent to any improvements or alterations upon Tenant's obtaining such lien releases, waivers, bonds, and insurance as Landlord shall require. 12.3 LIENS: Tenant will pay all costs of construction done by it or caused to be done by it on the Premises as permitted by this Lease. Tenant will keep the Project free and clear of all construction, mechanic's, materialman's, laborer's and supplier's liens, resulting from construction done by or for Tenant. The interest of Landlord in the Premises and the Project shall not be subject to liens for improvements made by Tenant. Any lien filed by any contractor, materialman, laborer or supplier performing work for Tenant shall attach only to Tenant's interest in the Premises. Tenant agrees to indemnify, defend (by counsel reasonably acceptable to Landlord) and hold harmless Landlord from and against any and all costs and liabilities and any and all mechanic's, materialman's or laborer's liens arising out of or pertaining to any improvements or construction done by Tenant. All persons and entities contracting or otherwise dealing with Tenant relative to the Premises or the Project are hereby placed on notice of the provisions of this paragraph, and Tenant shall further notify in writing such persons or entities of the provisions of this paragraph prior to commencement of any Tenant work in the Premises. If any construction, mechanic's, materialman's or laborer's lien is ever claimed, fixed or asserted against the Premises or any other portion of the Project in connection with any such Tenant work, Tenant shall, within thirty (30) days after receipt by Tenant of notice of such lien, discharge same as a lien either by payment or by posting of any bond as permitted by law. If Tenant shall fail to discharge any such lien, whether valid or not, within ten (10) days after receipt of notice from Landlord, Landlord shall have the right, but not the obligation, to discharge such lien on behalf of Tenant and all costs and expenses incurred by 24 Landlord associated with the discharge of the lien, including without limitation, attorneys' fees, shall constitute additional rent hereunder and shall be immediately due and payable by Tenant. Landlord, at its option may record a Notice of Lease pursuant to F.S 718.01. 12.4. SURRENDER OF PREMISES: On the last day of the term hereof or on any sooner termination, Tenant shall surrender the Premises to Landlord in the same condition as when received, ordinary wear and tear excepted, clear and free of debris. Tenant shall repair any damage to the Premises occasioned by the installation or removal of Tenant's trade fixtures, furnishings and equipment. 12.5. LANDLORD'S OBLIGATIONS: Landlord shall maintain as part of Operating Expenses all structural elements of the Building, the Building's HVAC and other Building systems, including without limitation, the elevator plumbing, electrical, heating and air conditioning systems and equipment in and/or serving the Premises, as well as the common and parking areas of the Project, all in a in a manner consistent with similar Brickell Avenue office buildings. 13. ENTRY AND INSPECTION: Tenant shall permit Landlord or Landlord's agents to enter upon the Premises at reasonable times and upon reasonable notification for the purpose of inspecting the same, performing any services required of Landlord hereunder and showing the Premises to potential and existing mortgagees and purchasers and prospective tenants of other space in the Project. The foregoing notwithstanding, Landlord is not required to give notice to Tenant if Landlord must enter the Premises because of an emergency or to perform janitorial and other services. Tenant will permit Landlord at any time within 180 days prior to the expiration of this Lease, to show the Premises and permit potential tenants to inspect the Premises. 14. INDEMNIFICATION OF LANDLORD: Subject to paragraph 16.8 below, Tenant will indemnify, defend (by counsel reasonably acceptable to Landlord which is deemed to include counsel furnished by Tenant's liability insurer in accordance with this Lease), protect and hold Landlord harmless from and against any and all claims, demands, losses, damages, costs and expenses (including reasonable attorney's fees) or death of or injury to any person or damage to any property whatsoever arising out of or relating to Tenant's breach or default under this Lease, including, but not limited to Tenant's breach of paragraph 21 below or Tenant's use or occupancy of the Premises or caused by Tenant or its agents, employees or invitees. Landlord shall not be liable to Tenant for any damage by or from any act or negligence of any co-tenant or other occupant of the Project or by any owner or occupant of adjoining or contiguous property or by any defect in or failure to 25 maintain the Project or the Premises. Tenant agrees to pay for all damage to the Project as well as all damage to tenants or occupants thereof caused by misuse or neglect of said Premises, its apparatus or appurtenances or the Common Areas, by Tenant or Tenant's employees, agents and invitees. Landlord agrees to indemnify Tenant from any claims, demands, losses, damages, costs and expenses (including reasonable attorney's fees) incurred by Tenant as a result of the negligence or willful acts of Landlord, its agents, employees or contractors. 15. POSSESSION: If Landlord is unable to deliver possession of the Premises at the commencement hereof, Landlord shall not be liable for any damage caused thereby, nor shall this Lease be void or voidable, but Tenant shall not be liable for any rent until the Rent Commencement Date, at which time the term shall commence and the Expiration Date shall be extended so as to give effect to the full stated term. 16. TENANT'S INSURANCE: At all times during the term of this Lease, Tenant shall, at its sole expense, procure and maintain the following types of insurance overage: 16.1 GENERAL LIABILITY: Commercial general liability insurance against any and all damages and liability including attorneys' fees on account or arising out of injuries to or the death of any person or damage to property, however occasioned, in, on or about the Premises in an amount of at least $1,000,000.00 for one or more persons in a single accident damage to property. 16.2 PERSONAL PROPERTY: Insurance adequate in amount to cover damage to or replacement of, as necessary, the Premises including, without limitation, leasehold improvements, trade fixtures, furnishings, equipment goods and inventory. 16.3 BUSINESS INTERRUPTION INSURANCE: (Intentionally Omitted). 16.4 EMPLOYERS LIABILITY/WORKERS COMPENSATION: Employer's liability insurance and worker's compensation insurance providing statutory state benefits for all persons employed by Tenant in connection with the Premise as required by applicable law. 16.5 SPRINKLER: Customary coverage. 16.6 OTHER INSURANCE: If this Lease is extended, such other insurance in such amounts as may be reasonably required by Landlord against other insurable hazards as at the time are commonly insured against in case of prudent owners of comparable office projects in the area in which the Project is located. 26 16.7 FORM OF INSURANCE/COMPANIES: All such insurance shall be in a form satisfactory to Landlord and carried with companies reasonably acceptable to Landlord that are licensed or authorized to do business in the State, are in good standing with the Department of Insurance in the State of Florida and have a rating issued by an organization regularly engaged in rating insurance companies (including specifically A.M. Best & Company) of not less than two ratings below the top rating. Tenant shall provide Landlord with a Certificate of Insurance showing Landlord and Landlord's managing agent as an additional insured. The Certificate shall provide for a ten (10) day written notice to Landlord in the event of cancellation or material change of coverage. Not later than thirty (30) days prior to the expiration of any coverage, renewals of or replacements for such contracts of insurance shall be delivered to Landlord, together with proof of payment of the associated premiums. In the event Tenant shall fail to procure any contract of insurance required under the terms hereof or any renewal of or replacement for any contract of insurance that is expiring or has been canceled, Landlord may, but shall not be obligated to, procure such insurance on behalf of Tenant and the cost thereof shall be payable to Landlord as additional rent within ten (10) days following written demand therefor. 16.8 SUBROGATION: Landlord and Tenant shall each obtain from their respective insurers under all policies of fire, theft, public liability, workers' compensation and other insurance maintained by either of them at any time during the term hereof insuring or covering the Premises, a waiver of all rights of subrogation which the insurer of one party might otherwise have, if at all, against the other party. 16.9 UTILITIES AND SERVICES: Landlord shall use all reasonable efforts to furnish (as part of Operating Expenses) heating, ventilation, air conditioning, janitorial service, electricity for normal lighting and office machines, cold water for reasonable and normal drinking, and lavatory use, replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures and elevator service, if applicable, and if currently being provided to the Premises ("Landlord's Services"). Said services and utilities shall be provided on a 24-hour, 7-day a week basis, except for HVAC, janitorial and building maintenance services which shall be provided during building operating hours. Such utilities and services required at other times shall be subject to a reasonable charge. Such charge for HVAC services shall be as follows: $25 per hour for the first 500 hours of usage in each calendar year and $35 per hour of usage in excess of 500 hours in any calendar year and including a reasonable administrative charge for Landlord as determined by Landlord from time to time. Landlord shall not be liable for failure to furnish any of the utilities described in this paragraph 16.9, and Tenant shall have no right to abatement of rental hereunder or to termination of this Lease 27 with respect to any such interruption nor shall such failure constitute an eviction, nor shall Landlord be liable under any circumstances for loss of or injury to property, however occurring through or in connection with or incidental to the furnishing of any of the services enumerated above. Tenant agrees to exercise due care and prudence in the use of Landlord's Services and will comply with all federal, state, and local guidelines concerning the same. No heating, cooling, refrigeration or cooking equipment or office machines or equipment requiring electric current in excess of 110 volts shall be used in the Premises without Landlord's consent, which consent shall not be unreasonably withheld or delayed, provided however that such consent may be conditioned upon Tenant paying for direct expense as reasonably estimated by Landlord on account of the installation and use of such equipment. Nothing herein shall be deemed to waive Tenant's right to claim damages against Landlord for Landlord's failure to comply with Section 12.5 and the first sentence of this Section 16.9, nor in connection with the negligence or willful acts of Landlord or its employees, agents or contractors, or the right of Tenant to claim constructive eviction under Florida law in the case of any interruption which is not beyond Landlord's reasonable control and where Tenant vacates the Premises. 17. CONDEMNATION: If 25% of the land area of the Project site shall be taken or condemned for public use, Landlord may elect to terminate this Lease effective on the date of taking; otherwise this Lease will remain in full force and effect. If there is a taking of all of the Premises or a part thereof so that the remaining part of the Premises is not reasonably suited for Tenant's continued use or Tenant`s reserved parking area is unreasonably reduced, either party may elect to terminate this Lease effective on the date of taking. If there is a taking of a portion of the Premises and a part remains which is suitable for Tenant's use, this Lease shall, as to the part taken, terminate as of the date the condemnor acquires possession, and thereafter Tenant shall be required to pay such proportion of the rent for the remaining term as the value of the Premises remaining bears to the total value of the Premises at the date of condemnation. The election to terminate this Lease as provided herein must be exercised, if at all, within sixty (60) days after the nature and extent of the taking is determined, otherwise, this Lease will remain in full force and effect. All sums which may be payable on account of any condemnation shall belong solely to the Landlord, and Tenant shall not be entitled to any part thereof, provided however, that Tenant shall be entitled to retain any amount awarded to it for its trade fixtures or moving expenses. 18. FIXTURES: Any and all improvements made to the Premises during the term hereof shall unless Landlord requests that removal, belong to the Landlord without compensation, allowance or credit to Tenant, except movable trade fixtures of the Tenant which can be removed without defacing the Premises or the Project. 19. DESTRUCTION OF PREMISES: 19.1 PARTIAL DESTRUCTION: In the event of a partial destruction of the Premises during the term hereof, from any cause covered by insurance, Landlord may 28 elect to repair the same to the extent such repairs can be made with the insurance proceeds made available to Landlord (and not retained by any lender) and within a reasonable time under then existing governmental laws and regulations. Such partial destruction shall not terminate this Lease and Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, based upon the extent to which the making of such repairs shall interfere with the business of Tenant on the Premises. If Landlord elects to make said repairs, this Lease will continue in effect and the rent will be proportionately abated as stated above. If the repairs cannot be made with the available insurance proceeds and Landlord elects not to make said repairs, this Lease may be terminated at the option of either party upon ten (10) days prior written notice. No rent shall be payable for the period after the date of casualty whenever the Lease is terminated pursuant to this section 1 9. 19.2 MATERIAL/TOTAL DESTRUCTION: If the Building in which the Premises are situated or the Project sustains damage of more than 1/3 of the replacement cost thereof, Landlord may elect to terminate this Lease whether the Premises are injured or not, provided that Landlord terminates all other leases equally affected by such casualty. A total destruction of the Building in which the Premises are situated or the Project shall terminate this Lease. 19.3. TENANT'S RIGHT. In the event that the Premises are substantially damaged within the last year of the term, or in the event that the Premises are not likely to be restored within nine (9) months of the casualty, Tenant may terminate this Lease upon ten (10) days prior written notice. 20. HAZARDOUS SUBSTANCES: 20.1 DEFINITIONS: For the purposes of this Agreement, the following terms have the following meanings: (a) "Environmental Law" means any law, statute, ordinance or regulation pertaining to health, industrial hygiene or the environment including, without limitation CERCLA (Comprehensive Environmental Response, Compensation and Liability Act of 1980), RCRA (Resources Conservation and Recovery Act of 1976) and SARA (Superfund Amendments and Reauthorization Act of 1986). (b) "Hazardous Substance" means any substance, material or waste which is or becomes designated, classified or regulated as being "toxic" or "hazardous" or a "pollutant" or which is or becomes similarly designated, 29 classified or regulated, under any Environmental Law, including asbestos, petroleum and petroleum products. 20.2 TENANT'S RESPONSIBILITIES: At its own expense, Tenant will procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant`s particular manner of use of the Premises, as opposed .to the mere office use of the Premises as to which Landlord shall comply (e.g., certificate of occupancy, etc.). Tenant will not cause or permit its employees, agents invitees or contractors to cause any Hazardous Substance to be brought upon, kept or used in or about the Project by Tenant, its agents, employees, contractors or invitees without the prior written consent of Landlord (other than small quantities normally associated with office use). Tenant will, in all respects, handle, treat, deal with and manage any and all Hazardous Substances in, on, under or about the Premises in total conformity with all applicable Environmental Laws and prudent industry practices regarding management of such Hazardous Substances. Tenant will not take any remedial action in response to the presence of any Hazardous Substances in or about the Premises or the Project, nor enter into any settlement agreement, consent decree or other compromise in respect to any claims relating to any Hazardous Substances in any way connected with the Premises without first notifying Landlord of Tenant's intention to do so and affording Landlord. ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interests with respect thereto. 20.3. HAZARDOUS WASTE. (Intentionally Omitted) 20.4. INDEMNIFICATION: If the Premises or the Project become contaminated in any manner for which Tenant is legally liable or otherwise become affected by any release or discharge of a Hazardous Substance, Tenant shall immediately notify Landlord of the release or discharge of the Hazardous Substance, and to the extent that Tenant or its employees, agents, invitees or contractors cause such release or discharge, Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord) and hold harmless Landlord from and against any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, a decrease in value of the Project or the Premises, damages caused by loss or restriction of rentable or usable space, or any damages caused by adverse impact on marketing of the space, and any and all sums paid for settlement of claims, attorneys' fees, consultant fees and expert fees) arising during or after the term of this Lease and arising as a result of such contamination, release or discharge. This indemnification includes, without limitation, any and all cots incurred because of any investigation of the site or any cleanup, removal or 30 restoration mandated by federal, state or local agency or political subdivision. 21. EVENTS OF DEFAULT: If one or more of the following events ("Event of Default") occurs, such occurrence constitutes a breach of this Lease by Tenant: 21.1 ABANDONMENT/VACATION: Tenant abandons or vacates the remises or removes furniture, fixtures or personal property (except in the normal course of business or in connection with any proposed subletting or assignment of this Lease and as permitted in paragraph 7.2 hereof) or fails to perform its maintenance and presence obligations during a permitted period of vacancy, under paragraph 7.2 above; or 21.2 RENT: Tenant fails to pay any monthly Base Rent or Operating Expenses Rent, if applicable, as and when the same becomes due and payable, and such failure continues for more than five (5) days after written notice; or 21.3 OTHER SUMS: Tenant fails to pay any other sum or charge payable by Tenant hereunder as and when the same becomes due and payable, and such failure continues for more than five (5) days after Landlord gives written notice thereof to Tenant; or 21.4 OTHER PROVISIONS: Tenant fails to perform or observe any other agreement, covenant, condition or provision of this Lease to be performed or observed by Tenant as and when performance or observance is due, and such failure continues for more than thirty (30) days after Landlord gives written notice thereof to Tenant, or if the default cannot be cured within said thirty (30) day period and Tenant fails promptly to commence with due diligence and dispatch the curing of such default or, having so commenced, thereafter fails to prosecute or complete with due diligence and dispatch the curing of such default; or 21.5 INSOLVENCY: Tenant (a) files or consents by answer or otherwise to the filing against it of a petition for relief or reorganization or arrangement or any other petition in bankruptcy or liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction; (b) makes an assignment for the benefit of its creditors; (c) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property; or (d) takes action for the purpose of any of the foregoing; or 21.6 RECEIVER: A court or governmental authority of competent jurisdiction, without consent by Tenant, enters an order appointing a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial power of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in 31 bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of Tenant, or if any such petition is filed against Tenant and such petition is not dismissed within ninety (90) days; or 21.7 ATTACHMENTS: This Lease or any estate of Tenant hereunder is levied upon under any attachment or execution and such attachment or execution is not vacated within 60 days; or 21.8 ASSIGNMENT/SUBLEASE: Tenant assigns this Lease or subleases all or any portion of the Premises without Landlord's prior written consent, except as permitted under this Lease. 22. REMEDIES OF LANDLORD ON DEFAULT: 22.1 TERMINATION: In the event of any breach of this Lease by Tenant, Landlord may, at its option, terminate the Lease and repossess the Premises pursuant to the laws of the State of Florida and recover from Tenant as damages: (a) the unpaid rent and other amounts due at the time of termination plus interest thereon at the Default Rate from the due date until paid; (b) the balance of the rent for the remainder of the term after termination, less amounts, if any, collected by Landlord during such term; and (c) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the cost of recovering th Premises. 22.2 LANDLORD'S OPTIONS: Landlord may, in the alternative, (i) continue this Lease in effect, as long as Landlord does not terminate Tenant`s right to possession, and Landlord may enforce all its rights and remedies under the Lease, including the right to recover the rent as it becomes due under the Lease; or (ii) terminate Tenant's right of possession (but not this Lease) and repossess the Premises pursuant to the laws of the State of Florida, without demand or notice of any kind to Tenant, in which event Landlord may, but shall be under no obligation to do so (except to the extent required by the laws of the State of Florida ), relet the Premises for the account of Tenant for such rent and upon such terms as shall be satisfactory to Landlord. For purpose of such reletting Landlord is authorized by Tenant to decorate or to make any repairs, changes, alterations or additions in or to the Premises that may be necessary or convenient, at Tenant's expense. Tenant shaIl also be responsible for rent for the period that the Premises are vacant and all costs 32 of re-letting, including without limitation, brokerage commissions and attorneys' fees. Tenant shall also be liable for any deficiency of such rental below the total rental and all other payments herein provided for the unexpired balance of the term of this Lease; or (iii) exercise any and all other rights and remedies available to Landlord at law or in equity. 22.3 MULTIPLE DEFAULTS: Should Tenant default in the payment of Base Rent, Additional Rent, or any other sums payable by Tenant under this Lease on three (3) or more occasions during any twelve (12) month period, regardless of whether any such default is cured; then, in addition to all other remedies otherwise available to Landlord: (a) Landlord may demand by written notice to Tenant that all payments due by Tenant under this Lease shall be by bank certified or cashier's check. Tenant's failure to comply with this demand shall be an Event of default. (b) (Intentionally Omitted) (c) All notice requirements or cure periods otherwise set forth in the Lease with respect to a further default by Tenant in such twelve (12) month period shall not apply. (d) Any and all rights or options of first refusal, or to extend the Term, to expand the size of the Premises, to purchase the Premises or the Building, or other such or similar rights or options which have been granted to Tenant under this Lease shall automatically, and without further action on the part of any party, expire and be deemed canceled and of no further force and effect, unless and Tenant has fully cured all defaults within such twelve (12) month period. 23. SECURITY DEPOSIT: The Security Deposit set forth in paragraph 1, if any, shall secure the performance of the Tenant's obligations hereunder. Landlord may, but shall not be obligated to apply all or portions of the Security Deposit on account of Tenant's obligations hereunder. In the event that Landlord applies all or a portion of the Security Deposit to Tenant's obligations hereunder, Tenant shall be obligated, within ten (10) days of receipt of notice from Landlord, to deposit cash (or restore the LC) with Landlord in an amount sufficient to restore the Security Deposit to the full amount stated in paragraph 1.8 above, subject to reduction as may be provided under this Lease. Failure to deposit such cash shall be a default under the terms of this Lease. Provided Tenant is not in default, any balance remaining upon termination of the Lease shall be returned to Tenant within fifteen (15) days after expiration. Tenant shall not have the right to apply the Security Deposit in payment of the last month's rent. No interest shall be paid by Landlord on he Security Deposit. In the event of a sale of the Project, Landlord shall have the right to transfer the Security Deposit to the purchaser and upon such transfer Landlord 33 shall have no further liability with respect thereto, and Tenant agrees to look solely to such purchaser for the return of the Security Deposit provided such transferee shall have acknowledged in writing the receipt of such security and the obligations with respect thereto under this Lease. Landlord shall not be required to keep the Security Deposit in a segregated account, and the Security Deposit may be commingled with other funds of Landlord. 24. LIEN FOR RENT: Landlord shall have any and all lien rights in favor of Landlord arising under Florida law upon all equipment, fixtures, and furnishings, of Tenant which may be situated in or on the Premises at the time of a default, and all proceeds therefrom, and such property shall not be removed therefrom without the consent of Landlord until any and all sums of money then due to Landlord hereunder first shall have been paid and discharged, and all covenants, agreements and conditions hereof have been fully complied with and performed by Tenant. Landlord hereby waives its lien rights hereunder in favor of any existing lender, as well as any third party providing an equipment lease or equipment financing to Tenant, or hereafter having a blanket lien on Tenant's aforementioned property. 25. LIMITATION ON LANDLORD'S PERSONAL LIABILITY: Tenant specifically agrees to look solely to Landlord's interest in the Project and any proceeds therefrom for the recovery of any judgment from Landlord, it being agreed that Landlord (and any officers, shareholders, partners, directors or employees of Landlord or of any partners in the entity comprising Landlord) shall never be personally Iiable for any such judgment. 26. ATTORNEY'S FEES: In the event of any dispute or legal action between the parties as a result of Tenant's default under this Lease or otherwise, the prevailing party shall be entitled to reimbursement of reasonable attorneys' fees by the losing party. 27. WAIVER: No failure of Landlord to enforce any term hereof shall be deemed to be a waiver. 28. SEVERABILITY: If any clause or provisions of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term hereof, then it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of both parties that in lieu of each clause or provision that is illegal, invalid or unenforceable, there shall be added as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 29. NOTICES: All notices or other communications required or permitted hereunder 34 must be in writing, and be (i) personally delivered (including by means of professional messenger service), (ii) sent by overnight courier, with request for next Business Day delivery, or (iii) sent by registered or certified mail, postage prepaid, return receipt requested, to the addresses set forth in paragraph 1. All notices sent by mail will be deemed received two (2) business days after the date of mailing. Notwithstanding anything to the contrary hereinabove, any notice of default sent by Landlord to Tenant must be sent by certified mail, return receipt requested, to Tenant at the address(es) stated in paragraph 1.16 above. 30. HOLDING OVER: Any holding over after the expiration or termination of this Lease shall be construed as a month-to-month tenancy at a rental of 200% of the rent for the month of the Lease preceding the month in which the expiration or termination occurred, and otherwise in accordance with the terms hereof, as applicable. In the event Tenant shall be or become a holdover tenant, Tenant shall also indemnify Landlord against all claims for damages against Landlord as a result of Tenant's possession of the Premises, including, without limitation, claims for damages by any tenant to whom Landlord may have leased the Premises, or any portion thereof, for a term commencing after the expiration or termination of this Lease. 31. TIME: Time is of the essence of this Lease, subject to the grace and cure periods set forth herein. 32. HEIRS, ASSIGNS, SUCCESSORS: This Lease is binding upon and inures to the benefit of the assigns and successors in interest of Landlord and is binding upon and inures to the benefit of Tenant and Tenant's heirs and successor and, to the extent assignment may be approved by Landlord hereunder, Tenant's assigns. 33. SUBORDINATION: This Lease is and shall always be subject and subordinate to the lien of any mortgages which are now or shall at any future time be placed upon the Project, the Premises or Landlord's rights hereunder, and to any renewals, extensions, modifications or consolidations of any such mortgage. This clause shall be self-operative and no further instrument of subordination need be required by any mortgagee. In confirmation of such subordination, however, Tenant, at Landlord's request, shall execute promptly any appropriate certificate or instrument that Landlord may reasonably request. Notwithstanding anything to the contrary herein, Tenant's rights under this Lease shall not be disturbed in the event of any foreclosure of any such mortgage or lien, so long as Tenant attorns to the new owner of the Building as Landlord under this Lease. 34. ESTOPPEL CERTIFICATE; FINANCIAL STATEMENTS: 34.1 CONTENT: Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a 35 statement in writing: (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), the amount of any security deposit, and the date to which the rent and other charges are paid in advance, if any; and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer to the Premises. 34.2 FAILURE TO DELIVER: At Landlord's option, Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant: (a) that this Lease is in full force and effect, without modification except as may be represented by. Landlord; and (b) that there are no uncured defaults in Landlord's performance. 34.3 FINANCIAL STATEMENTS: [Intentionally Omitted]. 34.4. LANDLORD'S ESTOPPEL. Upon Tenant's reasonable request and in no event more than once during the Lease year, or in the event of a permitted assignment of sublease by Tenant, Landlord shall provide an estoppel statement certifying the facts stated in 34.1(a) and (b) hereof as related to Tenant. 35. AUTHORIZATION: If Tenant executes this Lease as a, corporation, partnership or, other entity or organization then Tenant and the person(s) executing this Lease on behalf of Tenant, represent and warrant that such entity or organization is duly qualified to do business in the State in which the Project is located and that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on Tenant's behalf. 36. JOINT AND SEVERAL LIABILITY: In the event that, more than one person or entity executes the Lease as Tenant, all such persons and entities shall be jointly and severally liable for all of Tenant's obligations hereunder. In the event that Tenant is a partnership, all general partners shall be jointly and severally liable for all of Tenant's obligations hereunder. 37. FORCE MAJEURE: Landlord and Tenant respectively shall be excused for the period of any delay in the performance of any obligations hereunder when 36 prevented from doing so by cause or causes beyond Landlord's or Tenant's reasonable control which shall include, without limitation, all labor disputes, civil commotion, civil disorder, riot, civil disturbance, war, war-like operations, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations, orders, moratoriums or controls, fire or other casualty, inability to obtain any material, services or financing or Acts of God. 38. RECORDING: Tenant shall not record this Lease, or any memorandum or short form thereof, without the written consent and joinder of Landlord, which may be unreasonably withheld. 39. RIDER: A Rider, signed by the parties /__/ is attached /__/ is not attached hereto. 40. ENTIRE AGREEMENT: The foregoing constitutes the entire agreement between the parties and may be modified only by a writing signed by both parties. 41. GOVERNING LAW: This Lease shall be construed in accordance with the internal laws of the State of Florida (without regard to conflicts of law or choice of law rules).Miami-Dade 42. RADON GAS: The following statement is included in order to comply with Florida statutory law requirements: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed Federal and State guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from our county public health unit. 43. WAIVER OF THE RIGHT TO TRIAL BY JURY/NO COUNTERCLAIM: LANDLORD AND TENANT HEREBY KNOWINGLY AND INTENTIONALLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING THAT LANDLORD OR TENANT MAY HEREINAFTER INSTITUTE AGAINST EACH OTHER WITH RESPECT TO ANY MATTER ARISING OUT OF OR RELATED TO THIS LEASE OR THE PREMISES, OR THE PROJECT, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY OTHER CLAIMS (EXCEPT CLAIMS FOR PERSONAL INJURY OR WHERE A WAIVER OF JURY TRIAL IS PROHIBITED) AND ANY EMERGENCY STATUTORY OR OTHER STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY ACTION FOR NON-PAYMENT OF RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION IN TO THE POSSESSORY COUNTS IN ANY SUCH ACTION OR PROCEEDING OTHER THAN COUNTERCLAIMS WHICH WOULD BE WAIVED IF NOT THEN ASSERTED SUCH AS COMPULSORY COUNTERCLAIMS AND WHICH COULD NOT BE SEVERED OR OTHERWISE MAINTAINED AS A SEPARATE 37 ACTION. THE FOREGOING, HOWEVER, SHALL NOT BE CONSTRUED AS A WAIVER OF TENANT'S RIGHTS TO ASSERT SUCH CLAIM IN A SEPARATE ACTION INSTITUTED BY TENANT. 44. ACCEPTANCE BY LANDLORD: THE SUBMISSION OF THIS DOCUMENT FOR EXAMINATION DOES NOT CONSTITUTE AN OPTION OR OFFER TO LEASE SPACE IN THE PROJECT. THIS DOCUMENT SHALL HAVE NO BINDING EFFECT ON THE PARTIES UNLESS EXECUTED BY THE LANDLORD AND THE EXECUTED COPY IS DELIVERED TO THE TENANT. 38 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: UCCELLO IMMOBILIEN GMBH, a German corporation, by Welsh Companies, S.E., Inc., a Florida corporation, as its agent Witnesses as to Landlord: [ILLEGIBLE] By: /s/ GEORGE VUKOBRATOVICH - --------------------------------- --------------------------------- George Vukobratovich, President [ILLEGIBLE] - --------------------------------- TENANT: STARMEDIA NETWORK, INC. Witnesses as to Tenant: [ILLEGIBLE] By: /s/ FRANCISCO LOUREIRO - --------------------------------- --------------------------------- Name: Francisco Loureiro Title: COO [ILLEGIBLE] StarMedia Network, Inc. - --------------------------------- SCHEDULES AND EXHIBITS: - ---------------------- Schedule I: Project (paragraph 1.1) Schedule II: Omitted Schedule III: Rules and Regulations (paragraph 1.1 and 7.3 and 11) Exhibit "A": Premises (paragraph 1 .2) Exhibit "A1": Satellite Dish Antenna (paragraph 1.2.1) Exhibit "B": Rent Commencement Date Certificate (paragraph 1 .6) Exhibit "C": Building Standard Workletter (paragraph 1.6) Exhibit "C1": Tenant Improvements Layout (paragraph 1.15.1) Exhibit "D": Elevator Lobby Redesign Outline (paragraph 1.19) 39 EX-10.37 5 a2084088zex-10_37.txt EXHIBIT 10-37 Exhibit 10.37 FORM OF RETENTION BONUS AND SEVERANCE AGREEMENT THIS AGREEMENT (the "Agreement"), dated as of May 2, 2002, is between StarMedia Network, Inc. ("StarMedia"), and EXECUTIVE, an individual ("Executive"). WHEREAS, Executive is employed by StarMedia and StarMedia recognizes Executive's past service and continued commitment to StarMedia. NOW, THEREFORE, the parties agree as follows: 1. AT-WILL EMPLOYMENT. Executive acknowledges and agrees that his employment status is that of an employee-at-will and that Executive's employment may be terminated by StarMedia or Executive at any time with or without cause and with or without notice. Executive has not relied, and will not rely, on any statements or representations, whether oral or in writing, by any officers, employees or agents of StarMedia concerning the duration or term of employment, grounds and procedures for discharge or termination of employment, or any other terms and conditions of employment except those specifically stated in writing and signed by both Executive and an authorized director of StarMedia. 2. PERFORMANCE AND RETENTION BONUS. For the year 2002 only, Executive will receive a performance and retention bonus. To receive the bonus, Executive must be employed by StarMedia on the date that the bonus is paid. The bonus will be paid in two equal installments: July 10, 2002 and January 10, 2003, each installment in the amount of $________, less standard deductions and withholdings. 3. TERMINATION AND SEVERANCE. 3.1 TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION BY EXECUTIVE. In the event that Executive is terminated For Cause (as defined below) or if Executive voluntarily terminates his employment and is not Constructively Discharged (as defined below), StarMedia shall pay Executive all compensation due and owing through the last day actually worked and thereafter all of StarMedia's obligations under this Agreement shall cease. 3.2 TERMINATION NOT FOR CAUSE OR CONSTRUCTIVE DISCHARGE. (a) If within one year from the date hereof, StarMedia terminates Executive's employment for any reason other than For Cause or if Executive is Constructively Discharged, StarMedia shall pay Executive all compensation due and owing through the last day actually worked. In addition, if Executive signs a release substantially in the form attached as Annex A, Executive will receive a severance payment of $________ (the "Severance Payment"), less applicable and authorized deductions. (b) For purposes hereof, any rejection of this Agreement under Section 365 of the Bankruptcy Code or any other termination of this Agreement other than as expressly contemplated herein or mutually agreed by StarMedia and Executive shall be deemed to be a termination of Executive's employment other than For Cause. 3.3 DEFINITION OF FOR CAUSE. StarMedia's termination of Executive's employment with StarMedia shall be "For Cause" if, in the reasonable opinion of the Board: (i) Executive breached the terms of this Agreement and such breach is not cured within ten (10) days after Executive has received written notice from StarMedia of such breach, (ii) Executive exhibits dishonesty, habitual neglect, persistent and serious deficiencies in performance, or gross incompetence in the performance of his duties under this Agreement, (iii) Executive is convicted of a crime other than a minor traffic violation, or (iv) Executive refuses or fails to act on any lawful directive or order from the Board. 3.4 DEFINITION OF CONSTRUCTIVE DISCHARGE. Executive's resignation from employment with StarMedia shall be a "constructive discharge" if (i) Executive resigns because StarMedia has made a material reduction in Executive's salary or benefits or otherwise has breached the terms of this Agreement and such breach has not been cured within ten (10) days after Executive has provided notice thereof to StarMedia, or (ii) the Executive's office is relocated more than 50 miles from the Executive's present office. 3.5 LETTER OF CREDIT. StarMedia shall use its best efforts furnish to Executive a mutually acceptable letter of credit issued by a major United States bank in the amount of the Severance Payment. Executive is hereby authorized draw down the amount of the Severance Payment in the event that StarMedia fails to make timely payment thereof in accordance with this Agreement. 4. TERM. This Agreement shall be valid for a term of one year from the date hereof. 5. GOVERNING LAW. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York without reference to conflict of law principal. 2 6. ENTIRE AGREEMENT. This Agreement contains all the understandings and representations between the parties pertaining to the subject matter of this Agreement and supersedes all undertakings and agreement, whether oral or in writing, previously entered into by them on this subject. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. StarMedia Network, Inc. By: _______________________ Name: Title: EXECUTIVE _______________________________ 3 RELEASE AND WAIVER OF CLAIMS In exchange for the Severance Payments and other benefits to which I would not otherwise be entitled, I hereby furnish StarMedia Network, Inc., ("StarMedia") with the following release and waiver. I hereby release, and forever discharge StarMedia, its officers, directors, agents, employees, stockholders, attorneys, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed ("Claims"), arising at any time prior to and including the date I sign this Release with respect to any claims relating to my employment and the termination of my employment, including but not limited to: any and all such claims and demands directly or indirectly arising out of or in any way connected with my employment with StarMedia or the termination of that employment; claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in StarMedia, vacation pay, fringe benefits, expense reimbursements, sabbatical benefits, severance benefits, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination Act of 1990; the New York Human Rights Law, the Florida Civil Rights Law as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; emotional distress; and breach of the implied covenant of good faith and fair dealing. [IF OVER 40 YEARS OLD] I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this waiver and release is knowing and voluntary, and that the consideration given for this waiver and release is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that: (a) the waiver and release granted herein does not relate to claims which may arise after this agreement is executed; (b) I have the right to consult with an attorney prior to executing this agreement (although I may choose voluntarily not to do so); (c) I have twenty-one (21) days from the date I receive this agreement, in which to consider this agreement (although I may choose voluntarily to execute this agreement earlier); (d) I have seven (7) days following the execution of this agreement to revoke my consent to the agreement; and (e) this agreement shall not be effective until the seven (7) day revocation period has expired. Notwithstanding the foregoing, this Release shall not apply to any Claims to enforce (i) any of Company's obligations under the terms or provisions of the Performance and Retention Bonus and Severance Agreement, dated May __, 2002, between me and Company, (ii) any of Company's obligation to indemnify me pursuant to any indemnification arrangements for directors and officers as in effect from time to time during my employment or otherwise or (iii) the release executed and delivered to me by Company on the date hereof. Date:_____________________ Name:_________________________ 4 EX-10.38 6 a2084088zex-10_38.txt EXHIBIT 10.38 EXECUTION COPY EXHIBIT 10.38 - -------------------------------------------------------------------------------- AMENDED AND RESTATED ASSET PURCHASE AGREEMENT BY AND BETWEEN ERESMAS INTERACTIVA S.A. AND STARMEDIA NETWORK, INC. DATED AS OF JULY 1, 2002 - -------------------------------------------------------------------------------- AMENDED AND RESTATED ASSET PURCHASE AGREEMENT This AMENDED AND RESTATED ASSET PURCHASE AGREEMENT, dated as of the 1st day of July, 2002 (the "AGREEMENT"), by and between ERESMAS INTERACTIVA S.A., a Spanish SOCIEDAD ANONIMA corporation (the "PURCHASER"), and STARMEDIA NETWORK, INC., a Delaware corporation (the "SELLER"). Terms used herein and not otherwise defined shall have the meanings set forth in Section 13.3 hereof. RECITALS A. The Purchaser and the Seller have entered into an Asset Purchase Agreement, dated as of June 18, 2002 (the "ORIGINAL AGREEMENT"). B. It is the intent of the Purchaser and the Seller to amend and restate the Original Agreement for the purposes of making certain revisions to the Original Agreement. C. The Seller operates, directly and indirectly through its Business Subsidiaries, a Spanish and Portuguese language network of Internet websites, including without limitation StarMedia.com. The Seller also operates, and will continue to operate following the Closing, its mobile business and other businesses. D. The board of directors of the Purchaser has determined that it is in the best interests of the Purchaser that the Purchaser acquire certain of the assets used by or in connection with the Media Business, and has approved this Agreement and the transactions contemplated hereby. E. The parties hereto have agreed that the Seller will sell and the Purchaser will acquire the Acquired Assets free and clear of all Liens, Claims, Orders, and other Indebtedness other than Permitted Liens. F. The board of directors of the Seller has determined that it is in the best interests of the Seller and its shareholders, that the Seller sell the Acquired Assets and, in furtherance thereof, has approved this Agreement and the transactions contemplated hereby. G. Contemporaneously with the execution of this Agreement, the Purchaser and Seller are entering into a Stock Purchase Agreement (the "LATINRED STOCK PURCHASE AGREEMENT") pursuant to which the Purchaser will acquire all of the issued and outstanding shares of capital stock of LatinRed S.L., a Spanish SOCIEDAD LIMITADA ("LATINRED") wholly-owned by the Seller. H. In connection with the acquisition of the Acquired Assets, the Purchaser has agreed to deposit a portion of the Purchase Price in the amount of $1.0 million (the "ESCROW FUNDS") into an escrow account with Wilmington Trust Company, and Wilmington Trust Company has agreed to serve as escrow agent (the "ESCROW AGENT") with respect to the Escrow Funds, holding such funds upon the terms and conditions set forth in an escrow agreement by and among the Purchaser, the Seller, an affiliate of the Purchaser and the Escrow Agent (the "ESCROW AGREEMENT"). I. As an inducement to the Purchaser to enter this Agreement, the Seller has agreed to enter into a Transition Licensing Agreement, a copy of which is attached hereto as EXHIBIT 8.14, pursuant to which the Seller will grant a license to the Purchaser for certain intellectual property owned by the Seller and provide certain services related thereto to the Purchaser following the Closing (the "TRANSITION LICENSING AGREEMENT"). J. As further inducement to the Purchaser to enter into this Agreement, the Seller has agreed to waive certain non-solicitation restrictions with respect to those employees of the Seller or its Affiliates listed on SCHEDULE 5.3 attached hereto (the "BUSINESS EMPLOYEES") so that the Purchaser may offer certain or all of such Business Employees employment with the Purchaser or any Affiliate thereof upon terms and conditions determined by the Purchaser in its sole discretion. K. The Purchaser and the Seller desire to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the representations and warranties, covenants and agreements, and subject to the conditions contained herein, the Seller and the Purchaser hereby agree as follows: ARTICLE I PURCHASE OF ASSETS 1.1 PURCHASE AND SALE OF ACQUIRED ASSETS. Subject to the terms and conditions of this Agreement, the Seller agrees to sell, assign, convey and transfer to the Purchaser, and the Purchaser agrees to purchase from the Seller, those assets used by or in connection with the Media Business, wherever located, listed on SCHEDULE 1.1(a) attached hereto ( the "ACQUIRED ASSETS") free and clear of any Liens, Claims, Orders and Indebtedness other than Permitted Liens. Other than the Acquired Assets listed on SCHEDULE 1.1(a) hereto, the Purchaser is not purchasing and will not acquire, any other assets of the Seller pursuant to the terms of this Agreement including the assets identified on SCHEDULE 1.1(b). 1.2 ASSUMED OBLIGATIONS. At the Closing, the Purchaser shall not assume any obligations of the Seller or the Media Business other than those obligations of the Media Business accruing after the Closing Date under existing Contracts of the Media Business to be acquired by the Purchaser and specifically listed on SCHEDULE 1.2 hereto (collectively, the "ASSUMED OBLIGATIONS") pursuant to an Assignment and Assumption Agreement substantially in the form of EXHIBIT 1.2 hereto. Each of the Contracts assumed hereunder is independently assumed subject to the representations, warranties, covenants and conditions made herein as to that Contract. Except as expressly set forth in this Section 1.2 and SCHEDULE 1.2 hereto, the Purchaser shall not assume or otherwise be responsible at any time for any liability, obligation, Indebtedness, Contract or commitment of the Media Business or any of the other businesses of the Seller, whether absolute or contingent, accrued or unaccrued, asserted or unasserted, or otherwise, including, but not limited to, any liabilities, obligations, debts or commitments of the Media Business or the Seller (a) incident to, arising out of or incurred with respect to this Agreement and the transactions contemplated hereby, (b) which otherwise arise or are asserted or incurred by reason of events, acts or transactions occurring, or the operation of the Media Business, prior to or on the Closing Date, (c) relating to or arising under any Employee Benefit Plan, (d) relating to any employees or former employees of the Seller or any of its subsidiaries -2- who are not employed by the Purchaser on or after the Closing or otherwise relating to salaries, wages, bonuses, severance or retention pay or benefits accruing, or relating to employment or termination from employment, on or prior to the Closing or (e) for Taxes (except as allocated to the Purchaser pursuant to Section 7.2(b) of this Agreement) (i) related to the Media Business or the Acquired Assets or (ii) arising out of the income, assets or operations of the Seller's foreign subsidiaries, in each case for all Tax periods (or portions thereof) ending on or prior to the Closing Date (including any and all Taxes arising out of the transactions contemplated hereby) (collectively, the "EXCLUDED LIABILITIES"). The Seller agrees to satisfy and discharge each of the Excluded Liabilities as the same shall become due. The Purchaser's assumption of the Assumed Obligations shall in no way expand the rights or remedies of third parties against the Purchaser as compared to the rights and remedies which such parties would have had against the Seller had this Agreement not been consummated. 1.3 METHOD OF CONVEYANCE. The sale, transfer, conveyance and assignment by the Seller of the Acquired Assets to the Purchaser in accordance with Section 1.1 hereof shall be effected on the Closing Date by the execution and delivery by the Seller and any Business Subsidiary as applicable, to the Purchaser of instruments of transfer including, among others: (a) the bill of sale in substantially the form of EXHIBIT 1.3(a) attached hereto (the "BILL OF SALE"), and (b) the Assignment and Assumption Agreement in substantially the form of EXHIBIT 1.2 hereto, and (c) the assignments of proprietary software, domain names and trademarks for the Intellectual Property to be assigned to Purchaser in substantially the form of EXHIBIT 1.3(b) attached hereto. At the Closing, all of the Acquired Assets shall be transferred by the Seller to the Purchaser free and clear of any and all Liens, Claims, Orders and Indebtedness other than Permitted Liens, together with any and all consents of third parties required to transfer such assets to the Purchaser. 1.4 PURCHASE PRICE. In consideration for the conveyance of the Acquired Assets and in reliance on the representations and warranties, covenants and agreements of the Seller contained herein and the documents contemplated hereby, the Purchaser (a) on the Closing Date shall assume the Assumed Obligations and (b) pay to the Seller an aggregate amount equal to $7.0 million in cash (the "PURCHASE PRICE"), MINUS the Escrow Funds, MINUS, to the extent not paid by the Seller prior to the Closing, any amounts payable on any Contract set forth on SCHEDULE 1.2 attached hereto (such net amount being referred to as the "CLOSING CASH"). The Closing Cash shall be paid in immediately available funds to such account as the Seller shall have specified to the Purchaser three (3) Business Days prior to the Closing. The Purchase Price shall be allocated in accordance with Section 1.6 hereof. 1.5 ESCROW AGREEMENT. At the Closing, the Purchaser shall wire $1.0 million (the "ESCROW FUNDS") to the Escrow Agent for deposit as set forth in the Escrow Agreement to be governed by the terms of the Escrow Agreement in substantially the form of EXHIBIT 8.10 hereto (the "ESCROW AGREEMENT"). The Escrow Funds shall be available to compensate the Purchaser, its officers, directors, employees, agents and Affiliates for any and all losses (whether or not involving a third party Claim), indemnifiable pursuant to Article XII hereof. 1.6 ALLOCATION OF PURCHASE PRICE. The Seller and the Purchaser agree to allocate the aggregate purchase price to be paid for the Acquired Assets in accordance with Section 1060 of the Code. The Seller and the Purchaser agree that the Purchaser shall prepare and provide to the Seller a draft allocation of the purchase price among the Acquired Assets within ninety (90) days -3- after the Closing Date. The Seller shall notify the Purchaser within thirty (30) days of receipt of such draft allocation of any objection the Seller may have thereto. The Seller and the Purchaser agree to resolve any disagreement with respect to such allocation in good faith. In addition, the Seller and Purchaser hereby undertake and agree to file timely any information that may be required to be filed pursuant to Treasury Regulations promulgated under Section 1060(b) of the Code, and shall use the allocation determined pursuant to this Section 1.6 in connection with the preparation of Internal Revenue Service Form 8594 as such form relates to the transactions contemplated by this Agreement. Neither the Seller nor Purchaser shall file any Tax Return or other document or otherwise take any position which is inconsistent with the allocation determined pursuant to this Section 1.6 except as may be adjusted by subsequent agreement following an audit by the IRS or by court decision. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Purchaser as of the date hereof: 2.1 CORPORATE ORGANIZATION, ETC. The Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization with full corporate power and authority to carry on its business as it is now being conducted and to own, operate and lease its properties and assets. The Seller and each Business Subsidiary is duly qualified or licensed to do business and is in good standing in every jurisdiction in which the conduct of its business, the ownership or lease of its properties, require it to be so qualified or licensed. Such jurisdictions are set forth in SCHEDULE 2.1(a) hereto. True, complete and correct copies of the Seller's certificate of incorporation and bylaws as presently in effect are set forth in SCHEDULE 2.1(b) hereto. 2.2 AUTHORIZATION, ETC. The Seller has full power and authority to enter into this Agreement and the agreements contemplated hereby to which it is a party. The execution, delivery and performance of this Agreement and all other agreements and transactions contemplated hereby have been duly authorized by the Board of Directors of the Seller and, other than obtaining the consent of the holder(s) of shares of the Seller's Series A Preferred Stock and the consent of the Seller's stockholders solely with respect to the amendment of the Seller's certificate of incorporation to change its corporate name, no other corporate proceedings on the part of the Seller are necessary to authorize the Seller to enter into this Agreement and the agreements contemplated hereby and to consummate the transactions contemplated hereby and thereby. A certified copy of the resolutions adopted by the Seller's Board of Directors authorizing the execution, delivery and performance of this Agreement and all other agreements and transactions contemplated hereby is attached hereto as SCHEDULE 2.2. This Agreement and all other agreements contemplated hereby to be entered into by the Seller each constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms. 2.3 NO VIOLATION. Except as set forth in SCHEDULE 2.3 hereto, the execution, delivery and performance by the Seller of this Agreement, and all other agreements contemplated hereby, and the fulfillment of and compliance with the respective terms hereof and thereof by the Seller, do not and will not (a) conflict with or result in a breach of the terms, conditions or provisions of, (b) constitute a default or event of default under (whether with or without due notice, the passage -4- of time or both), (c) result in the creation of any Lien, Claim or Order (other than Permitted Liens) upon the Acquired Assets or Assumed Obligations pursuant to, (d) give any third party the right to modify, terminate or accelerate any obligation under, (e) result in a violation of, or (f) require any authorization, consent, approval, exemption or other action by, notice to, or filing with any third party or Authority pursuant to, the certificate of incorporation or bylaws of the Seller or any applicable Regulation, Order or Contract to which the Seller, the Acquired Assets or the Media Business is subject. The Seller has complied with all applicable Regulations and Orders in connection with the execution, delivery and performance of this Agreement, the agreements contemplated hereby and the transactions contemplated hereby and thereby. 2.4 FINANCIAL STATEMENTS. (a) Attached as SCHEDULE 2.4(a) hereto are (i) unaudited year-end balance sheets of the Seller as of December 31, 1999, 2000 and 2001 and statements of income, stockholders' equity and cash flow of the Seller for each of the fiscal years then ended and (ii) the unaudited balance sheet of the Seller as of March 31, 2002 and statements of income, stockholders' equity and cash flow of the Seller for the period then ended. Such balance sheets fairly present in all material respects the financial position of the Seller at the respective dates thereof in accordance with GAAP, and such statements of income, stockholders' equity and cash flow fairly present in all material respects the results of operations for the periods referred to therein in accordance with GAAP, except that the unaudited financial statements have no notes attached thereto and do not have year-end audit adjustments (none of which would be material or recurring). All of the foregoing financial statements were prepared from the books and records of the Seller and the Business Subsidiaries, as applicable. All properties used in the Media Business operations during the period covered by the foregoing financial statements are reflected in such financial statements in accordance with and to the extent required by GAAP. The foregoing balance sheets and statements of income, stockholders' equity and cash flow and the notes thereto are herein collectively referred to as the "FINANCIAL STATEMENTS" and March 31, 2002 is herein referred to as the "FINANCIAL STATEMENT DATE." (b) Except as set forth in SCHEDULE 2.4(B) hereto, the Seller does not have any Indebtedness, obligation or liability (whether accrued, absolute, contingent, unliquidated or otherwise, known or unknown to the Seller, whether due or to become due) arising out of transactions entered into at or prior to the Closing Date, or any state of facts existing at or prior to the Closing Date, other than: (i) liabilities set forth in the March 31, 2002 balance sheet of the Seller, or (ii) liabilities and obligations that have arisen after the Financial Statement Date in the ordinary course of business (none of which is a liability resulting from breach of a Contract, Regulation, Order or warranty, tort, infringement or Claim) which do not (A) individually exceed $100,000, and (B) in the aggregate (as to amount) differ from the liabilities set forth in the March 31, 2002 balance sheet in any material respect. (c) Immediately prior to, and immediately subsequent to, the consummation of the sale of the Acquired Assets pursuant to the provisions of this Agreement, the Seller will be a solvent corporation with the ability to pay its debts as they become due. For purposes of this Agreement, "solvent" shall mean that the present fair saleable value of the Seller's assets is greater than the amount that will be required to pay the liability on its existing debts as they become absolute and matured. -5- 2.5 EMPLOYEES. (a) The Media Business has been conducted in material compliance with all Regulations and Orders affecting employment and employment practices applicable to the Media Business, including terms and conditions of employment and the payment of wages and hours. None of the Seller's employees is subject to a collective bargaining agreement. At the Closing the Media Business will not have any liability or obligation to any of its Business Employees other than for the payment of salaries, bonuses, if any, and other benefits which are to be paid by the Seller in the ordinary course of business or otherwise. Except as set forth in SCHEDULE 2.5, the Seller has not taken any action, or failed to take any action, that has or would reasonably likely to result in any Claim by an employee of the Media Business that he has been constructively terminated or due severance payments prior to or in connection with the Closing. Upon the consummation of the transactions contemplated hereby and pursuant to the agreements referred to herein, there will be no "change in control" bonus or other obligations to any employees, consultants or other Persons performing services for the Media Business. (b) The Seller has not violated the Worker Adjustment Notification Act (the "WARN ACT") or any similar state or local legal requirement. 2.6 ABSENCE OF CERTAIN CHANGES. Since the Financial Statement Date, the Media Business has not experienced any (a) except as set forth on SCHEDULE 2.6(a), Material Adverse Change; (b) damage, destruction or loss, whether covered by insurance or not, having a cost of $100,000 or more; (c) increase in the compensation payable to or to become payable to any Business Employee or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any Business Employees; (d) except as set forth on SCHEDULE 2.6(d), entry into any Contract not in the ordinary course of business, including without limitation, any capital expenditure; (e) change in accounting methods or principles or any write-down, write up or revaluation of any of the Acquired Assets or Assumed Obligations except depreciation accounted for in the ordinary course of business and write-downs of inventory which reflect the lower of cost or market and which are in the ordinary course of business and in accordance with GAAP; (f) failure to promptly pay and discharge current liabilities or agree with any party to extend the payment of any current liability with respect to the Acquired Assets or the Assumed Obligations; (g) Lien placed on any of the Acquired Assets (other than Permitted Liens); (h) sale, assignment, transfer, lease, license or otherwise placement of a Lien (other than Permitted Liens) on any of the tangible assets that constitute part of the Acquired Assets, except in the ordinary course of business consistent with past practice, or canceled any debts or Claims; (i) sale, assignment, transfer, lease, license or otherwise placement of a Lien (other than Permitted Liens) on any of the Seller Intellectual Property or other intangible assets, disclosure of any confidential information related to the Seller Intellectual Property to any Person or abandoned or permitted to lapse any of the Seller Intellectual Property; or (j) agreement, whether orally or in writing, to do any of the foregoing. 2.7 CONTRACTS. (a) Except as set forth in SCHEDULE 2.7(a) hereto, Seller is not a party to any written or oral: (i) Contract relating to the mortgaging, pledging or otherwise placing a Lien on any of the Acquired Assets (other than as contemplated by the IP Licensing Agreement); (ii) Contract pursuant to which the Purchaser will become the lessor of, or permits any third party to -6- hold or operate, any of the Acquired Assets; (iii) warranty Contract with respect to its services rendered or its products sold or leased related to the Media Business; (iv) Contract or non-competition provision in any Contract that would prohibit the Purchaser from freely engaging in any aspect of the Media Business or competing anywhere in the world; (v) Contracts related to the Media Business with independent agents, brokers, dealers or distributors which provide for annual payments in excess of $25,000; (vi) employment, consulting, sales, commissions, advertising or marketing Contracts related to the Media Business; (vii) Contracts related to the Media Business providing for "take or pay" or similar unconditional purchase or payment obligations; (viii) Contracts related to the Media Business with Persons with which, directly or indirectly, an Affiliate of the Seller also has a Contract; (ix) Contract that requires the consent of any Person, or contains any provision that would result in a modification of any rights or obligation of any Person thereunder or which would provide any Person any remedy (including rescission or liquidated damages), in connection with the execution, delivery or performance of this Agreement and the agreements contemplated hereby and the consummation of the transactions contemplated hereby and thereby; (x) nondisclosure or confidentiality Contracts related to the Media Business; (xi) power of attorney or other similar Contract or grant of agency related to any of the Acquired Assets or the Assumed Obligation; or (xii) Contract related to the Media Business the breach or termination of which would have a Material Adverse Effect or would materially adversely affect the Seller's ability to perform under the Transition Licensing Agreement. (b) The Seller has performed all material obligations required to be performed by it and is not in default in any material respect under or in material breach of nor in receipt of any Claim of default or breach under any Contract included in the Acquired Assets or required by Seller to perform its obligations under the Transition Licensing Agreement; no event has occurred which with the passage of time or the giving of notice or both would result in a default, breach or event of non-compliance under any such Contract; the Seller does not have any present expectation or intention of not fully performing all obligations under such Contracts; the Seller does not have any knowledge of any breach or anticipated breach by the other Persons to any such Contract; and there are no amounts outstanding, due or owing on any of the Contracts listed on SCHEDULE 1.2 attached hereto. (c) The Seller has delivered to the Purchaser true and complete copies of all the Contracts which constitute part of the Acquired Assets or the Assumed Obligations and documents listed in the schedules to this Agreement. 2.8 GOVERNMENT CONTRACTS. Neither the Seller, any Business Subsidiary nor the Media Business is a party to any Government Contract. 2.9 TITLE AND RELATED MATTERS. (a) The Seller has good, valid and marketable title to all of the Acquired Assets, free and clear of all Liens, Claims, Orders and other Indebtedness (other than Permitted Liens). Each of the Acquired Assets that is tangible property is in good condition and repair, ordinary wear and tear excepted and is free from material defects and damages. At the Closing, the Seller shall convey to the Purchaser good and marketable title to the Acquired Assets free and clear of all Liens, Claims, Orders and other Indebtedness (other than Permitted Liens). All properties used in the Media Business as of the Financial Statement Date are reflected in -7- the Financial Statements in accordance with and to the extent required by GAAP, except as to those assets that are leased. (b) None of the Acquired Assets or Assumed Obligations are leases for real or personal property. (c) None of the Acquired Assets is or will be on the Closing Date subject to any (i) Contracts of sale or lease, other than pursuant to this Agreement and the agreements contemplated to be executed in connection herewith or (ii) Liens (other than Permitted Liens). (d) There has not been since the Financial Statement Date, and will not be prior to the Closing Date, any sale, lease, or any other disposition or distribution of any of the Acquired Assets, now or hereafter owned by the Seller, except as otherwise consented to in writing by the Purchaser. Immediately after the Closing, the Purchaser will own, or have the unrestricted right to use, the Acquired Assets. The assignment of the Contracts constituting an Assumed Obligation hereunder will not give any party thereto a right to alter the terms and conditions of any such Contract absent the Purchaser's consent. 2.10 LITIGATION. Except as set forth in SCHEDULE 2.10 hereto, to the knowledge of the Seller, there is no Claim or Order threatened against the Seller, Media Business or any of the Acquired Assets nor is there any reasonable basis therefor. Except as set forth on SCHEDULE 2.10 hereto, the Seller is fully insured with respect to each of the matters set forth on SCHEDULE 2.10 and the Seller has not received any opinion or a memorandum from legal counsel to the effect that it is likely to incur, from a legal standpoint, any liability or obligations which could have an adverse effect in excess of $150,000. 2.11 TAX RETURNS. (a) TAX RETURNS. Except as set forth in SCHEDULE 2.11(a) attached hereto, the Seller has timely filed or caused to be timely filed with the appropriate taxing authorities all tax returns, statements, forms and reports (including elections, declarations, disclosures, schedules, estimates and information Tax returns) for Taxes ("TAX RETURNS") that are required to be filed by, or with respect to the Media Business or the Acquired Assets, on or prior to the Closing Date. Except as set forth in SCHEDULE 2.11(a) attached hereto, the Tax Returns have accurately reflected all material liability for Taxes of the Media Business and the Acquired Assets for the periods covered thereby. (b) PAYMENT OF TAXES. All material Taxes and Tax liabilities due by or with respect to the income, assets or operations of the Media Business and the Acquired Assets for all taxable years or other taxable periods that end on or before the Closing Date and, with respect to any taxable year or other taxable period beginning on or before and ending after the Closing Date, the portion of such taxable year or period ending on and including the Closing Date ("PRE-CLOSING PERIOD") have been timely paid or will be timely paid in full on or prior to the Closing Date, accrued and adequately disclosed and fully provided for on the Financial Statements, or with respect to taxable years or periods (or portions thereof) beginning after the Financial Statement Date, such Taxes and Tax liabilities were incurred in the ordinary course of business. -8- (c) OTHER TAX MATTERS. (i) Except as set forth on SCHEDULE 2.11(c)(i), the Seller (with respect to the operation of the Media Business or the Acquired Assets) has not: (i) been the subject of an audit or other examination of Taxes by the tax authorities of any nation, state or locality; (ii) received any notices to the effect that such an audit or examination of Taxes is contemplated or pending; or (iii) received any notices from any taxing authority relating to any issue which could affect the Tax liability of the Seller with respect to the operation of the Media Business or the Acquired Assets. (ii) The Seller (with respect to the operation of the Media Business or the Acquired Assets), as of the Closing Date, (A) has not entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes, (B) is not presently contesting its Tax liability before any court, tribunal or agency, (C) has not granted a power-of-attorney relating to Tax matters to any Person and (D) has not applied for and/or received a ruling or determination from a taxing authority regarding a past or prospective transaction of the Seller. (iii) Except as set forth on SCHEDULE 2.11(c)(iii) attached hereto, all Taxes that the Seller (with respect to the operation of the Media Business or the Acquired Assets) is (or was) required by law to withhold or collect in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable. (iv) No claim has ever been made by any taxing authority in a jurisdiction where Seller does not file Tax Returns that the Seller (in each case with respect to the operation of the Media Business or the Acquired Assets) is or may be subject to taxation by that jurisdiction. (v) There are no tax sharing, allocation, indemnification or similar agreements in effect as between the Seller or any predecessor or Affiliate thereof and any other party under which Purchaser could be liable for any Taxes or other claims of any party after the Closing Date. (vi) The Seller is not a "foreign person" within the meaning of Section 1445 of the Code. (vii) There are no Liens or security interests (other than Permitted Liens) on any of the Acquired Assets that arose in connection with any failure (or alleged failure) to pay any Taxes. 2.12 COMPLIANCE WITH LAW AND CERTIFICATIONS. (a) The Media Business and the Acquired Assets have been operated in compliance with all applicable Regulations and Orders, including, without limitation, all Regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, consumer protection, privacy, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety. There are no Claims pending, or -9- threatened, nor has the Seller received any notice, regarding any violations of any Regulations or Orders enforced by any Authority. (b) The Seller holds all registrations, accreditations and other certifications required for the conduct of the Media Business and the operation of the Acquired Assets by any Authority or trade group, and the Media Business and the Acquired Assets have been operated in material compliance with the terms and conditions of all such registrations, accreditations and certifications. The Seller has not received any notice alleging that it has failed to hold any such registration, accreditation or other certification. 2.13 EMPLOYEE BENEFIT PLANS. SCHEDULE 2.13 hereto sets forth a complete and accurate list of each domestic and foreign employee benefit plan (as defined in Section 3(3) of ERISA) or material fringe benefit plan maintained or contributed to or required to be contributed to by the Seller with respect to any of the Business Employees ("EMPLOYEE BENEFIT PLANS"). The Seller has not incurred, and no event has occurred and no condition or circumstance exists that could result, directly or indirectly, in, any unsatisfied liability (including, without limitation, any indirect, contingent or secondary liability) of the Seller under Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA arising in connection with any employee pension benefit plan covered or previously covered by Title IV of ERISA or such sections of the Code or ERISA. No asset or property of the Seller is or may be subject to any Lien arising under Section 412(n) of the Code or Section 302(f) or Section 4068 of ERISA. The Seller has not been, and does not expect to be, required to provide any security under Section 307 of ERISA or Section 401(a)(29) or 412(f) of the Code. The Seller has complied in all respects with the applicable requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code ("COBRA"), except to the extent which could result in a material liability to the Purchaser. Full payment has been made of all amounts which the Seller is required under applicable Regulations or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan to have paid as contributions or premiums thereunder with respect to the Business Employees as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. The execution of this Agreement and the consummation of the transactions contemplated hereby, do not constitute a triggering event under any Employee Benefit Plan, policy, arrangement, statement, commitment or agreement which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (whether of severance pay or otherwise), "parachute payment" (as such term is defined in Section 280G of the Code), acceleration, vesting or increase in benefits to any Business Employee. The Seller does not have any obligation under any Employee Benefit Plan or otherwise to provide post-employment or retiree welfare benefits to any Business Employee, except as specifically required by COBRA. 2.14 INTELLECTUAL PROPERTY. (a) SCHEDULE 2.14(a) attached hereto sets forth a complete and accurate list of all Seller Registered Intellectual Property. (b) The Seller exclusively owns and otherwise has all requisite right, title and interest in or valid and enforceable rights to practice under or otherwise use the Seller Intellectual Property. Except as set forth in SCHEDULE 2.14(b), each item of Seller Intellectual Property, is owned exclusively by the Seller (excluding Intellectual Property licensed to the -10- Seller under any Contracts listed on SCHEDULE 2.14(g)) and is free and clear of any Liens, Claims, Orders and other Indebtedness (other than Permitted Liens). (c) To the extent that any Seller Intellectual Property has been developed or created by any Person other than the Seller, the Seller has either (i) obtained ownership of, and is the exclusive owner of, all such Intellectual Property by operation of law or by valid assignment of any such rights or (ii) has obtained a license under or to such Intellectual Property. (d) The Seller has taken all commercially reasonable steps consistent with the reasonable exercise of its business judgment to protect and preserve ownership of the Seller Intellectual Property (excluding Intellectual Property licensed to the Seller under any Contracts listed on SCHEDULE 2.14(g)). The Seller has secured valid non-disclosure agreements and written assignments from all consultants and employees who contributed to the creation or development of the Seller Intellectual Property (excluding Intellectual Property licensed to the Seller under any Contracts listed on SCHEDULE 2.14(g)). In the event that a consultant is concurrently employed by the Seller and a third party, the Seller has taken commercially reasonable steps to ensure that any Seller Intellectual Property developed by such a consultant does not belong to the third party or conflict with the third party's employment agreement (such steps include ensuring that all work performed by such a consultant are performed only on the facilities of the Seller and only using the resources of the Seller). (e) The Seller has taken all commercially reasonable steps to protect and preserve the confidential and other proprietary information and trade secrets used in the Media Business or provided by any other Person to the Seller subject to a duty of confidentiality, including without limitation, know-how, source codes, data collections, ideas, and databases. Without limiting the generality of the foregoing, there is an enforced policy requiring each employee, consultant and independent contractor providing services to the Media Business relating to technology (including software and/or hardware), content or management to execute proprietary information, confidentiality and invention and copyright assignment Contracts containing substantially the provisions set forth in SCHEDULE 2.14(e), all current technology, content and management employees and current and former consultants and independent contractors working for the benefit of the Media Business in relation to technology, content or management have executed such a Contract; all former employees who were employed in capacities relating to technology, content or management have signed such a Contract, a similar Contract or are otherwise similarly bound. The Seller has not breached any agreements of nondisclosure or confidentiality or is currently claimed to have done so. (f) The Seller Intellectual Property, the Intellectual Property contemplated to be licensed to Purchaser under the Transition Licensing Agreement and the hardware used in the operation of the Acquired Assets and contemplated to be used under the Transition Licensing Agreement constitutes all of the Intellectual Property necessary and material to operate the websites listed on SCHEDULE 1.1(a) as contemplated under the Transition Licensing Agreement, including, but not limited to the design, creation, development, distribution, marketing, manufacture, use, import, license and sale or offering for sale of the products, technology and services related to the Media Business. (g) SCHEDULE 2.14(g) attached hereto sets forth a complete and accurate list of all Contracts to which the Seller or any Business Subsidiary is a party with respect to any Seller -11- Intellectual Property including Contracts relative to the licensing of Seller Intellectual Property to third parties or from third parties or where the Seller or any Business Subsidiary has authorized the retention of any rights to use any Intellectual Property that is or was Seller Intellectual Property to any Person. (h) The Media Business as currently conducted, including the design, development, use, import, manufacture and sale of the products, technology or services (including products, technology or services currently under development and under development as of the Closing Date) does not (i) violate, infringe, misuse, or misappropriate the Intellectual Property of any Person, (ii) violate any term or provision of any Contract concerning such Intellectual Property, (iii) violate the rights of any Person (including rights to privacy or publicity), or (iv) constitute unfair competition or an unfair trade practice under any Regulation. Except as set forth in SCHEDULE 2.14(h), which lists any proceedings or actions pending as of the date hereof before any court or tribunal (including the U.S. patent and trademark office or equivalent authority anywhere in the world) or threatened, related to any of the Seller Intellectual Property, the Seller has not received written notice, or to the best of their knowledge, other notice, from any Person claiming or threatening to claim that the operations of the Media Business or any act, product, technology or service (including products, technology or services currently under development or under development as of the Closing Date) of the Seller violates, infringes, misuses or misappropriates the Intellectual Property of any Person or constitutes unfair competition or trade practices under any Regulation, including notice of third party patent or other Intellectual Property rights from a potential licensor of such rights, and no third party claims are pending referencing the above or asserting any opposition, abandonment, interference, invalidity or other infirmity of any proprietary rights. (i) Except as set forth on SCHEDULE 2.14(i) hereto, each item of Seller Registered Intellectual Property which has been registered or issued is valid and subsisting and has not been abandoned, cancelled and all necessary registration, maintenance, renewal fees, annuity fees and Taxes in connection with such Seller Registered Intellectual Property have been duly paid and all necessary documents and certificates in connection with such Seller Registered Intellectual Property have been filed with the relevant patent, copyright, trademark, Internet domain name registrar or other Authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Seller Registered Intellectual Property which remain in full force and effect as of the Closing Date. The Seller has the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Seller Registered Intellectual Property. In each case in which the Seller has acquired ownership of any Seller Intellectual Property rights relating to the Media Business from any Person, the Seller has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such Intellectual Property (including the right to seek damages with respect to such Intellectual Property) to the Seller and, to the maximum extent provided for by and required to protect the Seller's ownership rights in and to such Seller Intellectual Property in accordance with applicable Regulations, the Seller has recorded each such assignment of Seller Registered Intellectual Property with the relevant governmental or regulatory Authority, including the U.S. Patent and Trademark Office, the U.S. Copyright Office, or their respective equivalents in any relevant foreign jurisdiction, as the case may be. (j) Other than with respect to the Intellectual Property which has been licensed to the Seller as set forth on SCHEDULE 2.14(g) attached hereto, there are no Contracts -12- between the Seller and any other Person with respect to Seller Intellectual Property under which there is any dispute (or, to the Seller's knowledge, facts that may reasonably lead to a dispute) regarding the scope of such Contract, or performance under such Contract, including with respect to any payments to be made or received by the Seller hereunder. (k) Except as set forth on SCHEDULE 2.14(k) attached hereto, no Person is infringing or misappropriating any Seller Intellectual Property. Except as set forth on SCHEDULE 2.14(k) attached hereto, to the best of the Seller's knowledge, the Seller has not made any Claim in writing of a violation, infringement, misuse or misappropriation by any third party (including without limitation, any employee of the Seller or any Business Subsidiary) of its rights to, or in connection with any Seller Intellectual Property which Claim is pending. (l) Neither this Agreement nor any transactions to be accomplished pursuant to this Agreement will (i) result in Purchaser's granting any rights or Licenses with respect to the Intellectual Property of Purchaser (including, without limitation, the Seller Intellectual Property purchased or licensed by the Purchaser) to any Person pursuant to any Contract to which the Seller is a party or by which any of their respective assets and properties are bound, or (ii) cause a default or breach by the Seller of any Contract. (m) The IT has performed to date in all material respects as documented by their vendors, licensors or developers (whether third party or in-house), and in accordance with all specifications in user documentation and has provided to date all functionality necessary and material in order to support the Media Business as currently conducted, and (ii) are, to Seller's knowledge, free from material defects in design, workmanship and materials which materially affect their performance and contain no "virus", "worm", "time-bomb", "trap door", "back door" or other device or feature designed to disable or interfere, in any material respect with the functioning of any software, firmware or hardware, to corrupt, destroy, encrypt, rename or hide data or to permit unauthorized access to the same, except for documented software keys and expiration features identified in writing to the Purchaser's Chief Technology Officer or such other person in charge of the Purchaser's information technology in connection with this transaction or under the Transition Licensing Agreement. (n) Except as set forth on SCHEDULE 2.14(n), (i) all source code included in the Seller Intellectual Property, is and at all times has been exclusively in the possession and control of the Seller and is not and has not been the subject of any source code escrow arrangement nor has any such source code been retained off the business premises of the Seller by or is in the possession of any current or former contractor, employee, or third party, (ii) no customers of, or Persons outside of, the Media Business have been provided with or otherwise possess the means of accessing in any manner the Seller's IT inventory (except insofar as members of the public may access Seller's web sites in the ordinary course) and (iii) the Seller does not have any obligation, duty or responsibility, under Contract or otherwise, to maintain or support any systems, software or applications provided to or otherwise in the possession or control of customers of, or Persons outside of, the Media Business. (o) Except as set forth on SCHEDULE 2.14(o), as of the Closing Date, the internet domain names and URLs (as defined in the definition of Intellectual Property) in the Seller Intellectual Property direct and resolve to the appropriate internet protocol addresses and are accessible to Internet users on those certain computers used by the Seller to make the Sites -13- (as defined in the definition of Intellectual Property) so accessible substantially twenty-four (24) hours per day, seven (7) days per week and are operational for downloading content from the those certain computers used by the Seller to make the Sites so accessible on a twenty-four (24) hours per day, seven (7) days per week basis. The Seller has fully operational back-up copies of the Sites (and all related software, databases and other information), made from the current versions of the Sites as accessible to Internet users. From the date hereof until the Closing Date, back-up copies shall have been made no less frequently than every fourteen (14) days and such back-up copies shall have been stored in a safe and secure environment, fit for the back-up such media, and are not located at the same location of the Server. The Seller has no reason to believe that the Sites will not operate or will not continue to be accessible to internet users on substantially a 24/7 basis prior to, at the time of, and, provided they are properly maintained and operated by Purchaser, after the Closing Date. (p) The goodwill in the Intellectual Property as carried on the Seller's March 31, 2002 balance sheet is consistent with (i) accounting practice in the Seller's industry; (ii) GAAP or comparable accounting practices, in the jurisdiction where the relevant Intellectual Property is used, and (iii) the history of the Intellectual Property. (q) SCHEDULE 2.14(q) attached hereto sets forth a complete and accurate list of (i) all in-house content editors and providers or third party feeds, which are currently used by the Seller in connection with the operation of the Media Business as contemplated to be operated under the Transition Licensing Agreement. The Seller has all material rights necessary to use on its Sites or otherwise any and all content provided by the content editors and providers and third party feeds listed on SCHEDULE 2.14(q) free and clear of any valid third party Claims. 2.15 CUSTOMER WARRANTIES. There are no existing, or to the best knowledge of the Seller, potential Claims under or pursuant to any warranty, whether expressed or implied, on products or services related to the Media Business sold prior to the Closing Date. All of the services rendered by the Seller (whether directly or indirectly through independent contractors) have been performed in conformity with all expressed warranties and with all applicable contractual commitments, and, the Seller does not have nor shall have any liability for replacement, repair or modification or for other damages relating to or arising from any such services which would have a Material Adverse Effect. Seller has no reason to expect an increase in warranty Claims in the future. 2.16 ENVIRONMENTAL MATTERS. Neither the Media Business nor the operation thereof violates or has violated any applicable Environmental Law. The Seller is not required to possess Environmental Permits for the conduct or operation of the Media Business. The Seller does not and has not generated, used, treated or stored, transported to or from, or released or disposed of any Hazardous Substances on or at any of its facilities. The Seller has not received any notice from any Authority or any private Person that the Media Business or the operation of any of its facilities is in violation of any Environmental Law or any Environmental Permit or that it is responsible (or potentially responsible) for the cleanup of any Hazardous Substances at, on or beneath any property owned or leased by the Seller in the operation of the Media Business. The Seller has not been the subject of any foreign, Federal, state, local, or private Claim involving a demand for damages or other potential liability with respect to a violation of Environmental Laws or under any common law theories relating to operations or the condition of any facilities or property (including underlying groundwater) owned, leased, or operated by the Seller. -14- 2.17 CAPITAL EXPENDITURES AND INVESTMENTS. The Seller has no budget for capital expenditures to be made by or on behalf of the Media Business. 2.18 DEALINGS WITH AFFILIATES. There are no Contracts included in the Acquired Assets or Assumed Obligations to which the Seller, on the one hand, is a party and an Affiliate of the Seller, on the other hand, is also a party. 2.19 INSURANCE. The Seller has had Policies in full force and effect that provide for coverages that are usual and customary as to amount and scope in the Media Business. All of the Policies have been in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid or accrued therefor, and no notice of cancellation or termination has been received with respect to any Policy. The Seller has not breached or otherwise failed to perform in any material respect its obligations under any of the Policies nor has the Seller received any adverse notice or communication from any of the insurers party to the Policies with respect to any such alleged breach or failure in connection with any of the Policies. All Policies are sufficient for compliance with all Regulations and all Contracts to which the Media Business and the Acquired Assets are subject are to the Seller's best knowledge valid, outstanding, collectible and enforceable policies, and will not in any way be affected by, or terminate or lapse by reason of, the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 2.20 BROKERAGE. There are no Claims for brokerage commissions, investment banking or finders' fees or expenses or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or Contract binding upon the Seller, the Acquired Assets or the Media Business. 2.21 CUSTOMERS AND SUPPLIERS. None of the parties to any Contract included in the Acquired Assets or the Assumed Obligations or otherwise licensed pursuant to the Transition Licensing Agreement has advised the Seller in writing, or to the Seller's knowledge orally notified, within the past year that it will stop, or decrease the rate of, supplying materials, or changed its price or terms of any products, or services to the Media Business. No purchase order or commitment of the Media Business is in excess of normal requirements, nor are prices provided therein in excess of current market prices for the products or services to be provided thereunder. 2.22 PERMITS. The Permits listed on SCHEDULE 2.22 hereto are the only material Permits that have been required for the conduct of the Media Business in accordance with applicable Regulations and Orders of any Authority. The Media Business has duly and validly held all such Permits, and each such Permit has been in full force and effect and, to the best of the knowledge of the Seller, no suspension or cancellation of any such Permit is threatened and there is no basis for believing that such Permit will not be renewable upon expiration. 2.23 IMPROPER AND OTHER PAYMENTS. (a) Neither the Seller nor any of its directors, officers, or key employees, or any agent or representative of the Media Business nor any Person acting on behalf of any of them, has made, paid or received any unlawful bribes, kickbacks or other similar payments to or from any Person or Authority, (b) no contributions have been made, directly or indirectly, to a domestic or foreign political party or candidate, (c) no improper foreign payment (as defined in the Foreign Corrupt Practices Act) has been made, and (d) the -15- internal accounting controls of the Seller and each Business Subsidiary are adequate to detect any of the foregoing under current circumstances. 2.24 DISCLOSURE. Neither this Agreement nor any of the Contracts, exhibits, schedules, attachments, written statements, documents, certificates or other items prepared for or supplied to the Purchaser by or on behalf of the Seller with respect to the transactions contemplated hereby contains any untrue statement or omits a fact necessary to make each statement contained herein or therein not misleading except as would not have a Material Adverse Effect or would otherwise not materially adversely affect the Seller's ability to perform under the Transition Licensing Agreement. There is no fact which the Seller has not disclosed to the Purchaser herein and of which the Seller, or any of its officers, directors or executive employees is aware which could reasonably be anticipated to have a Material Adverse Effect on the Media Business or the ability of the Purchaser to operate the Acquired Assets. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Seller as of the date hereof: 3.1 CORPORATE ORGANIZATION, ETC. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation with full corporate authority to carry on its business as it is now being conducted and to own, operate and lease its properties and assets. The Purchaser is duly qualified or licensed to do business and is in good standing in every jurisdiction in which the conduct of its business, the ownership or lease of its properties, require it to be so qualified or licensed. True, complete and correct copies of the Purchaser's deed of incorporation and bylaws as presently in effect are set forth in SCHEDULE 3.1 hereto. 3.2 AUTHORIZATION, ETC. The Purchaser has full power and authority to enter into this Agreement and the agreements contemplated hereby to which it is a party. The execution, delivery and performance of this Agreement and all other agreements and transactions contemplated hereby have been duly authorized by the Board of Directors of the Purchaser and no other corporate proceedings on the part of the Purchaser, including the approval of the Purchaser's stockholders, are necessary to authorize this Agreement, the agreements contemplated hereby and the transactions contemplated hereby and thereby. This Agreement and all other agreements contemplated hereby to be entered into by the Purchaser each constitutes a legal, valid and binding obligation of the Purchaser enforceable against it in accordance with its terms. 3.3 NO VIOLATION. The execution, delivery and performance by the Purchaser of this Agreement, and all other agreements contemplated hereby, and the fulfillment of and compliance with the respective terms hereof and thereof by the Purchaser, do not and will not (a) conflict with or result in a breach of the terms, conditions or provisions of, (b) constitute a default or event of default under (whether with or without due notice, the passage of time or both), (c) result in the creation of any Lien, Claim or Order upon the Purchaser's assets pursuant to, (d) give any third party the right to modify, terminate or accelerate any obligation under, (e) result in a violation of, or (f) require any authorization, consent, approval, exemption or other action by, -16- notice to, or filing with any third party or Authority pursuant to, the deed of incorporation or bylaws of the Purchaser or any applicable Regulation, Order or Contract to which the Purchaser or its assets is subject. The Purchaser has complied with all applicable Regulations and Orders in connection with the execution, delivery and performance of this Agreement, the agreements contemplated herby and the transactions contemplated hereby and thereby. 3.4 BROKERAGE. Except as set forth on SCHEDULE 3.4 attached hereto, there are no Claims for brokerage commissions, investment banking or finders' fees or expenses or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or Contract binding upon the Purchaser or its Affiliates. ARTICLE IV COVENANTS OF THE SELLER Until the Closing Date, except as otherwise consented to or approved by the Purchaser in writing, the Seller agrees that it shall act, or refrain from acting where required hereinafter, to comply with the following: 4.1 OPERATION OF MEDIA BUSINESS. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Closing, the Seller shall operate the Acquired Assets and conduct the Media Business in the ordinary course of business consistent with commercially reasonable business practices and in compliance with applicable Regulations, and use its commercially reasonable efforts so as to preserve the current value and integrity of the Media Business and the Acquired Assets, pay all Taxes and accounts payable as they become due and payable, maintain in full force and effect the existence of all Intellectual Property, maintain insurance on the Acquired Assets (in amounts and types consistent with past practice), and use its commercially reasonable efforts to preserve the goodwill and organization of the Media Business and their relationships with customers, vendors, suppliers and others having business dealings with the Seller or any Business Subsidiary relating to the Media Business. Without limiting the generality of the foregoing, prior to the Closing, the Seller shall not, and shall cause each of its Affiliates and the Seller's and its Affiliates' officers, directors, shareholders, employees, partners, representatives and agents not to: (a) enter into any material Contract which may be included in the Acquired Assets or make a material change or modification to any existing material Contract included in the Acquired Assets, except for agreements relating to sales of inventory and purchase of inventory from suppliers in the ordinary course of business and consistent with past practices; (b) sell, lease, dispose of or otherwise distribute any of the Acquired Assets, except for agreements relating to sales of inventory and purchase of inventory from suppliers in the ordinary course of business and consistent with past practices; (c) mortgage or pledge any of the Acquired Assets or subject any Acquired Assets to any Lien other than Permitted Liens; (d) materially increase in any manner the salary, bonus, severance or other compensation or benefits of any Business Employee; -17- (e) adopt any benefit plan for employees of the Media Business or except as may be required by applicable Regulations, amend or modify any existing Employee Benefit Plan for such employees, except for such retention arrangements which the Purchaser shall have no obligations under; (f) take or omit to take any action that would require disclosure under Article II, or that would otherwise result in a breach of any of the representations, warranties or covenants made by the Seller in this Agreement or in any of the agreements contemplated hereby; (g) take any action or omit to take any action which act or omission would reasonably be anticipated to have a Material Adverse Effect on the Media Business or the Acquired Assets except as contemplated by this Agreement or any agreement to be executed in connection herewith or in connection with the consummation of the transactions contemplated herein or therein; or (h) agree in writing or otherwise to take any of the foregoing actions. Additionally, from the date of this Agreement to the Closing Date, the Seller shall promptly consult with the Purchaser about any material matters concerning the Acquired Assets or the Media Business. 4.2 FULL ACCESS AND DISCLOSURE. The Seller shall afford to the Purchaser and its counsel, accountants, agents and other authorized representatives and to financial institutions specified by the Purchaser reasonable access during business hours to the Seller's facilities, properties, books and records in order that the Purchaser may have full opportunity to make such reasonable investigations as they shall desire to make of the affairs of the Media Business and the Acquired Assets. The Seller shall cause its officers and employees, and shall use its commercially reasonable efforts to cause its counsel and auditors to furnish such additional financial and operating data and other information as the Purchaser shall from time to time reasonably request including, without limitation, any internal control recommendations made by its independent auditors in connection with any audit of the Seller or the Media Business. From time to time prior to the Closing Date, the Seller shall promptly supplement or amend information previously delivered to the Purchaser with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or disclosed herein; provided, however, that such supplemental information shall not be deemed to be an amendment to any schedule hereto and shall not change the risk allocation of this Agreement between the Purchaser and the Seller. 4.3 NON-COMPETITION; NON-SOLICITATION. (a) Except as contemplated in the Transition Licensing Agreement, during the Restricted Period, in the Restricted Area, the Seller and each of its Affiliates, agree not to, directly or indirectly, alone or as a partner, officer, director, employee, consultant, agent, independent contractor, member or stockholder of any Person, operate or develop any Internet web site (a "SITE") targeting the general public and from which the Seller or any Affiliate generates or intends to generate revenues principally from the sale of advertising, including but not limited to banners, newsletters, and the sale of any other promotional spaces in the Site, -18- and/or sale of content or services to the Site's users, including but not limited to pay per view, pay per listen, pay per use content or services, ecommerce and Internet access; PROVIDED, HOWEVER, that the foregoing shall not prohibit Seller or its Affiliates from designing and operating (i) on behalf of unaffiliated third parties, Sites intended for use by specific segments of the general pubic for the purpose of marketing such third parties' goods and services or providing services to its customers; (ii) a Site intended for use specifically by users of mobile telephony services; (iii) a corporate web site for internal or external use or (iv) the following existing websites: guiarj.com.br; guiasp.com.br; paisas.com; openchile.com; nacidade.com.br; openchile.cl; panoramas.cl; yoinvito.com; Adnet.com.mx; and batepapo.com.br; PROVIDED FURTHER, HOWEVER, that the record or beneficial ownership by the Seller as a passive investor of one percent (1%) or less of the outstanding publicly traded capital stock of any such Person for investment purposes shall not be deemed to be in violation of this Section 4.3 so long as the Seller does not breach Section 4.4. (b) The Seller further agrees that, during the Restricted Period, in the Restricted Area the Seller shall not in any capacity, either separately, jointly or in association with others, directly or indirectly do any of the following: (i) employ or seek to employ any Person or agent who is then employed or retained by the Purchaser or its Affiliates (or who was so employed or retained at any time within the one (1) year prior to the date the Seller employs or seeks to employ such Person); (ii) solicit, induce, or influence any proprietor, partner, stockholder, lender, director, officer, employee, joint venturer, investor, consultant, agent, lessor, supplier, customer or any other Person which has a business relationship with the Purchaser or its Affiliates, at any time during the Restricted Period, to discontinue or reduce or modify the extent of such relationship with the Purchaser or its Affiliates; (iii) submit, solicit, encourage or discuss any proposal, plan or offer to acquire an interest in any of the Purchaser's or its Affiliates' identified potential acquisition candidates and (iv) use any of the information contained in the users' databases related to the domains acquired by Purchaser and included in SCHEDULE 1.1(a). The "RESTRICTED PERIOD" shall mean eighteen (18) months after the date of this Agreement. The "RESTRICTED AREA" shall mean worldwide. (c) The Seller recognizes and agrees that compliance with the covenants contained in this Section 4.3 are necessary to protect the Purchaser, and that a breach by the Seller of any of the covenants set forth in this Section 4.3 could cause irreparable harm to the Purchaser, that the Purchaser's remedies at law in the event of such breach would be inadequate, and that, accordingly, in the event of such breach, a restraining order or injunction or both may be issued against the Seller without the requirement that the Purchaser post a bond, in addition to any other rights and remedies which are available to the Purchaser. If this Section 4.3 is more restrictive than permitted by the laws of any jurisdiction in which the Purchaser seeks enforcement hereof, this Section 4.3 shall be limited to the extent required to permit enforcement under such laws. In particular, the parties intend that the covenants contained in the preceding portions of this Section 4.3 shall be construed as a series of separate covenants, one for each location specified. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in this Section 4.3, then such unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If any court of competent jurisdiction shall determine the foregoing covenant to be unenforceable with respect to the term or the scope of the subject matter or geography covered thereby, then such covenant shall -19- nevertheless be enforceable by such court against the other party upon such shorter term or within such lesser scope as may be determined by such court to be reasonable and enforceable. 4.4 CONFIDENTIALITY. (a) Except as provided in Section 4.4(b), after the Closing Date, and for a period of five (5) years thereafter, the Seller agrees that it will keep confidential and shall use its best efforts to cause its Affiliates, and their respective officers, directors, employees and agents to keep confidential all of the Purchaser's and its Affiliates' proprietary information that is conveyed to the Purchaser as part of the Acquired Assets or is assigned as part of the Assumed Obligations or is otherwise exposed to the Seller in the course of the transactions contemplated hereby, including, for purposes of this Section 4.4, information about the Media Business' business plans and strategies, marketing ideas and concepts, especially with respect to unannounced products and services, present and future product plans, pricing, traffic volumes, volume estimates, financial data, product enhancement information, business plans, marketing plans, sales strategies, customer information (including customers' applications and environments), market testing information, development plans, specifications, customer requirements, configurations, designs, plans, drawings, apparatus, sketches, software, hardware, data, prototypes, connecting requirements or other technical and business information. (b) Notwithstanding the foregoing, such proprietary information shall not be deemed confidential and the Seller shall have no obligation with respect to any such proprietary information that, following the Closing: (i) is or becomes publicly known through publication, inspection of a product, or otherwise, and through no negligence or other wrongful act of any of the Seller; (ii) is received by the Purchaser from a third party without similar restriction and without breach of any agreement; or (iii) is, subject to Section 4.4(c), required to be disclosed under applicable Law or judicial process. (c) If the Seller (or any of its Affiliates or officers, directors, employees or agents) is requested or required (by oral question, interrogatory, request for information or documents, subpoena, civil investigative demand or similar process) to disclose any such proprietary information, the Seller will promptly notify the Purchaser of such request or requirement and will cooperate with the Purchaser such that the Purchaser may seek an appropriate protective order or other appropriate remedy. If, in the absence of a protective order or the receipt of a waiver hereunder, the Seller (or any of its Affiliates) is in the opinion of the Seller's counsel compelled to disclose the proprietary information or else stand liable for contempt or suffer other censure or significant penalty, the Seller (or its Affiliate) may disclose only so much of the proprietary information to the party compelling disclosure as is required by law. The Seller will exercise its (and will cause its Affiliates to exercise their) commercially reasonable efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to such proprietary information. 4.5 FULFILLMENT OF CONDITIONS PRECEDENT. The Seller shall use its best efforts to obtain at its expense all such waivers, Permits, consents, approvals or other authorizations from third -20- Persons and Authorities, and to do all things as may be necessary in connection with transactions contemplated by this Agreement. 4.6 EXCLUSIVITY. From and after the date hereof until the earlier of the Closing Date or the termination of this Agreement, the Seller will not, and will cause each of its Affiliates and the Seller's and its Affiliates' officers, directors, shareholders, employees, partners, representatives and agents not to enter into any agreement, negotiate with any other corporation, firm or other person, or solicit, encourage, entertain, initiate, pursue or consider any inquiries or proposals (whether written or oral) relating to (i) the possible disposition of all or any portion of the Acquired Assets or the Media Business (except inventory disposed of in the ordinary course of business) or (ii) any merger, consolidation or other business combination involving any of the Seller which would be inconsistent with the transaction contemplated by this Agreement. 4.7 DELIVERIES AFTER CLOSING. From time to time after the Closing, at the Purchaser's request and without further consideration from the Purchaser, the Seller shall and shall cause any Business Subsidiary, as applicable, to execute and deliver such other instruments of conveyance and transfer and take such other action as the Purchaser reasonably may require to convey, transfer to and vest in the Purchaser and to put the Purchaser in possession of any rights or property to be sold, conveyed, transferred and delivered hereunder. Among other things, the Seller agrees to promptly notify the Purchaser in writing at such time as the Seller receives notification (written or otherwise) that it must take certain actions that, if not taken, will adversely affect the Registered Intellectual Property or the right of the Seller (and following the Closing, the Purchaser) to use same, including the payment of any registration, maintenance, renewal fees, annuity fees and Taxes or the filing of any documents, applications or certificates for the purposes of maintaining, perfecting or preserving or renewing any Seller Registered Intellectual Property. 4.8 INTELLECTUAL PROPERTY PROTECTION. During the period from the date of this Agreement and continuing until the earlier of (x) the termination of this Agreement or (y) the Closing Date, the Seller agrees to take any and all actions necessary to protect and preserve the Seller Intellectual Property, including, without limitation, to: (a) at its own expense, make timely payment of all post-issuance renewal or other fees required to maintain in force its rights under all Seller Registered Intellectual Property; (b) use or license the use of any trademarks included in the Seller Registered Intellectual Property in interstate commerce and to take all such other actions as are necessary to preserve such marks as trademarks or service marks under the laws of the United States and any other relevant countries and, at its own expense, to diligently process and prosecute all documents required to maintain trademark registrations, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office for all such trademarks, and pay all fees and disbursements in connection therewith and not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Purchaser; (c) file copyright applications in the United States Copyright Office (and the equivalent office in any other country) where the failure to obtain copyright protection could -21- have a Material Adverse Effect on the value of the Seller Intellectual Property) within the appropriate time periods provided under the copyright laws of the United States (including, without limitation, those set forth in 17 U.S.C.) and such other countries, with respect to each copyrightable work set forth in SCHEDULE 1.1(a) and with respect to any other work which is material to the Seller Intellectual Property; (d) diligently prosecute all applications for United States and foreign copyrights filed pursuant to subsection (c) above and not abandon any such application prior to exhaustion of all applicable remedies absent written consent of the Purchaser. 4.9 ELECTRONIC DATA PROTECTION. During the period between the date of this Agreement and the Closing Date, the Seller shall use its best efforts to take any and all commercially reasonable actions necessary to retain all electronic data and records relating to the Acquired Assets, including without limitation, that electronic data, regardless of format, residing on Seller data servers, individual employee's personal computer fixed, disk drives, floppy and CD/DVD diskettes on or off-site data archives or backup sites or disaster recovery locations, in any media. During this period the Seller shall use its commercially reasonable efforts to ensure that no such data is lost or destroyed by either electronic/magnetic or physical destruction means including intentional loss or destruction by the Seller's employees of data files under their control outside the ordinary course of business or in connection with any employment terminations or employee departures. The Seller shall use its commercially reasonable efforts to take such steps to ensure that files and data in each employee's Seller e-mail accounts or in storage on or ancillary to seller-owned or controlled computer or otherwise located on a Seller's e-mail server or document server is archived as of the date of this Agreement and that such archived data will be stored under secured conditions to permit ready access and retrieval after the Closing Date and that, from the date hereof, no archival storage shall be recycled, written over, destroyed or discarded. Notwithstanding anything contained in this Section 4.9, the Purchaser acknowledges and agrees that some deletion of e-mails by individual users of the services provided by the Media Business occurs in the ordinary course of the Media Business and that such deletion shall not constitute a breach of the Seller's covenants in this Section 4.9. 4.10 INTELLECTUAL PROPERTY. The Seller shall give the Purchaser prompt notice that any Person shall have (a) commenced, or shall have notified the Seller that it intends to commence, a Claim or (b) provided the Seller with notice, in either case which allege(s) that any products or services related to the Acquired Assets, Assumed Obligations or Transition Licensing Agreement infringes or otherwise violates the intellectual property rights of such Person, is available for licensing from a potential licensor providing the notice or otherwise alleges that the Seller does not otherwise own or have the right to exploit such Intellectual Property, including the Seller Intellectual Property. 4.11 BOOKS AND RECORDS. Until the seventh anniversary of the Closing Date, the Seller will, to the extent necessary in connection with any Taxes (including, without limitation, the tax basis of any Acquired Asset) or other matter relating to the Media Business or the Acquired Assets for any period ending at or prior to the Closing, and without charge to Purchaser, (i) retain and, as the Purchaser may reasonably request, permit the Purchaser and its agents to inspect and copy all original books, records and other documents and all electronically archived data not deliverable to the Purchaser at Closing related to the Media Business or the Acquired Assets and (ii) make reasonably available to the Purchaser, the officers, directors, employees and agents of -22- the Seller and its Affiliates. The Seller shall, from and after the Closing Date, preserve all such books, records and other documents related to the Business or the Acquired Assets for such seven (7) year period, and, thereafter, shall not destroy or dispose of or allow the destruction or disposition of such books, records and other documents without first having offered in writing to deliver such books, records and other documents to the Purchaser at the Purchaser's expense. If the Purchaser fails to request such books, records and other documents within thirty (30) days after receipt of the notice described in the preceding sentence, the Seller may dispose of such books, records and other documents. 4.12 COBRA. The Seller shall be solely responsible for compliance with the requirements of COBRA, including, without limitation, the provision of continuation coverage, with respect to all employees or former employees of the Seller and their qualified beneficiaries for whom a qualifying event occurs prior to or in connection with the transactions contemplated by this Agreement. The terms "continuation coverage," "qualified beneficiaries," and "qualifying event" are used herein with the meanings ascribed to them in COBRA. 4.13 EMPLOYEE BENEFITS PLANS. During the period from the date of this Agreement to the Closing Date, the Seller shall not terminate any employee pension benefit plan subject to Title IV of ERISA maintained or contributed to or required to be contributed to by the Seller or any subsidiary thereof. 4.14 PRESS RELEASE. As soon as reasonably practicable after the execution of this Agreement, the Seller shall prepare, with the full cooperation of Purchaser, a press release to publicly disclose this Agreement and the material terms hereof. Within two (2) Business Days of the execution of this Agreement, subject to the Purchaser's prior approval, the Seller shall file such press release with the Securities and Exchange Commission on Form 8-K (the "FORM 8-K"). 4.15 CHARTER AMENDMENTS. During the period from the date of this Agreement to the Closing Date, the Seller shall adopt board resolutions that will (a) propose an amendment to its certificate of incorporation effecting a name change, (b) recommend that the amendment be adopted, (c) propose that the amendment be considered at the next stockholders' meeting to be held within six (6) months of the Closing Date, and (d) approve that the Seller file for a use of a fictitious name that shall not contain the name "StarMedia" in Delaware, Florida and New York and any other jurisdiction in which the Seller is qualified to do business and shall file such fictitious name applications on the Closing Date; provided that the Seller covenants that the foregoing amendment of its certificate of incorporation will occur not later than six (6) months from the Closing Date. During the period from the date of this Agreement to the Closing Date, Seller shall also take steps to begin the process of amending the charter documents of each of its applicable subsidiaries so that within ninety (90) days following the Closing Date, each such organizing document shall be amended for the purpose of adopting a corporate name not containing the name "StarMedia" or any variation thereof. A complete and accurate list of such subsidiaries is attached hereto as SCHEDULE 4.15. On the Closing Date, the Seller and each subsidiary shall cease doing business under the name "StarMedia" or any variation thereof. -23- ARTICLE V COVENANTS OF THE PURCHASER The Purchaser hereby covenants and agrees with the Seller that: 5.1 CONFIDENTIALITY. Except as may be required by lawful Order of an Authority of competent jurisdiction, the Purchaser agrees that unless and until the transactions contemplated hereby have been consummated, the Purchaser and its respective representatives and Affiliates and their representatives and advisors will hold in strict confidence all data and information obtained from the Seller in connection with the transactions contemplated hereby, except any of the same which (a) was, is now, or becomes generally available to the public (but not as a result of a breach of any duty of confidentiality by which the Purchaser and its respective representatives and advisors are bound); (b) was known to the Purchaser prior to its disclosure to the Purchaser as demonstrated by the Purchaser's records; or (c) is disclosed to the Purchaser by a third party not known by the Purchaser to be subject to any duty of confidentiality to the Seller prior to its disclosure to the Purchaser by the Seller. The Purchaser will use such data and information solely for the specific purpose of evaluating the transactions contemplated hereby. If this Agreement is properly terminated, the Purchaser and its Affiliates and their representatives and advisors will promptly destroy all such data, information and other written material (including all copies thereof) which has been obtained by the Purchaser, and the Purchaser will make no further use whatsoever of any of such or the information and knowledge contained therein or derived therefrom. 5.2 NON-SOLICITATION. (a) Except with respect to those persons listed on SCHEDULE 5.3 hereto, the Purchaser agrees that, during the Restricted Period, in the Restricted Area, the Purchaser shall not in any capacity, either separately, jointly or in association with others, directly or indirectly do any of the following: (i) employ or seek to employ any Person or agent who is then employed or retained by the Seller or its Affiliates (or who was so employed or retained at any time within the one (1) year prior to the date the Purchaser employs or seeks to employ such Person); (ii) solicit, induce, or influence any proprietor, partner, stockholder, lender, director, officer, employee, joint venturer, investor, consultant, agent, lessor, supplier, customer or any other Person which has a business relationship with the Seller or its Affiliates (other than the connection with the Media Business), at any time during the Restricted Period, to discontinue or reduce or modify the extent of such relationship with the Seller or its Affiliates; or (iii) submit, solicit, encourage or discuss any proposal, plan or offer to acquire an interest in any of the Seller's or its Affiliates' identified potential acquisition candidates. (b) Purchaser recognizes and agree that compliance with the covenants contained in this Section 5.2 are necessary to protect Seller, and that a breach by Purchaser of any of the covenants set forth in this Section 5.2 could cause irreparable harm to the Seller, that the Seller's remedies of law in the event of such breach would be inadequate, and that, accordingly, in the event of such breach, a restraining order or injunction or both may be issued against the Purchaser without the requirement that the Seller post a bond, in addition to any other rights and remedies which are available to the Seller. Notwithstanding anything contained in the foregoing to the contrary, the Purchaser and its Affiliates may hire or cause to be hired any person employed by the Seller or any Affiliate (i) responding to any newspaper advertisement or the like which is directed at a broad audience and does not mention the Purchaser by name, or -24- (ii) who initiates a solicitation for hire by the Purchaser; PROVIDED, HOWEVER, the Purchaser and its Affiliates may hire or cause to be hired any person employed or previously employed by the Seller or any Affiliate upon entry of an order of Bankruptcy Court approving a plan of liquidation of the Media Business or the cessation of operations of the Media Business. 5.3 BUSINESS EMPLOYEES. Prior to or following the Closing, the Purchaser or an Affiliate of the Purchaser may offer employment to any or all of the Business Employees identified on SCHEDULE 5.3 attached hereto. The Seller hereby waives any and all restrictions set forth herein or otherwise on the Purchaser or any of its Affiliates related to the Purchaser's ability to solicit for employment any or all of the Business Employees. From the date hereof to the Closing Date, the Seller shall upon request of the Purchaser provide the Purchaser with reasonable access during business hours to the Business Employees. 5.4 LICENSING AGREEMENT. Prior to the Closing, the Purchaser and the Seller will negotiate a licensing agreement pursuant to which the Purchaser will license certain of the Acquired Assets to the Seller in substantially the form attached hereto as EXHIBIT 5.4 (the "IP LICENSING AGREEMENT"). ARTICLE VI OTHER AGREEMENTS The parties further agree as follows: 6.1 FURTHER ASSURANCES. Subject to the terms and conditions of this Agreement, the parties hereto shall use their best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Regulations and Orders to consummate and make effective as promptly as possible the transactions contemplated by this Agreement and the agreements contemplated hereby, and to cooperate with each other in connection with the foregoing, including without limitation using their best efforts (a) to obtain all necessary waivers, consents, and approvals from other parties to Contracts; (b) to obtain all necessary Permits, consents, approvals and authorizations as are required to be obtained under any Regulation or Order; (c) to lift or rescind any injunction or restraining order or other Order adversely affecting the ability of the parties to consummate the transactions contemplated hereby; (d) to effect all necessary registrations and filings; and (e) to fulfill all conditions to the obligations of the parties under this Agreement. Each of the Purchaser and the Seller further covenants and agrees that it shall use its respective best efforts to prevent, with respect to a threatened or pending preliminary or permanent injunction or other Regulation or Order the entry, enactment or promulgation thereof, as the case may be. 6.2 PUBLIC ANNOUNCEMENTS. Except as set forth in Section 4.14, or as required by applicable law, neither the Seller nor any Affiliate, representative or stockholder of the Seller, shall disclose any of the terms of this Agreement to any third party without the Purchaser's prior written consent. The form, content and timing of all press releases, public announcements or publicity statements with respect to this Agreement and transactions contemplated hereby shall be subject to the prior consent and approval of the Purchaser, which approval shall not be unreasonably withheld or delayed. No press releases, public announcements or publicity statements shall be released by the Seller without such prior consent. -25- 6.3 STOCKHOLDER ACTIONS. If between the date hereof and Closing, any stockholder of the Seller brings any action to restrain, delay or otherwise enjoin the transactions contemplated by this Agreement, the Seller shall use its best efforts to obtain the necessary approval or ratification of the Seller's execution and delivery of this Agreement and the transactions contemplated hereby. 6.4 COVENANTS. During the time period commencing on the date hereof and continuing until the Closing Date, the Seller shall: (a) not agree to create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets (real, personal or mixed, tangible or intangible), whether now owned or hereafter acquired, used by the Seller to perform its obligations under the Transition Licensing Agreement, provided that prior to the expiration of the term of the Transition Licensing Agreement, the Seller may negotiate and agree to sell such assets effective as of the end of the term of the Transition Licensing Agreement; (b) not declare or pay any dividends, or return any capital, to its shareholders or authorize or make any other distribution, payment or delivery of property or cash to its shareholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for any consideration, any shares of any class of its capital stock or interest of any of its shareholders, in each case now or hereafter outstanding (or any options or warrants issued by the Seller with respect to its capital stock) or set aside any funds for any of the foregoing purposes; provided that the Seller may redeem shares of its capital stock for consideration other than cash. (c) not, directly or indirectly, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person or otherwise form, organize or operate any subsidiaries (other than substantially in existence as of the date hereof), or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, except that the Seller may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary commercial practice; (d) not sell or transfer any property or assets to, or otherwise engage in any other transactions with any Affiliate (as defined in section 101 of the Bankruptcy Code) of the Seller, other than (i) in the ordinary course of business or (ii) in connection with the sale of assets no longer required by the Seller to operate the Media Business or perform its obligations under the Transition Licensing Agreement, provided in each case that such sale or transfer shall be at prices and on terms and conditions not less favorable to Seller than could be obtained on an arm's-length basis from unrelated third parties; (e) not agree in writing or otherwise to do any of the foregoing; (f) provide the Purchaser with (i) 48 hours prior written notice of the Seller's intention to file a voluntary or petition concerning a bankruptcy case and (ii) 24 hours notice of any involuntary bankruptcy filing involving the Seller; and (g) use its cash to pay when due the accounts payable of the vendors listed on SCHEDULE 6.4 attached hereto. -26- Notwithstanding the foregoing, the Seller may from time to time request in writing that Purchaser consent to the Seller taking one or more of the prohibited actions set forth in this Section 6.4, and to the extent that the action(s) desired to be taken by the Seller will not in the Purchaser's reasonable determination have a Material Adverse Effect on the Seller's liquidity or its ability to perform its obligations under the Transition Licensing Agreement, the Purchaser's consent shall not be unreasonably withheld or delayed. Failure by the Purchaser to respond to any such written request of Seller within three (3) Business Days shall be deemed a grant of such consent by the Purchaser. 6.5 INSURANCE. The Seller shall maintain Policies in full force and effect that provide for coverages that are usual and customary as to amount and scope in the Media Business through the term of the Transition Licensing Agreement. 6.6 COMMERCIAL AGREEMENTS. The Seller and the Purchaser agree to study the eventual joint cooperation following the Closing Date for the following commercial or strategic projects: (i) a content supply agreement whereby the Purchaser would supply the Seller with content for its mobile business; (ii) application use agreement whereby the Purchaser would offer its customers in Latin America and Spain applications and/or mobile portals of the Seller; and (iii) joint development of web-wireless agreement whereby the Purchaser and the Seller create a joint team to study, develop and implement a web-wireless product using GPRS, UMTS, and/or i-Mode technologies; (iv) a customer share arrangement whereby each party would offer to its customers non-competitive products and services developed by the other party; (v) a program whereby the Purchaser and the Seller would provide introductions to their respective large shareholders (Grupo AUNA, Endesa, Santander Central Hispano and Union Fenosa in the case of the Seller and Bell South and Primedia in the case of the Purchaser) with the intent to cross sell services; (vi) an ISP service arrangement whereby the Purchaser would consider Bell South as a preferred ISP provider in the event the Purchaser develops a need for ISP service in Latin America; and (viii) an arrangement whereby the Purchaser and the Seller jointly purchase from suppliers in order to increase efficiencies. For the avoidance of doubt, neither the Seller nor the Purchaser shall not be obligated to negotiate or enter into any of the aforementioned arrangements. 6.7 LIMITATION OF USE. After the Closing Date, the Seller, Seller's Affiliates and their respective directors, officers, successors, assigns, agents and representatives shall not register, or attempt to register, and agree that they shall not directly or indirectly use or seek to register any Intellectual Property that includes, is identical to or is confusingly similar to any of the trademarks, -27- service marks, domain names, trade names, brand names or other indicia of origin set forth on SCHEDULE 1.1(a), anywhere in the world in any medium, nor shall any of them challenge or assist any third party in opposing the rights of Purchaser in any such intellectual property. Examples of uses precluded hereby include, but are not limited to use: (i) in conjunction with goods or services related to the Media Business or otherwise; (ii) on websites, whether Seller's or any third parties' or (iii) in combination with any other words or marks to act as an indicia of origin. 6.8 PERSONAL DATA AND INFORMATION. Each of the Parties hereto agrees that while in possession of user personal data and information it shall and shall cause its Affiliates to comply in all material respects with all Regulations applicable to maintenance and communication of such personal data and related information. 6.9 TAX GOOD STANDING CERTIFICATE. Within fifteen (15) Business Days after the Closing, the Seller shall deliver to the Purchaser a certificate issued by the appropriate agency of State of New York indicating the Seller's good standing with respect to the payment of Taxes in such jurisdiction. ARTICLE VII TAX MATTERS The parties agree as follows: 7.1 TAXES. Prior to the Closing, the Seller shall not without the prior written consent of Purchaser (which consent shall not be unreasonably withheld or delayed, it being understood that the Purchaser's withholding of consent shall be deemed unreasonable if, by granting such consent, the Purchaser's liability for Taxes would not be adversely affected): (i) file or cause to be filed any amended Tax Returns or claims for refund with respect to the Media Business or the Acquired Assets; (ii) prepare any Tax Returns with respect to the Media Business or the Acquired Assets in a manner that is inconsistent with the past practices of the Seller with respect to the treatment of items on such Tax Returns except to the extent that any inconsistency (x) would not materially increase the Purchaser's liability for Taxes for any period or (y) is required by law; (iii) incur any material liability for Taxes with respect to the Media Business or the Acquired Assets other than in the ordinary course of business; or (iv) enter into any settlement or closing agreement with a taxing authority that materially increase or may materially increase the Tax liability of the Purchaser for any period. 7.2 PAYMENT OF TAXES. (a) The Seller shall be responsible and liable for the timely payment of any and all Taxes imposed on or with respect to the Media Business or the Acquired Assets for all Pre-Closing Periods, including the portion of the taxable period beginning on or prior to the Closing Date and ending after the Closing date (the "OVERLAP PERIOD") up to and including the Closing Date. For purposes of this Agreement, all Taxes and Tax liabilities with respect to the income, property or operations of the Media Business or the Acquired Assets that relate to the Overlap Period shall be apportioned between the Seller and the Purchaser as follows: (i) in the case of Taxes other than income, sales and use and withholding Taxes, on a per diem basis, and (ii) in the case of income, sales and use and withholding Taxes, as determined from the books -28- and records of the Seller, as though the taxable year of the Seller, terminated at the close of business on the Closing Date. In addition, the Seller, on the one hand, and the Purchaser, on the other hand, shall pay the other the amount of any Taxes allocated to it herein (to the extent that it is liable therefor and to the extent not already paid by it) at least five (5) Business Days prior to the due date of such Taxes. (b) All stamp, transfer, documentary, sales and use, value added, registration, and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement or any transaction contemplated hereby (collectively, the "TRANSFER TAXES") shall be paid by the Purchaser, and the Seller shall, at its own expense, properly file on a timely basis all necessary Tax Returns, reports, forms, and other documentation with respect to any Transfer Tax as requested by the Purchaser. ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER Each and every obligation of the Purchaser under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by the Purchaser: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations and warranties of the Seller contained in Article II and elsewhere in this Agreement and all information contained in any exhibit or schedule hereto delivered by, or on behalf of, the Seller, to the Purchaser, shall be true and correct in all material respects (except for those representations and warranties which are qualified by materiality, which shall be true and correct in all respects) when made and on the Closing Date as though then made. The Seller shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it prior to the Closing Date. The president and the chief financial officer of the Seller shall have delivered to the Purchaser a certificate dated the Closing Date, in substantially the form of EXHIBIT 8.1 attached hereto, certifying to the foregoing. 8.2 CONSENTS AND APPROVALS. The Purchaser and the Seller shall have obtained any and all consents, approvals, Orders, Permits or other authorizations, including any stockholder approval (other than stockholder approval relating solely to the amendment of the Seller's certificate of incorporation and the charter amendments of its subsidiaries in accordance with Section 4.15 hereto), required by all applicable Regulations, Orders and Contracts involving the Seller or binding on its properties and assets, with respect to the execution, delivery and performance of the Agreement and the agreements contemplated hereby, the consummation of the transactions contemplated hereby and the conduct of the Media Business in the same manner after the Closing Date as before the Closing Date including, without limitation, the Purchaser's receipt of the unqualified consent of the holder(s) of shares of the Seller's Series A Preferred Stock. 8.3 OPINION OF THE SELLER'S COUNSELS. The Purchaser shall have received the opinions of Hughes Hubbard & Reed LLP and Gibson, Dunn & Crutcher, LLP (which will be addressed -29- to the Purchaser), dated as of the Closing Date, in substantially the forms of EXHIBITS 8.3(a) AND 8.3(b) attached hereto, respectively. 8.4 NO MATERIAL ADVERSE CHANGE. There shall have been no Material Adverse Change since the date of this Agreement. The Purchaser shall have received certificates dated the Closing Date, of the president and the chief financial officer of the Seller, in the form of EXHIBIT 8.4 attached hereto, certifying to the foregoing. 8.5 NO PROCEEDING OR LITIGATION. No preliminary or permanent injunction or other Order issued by a court of competent jurisdiction or by any Authority, or any Regulation or Order promulgated or enacted by any Authority shall be in effect which would prohibit, prevent or restrict the consummation of the transactions contemplated hereby. There shall be no Claim pending or threatened by any stockholder of the Seller alleging that the Seller failed to obtain stockholder approval of this Agreement and the transactions contemplated hereby. The Seller shall not have received any notification, whether in writing or orally, from the Securities and Exchange Commission restraining or delaying the consummation of, or requiring that the Seller refrain from consummating, the sale of the Acquired Assets or otherwise prohibiting, restraining or otherwise enjoining such transaction. 8.6 CONDITION OF ASSETS. None of the Acquired Assets shall have been damaged or destroyed, prior to the Closing Date, by fire or other casualty, whether or not fully covered by insurance in an aggregate amount of $100,000. 8.7 ACCOUNTING MATTERS. The Purchaser shall have received a certificate, dated the Closing Date, of the Seller's chief financial officer in the form of EXHIBIT 8.7 attached hereto, (i) as to the accuracy of all of the Seller's Financial Statements, and (ii) that all financial information, upon which the opinion of Gibson Dunn & Crutcher, LLP referenced in Section 8.3 is based was prepared by the Seller's management based upon the Seller's books and records and, if applicable, upon reasonable estimates and assumptions. 8.8 CERTIFICATES OF GOOD STANDING. At the Closing, the Seller shall have delivered to the Purchaser certificates issued by the appropriate governmental Authorities in those jurisdictions in which the Seller is registered or otherwise authorized to transact business evidencing its good standing as of a date not more than fifteen (15) days prior to the Closing Date. 8.9 SECRETARY'S CERTIFICATE. The Purchaser shall have received certificates, by the secretary of the Seller, as to the certificate of incorporation and bylaws of the Seller, the resolutions adopted by the board of directors of the Seller in connection with this Agreement, the incumbency of certain officers of the Seller and the jurisdictions in which the Seller are qualified to conduct business in substantially the form of EXHIBIT 8.9 attached hereto. 8.10 ESCROW AGREEMENT. The Seller shall have executed the Escrow Agreement substantially in the form of EXHIBIT 8.10 attached hereto. 8.11 BILL OF SALE. The Seller shall have executed a Bill of Sale in the form of EXHIBIT 1.3(a) hereto. -30- 8.12 ASSIGNMENT AND ASSUMPTION AGREEMENT. The Seller shall have executed the Assignment and Assumption Agreement in the form of EXHIBIT 1.2 hereto. 8.13 INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT. The Seller shall have executed Intellectual Property Assignment Agreements substantially in the form of EXHIBIT 1.3(b) hereto. 8.14 TRANSITION LICENSING AGREEMENT. The Seller shall have executed the Transition Licensing Agreement in substantially the form of EXHIBIT 8.14 attached hereto. 8.15 LATINRED CLOSING. A closing under the LatinRed Stock Purchase Agreement shall have occurred prior to or contemporaneously with the Closing hereof. 8.16 OTHER DOCUMENTS. The Seller shall have furnished the Purchaser with such other and further documents and certificates, including certificates of the Seller's officers and others, as the Purchaser shall reasonably request to evidence compliance with the conditions set forth in this Article VIII. ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF THE SELLER Each and every obligation of the Seller under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by the Seller: 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations and warranties of the Purchaser contained in Article III and elsewhere in this Agreement and all information contained in any exhibit or schedule hereto delivered by, or on behalf of the Purchaser to Seller, shall be true and correct in all material respects when made and on the Closing Date as though then made except for those representations and warranties which are qualified by materiality, which shall be true and correct in all respects. The Purchaser shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it prior to the Closing Date. The president and the chief financial officer of the Purchaser shall have delivered to the Seller a certificate dated the Closing Date, in substantially the form of EXHIBIT 9.1 attached hereto, certifying to the foregoing. 9.2 CONSENTS AND APPROVALS. The Purchaser shall have obtained any and all material consents, approvals, Orders, Permits or other authorizations, required by all applicable Regulations or Orders involving the Seller, with respect to the execution, delivery and performance of the Agreement, and the consummation of the transactions contemplated hereby including, without limitation, the Seller's receipt of the consent of the holder(s) of shares of the Seller's Series A Preferred Stock. 9.3 NO PROCEEDING OR LITIGATION. No preliminary or permanent injunction or other Order issued by a court of competent jurisdiction or by any Authority, or any Regulation or Order promulgated or enacted by any Authority shall be in effect which would prohibit, prevent or restrict the consummation of the transactions contemplated hereby. -31- 9.4 SECRETARY'S CERTIFICATE. The Seller shall have received a certificate, by the secretary of the Purchaser, dated the Closing Date, as to the resolutions adopted by the directors of the Purchaser in connection with this Agreement and the incumbency of certain officers of the Purchaser and the jurisdictions in which the Purchaser is qualified to conduct business in substantially the form of EXHIBIT 9.4 attached hereto. 9.5 ESCROW AGREEMENT. The Purchaser shall have executed the Escrow Agreement in substantially the form of EXHIBIT 8.10 attached hereto. 9.6 TRANSITION LICENSING AGREEMENT. The Purchaser shall have executed the Transition Licensing Agreement in the form of EXHIBIT 8.14 attached hereto. 9.7 ASSIGNMENT AND ASSUMPTION AGREEMENT. The Purchaser shall have executed the Assignment and Assumption Agreement in the form of EXHIBIT 1.2 hereto. 9.8 OPINIONS OF PURCHASER'S COUNSEL. The Seller shall have received the opinions of White & Case LLP and the Purchaser's general counsel addressed to the Seller, dated as of the Closing Date, in substantially the forms attached hereto as EXHIBITS 9.8(a) and 9.8(b). 9.9 IP LICENSING AGREEMENT. The Purchaser shall have executed the IP Licensing Agreement. 9.10 LATINRED CLOSING. A closing under the LatinRed Stock Purchase Agreement shall have occurred prior to or contemporaneously with the Closing hereof. ARTICLE X CLOSING 10.1 CLOSING. Unless this Agreement shall have been terminated or abandoned pursuant to the provisions of Article XI hereof, a closing of the transactions contemplated by this Agreement (the "CLOSING") shall be held on such date and time (the "CLOSING DATE") agreed to by the Purchaser and the Seller in the offices of the Purchaser's counsel, provided that the Closing shall not occur, in any event, after July 18, 2002. 10.2 INTERVENING LITIGATION. If prior to the Closing Date any preliminary or permanent injunction or other Order issued by a court of competent jurisdiction or by any other Authority, or any notice from the Securities and Exchange Commission shall restrain or prohibit this Agreement or the consummation of the transactions contemplated hereby for a period of fifteen (15) days or longer, the Closing shall be adjourned at the option of either party for a period of not more than thirty (30) days. If at the end of such thirty (30) day period such injunction or Order shall not have been favorably resolved, either party may, by written notice thereof to the other, terminate this Agreement, without liability or further obligation hereunder. -32- ARTICLE XI TERMINATION AND ABANDONMENT 11.1 METHODS OF TERMINATION. This Agreement may be terminated and the transactions herein contemplated may be abandoned at any time: (a) by mutual consent of the Purchaser and the Seller; or (b) by the Purchaser or the Seller if the transactions contemplated by this Agreement are not consummated on or before July 18, 2002 as a result of, among other things, the failure of any of the conditions specified in Articles VIII or IX to have been satisfied; PROVIDED THAT if any party has breached or defaulted with respect to its obligations under this Agreement on or before such date, such party may not terminate this Agreement pursuant to this Section 11.1(b), and each other party to this Agreement may at its option enforce its rights against such breaching or defaulting party and seek any remedies against such party, in either case as provided hereunder and by applicable Regulation. 11.2 PROCEDURE UPON TERMINATION. In the event of termination and abandonment pursuant to Section 11.1 hereof, and subject to the proviso contained in Section 11.1(b) this Agreement shall terminate and shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (a) each party shall either destroy or redeliver all documents and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; (b) all information received by any party hereto with respect to the business of any other party (other than information which is a matter of public knowledge or which has heretofore been or is hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for the advantage of, or disclosed to third parties by, such party to the detriment of the party furnishing such information; and (c) other than as provided in Section 13.13, no non-breaching party hereto shall have any liability or further obligation to any other party to this Agreement. ARTICLE XII INDEMNIFICATION 12.1 SURVIVAL. All of the terms and conditions of this Agreement, together with the representations, warranties and covenants contained herein or in any instrument or document delivered or to be delivered pursuant to this Agreement, shall survive the execution of this Agreement and the Closing Date until all obligations set forth therein shall have been performed and satisfied notwithstanding any investigation heretofore or hereafter made by or on behalf of any party hereto as follows: (a) the representations and warranties in Section 2.11 (Tax Returns) and Section 2.13 (Employee Benefit Plans) and their related schedules and the covenants contained in this Agreement shall survive until sixty (60) days after the date as of which the -33- applicable statutes of limitations with respect to such matters expire (after giving effect to any extensions or waivers thereof); (b) the representations and warranties in Section 2.12 (Compliance with Law and Certifications) and Section 2.16 (Environmental Matters) and their related schedules shall terminate on the sixth anniversary of the Closing Date; (c) the representations and warranties in Section 2.2 (Authorization, Etc.), Section 2.9 (Title and Related Matters) and Section 2.20 (Brokerage) and their related schedules shall survive indefinitely and not terminate; and (d) all other representations and warranties in this Agreement and their related schedules or in any of the written statements, certificates or other items prepared and delivered hereunder or to induce the consummation of any of the transactions contemplated hereby, shall terminate upon the twelve (12) month anniversary of the Closing Date; PROVIDED that the representations, warranties and indemnities for which an indemnification Claim shall be pending as of the end of the applicable period referred to herein shall survive with respect to such Claim until the final disposition thereof. The representations and warranties in this Agreement and the schedules attached hereto or in any writing delivered in connection herewith shall in no event be affected by any investigation, inquiry or examination made for or on behalf of any party or be affected by the knowledge of any officer, director, stockholder, employee, partner or agent of any party seeking indemnification hereunder or by the acceptance of any certificate or opinion from any third party. In addition, in no event will any disclosure of any event or circumstance made after the date hereof and prior to the Closing serve to amend any representation or warranty for any purpose of this Agreement. 12.2 INDEMNIFICATION BY THE SELLER. Subject to Sections 12.1 and 12.6, the Seller agrees to, and shall indemnify the Purchaser and its officers, directors, employees, stockholders, representatives and agents on an after-tax basis and hold each of them harmless, against and in respect of any and all damage, loss, deficiency, liability, obligation, commitment, cost or expense (including the reasonable fees and expenses of counsel) resulting from, or in respect of, any of the following: (a) Any breach of a representation or warranty, or non-fulfillment of any obligation on the part of the Seller under this Agreement, the Transition Licensing Agreement, any document relating hereto or thereto or contained in any schedule to this Agreement, or from any misrepresentation in or omission from any certificate, schedule, other Contract or instrument delivered by the Seller hereunder, or the failure of any representation or warranty made in this Agreement to be true and correct as of the Closing Date. (b) Any and all Excluded Liabilities. (c) All liability Claims arising against or involving the Media Business or concerning any services sold or provided by or on behalf of the Media Business on or prior to the Closing Date related to or resulting from an alleged defect in design, manufacture, materials or workmanship of any services provided, sold or delivered by or on behalf of the Seller or any alleged failure to warn, or any alleged breach of express or implied warranties or representations. (d) Warranty Claims relating to products manufactured or shipped or services provided by or on behalf of the Media Business prior to the Closing Date. (e) All Taxes imposed on or asserted against the properties, income or operations of the Seller for Pre-Closing Periods and any Tax liability of the Seller arising in -34- connection with the transactions contemplated hereby (except as provided by Section 7.2(b)). Any Taxes, penalties or interest attributable to the operations of the Seller payable as a result of an audit of any Tax Return shall be deemed to have accrued in the period to which such Taxes, penalties or interest are attributable. (f) Any Claims for breaches under or penalties payable with respect to any Contracts that are part of the Acquired Assets as a result of late delivery of services by the Seller or its Affiliates. (g) All environmental liability of the Seller, including federal, state and local environmental liability, together with any interest or penalties thereon or related thereto, that arises or accrues on or prior to the Closing Date. (h) Any failure of the Seller to have good, valid and marketable title to the Acquired Assets, free and clear of all Liens (other than Permitted Liens), Claims, Orders and Other Indebtedness. (i) Any Claim for Seller's transaction costs and expenses (other than as set forth in 7.2(b)). (j) Any failure by the Seller to comply with applicable bulk sales laws. (k) Any Claims brought by third parties arising from the operation of or related to the Media Business prior to the Closing Date or any Claims brought by third parties arising from the operation of or related to that portion of the businesses retained by the Seller following to the Closing Date. (l) Any successor or vicarious liability of the Seller. (m) All demands, assessments, judgments, costs and reasonable legal and other expenses arising from, or in connection with, any action, suit, proceeding or Claim incident to any of the foregoing. 12.3 INDEMNIFICATION BY THE PURCHASER. Subject to Sections 12.1 and 12.6, the Purchaser agrees to, and shall, indemnify the Seller and its officers, directors, employees, stockholders, representatives and agents and hold each harmless, against and in respect of any and all damage, loss, deficiency, liability, obligation, commitment, cost or expense (including the fees and expenses of counsel) resulting from, or in respect of, any of the following: (a) The breach of any representation or warranty and the non-fulfillment of any obligation on the part of the Purchaser under this Agreement, the Transition Licensing Agreement, any document relating hereto or thereto or contained in any schedule to this Agreement, or from any misrepresentation in or omission from any certificate, schedule, other Contract or instrument delivered by the Purchaser hereunder, or the failure of any representation or warranty made in this Agreement to be true and correct as of the Closing Date. (b) The Assumed Obligations. -35- (c) All Taxes imposed on or asserted against the Acquired Assets held by the Purchaser for Post-Closing Periods and any Tax liability of the Purchaser arising in connection with the transactions contemplated hereby. Any Taxes, penalties or interest attributable to the operations of the Purchaser payable as a result of an audit of any Tax Return shall be deemed to have accrued in the period to which such Taxes, penalties or interest are attributable. (d) All liability Claims arising against or involving the StarMedia.com Business or concerning any services sold or provided by or on behalf of the StarMedia.com Business after the Closing Date related to or resulting from an alleged defect in design, manufacture, materials or workmanship of any services provided, sold or delivered by or on behalf of the Purchaser or any alleged failure to warn, or any alleged breach of express or implied warranties or representations. (e) Warranty Claims relating to products manufactured or shipped or services provided by the Purchaser after the Closing Date. (f) All demands, assessments, judgments, costs and reasonable legal and other expenses arising from, or in connection with, any action, suit, proceeding or Claim incident to the foregoing. 12.4 THIRD PARTY CLAIMS. (a) The following procedures shall be applicable with respect to indemnification for third party Claims. Promptly after receipt by the party seeking indemnification hereunder (hereinafter referred to as the "INDEMNITEE") of notice of the commencement of any (i) Tax audit or proceeding for the assessment of Tax by any Taxing Authority or any other proceeding likely to result in the imposition of a Tax liability or obligation or (ii) any action or the assertion of any Claim, liability or obligation by a third party (whether by legal process or otherwise), against which Claim, liability or obligation the other party to this Agreement (hereinafter the "INDEMNITOR") is, or may be, required under this Agreement to indemnify such Indemnitee, the Indemnitee shall, if a Claim thereon is to be, or may be, made against the Indemnitor, notify the Indemnitor in writing of the commencement or assertion thereof and give the Indemnitor a copy of such Claim, process and all legal pleadings. The Indemnitor shall have the right to (i) participate in the defense of such action with counsel of reputable standing and (ii) assume the defense of such action by agreeing to assume such defense within ten (10) days of transmittal of the notice of the Claim by the Indemnitee, in writing unless such Claim (A) may result in criminal proceedings, injunctions or other equitable remedies in respect of the Indemnitee or its business; (B) may result in liabilities which, taken with other then existing Claims under this Article XII, would not be fully indemnified hereunder; (C) may have a Material Adverse Effect on the business or financial condition of the Indemnitee after the Closing Date (including an effect on the Tax liabilities, earnings or ongoing business relationships of the Indemnitee); (D) is for an alleged amount of less than $25,000; (E) upon petition by the Indemnitee, if an appropriate court rules that the Indemnitor failed or is failing to vigorously prosecute or defend such Claim, in which event the Indemnitee shall assume the defense; or (F) also involves the Indemnitor or its Affiliate as a party and counsel to the Indemnitee determines in good faith that joint representation would give rise to a conflict of interest. -36- (b) The Indemnitor and the Indemnitee shall cooperate in the defense of any third party Claims. In the event that the Indemnitor assumes or participates in the defense of such third party Claim as provided herein, the Indemnitee shall make available to the Indemnitor all relevant records and take such other action and sign such documents as are reasonably necessary to defend such third party Claim in a timely manner. If the Indemnitee shall be required by judgment or a settlement agreement to pay any amount in respect of any obligation or liability against which the Indemnitor has agreed to indemnify the Indemnitee under this Agreement, the Indemnitor shall promptly reimburse the Indemnitee in an amount equal to the amount of such payment plus all expenses (including legal fees and expenses) incurred by such Indemnitee in connection with such obligation or liability subject to this Article XII. No Indemnitor, in the defense of any such Claim, shall, except with the consent of the Indemnitee, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee of a release from all liability with respect to such Claim. In addition, with respect to a Claim for Taxes, the Indemnitor shall not enter into any settlement or arrangement with any taxing authority without the prior written consent of the Indemnitee, such consent not to be unreasonably withheld or delayed. In the event that the Indemnitor does not accept the defense of any matter for which it is entitled to assume as provided above, the Indemnitee shall have the full right to defend such Claim. (c) Prior to paying or settling any Claim against which an Indemnitor is, or may be, obligated under this Agreement to indemnify an Indemnitee, the Indemnitee must first supply the Indemnitor with a copy of a final court judgment or decree holding the Indemnitee liable on such Claim or failing such judgment or decree, must first receive the written approval of the terms and conditions of such settlement from the Indemnitor, which shall not be unreasonably withheld or delayed; provided however, that no written approval is required from the Indemnitor as to any third party Claim (i) that results solely in injunctions or other equitable remedies in respect of the Indemnitee or its business; (ii) that settles liabilities, or portions thereof, that are not subject to indemnification hereunder; or (iii) is for an amount of less than $25,000. (d) An Indemnitee shall have the right to employ its own counsel in any case and the fees and expenses of such counsel shall be at the expense of the Indemnitee unless (i) the employment of such counsel shall have been authorized in writing by the Indemnitor in connection with the defense of such Claim; (ii) the Indemnitor has not employed counsel in the defense of such Claim after ten (10) days notice; or (iii) such Indemnitee has reasonably concluded that there may be defenses available to it which are contrary to, or inconsistent with, those available to the Indemnitor; in any of the foregoing events such fees and expenses shall be borne by the Indemnitor. 12.5 SECURITY FOR THE INDEMNIFICATION OBLIGATION. (a) The parties hereby agree that, subject to the following provisions of this Section 12.5, any Claims for indemnification by the Purchaser against the Seller hereunder shall be satisfied by the Purchaser first by recourse against the Escrow Funds pursuant to the terms of the Escrow Agreement. All payments for indemnifiable damages made pursuant to this Article XII shall be treated as adjustments to the Purchase Price. -37- (b) Each Indemnitor shall pay the indemnification amount claimed by the Indemnitee in immediately available funds promptly within ten (10) days after the Indemnitee provides the Indemnitor with written notice of a Claim hereunder unless the Indemnitor in good faith disputes such Claim. If the Indemnitor disputes such Claim in good faith, then promptly after the resolution of such dispute, the amount finally determined to be due shall be paid by the Indemnitor to the Indemnitee in immediately available funds within ten (10) days of such dispute resolution. In the event the Indemnitor fails to pay the Indemnitee the amount of such indemnification Claim within such ten (10) day period the Indemnitor shall pay the Indemnitee interest on the amount of such indemnification Claim at a rate of ten percent (10%) per annum, compounded monthly from the date of the original written notice of such indemnification Claim until the indemnification Claim is paid in full. (c) If any Indemnitor fails to comply with its obligations to make cash payments to an Indemnitee in an aggregate amount sufficient to reimburse the Indemnitee for all losses resulting from an indemnified Claim, the Indemnitee may pursue any and all rights and remedies against the Indemnitor available in law or in equity, and shall be entitled to payment of its reasonable attorneys' fees. 12.6 LIMITATIONS. (a) Neither party shall be required to indemnify the other party under Sections 12.2 and 12.3 until the indemnifiable damages, individually or in the aggregate, exceed $150,000 (the "HURDLE RATE"), at which point such indemnifying party shall be responsible for all indemnifiable damages that may arise, irrespective of the Hurdle Rate; and provided that indemnifiable damages shall accumulate until such time as they exceed the Hurdle Rate, whereupon the party to be indemnified shall be entitled to seek indemnification for the full amount of such damages. (b) Absent fraud, the aggregate amount of indemnifiable damages for which the Seller or the Purchaser shall be liable pursuant to this Article XII (other than for breaches of representations and warranties contained in Sections 2.2, 2.9, 2.11, 2.13 and 3.2 or for intentional misrepresentations or breaches of covenants and other agreements) shall not exceed the Purchase Price. (c) The parties agree that any Claim for indemnification under the LatinRed Stock Purchase Agreement shall be pursuant to such agreement and not hereunder. ARTICLE XIII MISCELLANEOUS PROVISIONS 13.1 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified and supplemented only by written agreement of all the parties hereto with respect to any of the terms contained herein. No course of dealing between or among the parties shall be deemed effective to modify, amend, waive or discharge any part of this Agreement or any rights or obligations of any party under or by reason of this Agreement. 13.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of any party hereto to comply with any obligation, covenant, agreement or condition herein may be waived in writing by the other -38- parties hereto, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing to be effective. 13.3 CERTAIN DEFINITIONS. "ACQUIRED ASSETS" shall have the meaning set forth in Section 1.1. "AFFILIATE" means, with regard to any Person, (a) any Person, directly or indirectly, controlled by, under common control of, or controlling such Person; (b) any Person, directly or indirectly, in which such Person holds, of record or beneficially, five percent (5%) or more of the equity or voting securities; (c) any Person that holds, of record or beneficially, five percent (5%) or more of the equity or voting securities of such Person; (d) any Person that, through Contract, relationship or otherwise, exerts a substantial influence on the management of such Person's affairs; (e) any Person that, through Contract, relationship or otherwise, is influenced substantially in the management of its affairs by such Person; (f) any director, officer, partner or individual holding a similar position in respect of such Person; or (g) as to any natural Person, any Person related by blood, marriage or adoption and any Person owned by such Persons, including without limitation, any spouse, parent, grandparent, aunt, uncle, child, grandchild, sibling, cousin or in-law of such Person; PROVIDED, HOWEVER, that for purposes hereof (except for purposes of Section 4.4 hereof), neither BellSouth Enterprises, Inc. nor its Affiliates (other than the Seller and any subsidiary or other entity in which the Seller or any subsidiary thereof has an investment) shall be considered Affiliates of the Seller. "ASSIGNMENT OF INTELLECTUAL PROPERTY" shall have the meaning set forth in Section 1.3. "ASSUMED OBLIGATIONS" shall have the meaning set forth in Section 1.2. "AUTHORITY" means any governmental, regulatory or administrative body, agency, commission, board, arbitrator or authority, any court or judicial authority, any public, private or industry regulatory authority, whether international, national, federal, state or local. "BILL OF SALE" shall have the meaning set forth in Section 1.3. "BUSINESS DAY" means any day which is not a Saturday or Sunday or any other day on which commercial banks are required or authorized to close in New York, New York, Miami, Florida or Madrid, Spain. "BUSINESS EMPLOYEES" means those persons listed on SCHEDULE 5.3 hereto. "BUSINESS SUBSIDIARY" means the following entities wholly owned by the Seller to the extent that it is part of the Media Business and it owns an Acquired Asset: StarMedia Network Americas (S.A.), StarMedia do Brasil, Ltda., StarMedia Chile Ltda., StarMedia Argentina SRL, SMN de Mexico SRL, StarMedia Network S.L., StarMedia SRL, StarMedia Colombia, SRL, Servicios Star Mexico S de RL de CV, StarMedia Uruguay SRL, and LatinRed, S.L. -39- "CLAIM" means any action, claim, lawsuit, demand, suit, inquiry, hearing, investigation, notice of a violation or noncompliance, litigation, proceeding, arbitration, appeals or other dispute, whether civil, criminal, administrative or otherwise. "CLOSING" shall have the meaning set forth in Section 10.1. "CLOSING CASH" shall have the meaning set forth in Section 1.4. "CLOSING DATE" shall have the meaning set forth in Section 10.1. "COBRA" shall have the meaning set forth in Section 2.13. "CODE" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated, and rulings issued, thereunder. "CONTRACT" means any agreement, contract, commitment, instrument, document, license and/or permit (issued by an Authority or other third party relating to the operation of any of the Acquired Assets or conduct of the Media Business), certificate or other binding arrangement or understanding, whether written or oral. "EMPLOYEE BENEFIT PLAN" shall have the meaning set forth in Section 2.13. "ENVIRONMENTAL LAWS" means all federal, state, regional or local statutes, laws, rules, regulations, codes, ordinances, orders, plans, injunctions, decrees, rulings, licenses, rule of common law, and changes thereto or judicial or administrative interpretations thereof, or similar laws of foreign jurisdictions where the Seller conducts business, any of which govern or relate to pollution, protection of the environment, public health and safety, air emissions, water discharges, waste disposal, hazardous or toxic substances, solid or hazardous waste, petroleum or petroleum products or occupational health and safety, as any of these terms are or may be defined in such statutes, laws, rules, regulations, codes, orders, ordinances, plans, injunctions, decrees, rulings, licenses and changes thereto or judicial or administrative interpretations thereof, including, without limitation: the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section9601, ET SEQ.; the Solid Waste Disposal Act, as amended by the Resource Conversation and Recovery Act of 1976 and subsequent Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. Section6901 ET SEQ. (herein, collectively "RCRA"); the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section1801, ET SEQ.; the Clean Water Act, as amended, 33 U.S.C. Section1311, ET SEQ.; the Clean Air Act, as amended, 42 U.S.C. Section7401-7642; the Safe Drinking Water Act, as amended, 42 U.S.C. Section300f, ET SEQ.; the Toxic Substances Control Act, as amended ("TSCA"), 15 U.S.C. Section2601 ET SEQ.; the Federal Insecticide, Fungicide, and Rodenticide Act as amended ("FIFRA"), 7 U.S.C. Section136-136y; the Emergency Planning and Community Right-to-Know Act of l986, as amended ("EPCRA"), 42 U.S.C. Section11001, ET SEQ. (Title III of SARA); the Endangered Species Act, as amended ("ESA"), 7 U.S.C. Section136, 16 U.S.C. Section460, ET SEQ.; and the Occupational Safety and Health Act of 1970 ("OSHA"), as amended, 29 U.S.C. Section651, ET SEQ. "ENVIRONMENTAL PERMIT" means Permits, certificates, approvals, licenses, decrees, consents, Orders and other authorizations relating to or required by Environmental Law and necessary or desirable for the Seller's business. -40- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the Regulations issued thereunder. "ERISA AFFILIATE" means each person (as defined in Section 3(9) of ERISA) which together with the Seller or their respective subsidiaries would be deemed to be a "single employer" within the meaning of Section 414 of the Code. "ESCROW AGENT" means the Wilmington Trust Company and its successors and assigns, as provided in the Escrow Agreement. "ESCROW AGREEMENT" shall have the meaning set forth in Section 1.5. "ESCROW FUNDS" shall have the meaning set forth in Section 1.5. "EXCLUDED LIABILITIES" shall have the meaning set forth in Section 1.2. "FINANCIAL STATEMENTS" shall have the meaning set forth in Section 2.4. "FINANCIAL STATEMENT DATE" shall have the meaning set forth in Section 2.4. "GAAP" means U.S. generally accepted accounting principles, consistently applied, as in existence at the date hereof. "GOVERNMENT CONTRACT" means any bid, quotation, proposal, contract, work authorization, lease, commitment or sale or purchase order of the Seller that is with the United States government, any state, local or foreign Authority or Government Entity to supply goods and/or services to the United States government or any state, local or foreign Authority. "GOVERNMENT ENTITY" means a federal, state, provincial, local, county or municipal government, governmental, regulatory or administrative agency, department, court or judicial entity, commission, board, bureau, industry regulatory authority or other Authority or instrumentality, domestic or foreign. "GUARANTEE" means any guarantee or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect with respect to any obligations of another Person, through a Contract or otherwise, including, without limitation, (a) any endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (b) any Contract (i) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (ii) to purchase, sell or lease property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the property, products, materials or supplies or transportation or services or (iii) to make any loan, advance or capital contribution to or other Investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy an obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. -41- "HAZARDOUS SUBSTANCES" shall be construed broadly to include any toxic or hazardous substance, material, or waste, any petroleum or petroleum products or motor oil, pesticides, explosive or radioactive materials, asbestos in any form that has or threatens to become friable, urea formaldehyde foam insulation, dielectric fluid containing levels of polychlorinated biphenyls, and radon gas, any chemicals, materials or substances, including raw products or raw materials, defined or included in the definition of "hazardous materials," "hazardous substances," "hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import, under any applicable Environmental Laws, any other chemical, material, substance, mixture or by-product, exposure to which is prohibited, limited, or regulated by any Government Entity and any other contaminant, pollutant or constituent thereof, whether liquid, solid, semi-solid, sludge and/or gaseous, the presence of which requires investigation or remediation under any Environmental Law or which are regulated, listed or controlled by, under or pursuant to any Environmental Law, or which has been or shall be determined or interpreted at any time by any Government Entity to be a hazardous or toxic substance regulated under any other Regulation or Order, or which causes or poses a threat to cause contamination or a nuisance on the premises or any adjacent premises or a hazard to the environment or to the health or safety of persons, flora, or fauna on the premises. "INDEBTEDNESS" with respect to any Person means (a) any obligation of such Person for borrowed money, including, without limitation: (i) any obligation or liabilities incurred for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business, (whether or not such Person has assumed or become liable for the payment of such obligation) (whether accrued, absolute, contingent, unliquidated or otherwise, known or unknown, whether due or to become due); (ii) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder; (iii) obligations incurred for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business (whether or not such Person has assumed or become liable for the payment of such obligation) secured by Liens; (iv) capitalized lease obligations; and (v) all Guarantees of such Person; (b) accounts payable of such Person that have not been paid within sixty (60) days of their due date and are not being contested; (c) annual employee bonus obligations that are not accrued on the Financial Statements; and (d) retroactive insurance premium obligations. "INDEMNITEE" shall have the meaning set forth in Section 12.4. "INDEMNITOR" shall have the meaning set forth in Section 12.4. "INTELLECTUAL PROPERTY" means all foreign and domestic, registered, unregistered or pending applications for trademarks, trade names, trade dress, service marks, service names, brand names and other indicia of origin, patents and patent rights (including provisional applications), utility models and utility model rights, registered, unregistered or pending applications for copyrights, mask works, or similar materials eligible for copyright or mask work registration, product designs, product packaging, business and product names, logos, slogans, rights of publicity, trade secrets, inventions and methods (whether or not patentable or reduced to practice), invention disclosures, improvements, processes, formulae, industrial models, designs, -42- specifications, moral and economic rights of authors and inventors (however denominated), technology, methodologies, computer and electronic data, data processing programs, computer applications and operating program software (including all source code and object code) (including flow charts, diagrams, descriptive texts and programs, computer printouts and similar items), firmware, development tools, flow charts, annotations, all Web addresses, uniform resource locators ("URLS"), internet domain names applications and registrations therefor, and the corresponding internet sites (including any content and other materials accessible and/or displayed thereon, collectively, the "SITES"), all data bases and data collections and all rights therein, any other confidential and proprietary right or information, whether or not subject to statutory registration, and all derivatives, improvements and refinements thereof as well as all related technical information, manufacturing, engineering and technical drawings, know-how, and goodwill associated with any of the foregoing trademarks, trade names, trade dress, service marks, service names, brand names, business and product names, logos, slogans or other indicia of origin, and the right to sue for past infringement, if any, in connection with any of the foregoing. "INVESTMENT" means (a) any direct or indirect ownership, purchase or other acquisition by a Person of any notes, obligations, instruments, capital stock, Options, securities or ownership interests (including partnership interests and joint venture interests) of any other Person; and (b) any capital contribution or similar obligation by a Person to any other Person. "IP LICENSING AGREEMENT" shall have the meaning set forth in Section 5.4. "IT" shall mean Seller's information technology to be transferred or included in the Acquired Assets, Assumed Obligations or to be licensed under the Transition Licensing Agreement relating to the maintenance and performance of Seller's computer structure, including, but not limited to, hardware and/or application technology infrastructure, computer software programs, servers and other related inventory. "LATINRED" shall have the meaning set forth in the Recitals. "LATINRED STOCK PURCHASE AGREEMENT" shall have the meaning set forth in the Recitals. "LIEN" means any (a) security interest, lien, mortgage, pledge, hypothecation, encumbrance, Claim, easement, charge, restriction on transfer or otherwise, or interest of another Person of any kind or nature, including any conditional sale or other title retention Contract or lease in the nature thereof; (b) any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute; and (c) any subordination arrangement in favor of another Person; provided that any obligations to provide banners and other similar promotions sold by the Seller as of the Closing Date, which obligations shall remain the sole and exclusive responsibility of the Seller following the Closing Date, shall not constitute a Lien for purposes hereof. "MATERIAL ADVERSE CHANGE" means any developments or changes which would have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any circumstances, state of facts or matters which have, or which might reasonably be expected to have, a material adverse effect in respect -43- the operations, properties, assets, liabilities, affairs, condition (financial or otherwise) or results of the Media Business taken as a whole; PROVIDED, HOWEVER, that the effects solely resulting from the Seller's announcement of the transactions contemplated by this Agreement and the agreements to be executed in connection herewith shall not constitute a Material Adverse Effect. Without limiting the generality of the foregoing, any Claim that the Acquired Assets (other than the Acquired Assets set forth on Schedule 2.14(i)) infringe or require a license under the Intellectual Property of a third party shall be deemed to have a Material Adverse Effect. "MEDIA BUSINESS" shall mean the Seller's operation of its Spanish- and Portuguese-language network of Internet websites, including without limitation, StarMedia.com, and all services and assets owned or provided by the Seller's Internet network to support and maintain those websites operated by LatinRed. For purposes hereof, the parties agree that LatinRed, the Seller's wireless business and the following websites operated by the Seller shall not deemed part of the Media Business: guiarj.com.br; guiasp.com.br; paisas.com; openchile.com; and batepapo.com.br. "ORIGINAL AGREEMENT" shall have the meaning set forth in the Preamble. "OPTION" means any subscription, option, warrant, right, security, Contract, commitment, understanding, stock appreciation right, phantom stock option, profit participation or arrangement by which the Seller is bound to issue any additional shares of its capital stock or an interest in the equity or equity appreciation of the Seller or rights pursuant to which any Person has a right to purchase shares of the Seller's capital stock or an interest in the equity or equity appreciation of the Seller. "ORDER" means any writ, decree, order, judgment, injunction, rule, ruling, Lien, voting right, consent of or by a Government Entity. "OVERLAP PERIOD" shall have the meaning set forth in Section 7.2(a). "PERMITS" means all permits, licenses, registrations, certificates, Orders, qualifications or approvals required by any Authority or other Person. "PERMITTED LIENS" means Liens for Taxes not yet delinquent or being contested by the Seller in good faith through appropriate procedures (the payment of which Taxes shall remain the sole and exclusive responsibility of the Seller) and any and all rights granted to the Seller upon the Closing pursuant to the IP Licensing Agreement and the Transition Licensing Agreement. "PERSON" means any corporation, partnership, joint venture, limited liability company, organization, entity, Authority or natural person. "POLICIES" means all Contracts that insure (a) the Seller's or any of its subsidiaries' properties, plant and equipment for loss or damage; and (b) the Seller or any of its subsidiaries, officers, directors, employees or agents against any liabilities, losses or damages (or lost profits) for any reason or purpose. "POST-CLOSING PERIOD" means any taxable year or other taxable period beginning after the Closing Date and the portion of the Overlap Period after the Closing Date. -44- "PRE-CLOSING PERIOD" shall have the meaning set forth in Section 2.11(b). "PURCHASE PRICE" shall have the meaning set forth in Section 1.4. "PURCHASER" shall have the meaning set forth in the Preamble. "REGISTERED INTELLECTUAL PROPERTY" means all Seller Intellectual Property that consists of United States, international and foreign: (a) patents and patent applications (including provisional applications); (b) registered trademarks and servicemarks, applications to register trademarks and servicemarks, intent-to-use applications, other registrations or applications to trademarks or servicemarks; (c) registered copyrights and applications for copyright registration; (d) any mask work registrations and applications to register mask works; and (e) any other Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public legal authority, whether domestic or foreign, PROVIDED, HOWEVER, that Seller Intellectual Property shall not be deemed Registered Intellectual Property merely by reason of the filing with respect thereto of a financing statement pursuant to the Uniform Commercial Code (or corresponding commercial statute of the applicable jurisdiction). "REGULATION" means any rule, law, code, statute, regulation, ordinance, requirement, announcement, policy, guideline, rule of common law or other binding action of or by a Governmental Entity and any judicial interpretation thereof. "RESTRICTED AREA" shall have the meaning set forth in Section 4.3(b). "RESTRICTED PERIOD" shall have the meaning set forth in Section 4.3(b). "SELLER" shall have the meaning set forth in the Preamble. "SELLER INTELLECTUAL PROPERTY" means any and all Intellectual Property listed on SCHEDULE 1.1(a) attached hereto. "SELLER REGISTERED INTELLECTUAL PROPERTY" means all domestic or foreign Registered Intellectual Property owned by, held by another for the benefit of, filed in the name of, assigned to or applied for by, or held by a third party for the benefit of, the Seller or any Business Subsidiary related to the Media Business. "SITE" shall have the meaning set forth in Section 4.3(a). "TAX RETURNS" shall have the meaning set forth in Section 2.11(a). "TAX" or "TAXES" means all taxes, assessments, charges, duties, fees, levies or other governmental charges, including, without limitation, all Federal, state, local, foreign and other income, franchise, profits, gross receipts, capital gains, capital stock, transfer, property, sales, use, value-added, occupation, property, excise, severance, windfall profits, stamp, license, payroll, social security, withholding and other taxes, assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever, including any fees or charges due under any Environmental Permits or Environmental Laws (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), all estimated taxes, deficiency assessments, -45- additions to tax, penalties and interest and shall include any liability for such amounts as a result either of being a member of a combined, consolidated, unitary or affiliated group or of a contractual obligation to indemnify any person or other entity. "TAXING AUTHORITIES" means Internal Revenue Service and any other Federal, state, or local Authority which has the right to impose Taxes on the Seller. "TRANSFER TAXES" shall have the meaning set forth in Section 7.2(b). "TRANSITION LICENSING AGREEMENT" shall have the meaning set forth in the Recitals. 13.4 NOTICES. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission against facsimile confirmation or mailed by internationally recognized overnight courier prepaid, to the parties at the following addresses or facsimile numbers: (a) If to the Seller, to: StarMedia Network, Inc. 999 Brickell Avenue, Suite 808 Miami, Florida 33131 Facsimile: (305)938-3000 Attn: President with a copy to (which shall not constitute notice to the Seller): Hughes, Hubbard & Reed LLP 201 South Biscayne Boulevard Suite 2500 Miami, FL 33131-4332 Facsimile: (305) 371-8759 Attn: Timothy J. McCarthy, Esq. or to such other Person or address as the Seller shall furnish by notice to the Purchaser in writing. (b) If to the Purchaser, to: EresMas Interactiva U.S.A., Inc. Ribera del Sena s/n Edificio APOT pl. 3(a) 28042 Madrid Spain Facsimile: 34 91 202 0541 Attn: Luis Arguello, General Counsel -46- with a copy to (which shall not constitute notice to the Purchaser): White & Case LLP 200 South Biscayne Boulevard Suite 4900 Miami, Florida 33131 Facsimile: (305) 358-5744 Attn: Jeffrey M. Oshinsky, Esq. or to such other Person or address as the Purchaser shall furnish by notice to the Seller in writing. If to the Escrow Agent: Wilmington Trust Company 520 Madison Avenue New York, New York 10022 Facsimile: (212) 425-0513 Attn: James D. Nesci All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section 13.4, be deemed given upon delivery, (b) if delivered by facsimile transmission to the facsimile number as provided for in this Section 13.4, be deemed given upon facsimile confirmation, and (c) if delivered by overnight courier to the address as provided in this Section 13.4, be deemed given on the earlier of the first business day following the date sent by such overnight courier or upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice is to be delivered pursuant to this Section 13.4). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. 13.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties, except that the Purchaser may, without the prior approval of the Seller, assign its rights, interests and obligations hereunder to any Affiliate, and may grant Liens in respect of its rights and interests hereunder to its lenders (and any agent for the lenders), and the parties hereto consent to any exercise by such lenders (and such agent) of their rights and remedies with respect to such collateral. In the event of any such assignment, the Purchaser agrees that it shall remain bound by its obligations herein. 13.6 GOVERNING LAW, SUBMISSION TO JURISDICTION. Except as and to the extent required to consummate the transactions contemplated by this Agreement under Delaware law, this Agreement, any ancillary agreements and any other closing documents shall be governed by and construed in accordance with the laws of the State of Florida as applied to Contracts entered into by Florida residents and performed entirely in Florida, without giving effect to its principles or rules regarding conflicts of laws, other than such principles directing application of the laws of -47- Florida. Each party hereto irrevocably agrees that any legal action or proceeding with respect to this Agreement or for recognition and enforcement of any judgment in respect hereof brought by another party hereto or its successors or assigns may be brought and determined by either a state court or federal court sitting in the Southern District of Florida and each party hereto hereby irrevocably submits with regard to any such action or proceeding for itself and in respect to its property, generally and unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each party hereto hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (a) any Claim that it is not personally subject to the jurisdiction of the above-named courts for any reason other than the failure to serve process in accordance with this Section 13.6, (b) that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise), and (c) to the fullest extent permitted by applicable law, that (i) the suit, action or proceeding in any such court is brought in an inconvenient forum, (ii) the venue of such suit, action or proceeding is improper and (iii) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. 13.7 COUNTERPARTS. This Agreement may be executed in two or more counterparts (including by means of telecopied signature pages), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterpart signatures need not be on the same page and shall be deemed effective upon receipt. 13.8 HEADINGS. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13.9 ENTIRE AGREEMENT. This Agreement, including the schedules and exhibits hereto and the contracts, documents, certificates and instruments referred to herein, embodies the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement and supersedes all prior contracts, representations, warranties, promises, covenants, arrangements, communications and understandings, oral or written, express or implied, between the parties with respect to such transactions. There are no contracts, representations, warranties, promises, covenants, arrangements or understandings between the parties with respect to the transactions contemplated hereby, other than those expressly set forth or referred to herein. 13.10 INJUNCTIVE RELIEF. The parties hereto agree that in the event of a breach of any provision of this Agreement or a failure by a party to perform in accordance with the specific terms herein, the aggrieved party or parties may be damaged irreparably and without an adequate remedy at law. The parties therefore agree that in the event of a breach of any provision of this Agreement, the aggrieved party or parties may elect to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of such provision without the requirement of posting a bond, as well as to obtain damages for breach of this Agreement. By seeking or obtaining any such relief, the aggrieved party shall not be precluded from seeking or obtaining any other relief to which it may be entitled. 13.11 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party hereto, upon any breach or default of any other party under this -48- Agreement, shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party hereto of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 13.12 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Regulations, but if any provision of this Agreement or the application of any such provision to any Person or circumstance shall be held to be prohibited by, illegal or unenforceable under applicable law in any respect by a court of competent jurisdiction, such provision shall be ineffective only to the extent of such prohibition or illegality or unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13.13 EXPENSES. Each of the parties shall bear its own expenses, including without limitation, brokerage or investment banking, accounting and legal fees and expenses, with respect to this Agreement and the transactions contemplated hereby. If any legal action or other proceeding relating to this Agreement, the agreements contemplated hereby, the transactions contemplated hereby or thereby or the enforcement of any provision of this Agreement or the agreements contemplated hereby is brought against any party, the prevailing party in such action or proceeding shall be entitled to recover all reasonable expenses relating thereto (including reasonable attorney's fees and expenses) from the party against which such action or proceeding is brought in addition to any other relief to which such prevailing party may be entitled. 13.14 NO THIRD PARTY BENEFICIARIES. This Agreement is for the sole benefit of the parties and their permitted successors and assigns and nothing herein express or implied shall be construed to give any person, other than the parties of such permitted successors and assigns, any legal or equitable rights hereunder. 13.15 SCHEDULES. No exceptions to any representations or warranties disclosed on one schedule shall constitute an exception to any other representation or warranties made in this Agreement unless the substance of such exception is disclosed as provided herein on each such applicable schedule or a specific cross reference to a disclosure on another schedule is made. All schedules and exhibits attached hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. 13.16 NO STRICT CONSTRUCTION. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 13.17 CONSTRUCTION. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender and the neuter, (ii) words using the singular or plural -49- number also include the plural or singular number, respectively, (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement as a whole and not to any particular Article, Section or other subdivision, (iv) the terms "Article" or "Section" or other subdivision refer to the specified Article, Section or other subdivision of the body of this Agreement, (v) the phrases "ordinary course of business" and "ordinary course of business consistent with past practice" refer to the Media Business and practice of the Seller and the Media Business, (vi) the words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation," and (vii) when a reference is made in this Agreement to exhibits, such reference shall be to an exhibit to this Agreement unless otherwise indicated. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP. When used herein, the terms "party" or "parties" refer to the Seller, on the one hand, and the Purchaser, on the other, and the terms "third party" or "third parties" refers to Persons other than the Seller or the Purchaser. 13.18 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY SCHEDULE OR EXHIBIT HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING OR STATEMENTS (WHETHER VERBAL OR WRITTEN) RELATING TO THE FOREGOING. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT. * * * -50- IN WITNESS WHEREOF, the parties hereto have made and entered into this Amended and Restated Asset Purchase Agreement the date first hereinabove set forth. ERESMAS INTERACTIVA S.A. By: ---------------------------------------- Antonio Anguita Ruiz Chief Executive Officer STARMEDIA NETWORK, INC. By: ---------------------------------------- Jose Manuel Tost President -51- TABLE OF CONTENTS
Page ---- ARTICLE I PURCHASE OF ASSETS..................................................2 1.1 Purchase and Sale of Acquired Assets................................2 1.2 Assumed Obligations.................................................2 1.3 Method of Conveyance................................................3 1.4 Purchase Price......................................................3 1.5 Escrow Agreement....................................................3 1.6 Allocation of Purchase Price........................................3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER........................4 2.1 Corporate Organization, Etc.........................................4 2.2 Authorization, Etc..................................................4 2.3 No Violation........................................................4 2.4 Financial Statements................................................5 2.5 Employees...........................................................6 2.6 Absence of Certain Changes..........................................6 2.7 Contracts...........................................................6 2.8 Government Contracts................................................7 2.9 Title and Related Matters...........................................7 2.10 Litigation..........................................................8 2.11 Tax Returns.........................................................8 2.12 Compliance with Law and Certifications..............................9 2.13 Employee Benefit Plans.............................................10 2.14 Intellectual Property..............................................10 2.15 Customer Warranties................................................14 2.16 Environmental Matters..............................................14 2.17 Capital Expenditures and Investments...............................15 2.18 Dealings with Affiliates...........................................15 2.19 Insurance..........................................................15 2.20 Brokerage..........................................................15 2.21 Customers and Suppliers............................................15 2.22 Permits............................................................15 2.23 Improper and Other Payments........................................15 2.24 Disclosure.........................................................16 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER....................16 3.1 Corporate Organization, Etc........................................16 3.2 Authorization, Etc.................................................16 3.3 No Violation.......................................................16 3.4 Brokerage..........................................................17 ARTICLE IV COVENANTS OF THE SELLER............................................17 4.1 Operation of Media Business........................................17 -i- 4.2 Full Access and Disclosure.........................................18 4.3 Non-Competition; Non-Solicitation..................................18 4.4 Confidentiality....................................................20 4.5 Fulfillment of Conditions Precedent................................20 4.6 Exclusivity........................................................21 4.7 Deliveries After Closing...........................................21 4.8 Intellectual Property Protection...................................21 4.9 Electronic Data Protection.........................................22 4.10 Intellectual Property..............................................22 4.11 Books and Records..................................................22 4.12 COBRA..............................................................23 4.13 Employee Benefits Plans............................................23 4.14 Press Release......................................................23 4.15 Charter Amendments.................................................23 ARTICLE V COVENANTS OF THE PURCHASER.........................................24 5.1 Confidentiality....................................................24 5.2 Non-Solicitation...................................................24 5.3 Business Employees.................................................25 5.4 Licensing Agreement................................................25 ARTICLE VI OTHER AGREEMENTS...................................................25 6.1 Further Assurances.................................................25 6.2 Public Announcements...............................................25 6.3 Stockholder Actions................................................26 6.4 Covenants..........................................................26 6.5 Insurance..........................................................27 6.6 Commercial Agreements..............................................27 6.7 Limitation of Use..................................................27 6.8 Personal Data and Information......................................28 6.9 Tax Good Standing Certificate......................................28 ARTICLE VII TAX MATTERS........................................................28 7.1 Taxes..............................................................28 7.2 Payment of Taxes...................................................28 ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER.....................29 8.1 Representations and Warranties; Performance........................29 8.2 Consents and Approvals.............................................29 8.3 Opinion of the Seller's Counsels...................................29 8.4 No Material Adverse Change.........................................30 8.5 No Proceeding or Litigation........................................30 8.6 Condition of Assets................................................30 8.7 Accounting Matters.................................................30 8.8 Certificates of Good Standing......................................30 8.9 Secretary's Certificate............................................30 8.10 Escrow Agreement...................................................30 -ii- 8.11 Bill of Sale.......................................................30 8.12 Assignment and Assumption Agreement................................31 8.13 Intellectual Property Assignment Agreement.........................31 8.14 Transition Licensing Agreement.....................................31 8.15 LatinRed Closing...................................................31 8.16 Other Documents....................................................31 ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF THE SELLER........................31 9.1 Representations and Warranties; Performance........................31 9.2 Consents and Approvals.............................................31 9.3 No Proceeding or Litigation........................................31 9.4 Secretary's Certificate............................................32 9.5 Escrow Agreement...................................................32 9.6 Transition Licensing Agreement.....................................32 9.7 Assignment and Assumption Agreement................................32 9.8 Opinions of Purchaser's Counsel....................................32 9.9 IP Licensing Agreement.............................................32 9.10 LatinRed Closing...................................................32 ARTICLE X CLOSING............................................................32 10.1 Closing............................................................32 10.2 Intervening Litigation.............................................32 ARTICLE XI TERMINATION AND ABANDONMENT........................................33 11.1 Methods of Termination.............................................33 11.2 Procedure Upon Termination.........................................33 ARTICLE XII INDEMNIFICATION....................................................33 12.1 Survival...........................................................33 12.2 Indemnification by the Seller......................................34 12.3 Indemnification by the Purchaser...................................35 12.4 Third Party Claims.................................................36 12.5 Security for the Indemnification Obligation........................37 12.6 Limitations........................................................38 ARTICLE XIII MISCELLANEOUS PROVISIONS...........................................38 13.1 Amendment and Modification.........................................38 13.2 Waiver of Compliance; Consents.....................................38 13.3 Certain Definitions................................................39 13.4 Notices............................................................46 13.5 Assignment.........................................................47 13.6 Governing Law, Submission to Jurisdiction..........................47 13.7 Counterparts.......................................................48 13.8 Headings...........................................................48 13.9 Entire Agreement...................................................48 13.10 Injunctive Relief..................................................48 13.11 Delays or Omissions................................................48 -iii- 13.12 Severability.......................................................49 13.13 Expenses...........................................................49 13.14 No Third Party Beneficiaries.......................................49 13.15 Schedules..........................................................49 13.16 No Strict Construction.............................................49 13.17 Construction.......................................................49 13.18 WAIVER OF JURY TRIAL...............................................50
-iv- SCHEDULES AND EXHIBITS
SCHEDULE RESPONSIBILITY - -------- ("SELLER" OR "PURCHASER") ------------------------- 1.1 Acquired Assets....................................................................P 1.2 Assumed Obligations................................................................P 1.6 Allocation of Purchase Price.......................................................P/S 2.1(a) Foreign Qualifications of the Seller...............................................S 2.1(b) Certificate of Incorporation and Bylaws of the Seller..............................S 2.2 Seller Board of Director's Resolution..............................................S 2.3 No Violation.......................................................................S 2.4(a) Financial Statements...............................................................S 2.4(b) Indebtedness.......................................................................S 2.5 Employee Matters...................................................................S 2.6(a) Absence of Certain Change..........................................................S 2.6(d) Contracts Not in the Ordinary Course of Business...................................S 2.7(a) Contracts..........................................................................S 2.10 Litigation.........................................................................S 2.11 Tax Returns........................................................................S 2.13 ERISA Matters List of Plans........................................................S 2.14(a) Seller Registered Intellectual Property............................................S 2.14(b) Licensed Intellectual Property.....................................................S 2.14(e) Form of Seller's Confidentiality Agreement.........................................S 2.14(g) Third Party Licenses...............................................................S 2.14(h) IP Litigation......................................................................S 2.14(i) Maintenance........................................................................S 2.14(k) Infringement.......................................................................S 2.14(n) Source Codes.......................................................................S 2.14(o) Site Operations....................................................................S 2.14(q) Content Providers..................................................................S 2.22 Permits............................................................................S 3.1 Deed of Incorporation and Bylaws of the Purchaser..................................P 3.4 Brokerage..........................................................................P 4.15 Charter Amendments.................................................................S 5.3 Business Employees.................................................................P 6.4 Critical Vendors...................................................................P
EXHIBIT RESPONSIBILITY ------- -------------- 1.2 Form of Assignment and Assumption Agreement.........................P 1.3(a) Form of Bill of Sale................................................P 1.3(b) Form of Intellectual Property Assignment Agreement..................P 5.4 Form of IP Licensing Agreement......................................S 8.1 Form of Officer's Certificate - Seller..............................P 8.3(a) Form of Hughes Hubbard & Reed Opinion...............................P 8.3(b) Form of Gibson, Dunn & Crutcher Opinion.............................S/P -v- 8.4 Form of Officer's Certificate - No Material Adverse Change..........P 8.7 Form of Accounting Certificate......................................P 8.9 Form of Secretary's Certificate - Seller............................P 8.10 Form of Escrow Agreement............................................P 8.14 Transition Licensing Agreement......................................P 9.1 Form of Officer's Certificate - Purchaser...........................P 9.4 Form of Secretary's Certificate - Purchaser.........................P 9.8(a) Form of White & Case Opinion........................................P 9.8(b) Form of Purchaser's General Counsel Opinion.........................P
-vi- EX-10.39 7 a2084088zex-10_39.txt EXHIBIT 10.39 COPIA DEFINITIVA EXHIBIT 10.39 CONTRATO DE COMPRAVENTA DE PARTICIPACIONES En Madrid, a 18 de junio de 2.002. COMPARECEN De una parte, D. Antonio Anguita Ruiz, mayor de edad, de nacionalidad espanola, con domicilio en Las Rozas (Madrid), Urbanizacion "Monte Rozas", C/Salonica, numero 37 y provisto de N.I.F. 51.396.882-R. De otra parte, D. Jose Manuel Tost, mayor de edad, de nacionalidad venezolana, con domicilio en Miami (Florida), 540 Brickell Key Drive, Apt. 1026 y provisto de pasaporte venezolano numero 5.539.343. INTERVIENEN El Sr. Anguita, en representacion de la entidad mercantil de nacionalidad espanola eresMas Interactiva, S.A. (en adelante, "eresMas"), con domicilio en Madrid, C/Ribera del Sena s/n, Edif. APOT, pl. 3 DEG. y C.I.F. A-82500356, constituida por tiempo indefinido mediante escritura autorizada por el Notario de Barcelona D. Joan Carles Farres Ustrell, con fecha de 2 de diciembre de 1.999 y num. 1.692 de orden de su protocolo, inscrita en el Registro Mercantil de Madrid en el tomo 14.734, folio 93, hoja numero M-244379, en calidad de Director General y apoderado de la misma, conforme consta en la escritura autorizada por el Notario de Madrid D. Luis Rueda Esteban, con fecha 30 de marzo de 2.001 y num. 1.445 de orden de su protocolo, inscrita en el Registro Mercantil de Madrid en el tomo 15.295, folio 108, hoja numero M-244379. El Sr. Jose Manuel Tost, en representacion de la entidad mercantil de nacionalidad norteamericana StarMedia Network, Inc. (en adelante, "StarMedia"), con domicilio en, 999 Brickell Avenue Suite 808, Miami, FL 33131, y constituida bajo las leyes del estado de Delaware, con fecha 9 de marzo de 1996. Las partes se reconocen mutuamente la capacidad para obligarse conforme al presente documento y, al efecto, EXPONEN I. Que StarMedia es socio unico y titular de siete mil (7.000) participaciones, numeros 1 a 7.000 ambos inclusive, de 6,01 euros de valor nominal cada una (en adelante, "las participaciones"), de la entidad mercantil de nacionalidad espanola Latinred, S.L. (en adelante, "la Sociedad"), con domicilio en Barcelona, C/Balmes 7, 1 DEG. y C.I.F. B-61449773 constituida por tiempo indefinido mediante escritura autorizada por el Notario de Barcelona D. Pedro Pineda Massip, con fecha 29 de agosto de 1.997 y num. 2.063 de orden de su protocolo, inscrita en el Registro Mercantil de Barcelona en el tomo 300074, folio 202, hoja numero B-163794, y desea vender las participaciones. II. Que eresMas desea comprar las participaciones, comprensivas del cien por cien del capital social de la Sociedad. III. Que, expuesto cuanto antecede, las partes desean suscribir el presente contrato de compraventa de participaciones (en adelante, el "Contrato"), a cuyo efecto. OTORGAN: PRIMERO. StarMedia vende a eresMas las participaciones libres de cualesquiera cargas y gravamenes, comprensivas del cien por cien del capital social de la Sociedad, y eresMas las compra, por el precio de UN MILLON ($1.000.000.-) de dolares de los Estados Unidos de America. El pago del precio tendra lugar dentro de las 48 horas siguientes a la entrada en vigor del Contrato, mediante el deposito de fondos inmediatamente disponibles en la cuenta bancaria indicada por StarMedia a continuacion: Nombre: StarMedia Network, Inc. Domicilio: 29 West 36th street, NY, NY 10018 Numero de Cuenta: 06430837 Numero ABA: 021000089 Entidad Bancaria: Citibank, N.A. New York, NY 10017 SEGUNDO. StarMedia resarcira a eresMas por un monto equivalente al cincuenta por ciento (50%) de cualquier perjuicio que se derivare de cualesquiera reclamaciones de D. Javier Romero Mateos, o empresa relacionada con el mismo, relativas a la hipotetica comision por la previa compraventa de la Sociedad o de activos de la misma por parte de StarMedia, luego de haber agotado la accion social de responsabilidad o bien la accion contractual indemnizatoria contra el Sr. Salvador Porte, y descontando el monto que eresMas lograre recuperar de dicha persona. EresMas debera asimismo mantener informada a StarMedia respecto al inicio de cualquier reclamacion o litigio y todas las instancias relativas a la respectiva contestacion y defensa en relacion a las reclamaciones antes citadas. TERCERO. Sin perjuicio de sus restantes obligaciones derivadas del ordenamiento juridico, StarMedia realiza bajo su responsabilidad las manifestaciones y garantias que se adjuntan al presente documento como Anexo I. En el supuesto de que se ocasione cualquier perjuicio economico para eresMas, como socio de la Sociedad, y/o a la Sociedad, que tenga su origen en eventos anteriores a la entrada en vigor del Contrato y se derive de la falta de veracidad o exactitud, o del incumplimiento o cumplimiento defectuoso, de las manifestaciones y garantias contenidas en el Anexo I (en adelante, dicho perjuicio sera referido como "Quebranto"), StarMedia se compromete a dejar indemne y a pagar a eresMas o a la Sociedad (a criterio de eresMas) por dicho Quebranto, con las limitaciones economicas y temporales que se indican a continuacion. Sin perjuicio de lo estipulado en el otorgamiento SEGUNDO del Contrato, que a estos efectos no se considerara Quebranto, StarMedia no sera responsable por ningun Quebranto a menos que el importe total de la responsabilidad de StarMedia por todos los Quebrantos reclamados por eresMas exceda los 150.000 US$. Asimismo, las partes acuerdan expresamente que el monto total a ser cubierto por StarMedia en concepto de reclamos indemnizatorios realizados en virtud del presente otorgamiento TERCERO y las correspondientes manifestaciones y garantias incluidas en el Anexo I no excedera en su totalidad, bajo ninguna circunstancia, de un valor equivalente al precio indicado en el otorgamiento PRIMERO precedente; este limite tampoco sera de aplicacion a lo estipulado en el otorgamiento SEGUNDO del Contrato. La obligacion de indemnizar contemplada en este otorgamiento se mantendra vigente desde la fecha de firma del Contrato hasta la expiracion del periodo de prescripcion legal aplicable. CUARTO. StarMedia se compromete, empleando sus mejores esfuerzos, a colaborar con eresMas en la obtencion de cuanto fuera preciso para acreditar la titularidad de los bienes y derechos pertenecientes a la Sociedad conforme a lo descrito en las manifestaciones y garantias del Anexo I, incluyendo recabar las declaraciones de terceros pertinentes a efectos tales como la inscripcion en el Registro espanol de la Propiedad Intelectual o el deposito notarial de software o de otros bienes o derechos. Asimismo, StarMedia se compromete, empleando sus mejores esfuerzos, a proporcionar una copia original de los acuerdos de confidencialidad, proteccion de desarrollos e informacion confidencial que se hubieren suscrito con cualquier tercero, en relacion con los derechos de explotacion relativos a las aplicaciones de software descritos en el Anexo II, antes de la entrada en vigor (Closing") de este Contrato. QUINTO. En garantia de los anteriores otorgamientos por parte de StarMedia, las partes, entre otras, tienen convenido constituir un deposito en la entidad financiera norteamericana Wilmington Trust Company, que se regulara a traves del texto contractual titulado "Escrow Agreement" que se adjunta al contrato de compraventa de activos referido en la condicion Primera del otorgamiento SEXTO siguiente, contrato de cuyas obligaciones asimismo responde. SEXTO. El Contrato queda sometido a todas y cada una de las siguientes condiciones suspensivas: Primera.- Que se produzca la entrada en vigor ("Closing") del contrato de compraventa de activos ("Asset Purchase Agreement") suscrito en el dia de hoy entre, por una parte, eresMas y/o alguna filial de la misma y, por otra, StarMedia; Segunda.- Que StarMedia, en su calidad de socio unico de la Sociedad, haya firmado el acta de consignacion de su decision de efectuar un reintegro de capital en un importe de 5.484.807,18 euros para disminuir las perdidas de la Sociedad, mediante la aportacion de los derechos de credito que StarMedia ostenta frente a la Sociedad derivados de los prestamos concedidos a esta, asi como que se haya compensado la factura emitida por la Sociedad a StarMedia por los servicios prestados por aquella a esta por importe de 501.666,25 euros con igual importe correspondiente a los restantes derechos de credito de StarMedia; Tercera.- Que StarMedia haya entregado a eresMas la correspondiente documentacion, con todas las debidas formalidades exigidas por la legislacion aplicable, para el deposito mercantil de las Cuentas Anuales de la Sociedad correspondientes al ejercicio social transcurrido desde el 1 de enero de 2001 al 31 de diciembre de 2001; Cuarta.- Que la Sociedad tenga fondo de maniobra positivo, a la fecha de entrada en vigor del contrato de compraventa de activos referido en la condicion primera, suficiente como para cubrir las obligaciones devengadas y/o pasivos circulantes a dicha fecha. StarMedia ha informado a eresMas de que las deudas de la Sociedad con companias de su grupo se limitan unicamente a la deuda existente con StarMedia. A los efectos del cumplimiento de la condicion cuarta, se entendera por fondo de maniobra la diferencia entre el activo circulante y el pasivo circulante. En el plazo de 48 horas desde el cumplimiento, en su caso, de las condiciones antes referidas, y por tanto de la entrada en vigor del presente Contrato, tendra lugar en Madrid la formalizacion notarial del presente Contrato, para lo cual las partes deberan haber apoderado o facultado debidamente a sus respectivos representantes. Correran a cargo de eresMas los gastos de dicha formalizacion notarial. SEPTIMO. El presente Contrato queda sometido a la legislacion espanola y las partes, renunciando a cualquier otro foro que pudiera corresponderles, se someten expresamente, para la interpretacion y ejecucion del presente documento y sus Anexos, a arbitraje de Derecho ante la Corte Civil y Mercantil de Arbitraje de Madrid, aceptando el laudo que se dictare. Y, para que asi conste, las partes firman el presente documento por duplicado ejemplar, y a un solo efecto, en el lugar y fecha senalados en el encabezamiento. ERESMAS INTERACTIVA, S.A. STARMEDIA NETWORK, INC. p.p. ________________________ p.p. ________________________ D. Antonio Anguita Ruiz D. Jose Manuel Tost ANEXO I MANIFESTACIONES Y GARANTIAS StarMedia manifiesta y garantiza a eresMas los siguientes extremos, cuya falta sustancial de veracidad total o parcial sera considerada incumplimiento del Contrato y sus otorgamientos: Asuntos societarios 1. La Sociedad es una entidad mercantil debidamente constituida y se encuentra legalmente vigente, sin encontrarse en estado economico susceptible de causa de disolucion o situacion concursal alguna. 2. La Sociedad tiene inscritos en el Registro Mercantil todos los actos societarios susceptibles de inscripcion al dia de hoy, a excepcion de los referidos en el Apendice 1 del presente Anexo, y ha aprobado las cuentas anuales correspondientes al ejercicio 2.001. 3. La Sociedad cuenta con todos los permisos, licencias, aprobaciones o autorizaciones necesarios para el desarrollo de su actividad y cumple con la legalidad en la totalidad de sus operaciones, a excepcion de los indicados en el Apendice 2 del presente Anexo. 4. No existen participaciones directas o indirectas de la Sociedad en otras sociedades. 5. Todas las participaciones de la Sociedad estan libres de cargas y gravamenes de todo tipo y ningun tercero tiene derecho de ningun tipo a adquirir o suscribir por titulo alguno participaciones representativas del capital de la Sociedad. Inmuebles y otros activos 6. La Sociedad no tiene inmuebles en propiedad. La Sociedad es arrendataria de una oficina sita en la calle Balmes numero 7, de Barcelona, en virtud del contrato suscrito con NAI FORCADELL con fecha de 1 de octubre de 2.000, de 3 plazas de parking sitas en las inmediaciones de dicha oficina y de un apartamento sito en la calle Balmes n DEG. 291 de Barcelona, en virtud del contrato suscrito con D. Benito Garcia-Barroso Arias, con fecha 17 de noviembre de 1.999, siendo estos los unicos espacios en los que desarrolla sus actividades. No existen otros inmuebles sobre los que la Sociedad tenga derechos. 7. La Sociedad cumple en su integridad la legalidad vigente que le resulta aplicable respecto a inmuebles y otros activos. 8. Todos los contratos relativos a inmuebles y otros activos suscritos por la Sociedad han sido cumplidos por todas las partes intervinientes en los mismos. Asimismo, la Sociedad se encuentra en disposicion de cumplir con las obligaciones contractualmente asumidas. No existen razones que hagan prever un incumplimiento de las obligaciones debidas por la Sociedad en sus obligaciones contractuales. 9. A excepcion de los activos listados en el Apendice 3 del presente Anexo, todos los activos utilizados por la Sociedad estan en condiciones de correcto funcionamiento en consideracion del uso al que han sido destinados hasta la fecha, han sido adecuadamente conservados y, si estan en periodo de garantia, cumplen las condiciones para que puedan beneficiarse de la misma. 10. En concreto, la Sociedad es la plena titular de tres ordenadores EMC Symmetrix numeros de serie 8730 HK0863, 3830 HK1019 y 3930 HK1953, respectivamente, en perfecto estado de funcionamiento, asi como de las licencias de software necesarias para la plena explotacion de aquellos, sin que la Sociedad tenga pendiente obligacion de pago alguna en relacion con los referidos ordenadores y licencias, asi como su mantenimiento, frente a cualesquiera terceros. Contratos de la Sociedad 11. La firma del presente Contrato no supone que ningun contrato de la Sociedad vaya a ser incumplido, resuelto, rescindido o no renovado a su vencimiento. 12. Ningun contrato de la Sociedad infringe la legalidad o derechos de terceros. Propiedad intelectual e industrial 13. La Sociedad es legitima titular de sus elementos de propiedad industrial o intelectual, excepto por lo que se refiere a los nombres de dominio y marcas registradas que eran de propiedad de StarMedia y pasan a ser de propiedad de eresMas conforme al contrato de compraventa de activos referido en la condicion Primera del otorgamiento SEXTO, y ha llevado a cabo todos los tramites para el reconocimiento y explotacion legales de los mismos y esta al corriente de los correspondientes pagos para su inscripcion, renovacion y mantenimiento. 14. La Sociedad no infringe en modo alguno los derechos de ningun tercero derivados de algun derecho de propiedad industrial o intelectual. 15. La Sociedad es titular de las licencias de software necesarias para poder realizar todas las actividades propias de su giro o trafico en la forma que se realizan en la actualidad. 16. La Sociedad cumple las obligaciones que le incumben en relacion con la Ley Organica 15/1999, de 13 de diciembre, de proteccion de datos de caracter personal y normativa complementaria. 17. La Sociedad es titular y propietaria exclusiva de los programas de software listados en el Anexo II del presente Contrato, y se encuentra capacitada para ejercer validamente sus derechos sobre todos los elementos necesarios para el uso, actualizacion, mantenimiento y explotacion de los mismos, incluyendo sin limitacion, los respectivos codigos fuente y codigo objeto, los cuales se hallan actualmente bajo su control. Respecto a los referidos programas de software, la Sociedad no adeuda cantidad alguna cuyo pago se encuentre ya vencido a la fecha de la firma de este Contrato. 18. La Sociedad es plena titular de las licencias de uso y explotacion sobre las aplicaciones de software "Cyberjuegos" (sistema informatico de juegos "online" de la entidad Cyberjuegos.com) y "Oanda" (sistema informatico de conversion de divisas de la entidad Oanda Corporation), asi como de las correspondientes licencias para el uso y explotacion de Macromedia Multi User Server 1 para el servicio "Latingames", y de analoga licencia para el servicio "Latincards". Respecto a las referidas licencias y servicios, la Sociedad no adeuda cantidad alguna cuyo pago se encuentre ya vencido a la fecha de la firma de este Contrato. Laboral 19. Todos los contratos laborales de la Sociedad son conformes a la legalidad y la Sociedad no tiene pendiente de pago cantidades por estos conceptos. 20. La Sociedad se halla al corriente de todas las obligaciones laborales, incluidas las relativas a Seguridad Social, a excepcion de la normativa en prevencion de riesgos laborales, respecto a la cual la debida regularizacion se halla en proceso de tramitacion. Fiscal 21. La Sociedad ha cumplido puntualmente, tanto desde el punto de vista de sus obligaciones formales como materiales, todas las exigencias legales en materia tributaria en relacion con todas las administraciones competentes, nacionales o extranjeras. 22. No existen expedientes, recursos, consultas o discusiones pendientes de ser resueltas por la administracion tributaria o los Tribunales y ni hay ni se han producido inspecciones o comprobaciones. Estados financieros 23. Los estados financieros de la Sociedad y el Balance y Cuenta de Perdidas y Ganancias cerradas a 31 de marzo de 2002 y no auditadas facilitadas a eresMas e incorporadas al presente documento como Anexo III han sido elaborados en base a sus libros de contabilidad y de conformidad con los principios contables generalmente aceptados. 24. Los estados financieros de la Sociedad y el Balance y Cuenta de Perdidas y Ganancias cerradas a 31 de marzo de 2002 y no auditadas facilitadas a eresMas e incorporadas al presente documento como Anexo III reflejan adecuada, veraz, completa y fielmente la situacion financiero-patrimonial, resultados de operaciones y cash-flows de la Sociedad, en las fechas y respecto a los periodos indicados. Los libros de contabilidad de la Sociedad no registran operaciones que no sean el resultado de transacciones efectuadas de buena fe ni omiten hechos u operaciones que puedan afectar a la Sociedad. 25. Los estados financieros y el Balance y Cuenta de Perdidas y Ganancias cerradas a 31 de marzo de 2002 y no auditadas facilitadas a eresMas e incorporadas al presente documento como Anexo III muestran integramente la totalidad de las obligaciones contraidas o a contraer por la Sociedad. La Sociedad no tiene mas contingencias, deudas, reclamaciones u obligaciones devengadas o previsibles que las que figuran en los estados financieros o en el Balance y Cuenta de Perdidas y Ganancias cerradas a 31 de marzo de 2002 y no auditadas facilitadas a eresMas e incorporadas al presente documento como Anexo III. Litigios 26. La Sociedad no es parte en procedimiento litigioso alguno ante ninguna jurisdiccion, ni se conocen amenazas o circunstancias de las que razonablemente pueda inferirse que se entablaran procedimientos judiciales contra la Sociedad, distintos de la reclamacion de D. Javier Romero Mateos relativa a la comision por la previa compraventa de la Sociedad por parte de StarMedia. 27. Igualmente, no hay reclamaciones entabladas contra los administradores de la Sociedad, de las que pueda resultar una obligacion economica para esta. Tampoco se conocen amenazas o circunstancias de las que razonablemente puedan inferirse reclamaciones contra los administradores de la Sociedad o contra esta. Cambios relevantes 28. La Sociedad ha dirigido sus actividades con completa normalidad y de forma coherente con las practicas y pautas seguidas hasta hoy, sin que nada relevante deba ser mencionado por StarMedia distinto de lo reflejado en los estados financieros y contables. La Sociedad no ha sufrido ningun cambio adverso relevante, ni ningun dano, destruccion o perdida material en alguno de sus activos o propiedades o en su actividad. 29. Desde el inicio de negociaciones entre eresMas y StarMedia para la posible adquisicion de la Sociedad y hasta la formalizacion del presente Contrato en documento publico, ni StarMedia ni la Sociedad han llevado ni llevaran a cabo actuacion alguna relativa a la Sociedad distinta de la gestion ordinaria de esta, salvo las gestiones realizadas por StarMedia para subsanar el conflicto derivado de la reclamacion que se senala en la manifestacion 26 anterior, ni en particular se han producido modificaciones de las condiciones laborales aplicables a la Sociedad ni alteraciones en sus activos distintas de las derivadas de su uso ordinario o depreciacion temporal. 30. La Sociedad no ha vendido, comprometido, cedido o gravado o de cualquier otra forma dispuesto de los activos y propiedades de la Sociedad. 31. La Sociedad no ha renunciado, transigido o cancelado reclamaciones o derechos, judiciales o extrajudiciales, de las que fuera titular contra terceras personas. 32. La Sociedad no ha efectuado cambios en sus sistemas, politicas comerciales y de precios, principios registros o practicas contables, ni ha suscrito, modificado, autorizado ni se ha comprometido a suscribir ninguna transaccion, operacion o relacion con partes vinculadas, excepto por el cambio relativo a la facturacion intercompania que se implemento en febrero de 2.002, en virtud del cual la Sociedad le factura a StarMedia el monto equivalente a su costo operativo mensual mas un 5% de margen. 33. La Sociedad no ha concedido ni se ha comprometido a conceder ningun prestamo, fianza o garantia en favor de ninguna persona. 34. La Sociedad no ha modificado ninguna condicion retributiva de sus administradores, directivos, empleados o colaboradores. Miscelanea 35. StarMedia ha proporcionado a eresMas toda la informacion relevante a los efectos del presente Contrato. 36. No existe ninguna afectacion, carga o gravamen sobre ninguno de los activos de la Sociedad. 37. No se adeudan mas cantidades ni existen mas obligaciones que las que expresamente aparecen en los estados financieros o en el Balance y Cuenta de Perdidas y Ganancias cerradas a 31 de marzo de 2002 y no auditadas facilitadas a eresMas e incorporadas al presente documento como Anexo III. 38. No existe ningun acontecimiento o circunstancia significativa no revelada a eresMas que sea del conocimiento de la Sociedad y afecte negativamente a los negocios, perspectivas o situacion de la Sociedad o a la capacidad de StarMedia para cumplir este Contrato. 39. Todos los requisitos legales y estatutarios aplicables han sido previamente cumplidos por StarMedia para la suscripcion, formalizacion y plena ejecucion del Contrato. 40. Las manifestaciones y garantias prestadas por StarMedia, asi como todos y cada uno de los documentos remitidos por estos en relacion con el presente Contrato o sus Anexos, son verdaderas y exactas. Ninguna de las informaciones, manifestaciones o garantias dadas por StarMedia encubre, falsea ni omite ningun hecho importante o cuya revelacion sea necesaria para que un comprador o inversor pueda conocer el estado de la Sociedad. Apendice 1 Asuntos Societarios - El tramite de nombramiento del Sr. Tost como Administrador Unico de la Sociedad, en sustitucion del Sr. Steven Heller, se encuentra aun pendiente de inscripcion en el Registro Mercantil de Barcelona, si bien la decision de socio unico relativa a dicho nombramiento tuvo lugar el pasado dia 28 de marzo de 2.002. - Igualmente, el tramite relativo al deposito de las cuentas anuales correspondientes al ejercicio 2.001 en el Registro Mercantil de Barcelona se encuentra aun pendiente. Apendice 2 - La licencia tipo "C" obtenida por la Sociedad relativa a la operacion del servicio de e-mail, fue dada de baja por la CMT (Comision Mercado de Telecomunicaciones), debido a un error admisitrativo ocurrido con motivo de la presentacion de la declaracion anual de la Sociedad, en la cual la Sociedad manifesto que no percibia ingreso alguno en relacion al servicio de e-mail. La CMT procedio automaticamente a suspender dicha licencia, sin embargo, luego de que la Sociedad realizara el pertinente reclamo, le fue confirmado que se trata de un error y que el alta sera activada nuevamente a la brevedad. Apendice 3 - La Sociedad es propietaria de un vehiculo Patrol, el cual ya no es utilizado pero no ha sido dado de baja, el mismo se encuentra completamente amortizado. ANEXO II PROGRAMAS DE SOFTWARE DE PROPIEDAD DE LA SOCIEDAD - LatinMail (sistema informatico de correo electronico de la Sociedad, basado en Postfix de Linux y en codigo C++ de NT de titularidad de la Sociedad) - Clasificados (sistema informatico de publicacion de anuncios clasificados para productos y servicios) - Cupido Software (sistema informatico de "match making" de contactos entre personas para establecer cualquier tipo de relacion) - Trivia (juego informatico del tipo "trivia", en el cual los usuarios tienen que responder a distintas preguntas) - Gratisweb (sistema informatico de paginas web personales de la Sociedad) - Humor (seccion de chistes de la Sociedad) - MRT Reporting (aplicacion informatica que genera informes sobre las promociones realizadas por los clientes de StarMedia y desarrollada en Excel) - Search Software & Directory Service (servicio de directorio informatico de la Sociedad titulado "Latinguia" y de StarMedia, sobre software Texis) EX-10.48 8 a2084088zex-10_48.txt EXHIBIT 10.48 Exhibit 10.48 [STARMEDIA LOGO] December 27, 2001 Ms. Adriana Kampfner 2485 Traver Road Ann Arbor, MI 48105 Re: SEPARATION AGREEMENT INCLUDING A GENERAL RELEASE Dear Adriana: This letter sets forth the terms of our agreement (this "Agreement") with respect to your separation from employment with StarMedia Network, Inc. and its subsidiaries (collectively, "StarMedia"). Your final date of employment with StarMedia will be December 31, 2001 ("Separation Date"). As of the Separation Date, except as specifically provided in this Agreement, all compensation, including bonuses, and all other benefits and perquisites of employment with StarMedia, will cease, and all option agreements, option grants and other rights heretofore granted to you to purchase or otherwise obtain equity securities of StarMedia will terminate as of the Separation Date and be of no further force and effect. The Line of Credit provided pursuant to the letter agreement, dated December 28, 2000, between you and StarMedia (the "Line of Credit"), will be terminated on the Separation Date. You may elect to continue your medical coverage at the prevailing active employee rate(s) as provided by the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"). Additional information concerning your COBRA rights will be provided separately. If the terms of this Agreement are accepted by you and if you return a fully executed original of this Agreement no later than December 31, 2001, and if you perform all of your obligations under this Agreement prior to the Separation Date, you will be entitled to the following: a) On the Separation Date, StarMedia will pay you any unpaid salary through the Separation Date and all reasonable unpaid expenses incurred by you in connection with services to the StarMedia on or prior to the Separation Date. b) On Separation Date, StarMedia will forgive the remaining balance of the American Express Corporate Credit Card balance credit that you are currently repaying pursuant to the Capital Reimbursement Agreement dated July 6, 2001. On the Separation Date that amount will be $24,947.33. 29 West 36th Street, New York, NY 10018 Phone: 212.905.8200 Fax: 212.905.8393 Page 2 c) On or before January 20, 2002, StarMedia will pay you $64,167, less appropriate withholdings. You acknowledge and agree that the Company had no previous contractual or other obligation to pay you this amount. In return for the payments and other benefits described above as well as the promises contained herein, you completely release StarMedia from all claims of any kind, known and unknown, which you may know have or have ever had against StarMedia, including claims for compensation, bonuses, severance pay, stock options, loans, lines of credits, tax indemnity and all claims arising from your employment with StarMedia, whether based on contract, tort, statute, local or municipal ordinance, regulation or any comparable law in any jurisdiction ("Released Claims"). By way of example and not in limitation, the Released Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the New York Human Rights Law, the New York City Human Rights Law, as well as any claims asserting wrongful termination, breach of contract, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract, and defamation. You represent that you have not filed or permitted to be filed on your behalf any claims, administrative proceedings or lawsuits against StarMedia, and you agree that you will not do so at any time in the future with respect to the subject matter of the Released Claims. You agree not to disclose any confidential, proprietary or know-how belonging to StarMedia or acquired by you during your employment with StarMedia as described in the "Non-Disclosure and Development Agreement" ("Non-Disclosure Agreement"). You acknowledge that the Non-Disclosure Agreement entered into by you on March 18, 1999 remains in effect after your employment with StarMedia ends. You represent that you have returned or will return prior to the Separation Date to StarMedia, all StarMedia property (including without limitation, keys to all offices and facilities, employee handbooks, business cards, client files, corporate credit cards, telephone calling card, files, sales material, laptop computer, cellular telephone, blackberry etc.) in your possession and you have not retained any reproductions of these items. You agree that you will cooperate with StarMedia and its counsel (internal and external) in connection with any matter with which you were involved while employed by StarMedia or of which you have knowledge by providing information, answering questions, or appearing as a witness, and that you will cooperate in connection with any administrative proceeding or litigation relating to any matter in which you were involved or about which you have knowledge as a result of your employment with StarMedia. This Agreement shall be governed by the laws of the State of New York and the parties in any action arising from this Agreement shall be subject to the jurisdiction and venue of the federal and state courts, as applicable, in the borough of Manhattan, State of New York. Page 3 You and StarMedia mutually agree that any controversy or claim arising out of or relating to this Agreement or its breach, shall be submitted to be resolved by arbitration. The parties hereby waive any rights they may have to trial by jury in regard to such claims. A judgment may be entered on the arbitrator's award in any court having jurisdiction. Arbitration under this Agreement shall be the exclusive remedy. You and StarMedia agree that arbitration shall be held in or near New York, New York and shall be in accordance with the then-current Employment Dispute Resolution Rules of the American Arbitration Association, before an arbitrator licensed to practice law in the State of New York. The arbitrator shall have authority to award or grant both legal, equitable, and declaratory relief. Such arbitration shall be final and binding on the parties. The Federal Arbitration Act shall govern the interpretation and enforcement of this section pertaining to Alternative Dispute Resolution. You and StarMedia also agree that this letter contains all of our agreements and understandings, and fully supersedes any prior agreements or understandings that we may have had regarding the subject matter of this Agreement. You acknowledge you have have had an opportunity to consult counsel of your own choosing, and that you have chosen to enter into this Agreement and based upon your own judgment and not in reliance upon any promises made by StarMedia other than those contained in this Agreement. If this letter comports with your understanding of your agreement, please sign on the line provided below and return the original by hand delivery. Sincerely /s/ EMILY AREAN --------------------------------- Emily Arean I have read and understand the Agreement above and agree to be bound by its terms and conditions. /s/ ADRIANA KAMPFNER 12/27/01 - ------------------------------- --------------------------------- Adriana Kampfner Date [STARMEDIA LOGO] December 26, 2001 Ms. Adriana Kampfner 2485 Traver Road Ann Arbor, MI 48105 Dear Adriana: I am writing in reference to the agreement between you and StarMedia Network, Inc. ("StarMedia"), dated December 28, 2000, relating to the line of credit of up to $1.1 million that StarMedia has extended to you. Under this agreement, you currently owe StarMedia $1.1 million in principal, plus accrued interest (collectively, the "Outstanding Balance"). StarMedia hereby acknowledges that you have represented to us and to our outside auditors that you do not have sufficient assets to repay the Outstanding Balance. Accordingly, StarMedia has agreed to forgive all of your indebtedness as to the Outstanding Balance based upon your inability to pay. Please do not hesitate to contact me if you have any questions regarding this matter. Very truly yours, /s/ EMILY AREAN Emily Arean SVP, Human Resources I acknowledge and agree to the above: /s/ ADRIANA KAMPFNER 12/26/01 - --------------------------------- ----------------------------- Adriana Kampfner Date 29 West 36th Street, New York, NY 10018 Phone: 212.905.8200 Fax: 212.905.8393 EX-12.1 9 a2084088zex-12_1.txt EXHIBIT 12.1 EXHIBIT 21.2 LIST OF SUBSIDIARIES StarMedia Argentina Sociedad de Responsabilidad Limitada (SRL) Buenos Aires, Argentina StarMedia do Brasil Ltda. Sao Paulo, Brazil StarMedia Mobile do Brasil Ltda. Sao Paulo, Brazil Servicios Interactivos Limitada, Santiago, Chile StarMedia Chile Limitada Santiago, Chile StarMedia Colombia Ltda., Sociedad de Responsabilidad Limitada Bogota, Colombia SMN de Mexico, Sociedad de Responsabilidad Limitada (S. de R.L.) Mexico City, Mexico Servicios Star Mexico, Sociedad de Responsabilidad Limitada de Capital Variable Mexico City, Mexico AdNet S.A. de C.V. Mexico City, Mexico StarMedia Network, S.L. Madrid, Spain StarMedia Network Americas, Sociedad Anonima (S.A.) Montevideo, Uruguay StarMedia Sociedad de Responsabilidad Limitada S.R.L. Montevideo, Uruguay StarMedia S.R.L. Caracas, Venezuela StarMedia Mobile (USA), Inc. Delaware StarMedia Mobile (BVI), Inc. British Virgin Islands EX-23.1 10 a2084088zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-41962) pertaining to the StarMedia Network, Inc. 2000 Stock Incentive Plan and (Form S-8 No. 333-79255) pertaining to the 1997 Stock Option Plan, 1998 Stock Option Plan and 1999 Employee Stock Purchase Plan of StarMedia Network, Inc. of our report dated June 21, 2002, with respect to the consolidated financial statements and schedule of StarMedia Network, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ ERNST & YOUNG LLP New York, New York July 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----