-----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, NFMvCYm+cwkGByylKjm8szgarDLByq1aA7HE9XnpjAsn8++4SFjaI0l942tPZWrh WLHBAS0JT9E0abJyevYWgA== 0001047469-99-010390.txt : 19990319 0001047469-99-010390.hdr.sgml : 19990319 ACCESSION NUMBER: 0001047469-99-010390 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARMEDIA NETWORK INC CENTRAL INDEX KEY: 0001057334 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-74659 FILM NUMBER: 99568298 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 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- STARMEDIA NETWORK, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------------ DELAWARE 7375 06-1461770 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification Number)
29 WEST 36(TH) STREET FIFTH FLOOR NEW YORK, NEW YORK 10018 (212) 548-9600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------------ FERNANDO J. ESPUELAS CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER STARMEDIA NETWORK, INC. 29 WEST 36(TH) STREET FIFTH FLOOR NEW YORK, NEW YORK 10018 (212) 548-9600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------------ COPIES TO: ALEXANDER D. LYNCH, ESQ. KEITH F. HIGGINS, ESQ. BABAK YAGHMAIE, ESQ. CHRISTOPHER J. AUSTIN, ESQ. BROBECK, PHLEGER & HARRISON LLP ROPES & GRAY 1633 BROADWAY, 47TH FLOOR ONE INTERNATIONAL PLACE NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02110 (212) 581-1600 (617) 951-7000
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE OFFERING TO BE REGISTERED PRICE(1) AMOUNT OF REGISTRATION FEE Common stock, par value $.001 per share $75,000,000 $20,850
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION. DATED MARCH 18, 1999. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Shares STARMEDIA NETWORK, INC.
Common Stock ------------------ This is an initial public offering of shares of common stock of StarMedia Network, Inc. All of the shares of common stock are being sold by StarMedia. Before this offering, there has been no public market for the common stock. StarMedia currently anticipates that the initial public offering price will be between $ and $ per share. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "STRM". SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Per Share Total ---------------- ------------------ Initial public offering price........................... $ $ Underwriting discount................................... $ $ Proceeds, before expenses, to StarMedia................. $ $
The underwriters may, under certain circumstances, purchase up to an additional shares from StarMedia at the initial public offering price less the underwriting discount. ------------------------ The underwriters expect to deliver the shares against payment in New York, New York on , 1999. GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS J.P. MORGAN & CO. SALOMON SMITH BARNEY ------------------------ Prospectus dated , 1999. [GRAPHICS] PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. STARMEDIA NETWORK, INC. OUR BUSINESS StarMedia is the leading online network across Latin America. At a time when content on the Internet is overwhelmingly in English, we offer Latin Americans a pan-regional community experience, combined with a broad array of Spanish and Portuguese content tailored for regional dialects and local cultural norms. We also provide advertisers and merchants targeted access to Latin American Internet users, an audience with a highly desirable demographic profile. Our network provides 16 interest-specific channels, extensive community features, sophisticated search capabilities and online shopping in Spanish and Portuguese. Our channels cover topics of interest to Latin Americans online, such as local and regional news, business and sports. We promote user affinity to the StarMedia community by providing in-language e-mail, chat rooms, instant messaging and personal homepages. We develop our product offerings both internally and through strategic relationships with third parties, including Netscape, Disney, Reuters and Ziff-Davis. Our monthly page views have grown from approximately 7 million in December 1997 to approximately 61 million in December 1998, which represented approximately 2.4 million user visits in that month. In addition, as of December 31, 1998, we had over 300,000 registered e-mail users. We believe that StarMedia appeals to advertisers and merchants because of our: - focus on Latin America; - powerful brand image in Latin America; - highly-targeted and attractive demographic user base; and - effective advertising delivery and results tracking services. Consequently, we have been able to attract leading advertisers and sponsors such as Bradesco, Ford, Fox Television, IBM, Microsoft, Motorola, Nokia and Sony. OUR MARKET OPPORTUNITY We believe that growth of Internet usage in Latin America will significantly outpace growth of worldwide Internet usage over the next several years. According to Nazca Saatchi & Saatchi, the number of Internet users in Latin America is expected to increase from 7 million users at the end of 1997 to 34 million users by the end of 2000. In Latin America, 20% of the population controls an estimated 65% of the overall buying power. Nazca Saatchi & Saatchi also reports that 90% of Latin American Internet users are from upper and middle socio-economic classes. This group represents an attractive demographic audience for advertisers and businesses. OUR STRATEGY Our objective is to strengthen our position as the leading online network across Latin America by: - aggressively extending our brand recognition; - enhancing and expanding our network of in-language content and pan-regional community; - delivering superior network functionality and speed; and - expanding into additional Spanish- and Portuguese-speaking markets. 3 OUR OFFICES Our principal executive offices are located at 29 West 36(th) Street, Fifth Floor, New York, New York 10018 and our telephone number is (212) 548-9600. In addition, we maintain offices in Sao Paulo, Mexico City, Buenos Aires, Bogota, Santiago, Montevideo, Caracas and Miami. Our Internet address is www.starmedia.com. The information on our Web site is not a part of this prospectus. OUR TRADEMARKS STARMEDIA and the STARMEDIA logo are registered trademarks and service marks of StarMedia. STARMEDIA.COM, TALKPLANET, BUSCAWEB, ORBITA, PIZARRAS and (V)PULSE are trademarks and service marks of StarMedia. All other trademarks and service marks used in this prospectus are the property of their respective owners. THE OFFERING The following information assumes that the underwriters do not exercise the option we have granted to them to purchase additional shares in this offering. Please see "Underwriting". Shares offered by StarMedia.......... shares Shares to be outstanding after this offering........................... shares Proposed Nasdaq National Market symbol............................. STRM Use of proceeds...................... To fund our marketing activities, expand our sales force, enhance our products and services, improve our network infrastructure, make strategic investments and acquisitions, and for general corporate purposes. Please see "Use of Proceeds".
This information is based on our shares of common stock outstanding as of December 31, 1998 and gives effect to the conversion of all outstanding shares of redeemable convertible preferred stock into 31,996,667 shares of common stock automatically on the closing of this offering. This information excludes: - 6,131,933 shares subject to options outstanding as of December 31, 1998 at a weighted average exercise price of $0.81 per share; - 3,868,067 additional shares that could be issued under our 1998 Stock Plan; and - 7,000,000 additional shares authorized for issuance under our 1998 Stock Plan in February 1999. 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize the financial data for our business. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes to those statements included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, PERIOD FROM MARCH 5, 1996 (INCEPTION) TO ------------------------ DECEMBER 31, 1996 1997 1998 --------------------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues........................................................ $ -- $ 460 $ 5,329 Operating expenses: Product and technology development............................ 36 1,229 6,816 Sales and marketing........................................... 12 2,108 29,274 General and administrative.................................... 78 648 4,600 Depreciation and amortization................................. 2 38 774 Stock-based compensation expense.............................. -- -- 10,421 -------- --------- ------------- Total operating expenses...................................... 128 4,023 51,885 -------- --------- ------------- Operating loss.................................................. (128) (3,563) (46,556) Interest income, net.......................................... -- 35 670 -------- --------- ------------- Net loss........................................................ (128) (3,528) (45,886) -------- --------- ------------- Preferred stock dividends and accretion......................... -- (185) (4,536) Net loss available to common shareholders....................... $ (128) $ (3,713) $(50,422) -------- --------- ------------- -------- --------- ------------- Basic and diluted net loss per share............................ $ (0.01) $ (.37) $ (4.94) -------- --------- ------------- Shares used in computing basic and diluted net loss per share... 9,147 10,012 10,202 -------- --------- ------------- Pro forma basic and diluted net loss per share.................. $ (1.09) ------------- Shares used in computing pro forma basic and diluted net loss per share..................................................... 42,199 ------------- -------------
The following table is a summary of our balance sheet at December 31, 1998. The pro forma data give effect to the conversion of our redeemable convertible preferred stock. The pro forma as adjusted data reflect the sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting underwriting discounts and estimated offering expenses.
AS OF DECEMBER 31, 1998 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................................. $ 53,141 $ 53,141 $ Working capital........................................................... 47,512 47,512 Total assets.............................................................. 60,986 60,986 Redeemable convertible preferred stock.................................... 96,494 -- Total stockholders' (deficit) equity...................................... (43,393) 53,101
5 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT STARMEDIA AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS PROSPECTUS. 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 ONLY BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME; YOUR BASIS FOR EVALUATING US IS LIMITED We were incorporated in March 1996. We commenced operations in September 1996 and launched the StarMedia network in December 1996. Accordingly, we have only a limited operating history for you to evaluate our business. You must consider the risks, expenses and uncertainties that an early stage company like ours faces in the new and rapidly evolving Internet market. In order to address these risks, we must: - increase awareness of the StarMedia brand and continue to build user loyalty; - expand the content and services on our network; - attract a larger audience to our network; - attract a large number of advertisers from a variety of industries; - maintain our current, and develop new, strategic relationships; - respond effectively to competitive pressures; - continue to develop and upgrade our technology; and - attract, retain and motivate qualified personnel. If we are unsuccessful in addressing these risks, our business, financial condition and results of operations will be materially and adversely affected. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for detailed information on our limited operating history. WE HAVE NEVER MADE MONEY AND EXPECT OUR LOSSES TO CONTINUE We have never been profitable. As of December 31, 1998, we had an accumulated deficit of approximately $54.3 million. We expect to continue to incur significant losses for the foreseeable future. We expect to increase our spending significantly. Although our revenues have grown in recent quarters, our expenses have grown even faster. We will need to generate significant revenues to achieve profitability. We may not achieve profitability. If our revenues grow more slowly than we anticipate or if our operating expenses either increase more than we expect or cannot be reduced in light of lower revenues, our business, financial condition and results of operations will be materially and adversely affected. 6 OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS Our future revenues and results of operations may significantly fluctuate due to a combination of factors, including: - growth and acceptance of the Internet, particularly in Latin America; - our ability to attract and retain users; - demand for advertising on the Internet in general and on our network in particular; - our ability to upgrade and develop our systems and infrastructure; - technical difficulties that users may experience on our network; - technical difficulties or system downtime resulting from the developing telecommunications infrastructure in Latin America; - competition in our markets; - foreign currency exchange rates that affect our international operations; and - general economic conditions in Latin America. Future revenues are difficult to forecast and for the foreseeable future will depend on user traffic levels and advertising activity on our network. We plan to increase our sales and marketing operations and to expand and develop our content. We also plan to upgrade and enhance our technology and infrastructure development in order to support our growth. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues in relation to our expenses, then our business, results of operations and financial condition would be materially and adversely affected. This would likely affect the market price of our common stock in a manner which may be unrelated to our long-term operating performance. Due to these factors, and the other risks discussed in this section, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. 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. SEASONAL FACTORS MAY AFFECT OUR OPERATING RESULTS The level of use on our network is highly seasonal. Visitor traffic on our network has historically been significantly lower during the first calendar quarter of the year because: - it includes the summer months in much of Latin America; - our target audience tends to take extended vacations during these months; and - schools and universities are generally closed. Our advertising revenue is also subject to seasonal fluctuations. Historically, advertisers have spent less in the first and second calendar quarters. We believe that these seasonal trends will continue to affect our results of operations. As a result, if our expenses increase during these periods, it may materially and adversely affect our business, financial condition and results of operations. WE MAY HAVE DIFFICULTY OBTAINING ADDITIONAL CAPITAL IF NEEDED We intend to grow our business rapidly. Therefore, we will likely have substantial future capital needs after this offering. 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 7 to raise capital to fund our growth, our business, financial condition and results of operations would be materially and adversely affected. RISKS RELATED TO OUR MARKETS AND STRATEGY WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA We have and expect to continue to derive substantially all of our revenues from the Latin American markets. We intend to continue to expand into international markets and to spend significant financial and managerial resources to do so. We operate throughout Latin America, a region which in the past has been subject to: - significant governmental influence over many aspects of its economy; - political and economic instability; - social unrest; - slow or negative growth; - high inflation; - high rates of unemployment; - currency fluctuations and devaluations; - changing interest rates; - changing tax laws; - imposition of exchange controls; - wage and price controls; and - restructuring of portions of external indebtedness owed to commercial and governmental creditors. We have no control over these matters and any of them may adversely affect our business, financial condition and results of operations. The currencies of many countries in Latin America have experienced substantial depreciation and volatility against the U.S. dollar since July 1997. The currency fluctuations, as well as higher interest rates and political instability, have materially and adversely affected the economies of many countries in Latin America, including countries which account for a significant portion of our revenues. Our reporting currency is the U.S. dollar. In a number of cases, however, customers in Latin America may be billed in local currencies. Our 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. However, we may choose to do so in the future. We may not be able to do this successfully. In addition, we may be subject to exchange control regulations which might restrict our ability to convert local currencies into U.S. dollars. These exchange controls could have a material adverse effect on our business, financial condition and results of operations. Our business internationally is subject to a number of other risks. These include: - unexpected changes in regulatory requirements; - difficulties and costs of staffing and managing international operations; - differing technology standards; - potentially adverse tax consequences; - uncertain protection for intellectual property rights; - trade barriers for goods sold over our network; - difficulties in maintaining and upgrading our systems; - export restrictions and export controls relating to encryption technology; and - varying seasonal fluctuations in business activity. Any of these factors could adversely affect our business, financial condition and results of operations. 8 WE DEPEND ON THE GROWTH OF THE INTERNET IN LATIN AMERICA The Latin American Internet market is in an early stage of development. Our future success depends on the continued growth of the Internet in Latin America. Internet usage in Latin America may be inhibited for a number of reasons, including: - the cost of Internet access; - concerns about security, reliability, and privacy; - ease of use; and - quality of service. Our business, financial condition and results of operations will be materially and adversely affected if Internet usage in Latin America does not continue to grow or grows more slowly than we anticipate. UNDERDEVELOPED LATIN AMERICAN TELECOMMUNICATIONS INFRASTRUCTURES MAY LIMIT ACCESS TO THE INTERNET Access to the Internet requires a relatively advanced telecommunications infrastructure. The telecommunications infrastructure in many parts of Latin America is not as well-developed as in the United States or Europe. The quality and continued development of the telecommunications infrastructure in Latin America will have a substantial impact on our ability to deliver our services and on the market acceptance of the Internet in Latin America in general. If further improvements to the Latin American telecommunications infrastructure are not made, the Internet will not gain broad market acceptance in Latin America. If access to the Internet in Latin America does not continue to grow or grows more slowly than we anticipate, our business, financial condition and results of operations will be materially and adversely affected. OUR PAN-REGIONAL APPROACH TO CONTENT DELIVERY MAY NOT BE SUCCESSFUL Latin America is made up of a number of diverse markets that differ historically, culturally, economically and politically. We use a pan-regional approach of customizing our content and advertisements to a particular user based on the user's location. Users, however, may prefer content which is specifically created for a local audience within Latin America using a strictly localized approach over our pan-regional approach. This may materially and adversely affect our business, financial condition and results of operations. WE RELY ON THE INTERNET AS A MEDIUM FOR ADVERTISING AND ELECTRONIC COMMERCE We expect to derive most of our revenue for the foreseeable future from Internet advertising. In order for us to generate revenue, advertisers and advertising agencies must direct a portion of their budgets to the Internet and, specifically, to our network. The Internet advertising market is new and rapidly evolving, particularly in Latin America. As a result, we cannot gauge its effectiveness or long term market acceptance as compared with traditional media. Our business, financial condition and results of operations will be materially and adversely affected if the Internet advertising market in Latin America fails to develop or develops more slowly than we expect. Many of our current or potential advertising and electronic commerce partners have limited experience using the Internet for advertising purposes and have not devoted a significant portion of their advertising budgets to Internet-based advertising. The adoption of Internet advertising requires the acceptance of a new way of conducting business and exchanging information. Advertisers that have invested substantial resources in other methods of conducting business may be reluctant to adopt a new strategy that may limit or compete with their existing efforts. These customers may find Internet advertising to be less effective for promoting their products and services than traditional print and broadcast media. Advertisers and electronic commerce marketers may choose not to advertise on the StarMedia network if they do not perceive our audience demographic to be desirable or 9 advertising on our network to be effective. No standards have been widely accepted for the measurement of the effectiveness of Internet advertising or to measure the demographics of our visitor base. Standards may not develop sufficiently to support the Internet as an effective advertising medium. If these standards do not develop, advertisers may choose not to advertise on the Internet in general or, specifically, on our network. This could have a material adverse effect on our business, financial condition and results of operations. Different pricing models are used to sell advertising on the Internet. It is difficult to predict which, if any, will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. Our advertising revenues could be adversely affected if we are unable to adapt to new forms of Internet advertising. Moreover, software programs are available that limit or prevent advertising from being delivered to an Internet user's computer. Widespread adoption of this software could adversely affect the commercial viability of Internet advertising. Advertising based on impressions, or the number of times an advertisement is delivered to users, comprises substantially all of our revenues. To the extent that minimum guaranteed impression levels are not met, we defer recognition of the corresponding revenues until guaranteed impression levels are achieved. To the extent that minimum impression levels are not achieved, we may be required to provide additional impressions after the contract term, which would reduce our advertising inventory. This could have a material adverse effect on our business, financial condition and results of operations. OUR SUCCESS WILL DEPEND ON HOW WELL WE DEVELOP OUR BRAND Maintaining the StarMedia brand is critical to our ability to expand our user base and our advertising and electronic commerce revenues. We believe that the importance of brand recognition will increase as the number of Internet sites in Latin America grows. In order to attract and retain Internet users, advertisers and electronic commerce partners, we intend to increase substantially our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing the StarMedia brand will also depend on our success in providing high quality content, features and functionality. If we fail to promote our brand successfully or if visitors to our network or advertisers do not perceive our services to be of high quality, the value of the StarMedia brand could be diminished. This could have a material and adverse effect on the business, financial condition and results of operations. WE MAY BE UNABLE TO ADEQUATELY TRACK AND MEASURE THE DELIVERY OF ADVERTISEMENTS It is important to our advertisers that we accurately measure the demographics of our user base and the delivery of advertisements on our network. We depend on third parties to provide us with some of these measurement services. If they are unable to provide these services in the future, we would need to perform them ourselves or obtain them from another provider. This could cause us to incur additional costs or cause interruptions in our business during the time we are replacing these services. We are currently implementing additional systems designed to record information on our users. If we do not implement these systems successfully, we may not be able to accurately evaluate the demographic characteristics of our users. Companies may choose to not advertise on our network or may pay less for advertising if they do not perceive our measurements or measurements made by third parties to be reliable. WE DEPEND ON A SMALL GROUP OF ADVERTISERS In 1998, our top advertiser accounted for approximately 23% of our total advertising revenues. In 1998, our top five advertisers accounted for approximately 62% of our total advertising revenues. Our business, results of operations and financial condition could be materially adversely affected by the loss of one 10 or more of our top advertisers. If we do not attract additional advertisers, our business, financial condition and results of operations could be materially adversely affected. WE DEPEND ON OUR ADVERTISING SALES DEPARTMENT We depend on our advertising sales department to maintain and increase our advertising sales. As of December 31, 1998, our advertising sales department consisted of over 60 employees. The success of our advertising sales department is subject to a number of risks, including: - competition in hiring and retaining qualified sales personnel; and - the length of time it takes new sales personnel to become productive. In addition, we are hiring sales personnel in Latin American countries where the Internet advertising sales market is at an early stage of development. We may have difficulty finding experienced and effective sales personnel. Our business, financial condition and results of operations could be materially adversely affected if we do not maintain an effective advertising sales department. WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS We have recently experienced a period of rapid growth. This has placed a significant strain on our managerial, operational and financial resources. To accommodate this growth, we must implement new or upgraded operating and financial systems, procedures and controls throughout many different locations. We may not succeed with these efforts. Our failure to expand and integrate these areas in an efficient manner could have a material adverse effect on our business, financial condition and results of operations. We will need to recruit, train and retain a significant number of employees, particularly employees with technical, marketing and sales backgrounds. These individuals are in high demand. We may not be able to attract the staff we need. Moreover, our systems, procedures and controls may not be adequate to support our future operations and our management may not be able to achieve the rapid execution necessary to fully exploit the market opportunity for our products and services. WE HAVE MANY COMPETITORS AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST THEM There are many companies that provide Web sites and online destinations targeted to Latin Americans and Spanish- and Portuguese-speaking people in general. All of these companies compete with us for visitor traffic, advertising dollars and electronic commerce partners. The market for Internet content companies in Latin America is new and rapidly evolving. Competition for visitors, advertisers and electronic commerce partners is intense and is expected to increase significantly in the future because there are no substantial barriers to entry in our market. Increased competition could result in: - lower advertising rates; - price reductions and lower profit margins; - loss of visitors; - reduced page views; or - loss of market share. Any one of these could materially and adversely affect our business, financial condition and results of operations. Our ability to compete successfully depends on many factors. These factors include: - the quality of the content provided by us and our competitors; - how easy our respective services are to use; - the effectiveness of our sales and marketing efforts; and - the performance of our technology. We compete with providers of content and services over the Internet, including Web directories, search engines, content sites and 11 sites maintained by government and educational institutions. Our current competitors include: - companies that target Spanish-speakers throughout Latin America, like Ciudad Futura, El Sitio, Telefonica/Ole and Yupi; - Spanish and Portuguese language versions of U.S. companies like CompuServe and Yahoo!; and - companies like ZAZ (Brazil), CompuServe Mexico (Mexico), Ciudad Internet (Colombia) and Universo Online (Brazil), that target particular Latin American countries. In addition, America Online recently announced a joint venture with the Cisneros Group to enter the Latin American Internet market, initially targeting Brazil, Mexico and Argentina. Many of our competitors and potential competitors have: - longer operating histories; - greater name recognition in some markets; - larger customer bases; and - significantly greater financial, technical and marketing resources. These competitors may also be able to: - undertake more extensive marketing campaigns for their brands and services; - adopt more aggressive advertising pricing policies; - use superior technology platforms to deliver their products and services; and - make more attractive offers to potential employees, distribution partners, commerce companies, advertisers and third-party content providers. Our competitors may develop content that is better than ours or that achieves greater market acceptance. It is also possible that new competitors may emerge and acquire significant market share. These could have a material and adverse effect on our business, financial condition and results of operations. We also compete with traditional forms of media, like newspapers, magazines, radio and television for advertisers and advertising revenue. If advertisers perceive the Internet or our network to be a limited or an ineffective advertising medium, they may be reluctant to devote a portion of their advertising budget to Internet advertising or to advertising on our network. WE MUST CONTINUALLY ENHANCE AND DEVELOP THE CONTENT AND FEATURES OF OUR NETWORK TO ATTRACT VISITORS AND ADVERTISERS To remain competitive, we must continue to enhance and improve our content. In addition, we must: - continually improve the responsiveness, functionality and features of our network; and - develop other products and services that are attractive to users and advertisers. We constantly attempt to determine what content, features and functionality our target audience wants. We rely to a large extent on third parties for our content, much of which is easily available from other sources. If other networks present the same or similar content in a superior manner, it would adversely affect our visitor traffic. In addition, the market for qualified content development personnel is extremely competitive, especially for those that have the requisite Latin American qualifications. We may not be able to identify or hire these candidates. We may not succeed in developing or introducing features, functions, products and services that visitors and advertisers find attractive in a timely manner. This would likely materially and adversely affect our business, financial condition and results of operations. 12 WE DEPEND ON STRATEGIC THIRD-PARTY RELATIONSHIPS We have focused on establishing relationships with leading content providers, electronic commerce merchants, technology providers, and infrastructure providers. Our future success depends extensively on these relationships. Because most of our agreements with these third parties are not exclusive, our competitors may seek to use the same partners as we do and attempt to adversely impact our relationships with our partners. We might not be able to maintain these relationships or replace them on financially attractive terms. If the parties with which we have these relationships do not adequately perform their obligations, reduce their activities with us, choose to compete with us or provide their services to a competitor, our business, financial condition and results of operations could be materially and adversely affected. Also, we intend to actively seek additional relationships in the future. Our efforts in this regard may not be successful. RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE WE FACE RISKS OF UNEXPECTED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS In the past, we have experienced significant and sudden increases in traffic on our network. In addition, the number of pages of information transmitted over our network, commonly referred to as page views, have continued to increase over time. We are aggressively trying to increase our page views further. As a result, our network must accommodate a high volume of traffic, often at unexpected times. We have in the past experienced significant capacity constraints with our systems. These have resulted in: - system disruptions; - inaccessibility of our network; - long response times; - impaired quality; and - loss of important reporting data. Although we are in the process of improving our network, we may not be successful in implementing these measures. We may also, from time to time, experience interruptions due to hardware failures, unsolicited bulk e-mail and operating system failures. Because our revenues depend on the number of individuals who use our network, our business will suffer if we experience frequent or long system delays or interruptions. If this were to continue to happen: - our visitors could perceive our network as not functioning properly; - our business could suffer dramatically; and - our brand could be adversely affected. If so, our business, financial condition and results of operations could be materially adversely affected. We maintain our central production servers at the New Jersey data center of Exodus Communications. We also have a second co-location facility at Digital Island in New York. A failure by Exodus or Digital Island to protect their systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins or other events, could have a material adverse effect on our business, financial condition and results of operations. CONCERNS ABOUT SECURITY OF THE INTERNET MAY 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 13 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, results of operation and financial condition. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS Many currently installed computer systems and software products only accept two digits to identify the year in any date. Therefore, the year 2000 will appear as "00", which the system might consider to be the year 1900 rather than the year 2000. This could result in system failures, delays or miscalculations causing disruptions to our operations. We are currently conducting an inventory, and developing testing procedures, for all software and other systems that we believe might be affected by Year 2000 issues. Since third parties developed and currently support many of the systems that we use, a significant part of this effort will be to ensure that these third-party systems are Year 2000 compliant. We plan to confirm this compliance through a combination of the representation by these third parties of their products' Year 2000 compliance, as well as specific testing of these systems. The failure of any of our systems or systems maintained by third parties to be Year 2000 compliant could: - cause us to incur significant expenses to remedy any problems; - affect the availability and performance of our network; or - otherwise seriously damage our business. A significant Year 2000-related disruption to our network could cause our users, advertisers or electronic commerce partners to be dissatisfied with our network or could impose an unmanageable burden on our technical support staff. Our failure to correct a material Year 2000 problem could have a material adverse effect on our business, financial condition and results of operations. WE ARE SUBJECT TO THE RISKS OF INTEGRATING AND FUNDING OUR JOINT VENTURES, ACQUISITIONS AND ALLIANCES We may acquire or develop alliances or joint ventures with complementary businesses, technologies, services or products. We do not know if we will be able to complete any future joint ventures, acquisitions or alliances or that we will be able to successfully integrate these transactions into our operations. To finance these transactions, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may impact our operations and, in the case of equity financings, may result in dilution to existing stockholders. If we are unable to integrate or implement any joint venture, acquisition or alliance effectively, our business, financial condition and results of operations could be materially and adversely affected. 14 LEGAL UNCERTAINTY AND OTHER RISKS RELATING TO OUR ORGANIZATION THE INTERNET IS SUBJECT TO MANY GOVERNMENTAL REGULATIONS WHICH MAY IMPACT OUR ABILITY TO CONDUCT BUSINESS 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 prevent us from delivering 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 like: - 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. Each country in Latin America has its own telephone tariffs which, if too high, may cause consumers to be less likely to access and transact business over the Internet. Although the tariffs have been reduced recently in some countries, we do not know whether this trend will continue. Unfavorable tariff developments could decrease our visitor traffic and our ability to derive revenues from transactions over the Internet. This could have a material adverse effect on our business, financial condition and results of operations. WE ARE SUBJECT TO FOREIGN LAWS AND REGULATIONS Because we have employees, property and business operations in the United States and throughout Latin America, we are subject to the laws and the court systems of many jurisdictions. We may become subject to claims in these foreign jurisdictions for violations of their laws. In addition, these laws may be changed, or new laws enacted, in the future. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. OUR KEY PERSONNEL ARE VERY IMPORTANT TO OUR SUCCESS We depend on the services of our senior management and key technical personnel. Our success is dependent, in large part, on our ability to hire, retain and motivate highly qualified technical and managerial personnel. In particular, our success depends on the continued efforts of our Chairman and Chief Executive Officer, Fernando J. Espuelas, and our President, Jack C. Chen. The loss of the services of either executive officer or any of our key management or technical personnel could have a material adverse effect on our business, financial condition and results of operations. WE ARE DEPENDENT ON OUR INTELLECTUAL PROPERTY 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 is uncertain and still evolving. The laws of some foreign countries do not protect intellectual property rights to the 15 same extent as do the laws of the United States. We pursue the registration of our trademarks in the United States and internationally in Latin America, Spain and Portugal. We may not be able to secure adequate protection for our trademarks in the United States and other countries. We are aware of an opposition filed in Spain against our application for registration of the StarMedia trademark which we are currently contesting. In addition, there have been other oppositions filed against our applications in other countries for some of our other marks. Effective 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. In addition, 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. For example, we are aware of certain unauthorized uses of our PIZARRAS trademark and intend to pursue enforcement of our rights against those who are infringing this mark. This may be time consuming and expensive. Our inability to effectively protect our trademarks and service marks would have a material adverse effect on our business, financial condition and results of operations. Many parties are actively developing chat, homepage, search and related Web technologies. We expect these developers to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and that cover significant parts of our technology, business methods or services. For example, we are aware that a number of patents have been issued in the areas of electronic commerce, Web-based information indexing and retrieval and online direct marketing. Disputes over rights to these technologies are likely to arise in the future. 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. 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. We also intend to continue to license technology from third parties, including our Web server and encryption technology. We may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE AND FOR THE PRODUCTS SOLD OVER OUR NETWORK The laws in the United States and in Latin American countries relating to the liability of online service providers like us for activities of their visitors are currently unsettled. Claims have been made against other online service providers 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. 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. 16 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. We have entered into arrangements to offer third-party products and services on our network under which we may be entitled to receive a share of revenues generated from these transactions. These arrangements may subject us to additional claims including product liability or personal injury from the products and services, even if we do not ourselves provide the products or services. While our agreements with these parties often provide that we will be indemnified against such liabilities, such indemnification may not be adequate. Although we carry general liability insurance, our insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, financial condition and results of operations or could result in the imposition of criminal penalties. In addition, the increased attention focused on liability issues as a result of these lawsuits and legislative proposals could impact the overall growth of Internet use. RISKS RELATED TO THIS OFFERING WE WILL HAVE DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING We intend to use the net proceeds from this offering to: - fund our marketing activities; - expand our sales force; - enhance our products and services; - improve our network infrastructure; - to make strategic investments and acquisitions; and - for general corporate purposes. We are not required to use the net proceeds for the purposes described above. Our management will therefore have significant flexibility in applying the net proceeds of this offering, including ways in which stockholders may disagree. The failure of management to apply such funds effectively could have a material adverse effect on our business, financial condition and results of operations. See "Use of Proceeds". OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE Following this offering, an active trading market may not develop or be sustained for our common stock. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially due to a number of factors, including: - actual or anticipated fluctuations in our results of operations; - changes in or our failure to meet securities analysts' expectations; - technological innovations; - increased competition; - conditions and trends in the Internet and other technology industries; - Latin American market conditions; and - general market conditions. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology 17 companies, particularly Internet companies. These broad market fluctuations may result in a material decline in the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management's attention and resources, which could have a material adverse effect upon our business, financial condition and results of operations. SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR STOCK PRICE After this offering, there will be outstanding shares of our common stock, or if the underwriters' over-allotment option is exercised in full. Of these shares, the shares sold in this offering will be freely tradeable except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. Of the remaining shares of common stock held by existing stockholders, are subject to a 180-day lock-up agreement with Goldman, Sachs & Co. and are eligible for sale only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 under the Securities Act. In addition, subject to the provisions of Rules 144, 144(k) and 701, 180 days after the date of this prospectus, at least 42,423,667 shares will be available for sale in the public market, subject in the case of shares held by affiliates to compliance with applicable volume restrictions. Sales of a large number of shares could have an adverse effect on the market price of our common stock. The stockholders have no restrictions on selling any of our securities held by them, other than as provided in certain lock-up agreements with Goldman, Sachs & Co. and under applicable securities laws. In addition, some of our stockholders can require us to register our securities they own for public sale. Any sales by these stockholders could adversely affect the trading price of our common stock. OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others: - the division of the board of directors into three separate classes; - the right of the board to elect a director to fill a space created by the expansion of the board; - the ability of the board to alter our bylaws; and - the requirement that at least 10% of the outstanding shares are needed to call a special meeting of stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions prohibit certain large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless: - 66 2/3% of the shares of voting stock not owned by this large stockholder approve the merger or combination; or - our board of directors approves the merger or combination or the transaction which resulted in the large stockholder owning 15% or more of our outstanding voting stock. Please see "Description of Capital Stock". WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS Our directors, executive officers and affiliates currently beneficially own 67.3% of the outstanding shares of our common stock, and after the offering will own % of the 18 outstanding shares of our common stock. 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, and also the power to prevent or cause a change in control. The interests of these stockholders may differ from the interests of the other stockholders. YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price per share will significantly exceed the net tangible book value per share. Accordingly, investors purchasing shares in this offering will suffer immediate and substantial dilution of their investment. Please see "Dilution". 19 USE OF PROCEEDS The net proceeds we will receive from the sale of the shares of common stock offered by us are estimated to be $ million, assuming an initial public offering price of $ per share and after deducting the estimated underwriting discount and offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that the net proceeds will be $ million. We intend to use the proceeds of this offering as follows: - to fund our marketing activities; - to expand our sales force; - to enhance our products and services; - to improve our network infrastructure; - to make strategic investments and acquisitions; and - for general corporate purposes. We believe opportunities may exist to expand our current business through strategic investments or acquisitions. We may use a portion of the proceeds for these purposes. We have not determined the amount of net proceeds to be used for each of the specific purposes indicated. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. Pending any use, the net proceeds of this offering will be invested in short-term, interest-bearing securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. 20 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998: - on an actual basis; - on a pro forma basis after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock; and - on a pro forma as adjusted basis to reflect our sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Please see "Use of Proceeds". You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus.
AS OF DECEMBER 31, 1998 ------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ---------- ---------- ------------- (IN THOUSANDS) Capital lease obligations--current portion................................ $ 220 $ 220 $ Preferred stock, authorized 60,000,000 shares: Series A redeemable convertible preferred stock, $.001 par value; 7,330,000 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)........................................................... 4,218 -- -- Series B redeemable convertible preferred stock, $.001 par value; 8,000,000 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)........................................................... 12,944 -- -- Series C redeemable convertible preferred stock, $.001 par value; 16,666,667 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)........................................................... 79,332 -- -- Stockholders' (deficit) equity: Common stock, $.001 par value; 100,000,000 shares authorized (actual, pro forma and pro forma as adjusted); 10,392,000 shares issued and outstanding (actual); 42,388,667 shares issued and outstanding (pro forma); shares issued and outstanding pro forma as adjusted....... 10 42 Additional paid in capital................................................ 19,563 116,025 Deferred compensation..................................................... (8,666) (8,666) Other comprehensive income................................................ (37) (37) Accumulated deficit....................................................... (54,263) (54,263) ---------- ---------- ------------- Total stockholders' (deficit) equity...................................... (43,393) 53,101 ---------- ---------- ------------- Total capitalization...................................................... $ 53,321 $ 53,321 $ ---------- ---------- ------------- ---------- ---------- -------------
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1998. It does not include: - 6,131,933 shares subject to options outstanding as of December 31, 1998 at a weighted average exercise price of $0.81 per share; - 8,868,067 additional shares that could be issued under our 1998 Stock Plan; and - 7,000,000 additional shares authorized for issuance under our 1998 Stock Plan in February 1999. 21 DILUTION Our pro forma net tangible book value as of December 31, 1998 was approximately $52.9 million, or $1.25 per share of common stock. Pro forma net tangible book value per share is determined by dividing the amount of our total tangible assets less total liabilities by the pro forma number of shares of common stock outstanding at that date, assuming conversion of all outstanding shares of our convertible preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering made and the net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the issuance and sale of the shares of common stock offered by us and after deducting the estimated underwriting discount and offering expenses payable by us, our pro forma net tangible book value as of December 31, 1998 would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares in this offering. If the initial public offering price is higher or lower, the dilution to the new investors will be greater or less, respectively. The following table illustrates this per share dilution: Assumed initial public offering price per share............................. $ Pro forma net tangible book value per share at December 31, 1998............ $ 1.25 Increase in pro forma net tangible book value per share attributable to this offering --------- Pro forma net tangible book value per share after this offering --------- Dilution per share to new investors......................................... $ ---------
------------------------ The following table summarizes, on a pro forma basis, as of December 31, 1998, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $ per share, before deducting the estimated underwriting discount and offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE -------------- --------- -------------- --------- --------------- Existing stockholders..................... 42,388,667 % $ 96,151,000 % $ 2.27 New investors............................. -------------- --------- -------------- --------- Total................................. 100.0% $ 100.0% -------------- --------- -------------- --------- -------------- --------- -------------- ---------
This discussion and table assume no exercise of any stock options outstanding as of December 31, 1998. As of December 31, 1998, there were options outstanding to purchase a total of 6,131,933 shares of common stock with a weighted average exercise price of $0.81 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. Please see "Capitalization". 22 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated balance sheet data as of December 31, 1997 and 1998 and the selected consolidated statement of operations data for the period from March 5, 1996 (inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 1996 are derived from our consolidated audited financial statements not included in this prospectus. 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 prospectus.
PERIOD FROM MARCH 5, 1996 (INCEPTION) TO DECEMBER 31, YEAR ENDED DECEMBER 31, --------------- ------------------------- 1996 1997 1998 --------------- --------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................................................ $ -- $ 460 $ 5,329 --------------- --------- -------------- Operating expenses: Product and technology development................................ 36 1,229 6,816 Sales and marketing............................................... 12 2,108 29,274 General and administrative........................................ 78 648 4,600 Depreciation and amortization..................................... 2 38 774 Stock-based compensation expense.................................. -- -- 10,421 --------------- --------- -------------- Total operating expenses........................................ 128 4,023 51,885 Operating loss...................................................... (128) (3,563) (46,556) Interest income, net.............................................. -- 35 670 --------------- --------- -------------- Net loss............................................................ (128) (3,528) (45,886) --------------- --------- -------------- Preferred stock dividends and accretion............................. -- (185) (4,536) Net loss available to common shareholders........................... $ (128) $ (3,713) $ (50,422) --------------- --------- -------------- --------------- --------- -------------- Basic and diluted net loss per share................................ $ (0.01) $ (0.37) $ (4.94) --------------- --------- -------------- Shares used in computing basic and diluted net loss per share....... 9,147 10,012 10,202 --------------- --------- -------------- --------------- --------- -------------- Pro forma basic and diluted net loss per share...................... $ (1.09) -------------- -------------- Shares used in computing pro forma basic and diluted net loss per share............................................................. 42,199 -------------- --------------
AS OF DECEMBER 31, -------------------------------- 1996 1997 1998 --------- --------- ---------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................................................... $ 230 $ 436 $ 53,141 Working capital................................................................... 284 146 47,512 Total assets...................................................................... 313 786 60,986 Total current liabilities......................................................... -- 324 7,763 Redeemable convertible preferred stock............................................ -- 3,833 96,494 Total stockholders' (deficit) equity.............................................. 313 (3,400) (43,393)
23 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 PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING INFORMATION DUE TO THE FACTORS DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW StarMedia is the leading online network across Latin America. At a time when content on the Internet is overwhelmingly in English, we offer Latin Americans a pan-regional community experience, combined with a broad array of Spanish and Portuguese content tailored for regional dialects and local cultural norms. We also provide advertisers and merchants targeted access to Latin American Internet users, an audience with a highly desirable demographic profile. Our network provides 16 interest-specific channels, extensive community features, sophisticated search capabilities and online shopping in Spanish and Portuguese. The channels cover topics of interest to Latin Americans online, such as local and regional news, business and sports. We promote user affinity to the StarMedia community by providing in-language e-mail, chat rooms, instant messaging and personal homepages. We were incorporated in March 1996 and commenced operations in September 1996. For the period from our inception through December 1996, we did not generate any revenues, incurred minimal operating expenses and focused our operating activities on the development of the StarMedia network. We launched our network in December 1996. During 1997, we continued the development of the StarMedia network and related technology infrastructure and also focused on recruiting personnel, raising capital and developing content to attract and retain users. In 1998, we: - improved and upgraded our services; - expanded our production staff; - built a direct sales force; and - increased our marketing activities in order to build the StarMedia brand. To date, we have derived substantially all of our revenues from the sale of advertisements and sponsorships on our network. Advertising revenues are derived principally from: - advertising arrangements under which we receive revenues based on a cost-per-thousand-impressions basis, commonly referred to as CPMs; - sponsorship arrangements which allow advertisers to sponsor an area on our network in exchange for a fixed payment; and - design, coordination and integration of content developed under advertising and sponsorship arrangements. Advertising and sponsorship rates depend on: - whether the impressions are for general audiences or targeted audiences; - which of the specific channels within the StarMedia network display the impressions; and - the number of guaranteed impressions, if any. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. To the extent minimum guaranteed impression levels are not met, we defer recognition of the corresponding revenues until guaranteed levels are achieved. Payments received from advertisers prior to displaying their advertisements on our network are recorded as deferred revenues. Revenues from sponsorship arrangements are recognized ratably over the contract term, provided that we have no significant obligations remaining. Revenue related to the design, coordination and integration of content under sponsorship arrangements are recognized ratably over the contract term or using the percentage of 24 completion method if the revenue for the services is fixed. Under some of our content arrangements, we have agreed to pay a portion of the advertising revenue derived from the related content to the content provider. We have entered into co-marketing arrangements with various media companies, including Fox Television and USA Networks. Under these arrangements, we exchange advertising space on our network predominantly for advertising on television and radio stations. We entered into these agreements to enhance our marketing efforts and to extend our marketing presence beyond the ten major markets in which our paid advertising is concentrated. Revenues and expenses from these arrangements are recorded at the lower of estimated fair value of the goods or services received or the estimated fair value of the advertisements given. Expenses are recorded at the value of the television advertising received when our advertisements are broadcast, which is typically in the same period as the advertisements are run on our network. These expenses are included in our sales and marketing expenses. To date, we have engaged in no barter transactions under which we have received online advertising. In addition to advertising revenues, we derive revenues from online commerce transactions conducted through our network. Revenues from our share of the proceeds from sales are recognized on notification of sales attributable to our network. To date, commerce revenues have not been significant. We anticipate that, although commerce revenues will increase in future periods, the substantial majority of our revenues will continue to be derived from the sale of advertising on our network. We have a limited operating history for you to use as a basis for evaluating our business. You must consider the risks and difficulties frequently encountered by early stage companies like us in new and rapidly evolving markets, including the Internet advertising market. Please see "Risk Factors--We have only been in business for a short period of time; your basis for evaluating us is limited". We have incurred significant net losses and negative cash flows from operations since our inception. At December 31, 1998, we had an accumulated deficit of $54.3 million. These losses have been funded primarily through the issuance of preferred stock. We intend to continue to invest heavily in marketing and brand development, content enhancements, and technology and infrastructure development. As a result, we believe that we will continue to incur net losses and negative cash flows from operations for the foreseeable future. Moreover, the rate at which these losses will be incurred may increase from current levels. We recorded deferred compensation of approximately $19.1 million for the year ended December 31, 1998, representing the difference between the exercise price of some stock options granted in 1998 and the fair market value of the underlying common stock at the date of grant. The difference is recorded as a reduction of stockholders' equity and amortized over the vesting period of the applicable options, either immediately or generally three years. Of the total deferred compensation amount, approximately $10.4 million had been amortized as of December 31, 1998. In the first quarter of 1999, we expect to record additional deferred compensation of approximately $2.5 million due to options granted in this period. This amount will be recorded as a reduction of stockholders' equity and amortized over the vesting period of the applicable options, generally three or four years. The amortization of deferred compensation is recorded as an operating expense. As a result, we currently expect to amortize the following amounts of deferred compensation annually: - 1999--$5,246,000; - 2000--$4,089,000; and - 2001--$1,908,000. 25 RESULTS OF OPERATIONS REVENUES Revenues increased to $5.3 million for the year ended December 31, 1998 from $460,000 for the year ended December 31, 1997. We did not have any revenue for the period from March 5, 1996 (inception) to December 31, 1996. The increase in revenues was primarily due to our ability to generate significantly higher advertising and sponsorship revenues. During 1998, we: - expanded our sales force; and - increased the number of impressions available on our network by adding channels and by increasing our marketing efforts. In 1997, three advertisers each accounted for greater than 10% of total revenues and the five largest advertisers accounted for 98% of total revenues. In 1998, two advertisers each accounted for greater than 10% of total revenues and the five largest advertisers accounted for 62% of total revenues. In 1998, 45% of our total revenues were derived from reciprocal advertising arrangements with our media partners, which consist primarily of television network operators. We have not engaged in any barter transactions under which we received online advertising. Electronic commerce revenues were not material during these periods. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include: - personnel costs; - hosting and telecommunications costs; and - content acquisition fees and revenue sharing arrangements. Product and technology expenses increased to $6.8 million, or 128% of total revenues, for the year ended December 31, 1998, from $1.2 million, or 267% of total revenues, for the year ended December 31, 1997. We incurred $36,000 of product and technology expenses during 1996. The increase in product and technology expenses was primarily attributable to increased staffing levels required to support the StarMedia network and related systems and to enhance the content and features on the StarMedia network. We have, to date, expensed all product and technology costs as incurred. We believe that increased investment in new and enhanced features and technology are critical to attaining our strategic objectives and remaining competitive. Accordingly, we intend to continue recruiting and hiring experienced product and technology personnel and to make additional investments in product development. We expect that product expenditures will continue to increase in absolute dollars in future periods. 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 $29.3 million, or 549% of total revenues, for the year ended December 31, 1998, from $2.1 million, or 458% of total revenues, for the year ended December 31, 1997, and $12,000 during 1996. The increases in sales and marketing expenses were primarily attributable to: - expansion of our advertising, public relations and other promotional expenditures related to our aggressive branding campaign; - increased sales commissions as our advertising sales increased; and 26 - higher personnel expenses as we built our sales force. Sales and marketing expenses as a percentage of total revenues have increased as a result of the continued development and implementation of StarMedia's branding and marketing campaign. We expect sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future as we: - continue our branding strategy; - expand our direct sales force; - hire additional marketing personnel; and - increase expenditures for marketing and promotion. 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 $4.6 million, or 86% of total revenues, for the year ended December 31, 1998, from $648,000, or 141% of total revenues, for the year ended December 31, 1997, and $78,000 during 1996. The increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with the hiring of additional personnel and increases in professional fees to support the growth of our business. General and administrative expenses decreased on a percentage basis because of the growth in revenues. We expect that we will incur additional general and administrative expenses as we hire additional personnel and incur additional costs related to the growth of our business and our operation as a public company. Accordingly, we anticipate that general and administrative expenses will continue to increase in absolute dollars in future periods. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased to $774,000, or 15% of revenues, for the year ended December 31, 1998, from $38,000, or 8% of revenues, for the year ended December 31, 1997 and from $2,000 during 1996. The dollar increases were primarily attributable to the increase in fixed assets of approximately $5.8 million during 1998 and $270,000 during 1997. STOCK-BASED COMPENSATION EXPENSE We recorded deferred compensation of $19.1 million during the year ended December 31, 1998. Of this amount, $10.4 million is being recorded as an expense in 1998. The remainder is being amortized over the vesting period for the individual options, which are typically three years. INTEREST INCOME, NET Interest income, net includes income from our cash and investments. Interest income, net increased to $670,000 for the year-ended December 31, 1998 from $35,000 for the year ended December 31, 1997. We did not record any interest income, net during 1996. The increase in interest income was primarily due to higher average cash, cash equivalent and investment balances as a result of capital received from the sale of preferred stock in the first and third quarters of 1998. QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly statement of operations data for each of the four quarters ended December 31, 1998. In the opinion of management, this information has been prepared substantially on the same basis as the audited financial statements appearing elsewhere in this prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations data. The quarterly data should be read with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. The operating 27 results for any quarter are not necessarily indicative of the operating results for any future period. In particular, because of our limited operating history, we have limited meaningful financial data to estimate revenues and operating expenses. In addition, we believe that we will continue to experience seasonality in our business, with use of our network being lower during the Latin American summer vacation period in the first calendar quarter of the year. This may adversely affect our advertising revenue during the first calendar quarter.
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 ---------- ---------- -------------- -------------- (IN THOUSANDS) Revenues..................................................... $ 256 $ 589 $ 1,308 $ 3,176 Operating expenses: Product and technology development......................... 794 2,384 1,552 2,086 Sales and marketing........................................ 1,816 4,199 7,725 15,534 General and administrative................................. 450 574 857 2,719 ---------- ---------- -------------- -------------- Depreciation and amortization.............................. 79 169 204 322 Stock-based compensation expense........................... 2 3,248 666 6,505 ---------- ---------- -------------- -------------- Total operating expenses................................. 3,141 10,574 11,004 27,166 ---------- ---------- -------------- -------------- Loss from operations......................................... (2,885) (9,985) (9,696) (23,990) ---------- ---------- -------------- -------------- Net loss..................................................... $ (2,857) $ (9,922) $ (9,624) $ (23,483) ---------- ---------- -------------- --------------
LIQUIDITY AND CAPITAL RESOURCES To date, we have primarily financed our operations through the sale of our preferred stock. As of December 31, 1998, we had approximately $53.1 million in cash and cash equivalents. Net cash used in operating activities was $30.6 million for the year ended December 31, 1998, $3.3 million for the year ended December 31, 1997 and $127,000 for 1996. To date, we have experienced significant negative cash flows from operating activities. Net cash used in operating activities resulted primarily from our net operating losses, offset by: - the amortization of deferred compensation; - depreciation and amortization; - increases in accounts payable and accrued expenses; and - deferred revenues. Net cash used in investing activities was $4.6 million for the year ended December 31, 1998, $280,000 for the year ended December 31, 1997 and $30,000 during 1996. Net cash used in investing activities during 1996, 1997 and 1998 resulted primarily from the purchase of fixed assets. Net cash provided by financing activities was $88 million for the year ended December 31, 1998, $3.8 million for the year ended December 31, 1997 and $387,000 during 1996. Net cash provided by financing activities during 1997 and 1998 consisted primarily of proceeds from the sale of preferred stock. Our principal commitments consist of obligations outstanding under capital and operating leases. As of December 31, 1998, we have spent approximately $5.8 million on capital expenditures, excluding capital lease arrangements. We expect our capital expenditures will increase significantly in the future as we make technological improvements to our system and technical infrastructure. Our capital requirements depend on numerous factors, including: 28 - market acceptance of our services; - the amount of resources we devote to investments in the StarMedia network; - marketing and selling our services; and - promoting our brand. We have experienced a substantial increase in our capital expenditures and operating lease arrangements since our inception consistent with the growth in our operations and staffing. We anticipate that this will continue for the foreseeable future. Additionally, we will continue to evaluate possible investments in businesses, products and technologies, and plan to expand our sales and marketing programs and conduct more aggressive brand promotions. We believe that the net proceeds from this offering, together with our current cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Please see "Risk Factors--We may have difficulty obtaining additional capital if needed". YEAR 2000 COMPLIANCE The Year 2000 issue is the potential for system and processing failures of date-related data and the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. STATE OF READINESS We may be affected by Year 2000 issues related to non-compliant information technology, or IT, systems or non-IT systems operated by us or by third parties. We have substantially completed an assessment of our internal and third-party IT systems and non-IT systems. At this point in our assessment, we are not currently aware of any Year 2000 problems relating to systems operated by us or by third parties that would have a material effect on our business, results of operations or financial condition, without taking into account our efforts to avoid such problems. Our IT systems consist of third-party and internally modified public domain and open-source software, and hardware purchased from vendors. We have contacted our principal vendors of hardware and software. All of those contacted vendors have notified us that the hardware and software that they have supplied to us is Year 2000 compliant. We have also substantially completed an assessment of our non-IT systems which we have identified as containing embedded chip systems for Year 2000 issues. At this point in our assessment, we are not currently aware of any Year 2000 problems relating to these systems which would have a material effect on our business, results of operations, or financial condition, without taking into account our efforts to avoid such problems. Our IT systems and other business resources rely on IT systems and non-IT systems provided by service providers and therefore may be vulnerable to those service providers' failure to remediate their own Year 2000 issues. Such service providers include those for StarMedia's network and e-mail services and landlords for our leased office spaces. We have contacted these principal service providers and have been notified that the IT and non-IT systems which they provide to us are Year 2000 compliant. 29 COSTS Based on our assessment to date, we do not anticipate that costs associated with remediating our non-compliant IT systems or non-IT systems will be material. RISKS To the extent that our assessment is finalized without identifying any additional material non-compliant IT systems operated by us or by third parties, the most reasonably likely worst case Year 2000 scenario is a systemic failure beyond our control, such as a prolonged telecommunications or electrical failure. Such a failure could prevent us from operating our business, prevent users from accessing our Web site, or change the behavior of advertising customers or persons accessing our Web site. We believe that the primary business risks, in the event of such failure, would include but not be limited to, lost advertising revenues, increased operating costs, loss of customers or persons accessing our Web site, or other business interruptions of a material nature, as well as claims of mismanagement, misrepresentation, or breach of contract. CONTINGENCY PLAN As discussed above, we are engaged in an ongoing Year 2000 assessment. Following the completion of the assessment, we plan to conduct a full-scale Year 2000 simulation of our IT systems. The results of this simulation and our assessment will be taken into account in determining the nature and extent of any contingency plans. FORWARD-LOOKING STATEMENTS The Year 2000 discussion above is provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains forward-looking statements. These statements are based on management's best current estimates, which were derived from a number of assumptions about future events, including the continued availability of resources, representations received from third parties and other factors. However, we cannot assure you that these estimates will be achieved, and our actual results could differ materially from those anticipated. Specific factors that might cause material differences include: - the ability to identify and remediate all relevant systems; - results of Year 2000 testing; - adequate resolution of Year 2000 issues by governmental agencies, businesses and other third parties who are our outsourcing service providers, suppliers, and vendors; - unanticipated system costs; and - our ability to implement adequate contingency plans. The forward-looking statements made in the Year 2000 discussion above relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. INFLATION AND FOREIGN CURRENCY EXCHANGE RATE LOSSES To date, our results of operations have not been impacted materially by inflation in the U.S. or in the countries that comprise Latin America. Although a substantial portion of our revenues are 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. To date, we have not tried to reduce our exposure to exchange rate fluctuations by using hedging 30 transactions. However, we may 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 We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130 requires us to report in our financial statements, in addition to our net income (loss), comprehensive income (loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. We have determined that we do not have any separately reportable business segments. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standard for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The statement is not expected to affect us as we currently do not have any derivative instruments or hedging activities. 31 BUSINESS OVERVIEW StarMedia is the leading online network across Latin America. At a time when content on the Internet is overwhelmingly in English, we offer Latin Americans a large pan-regional community experience, combined with a broad array of Spanish and Portuguese content tailored for regional dialects and local cultural norms. We also provide advertisers and merchants targeted access to Latin American Internet users, an audience with a highly desirable demographic profile. Our network provides 16 interest-specific channels, extensive community features, sophisticated search capabilities and online shopping in Spanish and Portuguese. The channels cover topics of interest to Latin Americans online, such as local and regional news, business and sports. We promote user affinity to the StarMedia community by providing in-language e-mail, chat rooms, instant messaging and personal homepages. INDUSTRY BACKGROUND THE GROWTH OF THE INTERNET AND ONLINE ADVERTISING AND COMMERCE The Internet has developed into a significant global mass medium that allows millions of people worldwide to find information, interact with others and conduct business electronically. International Data Corporation, or IDC, estimates that the number of Internet users worldwide will grow from approximately 97 million at the end of 1998 to approximately 320 million by the end of 2002. The Internet has also emerged as an attractive new medium for advertisers. The Internet allows advertisers to target desired demographic groups or consumers in specific geographic locations. It also allows them to interact more effectively with consumers and capture valuable data about buying patterns, preferences and demands. According to Jupiter Communications, the dollar value of Internet advertising in the U.S. is expected to increase from $1.9 billion in 1998 to approximately $7.7 billion in 2002, representing a compound annual growth rate of 42%. The growth in the use of the Internet is also providing businesses with a platform to conduct electronic commerce. According to IDC, consumer transactions on the Internet are expected to increase from $11.3 billion in 1998 to approximately $93.7 billion in 2002, representing a compound annual growth rate of 70%. INTERNET USE IN LATIN AMERICA Latin America is comprised of 23 countries with a total population of approximately 490 million people. Although divided by geographical and political boundaries, Latin Americans share many cultural affinities, including common languages and religions, as well as a similar heritage. A majority of Latin Americans speak Spanish or Portuguese, with only a small portion of the population being proficient in English. The Latin American population is also relatively young. For example, about 65% of the population in Mexico is under the age of 30 and over 40% of the population in Brazil is under the age of 20. A substantial portion of the buying power in Latin America is concentrated within 20% of the population, according to Strategic Research Corporation. This group of approximately 100 million people controls an estimated 65% of the overall buying power in Latin America and enjoys a standard of living comparable to the populations of Germany and Great Britain. As a result of these factors, the Latin American market represents a highly desirable demographic profile for advertisers and businesses. According to a study conducted in December 1998 by Zenith Media, overall advertising spending across all media in Latin America was $27 billion in 1998 and is estimated to grow to $34 billion in 2001. Internet use in Latin America has grown significantly in recent years and, according to Nazca Saatchi & Saatchi, is expected to significantly outpace growth in worldwide Internet usage over the next several years. According to Nazca Saatchi & Saatchi, the number of Internet users in Latin America is expected to increase from 7 million users in 32 1997 to 34 million users by the end of 2000. According to Nazca Saatchi & Saatchi, approximately 90% of these users are from upper and middle socio-economic classes. The following factors have contributed to the growth in Internet use in Latin America: - increased use of personal computers, particularly among affluent Latin Americans; - network infrastructure improvements accelerated by privatization of telecommunications providers and increased spending; - the relative youth of the Latin American population and their tendency to use new technologies, like the Internet; - reduced Internet access costs; and - increased awareness of the Internet. NEED FOR A LATIN AMERICAN ONLINE NETWORK Despite the rapid growth of non-English speaking Internet users worldwide, more than 80% of the content on the Internet remains in English. We believe that an increasing number of Latin American Internet users are seeking a full-service Internet destination site in their local language that provides them with: - a social interactive experience across the entire Spanish and Portuguese speaking world; - a variety of in-depth and focused local content; - a broad array of compelling content at the regional and international level; and - sophisticated Internet applications and tools like e-mail, chat, instant messaging, bulletin boards, personal homepages and search capabilities. To date, few Internet sites have been tailored specifically to the interests and needs of Latin Americans. In an attempt to address this need, some of the English language general destination sites have translated a small portion of their content into Spanish or Portuguese. To date, however, these sites, have been generally focused on expanding into the European and Asian markets. As a result, they typically do not extend their Spanish and Portuguese translations beyond selected topical content and do not provide in-depth local content or in-language applications for Latin Americans. Furthermore, they do not tailor their translations and content to take into account regional dialects, language differences or local cultural norms. Some regional sites attempt to provide content for the populations of specific cities or countries in the local dialect. These sites, while providing Spanish or Portuguese content, have a limited community of users and do not provide extensive regional or global content. There are also Spanish or Portuguese language interest-specific sites, like sports sites. These sites offer in-depth content, but are limited to only one topic. We believe that few of these Spanish and Portuguese language sites attract a broad user audience. Therefore, they cannot provide advertisers with an attractive platform to effectively reach the highly desirable Latin American Internet user demographics. THE STARMEDIA SOLUTION We are the leading online network across Latin America. We provide original and third-party branded content through sixteen interest-specific channels, extensive community features and sophisticated search capabilities in Spanish and Portuguese. We believe that we have created an online network that uniquely addresses the needs of Latin American Internet users and provides advertisers and merchants with a highly desirable platform for targeting affluent Latin American consumers. Our monthly page views have grown from approximately 7 million in December 1997 to approximately 61 million in December 1998, which represented approximately 2.4 million user visits in that month. In addition, as of December 31, 1998, we had over 300,000 registered e-mail users. We believe that our success to date is attributable to the following key factors: FOCUS ON LATIN AMERICA. We serve the interests and needs of Latin American Internet users and have developed both a product and 33 a business infrastructure to support our focus on this market. We designed our network around the needs of our users, providing them with: - customized global, regional and local content covering a variety of topics in the appropriate Spanish and Portuguese dialects based on the self-reported geographic location of our users; - a broad range of in-language community features, like chat, bulletin boards, free e-mail, personal homepages, and personal and classified ads, that allow users to interact with other Latin Americans with similar interests; - an easy-to-use interface and a consistent navigation experience that facilitates usage by the growing number of Latin Americans coming online for the first time; and - search capabilities that can be customized by country, region and/or language. In addition, we have developed a business infrastructure designed to address the needs of our Latin American users by maintaining a strong local presence throughout Latin America and employing a high percentage of Latin Americans both in the U.S. and abroad. These are critical to maintaining our network's Latin American focus and flavor. Our Latin American employees provide us with important cultural and linguistic insights. Our local presence allows us to better understand the needs of local advertisers and businesses, and to maintain strong relationships with local advertisers and businesses. We have sales offices throughout Latin America in Sao Paulo, Mexico City, Buenos Aires, Bogota, Santiago, Caracas and Montevideo. Each office is staffed predominantly with sales people from the country in which the office is located. MARKET LEADERSHIP THROUGH BRAND DEVELOPMENT. We believe that StarMedia is the most recognized Internet brand in Latin America. As a result, visiting the StarMedia network is one of the first Internet experiences for many Latin Americans. We began our marketing efforts in February 1997 and were the first online network to make a significant investment in brand development in Latin America. We believe that many of our regular users first visited our network in response to our marketing efforts. We have continued to invest heavily in building the StarMedia brand through our extensive marketing, advertising and public relations programs. Our brand recognition has enabled us to attract a growing user audience and leading companies as advertisers and electronic commerce partners. EXTENSIVE LOCAL CONTENT AND BROAD PAN-REGIONAL COMMUNITY STRUCTURE. We believe that our extensive local content combined with our pan-regional community offering gives us a competitive advantage and is key to our continued leadership as the Internet destination of choice across Latin America. We provide our users with a broad array of relevant and in-depth local content. In addition, our users throughout Latin America can use our network as a virtual central plaza to meet other Latin Americans, access region-specific information and conduct electronic commerce across boundaries. Our pan-regional community enables us to achieve a critical mass of users in order to provide a richer Internet experience for Latin Americans throughout the region. DEDICATION TO USER CARE. We believe that high quality user care and technical support are essential to our continued success and brand development efforts. To further enhance our users' experience and to foster user loyalty, we have local user care support teams that rapidly respond to e-mail inquiries and provide in-language technical advice, 24 hours a day, seven days a week. We also proactively solicit feedback from our users in order to understand their preferences and to enhance their experience on our network. For example, in order to better understand the demands of our users, we have developed a special EU QUERO/LO QUIERO, or "I Want It", area which is accessible from every page on our network. This feature enables our users to make requests for additions or modifications to the network. 34 HIGHLY ATTRACTIVE PLATFORM FOR ADVERTISING AND COMMERCE. We believe that the StarMedia network is a highly attractive platform for advertisers and businesses because it gives them access to: - the leading Internet brand in Latin America; - a highly desirable user demographic profile; and - users with a high degree of affinity and involvement through e-mail, chat, bulletin boards and personal homepages. Internet advertising is new to Latin America, and we believe that buying advertising on the StarMedia network is often one of the first Internet advertising purchases made by businesses and advertising agencies in Latin America. Accordingly, we have created an advertising environment that fosters advertiser use of this new medium and solidifies our relationship with advertisers. We have developed a client services team that is dedicated to enhancing our relationship with these advertisers and maximizing the effectiveness of their advertising campaigns. We use our knowledge about the needs and sensitivities of our user base to help advertisers create more effective advertising campaigns. In addition, we use leading advertising techniques and tracking technologies to: - target advertising to users with specific demographic profiles; - gather extensive data to create an intelligence profile for each campaign; and - use daily tracking data to analyze the campaign's effectiveness. As a result, we provide advertisers with detailed and timely feedback on the effectiveness of campaigns, as well as recommendations on how to improve their campaigns. We believe that our client services group is a key differentiator from other Latin American web sites and provides us with a significant competitive advantage. As a result, we have been able to: - attract high-profile advertisers, including Bradesco, Ford, Fox Television, IBM, Microsoft, Motorola, Nokia and Sony; - enter into relationships with leading electronic commerce companies, including barnesandnoble.com, Citibank, Outpost.com, Disney, and N2K; and - charge premium advertising rates. STRATEGY Our objective is to strengthen our position as the leading online network across Latin America. In order to accomplish this, we will: AGGRESSIVELY EXTEND OUR BRAND RECOGNITION. Our goal is to make the StarMedia brand synonymous with the Internet in Latin America. We believe that continuing to enhance our brand recognition will enable us to capitalize on our leading position in Latin America and will make us more attractive to advertisers and businesses conducting electronic commerce. This will increase in importance as more Latin American consumers move online and as additional Internet sites compete for these users. We intend to continue to build our brand through: - extensive television, print, Internet and outdoor advertising; - public relations programs; - conference sponsorships; - new strategic alliances; and - additional distribution relationships. ENHANCE AND EXPAND OUR NETWORK. We intend to continue to add new content and features to the StarMedia network. We believe that this will: - further differentiate our network from competing sites; - provide users with a more comprehensive and satisfying Internet experience; and - result in users visiting the StarMedia network more often and remaining there longer. 35 In 1998, we added 9 new channels to our network and expect to add a number of other new channels in 1999. We currently have relationships with leading content providers, including Fox Television, Internet Securities, Quote.com, Reuters, WeatherLabs, and Ziff-Davis. We are aggressively seeking new content relationships in order to further increase the breadth and depth of our content and community features without incurring significant additional costs. We currently have more than 70 employees in our content development group who are responsible for gathering, developing and designing our content. We intend to further enlarge this group. We are also expanding our country-specific content to further penetrate local markets. We are aggressively seeking to enter into partnerships with leading local interest-specific content providers. We also intend to continue to license and customize new technologies for our network in order to further enhance its features and functions. DELIVER SUPERIOR NETWORK FUNCTIONALITY AND SPEED. We continually seek to improve the speed and functionality of our network by developing and implementing leading technologies. We believe that establishing our headquarters in New York has enabled us to remain abreast of leading Internet technologies and trends. We are developing an innovative distributed server capability to meet the needs of our users across Latin America. We recently installed remote network operating centers in Brazil and Argentina. These facilities allow us to serve ads and cached content locally. This increases the speed with which we can deliver content to our users. We intend to install additional operating centers across the region and develop additional technologies to increase the efficiency of these local systems. In addition, we intend to develop a fully distributed content delivery platform, which will enable all of our content and features to be delivered from local servers. This new distributed platform will increase the speed and quality of service for users in key markets and will differentiate us by our ability to deliver common content more quickly across a wide array of geographic locations. In addition, this will also allow our advertisers to more effectively reach their target audience. EXPAND INTO ADDITIONAL SPANISH- AND PORTUGUESE-SPEAKING MARKETS. We seek to make StarMedia the first and most frequent destination on the Internet for the Spanish- and Portuguese-speaking population worldwide. We believe there is a significant opportunity for a Spanish and Portuguese language online network that extends beyond Latin America to include Spain, the United States and Portugal. There are approximately 7.4 million Spanish and Portuguese-speaking Internet users dispersed through the United States, Spain and Portugal. The Hispanic population is growing more rapidly than any other minority group within the U.S. population. According to the Tomas Rivera Policy Institute at Claremont University, from 1994 to 1998, Internet usage by U.S. Hispanics grew 800%. Forrester Research Inc. estimates that by the end of 1999, 43% of U.S. Hispanics will be online. We believe that Hispanic Americans are increasingly using our network to maintain their cultural identities and to communicate with friends and family in Latin America and elsewhere. As the number of Spanish- and Portuguese-speaking Internet users outside Latin America increases, advertisers and electronic commerce marketers will increasingly seek an effective means to reach these audiences. To take advantage of these opportunities, we are expanding our advertising and marketing campaigns in the United States and Spain. In addition, we intend to expand our presence in Spain by opening a local office. 36 THE STARMEDIA NETWORK The StarMedia network is currently organized around 16 channels. These channels are grouped into (1) community services and (2) content and commerce services. Our Welcome Screen--www.starmedia.com--is the gateway to our network. It provides a guide to the network channels, features special content and promotions, offers direct access to the search, e-mail and chat services and displays real-time news headlines. When users first visit the StarMedia network they are prompted to indicate what country they are from and whether they prefer to receive content in Spanish or Portuguese. This information allows us to target both content and advertising by subject matter and dialect. Our unique design and layout provides a consistent navigation experience allowing users to access any channel on our network from any other channel on the service. Additionally, this design allows for persistent branding throughout the network. The following is a description of the StarMedia network. COMMUNITY SERVICES
CHANNEL DESCRIPTION - -------------------------------- -------------------------------------------------------------------------------- STARMEDIA TALKPLANET (CHAT) StarMedia TalkPlanet is our chat community and the foundation of our network. TalkPlanet creates "virtual communities" where participants can interact in real-time groups or one-on-one discussions in both Spanish and Portuguese. These communities include broad interest areas like sports, romance and current events. Our users can host their own scheduled chats, create their own interest-specific rooms or participate in moderated celebrity events. STARMEDIA MAIL StarMedia Mail is our free Web-based e-mail service and is offered in both (E-MAIL) Spanish and Portuguese. We have over 300,000 registered e-mail users. StarMedia Mail allows users to access electronic mail from any computer with a standard Web browser. We believe that providing this service increases user loyalty and therefore, increases traffic on our network. We have also developed a series of "I-mails", which are interactive greeting cards that users can send to friends and family members. STARMEDIA ORBITA/ORBITA StarMedia Orbita/Orbita enables users to create personalized Web pages on the (PERSONAL HOMEPAGES) StarMedia network. Using a variety of proprietary publishing tools in Spanish and Portuguese, users are able to quickly and easily create fully personalized homepages. Individual homepages reside in designated communities of interest like family, business and technology. We believe that users will be more attracted to our network when they can publish content and share experiences with others through their personalized homepages. QUADRO DE AVISOS/ PIZARRAS Our bulletin board area--Quadro de Avisos/Pizarras--further enhances user (BULLETIN BOARDS) interaction. From politics and religion to music and travel, this user-generated content augments each channel and maintains a record of ongoing communication about a particular topic on the our network.
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CHANNEL DESCRIPTION - -------------------------------- -------------------------------------------------------------------------------- STARMEDIA EXPRESS (INSTANT This instant messaging service enables users to know whether their friends and MESSENGER) other users with similar interests are online and to send messages directly to them. Our partnership with PeopleLink enables users to subscribe to specific interest groups and communicate with people from around the world who share similar interests. STARMEDIA CLASSIFICADOS/ StarMedia Classificados/Clasificados is our classifieds marketplace, spanning STARMEDIA CLASIFICADOS numerous product and service areas from electronics to real estate. Buyers and (CLASSIFIEDS) sellers from across Latin America can trade timely information on goods and services. NAMORO PERSONET/ ROMANCE Namoro Personet/Romance Personet is an interactive meeting place for visitors in PERSONET (PERSONALS) search of new friends and relationships. Personet connects people from a wide range of interests, backgrounds and origins. On Personet, people meet in a variety of ways, including through personal ad postings and in discussion forums.
CONTENT AND COMMERCE SERVICES We have built our content and commerce services around our successful community environment. We enhance the effectiveness of our community services by wrapping them around engaging content like information, news, entertainment and shopping.
CHANNEL DESCRIPTION - -------------------------------- -------------------------------------------------------------------------------- STARMEDIA NOTICIAS/ NOTICIAS StarMedia Noticias/Noticias delivers a comprehensive selection of international, (NEWS) regional and local news. Content for news and all information services is provided by top syndicated wire services, local partnerships and by our team of editors, producers and writers throughout Latin America. Users can react to the latest headlines through chats, debates and polls. Our partners include Reuters, Agencia EFE and Agence France Presse. STARMEDIA ESPORTES/ DEPORTES Through the StarMedia Esportes/Deportes channel, we provide comprehensive local, (SPORTS) regional and global sports news and information. Users can access headlines, results, commentary, analysis and daily polls. They can also purchase merchandise and win prizes through our interactive games. In addition, we are the exclusive webcaster of FUTBOL DE PRIMERA, the world's most popular syndicated radio talk show about soccer, hosted by Andres Cantor. STARMEDIA MONEY (FINANCE) StarMedia Money provides online financial news and information. In addition, users can obtain research about top Latin American companies, access information on personal banking products and services, and track their individual investment portfolios in Spanish and Portuguese. Information is provided by a host of leading financial information publishers, including Avance Economico, Enfoque, El Economista, El Universal and Quote.com. STARMEDIA DIGITAL (TECHNOLOGY) StarMedia Digital offers the latest in technology news, product reviews and free downloads from ZDNet. The information provided by ZDNet helps users make informed buying decisions about technology products, which they can purchase through StarMedia's relationship with vendors like Outpost.com.
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CHANNEL DESCRIPTION - -------------------------------- -------------------------------------------------------------------------------- STARMEDIA ENTRETENIMENTO/ Entertainment and music are united in the StarMedia Entretenimento/ ENTRETENIMIENTOS (ENTERTAINMENT) Entretenimientos channel. Our partnerships with USA Networks, Fox Latin America, eDrive, Retila, Successo CD and N2K provide content that creates a bridge between online and traditional programming. (V)Pulse offers a popular selection of easily playable music videos. StarMedia TV and StarMedia Radios provide Internet broadcasts of popular television and radio stations from Latin America and around the world. STARMEDIA SHOPPING (ELECTRONIC StarMedia Shopping acts as a virtual central plaza for online Latin American COMMERCE) consumers. Users are able to purchase a variety of merchandise, including computers, books and CDs, from a host of global and local retailers like barnesandnoble.com, N2K, CIM and Outpost.com. Products from the StarMedia Shopping channel are also merchandised within appropriate channels. For example, there are direct links that allow a literary chat group to easily purchase books of interest from barnesandnoble.com. STARMEDIA BUSCAWEB (SEARCH AND StarMedia BuscaWeb is our Internet search engine with in-language functionality. GUIDE) It utilizes Inktomi's sophisticated search capabilities, which have been customized to support country-specific, regional and worldwide searches in both Spanish and Portuguese. STARMEDIA VIAGENS/VIAJES The travel channel offers travel guides and news through an exclusive (TRAVEL) relationship with Lonely Planet, as well as advice about preparing for a trip, links to travel resources on the Web and a forum for exchanging travel stories and tips. STARMEDIA TEMPO/TIEMPO (WEATHER) StarMedia Tempo/Tiempo provides up-to-the-minute weather conditions and extended forecasts for 3,000 cities around the globe.
STRATEGIC ALLIANCES We have developed strategic relationships with leading content, electronic commerce, syndication and application partners. Many of these relationships provide us with exclusive rights for the Spanish and Portuguese market and are designed to: - enhance our network; - expand our community of users; - increase traffic; and - provide us with additional revenues. Generally, content partnerships are revenue sharing relationships. Our commerce partners typically pay us an advertisement placement or sponsorship fee and share with us a percentage of transaction revenues generated through our network. CONTENT AND APPLICATION PROVIDERS. We have a number of relationships with leading content and application providers, including: - Agence France Press--news and sports information - Bottle Rocket--interactive sports games - BusinessWire--business news - Critical Path--email services - edrive--entertainment news and featured content - eShare--chat software - Agencia EFE--news and information - Futbol de Primera--soccer Webcasts - Inktomi--in-language search services - Internet Securities--local business news for major Latin American cities provided by leading publishers, including Avance 39 Economico, El Economista, El Universal and Enfoque - Lonely Planet--travel information - PeopleLink--instant messaging - Quote.com--stock and mutual fund quotes - Reuters--news and sports information - WeatherLabs--weather information - Ziff-Davis--technology news and information COMMERCE PARTNERS. Our electronic commerce relationships include: - barnesandnoble.com--book purchases - CIM--Brazilian music - Citibank--online banking and credit card applications - Disney--branded merchandise - Music Boulevard (N2K)--music products, CDs, clothing, posters and books - Outpost.com--computer and technology merchandise - SportsSuperstore--sports merchandise - Tickets.com--event information and ticketing NETSCAPE. In May 1998, we entered into a marketing and distribution agreement with Netscape. Together, we developed and launched NETSCAPE GUIDE BY STARMEDIA in both Spanish and Portuguese. NETSCAPE GUIDE BY STARMEDIA is one of the core services available as part of Netscape's Latin American Spanish and Portuguese browsers. We also appear as a premium bookmark located on Netscape's Spanish and Portuguese browser toolbars. These bookmarks link users directly to our network. StarMedia Noticias/Noticias appears as a ticker on the Netscape Latin America and Brazil homepages and directs users to our network's general news areas. In addition, Netscape promotes StarMedia throughout its Spanish and Portuguese offerings. REALNETWORKS. In February 1999, we entered into a relationship with RealNetworks, the leading provider of streaming audio/video over the Internet. We are the only in-language Internet company featured as a default channel on both the Spanish and Portuguese versions of RealNetworks' RealPlayer G2. This relationship uniquely positions us to enhance our user base by enabling Spanish and Portuguese-speaking Internet users to access our in-language streaming content, including music videos, television and radio programming, and sporting events directly from RealPlayer. ADVERTISING SALES We have built a direct sales organization of over 60 professionals located in eight offices: Sao Paulo, Mexico City, Buenos Aires, Bogota, Santiago, Caracas, Miami and New York. Our sales organization is dedicated to maintaining close relationships with top advertisers and leading advertising agencies throughout Latin America. It is structured on a regional basis and is focused solely on selling advertising on our network. Our sales organization consults regularly with advertisers and agencies on design and placement of their Web-based advertising, provides customers with advertising measurement analysis and focuses on providing a high level of customer service satisfaction. Currently, advertisers and advertising agencies enter into agreements under which they pay for a guaranteed number of impressions for a fixed fee. These agreements range from one month to multiple years. Advertising on our network currently consists primarily of banner-style advertisements, buttons and sponsorships from which viewers can hyperlink directly to the advertiser's own Web site. Our standard cost per thousand impressions, commonly referred to as CPMs, for banner advertisements varies depending on location of the advertisements on the network, the targeted country and the extent to which it is targeted for a particular audience. Discounts from standard CPM rates may be provided for higher volume, longer-term advertising contracts. We also offer promotional advertising programs, such as contests, sampling and couponing opportunities, in order to build brand awareness, generate leads and drive traffic to an advertiser's site. 40 ADVERTISING CUSTOMERS. During 1998, 72 companies advertised on the StarMedia network, up from 6 advertisers in 1997. The following is a selected list of our current advertising customers: Bradesco IBM Ford Fox Television Microsoft Motorola Nokia Sony
We have derived substantially all of our revenues to date from the sale of advertisements and sponsorships. In the fourth quarter of 1998, we had 44 advertisers, up from 3 advertisers in the first quarter of 1998. In 1998, two advertisers each accounted for greater than 10% of total revenues and the five largest advertisers accounted for 62% of total revenues. MARKETING AND BRAND AWARENESS We use multiple advertising media, such as television, print and Web-based advertising in order to: - build our brand; - increase traffic; and - raise our profile among potential advertisers. Our television advertisements have appeared on broadcast television in Brazil, Mexico, Colombia, Argentina, Chile, the United States, Uruguay, Venezuela, Spain, Peru and on cable networks throughout Latin America. Our first television commercial, "Birth of a Star", began airing in 18 Latin American markets in Spanish and Portuguese in February 1997. In addition to advertising on television, we advertise in print, use outdoor advertising and have a significant presence in highly-targeted online media. We also have an extensive public relations campaign. We are currently in the midst of our fourth advertising campaign across Latin America. Our strategic and content partners also typically provide us with advertising support. We form marketing alliances with companies that have broad reach and whose customers are similar to our target customers. We currently have co-marketing relationships with Fox Latin America, USA Networks and other regional television stations. TECHNOLOGY AND INFRASTRUCTURE Our technology infrastructure is built and maintained for reliability, security, and flexibility and is administered by our technical staff. We maintain our central production servers at the New Jersey data center of Exodus Communications. We also have a second co-location facility at Digital Island in New York. We maintain regional network operating centers in Brazil and Argentina. Our operations depend on the ability of Exodus or Digital Island to protect their systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins, or other events. Exodus and Digital Island provide comprehensive facilities management services, including human and technical monitoring of all production servers 24 hours per day, 7 days per week. Exodus and Digital Island also provide connectivity for our U.S. servers through multiple high-speed connections. In Brazil and Argentina, our servers are connected to the largest backbone providers in each country. All facilities are protected by multiple uninterruptible power supplies. For reliability, availability, and serviceability, we have implemented a modular server environment. Key components of our server architecture are served by multiple redundant machines. We employ in-house and third-party monitoring software. Reporting and tracking systems generate daily traffic, demographic, and advertising reports. Our production data is copied to backup tapes each night. We employ in-house and third-party software to monitor access to our production and development servers. 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. 41 COMPETITION There are many companies that provide Web sites and online destinations targeted to Latin Americans and Spanish- and Portuguese-speaking people in general. All of these companies compete with us for visitor traffic, advertising dollars and electronic commerce partners. The market for Internet content companies in Latin America is new and rapidly evolving. Competition for visitors, advertisers and electronic commerce partners is intense and is expected to increase significantly in the future because there are no substantial barriers to entry in our market. Increased competition could result in: - lower advertising rates; - price reductions and lower profit margins; - loss of visitors; - reduced page views; or - loss of market share. Any one of these could materially and adversely affect our business, financial condition and results of operations. Our ability to compete successfully depends on many factors. These factors include: - the quality of the content provided by us and our competitors; - how easy our respective services are to use; - sales and marketing efforts; and - the performance of our technology. We compete with providers of content and services over the Internet, including Web directories, search engines, content sites and sites maintained by government and educational institutions. Our current competitors include: - companies that target Spanish-speakers throughout Latin America, like Ciudad Futura, El Sitio, Telefonica/Ole and Yupi; - Spanish- and Portuguese-language versions of U.S. companies like CompuServe and Yahoo!; and - companies like ZAZ (Brazil), CompuServe Mexico (Mexico), Ciudad Internet (Colombia) and Universo Online (Brazil), that target particular Latin American countries. In addition, America Online recently announced a joint venture with the Cisneros Group to enter the Latin American Internet market, initially targeting Brazil, Mexico and Argentina. Many of our competitors and potential new competitors, have: - longer operating histories; - greater name recognition in some markets; - larger customer bases; and - significantly greater financial, technical and marketing resources. These competitors may also be able to: - undertake more extensive marketing campaigns for their brands and services; - adopt more aggressive advertising pricing policies; - use superior technology platforms to deliver their products and services; and - make more attractive offers to potential employees, distribution partners, commerce companies, advertisers and third-party content providers. Our competitors may develop content that is better than ours or that achieves greater market acceptance. It is also possible that new competitors may emerge and acquire significant market share. This could have a material and adverse effect on our business, financial condition and results of operations. We also compete with traditional forms of media, like newspapers, magazines, radio and television for advertisers and advertising revenue. If advertisers perceive the Internet or our network to be a limited or an ineffective advertising medium, they may be reluctant to devote a portion of their advertising budget to Internet advertising or to advertising on our network. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES To date, regulations have not materially restricted use of the Internet in our markets. 42 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 prevent us from delivering 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 like: - 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. Each country in Latin America has its own telephone tariffs which, if too high, may cause consumers to be less likely to access and transact business over the Internet. Although the tariffs have been reduced recently in some countries, we do not know whether this trend will continue. Unfavorable tariff developments could decrease our visitor traffic and our ability to derive revenues from transactions over the Internet. This could have a material adverse effect on our business, financial condition and results of operations. 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 is 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. We pursue the registration of our trademarks in the United States and internationally in Latin America, Spain and Portugal. We may not be able to secure adequate protection for our trademarks in the United States and other countries. We are aware of an opposition filed in Spain against our application for registration of the StarMedia trademark, which we are currently contesting. In addition, there have been other oppositions filed against our applications in other countries for some of our other marks. We currently hold trademark registrations in the United States, Peru, Uruguay, Colombia and Paraguay for the StarMedia trademark and registrations for other marks in some of these and other countries. Effective 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. In addition, 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. We actively seek to protect our marks against similar and confusing marks of third parties by: - using a watch service which identifies applications to register trademarks; - filing oppositions to third parties' applications for trademarks; and - bringing lawsuits against infringers. For example, we are aware of certain unauthorized uses of our PIZARRAS trademark and intend to pursue enforcement of our rights against those who are infringing this mark. This may be time consuming and expensive. Our inability to effectively protect our trademarks and service marks would have a material adverse effect on our business, financial conditions and results of operations. 43 Many parties are actively developing chat, homepage, search and related Web technologies. We expect these developers to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and that cover significant parts of our technology, business methods or services. For example, we are aware that a number of patents have been issued in the areas of electronic commerce, Web-based information indexing and retrieval and online direct marketing. Disputes over rights to these technologies are likely to arise in the future. 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. 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. We also intend to continue to license certain technology from third parties, including our Web-server and encryption technology. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until alternative technologies can be identified, licensed and integrated. EMPLOYEES As of February 28, 1999, we had 247 full-time employees, of whom 64 worked in sales, 10 in editorial, 18 in marketing, 107 in product and technology and 48 in finance and administration. From time to time, we employ independent contractors to support our research and development, marketing, sales and editorial departments. None of our personnel are represented under collective bargaining agreements. We consider our relations with our employees to be good. FACILITIES Our principal executive offices are located in approximately 19,500 square feet of office space in New York, New York, under a lease that expires in August 2003. We also lease sales and business development office space in: - Sao Paulo, Brazil; - Mexico City, Mexico; - Buenos Aires, Argentina; - Bogota, Colombia; - Santiago, Chile; - Montevideo, Uruguay; - Caracas, Venezuela; and - Miami, Florida. LEGAL PROCEEDINGS There are no material legal proceedings pending or, to our knowledge, threatened against us. 44 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the executive officers, directors and key employees of StarMedia, their ages and the positions held by them:
NAME AGE POSITION - --------------------------------------------- --- ------------------------------------------------------------ Fernando J. Espuelas......................... 32 Chairman of the Board of Directors and Chief Executive Officer Jack C. Chen................................. 32 President and Director Tracy J. Leeds............................... 34 Chief Operating Officer Steven J. Heller............................. 33 Vice President, Finance and Administration Adriana J. Kampfner.......................... 26 President, StarMedia, Mexico and Senior Vice President, Global Sales James D. Granlund............................ 35 Chief Technology Officer Douglas M. Karp.............................. 43 Director Christopher T. Linen(1)...................... 49 Director Gerardo M. Rosenkranz(2)..................... 47 Director Susan L. Segal............................... 46 Director Frederick R. Wilson(1)(2).................... 36 Director
- ------------------------ (1) Member of the compensation committee (2) Member of the audit committee FERNANDO J. ESPUELAS is a founder of StarMedia and has been Chairman of the Board and Chief Executive Officer since September 1996. Prior to founding StarMedia, Mr. Espuelas was employed in various positions at AT&T from 1994 to 1996, most recently as Managing Director of Marketing Communications for the Americas. From 1991 to 1994, Mr. Espuelas was employed in various positions at Ogilvy & Mather, an international advertising firm, most recently as Regional Account Director for Latin America. Prior to his employment at Ogilvy & Mather, Mr. Espuelas worked at other major advertising agencies, including Lowe & Partners and Wunderman Worldwide. He received a B.A. with Distinction from Connecticut College. Mr. Espuelas is a native of Uruguay. JACK C. CHEN is a founder of StarMedia and has been President and a Director since March 1996. Prior to founding StarMedia, Mr. Chen was a Vice President at S.L. Chen & Associates, Inc., an international merchant banking firm, advising companies, joint ventures and government organizations from 1995 through 1996. Mr. Chen was a securities analyst at CS First Boston Investment Management from 1994 to 1995. Prior to his employment at CS First Boston, Mr. Chen was an investment banker at Goldman, Sachs & Co. Mr. Chen received an M.B.A. from Harvard Business School and a B.A. with High Honors in Computer Science from Harvard University. TRACY J. LEEDS has been the Chief Operating Officer of StarMedia since September 1998, and prior to that served as StarMedia's Vice President, Business Operations since July 1997. From 1996 to 1997, Ms. Leeds was General Manager of the Healthsite Web service for AT&T Personal Online Services. From 1994 to 1996, she was Director of the PC DreamShop the electronic commerce project of Time Warner Cable Programming. Prior to that, Ms. Leeds was Director, Client Services, for Catalog 1, a joint venture between Time Warner and Spiegel. Ms. Leeds has also held various marketing positions at Johnson & Johnson and Playtex. Ms. Leeds received an M.B.A. from Harvard Business School and a B.A. from Yale University. STEVEN J. HELLER has been Vice President, Finance and Administration of StarMedia since 45 October 1997. From 1995 to 1997, Mr. Heller was Director, Finance and Administration, and Treasurer at Evolve Software, Inc., a software firm based in San Francisco. Prior to that, Mr. Heller was Managing Director of Entrepreneurial Accounting Resources, a firm he founded in 1991 that provided finance and accounting consulting services to high technology and media companies. Mr. Heller served in the San Francisco office of Coopers & Lybrand in the Emerging Business Services division of the Business Assurance Group from 1987 to 1991. He received a B.S. degree from The American University. ADRIANA J. KAMPFNER is President of StarMedia, Mexico and Senior Vice President of Global Sales. Ms. Kampfner has worked at StarMedia since August 1997. Prior to her current position, Ms. Kampfner was StarMedia's Vice President, General Manager, Mexico and StarMedia's Director of Sales, North America, responsible for initiating relationships with key domestic and international clients. Before joining StarMedia, Ms. Kampfner was a Senior Financial Analyst at Chase Securities Inc. from 1996 to 1997. Ms. Kampfner received a B.A. in Business Administration from the University of Michigan. JAMES D. GRANLUND joined StarMedia as its Chief Technology Officer in January 1999. Prior to joining StarMedia, Mr. Granlund was Vice President, Operations and Technology for Turner Broadcast Systems/CNNfn from 1995 until 1999. During his tenure with CNNfn, he designed, developed and implemented technological strategies and maintained operational integrity for both the CNNfn television network and CNNfn.com Web site. Prior to joining Turner Broadcast Systems, Mr. Granlund was manager of Work Group Computing for Bristol-Myers Squibb Company from 1988 to 1995. He received a B.S. in Industrial and Labor Relations from Cornell University. DOUGLAS M. KARP has been a Director of StarMedia since September 1998. Mr. Karp is currently Managing Director and a member of the Operating Committee of E.M. Warburg, Pincus & Company, LLC, where he is responsible for limited partner relationships and fund raising as well as the firm's Communications and Latin American investments. Prior to joining Warburg, Pincus, he 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 Qwest Communications, Journal Register Company, TV Filme, Inc., Primus Telecommunications Group, Golden Books Family Entertainment and PageNet do Brasil. Mr. Karp received a B.A. from Yale University and a J.D. from Harvard Law School. CHRISTOPHER T. LINEN has been a Director of StarMedia since November 1996. Currently, Mr. Linen is Principal of Christopher Linen & Company, a venture capital firm. Mr. Linen was President and Chief Executive Officer of Warner Music Enterprises, a Time Warner Inc. unit charged with developing new music- related opportunities including Internet properties and direct marketing businesses worldwide from 1992 to 1996. From 1988 to 1992, Mr. Linen was President and Chief Executive Officer of Time Warner Direct, a unit of Time Warner Inc. composed of Time Life, one of the world's largest direct marketers of books, music and videocassettes; Book-of-the-Month Club Inc., the nation's largest book club operator; and related ventures. Prior to his employment with Time Warner Direct, Mr. Linen held various top-level executive positions at Time Life, including President and Chief Executive Officer and Managing Director for Latin America, and currently serves on the board of directors of Allied Devices Corporation. Mr. Linen received a B.S. from Williams College and attended the Graduate School of Business Administration at New York University. GERARDO M. ROSENKRANZ has been a Director of StarMedia since November 1996. Mr. Rosenkranz is a private investor and founder and Chief Executive Officer of Ventech International, Inc. Ventech provides consulting services to telecommunications and information technology companies. Prior to establishing Ventech in 1995, Mr. Rosenkranz 46 served for 10 years at Sprint International (formerly GTE Telenet), where he held senior executive positions in management, business development and sales. Mr. Rosenkranz received B.S., M.S. and Engineer Degrees in Electrical Engineering from Stanford University. He was born and raised in Mexico City, Mexico. SUSAN L. SEGAL has been a Director of StarMedia since July 1997. Ms. Segal has served as General Partner and Latin American Group Head at Chase Capital Partners since December 1996. 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 the Council of the Americas and the boards of directors of the Tinker Foundation, the Americas Society and the Corp Group. Ms. Segal received an M.B.A. from Columbia University and a B.A. from Sarah Lawrence College. FREDERICK R. WILSON has been a Director of StarMedia since July 1997. Mr. Wilson is currently Managing Partner of Flatiron Partners, a venture capital firm focused on early-stage, Internet-focused investments. Prior to founding Flatiron Partners, Mr. Wilson was associated with Euclid Partners from 1986 to 1996. He received an M.B.A. from The Wharton School of Business at The University of Pennsylvania and a B.S. in Mechanical Engineering and Computer Science from MIT. CLASSIFIED BOARD OF DIRECTORS Our board of directors is divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected each year. These provisions, when coupled with the provision of our amended and restated certificate of incorporation authorizing the board of directors to fill vacant directorships or increase the size of the board of directors, may delay a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies with its own nominees. BOARD COMMITTEES The audit committee reports to the board regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management's procedures and policies relative to the adequacy of our internal accounting controls. The audit committee consists of Gerardo M. Rosenkranz and Frederick R. Wilson. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies and all forms of compensation to be provided to our executive officers and directors. In addition, the compensation committee reviews bonus and stock compensation arrangements for all of our other employees. The current members of the compensation committee are Christopher T. Linen and Frederick R. Wilson. No interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. DIRECTOR COMPENSATION Directors currently do not receive a stated salary from StarMedia for their service as members of the board of directors, although by resolution of the board, they may receive a fixed sum and reimbursement for expenses in 47 connection with the attendance at board and committee meetings. We currently do not provide additional compensation for committee participation or special assignments of the board of directors. From time to time, some of our directors have received grants of options to purchase shares of common stock. EMPLOYMENT CONTRACTS We have entered into executive employment agreements with Fernando J. Espuelas, our Chairman and Chief Executive Officer, and Jack C. Chen, our President. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued for the year ended December 31, 1998 to our Chief Executive Officer and to each of our most highly compensated executive officers, other than the Chief Executive Officer, whose salary and bonus for such fiscal year exceeded $100,000. Securities Underlying Options/SARs does not include options cancelled under our 1997 Plan, but does include the immediate reissuance of options equal to the cancelled options under our 1998 Plan. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------- AWARDS ----------------- ANNUAL COMPENSATION SECURITIES ------------------------ UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS ($) OPTIONS/SARS(#) - --------------------------------------------------------------------- ----------- ----------- ----------------- Fernando J. Espuelas................................................. $ 152,084 $ 200,000 1,750,000 Chairman of the Board and Chief Executive Officer Jack C. Chen......................................................... 152,104 200,000 1,750,000 President Tracy J. Leeds....................................................... 117,917 -- 550,000 Chief Operating Officer Steven J. Heller..................................................... 106,667 -- 190,000 Vice President, Finance and Administration Adriana J. Kampfner.................................................. 138,750 -- 230,000 President, StarMedia Mexico, Senior Vice President, Global Sales
OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth grants of stock options for the year ended December 31, 1998 to our Chief Executive Officer and our most highly compensated executive officers, other than our Chief Executive Officer, whose salary and bonus exceeded $100,000. The options shown for each executive officer do not include options cancelled under our 1997 Plan, but do include the immediate reissuance of options equal to the cancelled options under our 1998 Plan. We have never granted any stock appreciation rights. The potential realizable value is calculated based on the term of the option at its time of grant. It is calculated assuming that the fair market value of common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect our estimate of future stock price growth. 48
POTENTIAL REALIZABLE VALUE AT ASSUMED OPTION GRANTS IN LAST FISCAL YEAR ANNUAL RATES INDIVIDUAL GRANTS OF ------------------------------------------------------------------- STOCK PRICE NUMBER OF APPRECIATION SECURITIES PERCENT OF TOTAL EXERCISE FOR OPTION UNDERLYING OPTIONS GRANTED TO PRICE PER FMV ON THE TERM OPTIONS EMPLOYEES IN SHARE DATE OF GRANT EXPIRATION ------------- NAME GRANTED(#) FISCAL YEAR (%) (1) ($/SHARE) ($/SHARE) DATE 0%($) - ----------------------------- ------------ ----------------------- ----------- --------------- ---------- ------------- Fernando J. Espuelas......... 1,000,000 17% $ 0.50 $ 2.08 4/1/08 $ 1,580,000 750,000 13 1.60 5.20 12/17/08 2,700,000 Jack C. Chen................. 1,000,000 17 0.50 2.08 4/1/08 1,580,000 750,000 13 1.60 5.20 12/17/08 2,700,000 Tracy J. Leeds............... 375,000 6 0.50 3.83 7/16/07 1,248,750 175,000 3 0.50 4.54 9/17/08 707,000 Steven J. Heller............. 100,000 2 0.50 3.83 7/10/08 333,000 90,000 2 0.50 4.54 9/17/08 363,600 Adriana J. Kampfner.......... 130,000 3 0.50 3.83 7/10/08 432,900 100,000 2 0.50 4.54 9/17/08 404,000 NAME 5%($) 10%($) - ----------------------------- ------------- ------------- Fernando J. Espuelas......... $ 2,890,400 $ 4,887,200 5,157,000 8,901,000 Jack C. Chen................. 2,890,400 4,887,200 5,157,000 8,901,000 Tracy J. Leeds............... 2,153,588 3,532,388 1,207,535 1,970,255 Steven J. Heller............. 574,290 941,970 621,018 1,013,274 Adriana J. Kampfner.......... 746,577 1,224,561 690,020 1,125,860
- ------------------------ (1) Based on options to purchase an aggregate of 5,782,000 shares of common stock granted under our 1998 Plan to employees, consultants and directors of StarMedia and under our 1997 Plan to Messrs. Espuelas and Chen in the year ended December 31, 1998. All options granted under our 1997 Plan, other than those granted to Messrs. Espuelas and Chen, have been cancelled and reissued under our 1998 Plan. FISCAL YEAR-END OPTION VALUES The following table provides some information about stock options held as of December 31, 1998 by our Chief Executive Officer and our most highly compensated executive officers other than our Chief Executive Officer. No options were exercised during fiscal 1998 by any of these executive officers. There was no public trading market for the common stock as of December 31, 1998. Accordingly, the value of unexercised in-the-money options at fiscal year-end is based on the assumed initial public offering price of $ per share, less the exercise price per share, multiplied by the number of shares underlying the options. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR-END (#) AT FISCAL YEAR END ----------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------- ------------- -------------- ------------ -------------- Fernando J. Espuelas................................ 1,750,000 -- $ $ Jack C. Chen........................................ 1,750,000 -- Tracy J. Leeds...................................... 82,639 467,361 Steven J. Heller.................................... 36,111 153,889 Adriana J. Kampfner................................. 13,333 216,667
STOCK OPTION PLANS 1997 STOCK OPTION PLAN Our 1997 Stock Option Plan was adopted by the board of directors in June 1997. A total of 5,000,000 shares of common stock were authorized for issuance under the 1997 Plan. When the 1998 Plan was adopted, all options outstanding under the 1997 Plan were cancelled and reissued under the 1998 Plan, other than those granted to Messrs. Espuelas and Chen in the aggregate amount of 2,000,000. We will not issue additional options under the 1997 Plan. 49 The exercise price for the shares of common stock subject to option grants made under the 1997 Plan may, at the discretion of the plan administrator, be paid in cash or in shares of common stock valued at fair market value on the exercise date. In the event of a merger pursuant to which StarMedia is acquired, each outstanding option may, at the discretion of the plan administrator, be assumed by the successor corporation or terminated in exchange for a cash payment equal to the difference between the fair market value of the shares for which the option is at the time exercisable and the exercise price payable for such shares. The board may amend or modify the 1997 Plan at any time. The 1997 Plan will terminate in all events on December 31, 1999. Options under the 1997 Plan, however, will remain outstanding in accordance with their terms. 1998 STOCK PLAN Our 1998 Stock Plan was adopted by the board of directors and approved by the stockholders in July 1998. A total of 15,000,000 shares of common stock have been authorized for issuance under the 1998 Plan. The number of shares of common stock available for issuance under the 1998 Plan will increase on July 1 of each year beginning in 2000 by the lesser of (i) 4 million shares, (ii) 4% of the outstanding shares on such date or (iii) an amount determined by the board. Under the 1998 Plan, eligible individuals in StarMedia's employ or service may, at the discretion of the plan administrator, be granted options to purchase shares of common stock at an exercise price determined by the plan administrator or may be issued shares of common stock directly through the purchase of such shares at a price determined by the plan administrator. Eligible individuals include officers, non-employee board members and consultants. The 1998 Plan is administered by the compensation committee of the board. The compensation committee as plan administrator has complete discretion to determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The exercise price for the shares of common stock subject to option grants made under the 1998 Plan may, at the discretion of the plan administrator, be paid in cash, in shares of common stock valued at fair market value on the exercise date, through a same-day sale program without any cash outlay by the optionee or by delivering a full-recourse, interest-bearing promissory note. In the event of an acquisition of StarMedia, whether by merger or asset sale, each option which is not to be assumed by the successor corporation will automatically accelerate in full and all unvested shares will immediately vest, except to the extent that StarMedia's repurchase rights with respect to those shares are to be assigned to the successor corporation. The plan administrator has the authority to effect the cancellation of outstanding options in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. The board may amend or modify the 1998 Plan at any time, subject to any required stockholder approval. The 1998 Plan will terminate on the earliest of (i) the date determined by the board, (ii) the date on which all shares available for issuance under the 1998 Plan have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with an acquisition of StarMedia. 50 CERTAIN TRANSACTIONS In 1996, our directors, officers and 5% stockholders, and their affiliates, purchased common stock as follows:
NUMBER OF SHARES OF PURCHASE COMMON PRICE PER NAME OF INVESTOR STOCK SHARE - ------------------------------ ----------- ----------- Fernando J. Espuelas.......... 4,500,000 $ .0056 Jack C. Chen.................. 4,500,000 .0056 Gerardo M. Rosenkranz......... 220,000 .09 Christopher T. Linen.......... 100,000 .25 A trust, of which Mr. Chen is trustee..................... 20,000 .50
Messrs. Espuelas, Chen, Rosenkranz and Linen currently serve as our officers and/or directors. In May 1997, we issued options to purchase 280,000 shares of common stock at an exercise price of $0.09 per share to Mr. Rosenkranz. At that time, we also issued options to purchase 100,000 shares of common stock at an exercise price of $0.25 per share to Mr. Linen. In July 1997, we sold 7,330,000 shares of our series A redeemable convertible preferred stock to a number of investors at a purchase price of $0.50 per share. Of these, our directors, officers and 5% stockholders, and their affiliates, purchased shares as follows:
NUMBER OF SHARES OF SERIES A REDEEMABLE CONVERTIBLE NAME OF INVESTOR PREFERRED STOCK - --------------------------------------- ---------------- Chase Venture Capital Associates....... 5,535,000 fl@tiron Fund.......................... 465,000 Tracy Leeds and family................. 200,000 Christopher T. Linen................... 100,000 Gerardo Rosenkranz, family and affiliates........................... 100,000 A trust, of which Mr. Chen is trustee.............................. 20,000
Chase Venture Capital Associates owns more than 5% of our stock. In addition, Susan Segal, one of our directors, is affiliated with Chase Venture Capital Associates. The fl@tiron Fund is controlled by Frederick Wilson, one of our directors. Tracy Leeds currently serves as one of our executive officers. After this offering, all of the series A redeemable convertible preferred stock will automatically convert into an aggregate of 7,330,000 shares of common stock. In January 1998, we issued 8% convertible subordinated notes that were due on the earlier of July 21, 1998 or the closing of our series B redeemable convertible preferred stock financing to the fl@tiron Fund in the aggregate principal amount of $410,000 and to Chase Venture Capital Associates in the aggregate principal amount of $3,590,000. The notes were repaid in full. In February 1998, we sold 8,000,000 shares of series B redeemable convertible preferred stock to a number of investors at a purchase price of $1.50 per share. Of these, our directors, officers and 5% stockholders, and their affiliates, purchased shares as follows:
NUMBER OF SHARES OF SERIES B REDEEMABLE CONVERTIBLE NAME OF INVESTOR PREFERRED STOCK - --------------------------------------- ---------------- Chase Venture Capital Associates....... 2,393,333 fl@tiron Fund.......................... 273,333 Gerardo Rosenkranz, family and affiliates........................... 66,666 Tracy Leeds and family................. 66,668 Family of Steven Heller................ 30,000
Steven Heller is one of our executive officers. After this offering, the series B redeemable convertible preferred stock will automatically convert into an aggregate of 8,000,000 shares of common stock. In August 1998, we issued 8% convertible subordinated notes that were due on the earlier of December 31, 1998 or the closing of our series C redeemable convertible preferred stock financing to the Flatiron Fund 1998/99 in the aggregate principal amount of $200,000, and to Chase Venture Capital Associates in the aggregate amount of $1,800,000. The Flatiron Fund 1998/99 is controlled by Mr. Wilson. The notes were repaid in full. 51 In August 1998, we sold 16,666,667 shares of series C redeemable convertible preferred stock to a number of investors at a purchase price of $4.80 per share. Of these, our directors, officers and 5% stockholders, and their affiliates, purchased shares as follows:
NUMBER OF SHARES OF SERIES C REDEEMABLE CONVERTIBLE NAME OF INVESTOR PREFERRED STOCK - --------------------------------------- ---------------- Chase Venture Capital Associates ...... 3,750,000 Warburg, Pincus Equity Partners ....... 2,380,209 Warburg, Pincus Ventures International ....................... 2,380,208 Flatiron Fund 1998/99.................. 416,667 Gerardo Rosenkranz, family and affiliates........................... 104,165 Tracy Leeds............................ 28,918
The Warburg, Pincus entities, collectively, own more than 5% of our stock. In addition, Douglas M. Karp, one of our directors, is affiliated with the Warburg, Pincus entities. After this offering, the series C redeemable convertible preferred stock will automatically convert into an aggregate of 16,666,667 shares of common stock. We have entered into employment agreements with Fernando J. Espuelas, our chairman and chief executive officer, and Jack C. Chen, our president. From time to time we have retained an affiliate of Chase Venture Capital Associates to perform various investment banking and advisory services on our behalf. The amount paid to this affiliate of Chase in 1998 for these services was $1.2 million. We believe that these transactions were in the best interests of StarMedia. 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 independent directors, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us. For information concerning indemnification of directors and officers, please see "Management" and "Description of Capital Stock--Indemnification of Certain Directors and Officers and Limitation of Liability". 52 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock, as of March 18, 1999 and as adjusted to reflect the sale of common stock offered by StarMedia in this offering for (i) each person known by StarMedia to beneficially own more than 5% of the common stock, (ii) each executive officer named in the Summary Compensation Table, (iii) each director of StarMedia and (iv) all executive officers and directors of StarMedia 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. Shares beneficially owned includes ownership of shares of redeemable convertible preferred stock. Unless otherwise indicated, the address for those listed below is c/o StarMedia Network, Inc., 29 West 36(th) Street, Fifth Floor, New York, New York 10018. 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 March 18, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 42,423,667 shares of common stock outstanding as of March 18, 1999, assuming the conversion of the redeemable convertible preferred stock, and shares of common stock outstanding after completion of this offering.
PERCENTAGE OF COMMON STOCK SHARES BENEFICIALLY OWNED BENEFICIALLY -------------------------------------- NAME OF BENEFICIAL OWNER OWNED PRIOR TO OFFERING AFTER OFFERING - ----------------------------------------------------------------- ------------- ------------------- ----------------- Fernando J. Espuelas(1).......................................... 6,250,000 14.1% % Jack C. Chen(2).................................................. 6,290,000 14.2 Tracy J. Leeds(3)................................................ 336,557 * Adriana J. Kampfner(4)........................................... 53,611 * Steven J. Heller(5).............................................. 50,000 * Douglas M. Karp(6)............................................... 4,760,417 11.2 Christopher T. Linen(7).......................................... 300,000 * Gerardo M. Rosenkranz(8)......................................... 588,055 1.4 Susan L. Segal(9)................................................ 11,378,333 26.8 Frederick R. Wilson(10).......................................... 1,155,000 2.7 Chase Venture Capital Associates, L.P.(11)....................... 11,378,333 26.8 Warburg, Pincus Equity Partners, L.P.(12)........................ 2,380,209 5.6 Warburg, Pincus Ventures International, L.P.(12)................. 2,380,208 5.6 All directors and executive officers as a group (11 persons)..... 31,161,973 67.3
- ------------------------ * Indicates less than one percent of the common stock. (1) Includes (i) 1,750,000 shares issuable upon the exercise of currently exercisable stock options and (ii) 1,000,000 shares held by a trust, of which Mr. Espuelas is trustee. (2) Includes (i) 1,750,000 shares issuable upon the exercise of currently exercisable stock options, (ii) 2,150,000 shares owned by Mr. Chen's spouse and (iii) an aggregate of 2,246,600 shares held by two trusts, of which Mr. Chen is trustee. 53 (3) Includes 174,305 shares issuable upon the exercise of currently exercisable stock options and stock options which vest within 60 days. (4) Consists of 53,611 shares issuable upon the exercise of currently exercisable stock options and stock options which vest within 60 days. (5) Consists of 50,000 shares issuable upon the exercise of currently exercisable stock options and stock options which vest within 60 days. (6) All shares indicated as owned by Mr. Karp are included because of Mr. Karp's affiliation with the Warburg, Pincus entities. Mr. Karp disclaims beneficial ownership of all shares owned by the Warburg, Pincus entities. Mr. Karp's address is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue, New York, NY 10017. See note 12 below. (7) Includes 100,000 shares owned by members of Mr. Linen's immediate family. Mr. Linen's address is c/o Christopher Linen & Co., 113 East 19(th) Street, New York, NY 10003. (8) Consists of (i) 520,833 shares owned by Mr. Rosenkranz, (ii) 43,055 shares owned by a trust, of which Mr. Rosenkranz is managing trustee, and (iii) 24,167 shares owned by a company controlled by Mr. Rosenkranz. Mr. Rosenkranz's address is c/o Ventech International, Inc., 60 Arch Street, Greenwich, CT 06830. (9) All shares indicated as owned by Ms. Segal are included because of Ms. Segal's affiliation with Chase Venture Capital Associates, L.P., of which Chase Capital Partners is the general partner. Ms. Segal disclaims beneficial ownership of all shares owned by Chase Ms. Segal's address is c/o Chase Venture Capital Associates, L.P., 380 Madison Avenue, 9(th) Floor, New York, NY 10017. (10) Consists of shares owned by the fI@tiron Fund, LLC and the FIatiron Fund 1998/99, LLC which are controlled by Mr. Wilson. Mr. Wilson's address is c/o Flatiron Partners, 257 Park Avenue South, 12(th) Floor, New York, NY 10010. (11) The address of Chase Venture Capital Partners is 380 Madison Avenue, 12(th) Floor, New York, NY 10017. (12) The sole general partner of Warburg, Pincus Equity Partners, L.P., together with certain affiliated partnerships, (WPEP) and Warburg, Pincus Ventures International, L.P. (WPVI) is Warburg, Pincus & Co., a New York general partnership (WP). E.M. Warburg, Pincus & Co., LLC, a New York limited liability company (EMW LLC), manages WPEP and WPVI. The members of EMW LLC are substantially the same as the partners of WP. Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC and may be deemed to control both WP and EMW LLC. WP has a 20% interest in the profits of WPEP as the general partner, and also owns approximately 2% of the limited partnership interests in WPEP. WP has a 20% interest in the profits of WPVI as the general partner, and also owns approximately 1.25% of the limited partnership interests in WPVI. Mr. Karp, a director of StarMedia, is a Managing Director and member of EMW LLC and a general partner of WP. As such, Mr. Karp may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934) in an indeterminate portion of the shares beneficially owned by WPEP and WPVI. The address of the Warburg, Pincus entities is 466 Lexington Avenue, New York, NY 10017. 54 DESCRIPTION OF CAPITAL STOCK GENERAL StarMedia's amended and restated certificate of incorporation, which will become effective upon the closing of this offering, authorizes the issuance of up to 200,000,000 shares of common stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par value $.001 per share, the rights and preferences of which may be established from time to time by StarMedia's board of directors. As of December 31, 1998, 10,392,000 shares of common stock were outstanding and 31,996,667 shares of convertible preferred stock convertible into the same amount of shares of common stock were issued and outstanding. As of December 31, 1998, StarMedia had 83 stockholders. COMMON STOCK Under our amended and restated certificate of incorporation, holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors. They do not have cumulative voting rights. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of our common stock are entitled to receive ratably dividends, if any, as may be declared by the board of directors out of legally available funds. In case of a liquidation, dissolution or winding up of StarMedia, the holders of common stock will be entitled to share ratably in the net assets legally available for distribution to shareholders after payment of all of our liabilities and any preferred stock then outstanding. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. After the closing of this offering, there will be no shares of preferred stock outstanding. PREFERRED STOCK Under our amended and restated certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue from time to time, shares of preferred stock in one or more series. The board of directors may fix the number of shares, designations, preferences, powers and other special rights of the preferred stock. The preferences, powers, rights and restrictions of different series of preferred stock may differ. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock or affect adversely the rights and powers, including voting rights, of the holders of common stock. The issuance may also have the effect of delaying, deferring or preventing a change in control of StarMedia. All outstanding shares of preferred stock will be automatically converted into common stock upon the closing of this offering. We have no current plans to issue any additional shares of preferred stock. REGISTRATION RIGHTS Under the terms of an amended and restated registration rights agreement, at any time on or after the first anniversary of the effective date of this offering, each of Chase Venture Capital Associates, Warburg, Pincus Equity Partners and the holders of a majority of the outstanding shares of common stock issuable after conversion of the shares of our preferred stock held by parties to such agreement may, on one occasion only, require us to register for sale all or any portion of the shares of common stock issuable upon conversion of the preferred shares held by them. We are also obligated to register any of the shares of common stock issuable upon conversion of the preferred shares held by parties to the registration rights agreement if they request to be included in the registration. These parties, in the aggregate, have three 55 demand registration rights. Further, if we become eligible to file registration statements on Form S-3, a holder of our preferred stock which is a party to the registration rights agreement may require us to file a registration statement on Form S-3 under the Securities Act with respect to the shares of common stock issuable upon conversion of its preferred stock. We are also obligated to register the shares of common stock issuable upon conversion of the preferred shares held by parties to the registration rights agreement if they request to be included in the registration, provided that we will not be required to effect any Form S-3 registration more than once in any 180-day period. In addition, holders of preferred stock which are parties to the registration rights agreement will be entitled to piggyback registration rights for the common stock issuable upon conversion of their preferred stock in connection with any registration of our stock for our own account or the account of other stockholders. Mr. Espuelas and Mr. Chen may also participate in any demand, S-3 or piggyback registration. The foregoing registration rights are subject to certain conditions and limitations, including: - the right of the underwriters in any underwritten offering to limit the number of shares of common stock held by stockholders with registration rights to be included in such registration; and - our right to delay for up to 90 days the filing or effectiveness of a registration statement pursuant to a demand for registration if the board of directors of determines that the registration would not be in our best interest at such time. We are generally required to bear all of the expenses of all registrations, except underwriting discounts and commissions. Registration of any of the shares of common stock held by stockholders with registration rights would result in such shares becoming freely tradable without restriction under the Securities Act immediately after effectiveness of the registration. We have agreed to indemnify the holders of registration rights in connection with demand, S-3 and piggyback registration under certain circumstances. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws, which provisions are summarized in the following paragraphs, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider it its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. CLASSIFIED BOARD OF DIRECTORS Our board of directors is divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected each year. These provisions, when coupled with the provision of our amended and restated certificate of incorporation authorizing the board of directors to fill vacant directorships or increase the size of the board of directors, may delay a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by such removal with its own nominees. CUMULATIVE VOTING Our amended and restated certificate of incorporation expressly denies stockholders the right to cumulate votes in the election of directors. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS Our amended and restated certificate of incorporation eliminates the ability of stockholders to act by written consent. It further provides that special meetings of our stockholders may be called only by the 56 chairman of the board of directors or a majority of the board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS Our amended and restated bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be received not later than the close of business on the tenth day following the date on which notice of the date of the annual meeting was mailed to stockholders or made public, whichever first occurs. In the case of a special meeting of stockholders called for the purpose of electing directors, notice by the stockholder in order to be timely must be received not later than the close of business on the tenth day following the day on which notice was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. Our amended and restated bylaws also specify certain requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. The Delaware General Corporate Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our amended and restated certificate of incorporation imposes supermajority vote requirements in connection with certain business combination transactions and the amendment of certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws, including those provisions relating to the classified board of directors, action by written consent and special meetings by stockholders. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for StarMedia's common stock is American Stock Transfer & Trust Company, New York, New York. LISTING We have applied to list our common stock on the Nasdaq National Market under the trading symbol "STRM". 57 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock. Furthermore, since no shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding an aggregate of shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 42,423,667 shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, which rules are summarized below. LOCK-UP AGREEMENTS All of our officers, directors and certain of our stockholders have signed lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the date of this prospectus. Transfers or dispositions can be made sooner: - with the prior written consent of Goldman, Sachs & Co.; - in the case of certain transfers to affiliates; - as a bona fide gift; or - to any trust. Subject to the provisions of Rule 144, 144(k) and 701, restricted shares totaling 42,423,667 will be available for sale in the public market, subject in the case of shares held by affiliates to compliance with certain volume restrictions, 180 days after the date of this prospectus. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be 58 sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS Upon completion of this offering, the holders of 38,290,000 shares of our common stock, or their transferees will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Please see "Description of Capital Stock-Registration Rights". STOCK PLANS Immediately after this offering, we intend to file a registration statement under the Securities Act covering 17,000,000 shares of common stock reserved for issuance under our 1997 and 1998 Plans and 349,933 shares reserved for issuance under our other non-qualified options. This registration statement is expected to be filed as soon as practicable after the effective date of this offering. At December 31, 1998, options to purchase 6,131,933 shares were issued and outstanding under our Plans and otherwise. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some of the options, the expiration of lock-up agreements. VALIDITY OF COMMON STOCK The validity of the common stock offered hereby will be passed upon for StarMedia by Brobeck, Phleger & Harrison LLP, New York, New York and for the underwriters by Ropes & Gray, Boston, Massachusetts. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule at December 31, 1997 and 1998, and for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 as set forth in their reports. We have included our financial statements and schedule in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including exhibits and schedules thereto) under the Securities Act with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to StarMedia and the common stock, reference is made to the registration statement and the exhibits and schedules thereto. Statements 59 contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each case reference is made to the copy of such contract, agreement or other document filed as an exhibit to the registration statement for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information in StarMedia's files in the Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. StarMedia's Commission filings, including the registration statement, will also be available to you on the Commission's Internet site (http://www.sec.gov). We intend to furnish to our stockholders with annual reports containing financial statements audited by our independent auditors and to make available to our stockholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year. 60 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS STARMEDIA NETWORK, INC. Report of Independent Auditors.................................................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998.................... F-3 Consolidated Statements of Operations for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998.......................................................................... F-4 Consolidated Statements of Changes in Stockholders' Deficit for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998.................................................... F-5 Consolidated Statements of Cash Flows for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998.......................................................................... F-6 F-7 - Notes to Consolidated Financial Statements...................................... F-16
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, 1997 and 1998, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarMedia Network, Inc. at December 31, 1997 and 1998 and the results of their operations and their cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP /s/ Ernst & Young LLP New York, New York March 5, 1999, except for Note 10, as to which the date is March 14, 1999 F-2 STARMEDIA NETWORK, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 PRO FORMA ------------------------- DECEMBER 31 1997 1998 1998 ----------- ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................................... $ 436,000 $ 53,141,000 $53,141,000 Accounts receivable net of allowance for bad debts of $0 and $60,000 as of December 31, 1997 and 1998, respectively........... 27,000 460,000 460,000 Other current assets............................................... 7,000 1,674,000 1,674,000 ----------- ------------ ------------- Total current assets................................................. 470,000 55,275,000 55,275,000 Fixed assets, net.................................................... 263,000 5,403,000 5,403,000 Intangible assets, net of accumulated amortization of $1,000 and $93,000 as of December 31, 1997 and 1998, respectively............. 30,000 179,000 179,000 Other assets......................................................... 23,000 129,000 129,000 ----------- ------------ ------------- $ 786,000 $ 60,986,000 $60,986,000 ----------- ------------ ------------- ----------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses.............................. $ 227,000 $ 6,728,000 $ 6,728,000 Due to principal stockholders...................................... 67,000 Capital lease obligations, current portion......................... 10,000 220,000 220,000 Deferred revenues.................................................. 20,000 815,000 815,000 ----------- ------------ ------------- Total current liabilities............................................ 324,000 7,763,000 7,763,000 Capital lease obligations............................................ 8,000 Deferred rent........................................................ 21,000 122,000 122,000 Preferred stock, authorized 60,000,000 shares: Series A Redeemable Convertible Preferred Stock, $.001 par value, 7,330,000 shares authorized, 7,330,000 shares issued and outstanding at December 31, 1997 and 1998, respectively, stated at liquidation value, net of related expenses.................... 3,833,000 4,218,000 Series B Redeemable Convertible Preferred Stock, $.001 par value, 8,000,000 shares authorized, 8,000,000 shares issued and outstanding at December 31, 1997 and 1998, respectively, stated at liquidation value, net of related expenses.................... 12,944,000 Series C Redeemable Convertible Preferred Stock, $.001 par value, 16,666,667 shares authorized, 16,666,667 shares issued and outstanding at December 31, 1997 and 1998, respectively, stated at liquidation value, net of related expenses.................... 79,332,000 Stockholders' deficit: Common stock, $.001 par value, 100,000,000 shares authorized, 10,012,000 shares and 10,392,000 shares issued and outstanding at December 31, 1997 and 1998, respectively, and 42,388,667 shares outstanding on a pro forma basis................................. 10,000 10,000 42,000 Additional paid-in capital......................................... 431,000 19,563,000 116,025,000 Deferred compensation.............................................. (8,666,000) (8,666,000) Other comprehensive loss........................................... (37,000) (37,000) Accumulated deficit................................................ (3,841,000) (54,263,000) (54,263,000) ----------- ------------ ------------- Total stockholders' (deficit)........................................ (3,400,000) (43,393,000) 53,101,000 ----------- ------------ ------------- Total liabilities and stockholders' deficit.......................... $ 786,000 $ 60,986,000 $60,986,000 ----------- ------------ ------------- ----------- ------------ -------------
SEE ACCOMPANYING NOTES. F-3 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 5,1996 (DATE OF INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER ------------------------------- 31, 1996 1997 1998 -------------- -------------- --------------- Revenues........................................................ $ $ 460,000 $ 5,329,000 Operating expenses: Product and technology development............................ 36,000 1,229,000 6,816,000 Sales and marketing........................................... 12,000 2,108,000 29,274,000 General and administrative.................................... 78,000 648,000 4,600,000 Depreciation and amortization................................. 2,000 38,000 774,000 Stock-based compensation expense.............................. 10,421,000 -------------- -------------- --------------- Total operating expenses........................................ 128,000 4,023,000 51,885,000 -------------- -------------- --------------- Loss from operations............................................ (128,000) (3,563,000) (46,556,000) Other income (expense): Interest income............................................... 35,000 715,000 Interest expense.............................................. (45,000) -------------- -------------- --------------- Net loss........................................................ (128,000) (3,528,000) (45,886,000) Preferred stock dividends and accretion......................... -- (185,000) (4,536,000) -------------- -------------- --------------- Net loss available to common shareholders....................... $ (128,000) $ (3,713,000) $ (50,422,000) -------------- -------------- --------------- -------------- -------------- --------------- Historical basic and diluted net loss per common share.......... $ (0.01) $ (0.37) $ (4.94) -------------- -------------- --------------- -------------- -------------- --------------- Historical number of shares used in computing basic and diluted net loss per share............................................ 9,147,223 10,012,000 10,202,000 -------------- -------------- --------------- -------------- -------------- --------------- Pro forma basic and diluted net loss per share.................. $ (1.09) --------------- --------------- Number of shares used in computing pro forma basic and diluted net loss per share............................................ 42,198,667 --------------- ---------------
SEE ACCOMPANYING NOTES. F-4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL OTHER ----------------------- PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME TOTAL ---------- ----------- ----------- ------------- -------------- --------------- ------------ Balance at March 5, 1996 (date of inception)........... $ $ $ $ $ $ Sale of common stock... 10,012,000 10,000 431,000 441,000 Net loss for the period............... (128,000) (128,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ Balance at December 31, 1996................. 10,012,000 10,000 431,000 (128,000) 313,000 Accretion of preferred stock................ (185,000) (185,000) Net loss for the year................. (3,528,000) (3,528,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ Balance at December 31, 1997................. 10,012,000 10,000 431,000 (3,841,000) (3,400,000) Deferred compensation related to stock options, net of cancellations........ 19,087,000 (19,087,000) Amortization of deferred compensation......... 10,421,000 10,421,000 Exercise of common stock options........ 380,000 45,000 45,000 Preferred stock dividends and accretion............ (4,536,000) (4,536,000) Net loss for the year................. (45,886,000) (45,886,000) Translation adjustment........... (37,000) (37,000) ------------ Comprehensive loss..... (45,923,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ Balance at December 31, 1998................. 10,392,000 $ 10,000 $19,563,000 $(54,263,000) $ (8,666,000) $ (37,000) $(43,393,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ ---------- ----------- ----------- ------------- -------------- --------------- ------------
SEE ACCOMPANYING NOTES. F-5 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER ------------------------------- 31, 1996 1997 1998 -------------- -------------- --------------- OPERATING ACTIVITIES Net loss........................................................ $ (128,000) $ (3,528,000) $ (45,886,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................... 1,000 38,000 774,000 Provision for bad debts..................................... 60,000 Amortization of deferred compensation....................... 10,421,000 Deferred rent............................................... 21,000 101,000 Changes in operating assets and liabilities: Accounts receivable....................................... (27,000) (493,000) Other assets.............................................. (30,000) (1,773,000) Accounts payable and accrued expenses..................... 227,000 5,356,000 Deferred revenues......................................... 20,000 795,000 -------------- -------------- --------------- Net cash used in operating activities........................... (127,000) (3,279,000) (30,645,000) INVESTING ACTIVITIES Purchase of fixed assets........................................ (30,000) (249,000) (4,395,000) Intangible assets............................................... (31,000) (241,000) -------------- -------------- --------------- Net cash used in investing activities........................... (30,000) (280,000) (4,636,000) FINANCING ACTIVITIES Issuance of common stock........................................ 441,000 45,000 Issuance of redeemable convertible preferred stock, net of related expenses.............................................. 3,647,000 88,125,000 Issuance of convertible subordinated notes...................... 6,000,000 Repayment of convertible subordinated notes..................... (6,000,000) (Loans) repayments (to) from stockholders....................... (54,000) 121,000 (67,000) Payments under capital leases................................... (3,000) (112,000) -------------- -------------- --------------- Net cash provided by financing activities....................... 387,000 3,765,000 87,991,000 Effect of exchange rate changes on cash and cash equivalents.... (5,000) -------------- -------------- --------------- Net increase in cash and cash equivalents....................... 230,000 206,000 52,705,000 Cash and cash equivalents, beginning of period.................. 230,000 436,000 -------------- -------------- --------------- Cash and cash equivalents, end of period........................ $ 230,000 $ 436,000 $ 53,141,000 -------------- -------------- --------------- -------------- -------------- --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid................................................... $ $ $ 45,000 -------------- -------------- --------------- -------------- -------------- --------------- NON-CASH FINANCING ACTIVITIES Acquisition of fixed assets through capital leases.............. $ $ 21,000 $ 314,000 -------------- -------------- --------------- -------------- -------------- ---------------
SEE ACCOMPANYING NOTES. F-6 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND DESCRIPTION OF BUSINESS The accompanying consolidated financial statements include the accounts of StarMedia Network, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All intercompany account balances and transactions have been eliminated in consolidation. StarMedia Network, Inc. was incorporated under Delaware law in March 1996. The Company develops and maintains www.starmedia.com, a branded Internet online network (the "Network") located on the World Wide Web (the "Web"). The Network is organized around interest specific channels, community features, search capabilities and online shopping in Spanish and Portuguese, targeted to Latin America. INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET (UNAUDITED) In February 1999, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission ("SEC") that would permit the Company to sell shares of the Company's common stock in connection with a proposed initial public offering ("IPO"). In conjunction with a qualified IPO, all outstanding shares of Series A, B and C Redeemable Convertible Preferred Stock, automatically convert into shares of Common Stock on a one for one basis. Accordingly, the effect of the conversions has been reflected in the accompanying unaudited pro forma balance sheet as if they had occurred as of December 31, 1998. REVENUE RECOGNITION The Company's revenues are derived principally from the sale of banner advertisements and sponsorships, some of which also involve more 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 Network. The sponsor buttons generally provide users with direct links to sponsor homepages that exist within the Network which are usually focused on selling sponsor merchandise and services to users of the Network. Advertising revenues on both banner and sponsorship contracts 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," or times that an advertisement appears in pages viewed by users of the Company's Network. 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. 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. A number of the Company's agreements provide for the Company to receive revenues from electronic commerce transactions. These revenues are recognized by the Company upon notification from the advertiser of revenues earned by the Company and, to date, have not been significant. F-7 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues from barter transactions are recognized during the period in which the advertisements are displayed on the Company's Network. Barter transactions are recorded at the lower of estimated fair value of the goods or services received or the estimated fair value of the advertisements given. For the year ended December 31, 1997, substantially all of the Company's revenues were derived from barter transactions. For the year ended December 31, 1998, revenues derived from barter transactions, were approximately $2.4 million. Deferred revenues are primarily comprised of billings in excess of recognized revenues relating to advertising contracts and sponsorship and banner advertising contracts. PRODUCT DEVELOPMENT Costs incurred in the classification and organization of listings within the Network and the development of new products and enhancements to existing products are charged to expense as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based upon the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. CASH AND CASH EQUIVALENTS The Company considers all financial instruments with a maturity of three months or less when purchased 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 and trade names and are being amortized on a straight-line basis over a period of five years. 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. F-8 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS Advertising costs are expensed as incurred. For the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998, advertising expense amounted to approximately $0, $1,610,000 and $21,246,000, respectively. 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. STOCK-BASED COMPENSATION The Company grants stock options generally for a fixed number of shares to certain employees with an exercise price equal to or below 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. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides an alternative to APB Opinion No. 25 in accounting for stock-based compensation. 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 5). COMPUTATION OF HISTORICAL NET LOSS PER SHARE The Company calculates earnings per share in accordance with SFAS No. 128, "Computation of Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. Accordingly, basic earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent 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); common equivalent 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. The Company maintains the majority of its cash and cash equivalents with one financial institution. 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 due principally from large U.S. companies under stated contract terms and the Company provides for estimated credit losses at the time of sale. Such losses have not been significant to date. F-9 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair values. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile and Colombia is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates for the year for revenues, costs, and expenses. Translation gains and losses are deferred and accumulated as a component of stockholders' deficit. The functional currency of the Company's subsidiaries in highly inflationary economies, Mexico, Uruguay, and Venezuela, is the U.S. dollar. Accordingly, for those subsidiaries that use U.S. dollars as the functional currency, monetary assets and liabilities are translated using the current exchange rate in effect at the year-end date, while nonmonetary assets and liabilities are translated at historical rates. Operations are generally translated at the weighted average exchange rate in effect during the period. The resulting foreign exchange gains and losses are recorded in the consolidated statement of operations. Revenues earned by the Company's foreign subsidiaries and assets of such foreign subsidiaries were not significant for all periods presented or at December 31, 1997 and 1998. 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. 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. The disclosure of segment information was not required as the Company operates in only one business segment. As of and for the period and years ended December 31, 1996, 1997 and 1998, substantially all of the Company's assets were located in the U.S. and the Company derived substantially all of its revenue from businesses located in the U.S. F-10 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31 -------------------------- 1997 1998 ----------- ------------- Computer equipment................................................ $ 172,000 $ 4,638,000 Furniture and fixtures............................................ 7,000 446,000 Leasehold improvements............................................ 121,000 1,038,000 ----------- ------------- 300,000 6,122,000 Less accumulated depreciation and amortization.................... (37,000) (719,000) ----------- ------------- $ 263,000 $ 5,403,000 ----------- ------------- ----------- -------------
3. STOCKHOLDERS' DEFICIT REDEEMABLE CONVERTIBLE PREFERRED STOCK In July 1997, the Company sold 7,330,000 shares of Series A Redeemable Convertible Preferred Stock (the "Series A Preferred") for $3,665,000, or $.50 per share. 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 an aggregate 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 Preferred, Series B Preferred and the Series C Preferred (collectively, the "Preferred Stock") are convertible into common stock on a one for one basis, subject to certain anti-dilution provisions, as defined, at any time at the option of the holder or automatically in the event of a qualified IPO. The holders of the Preferred Stock are 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 are entitled to a discretionary noncumulative dividend. Upon a liquidation, including any merger or acquisition where the existing stockholders of the Company own less than 50% of the successor entity, the holders of the Preferred Stock are entitled to have the Company redeem their shares at the original price paid per share (the "Original Investment"), plus a 10% cumulative return less any dividends paid. In the event that the Preferred Stock has not been converted as of December 31, 2004, the holders of the Preferred Stock can elect to have the Company redeem their Preferred Stock for an amount equal to their original investment plus any dividends declared but unpaid. No Preferred Stock dividends have been declared or paid as of December 31, 1998. At December 31, 1997 and 1998, total cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $183,000 and $4,233,000, respectively. The Company has recorded issuance costs incurred in connection with the Preferred Stock as discounts at issuance and is accreting the discounts from the date of issuance through the date of mandatory redemption on December 31, 2004. F-11 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. STOCKHOLDERS' DEFICIT (CONTINUED) CONVERTIBLE SUBORDINATED NOTES In January 1998 the Company issued $4,000,000 8% convertible subordinated notes due at the earlier of the closing of the Series B Preferred financing, or on July 21, 1998. In August 1998 the Company issued $2,000,000 8% convertible subordinated notes due at the earlier of the closing of the Series C Preferred financing or on December 31, 1998. All amounts outstanding were repaid during 1998 in accordance with their terms. 4. LOSS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER ------------------------------- 31, 1996 1997 1998 -------------- -------------- --------------- Numerator: Net loss...................................................... $ (128,000) $ (3,528,000) $ (45,886,000) Preferred stock dividends and accretion....................... -- (185,000) (4,536,000) -------------- -------------- --------------- Numerator for basic and diluted loss per share--net loss available for common stockholders............................. $ (128,000) $ (3,713,000) $ (50,422,000) -------------- -------------- --------------- -------------- -------------- --------------- Denominator: Denominator for basic and dilutive loss per share-- weighted average shares.............................................. 9,147,223 10,012,000 10,202,000 -------------- -------------- --------------- -------------- -------------- --------------- Basic and diluted net loss per share............................ $ (0.01) $ (0.37) $ (4.94) -------------- -------------- --------------- -------------- -------------- ---------------
Diluted net loss per share for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998, does not include the effect of options to purchase 0, 1,804,933 and 6,131,933 shares of common stock, respectively, or 0, 7,330,000, and 31,996,667 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 during each period. F-12 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LOSS PER SHARE (CONTINUED) The following table sets forth the computation of the unaudited pro forma basic and diluted loss per share, assuming conversion of the Preferred Stock as of January 1, 1998:
YEAR ENDED DECEMBER 31, 1998 --------------- Numerator: Net loss available to common stockholders.................................. $ (50,422,000) Preferred Stock dividends and accretion.................................... 4,536,000 --------------- Numerator for pro forma loss available to common stockholders................ $ (45,886,000) --------------- --------------- Denominator: Weighted average number of common shares................................... 10,202,000 Assumed conversion of Preferred Stock to common shares (if converted method).................................................................. 31,996,667 --------------- Denominator for pro forma basic and diluted loss per share................... 42,198,667 --------------- --------------- Pro forma basic and diluted net loss per share............................... $ (1.09) --------------- ---------------
5. STOCK OPTIONS In January 1997, the Company adopted the 1997 Stock Option Plan and, in July 1998, the Company adopted the 1998 Stock Option Plan (collectively, the "Option Plans"). The 1997 Stock Option Plan and the 1998 Stock Plan provide for the authorization of 10,000,000 shares. In February 1999, an additional 7,000,000 shares were reserved for issuance pursuant to the 1998 Stock Option Plan. The Option Plans provide for the granting of incentive stock options or non-qualified stock options to purchase common stock to eligible participants. Options granted under the Option Plan are for periods not to exceed ten years. In July 1998, approximately 1,400,000 non-qualified options outstanding were exchanged for incentive stock options having generally equivalent terms as the non-qualified options. Other than options to purchase 2,000,000 and 1,500,000 shares granted in April and December 1998, respectively, which were immediately vested, options outstanding under the Option Plans generally vest one-third after the first year of service and ratably each month over the next two years. 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 $19,087,000. This deferred compensation is being amortized for financial reporting purposes over the vesting period of the options and the amount recognized as expense during the year ended December 31, 1998 amounted to approximately $10,421,000. F-13 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCK OPTIONS (CONTINUED) The following transactions occurred with respect to the Option Plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ --------------- Granted........................................................ 1,814,933 $ 0.42 Canceled....................................................... (10,000) .50 ------------ Outstanding, December 31, 1997................................. 1,804,933 .42 Granted........................................................ 6,792,000 .78 Canceled....................................................... (2,085,000) .50 Exercised...................................................... (380,000) .12 ------------ Outstanding, December 31, 1998................................. 6,131,933 $ 0.81 ------------ ------------
The following table summarizes information concerning currently outstanding options:
OPTIONS OUTSTANDING ----------------------------- OPTIONS EXERCISABLE WEIGHTED- ------------------------- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE - ---------------------------------------------- ------------ --------------- ----------- ------------ ----------- $0.50......................................... 4,415,433 6.75 $ 0.50 3,062,987 $ 0.50 $1.60......................................... 1,716,500 7.00 $ 1.60 1,500,000 $ 1.60 ------------ ------------ 6,131,933 4,562,987 ------------ ------------ ------------ ------------
Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
ASSUMPTIONS 1997 1998 - ------------------------------------------------------------------------------ --------------- ---------------- Volatility factor of the expected market price of the Company's common stock....................................................................... 0.000 0.000 Average risk-free interest rate............................................... 6.00%-6.40% 4.440%-5.70% Dividend yield................................................................ 0.0% 0.0% Average life.................................................................. 5 years 5 years
Because the determination of fair value of all options granted after such time as the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph, the above results may not be representative of future periods. 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 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 stock options. F-14 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCK OPTIONS (CONTINUED) The Company's pro forma information is as follows:
1997 1998 -------------- --------------- Pro forma net loss available to common stockholders.............................. $ (3,749,000) $ (51,276,000) Pro forma basic and diluted loss per share....................................... $ (0.37) $ (5.03)
6. INCOME TAXES For Federal income tax purposes at December 31, 1998, the Company had net operating loss carryfowards of approximately $36,500,000 which expire from 2011 through 2018. The net operating loss carryforwards may be subject to Section 382 of the Internal Revenue Code, which imposes annual limitations on their utilization. A valuation allowance has been recognized to fully offset the deferred tax assets, after considering deferred tax liabilities. Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31 ------------------------------- 1997 1998 -------------- --------------- Federal net operating loss carryforwards..................... $ 1,200,000 $ 12,422,000 Depreciation and amortization................................ (6,000) (227,000) Deferred rent................................................ 9,000 55,000 Other........................................................ 27,000 -------------- --------------- 1,203,000 12,277,000 Valuation allowance.......................................... (1,203,000) (12,277,000) -------------- --------------- $ -- $ -- -------------- --------------- -------------- ---------------
The effective income tax rate differs from the statutory rate as follows:
PERIOD FROM MARCH 5, 1996 (DATE OF YEAR ENDED DECEMBER INCEPTION) TO 31 DECEMBER 31, -------------------- 1996 1997 1998 --------------- --------- --------- Statutory rate................................................................. (34%) (34%) (34%) Non deductible losses from foreign operations.................................. 2 Permanent differences.......................................................... 8 Valuation allowance............................................................ 33 33 23 Other.......................................................................... 1 1 1 ----- --------- --------- Effective tax rate............................................................. --% --% --% ----- --------- --------- ----- --------- ---------
F-15 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS CAPITAL LEASE Included in computer equipment are assets acquired under a capital lease. The cost of such equipment as of December 31, 1997 and 1998 is approximately $21,000 and $335,000 and the related accumulated depreciation is approximately $1,000 and $51,000, respectively. Future minimum lease payments under the noncancelable capital lease as of December 31, 1998 are $231,000, including interest of $11,000, which is all due in 1999. In connection with the capital lease the Company has a letter of credit outstanding of approximately $144,000 at December 31, 1998. OPERATING LEASES The Company rents office space under noncancelable lease agreements. The minimum annual rental commitments under noncancelable operating leases that have initial or remaining terms in excess of one year are as follows: Year ended December 31: 1999........................................................... $ 330,000 2000........................................................... 330,000 2001........................................................... 330,000 2002........................................................... 286,000 2003........................................................... 182,000 ---------- $1,458,000 ---------- ----------
Rent expense amounted to approximately $0, $66,000 and $392,000 for the period from March 5, 1996 (date of inception) to December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively. 8. 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. 9. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION For the year ended December 31, 1997, three customers accounted for approximately 38%, 23%, and 18% of the Company's total revenue, respectively. For the year ended December 31, 1998, two customers accounted for approximately 23% and 16% of the Company's total revenue, respectively. 10. SUBSEQUENT EVENTS In March 1999 the Company entered into two separate agreements to purchase all the outstanding equity interests of two entities. These acquisitions are subject to the completion of due diligence and the satisfaction of certain other conditions. The aggregate estimated purchase price and future compensation to be paid is approximately $13,000,000. The acquisitions will be accounted for as purchases. F-16 UNDERWRITING StarMedia and the underwriters for the offering (the "Underwriters") named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each Underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., J.P. Morgan Securities Inc. and Salomon Smith Barney Inc. are the representatives of the Underwriters.
Number of Underwriters Shares - ----------------------------------------------------------------------------------------------------- ----------- Goldman, Sachs & Co.................................................................................. BancBoston Robertson Stephens Inc.................................................................... J.P. Morgan Securities Inc........................................................................... Salomon Smith Barney Inc............................................................................. ----------- Total.......................................................................................... ----------- -----------
------------------------ If the Underwriters sell more shares than the total number set forth in the table above, the Underwriters have an option to buy up to an additional shares from StarMedia to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the Underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the Underwriters by StarMedia. Such amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares.
Paid by StarMedia ------------------ No Exercise Full Exercise ------------------ ------------- Per Share.......... $ $ Total.............. $ $
Shares sold by the Underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the Underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the Underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. StarMedia and its directors, officers and stockholders have agreed with the Underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. Please see "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions. At the request of StarMedia, the Underwriters have reserved for sale, at the initial public offering price, shares of common stock for certain directors, employees and associates of StarMedia. There can be no assurance that any of the reserved shares will be so purchased. The number of shares available for sale to the general public in the offering will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general U-1 public on the same basis as the other shares offered hereby. Prior to this offering, there has been no public market for the shares. The initial public offering price will be negotiated among StarMedia and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be StarMedia's historical performance, estimates of the business potential and earnings prospects of StarMedia, an assessment of StarMedia's management and the consideration of the above factors in relation to market valuation of companies in related businesses. StarMedia has applied to list the common stock on the Nasdaq National Market under the symbol "STRM". In connection with this offering, the Underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater number of shares than they are required to purchase in this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. The Underwriters also may impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such Underwriter in stabilizing or short covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The Underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. StarMedia estimates that its share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . J.P. Morgan Securities Inc., an affiliate of J.P. Morgan & Co., acted as a placement agent for StarMedia in connection with the private placement of StarMedia's series C redeemable convertible preferred stock in August 1998. StarMedia incurred customary placement fees to J.P. Morgan Securities Inc. for such services. Bayview Investors, an affiliate of BancBoston Robertson Stephens Inc., purchased 200,000 shares of StarMedia's series B redeemable convertible preferred stock in connection with StarMedia's private placement in February 1998 and 20,834 shares of StarMedia's series C redeemable convertible preferred stock in connection with StarMedia's private placement in August 1998. StarMedia has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------ TABLE OF CONTENTS
Page ----- Prospectus Summary................... 3 Risk Factors......................... 6 Use of Proceeds...................... 20 Dividend Policy...................... 20 Capitalization....................... 21 Dilution............................. 22 Selected Consolidated Financial Data............................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24 Business............................. 32 Management........................... 45 Certain Transactions................. 52 Principal Stockholders............... 53 Description of Capital Stock......... 55 Shares Eligible for Future Sale...... 58 Validity of Common Stock............. 59 Experts.............................. 59 Available Information................ 59 Index to Financial Statements........ F-1 Underwriting......................... U-1
------------------------ Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as underwriter and with respect to an unsold allotment or subscription. Shares STARMEDIA NETWORK, INC. Common Stock --------------- [LOGO] ------------ GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS J.P. MORGAN & CO. SALOMON SMITH BARNEY Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the costs and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the issuance and distribution of the common stock being registered. SEC registration fee............................................. $ 20,850 NASD filing fee.................................................. 8,000 NASDAQ listing fee............................................... * Legal fees and expenses.......................................... * Accountants' fees and expenses................................... * Printing expenses................................................ 250,000 Blue sky fees and expenses....................................... 5,000 Transfer Agent and Registrar fees and expenses................... 15,000 Miscellaneous.................................................... * --------- Total...................................................... $ * --------- ---------
- ------------------------ * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL makes provision for the indemnification of officers and directors in terms sufficiently broad to indemnify officers and directors under certain circumstances from liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The certificate of incorporation of StarMedia provides for indemnification of our directors against, and absolution of, liability to StarMedia and its stockholders to the fullest extent permitted by the DGCL. StarMedia intends to purchase directors' and officers' liability insurance covering certain liabilities that may be incurred by our directors and officers in connection with the performance of their duties. The employment agreements we have with Fernando J. Espuelas and Jack C. Chen provide that such executives will be indemnified by us for all liabilities relating to their status as officers or directors of StarMedia, and any actions committed or omitted by the executives, to the maximum extent permitted by law of the State of Delaware. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has sold and issued the following securities since March 5, 1996 (inception): 1. From March 5, 1996 to December 31, 1998, the Registrant issued and sold 10,392,000 shares of common stock at prices ranging from $0.0056 to $0.50 per share. II-1 2. In 1997, the Registrant issued and sold 7,330,000 shares of series A redeemable convertible preferred stock for an aggregate purchase price of $3,665,000. 3. On January 21, 1998, the Registrant issued 8% convertible subordinated notes due July 21, 1998 to the fl@tiron Fund, LLC in the aggregate principal amount of $410,000 and to Chase Venture Capital Associates, L.P. in the aggregate amount of $3,590,000. 4. In February 1998, the Registrant issued and sold 8,000,000 shares of series B redeemable convertible preferred stock for an aggregate purchase price of $12,000,000. 5. On August 14, 1998, the Registrant issued 8% convertible subordinated notes due December 31, 1998 to the Flatiron Fund 1998/99, LLC in the aggregate principal amount of $200,000 and to Chase Venture Capital Associates, L.P. in the aggregate amount of $1,800,000. 6. In August 1998, the Registrant issued and sold 16,666,667 shares of series C redeemable convertible preferred stock for an aggregate purchase price of $80,000,000. 7. Since December 31, 1998, the Registrant issued 35,000 shares of common stock upon the exercise of options at exercise prices ranging from $0.50 to $1.50 per share. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 1.1 Form of underwriting agreement. 3.1 Certificate of incorporation, as amended. 3.2* Form of amended and restated certificate of incorporation to be in effect upon the closing of this offering. 3.3 By-laws. 3.4* Form of amended and restated bylaws to be in effect upon the closing of this offering. 4.1* Specimen common stock certificate. 4.2 Please see Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the certificate of incorporation and bylaws defining the rights of holders of common stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 1997 stock option plan. 10.2 1998 stock plan. 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and StarMedia, as amended. 10.4 Amended and restated registration rights agreement. 10.5 Amendment no. 1 to amended and restated registration rights agreement. 10.6 Series A convertible stock purchase agreement, dated as of July 25, 1997, between StarMedia and several purchasers named in attached schedule. 10.7 Series B convertible stock purchase agreement, dated as of February 20, 1998, between StarMedia and several purchasers named in attached schedule. 10.8 Series C convertible stock purchase agreement, dated as of August 24, 1998, between StarMedia and several purchasers named in attached schedule.
II-2
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 21.1 List of subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 24.1 Power of attorney (please see Signature Page). 27.1 Financial Data Schedule.
- ------------------------ * To be filed by amendment. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on this 18th day of March, 1999. STARMEDIA NETWORK, INC. BY: /S/ FERNANDO J. ESPUELAS ----------------------------------------- Fernando J. Espuelas CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY We, the undersigned directors and/or officers of StarMedia Network, Inc. (the "Company"), hereby severally constitute and appoint Fernando J. Espuelas, chief executive officer, and Jack C. Chen, president, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, the registration statement on Form S-1 filed with the Securities and Exchange Commission, and any and all amendments to said registration statement (including post-effective amendments), and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Company, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below: Dated: March 18, 1999 /s/ FERNANDO J. ESPUELAS -------------------------------------------- Fernando J. Espuelas Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: March 18, 1999 /s/ JACK C. CHEN -------------------------------------------- Jack C. Chen President and Director Dated: March 18, 1999 /s/ STEVEN J. HELLER -------------------------------------------- Steven J. Heller Vice President, Finance and Administration (Principal Financial and Accounting Officer)
II-4 Dated: March 18, 1999 /s/ DOUGLAS M. KARP -------------------------------------------- Douglas M. Karp Director Dated: March 18, 1999 /s/ CHRISTOPHER T. LINEN -------------------------------------------- Christopher T. Linen Director Dated: March 18, 1999 /s/ GERARDO M. ROSENKRANZ -------------------------------------------- Gerardo M. Rosenkranz Director Dated: March 18, 1999 /s/ SUSAN L. SEGAL -------------------------------------------- Susan L. Segal Director Dated: March 18, 1999 /s/ FREDERICK R. WILSON -------------------------------------------- Frederick R. Wilson Director
II-5 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the consolidated financial statements of StarMedia Network, Inc. as of December 31, 1997 and 1998, and the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998, and have issued our report thereon dated March 5, 1999 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP /s/ Ernst & Young LLP New York, New York March 5, 1999 S-1 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS STARMEDIA NETWORK INC.
COLUMN A COLUMN B COLUMN C COLUMN D ADDITIONS BALANCE AT CHARGED TO COSTS CHARGED TO OTHER DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... -- $ 60,000 -- -- YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... -- -- -- -- PERIOD ENDED MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... -- -- -- -- COLUMN A COLUMN E BALANCE AT END DESCRIPTION OF PERIOD YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 60,000 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... -- PERIOD ENDED MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... --
S-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 1.1 Form of underwriting agreement. 3.1 Certificate of incorporation, as amended. 3.2* Form of amended and restated certificate of incorporation to be in effect upon the closing of this offering. 3.3 By-laws. 3.4* Form of amended and restated bylaws to be in effect upon the closing of this offering. 4.1* Specimen common stock certificate. 4.2 Please see Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the certificate of incorporation and bylaws defining the rights of holders of common stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 1997 stock option plan. 10.2 1998 stock plan. 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and StarMedia, as amended. 10.4 Amended and restated registration rights agreement. 10.5 Amendment no. 1 to amended and restated registration rights agreement. 10.6 Series A convertible stock purchase agreement, dated as of July 25, 1997, between StarMedia and several purchasers named in attached schedule. 10.7 Series B convertible stock purchase agreement, dated as of February 20, 1998, between StarMedia and several purchasers named in attached schedule. 10.8 Series C convertible stock purchase agreement, dated as of August 24, 1998, between StarMedia and several purchasers named in attached schedule. 21.1 List of subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 24.1 Power of attorney (please see Signature Page). 27.1 Financial Data Schedule.
- ------------------------ * To be filed by amendment. EX-1.1 2 UNDERWRITING AGREEMENT Exhibit 1.1 Draft of March 18, 1999 3373664.04 STARMEDIA NETWORK, INC. Common Stock (par value $0.001 per share) UNDERWRITING AGREEMENT ---------------------- ........................, 1999 Goldman, Sachs & Co., BancBoston Robertson Stephens JP Morgan Salomon Smith Barney As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 Ladies and Gentlemen: StarMedia Network, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of ........ shares (the "Firm Shares") and, at the election of the Underwriters, up to ........ additional shares (the "Optional Shares") of Common Stock (par value $0.001 per share) ("Stock") of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the "Shares"). 1. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-1 (File No. 333-....) and all pre-effective amendments thereto (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (c) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto, and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (d) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than pursuant to the grant or exercise of options described in the Prospectus) or -2- long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; (e) The Company and its subsidiaries do not own any real property and have good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, except where the failure to be so qualified would not be reasonably likely to have a material adverse effect now or in the future on the business, financial condition, stockholder's equity or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"); and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (g) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares [and except as set forth in the Prospectus]) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (h) The unissued Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (i) The issue and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement -3- or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, other than breaches or defaults that are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any material order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (j) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (k) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (l) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (m) Other than as set forth in the Prospectus, the Company and its subsidiaries own or have the right to use pursuant to license, sublicense, agreement, or permission all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, confidential information, proprietary rights and processes ("Intellectual Property") necessary for the operation of the business of the Company and its subsidiaries as described in the Prospectus and have taken all steps reasonably necessary to secure assignments of such Intellectual Property from its employees and contractors; to the Company's knowledge, none of the technology employed by the Company or its subsidiaries has been obtained or is being used by the Company or its subsidiaries in violation of any contractual or fiduciary obligation binding on the Company, its subsidiaries or any of their respective directors or executive officers or any of their respective employees or consultants; and the Company and its subsidiaries have taken and will maintain reasonable measures to prevent the unauthorized dissemination or publication of its confidential information. -4- To the Company's knowledge, neither the Company nor any of its subsidiaries have interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties, and the Company and its subsidiaries have not received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that the Company or any of its subsidiaries must license or refrain from using any intellectual property rights of any third party) which, if the subject of any unfavorable decision, ruling or finding would, individually or in the aggregate, have a Material Adverse Effect; (n) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (o) Ernst & Young LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (p) The Company is in the process of reviewing its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review to date, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a Material Adverse Effect or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. 2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $................, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase -5- as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to ................... Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on ............., 1999 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices of Brobeck, Phleger & Harrison, LLP, 1633 Broadway, New York, New York 10019 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 6:00 p.m., New York City time, -6- on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you -7- and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its security holders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent, except that the Company may issue such securities in exchange for all of the equity or substantially all of the equity or assets of a company in connection with a merger or acquisition, provided that prior to any such issuance the recipients of such securities shall have agreed with Goldman, Sachs & Co. in writing to be bound by this provision for the remainder of the 180-day period; (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the -8- accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To use its best efforts to list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); (j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act; and (k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the reasonable fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, -9- true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Ropes & Gray, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii) and (xii) of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Brobeck, Phleger & Harrison, LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and, upon payment therefor in accordance with the terms hereof, will be fully paid and non-assessable; and the Shares conform in all material respects to the description of the Stock contained in the Prospectus; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of [Florida, New Jersey and New York] (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); -10- (iv) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares [and except as otherwise set forth in the Prospectus]) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (v) Any material real property and buildings held under lease by the Company, including the Company's New York headquarters, are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries (in giving the opinion in this clause, such counsel may state that no examination of record titles for the purpose of such opinion has been made, and that they are relying upon a general review of the titles of the Company and its subsidiaries, upon opinions of local counsel and abstracts, reports and policies of title companies rendered or issued at or subsequent to the time of acquisition of such property by the Company or its subsidiaries, upon opinions of counsel to the lessors of such property and, in respect to matters of fact, upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions, abstracts, reports, policies and certificates); (vi) To such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vii) This Agreement has been duly authorized, executed and delivered by the Company; (viii) The issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument which is filed as an exhibit to, or referred to, in the Registration Statement (in giving the opinion in this clause counsel may attach to such opinion a list of the foregoing agreements and instruments), nor will such action result in any violation of the provisions -11- of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (ix) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (x) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xi) The Company is not an "investment company", as such term is defined in the Investment Company Act; and (xii) Although such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (xi) of this Section 7(c), they have participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof with representatives of the Underwriters and their counsel, officers and representatives of the Company, and representatives of the independent certified public accountants of the Company, and nothing has come to their attention that has caused them to believe that the Registration Statement (other than with respect to the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Registration Statement, as to which they need express no opinion), at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (other than with respect to the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Prospectus, as to which they need express no opinion), as of its date or as of such Time of Delivery, contained an untrue statement of material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and that the Registration Statement and the Prospectus (other than the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Prospectus, as to which they need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the rules and regulations thereunder, and to their knowledge, no amendment to the Registration Statement is required -12- to be filed and there are no contracts or documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. (d) Each of [insert counsel for foreign subsidiaries], counsel to the Company, shall have furnished to you their written opinion, dated such time of delivery, in form and substance satisfactory to you, with respect to the matters set forth in clauses (iv) and (vi) of the foregoing paragraph (c), relating to [insert foreign subsidiaries], respectively; (e) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Ernst & Young LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto); (f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in Clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (g) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (h) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on NASDAQ ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities; or (iv) the outbreak or escalation of hostilities involving the United -13- States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this Clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (i) The Shares to be sold at such Time of Delivery shall have been duly listed for quotation on NASDAQ; (j) The Company has obtained and delivered to the Underwriters executed copies of agreements from stockholders of the Company holding in the aggregate in excess of 95% of the shares outstanding on the date of this Agreement, substantially to the effect set forth in Subsection 5(e) hereof in form and substance satisfactory to you; (k) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (l) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (f) of this Section and as to such other matters as you may reasonably request. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstances in which they were made, or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. -14- (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstances in which they were made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. -15- (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and -16- conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or -17- the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration Department; and if to the Company shall be delivered or sent by mail to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. -18- 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding, please sign and return to us eight counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, StarMedia Network, Inc. By: ---------------------------------- Name: Title: Accepted as of the date hereof: Goldman, Sachs & Co. BancBoston Robertson Stephens JP Morgan Salomon Smith Barney By: ------------------------------------- (Goldman, Sachs & Co.) On behalf of each of the Underwriters -19- SCHEDULE I
NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF PURCHASED IF FIRM SHARES MAXIMUM OPTION UNDERWRITER TO BE PURCHASED EXERCISED ----------- --------------- ------------------ Goldman, Sachs & Co........................................... BancBoston Robertson Stephens................................. JP Morgan..................................................... Salomon Smith Barney.......................................... [NAMES OF OTHER UNDERWRITERS]................................. --------- -------- Total .................... ''''''''' ''''''''
-20- ANNEX I Pursuant to Section 7(d) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, financial forecasts and/or pro forma financial information) examined by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished to the representatives of the Underwriters (the "Representatives") and are attached hereto; (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus as indicated in their reports thereon copies of which are attached hereto and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, nothing came to their attention that cause them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, -1- inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Prospectus; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in Clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Prospectus; (D) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest financial statements included in the Prospectus) or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and -2- (F) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in Clause (E) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the examination referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. -3- EX-3.1 3 CERTIFICATE OF INCORPORATION EXHIBIT 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 03/05/1996 960064458-2592265 CERTIFICATE OF INCORPORATION OF StarMedia Network, Inc. FIRST: The name of this corporation is StarMedia Network, Inc., SECOND: Its registered office in the State of Delaware is to be located at Three Christina Centre, 201 N. Walnut Street, Wilmington DE 19801. County of New Castle. The registered agent in charge thereof is The Company Corporation, address "same as above". THIRD: The nature of the business and, the objects and purposes proposed to be transacted, promoted and carried on, are to do any or all the things herein mentioned as fully and to the same extent as natural persons might or could do, and in any part of the world, viz: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The amount of the total authorized capital stock of this corporation is divided into 1,500 shares of stock at NO par value. FIFTH: The name and mailing address of the incorporator is as follows: Regina Cephas, Three Christina Centre, 201 N. Walnut St., Wilmington DE 19801 SIXTH: The Directors shall have power to make and to alter or amend the By-Laws, to fix the amount to be reserved as working capital, and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchise of the Corporation. With the consent in writing, and pursuant to a vote of the holders of a majority of the capital stock issued and outstanding, the Directors shall have the authority to dispose, in any manner, of the whole property of this corporation. The By-Laws shall determine whether and to what extent the accounts and books of this corporation, or any of them shall be open to the inspection of the stockholder; and no stockholder shall have any right of inspecting any account, or book or document of this Corporation, except as conferred by the law of the By-Laws, or by resolution of the stockholders. The stockholders and directors shall have power to hold their meetings and keep the books, documents and papers of the Corporation outside of the State of Delaware, at such places as may be from time to time designated by the By-Laws or by resolution of the stockholders or directors, except as otherwise required by the laws of Delaware. SEVENTH: Directors of the corporation shall not be liable to either the corporation or its stockholders for monetary damages for a breach of fiduciary duties unless the breach involves: (1) a director's duty of loyalty to the corporation or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) liability for unlawful payments of dividends or unlawful stock purchase or redemption by the corporation; or (4) a transaction from which the director derived an improper personal benefit. I, THE UNDERSIGNED, for the purpose of forming a Corporation under the laws of the State of Delaware, do make, file and record this Certificate and do certify that the facts herein are true; and I have accordingly hereunto set my hand. DATED: MARCH 5, 1996 /s/ Regina Cephas STATE OF DELAMARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 08/24/1998 981330041 - 2592265 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION StarMedia Network, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, duly adopted resolutions setting forth a proposed amendment of the Certificate of Incorporation of the Corporation (the "Amendment"), declaring the Amendment to be advisable and calling upon the stockholders of the Corporation to give consideration thereto. The resolution setting forth the Amendments is as follows: RESOLVED, that the directors deem it advisable that the Certificate of Incorporation of the Corporation be amended pursuant to Section 242 of the General Corporation Law of the State of Delaware by amending Article "FOURTH" to read in ITS entirety as follows: FOURTH: The authorized capital stock of the Corporation consists of (i) 60,000,000 shares of Preferred Stock, par value $0.001 per share, and (ii) 100,000,000 shares of Common Stock, par value $0.001 per share. The Preferred Stock may be issued in one or more series at the discretion of the Board of Directors, and each series shall have such designation, preferences, rights and restrictions as the Board of Directors shall designate. The number of shares of authorized Common Stock may be increased or decreased (but not below the number then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, voting together as a single class notwithstanding the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware. SECOND: That thereafter, in accordance with Section 228(a) of the General Corporation Law of the State of Delaware, the written consent of the necessary number of shares as required by statute were voted in favor of the Amendment. THIRD: That the Amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of the Corporation shall not be reduced under or by reason of the Amendment. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Jack C. Chen, its authorized officer, this 24th day of August, 1998. /s/ Jack C. Chen ---------------------------------------- Jack C. Chen President 2 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK OF STARMEDIA NETWORK, INC. StarMedia Network, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: That, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, as amended, of the Corporation, and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors, by unanimous written consent of its members, filed with the minutes of the Board, adopted a resolution providing for the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of the Series C Convertible Preferred Stock, which resolution is as follows: RESOLVED, that pursuant and subject to the provisions of Article Fourth of the Corporation's Certificate of Incorporation, as amended, there is hereby established a new series of Preferred Stock of the Corporation, consisting of 16,666,667 shares, par value $0.00l per share, designated as the Series C Convertible Preferred Stock and having those preferences, rights and restrictions as are set forth in Annex I attached hereto; STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:01 AM 08/24/1998 981330043 - 2592265 IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Jack C. Chen, its authorized officer, this 24th day of August, 1998. /s/ Jack C. Chen ---------------- Jack C. Chen President 2 ANNEX I SERIES A, SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK 1. Designation of Shares; Rank. 1A. Designation. The series of Preferred Stock designated and known as "Series A Convertible Preferred Stock" shall consist of 7,330,000 shares. The series of Preferred Stock designated and known as "Series B Convertible Preferred Stock" shall consist of 8,000,000 shares. The series of Preferred Stock designated and known as "Series C Convertible Preferred Stock" shall consist of 16,666,667 shares. The Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock are collectively at times referred to herein as the "Convertible Preferred Stock." 1B. Rank. The Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock shall, with respect to dividend rights, have the entitlements set forth herein and shall, with respect to rights on liquidation, dissolution and winding up of the affairs of the Company, rank pari passu; senior to all classes of the common stock of the Company (the "Common Stock") and other equity securities of the Company hereafter issued. 2. Voting. 2A. General. Except as may be otherwise provided in these terms of the Convertible Preferred Stock or by law, the Convertible Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation, including, but not limited to actions amending the Certificate of Incorporation of the Corporation to increase the number of authorized shares of Common Stock. Each share of Convertible Preferred Stock shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Convertible Preferred Stock is then convertible. 2B. Board Size. The Corporation shall not, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Convertible Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, increase the maximum number of directors constituting the Board of Directors to a number in excess of seven. 2C. Board Seats. Notwithstanding anything to the contrary provided in the Certificate of Incorporation, if the Corporation fails or refuses, for any reason or for no reason, to redeem on the Redemption Date (as defined in paragraph 7) all of the then outstanding shares of Convertible Preferred Stock for which redemption has been requested in accordance with the terms and provisions of paragraph 7, the holders of the Convertible Preferred Stock, voting as a separate class, shall be entitled to elect a majority of the directors of the Corporation. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing directors, the presence in person or by proxy (or the written consent) of the holders of a majority of the shares of Convertible Preferred Stock then outstanding shall constitute a quorum of the Convertible Preferred Stock for the election of directors to be elected solely by the holders of the Convertible Preferred Stock. A vacancy in any directorship elected by the holders of the Convertible Preferred Stock pursuant to the preceding sentence shall be filled only by vote or written consent of the holders of the Convertible Preferred Stock and a vacancy in any directorship elected by the holders of the Common Stock shall be filled only by vote or written consent of the holders of the Common Stock. 3. Dividends. The holders of the Convertible Preferred Stock shall be entitled to receive, out of funds legally available therefor, dividends at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Common Stock (treating each share of Convertible Preferred Stock as being equal to the number of shares of Common Stock (including fractions of a share) into which each share of Convertible Preferred Stock is then convertible). 4. Liquidation. Upon any Liquidation (as defined below) of the Corporation, the holders of the shares of Convertible Preferred Stock shall first be entitled, before any distribution or payment is made upon any stock ranking on liquidation junior to the Convertible Preferred Stock, to be paid, in preference to the Common Stock, the following amounts in cash: (i) in respect of each share of Series A Convertible Preferred Stock, the sum of (x) $0.50 (as adjusted for stock splits, stock dividends and the like) plus (y) an amount equal to 10% per annum on $0.50, which shall commence to accrue on the date of issuance of such shares of the Series A Convertible Preferred Stock and shall be cumulative, less (z) the aggregate amount of dividends declared and paid thereon; (ii) in respect of each share of Series B Convertible Preferred Stock, the sum of (x) $1.50 (as adjusted for stock splits, stock dividends and the like) plus (y) an amount equal to 10% per annum on $1.50, which shall commence to accrue on the date of issuance of such shares of Series B Convertible Preferred Stock and shall be cumulative, less (z) the aggregate amount of dividends declared and paid thereon; (iii) in respect of each share of Series C Convertible Preferred Stock, the sum of (x) $4.80 (as adjusted for stock splits, stock dividends and the like) plus (y) an amount equal to 10% per annum on $4.80, which shall commence to accrue on the date of issuance of such shares of Series C Convertible Preferred Stock and shall be cumulative, less (z) the aggregate amount of dividends declared and paid thereon; such amount payable with respect to one share of Convertible Preferred Stock being sometimes referred to as the "Liquidation Preference Payment" for such shares and with respect to all shares of Convertible Preferred Stock being sometimes referred to as the "Liquidation Preference Payments." If upon such Liquidation, the assets to be distributed among the holders of Convertible Preferred Stock shall be insufficient to permit payment in full to the holders of Convertible Preferred Stock of the Liquidation Preference Payments to which such holders would be entitled, then the entire assets of the Corporation to be so distributed shall be distributed among the holders of Convertible Preferred Stock in proportion to the aggregate Liquidation Preference Payments to which each such holder is entitled. Upon any Liquidation, immediately after the holders of Convertible Preferred Stock shall have been paid in full the Liquidation Preference Payments, the remaining net assets of the Corporation available for distribution shall be distributed ratably among the holders of Common Stock or other securities ranking junior to the Convertible Preferred Stock. Written notice of such Liquidation, stating a payment date, the amount of the Liquidation Preference Payments and the place where said Liquidation Preference Payments shall be payable, shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, not less than 2 20 days prior to the payment date stated therein, to the holders of record of Convertible Preferred Stock, such notice to be addressed to each such holder as its address as shown by the records of the Corporation. As used in this Certificate of Designation, the term Liquidation shall be deemed to include (i) any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or (ii) a consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction) in which the shareholders of the Corporation do not continue to hold a greater than a 50% interest in the successor entity, a transaction or series of transactions that results in the transfer of more than 50% of the voting power of the Corporation, and the sale, lease, abandonment, transfer or other disposition by the Corporation of all or substantially all its assets; provided, however, that for purposes of this Section 4 only, a Liquidation shall not include any of the events described in clause (ii) of the preceding sentence resulting in aggregate net proceeds to the stockholders of the Corporation a fair market value of at least $125,000,000. After the payment of the Liquidation Preference Payment with respect to any shares of Convertible Preferred Stock, such shares shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease. 5. Restrictions. 5A. Series Voting. At any time when shares of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock or Series C Convertible Preferred Stock are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by the Certificate of Incorporation, and in addition to any other vote required by law or the Certificate of Incorporation, the Corporation will not, without the prior written consent of the holders of a majority of the then outstanding shares of such series of Convertible Preferred Stock so affected, voting separately as a series, (i) amend, alter or repeal (whether by merger, consolidation, combination, reclassification or otherwise) any of the provisions of the Certificate of Incorporation of the Corporation (including, without limitation, the provisions of this Amended and Restated Certificate of Incorporation) or any of the bylaws of the Corporation in a manner that would disproportionately adversely affect the preferences, rights or powers, including, without limitation, the liquidation preference, of such series of Convertible Preferred Stock, or (ii) create or authorize the creation of any additional class or series of shares of stock or rights to acquire stock that ranks senior to or pari passu with such series of Convertible Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or increase the authorized amount of such series of Convertible Preferred Stock, or increase the authorized amount of any additional class or series of shares of stock that ranks senior to or pari passu with such series of Convertible Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or create or authorize any obligation or security convertible into shares of a series of Convertible Preferred Stock or into shares of any other class or series of stock that ranks senior to or pari passu with such series of the Convertible Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, whether any such creation, authorization or increase shall be by means of amendment to the Certificate of Incorporation or by merger, consolidation or otherwise, except to the extent a majority of the Board of Directors of the Corporation, such majority to include a majority of the directors not 3 designated in whole or in part by the holders of Common Stock, has approved any of the foregoing. 5B. Class Voting. At any time when shares of Convertible Preferred Stock are outstanding (except in the case of Section 5B(1) below, which shall apply so long as at least 8,500,000 shares of Convertible Preferred Stock remain outstanding), except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by the Certificate of Incorporation, and in addition to any other vote required by law or the Certificate of Incorporation, without the approval of the holders of a majority of the then outstanding shares of Convertible Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) together as a single class, the Corporation will not: 5B(1). Consent to any Liquidation, or permit any subsidiary to enter into any Liquidation (other than a merger of any subsidiary with or into any other subsidiary or the Corporation or the sale or other disposition of all or substantially all of the assets of any subsidiary to any other subsidiary or to the Corporation); 5B(2). Purchase or set aside any sums for the purchase of or pay any dividend or make any distribution on, any shares of stock other than the Convertible Preferred Stock, except for (x) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and (y) the purchase of all of the shares of Common Stock held either by a stockholder of the Corporation or by a former employee of the Corporation upon termination of his or her employment who acquired such shares directly from the Corporation, any such purchases under this clause (y) not to exceed $300,000 per annum in the aggregate for all such purchases by the Corporation, provided, that such purchases in excess of such amount may be made if approved by a majority of the directors of the Corporation designated solely by certain holders of Convertible Preferred Stock. 5B(3). Redeem or otherwise acquire any shares of Convertible Preferred Stock except as expressly authorized in paragraph 7 hereof or pursuant to a purchase offer made pro rata to all holders of the shares of Convertible Preferred Stock on the basis of the aggregate number of outstanding shares of Convertible Preferred Stock then held by each such holder. 6. Conversions. The holders of shares of Convertible Preferred Stock shall have the following conversion rights. 6A. Right to Convert. Subject to the terms and conditions of this paragraph 6, the holder of any share or shares of Convertible Preferred Stock shall have the right, at its option at any time, to convert any such shares of Convertible Preferred Stock (except that upon any Liquidation of the Corporation the right of conversion shall terminate at the close of business on the business day fixed for payment of the amount distributable on the Convertible Preferred Stock) into such number of fully paid and nonassessable shares of Common Stock as is obtained by (i) multiplying the number of shares of Convertible Preferred Stock so to be converted by $0.50 in the case of each share of Series A Convertible Preferred Stock, $1.50 in the case of each share of Series B Convertible Preferred Stock and $4.80 in the case of each share of Series C Convertible Preferred Stock and (ii) dividing the result by the conversion price of $0.50 per share in the case of each share of Series A Convertible Preferred Stock, $1.50 in the case of each share 4 of Series B Convertible Preferred Stock and $4.80 in the case of each share of Series C Convertible Preferred Stock or, in case an adjustment of such price has taken place pursuant to the further provisions of this paragraph 6, then by the conversion price as last adjusted and in effect at the date any share or shares of Convertible Preferred Stock are surrendered for conversion (each such price, or such price as last adjusted, being referred to as the "Series A Conversion Price," "Series B Conversion Price" or "Series C Conversion Price", as the case may be, and collectively as the "Series Conversion Prices"). Such rights of conversion shall be exercised by the holder thereof by giving written notice to the Corporation that the holder elects to convert a stated number of shares of Series A Convertible Preferred Stock and/or Series B Convertible Preferred Stock, as the case may be, into Common Stock together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued, and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Convertible Preferred Stock) at any time during its usual business hours on the date set forth in such notice. 6B. Issuance of Certificates; Time Conversion Effected. Promptly after the receipt of the written notice referred to in subparagraph 6A and surrender of the certificate or certificates for the share or shares of Convertible Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Convertible Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the applicable Series Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and a such time the rights of the holder of such share or shares of Convertible Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 6C. Fractional Shares; Dividends Partial Conversion. No fractional shares shall be issued upon conversion of Convertible Preferred Stock into Common Stock and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. As the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends declared and unpaid on the shares of Convertible Preferred Stock surrendered for conversion to the date upon which such conversion is deemed to take place as provided in subparagraph 6B. In case the number of shares of Convertible Preferred Stock represented by the certificate or certificates surrendered pursuant to subparagraph 6A exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Convertible Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional share of Common Stock would, except for the provisions of the first sentence of this subparagraph 6C, be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Convertible Preferred Stock for conversion an amount in cash 5 equal to she current market price of such fractional share as determined in good faith by the Board of Directors of the Corporation. 6D. Adjustment of Price Upon Issuance of Common Stock. Except as provided in subparagraph 6E, if and whenever the Corporation shall issue or sell, or is, in accordance with paragraphs 6D(1) through 6D(7), deemed to have issued or sold, any shares of Common Stock for a consideration per share less than a Series Conversion Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, such Series Conversion Price shall be reduced to the price determined by dividing (i) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Series Conversion Price and (b) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale. For purposes of this subparagraph 6D, the following subparagraphs 6D(l) to 6D(7) shall also be applicable: 6D(1). Issuance of Rights or Options. In case at any time the Corporation shall in any manner grant (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than a Series Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding. Except as otherwise provided in subparagraph 6D(3), no adjustments of a Series Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 6D(2). Issuance of Convertible Securities. In case the Corporation shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible 6 Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than a Series Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in subparagraph 6D(3), no adjustment of a Series Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any Options to purchase any such Convertible Securities for which adjustments of Series Conversion Prices have been or are to be made pursuant to other provisions of this subparagraph 6D, no further adjustment of a Series Conversion Prices shall be made by reason of such issue or sale. 6D(3). Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subparagraph 6D(l), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate at which Convertible Securities referred to in subparagraph 6D(l) or 6D(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Series Conversion Prices in effect at the time of such event shall forthwith be readjusted to the Series Conversion Prices which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold; and on the termination of any such Option or any such right to convert or exchange such Convertible Securities, the Series Conversion Prices then in effect hereunder shall forthwith be increased to the Series Conversion Prices which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued. 6D(4). Stock Dividends. In case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation (other than the Common Stock) payable in Common Stock, Options or Convertible Securities, then any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 6D(5). Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concession paid or allowed by the Corporation in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than 7 cash, the amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Corporation. 6D(6). Record Date. In case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 6B(7). Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph 6D. 6E. Certain Issues of Common Stock Excepted. Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of a Series Conversion Price in the case of the issuance from and after the date of filing of these terms of the Convertible Preferred Stock of up to an aggregate of 8,000,000 shares (appropriately adjusted to reflect the occurrence of any event described in subparagraph 6F) of Common Stock to directors, officers, employees or consultants of the Corporation, in connection with their service as directors of the Corporation, their employment by the Corporation or their retention as consultants by the Corporation (collectively, "Qualified Recipients"), which shares may be issued to Qualified Recipients either directly or upon exercise of options, and such additional number of shares to be issued to Qualified Recipients as may be approved by a majority of the directors designated by holders of Convertible Preferred Stock. 6F. Subdivision or Combination of Common Stock. In case the Corporation shall at any time subdivide (by any stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Series Conversion Prices in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Series Conversion Prices in effect immediately prior to such combination shall be proportionately increased. In the case of any such subdivision, no further adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof. 6G. Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Corporation shall be effected in such any that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in 8 exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions shall be made whereby each holder of a share or shares of Convertible Preferred Stock shall thereupon have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the conversion of such share or shares of Convertible Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore receivable upon such conversion had such reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Series Conversion Prices) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. 6H. Notice of Adjustment. Upon any adjustment of any or all of the Series Conversion Prices, then and in each such case the Corporation shall give written notice thereof, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of shares of Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the Series A Conversion Price, Series B Conversion Price and/or Series C Conversion Price, as the case may be, resulting from such adjustment, setting forth in reasonable detail the method upon which such calculation is based. 6I. Other Notices. In case at any time: (1) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (2) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (3) there shall be any capital reorganization or reclassification of the capital stock of the Corporation; or (4) there shall be a Liquidation; then, in any one or more of said cases, the Corporation shall give, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of any shares of Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, (a) at least 20 days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up and (b) in the case of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case 9 of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, as the case may be. 6J. Stock to be Reserved. The Corporation will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of Convertible Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Convertible Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the lowest of (i) the Series A Conversion Price, (ii) the Series B Conversion Price and (iii) the Series C Conversion Price in effect at the time. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities exchange upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment of either Series Conversion Price if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Convertible Preferred Stock would exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation. 6K. No Reissuance of Convertible Preferred Stock. Shares of Convertible Preferred Stock which are converted into shares of Common Stock as provided herein shall not be reissued. 6L. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of Convertible Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Convertible Preferred Stock which is being converted. 6M. Closing of Books. The Corporation will at no time close its transfer books against the transfer of any Convertible Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Convertible Preferred Stock in any manner which interferes with the timely conversion of such Convertible Preferred Stock, except as may otherwise be required to comply with applicable securities laws. 6N. Definition of Common Stock. As used in this paragraph 6, the term "Common Stock" shall mean and include the Corporation's authorized Common Stock, par value $0.001 per share, as constituted on the date of filing of these terms of the Convertible Preferred Stock, and shall also include any capital stock of any class of the Corporation thereafter author- 10 ized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided that the shares of Common Stock receivable upon conversion of shares of Convertible Preferred Stock shall include only shares designated as Common Stock of the Corporation on the date of filing of this instrument, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 6G. 6O. Mandatory Conversion. If at any time the Corporation shall have consummated an underwritten public offering of shares of Common Stock conducted by a nationally recognized reputable underwriter in which (i) the aggregate price paid for such shares by the public shall be at least $30,000,000 and (ii) the price paid by the public for such shares shall be at least $7.00 per share (appropriately adjusted to reflect the occurrence of any event described in subparagraph 6F), then effective upon the closing of the sale of such shares by the Corporation pursuant to such public offering, all outstanding shares of Convertible Preferred Stock shall automatically convert to shares of Common Stock on the basis set forth in this paragraph 6. Holders of shares of Convertible Preferred Stock so converted may deliver to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to such holders) during its usual business hours, the certificate or certificates for the shares so converted. As promptly as practicable thereafter, the Corporation shall issue and deliver to such holder a certificate or certificates to the number of whole shares of Common Stock to which such holder is entitled, together with any cash dividends and payment in lieu of fractional shares to which such holder may be entitled pursuant to subparagraph 6C. Until such time as a holder of shares of Convertible Preferred Stock shall surrender his or its certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled upon the surrender thereof 7. Redemption. The shares of Convertible Preferred Stock shall be redeemed as follows: 7A. Optional Redemption. On August 31, 2005 (the "Redemption Date"), at the holder's request, the Corporation shall redeem any or all of the shares of Convertible Preferred Stock held by such holder on the Redemption Date. 7B. Redemption Price and Payment. The Convertible Preferred Stock to be redeemed on the Redemption Date shall be redeemed by paying for each share in cash an amount equal to $.50 per share in the case of the Series A Convertible Preferred Stock, $1.50 per share in the case of the Series B Convertible Preferred Stock and $4.80 per share in the case of the Series C Convertible Preferred Stock plus, in the case of each share, an amount equal to all dividends declared but unpaid thereon computed to the Redemption Date, such amount being referred to as the "Redemption Price." Such payment shall be made in full on the Redemption Date to the holders entitled thereto. 7C. Redemption Mechanics. At least 20 but not more than 30 days prior to the Redemption Date, written notice (the "Redemption Notice") shall be given by the Corporation by delivery in person, certified or registered mail, return receipt requested, 11 telecopier or telex, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Convertible Preferred Stock notifying such holder of the Redemption and specifying the Redemption Price, the Redemption Date and the place where said Redemption Price shall be payable. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. From and after the close of business on the Redemption Date, unless there shall have been a default in the payment of the Redemption Price, all rights of holders of shares of Convertible Preferred Stock (except the right to receive the Redemption Price) shall cease with respect to those shares that have been redeemed, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Convertible Preferred Stock on the Redemption Date are insufficient to redeem the total number of outstanding shares of Convertible Preferred Stock for which redemption has been requested, then, to the extent funds are legally available, such funds shall be distributed among the holders of Convertible Preferred Stock in proportion to the total number of shares of Convertible Preferred Stock held by each such holder, and upon payment in full to holders of any series of Convertible Preferred Stock of the full Redemption Price to which such holders are entitled, then the remaining legally available funds shall be distributed ratably among each holder of any series of Convertible Preferred Stock that shall not have received full payment of the Redemption Price to which holders of such series were entitled. The shares of Convertible Preferred Stock for which redemption is requested, but that are not redeemed, shall remain outstanding and entitled to all rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of such shares of Convertible Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to pay the balance of such redemption amount, or such portion thereof for which funds are then legally available, on the basis set forth above. 7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares of Convertible Preferred Stock redeemed pursuant to this paragraph 7 or otherwise acquired by the Corporation in any manner whatsoever shall be canceled and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of Convertible Preferred Stock. 12 EX-3.3 4 BY-LAWS EXHIBIT-3.3 BY-LAWS StarMedia Network, Inc. ARTICLE I - OFFICES Section 1. The registered office of the corporation shall be at 1013 Centre Road, Wilmington, Delaware 19805. The registered agent in charge thereof shall be Corporation Service Company. Section 2. The corporation may also have offices iii at such other places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II - SEAL Section 1. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." ARTICLE III - STOCKHOLDERS' MEETINGS Section 1. Meetings of stockholders shall be held at the registered office of the corporation in this state or at such place, either within or without this state, as may be selected from time to time by the Board of Directors. Section 2. Annual Meetings: The annual meeting of the stockholders shall be held on the 8th of March in each year if not a legal holiday, and if a legal holiday, then on the next secular day following at ten o'clock A.M., when they shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. If the annual meeting for election of directors is not held on the date designated therefor, the directors shall cause the meeting to be held as soon thereafter as convenient. Section 3. Election of Directors: Elections of the directors of the corporation shall be by written ballot. Section 4. Special Meetings: Special meetings of the stockholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) any two directors, (iv) stockholders entitled to cast at least one-fifth of the votes which all stockholders are entitled to cast at the particular meeting, or (v) any holder or holders of at least 8,500,000 shares of Convertible Preferred Stock. At any time, upon written request of any person or persons who have duly called a special meeting, it shall be the duty of the Secretary to fix the date of the meeting, to be held not more than sixty days after receipt of the request, and to give due notice thereof. if the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at all special meetings shall be confined to the objects stated in the call and matters germane thereto, unless all stockholders entitled to vote are present and consent. Written notice of a special meeting of stockholders stating the time and place and object thereof, shall be given to each stockholder entitled to vote thereat at least ten days before such meeting, unless a greater period of notice is required by statute in a particular case. Section 5. Quorum: A majority of the outstanding votes of holders of stock in the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares entitled to vote is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 6. Proxies: Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. All proxies shall be filed with the Secretary of the meeting before being voted upon. Section 7. Notice of Meetings: Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 8. Consent in Lieu of Meetings: Any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less 2 than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 9. List of Stockholders: The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the metropolitan area where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE IV - DIRECTORS Section 1. The business and affairs of this corporation shall be managed by its Board of Directors, seven in number; provided, however, that the number of directors fixed in accordance herewith shall in no event conflict with any of the terms or provisions of the Convertible Preferred Stock as set forth in the corporation's Certificate of Incorporation. The directors need not be residents of this state or stockholders in the corporation. They shall be elected by the stockholders at the annual meeting of stockholders of the corporation, and each director shall be elected for the term of one year, and until his successor shall be elected and shall qualify, or until his earlier resignation or removal. Section 2. Regular Meetings: Regular meetings of the Board shall be held without notice at the registered office of the corporation, or at such other time and place as shall be determined by the Chairman of the Board. Section 3. Special Meetings: Special meetings of the Board may be called by the Chairman of the Board or President on three days' notice to each director, either personally or by mail or by facsimile or by telegram; special meetings shall be called by the Chairman of the Board, President or Secretary in like manner and on like notice on the written request of (i) any two of the directors in office, or (ii) any holder or holders of at least 8,500,000 shares of Convertible Preferred Stock. Section 4. Quorum: A majority of the total number of directors shall constitute a quorum for the transaction of business. Section 5. Consent in Lieu of Meeting: Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all of the members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. The Board of Directors may hold its meetings, and have an office or offices, outside of this state. 3 Section 6. Conference Telephone: One or more directors may participate in a meeting of the Board, or a committee of the Board or of the stockholders, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other; participation in this manner shall constitute presence in person at such meeting. Section 7. Compensation: Directors as such, shall not receive any stated salary for their services, but by resolution of the Board, a fixed sum and expenses of attendance at each regular or special meeting of the Board, PROVIDED, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 8. Removal: Any director or the entire Board of Directors may be removed, with or without cause, by the holders of shares representing a majority of the votes then entitled to vote at an election of directors during the annual meeting or a duly called special meeting called for the purpose of removal of any director(s) or the entire Board. Removal of any director(s) or the entire Board may also be conducted through a duly executed consent in lieu of meeting pursuant to Article III, Section 8 of these By-Laws. ARTICLE V - OFFICERS Section 1. The executive officers of the corporation shall be chosen by the directors and shall be a Chairman of the Board, President, Secretary and Treasurer. The Chairman of the Board may choose one or more Vice Presidents and such other officers as the Chairman of the Board deems necessary. Any number of offices may be held by the same person. Section 2. Salaries: Salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 3. Term of Office: The officers of the corporation shall hold office for one year and until their successors are chosen and have qualified. Any officer or agent elected or appointed by the Board may be removed by the Board of Directors whenever in its judgment the best interest of the corporation will be served thereby. Section 4. Chairman of the Board: The Chairman of the Board shall be the chief executive officer of the corporation; he shall preside at all meetings of the stockholders and directors; he shall conduct general and active management of the business of the corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the Chairman of the Board, to any other officer or officers of the corporation. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. He shall be EX-OFFICIO a member of all committees, and shall have the general power and duties of supervision and management usually vested in the office of Chairman of the Board of a corporation. 4 Section 5. President: The President shall conduct general and active management of the business of the corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the corporation. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. He shall be EX-OFFICIO a member of all committees, and shall have the general power and duties of supervision and management usually vested in the office of President of a corporation. Section 6. Secretary: The Secretary shall attend all sessions of the Board and all meetings of the stockholders and act as clerk thereof, and record all the votes of the corporation and the minutes of all its transactions in a book to be kept for that purpose, and shall perform like duties for all committees of the Board of Directors when required. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or Chair-man of the Board, and under whose supervision he shall be. He shall keep in safe custody the corporate seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it. Section 7. Treasurer: The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall keep the moneys of the corporation in separate account to the credit of the corporation. He shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the corporation. ARTICLE VI - VACANCIES Section 1. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although not less than a quorum, or by a sole remaining director. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of stockholder, may call a special meeting of stockholders in accordance with the provisions of these By-Laws. Section 2. Resignations Effective at Future Date: When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. 5 ARTICLE VII - CORPORATE RECORDS Section 1. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other corporate books and records including a copy of these By-Laws, as amended, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in this state or at its principal place of business. ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS, ETC. Section 1. The stock certificates of the corporation shall be numbered and registered in the share ledger and transfer books of the corporation as they are issued. They shall bear the corporate seal and shall be signed by (i) the President and (ii) the Secretary and/or Treasurer. Section 2. Transfers: Transfers of shares shall be made on the books of the corporation upon surrender of the certificates therefor, endorsed by the person named in the certificate or by attorney, lawfully constituted in writing. No transfer shall be made which is inconsistent with law. Section 3. Lost Certificate: The corporation may issue a new certificate of stock in the place of any certificate theretofore signed by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Record Date: In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or the express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which 6 notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (d) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. Dividends: The Board of Directors may declare and pay dividends upon the outstanding shares of the corporation from time to time and to such extent as they deem advisable, in the manner and upon the terms and conditions provided by applicable statutes and the Certificate of Incorporation. Section 6. Reserves: Before payment of any dividend there may be set aside out of the net profits of the corporation such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve in the manner in which it was created. ARTICLE IX - MISCELLANEOUS PROVISIONS Section 1. Checks: All checks or demands for money and notes of the corporation shall be signed by the Chairman of the Board, the President, or such other officer or officers as the Board of Directors may from time to time designate. Section 2. Fiscal Year: The fiscal year shall begin on the first day of January of each calendar year. Section 3. Notice: Whenever written notice is required to be given to any person, it may be given to such person, either personally or by sending a copy thereof through the mail, by facsimile, or by telegram, charges prepaid, to his address or facsimile number appearing on the books of the corporation, or supplied by him to the corporation for the purpose of notice. If the notice is sent by mail, by facsimile or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail, upon successful transmission of facsimile or with a telegraph office for transmission to such person. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of stockholders, the general nature of the business to be transacted. 7 Section 4. Waiver of Notice: Whenever any written notice is required by statute, or by the Certificate or the By-Laws of this corporation a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders, neither the business to be transacted at nor the purpose of the meeting need be specified in the waiver of notice of such meeting. Attendance of a person either in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 5. Disallowed Compensation: Any payments made to an officer or employee of the corporation such as a salary, commission, bonus, interest, rent, travel or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer or employee to the corporation to the full extent of such disallowance. It shall be the duty of the directors, as a Board, to enforce payment of each such amount disallowed. In lieu of payment by the officer or employee, subject to the determination of the directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the corporation has been recovered. Section 6. Resignations: Any director or other officer may resign at anytime, such resignation to be in writing, and to take effect from the time of its receipt by the corporation, unless some time be fixed in the resignation and then from that date. The acceptance of a resignation shall not be required to make it effective. ARTICLE X - ANNUAL STATEMENT Section 1. The Chairman of the Board and Board of Directors shall present at each annual meeting a full and complete statement of the business and affairs of the corporation for the preceding year. Such statement shall be prepared and presented in whatever manner the Board of Directors shall deem advisable and need not be verified by a certified public accountant. ARTICLE XI - AMENDMENTS Section 1. These By-Laws may be amended or repealed by the vote of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast thereon, at any regular or special meeting of the stockholders, duly convened after notice to the stockholders of that purpose. 8 EX-10.1 5 1997 STOCK OPTION PLAN EXHIBIT-10.1 STARMEDIA NETWORK, INC. 1997 STOCK OPTION PLAN ARTICLE 1 Establishment and Purpose Section 1.1. Establishment. Effective January 1, 1997 and subject to the provisions of Article 10 hereof, StarMedia Network, Inc. (the "Company") hereby establishes a stock option plan for the benefit of certain employees and non-employee directors as described herein which shall be known as the StarMedia Network, Inc. 1997 Stock Option Plan (the "Plan"). The Plan is intended to provide for the grant of stock options which do not qualify as incentive stock options under Section 422 of the Code (as defined in Section 2.3). Section 1.2. Purpose. The purpose of the Plan is to promote the interests of the company and its shareholders by ensuring continuity of management and increased incentive on the part of officers, other key employees and non-employee directors of the Company and its Affiliates, through facilitating their acquisition of equity interests in the Company. ARTICLE 2 Definitions For purposes of the Plan, the following terms shall have the meanings provided herein: Section 2.1. "Affiliate" means any company which qualifies as a "subsidiary corporation" of the Company under Section 424(f) of the Code or, if applicable, as a "parent corporation" of the Company under Section 424(e) of the Code. Section 2.2. "Board" means the Board of Directors of the Company. Section 2.3. "Code" means the Internal Revenue Code of 1986, as amended. Section 2.4. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code. Section 2.5. "Employee" shall mean any active, full-time employee or active, regular part-time employee of the Company or an Affiliate who regularly works, or is anticipated to regularly work, at least 1,000 hours in a twelve (12) consecutive month period. Section 2.6. "Exercise Price" means the price per Share at which each Option granted under the Plan can be exercised. Section 2.7. "Fair Market Value" means, with respect to Shares on any date, the average of the high and low sales prices of the Shares on such date on the principal national securities exchange on which such Shares are listed or admitted to trading, or if such Shares are not so listed or admitted to trading, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market or medium in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to Shares on such date, the Fair Market Value shall be the value established by the Board in good faith. Section 2.8. "Grantee" shall mean any person to whom an Option has been granted. Section 2.9. "Non-Employee Director" means a member of the Board of the Company who is not also an Employee of the Company or any Affiliate. Section 2.10. "Option" means an option granted under the Plan to purchase Shares. Section 2.11. "Shares" means shares of the Company's common stock, $.001. par value. ARTICLE 3 Administration Section 3.1. Plan Administrator. The Plan shall be administered by the Chief Executive Officer of the Company; provided, however, that the Chief Executive Officer, in his discretion, may delegate any of his or her authorities or duties under the Plan to one or more other senior officers of the Company, under such conditions and subject to such limitations as the Chief Executive Officer may establish. The Chief Executive Officer or such other person or persons exercising administrative authorities with respect to the Plan shall be the Plan Administrator. -2- Section 3.2. Authorities and Duties. Subject to the terms, conditions and limitations set forth in the Plan, the Plan Administrator shall have authority to (a) approve the selection of Employees and Non-Employee Directors to receive Options and the terms and conditions applicable to such Options, including, without limitation, the number of Shares, Exercise Price, vesting terms and duration of such Options; (b) waive or amend the terms, conditions, restrictions or limitations applicable to any outstanding Options, including acceleration or extension of the exercisability of any outstanding Options; (c) interpret the Plan; (d) prescribe, amend and rescind rules and regulations for the operation and administration of the Plan; and (e) take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan. All determinations of the Plan Administrator shall be final, binding and conclusive. No Plan Administrator shall be liable for any action, interpretation or construction made in good faith with respect to the Plan or any Option granted thereunder. ARTICLE 4 Eligibility and Participation Subject to the approval of the Plan Administrator, Options may be granted only to officers, other key Employees and Non-Employee Directors of the Company and its Affiliates. The Plan Administrator shall determine the persons to whom Options are to be granted, the number of Shares subject to each Option, the period during which the Option can be exercised, the Exercise Price of the Option, and any other terms applicable to the Options or the Shares, which determinations shall take into consideration the person's present and potential contribution to the success of the Company and such other factors as the Plan Administrator may deem proper and relevant. ARTICLE 5 Shares Subject to Plan Section 5.1. Amount of Stock. There may be issued under the Plan an aggregate of 2,000,000 Shares, subject to adjustment as provided in Section 5.2. In the event that Options shall terminate or expire without being exercised in whole or in part, new Options may be granted covering the Shares not purchased under such lapsed Options. Section 5.2. Dilution and Other Adjustments. (a) Subject to any required action by stockholders, the aggregate number of Shares issuable under the Plan, and the Exercise Price and/or the number of Shares issuable under any Stock Option, -3- shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of a stock dividend on Shares other than a stock dividend that is a substitute for a cash dividend, or any other increase in the number of Shares effected without receipt of consideration by the Company; provided that no such adjustment in Exercise Price may reduce the Exercise Price to an amount per Share which is less than the par value of such Share. (b) Subject to any required action by stockholders, in the event of the dissolution or liquidation of the Company, a merger or consolidation in which the Company is not the surviving corporation, or a merger or consolidation in which the Company is the surviving corporation but the holders of Shares receive securities of another corporation: (i) any Option granted hereunder shall pertain to and apply to the securities, cash or other property (subject to adjustment by cash payment in lieu of fractional interests) to which a holder of the number of Shares equal to the number of Shares the Grantee would have been entitled; and (ii) the Plan Administrator shall, in his discretion, have the power, prior to such event, (A) to cancel any or all Options which are then exercisable and, in consideration of such cancellation, pay to each Grantee an amount in cash with respect to each Share as to which an Option is then exercisable equal to the difference between the value per Share of the consideration, as determined by the Plan Administrator, received by holders of Shares as a result of such dissolution, liquidation, merger or consolidation and the Exercise Price, and to terminate without consideration all Options not then exercisable; or (B) if the holders of Shares receive property other than cash as a result of such dissolution, liquidation, merger or consolidation, to provide for the exchange of an Option which is then exercisable for an Option on some or all of such property and, incident thereto, make an equitable adjustment, as determined by the Plan Administrator, in the Exercise Price of each affected Option, the number of Shares or other property subject to the Option and, if appropriate, provide for a cash payment to the Grantees in partial consideration for the exchange for their Option and to terminate without consideration all Options not then exercisable. The foregoing adjustment shall be made by the Plan Administrator, whose determination in that respect shall be final, binding and conclusive. (c) Except as provided herein, the Grantee shall have no rights by reason of any subdivision or consolidation of shares -4- of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, any dissolution, liquidation, merger, consolidation or change in control or any issue by the company of shares of stock of any class, or securities convertible into shares of stock of any class and no adjustment by reason thereof shall be made with respect to the Exercise Price or number of Shares subject to an Option. ARTICLE 6 Terms and Conditions of Options Section 6.1. Terms of Options. An Option granted under the Plan shall be in such form as the Plan Administrator may approve. Each Option shall be subject to the terms and conditions provided in this Article 6 and shall contain such additional terms and conditions as the Plan Administrator may deem desirable, but in no event shall such terms and conditions be inconsistent with the Plan. Section 6.2. Option Price. The Exercise Price under an Option shall be established by the Plan Administrator; provided, however, that in no event shall the Exercise Price under an Option be less than 100% of the Fair Market Value of a Share as of the grant date of the Option. Section 6.3. Option Period. The period during which an Option may be exercised shall be fixed by the Plan Administrator; provided, however, that no Option shall be exercisable after the expiration of ten years from the date such Option is granted. Section 6.4. Vesting of Options. Options shall become exercisable in accordance with the following schedule, based on the Grantee's years of service with the Company following the date of grant; provided, however, that following the first year of service with the Company after the date of grant, a proportional amount of the Option shall become exercisable on a quarterly basis: Years of Service Completed After Grant % of Option Exercisable --------------------- ----------------------- 1 33% 2 66% 3 100% All Options granted to a Grantee and not yet exercised shall become fully exercisable upon the occurrence of the Grantee's retirement on or after attainment of age 62, death or Disability -5- within the limitations described in Sections 6.7(a), 6.8 and 6.9, respectively. Notwithstanding the foregoing provisions of this Section 6.4, the Plan Administrator shall have the authority to prescribe a more accelerated or a more restrictive vesting schedule (including the authority to impose additional conditions that must be met prior to vesting and exercisability) with respect to a particular Option or group of Options, at any time and in his sole discretion. Section 6.5. Exercise of Option. (a) Except as provided in Sections 6.7, 6.8 and 6.9, the Grantee must be either (i) in the employ of the Company or an Affiliate, or (ii) a Non-Employee Director, at the time the Option is exercised. A Grantee shall be deemed to be in the employ of the Company or an Affiliate during any period of military, sick leave or other leave of absence meeting the requirements of Section 1.421-7(h)(2) of the Federal Income Tax Regulations, or similar or successor section. (b) An Option may be exercised in whole or in part from time to time during the Option period (or, if determined by the Plan Administrator, in specified installments during the Option period) by giving written notice of exercise to the Secretary of the Company specifying the number of Shares to be purchased. Notice of exercise of an Option must be accompanied by payment in full of the purchase price. Subject to the consent of the Plan Administrator (and subject to any restrictions imposed by the Plan Administrator on the use of any particular payment method), a Grantee may pay all or part of the purchase price either (i) by cash or check, (ii) by using previously acquired Shares, or (iii) by a combination of any of the foregoing methods. The value of previously acquired Shares and withheld Shares for this purpose shall be the Fair Market Value of such Shares on the date of exercise of the Option. (c) No Shares shall be issued in connection with the exercise of an Option until full payment therefor has been made. A Grantee shall have the rights of a shareholder only with respect to Shares for which certificates have been issued to such Grantee. (d) As a condition to the issuance of Shares in respect of an Option exercise, the Plan Administrator may require an Employee to execute an agreement giving effect to any terms, conditions and restrictions applicable to such Shares. Section 6.6. Nontransferability of Options. No Option granted under the Plan shall be transferable by the Grantee otherwise than by will or by the laws of descent and distribution, and such Option shall be exercisable, during such person's lifetime, only by such person. Section 6.7. Retirement and Termination of Employment. (a) If a Grantee retires from the Company and its Affiliates or -6- resigns as a Non-Employee Director, as the case may be, on or after the date he or she attains age 62, or upon such other retirement or resignation, as the case may be, as may be approved by the Plan Administrator, then except as set forth in the following sentence the Options granted to such person shall be exercisable by such person to the extent provided in the Option Agreement during the twelve-month period immediately following such person's retirement or resignation, as the case may be. Notwithstanding the foregoing, the Plan Administrator may, in his sole discretion and at any time, provide that the Option may be exercisable during a period of up to 5 years following the date of such retirement or resignation, but in no event beyond the Option period provided in the Option agreement pursuant to Section 6.3. (b) If a Grantee's employment with the Company or an Affiliate, or service on the Board, as the case may be, terminates for any reason other than death, Disability or retirement, the Option granted to such person shall, except as otherwise provided by the Plan Administrator, expire on the date six months following the date of such termination of employment or service on the Board, as the case may be. Section 6.8. Death of a Grantee. In the event of the death of a Grantee while in the employ of the Company or an Affiliate or serving on the Board, as the case may be, or during the twelve-month period referred to in Section 6.9, the Option granted to such person shall be exercisable by the executors, administrators, legatees or distributees of such person's estate, as the case may be. In such case, the Option shall be exercisable, unless otherwise provided in the Option agreement, for the total number of Shares remaining unexercised under the Option. The period during which such Option may be exercised shall end on the earlier of the date one year from the Grantee's death or expiration of the option period provided in the Option agreement pursuant to Section 6.3. In the event an Option is exercised by the executors, administrators, legatees or distributees of the estate of a deceased Grantee, the Company shall be under no obligation to issue Shares thereunder unless and until the Company is satisfied that the person or persons exercising the Option are the duly appointed legal representatives of the deceased Grantee's estate or the proper legatees or distributees thereof. Section 6.9. Disability of a Grantee. In the event of the termination of the employment or service on the Board, as the case may be, of a Grantee due to Disability, the Options granted to such person shall be exercisable by such person to the extent provided in the Option Agreement during the twelve-month period immediately following such termination of such person's employment or service on the Board, as the case may be. Section 6.10. Withholding Obligations. As a condition to the delivery of any Shares pursuant to the exercise of an Option, the Plan Administrator may require that the Grantee, at -7- the time of such exercise, pay to the Company an amount sufficient to satisfy any applicable tax withholding obligations. Subject to the Consent of the Plan Administrator (and subject to any restrictions imposed by the Plan Administrator on the use of any particular payment method), a Grantee may pay all or part of such withholding taxes either (i) by cash or check, (ii) by using previously acquired Shares, or (iii) by a combination of any of the foregoing methods. The value of previously acquired Shares and withheld Shares for this purpose shall be the Fair Market Value of such Shares on the date of exercise of the Option. ARTICLE 7 Miscellaneous Provisions Section 7.1. No Implied Rights. No Employee, Non-Employee Director or other person shall have any claim or right to be granted an Option under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Employee any right to be retained in the employ of the Company or any Affiliate or affect any right of the Company or any Affiliate to terminate any Employee's employment. Section 7.2. Securities Law Compliance. No Shares shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal and state securities laws. Section 7.3. Ratification or Actions. By accepting any Option or other benefit under the Plan, each Employee and each person claiming under or through such person shall be conclusively deemed to have indicated such person's acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Plan Administrator or the Board. Section 7.4. Gender. The masculine pronoun means the feminine and the singular means the plural wherever appropriate. ARTICLE 8 Amendments or Discontinuance The Plan may be amended at any time and from time to time by the Board and without the approval of shareholders of the Company. No amendment of the Plan shall adversely affect any right of any Grantee with respect to any Option theretofore granted without such Grantee's written consent. -8- ARTICLE 9 Termination The Plan shall terminate upon the earlier of the following dates or events to occur: (a) upon the adoption of a resolution of the Board terminating the Plan; or (b) December 31, 1999 No termination of the Plan shall alter or impair any of the rights or obligations of any person, without such person's consent, under any Option theretofore granted under the Plan. ARTICLE 10 Board Approval and Adoption The Plan shall be submitted for approval to the Board. Options may be granted hereunder prior to such approval but contingent upon such approval. ARTICLE 12 Governing Law and Interpretation The provisions of the Plan shall take precedence over any conflicting provision contained in an Option. The Plan shall be governed by and construed in accordance with the internal substantive laws, and not the choice of law rules, of the State of Delaware. If any term or provision of the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms and provisions will remain in full force and effect and will in no way be affected, impaired or invalidated. -9- EX-10.2 6 1998 STOCK OPTION PLAN EXHIBIT-10.2 STARMEDIA NETWORK, INC. 1998 STOCK PLAN 1. Purposes of the Plan. The purposes of this 1998 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof (f) "Common Stock" means the common stock of the Company. (g) "Company" means StarMedia Network, Inc., a Delaware corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "Director" means a member of the Board of Directors of the Company. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "Option" means a stock option granted pursuant to the Plan. (r) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. -2- (s) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (t) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. (u) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "Plan" means this 1998 Stock Plan. (x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "Service Provider" means an Employee, Director or Consultant. (z) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (aa) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below. (bb) "Subsidiarv" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 10,000,000 Shares, plus an annual increase to be added on July 1 of each year, beginning on July 1, 2000, equal to the lesser of (i) 4,000,000 shares, (ii) 4% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. -3- 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different Service Providers. (ii) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; -4- (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. (d) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than [500,000] Shares. -5- (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional [500,000] Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 12), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. -6- (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is -7- specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for thirty (30) days following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. -8- 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchasers service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a stockholder and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Adjustments Upon Changes in Capitalization. Merger or Asset Sale. -9- (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger -10- or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of -11- any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. -12- EX-10.3 7 LEASE DATED 9/15/97 - CLEMENS & STARMEDIA Exhibit 10.3 2/94 ================================================================================ STANDARD FORM OF LOFT LEASE The Real Estate Board of New York, Inc. ================================================================================ Agreement of Lease, made as of this 15th day of September 1997 between Clemons Management Corp. c/o Bernstein Real Estate of 855 Avenue of the Americas, New York, N.Y., party of the first part, hereinafter referred to as OWNER, and The Star Media Network, Inc. party of the second part, hereinafter referred to as TENANT, Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner Entire Fifth Floor in the building known as 29 - 33 West 36th Street in the Borough 0f Manhattan, City of New York, for the term of Five (5) Years (or until such term shall sooner cease and expire as hereinafter provided) to commence on the 1st day of September nineteen hundred and ninety seven, and to end on the 31st day of August two thousand and two and both dates inclusive, at an annual rental rate of See R5. which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: Rent: Occupancy: 1. Tenant shall pay the rent as above and as hereinafter provided. 2. Tenant shall use and occupy demised premises for General offices for multi-media company provided such use is in accordance with the certificate of occupancy for the building, if any, and for no other purpose. Alterations: 3. Tenant shall make no structural changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner which consent shall not be unreasonably withheld or delayed. and to the provisions of this article, Tenant, at Tenant's expense, may make alterations, installations, additions or improvements which are nonstructural [Intentionally Omitted] affect utility services or plumbing and electrical lines, in or to the interior of the demised premises using contractors or mechanics first approved in each instance by Owner which approval shall not be unreasonably withheld or delayed. Tenant shall, at its expense, before making any alterations, additions, installations or improvements obtain all permits, approval and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner. Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may reasonably require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing the bond required by law or otherwise. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or removed from the premises by Owner, at Tenant's expense. Notwithstanding anything to the contrary contained in this Article 3 or elsewhere in this Lease, Tenant, shall be entitled to make non-structural alterations of a decorative nature to the Premises, from time to time, without Owner's consent, provided in each instance the cost thereof shall not exceed $25,000.00, Landlord receives prior notice of Tenant's intent and Tenant complies with Article 3 of this Lease. Repairs: 4. Owner shall maintain and repair the exterior of and the public portions of the building. Tenant shall, throughout the term of this lease, take good care of the demised [Intentionally Deleted], including the bathrooms and lavatory facilities (if the demised premises encompass the entire floor of the building) and the windows and window frames and, the fixtures and appurtenances therein and at Tenant's sole cost and expense promptly make all repairs thereto and to the building, whether structural or non-structural in nature, caused by or resulting from the carelessness, omission, neglect or improper conduct of Tenant, Tenant's servants, employees, invitees, or licensees, and whether or not arising from such Tenant conduct or omission, when required by other provisions of this lease, including Article 6. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be of quality or class equal to the original work or construction. If Tenant fails, after ten days notice, to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by the Owner at the expense of Tenant, and the expenses thereof incurred by Owner shall be collectible, as additional rent, after rendition of a bill or statement therefor. If the demised premises be or become infested with vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant shall give Owner prompt notice of any defective condition in any plumbing, heating system or electrical lines located in the demised premises and following such notice, Owner shall remedy the condition with due diligence, but at the expense of Tenant, if repairs are necessitated by damage or injury attributable to Tenant, Tenant's servants, agents, employees, invitees or licensees as aforesaid. Except as specifically provided in Article 9 or elsewhere in this lease, there shall be no allowance to the Tenant for a diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner, Tenant or others making or failing to make any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any set off or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of any action for damages for breach of contract. The provisions of this Article 4 with respect to the making of repairs shall not apply in the case of fire or other casualty with regard to which Article 9 hereof shall apply. Notwithstanding anything to the contrary contained in Articles 4, 20, 27, 31 or elsewhere in this Lease, if, as a result of (i) repairs, alterations, additions or improvements made by or on behalf of Owner (not required by compliance with any new law or regulation), (ii) the interruption or stoppage of the plumbing, electric, heating, air-conditioning, elevator or other systems serving the demised premises (other than any interruption of stoppage because of inability to obtain parts or similar reason beyond the reasonable control of Owner) Tenant shall be completely unable to conduct business in the full demised premises for more than five (5) consecutive business days, then and in such event, the fixed rental and additional rental payable by Tenant under this Lease shall be abated from and after the sixth (6th) day of such interruption and until the date on which Tenant is able to conduct its business in the demised premises. Owner agrees to make any repairs required as quickly as possible under the circumstances and to use its best efforts not to interfere with Tenant's business operations. Window Cleaning: 5. Tenant will not clean nor require, permit. suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the New York State Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. Requirements of Law, Fire Insurance: 6. Prior to time commencement of the lease term, if Tenant is then in possession, and at all times thereafter Tenant shall, at Tenant's sole cost and expense, promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, or the Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof or, with respect to the building, if arising out of Tenant's use or manner of use of the demised premises of the building (including the use permitted under the lease). Except as provided in Article 30 hereof, nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant shall not do or Page 1 of 6 permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization and other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. If by reason of failure to comply with the foregoing the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" or rate for the building or demised premises issued by a body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's judgement, to absorb and prevent vibration, noise and annoyance. Notwithstanding anything to the contrary in Article 6, Article 30, or elsewhere in this Lease, it is understood that Tenant shall not be required to incur any expense in connection with any improvements, repairs, additions, alterations or changes (collectively, "changes") required to be made to the demised premises or the building by reason of any departmental or governmental regulation, order or law, including, but not limited to, installation of sprinkler systems or other fire prevention or safety measures, and Owner shall be solely responsible therefor, unless the same are required by reason of Tenant's particular manner of use of the demised premises, provided, however, that Tenant, at Tenant's expense, shall make any such changes required by Tenant's alterations to the premises. Further notwithstanding anything to the contrary contained hereinabove, Tenant will contribute up to $1,000 in any lease year towards changes which would be the Owner's responsibility hereunder. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument or subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner may request. Tenant's Liability Insurance Property Loss, Damage, Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence or willful acts of Owner, its contractors, agents, servants or employees; Owner or its agents shall not be liable for any tenants or persons in, upon or about said building or caused by operations in connection of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor ababtement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorney's fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. Counsel selected by Tenant's insurer shall be deemed accept able to Owner. Supplementing Article 8 and notwithstanding anything to the contrary contained therein or elsewhere in this Lease, Owner shall not be relieved from any liability to Tenant for, nor shall Tenant indemnify Owner against, any injury to persons or property, or any loss or damage, arising from the wilful misconduct or negligence of Owner, or its agents, contractors or employees. Destruction, Fire and Other Casualty: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casual or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the occupation of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Owner's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume fifteen (15) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. [Intentionally Deleted] (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owners obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery with respect to subparagraphs (b), (d) and (e) above, against the other or any one claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. Notwithstanding anything to the contrary contained within this Article 9 or elsewhere within this Lease, except if the damage to the demised premises or building is due to Tenant's or Tenant's agents fault, carelessness, wilful misconduct or negligence, Tenant may terminate this Lease if Landlord, in its sole determination and within ninety days (90) after such casualty, determines that the premises or building cannot be repaired or replaced or rendered usable within one hundred and twenty (120) days from Landlord's determination. In addition, if the demised premises or the building are, in Landlord's sole determination, substantially damaged during the last year of the Lease and such damage is not due to Tenant's or Tenant's agents fault, carelessness, wilful misconduct or negligence, Tenant may cancel the Lease in accordance with this Paragraph. However, notwithstanding anything to the contrary contained herein, in the event that Landlord shall have comparable space ("Temporary Premises") available, accessible and useable in the Building within thirty (30) days of said casualty then Tenant shall occupy the Temporary Premises in accordance with the same terms, conditions, and covenants of this Lease until the demised premises are restored and may not cancel this Lease. In order to terminate the Lease according to this Article, Tenant shall, after Landlord's determination as provided above, give Landlord thirty (30) days written notice (registered mail, return receipt requested) of its intent to terminate. Eminent Domain: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixtures and equipment at the end of the term and provided further such claim does not reduce Owner's award. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant or the majority partnership interest of a partnership Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by any body other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. Notwithstanding anything to the contrary contained in Article 11 hereof, or elsewhere in this Lease, Owner hereby consents from time to time to the subletting of all or portion of the demised premises, and the assignment of this Lease (i) to a business entity fifty (50%) percent or more of the outstanding interests in which are owned by Chase Capital Partners and/or Fernando Espuelas or entities under common control, (ii) to a business entity succeeding (by merger, consolidation or otherwise) to substantially all of Tenant's business assets at the demised premises, and (iii) to a business entity to which Tenant has sold substantially all of its business assets at the demised premises, provided, in the case of an assignment of this Lease, the assignee(s) agree, in writing, to observe the terms and conditions of this Lease to be performed by Tenant. Such sublet/assignment in (i) - (iii) are contingent upon Tenant's successor having an equal or greater net worth that Tenant as of the date hereof. Any such subtenant shall have the right to list its name on the door to the premises and on the lobby, floor and elevator directories (if any). Without limiting the foregoing, Owner agrees that no right to recapture all or a portion of the demised premises as set forth in subdivision B of Article R14, or any right to share in the rent or other consideration (however characterized and whether or not in excess of the rent and additional rent payable hereunder) received by Tenant from the assignee or sublessee, shall be applicable with respect to the assignments and sublettings contemplated in subdivisions (i) thru (iii) above. Tenant shall give written notice to Owner of the name and address of the assignee or sublessee, as the case may be, following any exercise of Tenant's rights herein. With respect to any other proposed sublettings or assignments, Tenant shall have the right to withdraw its notice of proposed assignment or subletting in the event that Owner elects to exercise any of its rights pursuant to said Article R14. The offering and/or sale or transfer of the stock of Tenant pursuant to any private placement memorandum or in connection with and following any public offering shall not be deemed an assignment of this Lease. Electric Current: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which, in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no way make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain, unless arising from the negligence or willful misconduct of Owner, its agents, employees or contractors. Access to Premises: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times after reasonable notice and during normal business hours to examine the same and to make such repairs, replacements and improvements as Owner may reasonably deem necessary and reasonably desirable to any portion of the building and do not materially and adversely affect Tenant's business operation or require the removal or relocation of any of Tenant's improvements, or which Owner may elect to perform in the premises after Tenant's failure to make repairs or perform any work which Tenant is obligated to perform under this lease, or for the purpose of complying with laws, regulations and other directions of governmental authorities. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided, wherever possible, they are within walls or otherwise concealed. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours after reasonable notice and during normal business hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants and may, during said six months period, place upon - ---------- [GRAPHIC OMITTED] Rider to be added if necessary. Page 2 of 6 the demised premises the usual notices "To Let" and "For Sale" which notices Tenant shall permit to remain thereon without molestation. If Tenant is not present to open and permit an entry into the demised premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom. Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligation hereunder. Notwithstanding the foregoing, except in event of emergency, as aforesaid, Owner shall not enter the demised premises except during regular business hours, upon reasonable notice to Tenant, accompanied by Tenant or its representative. Further supplementing Articles 4, 13, 18 and 20, and notwithstanding anything to the contrary contained therein or elsewhere herein, Owner agrees: (i) that in the exercise of its various rights under this Lease to make repairs, improvements, replacements, etc., and/or to have access to the demised premises, Owner agrees to make any repairs required as quickly as possible under the circumstances and to use all reasonable efforts so as not to interfere with the operation of Tenant's business, and Owner shall promptly repair any damage to the demised premises arising therefrom, and (ii) whenever it is provided in this Lease that Owner may recover from Tenant (or be indemnified by Tenant as to) attorneys' fees, costs and/or expenses, such fees, costs and expenses shall be reasonable in amount. Vault, Vault Space, Area: 14. No Vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building is leased hereunder anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant, if used by Tenant, whether or not specifically leased hereunder. Occupancy: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business, Tenant shall be responsible for and shall procure and maintain such license or permit. [Intentionally Omitted] Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rental reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. Default: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the demised premises becomes vacant or deserted "or if this lease be rejected under ss.235 of Title 11 of the U.S. Code (bankruptcy code);" or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if Tenant shall have failed, after seven (7) days notice days written notice, to redeposit with Owner any portion of the security deposited hereunder which Owner has applied to the payment of any rent and additional rent due and payable hereunder or failed to move into or take possession of the premises within [Intentionally Omitted] days after the commencement of the term of this lease, of which fact Owner shall be the sole judge; then in any one or more of such events, upon Owner serving a written fifteen (15) days notice upon Tenant specifying the nature of said default and upon the expiration of said fifteen (15) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said fifteen (15) day period, and if Tenant shall not have diligently commenced during such default within such fifteen (15) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required: within seven (7) days after written notice from Owner then and in any of such events Owner may without notice, re-enter the demised premises and dispossess Tenant by summary proceedings, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. Remedies of Owner and Waiver of Redemption: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent, and additional rent, shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof; either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and or covenanted to be paid and the net amount, if any, of the rents collected on account of the subsequent lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses, reasonable attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant he entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof. Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws. Fees and Expenses: 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorney's fees, in instituting, prosecuting or defending any action or proceedings, and prevails in any such action or proceeding, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. Building Alterations and Management: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and or location of public entrances, passageways, doors. doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number or designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenant making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of any controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. [Intentionally Omitted] Page 3 of 6 No Repre- sentations by Owner: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the demised premises or the building except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" on the date possession is tendered (except for the electrical, heating, and air-conditioning equipment and systems which shall be in good working order on the date of delivery of possession, and except as may otherwise be set forth herein), and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. [Intentionally Omitted) End of Term: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property from the demised premises. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. Quiet Enjoyment: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 34 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. No Waiver: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such remit or pursue any other remedy in this lease provided. All checks tendered to Owner as and for the rent of the demised premises shall be deemed payments for the account of Tenant. Acceptance by owner of rent from anyone other than Tenant shall not be deemed to operate as an attornment to Owner by the payor of such rent or as a consent by Owner as an assignment or subletting by Tenant of the demised premises to such payor, or as a modification of the provisions of this lease. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as termination of the lease or a surrender of the premises. Waiver of Trial by Jury: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession including a summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for statutory mandatory counterclaims. Inability to Perform: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no way be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment, fixtures or other materials if Owner is prevented or delayed from doing so by reason of strike or labor troubles or any cause whatsoever beyond Owner's sole control including, but not limited to, government preemption or restrictions or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency. Bills and Notices: 28. Except as otherwise in this lease provided, a bill statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, delivered to Tenant by registered or certified mail addressed to Tenant at the building of which the demised premises form a part, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be two (2) business days after the date of mailing of the same in the manner hereinabove required. A copy of any notice to Tenant shall be sent simultaneously, by certified mail, return receipt requested, Tenant's attorneys, Stern, Wiener & Levy, (Attention: Robert N. Pellegrino, Esq.), at 950 Third Avenue, New York, New York 10022. Notices to Owner shall also be deemed given two (2) business days after the date the same are mailed in accordance with the following sentence. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. Water Charges: 29. If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory purposes (of which fact Tenant constitutes Owner to be the sole judge) Owner may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Owner fur the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense in default of which Owner may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant as additional rent. Tenant agrees to pay for water consumed, as shown on said meter as and when bills are rendered, and on default in making such payment Owner may pay such charges and collect the same from Tenant as additional rent. [Intentionally Omitted] Tenant covenants and agrees to pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or charge which now or hereafter is assessed, imposed or a lien upon the demised premises or the realty of which they are part pursuant to law, order or regulation made or issued in connection with the use, consumption, maintenance or supply of water, water system or sewage or sewage connection or system. If the building or the demised premises or any part thereof is supplied with water through a meter through which water is also supplied to other premises Tenant shall pay to Owner, as additional rent, on the first day of each month % ($25.00) of the total meter charges as Tenant's portion. Independently of and in addition to any of the remedies reserved to Owner hereinabove or elsewhere in this lease, Owner may sue for and collect any monies to be paid by Tenant or paid by Owner for any of the reasons or purposes hereinabove set forth. Sprinklers: 30. Anything elsewhere in this lease to the contrary notwithstanding, if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official of the federal, state or city government recommend or require the installation of a sprinkler system or that any changes, modifications, alterations, or additional sprinkler heads or other equipment be made or supplied in an existing sprinkler system by reason of Tenant's business, or the location of partitions, trade fixtures, or other contents of the demised premises, or for any other reason, or if any such sprinkler system installations, modifications, alterations, additional sprinkler heads or other such equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate set by any said Exchange or by any fire insurance company, Tenant shall, at Tenant's expense, promptly make such sprinkler system installations, changes, modifications, alterations, and supply additional sprinkler heads or other equipment as required whether the work involved shall be structural or non-structural in nature. Tenant shall pay to Owner as additional rent the sum of $25.00, on the first day of each month during the term of this lease, as Tenant's portion of the contract price for sprinkler supervisory service. Elevators, Heat, Cleaning: 31. Owner shall: (a) provide necessary passenger elevator facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m.; (b) if freight elevator service is provided, same shall be provided only on regular business days Monday through Friday inclusive, and on those days only between the hours of 9 a.m. and 12 noon and between 1 p.m. and 5 p.m.; (c) furnish heat, water and other services supplied by Owner to the demised premises, when and as required by law, on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 - ---------- [GRAPHIC OMITTED] Space to be filled in or deleted. Page 4 of 6 a.m. to 1 p.m.; (d) clean the public halls and public portions of the building which are used in common by all tenants. Tenant shall, at Tenant's expense, keep the demised premises, including the windows, clean and in order, to the reasonable satisfaction of Owner, and for that purpose shall employ the person or persons, or corporation approved by Owner. Tenant shall pay to Owner the cost of removal of any of Tenant's refuse and rubbish from the building. Bills for the same shall be rendered by Owner to Tenant at such time as Owner may elect and shall be due and payable hereunder, and the amount of such bills shall be deemed to be, and be paid as, additional rent. Tenant shall, however, have the option of independently contracting for the removal of such rubbish and refuse in the event that Tenant does not wish to have same done by employees of Owner. Under such circumstances, however, the removal of such refuse and rubbish by others shall be subject to such rules and regulations as, in the judgment of Owner, are necessary for the proper operation of the building. Owner reserves the right to stop service of the heating, elevator, plumbing and electric systems, when necessary, by reason of accident, or emergency, or for repairs, alterations, replacements or improvements, in the judgment of Owner desirable or necessary to be made, until said repairs, alterations, replacements or improvements shall have been completed. If the building of which the demised premises are a part supplies manually operated elevator service, Owner may proceed diligently with alterations necessary to substitute automatic control elevator service without in any way affecting the obligations of Tenant hereunder. Security: 32. Tenant has deposited with Owner the sum of $14,083,34 as security for the faithful performance observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the reletting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall shall not then be in default of this Lease (beyond any applicable grace and notice period, if any), the security shall be returned to Tenant [Intentionally Omitted] after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lessee and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Owner nor its successors or assigns shall he bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Captions: 33.The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provision thereof. Definitions: 34. The term "Owner" as used in this lease means only the owner of the fee or of the leasehold of the building, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "rent" includes the annual rental rate whether so expressed or expressed in monthly installments, and "additional rent." "Additional rent" means all sums which shall be due to Owner from Tenant under this lease, in addition to the annual rental rate. The term "business days" as used in this lease, shall exclude Saturdays, Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service, Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld, such consent shall not be unreasonably delayed. Adjacent Excavation- Shoring: 35. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. Rules and Regulations: 36. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations annexed hereto and such other and further reasonable and non-discriminatory Rules and Regulations as Owner or Owner's agents may from time to adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within fifteen (15) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. All rule and regulations shall be enforced against Tenant in a non-discriminatory manner. In the event of any conflict between the terms and conditions of any Rules and Regulations now or hereafter adopted by Owner and any other provisions of this Lease, the other provisions of this Lease shall control. Glass: 37. Owner shall replace any and all plate and other glass damaged or broken from any cause whatsoever in and about the demised premises other than arising from the negligence or willful acts of Tenant, its employees, agents, contractors, licensees and/or invitees. Estoppel Certificate: 38. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. Owner, from time to time, upon at least ten (10) days prior notice from Tenant, shall execute, acknowledge and deliver such certificate to Tenant, and/or to any such other person, firm or corporation as aforesaid. Directory Board Listing: 39. If, at the request of and as accommodation to Tenant, Owner shall place upon the directory board in the lobby of the building, one or more names of persons other than Tenant, such directory board listing shall not be construed as the consent by Owner of an assignment or subletting by Tenant to such person or persons. Successors and Assigns: 40. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only to Owner's estate and interest in the land and building for the satisfaction of Tenant's remedies for the collection of a judgement (or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this lease, the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of the demised premises. - ---------- [GRAPHIC OMITTED] Space to be filled in or deleted. Riders, exhibits and annotations attached hereto are made a part of this Lease. In Witness Whereof, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. Clemons Management Corp. by Bernstein Management Corp. d/b/a Bernstein Real Estate, as Agent [CORP. SEAL] Witness for Owner: -------------------------------- By: /s/ Vincent Terranova - ------------------------------- -------------------------------- Vincent Terranova, Executive Vice President [CORP. SEAL] Witness for Tenant: Star Media Network, Inc. /s/ Donna A. Morales By: [ILLEGIBLE] - -------------------------------- -------------------------------- DONNA A. MORALES Notary Public, State of New York No. O1MO5062926 Qualified in Kings County Commission Expires July 8, 1998 Page 5 of 6 ID# -------------------------------- ACKNOWLEDGEMENTS CORPORATE TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he is the of the corporation described in and which executed the foregoing instrument, as TENANT; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. -------------------------- INDIVIDUAL TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to be known and known to me to be the individual described in and who, as TENANT, executed the foregoing instrument and acknowledged to me that he executed the same. -------------------------- [GRAPHIC OMITTED] IMPORTANT - PLEASE READ [GRAPHIC OMITTED] RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 36. 1. The sidewalks, entrances, driveways, passages, courts, elevators vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewall and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall he hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors of halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the buildings by reason of noise, odors, and or vibrations, or interfere in any way, with other Tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same is visible from the outside of the premises without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to he used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease of which these Rules and Regulations are a part. 9. No Tenant shall obtain for use upon the demised premises ice, drinking water, towel and other similar services, or accept barbering or bootblacking services in the demised premises, except from persons authorized by Owner, and at hours and under regulations fixed by Owner. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the building all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. Notwithstanding the foregoing, Owner shall not be required to allow Tenant or any person to enter or remain in the building, except on business days from 8:00 a.m. to 6:00 p.m. and on Saturdays from 8:00 a.m. to 1:00 p.m. Tenant shall not have a claim against Owner by reason of Owner excluding from the building any person who does not present such pass. 11. Owner shall have the right to prohibit any advertising by any Tenant which in Owner's opinion, tends to impair the reputation of the building or its desirability as a loft building, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, or explosive, or hazardous fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. 13. Tenant shall not use the demised premises in a manner which disturbs or interferes with other Tenants in the beneficial use of their premises. Address 29-33 West 36th Street Premises Entire Fifth Floor ================================================================================ TO ================================================================================ STANDARD FORM OF [SEAL] Loft [SEAL] Lease The Real Estate Board or New York, Inc. (C) Copyright 1994. All rights Reserved. Reproduction in whole or in part prohibited. ================================================================================ Dated September 15, 1997 Rent Per Year See R5. Rent Per Month See R5. Term Five (5) Years From 09/01/97 To 08/31/2002 Drawn by ------------------------------- Checked by ------------------------------- Entered by ------------------------------- Approved by ------------------------------- ================================================================================ Page 6 of 6 RIDER ANNEXED TO LEASE BETWEEN CLEMONS MANAGEMENT CORP., As Landlord, and THE STARMEDIA NETWORK, INC., as Tenant, Dated September 15, 1997, for the Entire Fifth Floor (the "demised premises") in the building known as 29-33 WEST 36TH STREET, New York, New York (the "Building"). - --------------------------------------------------------- R1. RIDER. To the extent that any provisions of any Rider to this Lease are in any way inconsistent or conflict with any of the preceding provisions of the Lease, or of the rules and regulations appended to this Lease, regardless of whether or not such inconsistency is expressly noted in the Rider, the provisions of the Rider shall be controlling. R2. CAPTIONS. The captions are inserted only as a matter of convenience and for reference and in no way define, limit, or describe the scope of this Lease nor the intent of any provision thereof. R3. DEFINITIONS. As used in this Lease and when required by the context, each number (singular and plural) shall include all numbers, and each gender shall include all genders. The captions, headings and marginal notes throughout this Lease are for convenience of reference only and the words contained therein shall in no way be held or deemed to define, limit, explain, modify, amplify, or add to the interpretation, construction or meaning of any provision of, or the scope or intent of, this Lease, nor in any way affect this Lease. Except as otherwise expressly stated, each payment provided to be made by the Tenant shall be in addition to, and not in substitution for, all other payments to be made by the Tenant to the Landlord. The term "PERSON" used herein means person, firm, association, or corporation, as the case may be. The term "Landlord" or "Owner" are synonymous. R4. GOVERNING LAW. The laws of the State of New York shall govern the validity, performance, and enforcement of this Lease. The invalidity or unenforceability of any provision of this Lease shall not affect or impair any other provision. If any provision of this Lease is capable of two constructions, one of which would render the provision invalid and the other of which would make the provision valid, then the provision shall have the meaning which renders it valid. The submission of this Lease for examination does not constitute an offer to lease and becomes effective only upon execution and delivery thereof by Landlord and Tenant. R5. ANNUAL RENT. A. The annual rental rate ("Base Annual Rent") shall be: Eighty four thousand five hundred and four ($84,504.00) dollars from 09/01/97 through 08/31/98 Eighty seven thousand four hundred and sixty eight ($87,468.00) dollars from 09/01/98 through 08/31/99 Ninety thousand five hundred and twenty eighty ($90,528.00) dollars from 09/01/99 through 08/31/2000 Ninety three thousand six hundred and ninety six ($93,696.00) dollars from 09/01/2000 through 08/31/2001 ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 1 Ninety six thousand nine hundred and seventy two ($96,972.00) dollars from 09/01/2001 through 08/31/2002 R6. ELECTRIC. A. The demised premises are separately metered for electricity. Tenant shall pay directly for all electric current used in the demised premises for light or power or any other purpose for the exclusive use of the demised premises and the operation of fans and other devices in the heating, air conditioning and ventilating which may exclusively serve the demised premises. B. Tenant shall keep all electric meters at the demised premises and all installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Provided that Tenant is not then in default hereunder, Landlord shall assign to Tenant any guaranty and warranty, covering such required repair, the Landlord may have obtained. Tenant shall pay for all such items consumed as shown on said meters within ten (10) days of the rendition of bills thereof, and on default in making such payment, Landlord may pay such bills and charges and rents and collect the same from Tenant as additional rent. Any such costs or expenses incurred or payments made by Landlord for any reasons or purposes hereinabove stated shall be paid by Tenant to Landlord on demand or, at Landlord's election, may be added to any subsequent installment or installments of Annual Rent. C. Landlord shall not be responsible for the maintenance or repair of the Tenant's electrical system from the point beyond and including the panel box serving the Tenant, air conditioning and ventilation systems including all mechanical equipment which serves the Tenant and piping and ducting within Tenants space, and lighting and lighting fixtures within Tenants space. Said repairs and maintenance shall be at Tenants sole cost and expense. D. Landlord shall not be liable to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's electrical requirements. Any riser or risers to supply Tenant's electrical requirements, upon written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant, if, in Landlord's reasonable judgment, the same will not cause permanent damage or injury to the building or demised premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other Tenants or occupants. In addition to the installation of such riser or risers, Landlord will also at the sole cost and expense of Tenant, install all other equipment proper and necessary in connection therewith subject to the aforesaid terms and conditions. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building or the risers of wiring installations. E. Tenant shall make no alteration or additions to the electric equipment and/or appliances without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld. Rigid conduit only will be allowed. R7. REAL PROPERTY TAX. A. Tenant shall pay, as Additional Rent, eight point three three (8.33%) percent of any and all increases in real estate taxes or assessments for public betterments covering the land and the building of which the demised premises form a part. Said increases ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 2 shall be the amount charged during any Tax Year above the amount charged during the Base Tax Year. B. "Tax Year" shall mean each period of twelve (12) months commencing on the first day of July in which occurs any part of the term of this Lease or such other period of twelve (12) months occurring during the term of this Lease as hereafter may be adopted as the fiscal year for real estate tax purposes of the City of New York or any other governmental authority. C. "Base Tax Year" shall mean the Tax Year 1997/1998. D. Tenant shall pay, as additional rent, eight point three three percent (8.33%) of any reasonable costs and expenses including, without limitation, counsel fees incurred by Landlord in contesting the validity or amount of any taxes or in obtaining a reduction of the assessed value of the land and building or in attempting to prevent an increase in the taxes as proposed by the City of New York or any other governmental authority for any Tax Year after the Base Tax Year to the extent the same do not exceed the amount of any refund obtained, if any, as a result of Landlord's efforts. Provided that Tenant is not then in default of any terms, conditions or covenants of this Lease, that Tenant is not in stipulation of settlement with Landlord, that Tenant is not operating under a rental reduction and further provided that Tenant has paid its proportionate share of the real estate tax increase for which a refund has been awarded to Landlord, Tenant shall be entitled to its proportionate share of said refund, less any costs or expenses incurred in achieving refund. However, in no event shall Landlord be required to refund to Tenant more than the amount Tenant paid to Landlord as its proportionate share of the real estate tax increase for each year such refund was obtained. E. Payment of Additional Rent pursuant to paragraphs "(A)" and "(D)" above shall be made within fifteen (15) days after demand based upon a statement furnished by Landlord to Tenant with each such demand. F. The term "real estate taxes" shall mean all taxes and assessments levied, assessed or imposed at any time by the City of New York or by any other governmental authority upon or against the land and/or building of which the demised premises form a part, and also any tax or assessment levied, assessed or imposed at any time by any governmental authority in connection with the receipt of income or rents from said land and/or Building. If, due to a future change in the method of taxation, or in the taxing authority, a franchise, license, income, transit, profit or other tax, fee, or governmental imposition, however designated, shall be levied, assessed or imposed against Landlord in substitution, in whole or in part, for the said real estate taxes, or in lieu of additional real estate taxes, then such franchise, license, income, transit, profit, or other tax, fee, or governmental imposition shall be deemed to be included within the definition of "real estate taxes" for the purposes hereof. G. Any delay or failure of Landlord in billing any amount payable under this Article shall not constitute a waiver or in any way impair the continuing obligation of Tenant to make all payments hereunder. H. Photostatic copies of real estate tax bills and assessments, for the tax year 1997/1998, and for the tax year in which the increase is claimed, shall be conclusive evidence of increased real estate taxes or assessments. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 3 R8. INSURANCE AND REQUIREMENTS OF LAW. Supplementing Article 6. A. Tenant, at its sole cost and expense, shall maintain at all times during the term of this Lease and at all times when Tenant is in possession of the demised premises, a comprehensive policy of general liability insurance in which Landlord, Landlord's managing agent, any Superior Lessor (as hereinafter defined), any mortgagees designated by Landlord, and Tenant, are the additional insured, for any and all claims arising during the term of this Lease for damages or injuries to goods, wares, merchandise and property and/or for any personal injury or loss of life, in, upon or about the demised premises; protecting Landlord, Landlord's managing agent, any Superior Lessor, any mortgagees designated by Landlord, and Tenant against any liability whatsoever occasioned by accidents on or about the demised premises or any appurtenances thereto. Such policy is to be written by a good and solvent insurance company, satisfactory to Landlord, in the amount of TWO MILLION AND 00/100---($2,000,000.00)---DOLLARS per occurrence (combined single limit), THREE MILLION AND 00/100 ($3,000,000.00) DOLLARS in aggregate. Tenant agrees to deliver to Landlord a certificate of endorsement of the aforesaid insurance policy and upon Tenant's failure to provide and keep in force the aforementioned insurance, it shall be regarded as a material default, entitling Landlord to exercise any or all of the remedies as provided in this Lease. B. Tenant shall deliver to Landlord such policies or certificates of such policies prior to the commencement of the term of this Lease. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insured such renewal policy or certificate at least thirty (30) days before the expiration of any existing policy. All such policies shall be for a period of not less than one year and shall contain a provision whereby the same cannot be canceled or modified unless Landlord and any additional insured are given at least thirty (30) days prior written notice of such cancellation or modification, including, without limitation, any such cancellation resulting from the nonpayment of premiums. Landlord shall have the right at any time and from time to time, but not more frequently than once every year, to require Tenant to increase the amount of the insurance maintained by Tenant under this Article, so that the amount thereof, as reasonably determined by Landlord, adequately protects the interest of Landlord. C. Tenant shall secure an appropriate clause in, or an endorsement upon, each insurance policy obtained by it and covering or applicable to the demised premises or the personal property, fixtures, and equipment located therein or thereon, pursuant to which the insurance company waives subrogation or permits the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party without invalidating the coverage under the insurance policy. The waiver of subrogation or permission for waiver of any claim shall extend to Landlord and its agents and their respective employees. D. Tenant shall also obtain, at its own cost and expense, naming both Landlord, Landlord's managing agent, any Superior Lessor, any mortgagees designated by Landlord, and Tenant as additional insured, fire insurance for all personal property which may be affixed to the realty now located in the demised premises and including any future installations. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 4 E. Notwithstanding anything herein to the contrary, nothing herein shall prevent Landlord from recovering in the event of fire or other loss under Landlord's fire or other insurance coverage for all betterments and improvements by Tenant so affixed to the demised premises as to be considered part of the realty under law. F. Tenant hereby releases Landlord, Landlord's partners or principals, disclosed or undisclosed, and its agents and their respective employees in respect to any claim occurring during the term of this Lease and normally covered under a fire insurance policy with extended coverage endorsement in the form normally used in respect to similar property in New York County. This Waiver shall include any claim which Tenant might otherwise have against Landlord, Landlord's partners or principals, disclosed or undisclosed, and its agents and their employees for loss, damage or destruction with respect to Tenant's property by fire or other casualty (including rental value or business interest, as the case may be). R9. EXCULPATORY CLAUSE. Tenant shall look only to Landlord's estate and property in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord hereunder. Tenant agrees that no other property or assets of Landlord or its partners or principals, disclosed or undisclosed, shall be subject to lien, levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use or occupancy of the demised premises. Furthermore, Tenant agrees that if Tenant shall acquire a lien on such other property or assets by judgment or otherwise, Tenant shall promptly release such lien by executing and delivering to Landlord an instrument to that effect prepared by Landlord or else be deemed in material default of this Lease. R10. WAIVER OF COUNTERCLAIM. Tenant shall and hereby does waive its right and agrees not to interpose any counterclaim or set off, of whatever nature or description, in any proceedings or action which may be constituted by Landlord against Tenant to recover Base Annual Rent, Additional Rent, other charges, or for damages, or in connection with any matters or claims whatsoever arising out of or in any way connected with this Lease, or any renewal, extension, holdover, or modification thereof, the relationship of Landlord and Tenant, or Tenant's use or occupancy of the demised premises. This Clause, as well as the "waiver of jury trial" provision of this Lease, shall survive the expiration, early termination, or cancellation of this Lease or the term thereof. Nothing herein contained, however, shall be construed as a waiver of Tenant's right to commence a separate action on a bonafide claim against Landlord. R11. DESIGNATION OF ARREARS. If Tenant is in arrears in payment of Base Annual Rent or Additional Rent (altogether called the "Rent"), Tenant waives Tenant's rights, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items Landlord sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. R12. DIRECTORY LISTINGS. If, at the request of and as an accommodation to Tenant, Landlord shall place upon such directory board, as Landlord may from time to time maintain in the lobby of the Building, one or more names or persons, firms or corporations other than Tenant, this shall not be deemed to operate as an ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 5 attornment or as a consent by Landlord to an assignment or sublet by Tenant of all or any portion of the demised premises to such persons, firms or corporations. Landlord reserves the right at all times to limit the number of listings which Tenant can have on the building directory. R13. ESTOPPEL CERTIFICATE. Supplementing Article 7. A. If, in connection with obtaining financing for the Building, a bank, insurance company or other lending institution shall request reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay, or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially and adversely affect the leasehold interest hereby created. B. Tenant agrees, at any time and from time to time, as requested by Landlord, upon not less than ten (10) days prior notice, to execute and deliver a statement certifying the following: 1. That this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force as modified and stating the modifications); 2. Certifying the dates to which the Base Annual Rent and Additional Rent have been paid; 3. Stating whether or not, to the best knowledge of Tenant, any party has defaulted under the Lease; 4. And, if a party has defaulted under the Lease, specifying each such default, stating whether or not to the best of knowledge of Tenant any event has occurred which with the giving of notice or passage of time, or both, would constitute such a default, and if so, specifying each such event, it being intended that any such statement delivered pursuant thereto shall be deemed a representation and warranty to be relied upon by Landlord and by others with whom Landlord may be dealing, regardless of independent investigation. R14. ASSIGNMENT AND SUBLETTING. Supplementing Article 11. A. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, or mortgage or otherwise encumber, all or any part of its interest in this Lease, sublet the demised premises, in whole or in part, or suffer or permit the demised premises or any part thereof to be used by other, without the prior written consent of Landlord in each instance. B. If Tenant shall desire to assign its interest in this Lease or to sublet all or any portion of the demised premises, Tenant shall submit to Landlord a written request for Landlord's consent to such assignment or subletting, which request shall be accompanied by the following information: (i) the name and address of the proposed assignee or subtenant; (ii) If Tenant desires to sublet a portion of the demised premises, a description of the portion to be sublet, together with a floor plan thereof; (iii) the terms and conditions of the proposed assignment or sublet; (iv) the nature ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 6 and character of the business of the proposed assignee or subtenant and its proposed use of the demised premises; and (v) current financial information and any other information Landlord may reasonably request with respect to the proposed assignee or subtenant. By notice given to Tenant within thirty (30) days after receipt of Tenant's request for consent to either sublet the entire demised premises or to assign the Lease, Landlord may terminate this Lease on a date to be specified in said Notice (the "Termination Date"), which date shall be not earlier than one (1) day before the effective date of the proposed assignment or sublet nor later than sixty-one (61) days after said effective date. Tenant shall vacate and surrender the demised premises on or before the Termination Date as if it were the lease expiration date (the "Lease Expiration Date"). However, if Tenant proposes to sublet any portion of the demised premises, Landlord, by notice given to Tenant within thirty (30) days after receipt of Tenant's request for consent thereto, may elect to eliminate such portion of the of the demised premises (said portion hereinafter called the "Eliminated Space") from the demised premises during the period (hereinafter called the "Elimination Period") commencing on the date (hereinafter called the "Elimination Date") immediately prior to the proposed commencement date of the term of the proposed sublet, and ending on the proposed expiration date of the term of the proposed sublet (the "Sublet Expiration Date"). In the event that Landlord gives notice to Tenant that it elects to eliminate said portion then: 1. The Eliminated Space shall be eliminated from the demised premises during the Elimination Period; 2. Tenant shall surrender the Eliminated Space to Landlord on or prior to the Elimination Date in the same manner as if said Date were the Lease Expiration Date; 3. If the Eliminated Space shall constitute less than an entire floor, Landlord shall, at Landlord's sole cost and expense, have the right to (i) make any alterations and installations in the demised premises required, in Landlord's sole and reasonable judgement, to make the Eliminated Space a self-contained rental unit with access through corridors to the elevators and core toilets serving the Eliminated Space, (ii) if the demised premises shall contain any core toilets or any corridors (including any corridors proposed to be constructed by Landlord pursuant to this Subparagraph 2(3)), provide access from the Eliminated Space to the core area, (iii) provide any tenant or other occupant of the Eliminated Space shall have the right to use such toilets in the corridors in common with Tenant and any other permitted occupants of the demised premises, and (iv) the right to install signs and directional indicators in or about such corridors indicating the name and location of such tenant or other occupant; 4. During the Elimination Period, the Base Annual Rent shall be reduced in the proportion to which the area of the Eliminated Space bears to the total area of the demised premises immediately prior to the Elimination Date (including an equitable portion of the area of any corridors referred to in subparagraph B(3) of this Article as part of the area of the Eliminated Space for the purpose of computing such reduction), Tenant's percentage shall be reduced proportionately, and any prepaid portion of Base Annual Rent and Additional ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 7 Rent for any period after the Elimination Date allocable to the Eliminated Space shall be refunded by Landlord to Tenant; 5. There shall be an equitable apportionment of any Additional Rent payable hereunder for any Tax Year in which said Elimination Date shall occur; 6. If the Elimination Period shall end prior to the Lease Expiration Date, the Eliminated Space, in its then existing condition, shall be deemed restored to and once again become a part of the demised premises during the period (hereinafter called the "Restoration Period") commencing on the date immediately following the expiration of the Elimination Period and ending on the Lease Expiration Date (except if Landlord is unable to give Tenant possession of the Eliminated Space at the expiration of the Elimination Period by reason of the holding over or retention of possession of any tenant or any other occupant, then, in that case, (i) the Restoration Period shall not commence, and the Eliminated Space shall not be deemed restored to the demised premises, until the date upon which Landlord shall give Tenant possession of such Eliminated Space free of all occupancies, (ii) neither the Lease Expiration Date nor the validity of this Lease shall be affected, and (iii) Tenant waives any rights under Section 223-a of the Real Property Law of New York, or any successor statute of similar import, to rescind this Lease and Tenant further waives the right to recover any damages which may result from the failure of Landlord to deliver possession of the Eliminated Space to Tenant at the end of the Elimination Period); 7. During the Restoration Period, if any, the Base Annual Rent shall be increased in the proportion to which the area of the Eliminated Space bears to the total area of the demised premises immediately prior to the commencement of the Restoration Period (including an equitable portion of the area of any corridors referred to in subparagraph B(3) of this Article as part of the area of the Eliminated Space for the purpose of computing such increase) and Tenant's Percentage shall be increased proportionately; and 8. There shall be an equitable apportionment of any Additional Rent payable hereunder for any Tax Year in which the Restoration Period, if any, shall commence. At the request of Landlord, Tenant shall execute and deliver an instrument(s), in a form satisfactory to Landlord, setting forth any modifications to this Lease contemplated in or resulting from the operation of the foregoing provision of this subsection; (however, neither Landlord's failure to request any such instrument nor Tenant's failure to execute or deliver any such instrument shall vitiate the effect of the forgoing provisions of this subsection B). C. If Landlord shall not exercise its option to terminate this Lease or eliminate the Eliminated Space from the demised premises pursuant to subsection B above, then Landlord shall not unreasonably withhold its consent to the proposed assignment or sublet for the use permitted in this Lease, provided that: 1. The demised premises shall not, without Landlord's prior consent, have been listed or otherwise publicly advertised for assignment or sublet at a rental rate lower than the higher of (a) the Base Annual Rent and all Additional Rent then payable, or (b) the then prevailing rental rate for other space in the Building, and Tenant shall not enter into any sublease at a lower rental rate than the Base Annual Rent and all Additional Rent then payable; ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 8 2. Tenant shall not then be in default hereunder beyond the expiration of any applicable grace period; 3. The proposed assignee or subtenant shall have a financial standing, be of a character, be engaged in a business, and propose to use the demised premises in a manner consistent with the permitted use(s) and in keeping with the standards of the Building; 4. The proposed assignee or subtenant shall not then be a tenant, subtenant or assignee of any space in the Building, nor shall the proposed assignee or subtenant be a person or entity with whom Landlord is then negotiating to lease space; 5. The character of the business to be conducted in the demised premises by the proposed assignee or subtenant shall not substantially increase operating expenses or building energy costs or the burden on existing cleaning services or elevators in the Building. 6. In case of a sublet, the subtenant shall be expressly subject to all of the obligations of Tenant under this Lease and the further condition and restriction that such sublease shall not be assigned, encumbered or otherwise transferred or the demised premises further sublet by the subtenant in whole or in part, or any part thereof suffered or permitted by the subtenant to be used or occupied by others, without the prior written consent of Landlord in each instance. 7. No subletting shall end later than one (1) day before the Lease Expiration Date nor shall any sublet be for a term of less than two (2) years unless it commences less than two (2) years before the Lease Expiration Date. 8. At no time shall there be more than two occupants, including Tenant, in the demised premises. 9. Any portion of the demised premises proposed to be sublet shall not comprise less than twenty five (25%) percent contiguous square feet of area and shall be of a shape or configuration such that both the area proposed to be sublet and the remainder of the demised premises shall in Landlord's judgment constitute commercially marketable separate rental units. 10. Tenant shall reimburse Landlord on demand for any costs, including attorney's fees and disbursements, that may be incurred by Landlord in connection with said assignment or sublease. D. Every sublet hereunder is subject to the express condition, and by accepting a sublease hereunder and each subtenant shall be conclusively deemed to have agreed, that if this Lease should be terminated prior to the Lease Expiration Date or if Landlord should succeed to Tenant's estate in the demised premises, then at Landlord's election such subtenant shall either surrender the demised premises to Landlord within sixty (60) days of Landlord's request therefor, or shall attorn to and recognize Landlord as such subtenant's Landlord under such sublease, and such subtenant shall promptly execute and deliver any instrument Landlord may reasonably request to evidence such attornment. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 9 E. Tenant shall deliver to Landlord a copy of each sublease or assignment made hereunder within ten (10) days after the date of its execution. Tenant shall remain fully liable for the performance of all of Tenant's obligations hereunder notwithstanding any sublet or assignment and, without limiting the generality of the foregoing, shall remain fully responsible and liable to Landlord for all acts and/or omissions of any subtenant, assignee or anyone claiming by, through or under any subtenant or assignee which shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant itself. Notwithstanding any assignment and assumption by the assignee of the obligations of Tenant hereunder, this Tenant, and each successor-in-interest of this Tenant, shall remain liable jointly and severally (as a primary obligor) with its assignee and all subsequent assignees for the performance of Tenant's obligations hereunder, and shall remain fully and directly responsible and liable to Landlord for all acts and/or omissions on the part of any assignee subsequent to it in violation of any of the obligations of this Lease. F. Notwithstanding anything to the contrary contained in this Lease, no assignment of Tenant's interest in this Lease shall be binding upon Landlord unless the assignee, (and, if the assignee is a partnership, the individual partners thereof), shall execute and deliver to Landlord an agreement, to be later described, in recordable form. In such agreement, the assignee shall agree unconditionally to be personally bound by and to perform all of the obligations of Tenant hereunder and shall further expressly agree that, notwithstanding such assignment, the provisions of this Article shall continue to be binding upon such assignee with respect to all future assignments and transfers. G. If Tenant shall enter into any assignment, sublease or other agreement of occupancy permitted under this Lease, of or affecting all or any portion of the demised premises, or if there is any transfer of this Lease by operation of law or otherwise, and if Tenant shall receive any consideration from its assignee, subtenant or licensee for or in connection with the assignment of Tenant's interest in this Lease or the sublet or occupancy of all or any part of the demised premises, as the case may be (including, but not limited to, sums paid for the sale or rental of Tenant's leasehold improvements, less, in the case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns) or, if Tenant shall sublet or otherwise permit occupancy of the demised premises at a rental rate (including Additional Rent) or other periodic consideration which shall exceed the Base Annual Rent and Additional Rent then payable hereunder, then Tenant shall pay to Landlord, as Additional Rent hereunder, one-half (1/2) of such consideration or such excess. H. Any transfer, by operation of law or otherwise of the interest of Tenant in this Lease (in whole or in part) or of a fifty (50%) percent or greater interest in Tenant (whether stock, partnership interest or otherwise) shall be deemed an assignment of this Lease within the meaning of this Article. If there has been a previous transfer of less than a fifty (50%) percent interest in Tenant, any other transfer of an interest in Tenant which would then result in an aggregate transfer of greater than fifty (50%) percent interest in Tenant shall be deemed an assignment of the interest of Tenant in this Lease within the meaning of this Article. Anything contained herein to the contrary notwithstanding the provisions of this section H shall not apply to the sale of shares by persons other than those deemed "insiders" within the meaning of the Securities Exchange Act of 1934, as amended, where such sale is effected through any recognized exchange or through the "over-the-counter" market, unless the same to be related to, result in or be the result of any merger, consolidation, tender offer, ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 10 takeover or other activity involving the acquisition of control of Tenant by another unrelated corporation or legal entity. All references to "Tenant" in this section H shall also be deemed to refer to any immediate or remote subtenant or assignee of Tenant. I. The consent of Landlord to an assignment or a subletting shall not relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or sublet. J. If Tenant's interest in this Lease be assigned, or if the demised premises or any part thereof be sublet or occupied by anyone other than Tenant, Landlord may collect Rent from the assignee, subtenant or occupant and apply the net amount collected to the Base Annual Rent and all Additional Rent herein reserved, but no such assignment, sublet, occupancy or collection shall be deemed a waiver of the provisions of this Article or of any default hereunder or the acceptance of the assignee, subtenant or occupant as Tenant, or a release of Tenant from the further observance or performance by Tenant of all of the covenants, conditions, terms and provisions on the part of Tenant to be performed or observed under this Lease. K. Tenant shall notify such managing agent of its desire to assign this Lease or sublet the premises. Upon obtaining a proposed assignee or sublessee, Tenant shall submit to Landlord in writing (i) the name of the proposed assignee or subtenant; (ii) the terms and conditions of the proposed assignment or sublease; (iii) the nature or character of the business of the proposed assignee or subtenant or (iv) any other information reasonably requested by Landlord. L. If there is a dispute between Landlord and Tenant as to the reasonableness of Landlord's refusal to consent to any sublease or assignment, such dispute shall be determined by arbitration in The City of New York in accordance with the prevailing rules of the American Arbitration Association, The arbitrators shall be bound by the provisions of this Lease and shall not add to, subtract from or otherwise modify such provisions. Notwithstanding any contrary provisions hereof, Landlord shall not be liable to Tenant for a breach of Landlord's covenant not unreasonably to withhold such consent and Tenant's sole remedy in such event shall be to enter into the proposed sublet or assignment. R15. LATE FEES In every case in which Tenant is required by the terms of this Lease to pay to Landlord a sum of money (including, without limitation, payment of Base Annual Rent and Additional Rent) and payment is not made within ten (10) days after the same shall become due, Tenant shall pay as Additional Rent hereunder, a late charge of seventy five ($75.00) dollars in addition to interest on such sum of money or so much thereof as shall be unpaid from the date it becomes due until it is paid. Such interest shall be computed at a rate which shall be one and one-half (l.5%) percent per month; provided, however, in no event shall such interest be in excess of the highest rate of interest which shall from time to time be permitted under the laws of the State of New York to be charged on late payments of sums of money due pursuant to the terms of a lease. R16. TENANT HOLDOVER. In the event that Tenant does not surrender all of the demised premises to Landlord upon the expiration or other earlier termination of this Lease, Tenant shall pay, as a use and occupation charge during such "hold-over period", a monthly amount equal to the sum of two (2) times the Base Annual Rent being due and payable during the last month of the term. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 11 Tenant agrees it shall indemnify and save Landlord harmless against all costs, claims, loss or liability resulting from delay by Tenant in surrendering the demised premises upon the expiration or earlier termination of this Lease, including, without limitation, any claims made by any succeeding tenant founded on such delay. R17. LIMITING LAW. If any law, decision, order, rule or regulation (collectively called "Limiting Law") of any governmental authority shall have the effect of limiting, for any period of time, the amount of Rent or other amounts payable by Tenant to Landlord to any amount less than the amount required by the Lease, then: A. Throughout the period of limitation, Tenant shall remain liable for the maximum amount of Rent and other amounts which are legally payable; and B. When the period of limitation ends or the amount allowed under a later Limiting Law is increased, or if the Limiting Law is repealed, or following any order or ruling that substantially restrains or prohibits the enforcement of the Limiting Law, then Tenant shall pay to Landlord, in twelve (12) equal consecutive monthly installments (to the extent that payment of such amounts is not prohibited by law), all amounts that would have been due from Tenant to Landlord during the period of limitation but which were not paid because of the Limiting Law; and thereafter Tenant shall pay to Landlord Rent and all other amounts due pursuant to this Lease, all calculated as though there had been no intervening period of limitation. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 12 R18. TENANT DEFAULT. Supplementing Article 17. Any default by Tenant under any other lease of space in the Building shall be deemed a default of the same nature under this Lease. R19. BROKER. Tenant represents to Landlord that no broker or other person other than Bernstein Real Estate and Williamson, Picket, Gross, Inc. had any part or was instrumental in any way in bringing about this Lease and Landlord alone shall pay any commission or fee due to Bernstein Real Estate and Williamson, Picket, Gross, Inc.. Tenant agrees to indemnify and hold Landlord harmless from and against any claims made by any other broker or other person seeking a brokerage commission, finder's fee, or similar compensation, by reason of or connection with this Lease, and any loss, liability, costs and expense (including reasonable attorney's fee) paid or incurred by Landlord in connection therewith, if the same shall arise by, through or on account of any act of Tenant or Tenant's agents, employees or representatives. Landlord represents that it knows of no claims by any other brokers. R20. UTILITIES. A. Tenant acknowledges and agrees that no utilities or other services, except as may be specifically provided herein, have been included in Tenant's Rent and that Landlord shall have no obligation to furnish or supply air conditioning, ventilation, or any other utility or service to or for the demised premises or as may be required by Tenant for its use and occupancy thereof B. Except as otherwise provided in this Lease, all utilities and services, other than heat (subject to the provisions of Section C of this Article), required for the use and occupancy of the demised premises shall be provided by Tenant, at its own cost and expense. C. Supplementing the provisions of Section B above, provided that Tenant is not in default under the terms of this Lease, Landlord shall permit Tenant to obtain heat for Tenant's use in the demised premises as, when and to the extent that same shall be furnished to the other tenants of the Building from the Building's central system. Tenant acknowledges and agrees that: 1. Tenant shall be entitled to receive such heat in the demised premises only during such times and in such quantities as heat is being furnished to the other tenants of the Building; 2. Landlord shall not be liable or responsible for the distribution of heat within the demised premises; and 3. Landlord has made no representation as to the sufficiency, adequacy or condition of the Building's central system heat facilities or boiler or of the heat for Tenant's use and occupancy of the demised premises. D. Notwithstanding anything to the contrary contained within this Lease, Landlord shall provide utilities in accordance with Article 31. In addition, Tenant shall have key access to the demised premises twenty four (24) hours a day, seven (7) days a week. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 13 Tenant understands that a lobby attendant is not supplied at all times during such access period. R21. TENANT REPAIRS AND IMPROVEMENTS. Supplementing Article 3. Tenant understands and agrees that no changes in or to the demised premises, of whatever nature, may be made without the prior written consent of Landlord. R22. ARBITRATION. Landlord may at any time request arbitration, and Tenant may at any time when not in default in the payment of any Rent request arbitration, of any matter in dispute, but only where arbitration is expressly provided for in this Lease such as in R.14. The party requesting arbitration shall do so by giving written notice to that effect to the other party, specifying in said notice the nature of the dispute, and said dispute shall be determined in New York City, before a panel of three arbitrators, in accordance with the rules of the American Arbitration Association or its successor, then obtaining, and any proceeding relating to such arbitration shall be brought in the Supreme Court of New York, County of New York, and any judgment upon the award rendered by the arbitrators may be entered in the same Court. The parties shall have the right to avail themselves of disclosure in aid of arbitration hereunder. Such rules notwithstanding, the arbitrators sitting in any arbitration arising hereunder shall be bound by the laws of the State of New York and shall not have the authority or power to modify or alter any express condition or provision of this Lease, to declare any such condition or provision unconscionable or otherwise inapplicable or unenforceable or to render an award which has the effect of altering or modifying any express condition or provision hereof or deeming in inapplicable or unenforceable for any reason whatsoever. R23. INTENTIONALLY OMITTED. R24. TENANT'S SQUARE FOOTAGE, PERCENTAGE AND SHARE. The square footage, share, and percentage set forth in this Lease are approximate only and the Landlord and Tenant hereby agree that same shall not be deemed a representation of Landlord. Furthermore, Landlord and Tenant agree that any square footage, share or percentage has been determined solely for the purposes of computing Tenant's contribution to escalation charges. R25. LANDLORD'S APPROVAL. If Tenant shall request Landlord's approval or consent and Landlord shall fail or refuse to give such approval or consent, Tenant shall not be entitled to any damages for any withholding or delay of such approval or consent by Landlord, it being intended that Tenant's sole remedy shall be an action for injunction without bond or specific performance (the rights to money damages or other remedies being hereby specifically waived), and that such remedy shall be available only in those cases where Landlord shall have expressly agreed in writing not to unreasonably withhold its consent or approval or where as a matter of law Landlord may not unreasonably withhold its consent or approval. R26. PROHIBITED USES. A. Tenant agrees that the value of the demised premises and the reputation of the Landlord will be seriously injured if the premises are used for any obscene or pornographic purposes or any sort of commercial sex establishment. Tenant Agrees that tenant will not bring or permit any obscene or pornographic material on the premises, and shall not permit or conduct any obscene, nude, or semi-nude live ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 14 performances on the premises, nor permit use of the premises for nude modeling, or as a so-called rubber goods shops, or as a sex club of any sort, or as a "massage parlor." Tenant agrees further that Tenant will not permit any of these uses by any sublessee or assignee of the premises. This Article shall directly bind any successors in interest to the Tenant. Tenant agrees that if at any time Tenant violates any of the provisions of this Article, such violation shall be deemed a breach of a substantial obligation of the terms of this Lease and objectionable conduct. Pornographic material is defined for purposes of this Article as any written or pictorial matter with prurient appeal or any objects of instrument that are primarily concerned with lewd or prurient sexual activity. Obscene material is defined here as it is in Penal Law Section 235.00. B. It is specifically understood and agreed that at no time shall the demised premises be used for living, sleeping, or any other residential purpose. C. Notwithstanding anything in Article 2 or elsewhere in this Lease to the contrary, Tenant shall not use or permit all or any part of the demised premises to be used for the: (i) storage for purpose of sale of any alcoholic beverage in the demised premises; (ii) storage for retail sale of any product or material in the demised premises; (iii) conduct of a manufacturing, printing or electronic data processing business, except that Tenant may operate business office reproducing equipment, electronic data processing equipment and other business machines for Tenant's own requirements (but shall not permit the use of any such equipment by or for the benefit of any party other than Tenant); (iv) rendition of any health or related services, conduct of a school or conduct of any business which results in the presence of the general public in the demised premises; (v) conduct of the business of an employment agency or executive search firm; (vi) conduct of any public auction, gathering, meeting or exhibition; (vii) conduct of banking and related financial business operations (except for a credit union and/or benefit plans for Tenant's employees) or a stock brokerage office or business, if such banking, financial or brokerage operations result in the presence of the general public in the demised premises. D. Tenant shall not use or permit all or any part of the demised premises to be used so as to impair the Building's character or dignity or impose any additional burden upon Landlord in its operation. E. Tenant shall not obtain or accept for use in the demised premises ice, drinking water, food, beverage, towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services for any party not theretofore approved by the Landlord (which party's charges shall not be excessive). Such services shall be furnished only at such hours, in such places within the demised premises and pursuant to such regulations as Landlord prescribes. R24. CONDITIONAL OFFER. It is specifically understood and agreed that this Lease is offered to the Tenant for signature by the Managing Agent of the building solely in its capacity as such Agent and subject to the Landlord's acceptance and approval and that the Tenant has hereunto affixed its signature with the understanding that the said Lease shall not in any way bind the Landlord or its Agent until such time as the Landlord has approved said Lease and same is fully-executed and delivered to Tenant by an authorized agent of Landlord. R27 ADDITIONAL RENT. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 15 Notwithstanding anything to the contrary contained in this Lease, any monies due Landlord other than the Base Annual Rent are deemed to be additional rent ("Additional Rent"), and any default in the payment of Additional Rent shall give to Landlord the same remedies as it has with respect to a default in the payment of Base Annual Rent. R28. RENT CONCESSION. Anything contained herein to the contrary notwithstanding, Tenant may occupy the demised premises Base Annual Rent free for the period beginning September 1, 1997 through to and inclusive of February 28, 1998. During this period the Tenant shall be responsible and shall pay for any and all Additional Rent charges provided for within the Lease for which Tenant will be billed on a monthly basis. R29. SECURITY. Supplementing Article 34. If Landlord applies or retains any part of the security so deposited, Tenant, within ten (10) days of Landlord's demand, shall pay to Landlord as Additional Rent the amount so applied or retained so that Landlord shall have the full deposit as stated in Article 31. at all times during the term of this Lease. Failure to replenish the Security Account within ten (10) days shall be deemed a material default under this Lease. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 16 R30. NOTICE. All notices required under this Agreement shall be in writing and shall be sent by Certified Mail, Return Receipt Requested to the address of party set forth below. Notice shall be deemed given five (5) business days after said notice, contained in a sealed properly addressed postage paid and certified envelope, is deposited in any official depository for United States Mail. Any party hereto may change the below set forth address to which notice addressed to said party is to be thereafter sent, by sending notice of said new address to the other party to this Lease. The addresses to which notices are to be sent (until said addresses are changed as herein authorized) are: LANDLORD: CLEMONS MANAGEMENT CORP. c/o Bernstein Real Estate 855 Avenue of the Americas New York, NY 10001 TENANT: At the Premises; (see also Insert 24) In lieu of sending notice by certified mail, notice may be delivered by hand to the addressee at its address set forth herein (or at any new address as herein provided), in which event such notice shall be deemed given on the next business day following said actual delivery of said notice by hand. R31. SIGNS. A. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside of the demised premises or the Building or on the inside of the demised premises if the same can be seen from the outside of the demised premises, without the prior written consent of Landlord in each instance. Tenant shall comply with all of the laws, orders, rules and regulations of the governmental authorities having jurisdiction thereof, including zoning laws, building codes and as required by insurance underwriters. Tenant shall obtain and pay for all permits required therefor. In the event of the violation of the foregoing by Tenant and if Tenant has refused to remove same after reasonable notice from Landlord, Landlord may remove same without any liability to Tenant therefor, Landlord may charge the expense incurred by such removal to Tenant as Additional Rent. In the event that Tenant desires to make changes to their signage, Tenant must give Landlord written request of its intent, including a description of the alterations desired, such change is subject to the sole and absolute discretion of Landlord. Should Landlord consent to such change then the change shall be made by Landlord at Tenant's sole cost and expense. B. In the event Landlord or Landlord's representatives shall deem it necessary to remove any sign or signs in order to paint or to make any other repairs, alterations or improvements in or upon said premises, or the Building wherein the same is situated, or any part thereof, Landlord shall have the right to do so, provided the same be removed and replaced promptly at the Landlord's expense. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 17 R32. HEALTH AND SAFETY. As a material condition of this Lease Tenant, at its sole cost and expense, covenants and agrees: C. PEST CONTROL. To employ an exterminator, as may be necessary, to keep the demised premises free of insects and mice as necessary. D. RUBBISH. To provide private carting for the removal of, and promptly dispose of all garbage, refuse, ashes and waste arising from the conduct of its business in the demised premises in accordance with any and all applicable municipal codes and regulations and in accordance with any rules and regulations of the Building which, in the judgment of Landlord, are necessary for the proper operation of the Building. All garbage that is retained in the premises shall be kept in covered receptacles. Any and all other reasonable safeguards that may be necessary so as to prevent the accumulation of such garbage or refuse from becoming a nuisance or interfering with the comfort of the other occupants of the Building of which the demised premises form a part shall be provided by Tenant at its own cost and expense. F. FIRE CONTROL. To furnish and install in the demised premises all fire fighting equipment and all appurtenances thereto required by the government authorities having jurisdiction of the demised premises which may be required by the use of the demised premises. D. DEMISED PREMISES. To maintain or cause to be maintained the demised premises in a clean and uncluttered, neat, sanitary and safe manner, and shall, at Tenant's sole cost and expense, provide or cause to be provided all maintenance supplies, materials and equipment necessary to maintain the demised premises in such a manner. Tenant further agrees, at its sole cost and expense, to keep the floors of the demised premises in a clean and condition. E. ODORS. At all times to operate its business in the demised premises in such a manner so that no offensive odors shall be permitted to emanate therefrom or to be produces beyond the walls of the demised premises. For that purpose, Tenant will, at its sole cost and expense, install, utilize, maintain and replace, where necessary, an adequate ventilation system in the demised premises and any other equipment suitable to keep the Building, including the hallways, lobbies, other common areas, and the adjacent sidewalk, if applicable, free from offensive odors and fumes. R33. NOISE. Tenant's right of QUIET ENJOYMENT as set forth in Article 23 of this Lease is modified as follows: Tenant or Tenant's successor-in-interest shall not create any noise levels which shall interfere with the quiet enjoyment of any tenants occupying other portions of the Building of which ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 18 the demised premises are a part, nor of the neighbors of the Building. Tenant agrees to promptly notify Landlord in writing of all noise complaints or summons's which it receives in writing, and to submit a proposal reasonably satisfactory to Landlord as to how to handle same and assure that such complaints shall not recur. In the event that any legal action is brought against Landlord by any municipal authority having jurisdiction, arising out of noise emanating from the demised premises Tenant shall pay Landlord, as Additional Rent, all of the attorney's fees and disbursements incurred by Landlord in defending such an action. R34. MISCELLANEOUS. F. Tenant covenants and agrees that it shall not permit any loitering by its agents, servants or employees on the sidewalk or street in front of the demised premises. G. Supplementing the provisions of Article 17. hereof, if, at any time during the term hereof, Tenant suspends or otherwise discontinues operation of its business at the demised premises for a period of thirty (30) consecutive days as a result of Tenant's acts, Landlord may, in its sole discretion, treat same as a default on the part of Tenant of Tenant's obligations hereunder and Landlord shall be entitled to exercise the rights set forth in said Article 17. All of the remaining terms and provisions of Article 17. hereof shall remain unchanged. R35. TENANTS ALTERATIONS. H. Tenant covenants and agrees that it shall make only non-structural alterations to the demised premises ("Tenant's Alterations"). Tenant acknowledges and agrees that Landlord shall have no obligation to perform any work or make installations in the demised premises and that Tenant has fully inspected the demised premises and accepts the demised premises in its "as is" and "where is" condition. I. Tenant covenants and agrees that all material, work, labor, fixtures and installations required for completion of the demised premises and the continuous operation of Tenant's business thereat (collectively "Tenant's Alterations") shall be promptly performed and provided by Tenant, at Tenant's own cost and expense. Tenant's Alterations shall comply with all rules and regulations of governmental authorities having jurisdiction thereover and Tenant shall, at its own cost and expense, promptly procure all necessary and required permits, approvals and licenses in connection with Tenant's Alterations and the operation of Tenant' business. J. Plans and specifications for the demised premises and Tenant's installations therein (collectively "Tenant's Plans") shall be prepared by Tenant, at Tenant's own cost and expense, and all Tenant's Plans shall be subject to the prior written approval of Landlord and submitted to Bernstein Real Estate or Landlord's then managing agent. Tenant shall submit Tenant's Plans to Landlord for such approval such approval not to be unreasonably withheld or delayed. Landlord's approval of Tenant's Plans shall not be deemed a representation or warranty of any kind to the effect that Tenant's Plans satisfy the requirements or standards of any governmental authority having jurisdiction thereover. K. Within ten (10) days following Landlord's advice to Tenant that Tenant's Plans have been approved by Landlord, Tenant shall notify Landlord in writing of the names of the contractors who are to perform the Tenant's Alterations in the demised premises (individually or collectively "Tenant's Contractor"), and shall thereafter promptly furnish Landlord with such other information relating to Tenant's alterations as landlord may require. Tenant acknowledges that it shall not be permitted to ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 19 commence Tenant's Alterations unless and until Tenant's Contractor shall have complied with Landlord's insurance requirements. Tenant agrees that, within twenty (20) days following Landlord's advice to Tenant that Tenant's Plans have been approved by Landlord, Tenant shall cause Tenant's Contractor to (i) comply with said insurance requirements, and (ii) commence performing Tenant's Alterations, which shall be diligently pursued to completion. L. 1. As a precondition to Tenant being permitted to perform any Tenant's Alterations, and throughout the entire period Tenant's Alterations is being performed, it shall be the obligation of Tenant to require Tenant's Contractor to carry and maintain, at no expense to Landlord: a) Comprehensive general liability insurance, including, but not limited to, contractor's liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement and contractor's protective liability coverage, to afford protection with limits, for each occurrence, of not less than $3,000,000 with respect to personal injury or death, and $1,000,000 with respect to property damage; and b) Worker's compensation or similar insurance in form and amounts required by law. 2. All policies of insurance required under Subsection E.1. of this Article shall name Landlord and Managing Agent as additional insureds, and certificates thereof shall be delivered to Landlord c/o Bernstein Real Estate or its then managing agent prior to the commencement of Tenant's Alterations. 3. Tenant shall furnish Landlord a waiver of lien from each of Tenant's Contractor (in the form set forth on Exhibit B annexed hereto). F. Tenant covenants and agrees that Tenant shall (i) indemnify Landlord from, and hold Landlord harmless against, all claims, actions, proceedings, suits of any nature whatsoever including, but not limited to, property damage and/or personal injury and/or wrongful death, resulting from Tenant's Alterations at the demised premises and (ii) satisfy and pay any violations, summons, fines, notices, orders imposed against the Landlord, the demised premises and/or the Building by any governmental authority having jurisdiction thereover, resulting from Tenant's Alterations at the demised premises. G. Except with respect to the time periods set forth in Sections C and D of this Article, all of the remaining provisions of Sections B, E, F and G of this Article shall also apply to any and all alterations, installations, additions or improvements with Tenant is permitted to make in or to the demised premises pursuant to Article 3 hereof. R36. INTENTIONALLY OMMITED. R37. AIR CONDITIONING. Prior to installing new or additional air conditioning unit or units in the demised premises, the Tenant shall first obtain the written consent of the Landlord or its Managing Agent. Tenant shall pay for all electrical current consumed in the operation thereof. In the event such unit or units utilize circulating water, it shall be equipped with an approved water conserving device and in connection therewith, Tenant shall install and maintain in good working order, at its own cost and expense, a ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 20 water meter which shall meter all make-up water used in such air conditioning equipment and shall pay for such water as per meter reading and in addition thereto, sewerage or any other charge, tax, or levy which now or hereafter is imposed by the City of New York in connection with said use of water. Any charge for electricity or water consumed as herein provided, shall be in addition to any other such charges as may be specified elsewhere in this Lease and shall be deemed to be additional rent and payable as such. There now exists in the demised premises central air conditioning units and the appurtenant duct work for the demised premises. Landlord shall deliver the existing air conditioning unit in good working order at the start of this Lease. In the event that it becomes necessary to repair any part of the air conditioning unit during the term of this Lease, provided that said repair is not due to Tenant's improper use or negligence, and Tenant undertakes said repairs using Landlord's approved contractor, then upon Landlord's agent having determined that such repair was necessary and has been properly completed, Landlord shall reimburse Tenant for the amount that such repairs exceed one thousand dollars ($1,000.00) in any given year excluding routine maintenance and filters which is Tenant's sole responsibility and cost. Additionally, Tenant shall contract with Landlord's air conditioning contractor for annual service. The service contract must remain in full force and effect during the term of the Lease. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 21 Exhibit B WAIVER OF LIEN Dated: STATE OF NEW YORK BOROUGH OF MANHATTAN KNOW ALL MEN BY THESE, PRESENT, that the Undersigned being duly authorized by __________________ , for and in consideration of $ __________ representing the accumulated amount paid to the Undersigned, receipt whereof is hereby acknowledged does hereby WAIVE, RELEASE, and SURRENDER, any and all lien or claim or right of lien, to the date of this Waiver, for labor, materials, and/or services furnished upon the Premises situated in the Borough of Manhattan, State of New York and as described below: - ---------------------------- By: ------------------------ Subscribed and sworn to before me this ___ day of ____ My Commission expires ___________________ Notary Public ____________ Notary Public [ILLEGIBLE] RE INSERTS TO PRINTED FORM AND SUPPLEMENTAL RIDER PARAGRAPHS TO LEASE AGREEMENT, DATED AS OF SEPTEMBER 15, 1997, BETWEEN CLEMONS MANAGEMENT CORP., AS OWNER, AND THE STAR MEDIA NETWORK, INC., AS TENANT, COVERING PREMISES AT 29-33 WEST 36TH STREET, NEW YORK NY - -------------------------------------------------------------------------------- Inserts to Printed Form 1A. structural 1B. which consent shall not be unreasonably withheld or delayed. 1C. [Intentionally Omitted] 1D. which approval shall not be unreasonably withheld or delayed 2A. reasonably 2B. Notwithstanding anything to the contrary contained in this Article 3 or elsewhere in this Lease, Tenant, shall be entitled to make non-structural alterations of a decorative nature to the Premises, from time to time, without Owner's consent, provided in each instance the cost thereof shall not exceed $25,000.00, Landlord receives prior notice of Tenant's intent and Tenant complies with Article 3 of this Lease. 3. [Intentionally Deleted] 4. Notwithstanding anything to the contrary contained in Articles 4, 20, 27, 31 or elsewhere in this Lease, if, as a result of (i) repairs, alterations, additions or improvements made by or on behalf of Owner (not required by compliance with any new law or regulation), (ii) the interruption or stoppage of the plumbing, electric, heating, air-conditioning, elevator or other systems serving the demised premises (other than any interruption of stoppage because of inability to obtain parts or similar reason beyond the reasonable control of Owner) Tenant shall be completely unable to conduct business in the full demised premises for more than five (5) consecutive business days, then and in such event, the fixed rental and additional rental payable by Tenant under this Lease shall be abated from and after the sixth (6th) day of such interruption and until the date on which Tenant is able to conduct its business in the demised premises. Owner agrees to make any repairs required as quickly as possible under the circumstances and to use its best efforts not to interfere with Tenant's business operations. 5. Notwithstanding anything to the contrary in Article 6, Article 30, or elsewhere in this Lease, it is understood that Tenant shall not be required to incur any expense in connection with any improvements, repairs, additions, alterations or changes (collectively, "changes") required to be made to the demised premises or the building by reason of any departmental or governmental regulation, order or law, including, but not limited to, installation of sprinkler systems or other fire prevention or safety measures, and Owner shall be solely responsible therefor, unless the same are required by reason of Tenant's particular manner of use of the demised premises, provided, however, that Tenant, at Tenant's expense, shall make any such changes required by Tenant's alterations to the premises. Further notwithstanding anything to the contrary contained hereinabove, Tenant will contribute up to $1,000 in any lease year towards changes which would be the Owner's responsibility hereunder. 6. or willful acts 7. , contractors, 8. Counsel selected by Tenant's insurer shall be deemed accept able to Owner. Supplementing Article 8 and notwithstanding anything to the contrary contained therein or elsewhere in this Lease, Owner shall not be relieved from any liability to Tenant for, nor shall Tenant indemnify Owner against, any injury to persons or property, or any loss or damage, arising from the wilful misconduct or negligence of Owner, or its agents, contractors or employees. 9A. fifteen (15) 9B. [Intentionally Deleted] 9C. Notwithstanding anything to the contrary contained within this Article 9 or elsewhere within this Lease, except if the damage to the demised premises or building is due to Tenant's or Tenant's agents fault, carelessness, wilful misconduct or negligence, Tenant may terminate this Lease if Landlord, in its sole determination and within ninety days (90) after such casualty, determines that the premises or building cannot be repaired or replaced or rendered usable within one hundred and twenty (120) days from Landlord's determination. In addition, if the demised premises or the building are, in Landlord's sole determination, substantially damaged during the last year of the Lease and such damage is not due to Tenant's or Tenant's agents fault, carelessness, wilful misconduct or negligence, Tenant may cancel the Lease in accordance with this Paragraph. However, notwithstanding anything to the contrary contained herein, in the event that Landlord shall have comparable space ("Temporary Premises") available, accessible and useable in the Building within thirty (30) days of said casualty then Tenant shall occupy the Temporary Premises in accordance with the same terms, conditions, and covenants of this Lease until the demised premises are restored and may not cancel this Lease. In order to terminate the Lease according to this Article, Tenant shall, after Landlord's determination as provided above, give Landlord thirty (30) days written notice (registered mail, return receipt requested) of its intent to terminate. 10. Notwithstanding anything to the contrary contained in Article 11 hereof, or elsewhere in this Lease, Owner hereby consents from time to time to the subletting of all or portion of the demised premises, and the assignment of this Lease (i) to a business entity fifty (50%) percent or more of the outstanding interests in which are owned by Chase Capital Partners and/or Fernando Espuelas or entities under common control, (ii) to a business entity succeeding (by merger, consolidation or otherwise) to substantially all of Tenant's business assets at the demised premises, and (iii) to a business entity to which Tenant has sold substantially all of its business assets at the demised premises, provided, in the case of an assignment of this Lease, the assignee(s) agree, in writing, to observe the terms and conditions of this Lease to be performed by Tenant. Such sublet/assignment in (i) - (iii) are contingent upon Tenant's successor having an equal or greater net worth that Tenant as of the date hereof. Any such subtenant shall have the right to list its name on the door to the premises and on the lobby, floor and elevator directories (if any). Without limiting the foregoing, Owner agrees that no right to recapture all or a portion of the demised premises as set forth in subdivision B of Article R14, or any right to share in the rent or other consideration (however characterized and whether or not in excess of the rent and additional rent payable hereunder) received by Tenant from the assignee or sublessee, shall be applicable with respect to the assignments and sublettings contemplated in subdivisions (i) thru (iii) above. Tenant shall give written notice to Owner of the name and address of the assignee or sublessee, as the case may be, following any exercise of Tenant's rights herein. With respect to any other proposed sublettings or assignments, Tenant shall have the right to withdraw its notice of proposed assignment or subletting in the event that Owner elects to exercise any of its rights pursuant to said Article R14. The offering and/or sale or transfer of the stock of Tenant pursuant to any private placement memorandum or in connection with and following any public offering shall not be deemed an assignment of this Lease. 11. , unless arising from the negligence or willful misconduct of Owner, its agents, employees or contractors. 12. after reasonable notice and during normal business hours 13. reasonably 14. and do not materially and adversely affect Tenant's business operation or require the removal or relocation of any of Tenant' s improvements. 15. Notwithstanding the foregoing, except in event of emergency, as aforesaid, Owner shall not enter the demised premises except during regular business hours, upon reasonable notice to Tenant, accompanied by Tenant or its representative. Further supplementing Articles 4, 13, 18 and 20, and notwithstanding anything to the contrary contained therein or elsewhere herein, Owner agrees: (i) that in the exercise of its various rights under this Lease to make repairs, improvements, replacements, etc., and/or to have access to the demised premises, Owner agrees to make any repairs required as quickly as possible under the circumstances and to use all reasonable efforts so as not to interfere with the operation of Tenant's business, and Owner shall promptly repair any damage to the demised premises arising therefrom, and (ii) whenever it is provided in this Lease that Owner may recover from Tenant (or be indemnified by Tenant as to) attorneys' fees, costs and/or expenses, such fees, costs and expenses shall be reasonable in amount. 16. [Intentionally Omitted] 17. seven (7) days notice 18. [Intentionally Omitted] 19. fifteen (15) 20. within seven (7) days after written notice from Owner 21. [Intentionally Omitted] 22. (except for the electrical, heating, and air-conditioning equipment and systems which shall be in good working order on the date of delivery of possession, and except as may otherwise be set forth herein), 23. [Intentionally Omitted) 24. two (2) business days after the date of mailing of the same in the manner hereinabove required. A copy of any notice to Tenant shall be sent simultaneously, by certified mail, return receipt requested, Tenant's attorneys, Stern, Wiener & Levy, (Attention: Robert N. Pellegrino, Esq.), at 950 Third Avenue, New York, New York 10022. Notices to Owner shall also be deemed given two (2) business days after the date the same are mailed in accordance with the following sentence. 25. [Intentionally Omitted] 26. shall not then be in default of this Lease (beyond any applicable grace and notice period, if any) 27. [Intentionally Omitted] 28. and non-discriminatory 4 29. All rule and regulations shall be enforced against Tenant in a non-discriminatory manner. In the event of any conflict between the terms and conditions of any Rules and Regulations now or hereafter adopted by Owner and any other provisions of this Lease, the other provisions of this Lease shall control. 30. other than arising from the negligence or willful acts of Tenant, its employees, agents, contractors, licensees and/or invitees. 31. Owner, from time to time, upon at least ten (10) days prior notice from Tenant, shall execute, acknowledge and deliver such certificate to Tenant, and/or to any such other person, firm or corporation as aforesaid. ---------- Supplemental Rider Paragraphs 1. Notwithstanding anything to the contrary contained in Paragraph R7, the term "real estate taxes" shall not include any additional real estate taxes arising from any enlargement of the demised premises or to the building of which the demised premises forms a part, it being agreed that Tenant shall have the burden of proving the existence of any increase attributable to any such enlargement. 2. Notwithstanding anything to the contrary contained in the Guaranty annexed hereto or anywhere else in this Lease, one time during the term of this Lease and provided that Tenant is not then in default of this Lease beyond any grace or applicable cure period, if any, Owner agrees to release the Guarantor from any further liability under the Guaranty from and after the date on which Tenant elects to tender to Landlord an additional three (3) months Base Annual Rent("Extra Security") as security (based on the then current rental rate). In that event only, Owner agrees to return to Tenant one month of the Extra Security in September 2000 and one month of the Extra Security in September 2001 in the form a rental credit. (ie. If Tenant tendered $21,000.00 of Extra Security in accordance with this Paragraph, then in September 2000 Landlord would return $7,000.00 and in September 2001 Landlord would return $7,000.00 with Landlord retaining the remaining $7,000.00 of Extra Security as security.) Guaranty A. As an inducement to Clemons Management Corp. ("Landlord"), to enter into an agreement of lease dated as of September 15, 1997 (the "Lease") with The Star Media Network, Inc. ("Tenant") for the premises located on the Entire Fifth Floor of the building known as 29--33 West 36th, New York, New York, (the "demised premises") the undersigned hereby absolutely, unconditionally and irrevocably guarantees to Landlord all Base Annual Rent and Additional Rent and other charges payable by Tenant under the Lease (hereinafter collectively referred to as "Accrued Rent"), up to the "Surrender Date". The "Surrender Date" means the date that Tenant shall have performed all of the following: (a) vacated and surrendered the demised premises to Landlord (or its managing agent) free of all subleases or licensees and in broom clean condition, and Tenant has so notified Landlord or such agent in writing and (b) delivered the keys to the doors to the demised premises to Landlord (or its managing agent). B. Guarantor shall not be liable under this Guaranty for any Base Annual Rent, Additional Rent or other charges or payments accruing under the Lease after the Surrender Date. Any security deposit under the Lease shall not be credited against amounts payable by Tenant, or by Guarantor under the terms of this Guaranty. The acceptance by Landlord of payments under this Guaranty or the acceptance of a surrender of the demised premises shall not be deemed a release or waiver by Landlord of any obligation of the Tenant under the Lease, and Tenant's obligations shall survive such acceptance and surrender. C Notwithstanding any payments made by Guarantor hereunder, the Guarantor shall not be subrogated to any of the rights of Landlord against Tenant for any payment, nor shall the Guarantor seek any reimbursement from Tenant in respect of payments made by such Guarantor hereunder until all of the amounts due or becoming due to Landlord under the Lease have been paid. D. This Guaranty is absolute and unconditional and is a guaranty of payment and performance, not of collection. This Guaranty may be enforced without the necessity of resorting to or exhausting any other security or remedy, and without the necessity at any time of having recourse to Tenant. The validity of this Guaranty shall not be affected or impaired by reason of the assertion by Landlord against Tenant of the rights or remedies reserved to Landlord under the Lease. Guarantor agrees that this Guaranty shall remain in force and effect as to any assignment, transfer, renewal, modification or extension of the Lease (excepting a public offering of the stock of Tenant or any entity which wholly controls Tenant as provided herein in Paragraph I below) whether or not Guarantor shall have received any notice of or consented to such renewal, modification, extension, assignment or transfer. E. The granting of any extension of time or the forbearance or failure of Landlord to insist upon strict performance or observance of any of the terms of The Lease, or otherwise to exercise any right therein contained, shall not be construed as a waiver as against Tenant or Guarantor of any such term or right and the same shall continue and remain in full force and effect. Receipt by Landlord of Rent with knowledge of the breach of any provision of the Lease shall not be deemed a waiver of such breach. The Guarantor waives notice of any and all defaults by Tenant in the payment of Base Annual Rent, Additional Rent, or other charges, and waives notice of any and all defaults by Tenant in the performance of any of the terms, of the Lease on Tenant's part to be performed. F. Guarantor further agrees that if Tenant becomes insolvent or shall be adjudicated a bankrupt or shall file for reorganization or similar relief or if such petition is filed by creditors of Tenant, under any present or future Federal or State law, Guarantor's obligations hereunder may nevertheless be enforced against the Guarantor. The termination of the Lease pursuant to the exercise of any rights of a trustee or receiver in any of the foregoing proceedings, shall not affect Guarantor's obligation hereunder or create in Guarantor any setoff against such obligation. Neither Guarantor's obligation under this Guaranty nor any remedy for enforcement thereof, shall be impaired, modified or limited in any manner whatsoever by any impairment, modification, waiver or discharge resulting from the operation of any present or future provision under the National Bankruptcy Act or any other statute or decision of any court. Guarantor further agrees that its liability under this Guaranty shall be primary and that in any right of action which may accrue to Landlord under the Lease, Landlord may, at its option, proceed against Guarantor or Tenant without having commenced any action against or having obtained any judgment against Tenant or Guarantor. G. Guarantor will pay reasonable attorneys' fees, court costs and other expenses incurred by Landlord in enforcing or attempting to enforce this Guaranty. H. This Guaranty is made and delivered in New York, New York and shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without regard to the conflicts of laws principles thereof. Guarantor hereby waives any right to trial by jury in any action or proceeding arising out of This Guaranty. I. Notwithstanding anything to the contrary contained hereinabove, Guarantor's liability hereunder shall extend only to the payment of Base Annual Rent and Additional Rent as set forth in R7 and Article 30 of the Lease until the sooner of (i) the Surrender Date or (ii) the date on which Tenant deposits additional security in strict accordance with Supplemental Rider Paragraph 2, or (iii) the date on which a public offering of the stock of Tenant or an entity which wholly controls Tenant is registered for a public offering and such public offering commences. J. All terms and provisions herein shall inure to the benefit of the assigns and successors of Landlord and shall be binding upon the assigns and successors of Guarantor. IN WITNESS WHEREOF, the Guarantors have signed this Guaranty on the _______ day of [ILLEGIBLE] - -------------------------------------- Guarantor SS#: 044729976 On the 16th day of September 1997 before me personally came to me known and known to me to be the individual described in, and who executed the foregoing guaranty, and he duly acknowledged to me that he executed the same. /s/ Donna A. Morales --------------------- DONNA A. MORALES Notary Public, State of New York No. 01M05062926 Qualified in Kings County Commission Expires July 8, 1998 AMENDMENT TO LEASE This Agreement made as of the April 8, 1998, between Clemons Management Corp. c/o Bernstein Real Estate, 855 Avenue of the Americas, New York, NY 10001, ("Landlord"), and Star Media Network, Inc., having offices at 29-33 West 36th Street, New York, NY, ("Tenant"). WITNESSETH WHEREAS, by Lease dated September 15, 1997 Landlord leased to Tenant, the Entire Fifth (5th) Floor ("demised premises") as presently occupied by Tenant in the building known as 29-33 West 36th Street, New York, NY, for a term of five (5) years beginning 9/01/97 and ending on 08/31/02 (as modified hereby, altogether the "Lease"); and WHEREAS, Tenant presently occupies the demised premises and is now the owner and holder of the aforesaid Lease, and WHEREAS, Landlord, and Tenant are desirous of modifying the Lease: NOW, THEREFORE, in consideration of the mutual covenants herein contained, ten dollars ($10.00) (the receipt and sufficiency of which is hereby acknowledged) and other good and valuable consideration, it is agreed between the parties that the Lease shall be amended as follows: 1. Demised Premises: Effective as of the date first set forth above, the demised premises shall also include the Entire 3rd Floor ("Additional Space") of the Building. Landlord shall deliver possession of the Additional Space in "as is" condition upon the execution of this Agreement. 2. Rent: Supplementing R5. of the Lease and effective 5/1/98, the Base Annual Rent for the Additional Space shall be as follows: $84,504.00 from 5/1/98 to 4/30/99 ($7,042.00 per month) $87,458.00 from 5/1/99 to 4/30/00 ($7,288.25 per month) $90,519.00 from 5/1/00 to 4/30/01 ($7,543.25 per month) $93,687.00 from 5/1/01 to 4/30/02 ($7,807.25 per month) $96,966.00 from 5/1/02 to 4/30/03 ($8,080.50 per month) The term for the Additional Space shall end on 8/31/02, if not earlier terminated by operation of law, in accordance with the Lease or otherwise. 3. Real Estate Taxes: Supplementing Article R7(A) and R7(D) of the Lease and effective 5/1/98, Tenant shall pay eight point three three percent (8.33%) as Additional Rent for the Additional Space. Supplementing R7(C) of the Lease and effective 5/1/98, Tenant's Base Tax Year for the Additional Space only shall be 1998/1999. 4. Security Deposit: Supplementing Article 32 of the Lease and upon the execution of this Agreement, Tenant shall deposit with Landlord fourteen thousand eighty three dollars and thirty four cents ($14,083.34) as security for the Additional Space so that Landlord shall now hold a total of twenty eight thousand one hundred sixty six dollars and sixty eight cents ($28,166.68) as security under the Lease. 5. Loan and Default: A. (i) As a material inducement to Landlord to enter into this Amendment to the Lease, Tenant has agreed to spend not less than eighty thousand dollars ($80,000.00) in making certain leasehold improvements (collectively the "Improvements") to the demised premises, which Improvements are more specifically described in Exhibit A attached hereto and made a part hereof and which shall be made in accordance with the Lease, including but not limited to Article 3, 6 and R35 thereof. (ii) In connection with the Improvements, Landlord has agreed to make, and Tenant has agreed to accept, a loan (the "Loan") from Landlord in the principal sum of eighty thousand dollars ($80,000.00) to be paid out in accordance with Paragraph B below (the "Note") and as evidenced by a certain Promissory Note of an even date herewith (see Exhibit B1 attached hereto and made a part hereof). Tenant hereby specifically acknowledges and agrees that the Note and this Lease are hereby cross-defaulted so that any default under the Note shall constitute a default under this Lease and any default under this Lease shall constitute a default under the Note entitling Landlord, in its capacity as Landlord under this Lease or a Holder under the Note, in either event without limitation, to exercise such rights and remedies as set forth in this Lease and the Note and/or which may be available to Landlord at law or in equity. (iii) Upon execution of this Agreement, Tenant shall deposit with Landlord a sum of fifteen thousand dollars ($15,000.00) as security for the Loan either in the form of a clear, irrevocable, self-renewing sight draft or an "evergreen" letter of credit substantially in the form of exhibit C annexed hereto and made a part hereof ("Letter of Credit"). Said Letter of Credit shall be issued by any commercial bank in the State and City of New York ("Issuing Bank") and shall be capable of being presented for payment in the City of New York. Payment under the Letter of Credit shall be made to Landlord upon Landlord's written notice to the Issuing Bank of Tenant's default under the Lease and/or the Note. Provided that Tenant is not in default of all the terms, conditions and covenants of this Lease at the time Tenant repays the Note as set forth in this Article said $15,000.00 shall be returned to Tenant. B. (i) All sums advanced pursuant to the Note shall be deemed advances of the Loan and shall be advanced by Landlord to Tenant, from time-to-time, at Landlord's option, whether to Tenant or directly to the General Contractor or to any other contractor(s) or subcontractor(s) against the requisitions by Tenant for payment for work ("Work") completed by the respective General Contractor, contractor(s) and/or subcontractor(s). Each advance by ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant Landlord shall be subject to receipt by Landlord of the following: (a) Approval by Landlord of the contractor and/or subcontractors; (b) Verifiable invoices for the Work; (c) Certification signed by an authorized officer of Tenant stating that (1) the Work has been completed in accordance with Exhibit A; (2) the amount of the invoice is consistent with Tenant's construction contract with the contractor and/or subcontractor submitting the invoice; and (3) that is was completed to Tenant's satisfaction; (d) Certification by Tenant architect that the Work has been completed accordance with Exhibit A; (ii) Payment for Work completed is hereby made expressly contingent upon delivery by Tenant to Landlord of a Partial Lien Waiver in the amount of the payment and a Final Lien Waiver and General Release upon completion of the Work (or the Improvement, as the case may be). Each Partial Lien Waiver, Final Lien Waiver and General Release to be executed in recordable form by the respective General Contractor, contractor(s) and subcontractor(s). The form of the Partial Lien Waiver and the Final Lien Waiver and General Release shall be substantially in the form of Exhibit B annexed hereto and made a part hereof. Neither Landlord or Tenant shall deliver payment for the Work without delivery to Landlord of the appropriate Partial Lien Waiver, Final Lien Waiver or General Release. The failure by Tenant to furnish Landlord with the aforesaid Waiver's or General Release shall be deemed a material default under this Lease.* *Shall be in form reasonably acceptable to Landlord's attorney. 6. Landlord's Work: Adding Article R38 to the Lease and pertaining solely to the Additional Space, 1. Demolition as per Tenant's Plans (see attached Exhibit A); 2. Upgrade restrooms to make similar to restrooms on 5th Floor of the Building; 3. Deliver 200 amp 3 phase electrical service to the panel box located on the 3rd Floor; 4. Patch ceiling, columns, beams and walls (including the closing of the easterly wall window openings); 5. Deliver and install one fifteen (15) ton air-cooled air conditioning unit. Tenant shall provide duct work and maintain and repair both unit and ducts throughout term of Lease; 6. Patch and repair floor to make ready for carpet; 7. Repair and seal rear windows, as needed; and 8. Reverse direction of nine (9) sprinkler heads. 9. Paint shell as needed Landlord's Work, as described above, shall be a one-time, non-recurring obligation of Landlord. 7. Guaranty: Supplementing the Guaranty attached to the Lease for the demised premises, ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant dated 9/15/97 and signed by Fernando Espoulas, individually, effective 5/1/98, the Guaranty shall also include the Additional Space. 8. Water Charges: Supplementing Article 29 of the Lease and effective 5/1/98, Tenant shall pay an additional twenty five ($25.00) as water charges for the Additional Space. 9. Option to Expand, Adding Article R39 to the Lease: As of the date of this Amendment and for the purposes of this Article Olivieri Footwear, Inc. ("Olivieri") is the current tenant-in-possession of 6th and 12th Floors under a lease dated 12/22/95 and as amended on 7/30/97 ("Documents"). Under such Documents, Tenant understands that Olivieri has the right to elect to cancel its possession of either the 6th or 12th Floor ("Canceled Space") on or about 7/31/98, Olivieri's notice to be given to Landlord on or about 4/30/98. Landlord and Tenant agree that, in the event that Olivieri properly exercises its right to cancel either the 6th or the 12th Floor then Landlord shall give Tenant notice of such cancellation ("Cancellation Notice"). Provided that (i) Tenant is not in default of any of the terms, covenants or conditions of the Lease, (ii) this Lease shall not have been terminated or transferred and (iii) Tenant is in possession of the demised premises (iv) Tenant is not is bankruptcy, then in that event only Tenant shall have the one-time option to expand the demised premises by entering into a lease for the Canceled Space ("Option"). The Option for such Canceled Space, if any, shall remain open for a period of fourteen (14) days only beginning on the day that Landlord or its agent gives Cancellation Notice to Tenant. Tenant must enter into a lease amendment expanding the demised premises within fourteen (14) days after Landlord supplies Tenant with the pertinent lease amendment document. In the event that Tenant properly exercises its Option to Expand under this Article, if any, and Landlord and Tenant enter into a lease amendment addition the Canceled Space to the demised premises then the Base Annual Rent shall be increased by $13.00 per square foot multiplied by the square footage of such Canceled Space. Additionally, Tenant's proportionate share for Real Estate Taxes under R5 of the Lease shall be increased by an additional 8.33% effective as of the date which is the first day of such lease amendment. The Base Tax Year for the Canceled Space shall be 1998/1999. Landlord agrees that, in the event of such a lease amendment, it shall demolish the Canceled Space and complete the same work as set forth in Article R38 hereof to the Canceled Space except that Landlord shall not be required to install a new air conditioning unit in the Canceled Space if an air conditioning unit is serving the Canceled Space and is in good working order, in Landlord's sole and unreviewable judgment. Rent shall commence five (5) days after Landlord substantially completes the work set forth above to the Canceled Space and delivers possession thereof to Tenant. 10. Option to Renew, Adding Article R40 to the Lease: A. Provided that (i) Tenant is not in default of any of the terms, conditions or covenant of this Lease, (ii) that this Lease shall not have been terminated or transferred (iii) ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant that Tenant is still in possession of the entire demised premises (plus additional space, if any, added under Article R39 above), (iv) that Tenant is not in bankruptcy, and (v) that Tenant gave to Landlord written notice of its intent to renew under this Article at least six (6) months prior to the Lease Expiration Date, then in that event only, Landlord and Tenant shall enter into a written lease amendment to extend the term of this Lease for a term of five (5) years only ("Renewal Period") on the same terms and conditions as are contained in this Lease except that the Base Annual Rent for the Renewal Period shall be at Fair Market Value, as determined below. However, in no event shall the Base Annual Rent for the Renewal Period be lower than the combined Base Annual Rent and Additional Rent due at the end of the term of this Amendment. B. For the purposes of this Article only, the fair market value ("Fair Market Value" or "FMV") of the demised premises for the Renewal Period shall be determined in the following manner: 1. Landlord and Tenant shall seek to agree as to the fair market rental value of the demised premises by taking into consideration the fair market rental value of untenanted space of a similar size and in similar condition in comparable Manhattan office buildings, including this Building, for a comparable term. 2. In the event that Landlord and Tenant cannot agree to the FMV of the demised premises under Paragraph 1 above within two (2) weeks of Tenant's notice to Landlord of Tenant's intent to renew, then both Landlord and Tenant, no later than one (1) week thereafter, shall give written notice to the other party setting forth the party's proposed annual fair market rental value that such party asserts is the basis for the Base Annual Rent which should be paid by Tenant hereunder. In addition, the party's shall include in such notice the name and address of the person that party elects to designate as an arbitrator on its behalf (notice altogether "Designation Notice"). If either party fails to make such designation then that arbitrator shall be appointed by the American Arbitration Association in accordance with Paragraph 3 below. In such an event, the FMV shall be determined by arbitration as hereinafter provided. 3. In the event of an arbitration to decide the FMV as set forth in Paragraph 2 above, the arbitrators shall be licensed real estate brokers or appraisers doing business in the City and State of New York and shall have not less than 10 years active experience as such. In making their determinations, the arbitrators shall consider the same factors as set forth in Paragraph 1 above and shall select either the annual fair market rental value proposed by Landlord or Tenant in notices required in Paragraph 2 above. The arbitration shall proceed in accordance with the below. 4. In the event that the FMV has not been determined at the time that the Renewal Period under R40 is to begin then Tenant shall occupy the pertinent space at the rate proposed by Landlord under Paragraph 2 above pending the ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant 12. In all other respects, the terms covenants, provisions and conditions of the Lease are hereby ratified and confirmed. IN WITNESS THEREOF, the parties hereto have hereunto set their hands and seals as of the date and year first above written. Clemons Management Corp. By Bernstein Management Corp. D/b/a Bernstein Real Estate, as Agent By: /s/ Vincent Terranova -------------------------- Vincent Terranova, Executive Vice President Star Media Network, Inc. By: /s/ [ILLEGIBLE] -------------------------- On the day of March, 1998, before me personally came the above person who is known to me and who did acknowledge to me that he is an officer of Star Media Network, Inc. and he executed this Agreement. ---------- ------ [ILLEGIBLE] RE ---------- ------ Landlord Tenant PROMISSORY NOTE $ 80,000.00 April , 1998 New York, N.Y. FOR VALUE RECEIVED, STAR MEDIA NETWORK, INC., a New York corporation, having an office at 29 33 West 36th Street, New York, N.Y. (hereinafter referred to as "Maker"), promises to pay to the order of CLEMONS MANAGEMENT CORP., a New York corporation, having an office at c/o Bernstein Real Estate, 855 Avenue of the Americas, New York, N.Y. (hereinafter referred to as "Holder") the principal sum of Eighty Thousand and 00/100 ($80,000.00) with interest thereon at the rate of nine percent (9.0%) per annum with principal and interest to be paid in forty-eight (48) equal and consecutive monthly installments of One-Thousand Nine-Hundred Ninety and 81/100ths ($1,990.81) Dollars each on the 1st day of each month commencing on August 1, 1998 through and including July 1, 2002, when any then unpaid balance of the principal and interest shall be due and payable.* The payment due hereunder shall be made payable to the order of Clemons Management Corp., or the then holder hereof, and payment shall be made by delivery of a check of Maker to Holder drawn on any bank, savings bank, trust company or savings and loan association having a banking office in the State of New York, or at such other place as the Holder hereof may designate from time to time in writing. This Note is issued pursuant to and is entitled to the benefits of the provisions of a certain Lease ("Lease") dated the date hereof between Holder, as Owner, and Maker, as Tenant, for the promises located at the Entire Third and Fifth Floors in the building located at 29-33 West 36th Street, New York, N.Y. In addition to the security set forth in the Lease, the payment of this Note is further occured by a certain irrevocable sight draft "evergreen" Letter of Credit in the sum of fifteen thousand ($15,000.00) dollars as more specifically described in the Lease. The Letter of Credit has been issued by a commercial bank located in the State, City and County of New York and may be presented for payment at a location within the State, City and County of New York. The entire amount of this Note shall become immediately due * In the event if the eighty thousand dollars has not been advanced by July 1, 1998, then the payments under the note will be adjusted so that interest only shall be payable on the amount advanced and when the eighty thousand dollars has been advanced the 48 equal monthly installments shall commence and run consecutively. If there shall not be remaining 48 months in the term of the lease at the time the eighty thousand dollars has been fully advanced then the installment due in the last month of the term shall include the balance of principal then remaining and any unpaid interest. and payable upon the the failure of Maker to make a payment due hereunder or the occurrence of an Event of Default under the Lease. An Event of Default under this Note shall have the same meaning as an Event of Default as specified in the Lease. Upon the occurrence of an Event of Default, whether upon maturity, acceleration or otherwise, interest shall thereafter accrue upon the unpaid principal balance at the highest rate per annum permissible by law; however, this provision shall not be construed to extend the maturity date. The Holder hereof may collect a "late charge" in an amount equal to six percent (6%) of any installment of interest, which is not received by the Holder hereof at the place designated herein for payment on or before the tenth (10th) day of the month in which such payment is due. The failure, or delay, by the Holder to enforce its rights under this Note, including, but not limited to, requiring Maker to pay immediately in full any and all sums due and owing under this Note following an event of default by Maker, shall not result in a waiver, or loss, by Holder of its rights under this Note nor shall such failure, or delay, by Holder in enforcing its rights under this Note relieve Maker of any of her obligations hereunder. The Holder may waive or delay enforcing a right under this Note without waving other rights the Holder may have hereunder. The Holder need not give Maker notice of its waiver or delay, of its rights under this Note. All payments hereunder shall be made in lawful money of the United States, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. If the Holder, or then holder hereof, retains counsel for the purpose of collecting any money which may be due under this Note, or to protect its interests herein, then and in that event, Maker hereby agrees to pay to the Holder, or then Holder hereof, counsel fees, the amount of which is hereby expressly fixed at fifteen percent (15%) of the then unpaid balance of this Note, and such counsel fees and all disbursements incurred by the Holder, or then holder hereof, shall be added to the indebtedness and shall be and are hereby made part of the debt due under this Note, and shall be payable on demand. Said counsel fees are in no event to affect, but are to be paid in addition to, any statutory court costs and disbursements. 2 The Maker reserves the right to prepay this Note in whole or in part without any premiums or penalties. All payments received by the Holder shall be applied first on account of interest; second, to pay unpaid late charges; and third on account of principal. If a law which applies to this loan and which sets maximum loan charges is finally interpreted so that the interest or other loan charges collected or to be collected in connection with this loan exceed the permitted limits, then (i) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and any sums already collected from Maker by Holder which exceeded permitted limits will be applied to the reduction of principal due under this Note and shall be treated by the Holder as a partial prepayment under this Note. The Maker hereby waives diligence, demand, presentment, notice of non-payment and protest, dishonor and non-payment and consents to any extension of time or payment hereof made after maturity by Agreement with Maker, with or without notice. This Note has been executed and delivered in the County, City and State of New York and shall be construed and interpreted in accordance with, and governed by, the laws off the State of New York, without application of the principles of conflicts of law. All notices or demands to be given under this Note shall be in writing and shall be served by personal delivery or registered or certified mail, return receipt requested, addressed as follows: (i) to the Holder at the address first set forth above, and (ii) to the Maker at The Fifth Floor, 29-33 West 36th Street, New York, N.Y. or to such other address as each party may hereafter designate by notice delivered in accordance herewith. All notice, demands, or other communications required hereunder shall be deemed given on the third day following deposit thereof in the U.S. mail or, in the case of personal delivery, on the date of such delivery. Star Media Network, Inc. By: /s/ [ILLEGIBLE] ---------------------------- 3 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 15th day of April, 1998 before me personally appeared Fernando Espuelas to me known, who being by me duly sworn, did depose and say that he resides at 156 Everett Rd., Easton CT 06612; that he is he CEO of Star Media Network, Inc., the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ William S. Marbit ------------------------------------ Notary WILLIAM S. MARBIT Notary Public, State of New York No. 31-4653555 Qualified in New York County Certificate Filed in New York County Commission Expires November 30, 1999 4 Exhibit "C" [NAME OF BANK] Clemons Management Corp. Irrevocable Letter of Credit [Date] [ADDRESS] Dear Sirs: We hereby authorize you to draw, at any time and from time to time on (name of bank), New York, New York FOR ACCOUNT OF Star Media Network, Inc. UP TO THE AGGREGATE OF Fifteen thousand ($15,00.00) DOLLARS U.S. Currency AVAILABLE BY YOUR DRAFTS AT SIGHT, accompanied by: Your written statement that you are entitled to draw against the Letter of Credit by reason of a default pursuant to a lease dated as of September 15, 1997 and as modified by an amendment dated March 13, 1998 between Clemons Management Corp., Landlord and Star Media Network, Inc., Tenant. It is a condition of this Letter of Credit that it shall be extended for an additional period of one year from the present or future expiration date hereof unless thirty days prior to such date we shall notify you in writing by certified mail, return receipt requested, that we elect not to renew this Letter of Credit for such additional period. Upon receipt by you of such notice you may draw hereunder by means of your draft on us at sight accompanied by your written statement that you have not received an appropriate renewal of this Letter of Credit. All drafts drawn under this Credit must bear on their face the clause "DRAWN UNDER (name of bank) CREDIT NO." This standby Letter of Credit and the payment is irrevocable and not otherwise conditional and shall not be subject to any defense, counterclaim or offset nor shall the payment thereof be subject to any restraint, injunction or other delay in payment. Except so far as otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce, Publication No. 500. We hereby agree with the drawers of drafts drawn in compliance with the terms of this Letter of Credit, that the same shall be duly honored on presentation to the drawee. Yours very truly, /s/ [ILLEGIBLE] ------------------------ AUTHORIZED SIGNATURE ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant SECOND AMENDMENT TO LEASE This Agreement made as of the August 27, 1998, between Clemons Management Corp. c/o Bernstein Real Estate, 855 Avenue of the Americas, New York, NY 10001, ("Landlord"), and Star Media Network, Inc., having offices at 29-33 West 36th Street, New York, NY, ("Tenant"). WITNESSETH WHEREAS, by Lease dated September 15, 1997 Landlord leased to Tenant, the Entire Fifth (5th) Floor in the building known as 29-33 West 36th Street, New York, NY, for a term of five (5) years beginning 9/01/97 and ending on 08/31/02; and WHEREAS, by Amendment to Lease dated April 8, 1998 Landlord leased to Tenant the Entire Third Floor in addition to the Entire Fifth Floor; WHEREAS, Tenant presently occupies the demised premises and is now the owner and holder of the aforesaid Lease, and WHEREAS, Landlord, and Tenant are desirous of modifying the Lease: NOW, THEREFORE, in consideration of the mutual covenants herein contained, ten dollars ($10.00) (the receipt and sufficiency of which is hereby acknowledged) and other good and valuable consideration, it is agreed between the parties that the Lease shall be amended as follows (altogether, as modified, the "Lease"): 1. Demised Premises: Effective as of the date first set forth above, the demised premises shall now also include the Entire Eighth Floor ("Second Additional Space") (altogether the "demised premises") of the Building. Landlord shall deliver possession of the Additional Space in "as is" condition upon the execution of this Agreement. 2. Term for the Entire demised premises and Rent for Third Floor and Fifth Floor: Effective as of the date first set forth above, the term under the Lease shall be extended from 08/31/02 to 8/31/03 (8/31/03 now being the "Lease Expiration Date" under the Lease as amended). The Base Annual Rent due in the last year of the Lease for the 3rd and 5th Floors, respectively, shall be as follows: 3rd Floor 5/1/02 - 4/30/03 $96,966.00 ($8,030.50 per month) 3rd Floor 5/1/03-- 8/31/03 $100,359.81 ($8,363.32 per month) 5th Floor 9/1/02-- 8/31/03 $100,366.02 ($3,363.83 per month) 3. Rent for the Eighth Floor: Supplementing R5. of the Lease and effective as of the date hereof, the Base Annual Rent for the Second Additional Space shall be as follows: $91,000.00 from 9/1/98 to 8/31/99 ($7,583.34 per month) $94,185.00 from 9/1/99 to 8/31/00 ($7,848.75 per month) $97,481.00 from 9/1/00 to 8/31/01 ($8,123.42 per month) $100.893.00 from 9/1/01 to 8/31/02 ($8,407.75 per month) $104,424.00 from 9/1/02 to 8/31/03 ($8,702.00 per month) Notwithstanding the foregoing and provided that Tenant is not in default of any of the terms of the Lease, is not in bankruptcy and is in possession of the demised premises, Tenant shall occupy the Second Additional Space Base Annual Rent free from 9/1/98 through to and including 10/31/98. Tenant, however, shall be responsible for all other charges and additional rent such as utilities due under the Lease. 4. Real Estate Taxes: Supplementing Article R7(A) and R7(D) of the Lease and effective 7/1/99, Tenant shall pay eight point three three percent (8.33%) as Additional Rent for the Second Additional Space. Supplementing R7(C) of the Lease and effective 7/1/99, Tenant's Base Tax Year for the Second Additional Space shall be 1998/1999, Notwithstanding the foregoing, Tenant shall not be required to pay any escalation for Real Estate Taxes for the Second Additional Space prior to 9/1/99. 5. Loan and Default: A. (i) As a material inducement to Landlord to enter into this Amendment to the ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant Lease, Tenant has agreed to spend not less than eighty thousand dollars ($80,000.00) in making certain leasehold improvements (collectively the "Improvements") to the Second Additional Space, which Improvements are more specifically described in Exhibit A attached hereto and made a part hereof and which shall be made in accordance with the Lease, including but not limited to Article 3, 6 and R35 thereof. (ii) In connection with the Improvements, Landlord has agreed to make, and Tenant has agreed to accept, a loan (the "Loan") from Landlord in the principal sum of eighty thousand dollars ($80,000.00) to be paid out in accordance with Paragraph B below (the "Note") and as evidenced by a certain Promissory Note of an even date herewith (see Exhibit B attached hereto and made a part hereof). Tenant hereby specifically acknowledges and agrees that the Note and this Lease are hereby cross-defaulted so that any default under the Note shall constitute a default under this Lease and any default under this Lease shall constitute a default under the Note entitling Landlord, in its capacity as Landlord under this Lease or a Holder under the Note, in either event without limitation, to exercise such rights and remedies as set forth in this Lease and the Note and/or which may be available to Landlord at law or in equity. (iii) No later than five (5) days prior to the requested date of any loan advance hereunder, Tenant shall deposit with Landlord a sum of fifteen thousand dollars ($15,000.00) as security for the Loan either in the form of a clear, irrevocable, self-renewing sight draft or an "evergreen" letter of credit substantially in the form of exhibit C annexed hereto and made a part hereof ("Letter of Credit"). Said Letter of Credit shall be issued by any commercial bank in the State and City of New York ("Issuing Bank") and shall be capable of being presented for payment in the City of New York. Payment under the Letter of Credit shall be made to Landlord upon Landlord's written notice to the Issuing Bank of Tenant's default under the Lease and/or the Note. Provided that Tenant is not in default of all the terms, conditions and covenants of this Lease at the time Tenant repays the Note as set forth in this Article said $15,000.00 shall be returned to Tenant. B. (i) All sums advanced pursuant to the Note shall be deemed advances of the Loan and shall be advanced by Landlord to Tenant, from time-to-time, at Landlord's option, whether to Tenant or directly to the General Contractor or to any other contractor(s) or subcontractor(s) against the requisitions by Tenant for payment for work ("Work") completed by the respective General Contractor, contractor(s) and/or subcontractor(s). Each advance by Landlord shall be subject to receipt by Landlord of the following: (a) Approval by Landlord of the contractor and/or subcontractors; (b) Verifiable invoices for the Work; (c) Certification signed by an authorized officer of Tenant stating that (1) the Work has been completed in accordance with Exhibit A; (2) the amount of the invoice is consistent with Tenant's construction contract with the contractor and/or subcontractor submitting the invoice; and (3) that is was completed to Tenant's satisfaction; (d) Certification by Tenant architect that the Work has been completed accordance with Exhibit A; (ii) Payment for Work completed is hereby made expressly contingent upon delivery by Tenant to Landlord of a Partial Lien Waiver in the amount of the payment and a Final Lien Waiver and General Release upon completion of the Work (or the Improvement, as the case may be). Each Partial Lien Waiver, Final Lien Waiver and General Release to the executed in recordable form by the respective General Contractor, contractor(s) and subcontractor(s). The form of the Partial Lien Waiver and the Final Lien ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant Waiver and General Release shall be substantially in the form of Exhibit B annexed hereto and made a part hereof. Neither Landlord or Tenant shall deliver payment for the Work without delivery to Landlord of the appropriate Partial Lien Waiver, Final Lien Waiver or General Release. The failure by Tenant to furnish Landlord with the aforesaid Waiver's or General Release shall be deemed a material default under this Lease. 6. Landlord's Work: Adding Article R38 to the Lease and pertaining solely to the Second Additional Space, 1. Demolition as per Tenant's Plans (see attached Exhibit A); 2. Upgrade restrooms to make similar to restrooms on Third Floor of the Building; 3. Deliver 200 amp 3 phase electrical service to the panel box located on the 8th Floor; 4. Patch ceiling, columns, beams and walls (including the closing of the easterly wall window openings); 5. Deliver and install one fifteen (15) ton air-cooled air conditioning unit. Tenant shall provide duct work and maintain and repair both unit and ducts throughout term of Lease; 6. Patch and repair floor to make ready for carpet; 7. Paint the entire demised premises if so requested; 8. Put all sprinkler heads in a upward facing position, if necessary; and 9. Repair and seal rear windows, as needed. Landlord's Work, as described above, shall be a one-time, non-recurring obligation of Landlord. Landlord shall use Building standard materials and supplies when performing said Work. 7. Guaranty: Supplementing the Guaranty attached to the Lease for the demised premises, dated 9/15/97 and signed by Fernando Espuelas, individually, effective 8/11/98, the Guaranty shall also include this Second Additional Space. 8. Water Charges: Supplementing Article 29 of the Lease and effective 8/11/98, Tenant shall pay an additional twenty five ($25.00) as water charges for this Second Additional Space. 9. Option to Renew, Supplementing Article R40 of the Lease: The Option to Renew shall apply to this Second Additional Space. 10. Building Flag: Adding Article R42 to the Lease: Tenant may, subject to Landlord's written consent, install and mount one (1) building flag similar in appearance to previously renditions submitted and approved by Landlord (such approval not to be unreasonably withheld) including requested dimensions (see Exhibit D attached hereto for an example of such approved rendition). Tenant shall, at its sole cost and expense, obtain all permits and comply with all applicable laws and regulations. Furthermore, Tenant shall assume all liability for such flag, obtaining insurance, if applicable, and shall keep such flag is good and safe repair. Tenant agrees to indemnify and hold Landlord harmless for any and all damages, loss and injuries which may result from such flag. In the event that Landlord elects to have the flag removed upon the termination of this Lease (at Landlord's sole option) or in the event that Tenant itself elects (with Landlord's written consent) to remove said flag during its tenancy, then Tenant shall repair any and all damage to the Building's facade at its own cost and expense. Tenant's flag may not interfere with any other tenant's windows or light into the tenant's space. 11. Telecommunications: Supplementing Article 41 of the Lease: The Telecommunications clause shall also apply to this Second Additional Space. 12. Security Deposit: Supplementing Article 32 of the Lease and upon the execution of this Agreement, Tenant shall deposit with Landlord fourteen thousand eight three dollars and thirty four cents ($14,083.34) as security for the Second Additional Space so that Landlord shall now hold a total of forty two thousand two hundred fifty dollars and two cents. ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant ($42,250.02) as security under the Lease. 13. Assignment and Subletting: Supplementing Article R14 of the Lease. Paragraph R14C(8) and R14C(9) shall now apply on a per floor basis. Paragraph C shall now permit, under the conditions and provisions set forth in R14 such as Landlord's prior written consent, the subletting or assignment to another whose use is general offices. 14. Request for Information: Adding Article R43 to the Lease. Tenant may, from time to time, but not more often than two (2) times per year, request in writing that Landlord disclose space which is available or may be coming available in the next twelve (12) months. Landlord shall respond to such request in good faith. 15. Supplementing and Modifying Paragraph 5 the first Amendment to Lease dated April 8, 1998: Landlord and Tenant acknowledge that, as of the date of this Amendment, Tenant has not drawn down on the above-referenced loan with respect to the Third Floor. Notwithstanding anything to the contrary contained within the first Amendment to Lease, the Letter of Credit for the Third Floor loan shall be required no later than five (5) days prior to the requested date of the loan advance therefor. 16. Supplementing Insert No. 10 of the annotations attached to the Lease and entitled "Inserts to Printed Form and Supplemental Rider Paragraphs": There shall be inserted a new insert (iv) which shall read as follows: (iv) to "Affiliates" as hereinafter defined. ("Affiliates" shall mean any entity which controls or is controlled by, or is under common control with, Tenant or any of Tenant's principal shareholders.) 17. In all other respects, the terms covenants, provisions and conditions of the Lease are hereby ratified and confirmed. IN WITNESS THEREOF, the parties hereto have hereunto set their hands and seals as of the date and year first above written. Clemons Management Corp. Star Media Network, Inc. By Bernstein Management Corp. D/b/a Bernstein Real Estate, as Agent By: By: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] - -------------------------------------- ----------------------------------- Vincent Terranova, Executive Vice President On the day of August, 1998, before me personally came the above person who is known to me and who did acknowledge to me that he is an officer of Star Media Network, Inc. and he executed this Agreement. ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant Exhibit C [NAME OF BANK] Clemons Management Corp. Irrevocable Letter of Credit [Date] [ADDRESS] Dear Sirs: We hereby authorize you to draw, at any time and from time to time on (name of bank), New York, New York FOR ACCOUNT OF Star Media Network, Inc. UP TO THE AGGREGATE OF Fifteen thousand ($15,000.00) DOLLARS U.S. Currency AVAILABLE BY YOUR DRAFTS AT SIGHT, accompanied by: Your written statement that you are entitled to draw against the Letter of Credit by reason of a default pursuant to a lease dated as of September 15, 1997 and as modified by an amendment dated April 8, 1998 and again on August 27, 1998 between Clemons Management Corp., Landlord and Star Media Network, Inc., Tenant. It is a condition of this Letter of Credit that it shall be extended for an additional period of one year from the present or future expiration date hereof unless thirty days prior to such date we shall notify you in writing by certified mail, return receipt requested, that we elect not to renew this Letter of Credit for such additional period. Upon receipt by you of such notice you may draw hereunder by means of your draft on us at sight accompanied by your written statement that you have not received an appropriate renewal of this Letter of Credit. All drafts drawn under this Credit must bear on their face the clause "DRAWN UNDER (name of bank) CREDIT NO." This standby Letter of Credit and the payment is irrevocable and not otherwise conditional and shall not be subject to any defense, counterclaim or offset nor shall the payment thereof be subject to any restraint, injunction or other delay in payment. Except so far as otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce, Publication No. 500.We hereby agree with the drawers of drafts drawn in compliance with the terms of this Letter of Credit, that the same shall be duly honored on presentation to the drawee. Yours very truly, - ----------------------------------- AUTHORIZED SIGNATURE New York ------------------------- [INITIALS] [INITIALS] ------------------------- Landlord Tenant PROMISSORY NOTE $ 80,000.00 August 1998 New York, N.Y. FOR VALUE RECEIVED, STAR MEDIA NETWORK, INC., a New York corporation, having an office at 29-33 West 36th Street, New York, N.Y. (hereinafter referred to as "Maker"), promises to pay to the order of CLEMONS MANAGEMENT CORP., a New York corporation, having an office at c/o Bernstein Real Estate, 855 Avenue of the Americas, New York, N.Y. (hereinafter referred to as "Holder") the principal sum of Eighty Thousand and 00/100 ($80,000.00) with interest thereon at the rate of nine percent (9.0%.) per annum with principal and interest to be paid in forty-eight (48) equal and consecutive monthly installments of One-Thousand Nine-Hundred Ninety and 81/100ths ($1,990.81) Dollars each on the 1st day of each month commencing on September 1,1998 through-and including __________________ when any then unpaid balance of the principal, and interest shall be due and payable. The payment due hereunder shall be made payable to the order of Clemons Management Corp., or the then holder hereof, and payment shall be made by delivery of a check of Maker to Holder drawn on any bank, savings bank, trust company or savings and loan association having a banking office in the State of New York, or at such other place as the Holder hereof may designate from time to time in writing. This Note is issued pursuant to and is entitled to the benefits of the provisions of a certain Lease ("Lease") dated the date hereof between Holder, as Owner, and Maker, as Tenant, for the premises located at the Entire Third, Fifth and Eighth Floors in the building located at 29-33 West 36th Street, New York, N.Y. in addition to the security set forth in the Lease, the payment of this Note is further secured by a certain irrevocable, sight draft "evergreen" Letter of Credit in the sum of fifteen thousand ($15,000.00) dollars as more specifically described in the Lease. The Letter of Credit has been issued by a commercial bank located in the State, City and County of New York and may be presented for payment at a location within the State, City and County of New York. The entire amount of this Note shall become immediately due and payable upon the failure of Maker to make a payment due hereunder or the occurrence of an Event of Default under the Lease. An Event of Default under this Note shall have the same meaning as an Event of Default as specified in the Lease. Upon the occurrence of an Event of Default, whether upon maturity, acceleration or otherwise, interest shall thereafter accrue upon the unpaid principal balance at the highest rate per annum permissible by law; however, this provision shall not be construed to extend the maturity date. The Holder hereof may collect a "late charge" in an amount equal to six percent (6%) of any installment of interest, which is not received by the Holder hereof at the place designated herein for payment on or before the tenth (10th) day of the month in which such payment is due. The failure, or delay, by the Holder to enforce its rights under this Note, including, but not limited to, requiring Maker to pay immediately in full any and all sums due and owing under this Note following an event of default by Maker, shall not result in a waiver, or loss, by Holder of its rights under this Note nor shall such failure, or delay, by Holder in enforcing its rights under this Note relieve Maker of any of her obligations hereunder. The Holder may waive or delay enforcing a right under this Note without waiving other rights the Holder may have hereunder. The Holder need not give Maker notice of its waiver or delay, of its rights under this Note. All payments hereunder shall be made in lawful money of the United States, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment. If the Holder, or then holder hereof, retains counsel for the purpose of collecting any money which may be due under this Note, or to protect its interests herein, then and in that event, Maker hereby agrees to pay to the Holder, or then Holder hereof, counsel fees, the amount of which is hereby expressly fixed at fifteen percent (15%) of the then unpaid balance of this Note, and such counsel fees and all disbursements incurred by the Holder, or then holder hereof, shall be added to the indebtedness and shall be and are hereby made part of the debt due under this Note, and shall be payable on demand. Said counsel fees are in no event to affect, but are to be paid in addition to, any statutory court costs and disbursements. The Maker reserves the right to prepay this Note in whole or in part without any premiums or penalties. All payments received by the Holder shall be applied first on account of interest; second, to pay unpaid late charges: and third on account of principal. If a law which applies to this loan and which sets maximum loan charges is finally interpreted so that the interest or other loan charges collected or to be collected in connection with this loan exceed the permitted limits, then (i) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and any sums already collected from Maker by Holder which exceeded permitted limits will be applied to the reduction of principal due under this Note and shall be treated by the Holder as a partial prepayment under this Note. The Maker hereby waives diligence, demand, presentment, notice of non-payment and protest, dishonor and non payment and consents to any extension of time or payment hereof made after maturity by Agreement with Maker, with or without notice. This Note has been executed and delivered in the County, City and State of New York and shall be construed and interpreted in accordance with, and governed by, the laws of the State of New York. without application of the principles of conflicts of law. 2 All notices or demands to be given under this Note shall be in writing and shall be served by personal delivery or registered or certified mail, return receipt requested, addressed as follows: (i) to the Holder at the address first set forth above, and (ii) to the Maker at The Fifth Floor, 29-33 West 36th Street, New York, N.Y. or to such other address as each party may hereafter designate by notice delivered in accordance herewith. All notice, demands, or other communications required hereunder shall be deemed given on the third day following deposit thereof in the U.S. mail or, in the case of personal delivery, on the date of such delivery. Star Media-Network, Inc. By: /s/ [ILLEGIBLE] ----------------------- 3 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 28 day of August, 1998 before me personally appeared Steve Heller to me known, who being by me duly sworn, did depose and say that he resides at __________________________; that he is the_____________________ of Star Media Network, Inc., the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ William S. Marbit ------------------------------------ Notary WILLIAM S. MARBIT Notary Public, State of New York No. 31-4653555 Qualified in New York County Certificate Filed in New York County Commission Expires November 30, 1999 4 EX-10.4 8 AMEND. & RESTATED REG. RIGHTS AGREEMENT EXHIBIT-10.4 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT dated as of August 31, 1998, by and among STARMEDIA NETWORK, INC., a Delaware corporation (the "Company"), Jack C. Chen and Fernando J. Espuelas (the "Founders"), and the persons identified as Purchasers on the signature pages hereto (the "Purchasers"). WHEREAS, the Founders are the holders of certain shares of Common Stock (as defined herein); and WHEREAS, the Purchasers are the holders of certain Preferred Shares (as defined herein); and WHEREAS, the parties hereto include all of the parties to that certain Registration Rights Agreement, dated as of July 25, 1997 (as amended by Amendment No. 1 thereto, dated as of February 20, 1998, and by Amendment No. 2 thereto, dated as of August 24, 1998, the "Original Agreement"); and WHEREAS, the parties hereto desire to amend and restate the Original Agreement in its entirety as set forth herein and, to the extent not a party to the Original Agreement, to become a party hereto; and WHEREAS, the parties hereto are willing to execute this Agreement and be bound by the provisions hereof; NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: 1. Certain Definitions. As used herein, the following terms shall have the following respective meanings: "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company. "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Conversion Shares" shall mean the shares of Common Stock issued or issuable upon conversion of the Preferred Shares. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Founders Stock" shall mean and include all shares of Common Stock held by the Founders, the certificates for which are required to bear the legend set forth in Section 2 hereof, excluding Founders Stock which has been (i) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (ii) publicly sold pursuant to Rule 144 under the Securities Act. "Preferred Shares" shall mean and include all shares of Series A Convertible Preferred Stock, $.001 par value, of the Company, Series B Convertible Preferred Stock, $.001 par value, of the Company and Series C Convertible Preferred Stock, $.001 par value, of the Company now owned or hereafter acquired by any of the Purchasers. "Public Sale" shall mean any sale of Preferred or Common Stock to the public pursuant to an offering registered under the Securities Act or to the public pursuant to the provisions of Rule 144 (or any successor or similar rule) adopted under the Securities Act. "Registration Expenses" shall mean the expenses so described in Section 8 hereof. "Restricted Stock" shall mean the Conversion Shares, the certificates for which are required to bear the legend set forth in Section 2 hereof, excluding Conversion Shares which have been (i) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (ii) publicly sold pursuant to Rule 144 under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean the expenses so described in Section 8 hereof. 2. Restrictive Legend. Each certificate representing one or more shares of Restricted Stock or Founders Stock, and each certificate issued upon exchange or transfer thereof, other than in a Public Sale or as otherwise permitted by the last paragraph of Section 3, shall be stamped or otherwise imprinted with a legend substantially in the following form: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3. Notice of Proposed Transfer. Prior to any proposed transfer of any share of Restricted Stock or Founders Stock (other than under the circumstances described in Section 4, 5 2 or 6 hereof), the holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel reasonably satisfactory to the Company (it being agreed that Kalow, Springut & Bressler shall be satisfactory) to the effect that the proposed transfer of the Founders Stock or Restricted Stock, as the case may be, may be effected without registration under the Securities Act, whereupon the holder of such Founders Stock or Restricted Stock, as the case may be, may transfer such Founders Stock or Restricted Stock, as the case may be, in accordance with the terms of its notice, provided, however, that no such opinion or other documentation shall be required if such notice shall cover a distribution by a partnership to its partners or by a limited liability company to its members. Each certificate of Founders Stock or Restricted Stock, as the case may be, transferred as above provided shall bear the legend set forth in Section 2, unless (i) such transfer is to the public in accordance with the provisions of Rule 144 (or any other rule permitting Public Sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a Public Sale without registration under the Securities Act. The restrictions provided for in this Section shall not apply to securities that are not required to bear the legend prescribed by Section 2 in accordance with the provisions of that Section. 4. Required Registration. (a) At any time on or after the first anniversary of the effective date of an initial public offering of the Company's Common Stock under the Securities Act, each of (i) Chase Venture Capital Associates, L.P. ("Chase"), (ii) Warburg, Pincus Equity Partners, L.P. ("Warburg"), and (iii) the holders of Restricted Stock constituting at least a majority of the total Restricted Stock outstanding at such time may, on one occasion only, request the Company to register all or any portion of the Restricted Stock held by such requesting holder or holders for sale in the manner specified in such notice; provided, however, that the only securities which the Company shall be required to register pursuant hereto shall be shares of Common Stock. (b) Promptly following receipt of any notice under this Section 4, the Company shall immediately notify any holders of Restricted Stock from whom notice has not been received and any holder of Founders Stock and shall use its best efforts to register under the Securities Act, for Public Sale in accordance with the method of disposition specified in such notice from requesting holders, the number of shares of Restricted Stock specified in such notice (and in any notices received from other holders of Restricted Stock and holders of Founders Stock within twenty (20) days after their receipt of notice from the Company), provided, however, that the number of shares of Restricted Stock and Founders Stock to be included in such an underwriting may be reduced (first, pro rata among the requesting holders of Founders Stock based upon the number of shares of Founders Stock owned by such holders and then, if necessary, pro rata among holders of Restricted Stock based upon the number of shares of Restricted Stock owned by such holder) if and to the extent that the managing underwriter, if the proposed method of disposition specified by the requesting holders shall be an underwritten public offering, shall be of the opinion that such inclusion would materially adversely affect the marketing of the Restricted Stock. If such method of disposition shall be an underwritten public offering, the Company shall designate the managing underwriter of such offering, subject to the approval of the selling holders of a majority of the Restricted Stock covered by the offering, 3 which approval shall not be unreasonably withheld. The Company shall be obligated to register Restricted Stock pursuant to this Section 4 on three (3) occasions only, provided that such obligation shall be deemed satisfied only when a registration statement covering all shares of Restricted Stock specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such shares shall have been sold pursuant thereto. (c) Notwithstanding anything to the contrary in this Agreement, the Company may delay for up to 90 days the filing or effectiveness of a registration statement pursuant to a request under this Section 4 if the Board of Directors of the Company shall determine that such a registration would not be in the best interests of the Company at such time, during which period the requesting holders may withdraw their request, in which case the requesting holders will not have been deemed to have made a request for registration under this Section 4. (d) The Company shall be entitled to include in any registration statement referred to in this Section 4, for sale in accordance with the method of disposition specified by the requesting holders, shares of Common Stock to be sold by the Company for its own account, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Restricted Stock (if any) to be sold. Except for registration statements on Form S-4, S-8 or any successors thereto, the Company will not file with the Commission any other registration statement with respect to its Common Stock, whether for its own account or that of other holders, from the date of receipt of a notice from a requesting holder or holders pursuant to this Section 4 until the completion of the period of distribution of the registration contemplated thereby or withdrawal of such registration. 5. Form S-3 Registration. (a) If at any time (i) the Company shall receive from any holder or holders of Restricted Stock a written request or requests that the Company effect a registration of all or any portion of the shares of Restricted Stock on Form S-3 or any successor thereto, and (ii) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such shares, the Company will: (A) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other holders of any shares of Restricted Stock and all holders of Founders Stock; and (B) as soon as practicable, effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other government requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such holder's Restricted Stock as are specified in such request, together with all or such portion of the Restricted Stock of any other holder or holders of Restricted Stock and all or such portion of Founders Stock of any holder or holders of Founders Stock joining in such request as are specified in 4 a written request given within thirty (30) days after receipt of such written notice from the Company, ), provided, however, that the number of shares of Restricted Stock and Founders Stock to be included in such an underwriting may be reduced (first, pro rata among the requesting holders of Founders Stock based upon the number of shares of Founders Stock owned by such holders and then, if necessary, pro rata among holders of Restricted Stock based upon the number of shares of Restricted Stock owned by such holder) if and to the extent that the managing underwriter, if the proposed method of disposition specified by the requesting holders shall be an underwritten public offering, shall be of the opinion that such inclusion would materially adversely affect the marketing of the Restricted Stock, and provided further that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 5 (A) more than once in any 180 day period. Subject to the foregoing, the Company shall file a registration statement covering the Restricted Stock and Founders Stock, if any, so requested to be registered as soon as practicable after receipt of the request or requests of the holder or holders of Restricted Stock to do so. Notwithstanding anything to the contrary in this Agreement, (i) the Company may delay for up to 90 days the filing or effectiveness of a registration statement pursuant to a request under this Section 5 if the Board of Directors of the Company shall determine such registration would not be in the best interests of the Company at such time, during which period the requesting holders may withdraw their request, in which case the requesting holders will not have been deemed to have made a request for registration under this Section 5. (b) Registrations effected pursuant to this Section 5 shall not be counted as requests for registration effected pursuant to Section 4. 6. Incidental Registration. If the Company at any time (other than pursuant to Section 4 or 5 hereof) proposes to register any of its Common Stock under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4 or S-8, any successors thereto or any other form not available for registering the Restricted Stock for sale to the public or a Form S-1 covering solely an employee benefit plan), it will give written notice at such time to all holders of outstanding Restricted Stock and Founders Stock of its intention to do so. Upon the written request of any such holder, given within thirty (30) days after receipt of any such notice by the Company, to register any of its Restricted Stock or Founders Stock, as the case may be (which request shall state the intended method of disposition thereof), the Company will use its best efforts to cause the Restricted Stock or Founders Stock or both, as the case may be, as to which registration shall have been so requested, to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holder (in accordance with its written request) of such Restricted Stock or Founders Stock, as the case may be, so registered; provided that nothing herein shall prevent the Company from abandoning or delaying any such registration at any time. In the event that any registration pursuant to this Section 6 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 6 to register Restricted Stock or Founders Stock, as the case may be, shall specify that either (i) 5 such Restricted Stock or Founders Stock, as the case may be, is to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration or (ii) such Restricted Stock or Founders Stock, as the case may be, is to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. The number of shares of Restricted Stock or Founders Stock or both, as the case may be, to be included in such an underwriting may be reduced (first, pro rata among the requesting holders of Founders Stock based upon the number of shares of Founders Stock owned by such holders and then, if necessary, pro rata among the other requesting holders of Restricted Stock, based upon the number of shares of Restricted Stock owned by such holders), if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein, provided however, that such number of shares of Restricted Stock shall not be reduced if any shares are to be included in such underwriting for the account of any person other than the Company or requesting holders of Restricted Stock or Founders Stock. 7. Registration Procedures. If and whenever the Company is required by the provisions of Section 4, 5 or 6 hereof to use its best efforts to effect the registration of any of the Restricted Stock or Founders Stock or both, as the case may be, under the Securities Act, the Company will, as expeditiously as possible: (a) prepare (and afford counsel for the selling holders reasonable opportunity to review and comment thereon) and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4 hereof, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare (and afford counsel for the selling holders reasonable opportunity to review and comment thereon) and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and to comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock or Founders Stock or both, as the case may be, covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons may reasonably request in order to facilitate the Public Sale or other disposition of the Restricted Stock or Founders Stock or both, as the case may be, covered by such registration statement; (d) use its best efforts to register or qualify the Restricted Stock or Founders Stock or both, as the case may be, covered by such registration statement under 6 the securities or blue sky laws of such jurisdictions as the sellers of Restricted Stock or Founders Stock or both, as the case may be, and in the case of an underwritten public offering, the managing underwriter, shall reasonably request (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any jurisdiction); (e) use its best efforts to list the Restricted Stock or Founders Stock or both, as the case may be, covered by such registration statement with any securities exchange on which any Common Stock of the Company is then listed; (f) immediately notify each seller under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) use its best efforts (if the offering is underwritten and at the request of any seller of Restricted Stock) to furnish, at the request of any seller, on the date that Restricted Stock or Founders Stock or both, as the case may be, is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus, and each amendment or supplement thereof, comply as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need express no opinion as to financial statements, the notes thereto, and the financial schedules and other financial and statistical data contained therein) and (C) to such other effects as may reasonably be requested by counsel for the underwriters or by such seller or its counsel, and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as such underwriters or seller may reasonably request; and 7 (h) make available for inspection by each seller, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. For purposes of paragraphs (a) and (b) above and of Section 4(c) hereof, the period of distribution of Restricted Stock or Founders Stock or both, as the case may be, in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock or Founders Stock or both, as the case may be, in any other registration shall be deemed to extend until the earlier of the sale of all Restricted Stock or Founders Stock or both, as the case may be, covered thereby or six months after the effective date thereof. In connection with each registration hereunder, the selling holders of Restricted Stock or Founders Stock, as the case may be, will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as shall be reasonably necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Sections 4, 5 and 6 hereof covering an underwritten public offering, the Company agrees to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between managing underwriters and companies of the Company's size and investment stature, provided, however, that such agreement shall not contain any such provision applicable to the Company which is inconsistent with the provisions hereof and provided, further, that the time and place of the closing under said agreement shall be as mutually agreed upon between the Company and such managing underwriter. 8. Expenses. All expenses incurred by the Company in complying with Sections 4, 5 or 6 hereof, including without limitation all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and reasonable fees and expenses of not more than one counsel for the sellers of Restricted Stock and not more than one counsel for the sellers of Founders Stock, but excluding any Selling Expenses, are herein called "Registration Expenses". All underwriting discounts and selling commissions applicable to the sale of Restricted Stock or Founders Stock are herein called "Selling Expenses". The Company will pay all Registration Expenses in connection with each registration statement filed pursuant to Sections 4, 5 and 6 hereof. All Selling Expenses in connection with any registration statement filed pursuant to Section 4, 5 or 6 hereof shall be borne by the participating sellers in proportion to the number of shares sold by each, or by such persons other than the Company (except to the extent the Company shall be a seller) as they may agree. 8 9. Indemnification. (a) In the event of a registration of any of the Restricted Stock or Founders Stock or both, as the case may be, under the Securities Act pursuant to Section 4, 5 or 6 hereof, the Company will indemnify and hold harmless each seller of such Restricted Stock or Founders Stock, as the case may be, thereunder and each underwriter of Restricted Stock or Founders Stock, as the case may be, thereunder and each officer, director and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock or Founders Stock, as the case may be, was registered under the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such seller, such underwriter or such controlling person in writing specifically for use in such registration statement or prospectus; and provided further, that the Company shall not be liable to and does not indemnify any underwriter in the offering or sale of Restricted Stock or Founders Stock, or any person who, within the meaning of the Securities Act, controls any underwriter, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such person's failure to send or give a copy of the final prospectus, as the same may be supplemented or amended, to the person asserting an untrue statement or omission or alleged untrue statement or omission at or prior to the written confirmation of the sale of Restricted Stock or Founders Stock to such person, if such statement or omission was corrected in such final prospectus. (b) In the event of a registration of any of the Restricted Stock or Founders Stock or both, as the case may be, under the Securities Act pursuant to Section 4, 5 or 6 hereof, each seller of such Restricted Stock or Founders Stock, as the case may be, thereunder, severally and not jointly, will indemnify and hold harmless the Company and each officer, director and each other person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer or director or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Restricted Stock or Founders Stock, as the case may be, was registered under the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged 9 omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus; provided, further, however, that the liability of each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of shares sold by such seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not to exceed the proceeds (net of underwriting discounts and commissions) received by such seller from the sale of Restricted Stock or Founders Stock, as the case may be, covered by such registration statement; and provided further, that such seller shall not be liable to and does not indemnify any underwriter in the offering or sale of Restricted Stock or Founders Stock, or any person who, within the meaning of the Securities Act, controls any underwriter, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such person's failure to send or give a copy of the final prospectus, as the same may be supplemented or amended, to the person asserting an untrue statement or omission or alleged untrue statement or omission at or prior to the written confirmation of the sale of Restricted Stock or Founders Stock to such person, if such statement or omission was corrected in such final prospectus. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under this Section 9. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party, or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. 10 Notwithstanding the foregoing, any indemnified party shall have the right to retain its own counsel in any such action, but the fees and disbursements of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party shall have failed to retain counsel for the indemnified person as aforesaid or (ii) the indemnifying party and such indemnified party shall have mutually agreed to the retention of such counsel. It is understood that the indemnifying party shall not, in connection with any action or related actions in the same jurisdiction, be liable for the fees and disbursements of more than one separate firm qualified in such jurisdiction to act as counsel for the indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in paragraphs (a) and (b) of this Section 9 is unavailable or insufficient to hold harmless an indemnified party under such paragraphs in respect of any losses, claims, damages or liabilities or actions in respect thereof referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as appropriate to reflect the relative fault of the Company, on the one hand, and the sellers of such Restricted Stock and Founders Stock, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give any notice under paragraph (c) of this Section 9. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Restricted Stock and Founders Stock, on the other hand, and to the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the sellers of Restricted Stock and Founders Stock agree that it would not be just and equitable if contributions pursuant to this paragraph were determined by pro rata allocation (even if all of the sellers of such Restricted Stock and Founders Stock were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above in this paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or action in respect thereof, referred to above in this paragraph, shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph, the sellers of such Restricted Stock and Founders Stock shall not be required to contribute any amount in excess of the amount, if any, by which the net proceeds received by such sellers for the Common Stock sold by each of them under such registration statement exceeds the amount of any damages which they would have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The indemnification of underwriters provided for in this Section 9 shall be on such other terms and conditions as are at the time customary and reasonably required by such underwriters. In that event the indemnification of the sellers of Restricted Stock or Founders Stock or both, as 11 the case may be, in such underwriting shall at the sellers' request be modified to conform to such terms and conditions. 10. Changes in Restricted Stock. If, and as often as, there are any changes in the Common Stock by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed and shall apply to any securities received in any such transaction. 11. Representations and Warranties of the Company. The Company represents and warrants to you as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation or By-laws of the Company, or any provision of any indenture, agreement or other instrument to which it or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to general equity principles and to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws from time to time in effect affecting the enforcement of creditors' rights generally (regardless of whether such enforceability is considered in a proceeding in equity or at law). 12. Rule 144 Reporting. The Company agrees with you as follows: (a) The Company shall make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after the date it is first required to do so. (b) The Company shall file with the Commission in a timely manner all reports and other documents as the Commission may prescribe under Section 13(a) or 15(d) of the Exchange Act at any time after the Company has become subject to such reporting requirements of the Exchange Act. (c) The Company shall furnish to such holder of Restricted Stock or Founders Stock forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after the date it first becomes subject to such reporting requirements), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents so filed as a holder may reasonably request to avail itself of any rule or regulation of the Commission 12 allowing a holder of Restricted Stock or Founders Stock to sell any such securities without registration. 13. Miscellaneous. (a) Each holder of Restricted Stock and Founders Stock will agree, to the extent reasonably requested by any underwriter of securities of the Company in connection with an initial public offering of the Company's Common Stock, to enter into an agreement consistent with then market practice for major bracket underwriters not to sell or otherwise transfer or dispose of any shares of Common Stock for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, which agreement shall also bind the Founders, executive officers, directors, and other shareholders on terms and conditions substantially similar to those which shall apply to holders of Restricted Stock and Founders Stock. (b) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto, including, without limitation, the rights to indemnification under Section 9 hereof, shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, the registration rights conferred herein on the holders of Restricted Stock or Founders Stock, as the case may be, shall inure to the benefit of any and all subsequent holders from time to time of the Restricted Stock and the Founders Stock. (c) All notices, requests, consents and other communications hereunder shall be in writing and shall be mailed by first class registered mail, postage prepaid, addressed as follows: if to the Company, to it at 29 West 36th Street, New York, New York 10018, Attn: President, with a copy to Justin K. Macedonia, Esq., Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, NY 10004; if to any holder of Restricted Stock, to him, her or it, as the case may be, at its address as set forth on Annex I hereto or on the applicable counterpart signature page hereto, with a copy to Jay S. Rand, Esq., Kalow, Springut & Bressler, 488 Madison Avenue, New York, New York 10022; if to any holder of Founders Stock, to him, her or it, as the case may be, at its address as set forth on Annex II hereto, with a copy to Justin K. Macedonia, Esq., Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, NY 10004; if to any subsequent holder of Restricted Stock or Founders Stock, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Restricted Stock or Founders Stock), or to the holders of Restricted Stock or Founders Stock (in the case of the Company). (d) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 13 (e) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except in writing executed by the Company, the holders of 51% of the total number of shares of Restricted Stock and the holders of 51% of the total number of shares of Founders Stock; provided, however, that no amendment to Section 4 of this Agreement adverse to Chase or Warburg shall be effective without the additional written consent of such party. (f) This Agreement may be executed in two or more counterparts, by original or facsimile signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) The Company shall not grant to any third party any registration rights more favorable than or inconsistent with any of those contained herein, so long as any of the registration rights under this Agreement remains in effect. (h) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. [This Page Intentionally Ends Here] 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. STARMEDIA NETWORK, INC. By: /s/ Jack Chen ----------------------- Name: JACK CHEN Title: PRESIDENT FOUNDERS: /s/ Fernando Espuelas --------------------------- Fernando Espuelas /s/ Jack Chen --------------------------- Jack Chen PURCHASERS: THE FLATIRON FUND LLC By: ----------------------- Name: Title: FLATIRON FUND 1998/99, LLC By: ----------------------- Name: Title: 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. STARMEDIA NETWORK, INC. By: ----------------------- Name: Title: FOUNDERS: --------------------------- Fernando Espuelas --------------------------- Jack Chen PURCHASERS: THE FLATIRON FUND LLC By: /s/ Fred Wilson ----------------------- Name: Fred Wilson Title: Managing Member FLATIRON FUND 1998/99, LLC By: /s/ Fred Wilson ----------------------- Name: Fred Wilson Title: Managing Member 15 PURCHASERS: CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: /s/ Donald J. Hofman, Jr. ----------------------------------- Name: Donald J. Hofman, Jr. Title: General Partner NEW YORK CITY INVESTMENT FUND, LLC By: ----------------------------------- Name: Title: INTEL CORPORATION By: ----------------------------------- Name: Title: WARBURG, PINCUS EQUITY PARTNERS, L.P. By: ----------------------------------- Name: Title: WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. By: ----------------------------------- Name: Title: 16 PURCHASERS: CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: ----------------------------------- Name: Title: NEW YORK CITY INVESTMENT FUND, LLC By: /s/ Kathlyn Wylde ----------------------------------- Name: Kathlyn Wylde Title: President & CEO INTEL CORPORATION By: ----------------------------------- Name: Title: WARBURG, PINCUS EQUITY PARTNERS, L.P. By: ----------------------------------- Name: Title: WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. By: ----------------------------------- Name: Title: 16 PURCHASERS: CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: ----------------------------------- Name: Title: NEW YORK CITY INVESTMENT FUND, LLC By: ----------------------------------- Name: Title: INTEL CORPORATION ----------- LEGAL OK By: /s/ Diane R. Labrader ----------- ----------------------------------- TLR 9/24/92 Name: Diane R. Labrader ----------- Title: Asst Treasurer WARBURG, PINCUS EQUITY PARTNERS, L.P. By: ----------------------------------- Name: Title: WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. By: ----------------------------------- Name: Title: 16 Intel/StarMedia -- Amended and Restated Registration Rights Agreement PURCHASERS: CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: ----------------------------------- Name: Title: NEW YORK CITY INVESTMENT FUND, LLC By: ----------------------------------- Name: Title: INTEL CORPORATION By: ----------------------------------- Name: Title: WARBURG, PINCUS EQUITY PARTNERS, L.P. By: /s/ Gary Nussbaum ----------------------------------- Name: Gary Nussbaum Title: Managing Director WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. By: /s/ Gary Nussbaum ----------------------------------- Name: Gary Nussbaum Title: Managing Director 16 PURCHASERS: /s/ Albert S. Waxman ----------------------------------------- Albert S. Waxman, Ph.D. ----------------------------------------- David Rockefeller ----------------------------------------- Henry R. Kravis AURORA INVESTMENTS LLC By: ------------------------------------- Name: Title: 17 PURCHASERS: ----------------------------------------- Albert S. Waxman, Ph.D. By: Rockefeller & Co., Inc. as Attorney-in-Fact /s/ William L. Asmundson ----------------------------------------- for David Rockefeller Name: William L. Asmundson Title: Authorized Signatory ----------------------------------------- Henry R. Kravis AURORA INVESTMENTS LLC By: ------------------------------------- Name: Title: 17 PURCHASERS: ----------------------------------------- Albert S. Waxman, Ph.D. ----------------------------------------- David Rockefeller /s/ Henry R. Kravis ----------------------------------------- Henry R. Kravis AURORA INVESTMENTS LLC By: /s/ Henry R. Kravis ------------------------------------- Name: Henry R. Kravis Title: Member 17 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: PLATINUM VENTURE PARTNERS II, L.P. /s/ Michael A. Santer ---------------------------------- Signature MICHAEL A. SANTER ---------------------------------- Print Name: ADDRESS: 1815 South Meyers Road ---------------------------------- Oakbrook Terrace, IL 60181 ---------------------------------- ---------------------------------- ---------------------------------- 2 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: FLATIRON ASSOCIATES, LLC By: Flatiron Partners, LLC, Manager /s/ Fred Wilson ---------------------------------- Signature Fred Wilson ---------------------------------- Print Name Address: 257 Park Avenue South ---------------------------------- New York, NY 10010 ---------------------------------- Attn: Mr. Fred Wilson ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: /s/ Robert K. Hamshaw ---------------------------------- Signature ROBERT K. HAMSHAW ---------------------------------- Print Name Brentwood Corporation Address: Apartado 87-2106, Zona 7 ---------------------------------- Panama ---------------------------------- Republica de Panama ---------------------------------- ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: New Crussul Holdings Inc. /s/ Artur Paxoto ---------------------------------- Signature ARTUR PAXOTO ---------------------------------- Print Name Address: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature Rosewood Ventures Ltd ---------------------------------- Print Name Address: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- 18 STARMEDIA NETWORK, INC. COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature ESRU Investments LLC ---------------------------------- Print Name Address: 9 East Loockerman Street ---------------------------------- Dover, Delaware 19901 ---------------------------------- U S A ---------------------------------- ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature Integrity Holdings Ltd. ---------------------------------- Print Name Integrity Holdings Ltd. Address: Sandringham House ---------------------------------- 83 Shirley Street ---------------------------------- P.O. Box N-3247 ---------------------------------- Nassau Bahamas ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature ---------------------------------- Print Name Address: JEMIAK LTD. ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: GENERAL ELECTRIC CAPITAL CORPORATION /s/ Tony J. Pantuso ---------------------------------- Signature Tony J. Pantuso ---------------------------------- Print Name Address: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- 18 COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 31, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Amended and Restated Registration Rights Agreement dated as of August 31, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, a Purchaser thereunder. PURCHASER: MORGAN STANLEY DEAN WITTER EQUITY FUNDING, INC. /s/ David R. Powers ---------------------------------- Signature David R. Powers ---------------------------------- Print Name Address: c/o Morgan Stanley Dean Witter ---------------------------------- 1585 Broadway ---------------------------------- 36th Floor ---------------------------------- New York, NY 10036 ---------------------------------- Attn: David R. Powers 18 ANNEX I Holders of Restricted Stock Chase Venture Capital Associates, L.P. 380 Madison Avenue, 12th floor New York, NY 10017 Attn: Mr. I. Robert Greene The Fl@tiron Fund LLC 257 Park Avenue South New York, NY 10010 Attn: Mr. Fred Wilson Flatiron Fund 1998/99, LLC 257 Park Avenue South New York, NY 10010 Attn: Mr. Fred Wilson New York City Investment Fund, LLC One Battery Park Plaza New York, NY 10004 Attn: Janice Roberts Albert S. Waxman, Ph.D. c/o Psilos Group Partners, L.P. 152 West 57th Street, 33rd Floor New York, New York 10011 David Rockefeller Rockefeller & Co. 30 Rockefeller Plaza New York, NY 10112 Henry R. Kravis c/o Kohlberg Kravis Roberts & Co. 9 West 57th Street, Suite 4200 New York, NY 10019 Intel Corporation 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: George Powlick Warburg, Pincus Equity Partners, L.P. 466 Lexington Avenue New York, NY 10017-3147 Warburg, Pincus Ventures International, L.P. 466 Lexington Avenue New York, NY 10017-3147 Aurora Investments LLC c/o Kohlberg Kravis Roberts & Co. 9 West 57th Street, Suite 4200 New York, NY 10019 20 EX-10.5 9 AMEND. NO. 1 TO AMEND. REST. REG. RIGHTS AGREEMENT EXHIBIT-10.5 AMENDMENT NO. 1 TO THE AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDMENT NO. 1 TO THE AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Amendment"), dated as of January 1, 1999, by and among StarMedia Network, Inc., a Delaware corporation ("the "Company"), Jack C. Chen and Fernando J. Espuelas (the "Founders"), and the persons identified as Purchasers on the signature pages hereto (the "Purchasers"). WHEREAS, the Company, the Founders and the Purchasers are party to an Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement"), dated as of August 31, 1998, pursuant to which the Company has agreed under certain circumstances to register under the Securities Act of 1933, as amended, certain of the Common Stock of the Company; and WHEREAS, the Company, the Founders and the Purchasers wish to amend Section 6 of the Registration Rights Agreement as provided herein so as to eliminate certain incidental registration rights in connection with the initial public offering of the Company's Common Stock; and WHEREAS, the Founders which are party to this Amendment hold at least 51% of the total number of shares of Founders Stock, and the Purchasers hold at least 51% of the Restricted Stock; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Registration Rights Agreement. 2. Section 6 to the Registration Rights Agreement is hereby amended and restated in its entirety as follows: "6. Incidental Registration. If the Company at any time (other than pursuant to Section 4 or 5 hereof) proposes to register any of its Common Stock under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to (i) a registration statement on Form S-1 relating to the initial public offering of the Company's Common Stock, or (ii) registration statements on Forms S-4 or S-8, any successors thereto or any other form not available for registering the Restricted Stock for sale to the public or a Form S-1 covering solely an employee benefit plan), it will give written notice at such time to all holders of outstanding Restricted Stock and Founders Stock of its intention to do so. Upon the written request of any such holder, given within thirty (30) days after receipt of any such notice by the Company, to register any of its Restricted Stock or Founders Stock, as the case may be, (which request shall state the intended method of distribution thereof), the Company will use its best efforts to cause the Restricted Stock or Founders Stock or both, as the case may be, as to which registration shall have been so requested, to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other distribution by the holder (in accordance with its written request) of such Restricted Stock or Founders Stock, as the case may be, to be so registered; provided that the Company shall have no obligation to include any Restricted Stock or Founders Stock in a registration statement on Form S-1 relating to the initial public offering of the Company's Common Stock; and further provided that nothing herein shall prevent the Company from abandoning or delaying any such registration at any time. In the event that any registration pursuant to this Section 6 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 6 to register Restricted Stock or Founders Stock, as the case may be, shall specify that either (i) such Restricted Stock or Founders Stock, as the case may be, is to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration or (ii) such Restricted Stock or Founders Stock, as the case may be, is to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. The number of shares of Restricted Stock or Founders Stock or both, as the case may be, to be included in such an underwriting may be reduced (first, pro rata among the requesting holders of Founders Stock based upon the number of shares of Founders Stock owned by such holders and then, if necessary, pro rata among the other requesting holders of Restricted Stock, based upon the number of shares of Restricted Stock owned by such holders), if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, that such number of shares of Restricted Stock shall not be reduced if any shares are to be included in such underwriting for the account of any person other than the Company or requesting holders of Restricted Stock or Founders Stock." 3. Except as provided herein, all of the terms, covenants and conditions of the Registration Rights Agreement shall be unaffected hereby and shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first above written. STARMEDIA NETWORK, INC. By: /s/ Jack Chen ------------------------------ Name: Title: FOUNDERS: /s/ Fernando Espuelas --------------------------------- Fernando J. Espuelas /s/ Jack Chen --------------------------------- Jack C. Chen PURCHASERS: CHASE VENTURE CAPITAL ASSOCIATES, L.P. By:/s/ Susan Segal ------------------------------ Name: Title: THE FL@TIRON FUND LLC By: /s/ Fred Wilson ------------------------------ Name: Fred Wilson Title: Managing Member FLATIRON FUND 1998/99 LLC By: /s/ Fred Wilson ------------------------------ Name: Fred Wilson Title: Managing Member WARBURG, PINCUS EQUITY PARTNERS, L.P. By: /s/ Douglas Karp ------------------------------ Name: Title: WARBURG, PINCUS VENTURES INTERNATIONAL, L.P. By: /s/ Douglas Karp ------------------------------ Name: Title: EX-10.6 10 SERIES A - STOCK PURCHASE AGREEMENT EXHIBIT-10.6 SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT between STARMEDIA NETWORK, INC. and THE SEVERAL PURCHASERS NAMED IN SCHEDULE I HERETO Dated as of July 25, 1997 TABLE OF CONTENTS Page ---- ARTICLE I. THE PREFERRED SHARES ..............................................1 Section 1.1 Issuance. Sale and Delivery of the Preferred Shares .......1 Section 1.2 Closing ...................................................1 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ....................1 Section 2.1 Organization, Qualifications and Corporate Power ..........2 Section 2.2 Authorization of Agreements, Etc. .........................2 Section 2.3 Validity ..................................................3 Section 2.4 Authorized Capital Stock ..................................3 Section 2.5 Financial Statements ......................................3 Section 2.6 Events Subsequent to the Date of the Balance Sheet ........4 Section 2.7 Litigation; Compliance with Law ...........................4 Section 2.8 Proprietary Information ...................................5 Section 2.9 Proprietary Rights ........................................5 Section 2.10 Title to Properties ......................................6 Section 2.11 Leasehold Interests ......................................6 Section 2.12 Insurance ................................................7 Section 2.13 Taxes ....................................................7 Section 2.14 Other Agreements .........................................7 Section 2.15 Loans and Advances .......................................9 Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons ............................9 Section 2.17 Significant Customers and Suppliers ......................9 Section 2.18 Governmental Approvals ...................................9 Section 2.19 Disclosure ..............................................10 Section 2.20 Offering of the Preferred Shares ........................10 Section 2.21 Brokers .................................................10 Section 2.22 Officers ................................................10 Section 2.23 Transactions With Affiliates ............................10 Section 2.24 Employees ...............................................11 Section 2.25 U.S. Real Property Holding Corporation ..................11 -1- Section 2.26 Environmental Protection ................................11 Section 2.27 ERISA ...................................................12 Section 2.28 [RESERVED] ..............................................13 Section 2.29 Qualified Small Business ................................13 Section 2.30 Foreign Corrupt Practices Act ...........................13 Section 2.31 Federal Reserve Regulation ..............................13 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS ...............13 ARTICLE IV. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS .................14 ARTICLE V. COVENANTS OF THE COMPANY .........................................17 Section 5.1 Financial Statements, Reports, Etc .......................17 Section 5.2 [RESERVED] ...............................................18 Section 5.3 Reserve for Conversion Shares ............................18 Section 5.4 Corporate Existence ......................................18 Section 5.5 Properties, Business, Insurance ..........................18 Section 5.6 Inspection, Consultation and Advice ......................19 Section 5.7 Restrictive Agreements Prohibited ........................19 Section 5.8 Transactions with Affiliates .............................19 Section 5.9 Expenses of Directors ....................................19 Section 5.l0 Use of Proceeds .........................................19 Section 5.11 Board of Directors Meetings .............................19 Section 5.12 Compensation ............................................19 Section 5.13 By-laws .................................................19 Section 5.14 Performance of Contracts ................................20 Section 5.15 Vesting of Reserved Employee Shares .....................20 Section 5.16 Employee Nondisclosure and Developments Agreements ......20 Section 5.17 Activities of Subsidiaries ..............................20 Section 5.18 Compliance with Laws ....................................20 Section 5.19 Keeping of Records and Books of Account .................20 Section 5.20 Change in Nature of Business ............................21 Section 5.21 Rule 144A Information ...................................21 Section 5.22 Compensation and Audit Committees .......................21 -2- Section 5.23. Termination of Covenants ...............................21 ARTICLE VI. MISCELLANEOUS ...................................................21 Section 6.1 Expenses .................................................21 Section 6.2 Survival of Representatives; Termination of Agreements ...22 Section 6.3 Brokerage ................................................22 Section 6.4 Parties in Interest ......................................22 Section 6.5 Lock-Up Agreement ........................................22 Section 6.6 Notices ..................................................22 Section 6.7 Governing Law ............................................23 Section 6.8 Entire Agreement .........................................23 Section 6.9 Counterparts .............................................23 Section 6.10 Amendments ..............................................23 Section 6.11 Severability ............................................23 Section 6.12 Titles and Subtitles ....................................23 Section 6.13 Certain Defined Terms ...................................23 -3- INDEX TO SCHEDULES SCHEDULE I Purchasers SCHEDULE II Disclosure Schedule INDEX TO EXHIBITS (Not included in Form S-1 Registration Statement filing) EXHIBIT A Form of Registration Rights Agreement EXHIBIT B Form of Stockholders' Agreement EXHIBITS C-1 and C-2 Form of Founders Agreements EXHIBIT D Charter and All Amendments Thereto EXHIBIT E Form of Employee Nondisclosure and Developments Agreement EXHIBIT F Form of Opinion of Counsel EXHIBIT G Form of SBA Side Letter EXHIBIT H Form of Stock Option Plan -4- SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of July 25, 1997, between StarMedia Network, Inc., a Delaware corporation (the "Company"), and the several purchasers named in the attached Schedule I (individually a "Purchaser" and collectively the "Purchasers"). WHEREAS, the Company wishes to issue and sell to the Purchasers an aggregate of 7,330,000 shares (the "Preferred Shares") of the authorized but unissued Series A Convertible Preferred Stock, $0.001 par value, of the Company (the "Series A Convertible Preferred Stock"); and WHEREAS, the Purchasers, severally but not jointly, wish to purchase the Preferred Shares on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I. THE PREFERRED SHARES Section 1.1 Issuance, Sale and Delivery of the Preferred Shares. The Company agrees to issue and sell to each Purchaser, and each Purchaser hereby agrees to purchase from the Company, the number of Preferred Shares set forth opposite the name of such Purchaser under the heading "Aggregate Purchase Price for Preferred Shares" on Schedule I. Section 1 .2 Closing. The closing shall take place at the offices of Brown Raysman Millstein Felder & Steiner LLP, 120 West 45th Street, New York, New York 10036 at 10:00 a.m., New York time, on July 25, 1997, or at such other location, date and time as may be agreed upon between the Purchasers and the Company (such closing being called the "Closing" and such date and time being called the "Closing Date"). At the Closing, the Company shall issue and deliver to each Purchaser a stock certificate or certificates in definitive form, registered in the name of such Purchaser, representing the Preferred Shares being purchased by it at the Closing. As payment in full for the Preferred Shares being purchased by it under this Agreement, and against delivery of the stock certificate or certificates therefor as aforesaid, on the Closing Date each Purchaser shall (i) deliver to the Company a certified check payable to the order of the Company, in the amount set forth opposite the name of such Purchaser under the heading "Aggregate Purchase Price for Preferred Shares" on Schedule I, (ii) transfer such sum to the account of the Company by wire transfer, (iii) deliver to the Company for cancellation promissory notes issued by the Company in the amount of such sum, or (iv) deliver or transfer such sum to the Company by any combination of such methods of payments. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchasers that, except as set forth in the Disclosure Schedule attached as Schedule II (which Disclosure Schedule makes explicit reference to the particular representation or warranty as to which exception is taken, which in each case shall constitute the sole representation and warranty as to which such exception shall apply): -1- Section 2.1 Organization, Qualifications and Corporate Power. (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so licensed or qualified would not have material and adverse effect on the business, prospects, financial condition, operations, property or affairs of the company ("Material Adverse Effect"). The Company has the corporate power and authority to own and hold its properties and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement, the Registration Rights Agreement with the Purchasers in the form attached as Exhibit A (the "Registration Rights Agreement"), the Stockholders' Agreement with the parties thereto named in paragraph (h) of Article IV of this Agreement, in the form attached as Exhibit B (the "Stockholders' Agreement), and the Amended Employment Agreements with each of Fernando Espuelas and Jack Chen (each a "Founder" and collectively the "Founders") in the forms attached as Exhibits C1 and C2 (the "Founders Agreements" and, together with the Registration Rights Agreement and the Stockholders Agreement, the "Transaction Documents"), to issue, sell and deliver the Preferred Shares and to issue and deliver the shares of Common Stock, $0.001 par value, of the Company ("Common Stock") issuable upon conversion of the Preferred Shares (the "Conversion Shares"). (b) The Company has no subsidiaries. The Company does not (i) own of record or beneficially, directly or indirectly, (A) any shares of capital stock or securities convertible into capital stock of any other corporation or (B) any participating interest in any partnership, joint venture or other non-corporate business enterprise or (ii) control, directly or indirectly, any other entity. Section 2.2 Authorization of Agreements, Etc. (a) The execution and delivery by the Company of this Agreement and the Transaction Documents; the performance by the Company of its obligations hereunder and thereunder, the issuance, sale and delivery of the Preferred Shares and the issuance and delivery of the Conversion Shares have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation of the Company, as amended (the "Charter"), or the By-laws of the Company, as amended, or any provision of any indenture, agreement or other instrument to which the Company or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. To the Company's knowledge, without having investigated such matter, no provision of the Stockholders' Agreement violates, conflicts with, results in a breach of or constitutes (with due notice or lapse of time or both) a default by any other party under any other indenture, agreement or instrument. (b) The Preferred Shares have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Series A Convertible Preferred Stock, with no personal liability attaching to the ownership thereof, and will be free and clear of all liens, charges, restrictions, claims and encumbrances -2- imposed by or through the Company except as set forth in the Registration Rights Agreement. The Conversion Shares have been duly reserved for issuance upon conversion of the Preferred Shares and, when so issued, will be duly authorized, validly issued, fully paid and nonassessable shares of Class B Common Stock, with no personal liability attaching to the ownership thereof, and will be free and clear of all liens, charges, restrictions, claims and encumbrances' imposed by or through the Company except as set forth in the Registration Rights Agreement and the Stockholders' Agreement. Neither the issuance, sale or delivery of the Preferred Shares nor the issuance or delivery of the Conversion Shares is subject to any preemptive right to stockholders of the Company or to any right of first refusal or other right in favor of any person. Section 2.3 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. The other Transaction Documents, when executed and delivered in accordance with this Agreement, will constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms. Section 2.4 Authorized Capital Stock. The authorized capital stock of the Company consists of (i) 8,000,000 shares of Preferred Stock, $0.001 par value (the "Preferred Stock"), of which 7,330,000 shares have been designated Series A Convertible Preferred Stock, and (ii) 70,000,000 shares of Common Stock, $0.001 par value. Immediately prior to the Closing, 10,012,000 shares of Common Stock will be validly issued and outstanding, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and no shares of Preferred Stock will have been issued. An aggregate of 7,330,000 shares of Common Stock has been reserved for issuance upon conversion of the Preferred Shares. An aggregate of 2,000,000 shares of Common Stock has been reserved for issuance pursuant to the Company's Stock Option Plan, of which options to purchase 1,839,933 shares have been granted to date. The designations, powers, preferences, rights, qualifications, limitation and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Charter, a copy of which is attached as Exhibit D, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. Except as set forth in the attached Disclosure Schedule, (i) no person owns of record or is known to the Company to own beneficially any share of Common Stock, (ii) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding and (iii) there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as provided for in the Charter or as set forth in the attached Disclosure Schedule, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. Except for the Stockholders' Agreement, neither the Company nor, to the Company's knowledge, without having investigated such matter, any other person is party to any voting trusts or agreements, stockholders' agreements, pledge agreements, buy-sell agreements, rights of first refusal, preemptive rights or proxies relating to any securities of the Company (whether or not the Company is a party thereto). All of the outstanding securities of the Company were issued in compliance with all applicable Federal and state securities laws. -3- Section 2.5 Financial Statements. The Company has furnished to the Purchasers (i) the balance sheet of the Company as of December 31, 1996 and the related unaudited statements of income and stockholders' equity for the year then ended, and (ii) the unaudited balance sheet of the Company as of March 31, 1997 (the "Balance Sheet"). All such financial statements have been prepared consistent with the cash method of accounting and fairly present the financial position of the Company as of December 31, 1996 and the results of their operations for the year ended December 31, 1996. Since the date of the Balance Sheet, (i) there has been no change in the assets, liabilities or financial condition of the Company from that reflected in the Balance Sheet except for changes in the ordinary course of business which in the aggregate have not been materially adverse and (ii) none of the business, prospects, financial condition, operations, property or affairs of the Company has been materially adversely affected by any occurrence or development, individually or in the aggregate, whether or not insured against. Section 2.6 Events Subsequent to the Date of the Balance Sheet. Since the date of the Balance Sheet, except as set forth in the attached Disclosure Schedule, the Company has not (i) issued any stock, bond or other corporate security, (ii) borrowed any amount or incurred or become subject to any liability (absolute, accrued or contingent), except current liabilities incurred and liabilities under contracts enter into in the ordinary course of business (iii) discharged or satisfied any lien or encumbrance or incurred or paid any obligation or liability (absolute, accrued or contingent) other than current liabilities shown on the Balance Sheet and current liabilities incurred since the date of the Balance Sheet in the ordinary course of business, (iv) declared or made any payment or distribution to stockholders or purchased or redeemed any share of its capital stock or other security, (v) mortgaged, pledged, encumbered or subjected to lien any of its assets, tangible or intangible, other than liens of current real property taxes not yet due and payable, (vi) sold, assigned or transferred any of its tangible assets except in the ordinary course of business, or cancelled any debt or claim, (vii) sold, assigned, transferred or granted any exclusive license with respect to any patent, trademark, trade name, service mark, copyright, trade secret or other intangible asset, (viii) suffered any loss of property or waived any right of substantial value whether or not in the ordinary course of business, (ix) made any change in officer compensation except in the ordinary course of business and consistent with past practice, (x) made any material change in the manner of business or operations of the Company, (xi) entered into any transaction except in the ordinary course of business or as otherwise contemplated hereby or (xii) entered into any commitment (contingent or otherwise) to do any of the foregoing. Section 2.7 Litigation; Compliance with Law. Except as set forth on the attached Disclosure Schedule there is no (i) action, suit, claim, proceeding or investigation pending or, to the best of the Company's knowledge, threatened against or affecting the Company, at law or in equity, or before or by any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau agency or instrumentality, (ii) arbitration proceeding relating to the Company pending under collective bargaining agreements or otherwise or (iii) foreign or domestic governmental inquiry pending or, to the best of the Company's knowledge, threatened against or affecting the Company (including without limitation any inquiry as to the qualification of the Company to hold or receive any license or permit), and there is no basis for any of the foregoing. The Company has not received any opinion or memorandum or legal advice from foreign or domestic legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business, prospects, financial condition, operations, property or affairs. The Company is not in default with respect to any order, writ, injunction or decree known to or served upon the Company of any court or of any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action or suit by the Company pending, threatened or contemplated against others. The Company has -4- commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action or suit by the Company pending, threatened or contemplated against others. The Company has complied with all foreign and domestic laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services, the Company has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as proposed to be conducted, and the Company has been operating its business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations, except to the extent that the failure to do any of the foregoing would not have a Material Adverse Effect. There is no existing law, rule, regulation or order, and the Company is not aware of any proposed law, rule, regulation or order, whether foreign or domestic, Federal, state, county or local, which would prohibit or restrict the Company from, or otherwise materially adversely affect the Company in, conducting its business in any jurisdiction in which it is now conducting business or in which it proposes to conduct business. Section 2.8 Proprietary Information. (a) To the best of the Company's knowledge, no third party has claimed or has reason to claim that any officer or director or other person employed by or engaged by the Company has (i) violated or may be violating any of the terms or conditions of his employment, non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. No third party has requested information from the Company which suggests that such a claim might be contemplated. To the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company has employed or proposes to employ any trade secret or any information or documentation proprietary to any former employer, and to the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company has violated any confidential relationship which such person may have had with any third party, in connection with the development, manufacture or sale of any product or proposed product or the development or sale of any service or proposed service of the Company, and the Company has no reason to believe there will be any such employment or violation. To the best of the Company's knowledge, none of the execution or delivery of this Agreement, or the carrying on of the business of the Company as officers, employees or agents by any officer, director or key employee of the Company, or the conduct or proposed conduct of the business of the Company, will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument under which any such person is obligated. Section 2.9 Proprietary Rights. Set forth in the Disclosure Schedule is a list and brief description of (i) all domestic and foreign patents, patent rights, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names and copyrights, and all applications for such which are in the process of being prepared, owned by or registered in the name of the Company, or of which the Company is a licensor or licensee or in which the Company has any right, and in each case a brief description of the nature of such right, (ii) all licenses and other agreements with third parties (the "Third Party Licenses") relating to any software, copyrights, technology, know-how or processes that the Company has licensed or is otherwise authorized by such third parties to use, market, distribute or incorporate into products distributed or services provided by the Company (such software, technology, know-how and processes being collectively referred to as "Third Party Technology"). The Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets, customer lists and know-how, including without limitation the Third Party Technology (collectively, "Intellectual Property") necessary or -5- desirable to the conduct of its business as conducted and as proposed to be conducted, free and clear of all liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims, security interests, rights of other and encumbrances (including, without limitation, distribution rights). The foregoing representation as it relates to Third Party Technology is limited to the Company's interest pursuant to the Third Party Licenses, all of which are valid and enforceable and in full force and effect and which grant the Company such right to Third Party Technology as are employed in or necessary to the business of the Company as conducted or proposed to be conducted. All of the Company's registered patents, trademarks and copyrights in any of the Company Products and applications therefor, if any, are valid and in full force and effect, and consummation of the transactions contemplated hereby will not alter or impair any such rights. Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that the operations of the Company infringe upon or conflict with, constitute misappropriation of or in any way involves unfair competition with respect to, the asserted rights of any other person under any Intellectual Property, and there is no basis for any such claim (whether or not pending or threatened). Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that any such Intellectual Property owned or licensed by the Company or which the Company otherwise has the right to use, is invalid or unenforceable by the Company, and there is no basis for any such claim (whether or not pending or threatened). All prior art known to the Company which may be or may have been pertinent to the examination of any United States patent or patent application listed in Schedule II has been cited to the United States Patent and Trademark Office. To the best of the Company's knowledge, all technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company has not granted or assigned to any other person or entity any right to manufacture, have manufactured, assemble or sell the products or proposed products or any adaptations, translations or derivative works based on such products, or to provide the service or proposed services of the Company. Section 2.10 Title to Properties. The Company has good, clear and valid title to its properties and assets reflected on the Balance Sheet or acquired by it since the date of the Balance Sheet (other than properties and assets disposed of in the ordinary course of business since the date of the Balance Sheet), and all such properties and assets are free and clear of mortgages, pledges, security interests, liens, charges, claims, restrictions and other encumbrances (including without limitation, easements and licenses), except for liens for or current taxes not yet due and payable and minor imperfections of title, if any, not material in nature or amount and not materially detracting from the value or impairing the use of the property subject thereto or impairing the operations or proposed operations of the Company, including, without limitation, the ability of the Company to secure financing using such properties and assets as collateral. To the best of the Company's knowledge, there are no condemnation, environmental, zoning or other land use regulation proceedings, either instituted or planned to be instituted, which would adversely affect the use or operation of the Company's properties and assets for their respective intended uses and purposes, or the value of such properties, and the Company has not received notice of any special assessment proceedings which would affect such properties and assets. Section 2.11 Leasehold Interests. Each lease or agreement to which the Company is a party under which it is a lessee of any property, real or personal, is a valid and subsisting agreement, duly authorized and entered into, without any default of the Company thereunder and, to the best of the Company's knowledge, without any default thereunder of any other party thereto. No event has occurred and is continuing which, with due notice or lapse of time or both, would constitute a default or event of default by the Company under any such lease or agreement or, to the best of the Company's knowledge, by any other party thereto. The Company's possession of such property has not been disturbed and, to the best of the Company's knowledge, -6- no claim has been asserted against the Company adverse to its rights in such leasehold interests. Section 2.12 Insurance. The Company holds valid policies covering all of the insurance required to be maintained by it under Section 5.5. Section 2.13 Taxes. The Company has filed all tax returns, Federal, state, county and local, required to be filed by it, and the Company has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges which have become due or payable, including without limitation all taxes which the Company is obligated to withhold from amounts owing to employees, creditors and third parties. The Company has established adequate reserves for all taxes accrued but not yet payable. All material tax elections of any type which the Company has made as of the date hereof are set forth in the financial statements referred to in Section 2.5. The Federal income tax returns of the Company have never been audited by the Internal Revenue Service. No deficiency assessment with respect to or proposed adjustment of the Company's Federal, state, county or local taxes is pending or, to the best of the Company's knowledge, threatened. There is no tax lien (other than for current taxes not yet due and payable), whether imposed by any Federal, state, county or local taxing authority, outstanding against the assets, properties or business of the Company. Neither the Company nor any of its present or former stockholders has ever filed an election pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code") that the Company be taxed as an S corporation. The Company's net operating losses for Federal income tax purposes, as set forth in the financial statements referred to in Section 2.5, are not subject to any limitations imposed by Section 382 of the Code and the full amount of such net operating losses are available to offset the taxable income of the Company for the current fiscal year and, to the extent not so used, succeeding fiscal years. Consummation of the transactions contemplated by this Agreement or by any other agreement, understanding or commitment (contingent or otherwise) to which the Company is a party or by which it is otherwise bound will not have the effect of limiting the Company's ability to use such net operating losses in full to offset such taxable income. Section 2.14 Other Agreements. Except as set forth in the attached Disclosure Schedule, the Company is not a party to or otherwise bound by any written or oral agreement, instrument, commitment or restriction which individually or in the aggregate could materially adversely affect the business, prospects, financial condition, operations, property or affairs of the Company. Except as set forth in the attached Disclosure Schedule, the Company is not a party to or otherwise bound by any written or oral: (a) distributor, dealer, manufacturer's representative or sales agency agreement which is not terminable on less than ninety (90) days' notice without cost or other liability to the Company (except for agreements which, in the aggregate, are not material to the business of the Company); (b) sales agreement which entitled any customer to a rebate or right of set-off, to return any product to the Company after acceptance thereof or to delay the acceptance thereof, or which varies in any material respect from the Company's standard form agreements; (c) agreement with any labor union (and, to the knowledge of the Company, no organizational effort is being made with respect to any of its employees); (d) agreement with any supplier containing any provision permitting any party other than the Company to renegotiate the price or other terms, or containing any pay-back or other similar provision, upon the occurrence of a failure by the Company to -7- meet its obligations under the agreement when due or the occurrence of any other event; (e) agreement for the future purchase of fixed assets or for the future purchase of materials, supplies or equipment in excess of its normal operating requirements; (f) agreement for the employment of any officer, employee or other person (whether of a legally binding nature or in the nature of informal understandings) on a full-time or consulting basis which is not terminable on notice without cost or other liability to the Company, except normal severance arrangements and accrued vacation pay; (g) bonus, pension, profit-sharing, retirement, hospitalization, insurance, stock purchase, stock option or other plan, agreement or understanding pursuant to which benefits are provided to any employee of the Company (other than group insurance plans which are not self-insured and are applicable to employees generally); (h) agreement relating to the borrowing of money or to the mortgaging or pledging of, or otherwise placing a lien or security interest on, any asset of the Company; (i) guaranty of any obligation for borrowed money or otherwise; (j) voting trust or agreement, stockholders' agreement, pledge agreement, buy-sell agreement or first refusal or preemptive rights agreement relating to any securities of the Company; (k) agreement, or group of related agreements with the same party or any group of affiliated parties, under which the Company has advanced or agreed to advance money or has agreed to lease any property as lessee or lessor; (1) agreement or obligation (contingent or otherwise) to issue, sell or otherwise distribute or to repurchase or otherwise acquire or retire any share of its capital stock or any of its other equity securities; (m) assignment, license or other agreement with respect to any form of intangible property; (n) agreement under which it has granted any person any registration rights, other than the Registration Rights Agreement; (o) agreement under which it has limited or restricted its right to compete with any person in any respect; (p) other agreement or group of related agreements with the same party involving more than $10,000 or continuing over a period of more than six months from the date or dates thereof (including renewals or extensions optional with another party), which agreement or group of agreements is not terminable by the Company without penalty upon notice of thirty (30) days or less, but excluding any agreement or group of agreements with a customer of the Company for the sale, lease or rental of the Company's products or services if such agreement or group of agreements was entered into by the Company in the ordinary course of business; or (q) other agreement, instrument, commitment, plan or arrangement, a copy of which would be required to be filed with the Securities and Exchange Commission (the -8- "Commission") as an exhibit to a registration statement on Form S-l if the Company were registering securities under the Securities Act of 1933, as amended (the "Securities Act"). Any agreement specified in the Disclosure Schedule pursuant to this Section 2.14 is hereafter referred to as a "Material Agreement". The Company, and to the best of the Company's knowledge after due inquiry, each other party thereto have in all material respects performed all the obligations required to be performed by them to date (or such non-performing party has received a valid, enforceable and irrevocable written waiver with respect to its non-performance), have received no notice of default and are not in default (with due notice or lapse of time or both) under any Material Agreement. The Company has no present expectation or intention of not fully performing all its obligations under each such Material Agreement, and the Company has no knowledge of any breach or anticipated breach by the other party to any Material Agreement, to which the Company is a party. The Company is in full compliance with all of the terms and provisions of its Charter and By-laws, as amended. Section 2.15 Loans and Advances. The Company does not have any outstanding loans or advances to any person and is not obligated to make any such loans or advances, except, in each case, for advances to employees of the Company in respect of reimbursable business expenses anticipated to be incurred by them in connection with their performance of services for the Company. Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons. The Company has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable on any indebtedness of any other person (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor, or otherwise to assure the creditor against loss), except for guaranties by endorsement of negotiable instruments for deposit in collection in the ordinary course of business. Section 2.17 Significant Customers and Suppliers. No customer or supplier which was significant to the Company during the period covered by the financial statements referred to in Section 2.5 or which has been significant to the Company thereafter, has terminated, materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company, as the case may be. Section 2.18 Governmental Approvals. Subject to the accuracy of the representations and warranties of the Purchasers set forth in Article III, no registration or filing with, or consent or approval of or other action by, any Federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance by the Company of this Agreement, the Registration Rights Agreement or the Stockholders' Agreement, the issuance, sale and delivery of the Preferred Shares or, upon conversion thereof, the issuance and delivery of the Conversion Shares, other than (i) filings pursuant to Federal and state securities laws (all of which filings have been made by the Company, other than those which are required to be made after the Closing and which will be duly made on a timely basis) in connection with the sale of the Preferred Shares and (ii) with respect to the Registration Rights Agreement, the registration of the shares covered thereby with the Commission and filings pursuant to state securities laws. Section 2.19 Disclosure. Neither this Agreement, nor any Schedule or Exhibit to this Agreement, nor the Business Plan of the Company dated [March], 1997 (the "Business Plan"), contains an untrue statement of a material fact or omits a material fact necessary to make the -9- statements contained herein or therein not misleading. None of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not misleading. There is no fact which the Company has not disclosed to the Purchasers and their counsel in writing and of which the Company is aware which materially and adversely affects or is reasonably likely to materially and adversely affect the business, prospects, financial condition, operations, property or affairs of the Company. The financial projections and other estimates contained in the Business Plan were prepared by the Company based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of the issuance of the Business Plan, believed to be reasonable, but which the Company cannot and does not assure or guarantee the attainment of in any manner. Except as set forth in the Disclosure Schedule, as of the date hereof no facts have come to the attention of the Company which would, in its opinion, require the Company to revise or amplify the assumptions underlying such projections and other estimates or the conclusions derived therefrom. Section 2.20 Offering of the Preferred Shares. Neither the Company nor any person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Preferred Shares or any security of the Company similar to the Preferred Shares has offered the Preferred Shares or any such similar security for sale to, or solicited any offer to buy the Preferred Shares or any such similar security from, or otherwise approached or negotiated with respect thereto with, any person or persons, and neither the Company nor any person acting on its behalf has taken or will take any other action (including, without limitation, any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with Preferred Shares under the Securities Act or the rules and regulations of the Commission thereunder), in either case so as to subject the offering, issuance or sale of the Preferred Shares to the registration provisions of the Securities Act. Section 2.21 Brokers. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. Section 2.22 Officers. Set forth in the Disclosure Schedule is a list of the names of the officers of the Company, together with the title or job classification of each such person and the total compensation anticipated to be paid to each such person by the Company in 1997. Except as set forth in the Disclosure Schedule, none of such persons has an employment agreement or understanding, whether oral or written, with the Company, which is not terminable on notice by the Company without cost or other liability to the Company. Section 2.23 Transactions With Affiliates. Except as set forth in the Disclosure Schedule, no director, officer, employee or stockholder of the Company, or member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or any member of the family of any such person, has a substantial interest or is an officer, director, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, is a party to any transaction with the Company, including any contract, agreement or other arrangement providing for the employment of, furnishing of services by rental of real or personal property from or otherwise requiring payments to any such person or firm, other than employment-at-will arrangements in the ordinary course of business. Section 2.24 Employees. Except as set forth on the Disclosure Schedule, each of the officers of the Company, each key employee and each other employee now employed by the -10- Company who has access to confidential information of the Company has executed an Employee Nondisclosure and Developments Agreement] substantially in the form of Exhibit E (collectively, the "Employee Nondisclosure and Developments Agreements"), and such agreements are in full force and effect. To the best knowledge of the Company, no employee or former employee of the Company is in violation of any term of any employment contract, patent disclosure agreement, confidentiality agreement or any other contract or agreement relating to the relationship of any such employee with the Company. No officer or key employee of the Company has advised the Company (orally or in writing) that he intends to terminate employment with the Company. The Company has complied in all material respects with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes. Section 2.25 U.S. Real Property Holding Corporation. The Company is not now and has never been a "United States real property holding corporation", as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the Regulations promulgated by the Internal Revenues Service, and the Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under Section 1.897-2(h) of such Regulations. Section 2.26 Environmental Protection. The Company has not caused or allowed, or contracted with any party for, the generation, use, transportation, treatment, storage or disposal of any Hazardous Substances (as defined below) in connection with the operation of its business or otherwise. The Company, the operation of its business, and, to the best knowledge of the Company, any real property that the Company owns, leases or otherwise occupies or uses (the "Premises"), are in compliance with all applicable Environmental Laws (as defined below) and orders or directives of any governmental authorities having jurisdiction under such Environmental Laws, including, without limitation, any Environmental Laws or orders or directives with respect to any cleanup or remediation of any release or threat of release of Hazardous Substances. The Company has not received any citation, directive, letter or other communication, written or oral, or any notice of any proceeding, claim or lawsuit, from any person arising out of the ownership or occupation of the Premises, or the conduct of its operations, and the Company is not aware of any basis therefor. The Company has obtained and is maintaining in full force and effect all necessary permits, licenses and approvals required of it by all Environmental Laws applicable to the Premises and the business operations conducted thereon (including operations conducted by tenants on the Premises), and is in compliance with all such permits, licenses and approvals. The Company has not caused or allowed a release, or a threat of release, of any Hazardous Substance unto, at or near the Premises, and, to the best of the Company's knowledge, neither the Premises nor any property at or near the Premises has ever been subject to a release, or a threat of release, of any Hazardous Substance. For the purposes of this Agreement, the term "Environmental Laws" shall mean any Federal, state or local law or ordinance or regulation pertaining to the protection of human health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq, the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001 et seq., and the Resource Conservation and Recovery Act, 42 U.S.C Sections 6901 et seq. For purposes of this Agreement, the term "Hazardous Substances" shall include oil and petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials classified as hazardous or toxic under any Environmental Laws. Section 2.27 ERISA. -11- (a) Except as set forth on the Disclosure Schedule, the Company, prior to the date of this Agreement, has not maintained, adopted or established, contributed to or been required to contribute to, or otherwise participated in or been required to participate in, and, as of the date of this Agreement, has not adopted or established, does not maintain, does not contribute to an is not required to contribute to, and does not otherwise participate in and is not required to participate in, (i) any "employee welfare benefit plan" or "welfare plan" as defined under Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) any "employee pension benefit plan" or "pension plan" as defined under Section 3(2) of ERISA; (iii) any "excess benefit plan" as defined under Section 3(36) of ERISA; (iv) any "multiemployer plan" as such term is defined under Section 3(37)(A) of ERISA; (v) any "multiple employer welfare arrangement" as defined under Section 3(40) of ("ERISA"); (vi) any plan, fund, program, agreement or arrangement which is unfunded and which is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as such term is referred to in Sections 201(2), 301(a)(3) and 401(a)(l) of ERISA; or; (vii) any other plan, fund program, agreement of arrangement, whether oral or written, which was or could have been prior to the date of this Agreement, or which is or could be as of the date of this Agreement, subject to any of the provisions of ERISA or the Code; (b) The Company has not committed itself, orally or in writing, to create, establish, adopt, maintain or participate in any plan, fund, program, agreement or arrangement described in paragraph (a) hereof. In addition, except as disclosed in the Disclosure Schedule, the Company has not committed itself, orally or in writing, to provide or to cause to be provided any severance, salary continuation, termination, disability, death, retirement, health or medical benefit, or similar benefit to any person (including, without limitation, any former or current employee). (c) Notwithstanding anything else set forth herein, except as set forth in the Disclosure Schedule, there exists no condition or set of circumstances which has resulted in, or which could result in the imposition of liability under ERISA, the Code, or other applicable law with respect to any plan, fund, program agreement or arrangement described in paragraph (a) of this Section 2. Section 2.28 [RESERVED] Section 2.29 Qualified Small Business. The Company represents that, as of the date of this Agreement, it qualifies as a "Qualified Small Business" as defined in Section 1202(d) of the -12- Code and covenants that so long as its shares are held by the Purchasers (or a transferee in whose hands the shares are eligible to qualify as Qualified Small Business Stock as defined in Section 1202(c) of the Code), it will use its reasonable efforts to cause the shares to qualify as Qualified Small Business Stock; provided that, notwithstanding the foregoing, the Company shall not be obligated to take any action, or refrain from any action, which in its good faith business judgment is not in the best interests of the Company or its stockholders. Section 2.30 Foreign Corrupt Practices Act. The Company has not taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules and regulations thereunder. To the best of the Company's knowledge, there is not now, and there has never been, any employment by the Company of, or beneficial ownership in the Company by, any governmental or political official in any country in the world. Section 2.31 Federal Reserve Regulation. The Company is not engaged in the business of extending credit for the purpose of purchasing or carrying margin securities (within the meaning of Regulation G of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Preferred Shares will be used to purchase or carry any margin security or to extend credit to others for the purpose of purchasing or carrying any margin security or in any other manner which would involve a violation of any of the regulations of the Board of Governors of the Federal Reserve System. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser, severally and not jointly, represents and warrants to the Company that: (a) such Purchaser, if not a natural person, is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the power and authority to execute, deliver and perform this Agreement and the Transaction Documents to which it is a party, and to purchase the Preferred Shares being purchased by it hereunder (b) the execution and delivery by such Purchaser of this Agreement and the Transaction Documents; the performance by such Purchaser of its obligations hereunder and thereunder, and the purchase of the Preferred Shares have been duly authorized by all requisite organizational action. (c) this Agreement has been duly executed and delivered by such Purchaser and constitutes the legal, valid and binding obligation of such Purchaser, enforceable in accordance with its terms. The other Transaction Documents, when executed and delivered in accordance with this Agreement, will constitute the legal, valid and binding obligations of such Purchaser, enforceable in accordance with their respective terms. (d) such Purchaser is an "accredited investor" within the meaning of Rule 501 under the Securities Act and was not organized for the specific purpose of acquiring the Preferred Shares; (e) such Purchaser has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof; (f) such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management; -13- (g) the Preferred Shares being purchased by such Purchaser are being acquired for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof; (h) such Purchaser understands that (i) the Preferred Shares and the Conversion Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, (ii) the Preferred Shares and, upon conversion thereof, the Conversion Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, (iii) the Preferred Shares and the Conversion Shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect; and (i) if such Purchaser sells any Conversion Shares pursuant to Rule 144A promulgated under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including (i) obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a qualified institutional buyer and (ii) advising such purchaser that Rule 144A is being relied upon with respect to such resale. ARTICLE IV. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS The obligation of each Purchaser to purchase and pay for the Preferred Shares being purchased by it on the Closing Date is, at its option, subject to the satisfaction, on or before the Closing Date, of the following conditions: (a) Opinion of Company's Counsel. The Purchasers shall have received from Winthrop, Stimson, Putnam & Roberts, counsel for the Company, an opinion dated the Closing Date, in form and scope satisfactory to the Purchasers and their counsel, to the effect set forth in Exhibit E hereto. (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II shall be true, complete and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the President and Treasurer of the Company shall have certified to such effect to the Purchasers in writing. (c) Performance. The Company shall have performed and complied with all agreements contained herein required to be performed or complied with by it prior to or at the Closing Date, and the President and Treasurer of the Company shall have certified to the Purchasers in writing to such effect and to the further effect that all of the conditions set forth in this Article IV have been satisfied. (d) All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in form and substance to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Supporting Documents. The Purchasers and their counsel shall have received copies of the following documents: -14- (i) (A) the Charter, certified as of a recent date by the Secretary of State of the State of Delaware, (B) a certificate of said Secretary, dated as of a recent date, as to the due incorporation and good standing of the Company, the payment of all excise taxes by the Company and listing all documents of the Company on file with said Secretary and (C) a certificate of the Secretary of the State of the State of Connecticut, dated as of a recent date, as to the good standing of the Company in such state. (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated the Closing Date and certifying: (A) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of this Agreement and the Transaction Documents, the issuance, sale and delivery of the Preferred Shares and the reservation, issuance, sale and delivery of the Conversion Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement and the Transaction Documents; (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; and (D) to the incumbency and specimen signature of each officer of the Company executing this Agreement or any of the Transaction Documents, the stock certificates representing the Preferred Shares and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); and (iii) such additional supporting documents and other information with respect to the operations and affairs of the Company as the Purchasers or their counsel reasonably may request. (f) Registration Rights Agreement. The Company shall have executed and delivered the Registration Rights Agreement. (g) Stockholders' Agreement. The Stockholders' Agreement shall have been executed and delivered by the Company and each of the Founders. (h) Founders Agreement. The Company shall have entered into a Founder's Agreement with each of the Founders. (i) Charter. The Charter shall read in its entirety as set forth in Exhibit D. The Charter shall have been duly amended, if necessary, to provide that: (i) all directors of the Company shall be indemnified against, and absolved of, liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Delaware, and (ii) the number of shares of authorized Common Stock of the Company may be increased or decreased (but not below the number then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, voting together as a single class notwithstanding the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware. -15- (j) By-Laws. The Company's By-laws shall have been amended, if necessary, to provide that (i) unless otherwise required by the laws of the State of Delaware, (A) any two directors and (B) any holder or holders of at least 1,500,000 shares of Series A Convertible Preferred Stock shall have the right to call a meeting of the Board of Directors or stockholders and (ii) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Series A Convertible Preferred Stock as set forth in the Charter. (k) Employee Agreements. Copies of the Employee Nondisclosure and Developments Agreements shall have been delivered to counsel for the Purchasers. (l) SBA Side Letter. A letter in the form of Exhibit G hereto obligating the Company with respect to certain regulatory requirements of the Small Business Administration shall have been executed and delivered by the Company. (m) Stock Option Plan. A Stock Option Plan, in the form of Exhibit H hereto, shall have been approved by the Board of Directors of the Company. (n) (n) Election of Directors. The number of directors constituting the entire Board of Directors shall have been fixed at seven and the following persons shall have been elected as the directors and shall each hold such position as of the Closing Date: Fernando Espuelas and Jack Chen as the directors elected solely by the holders of the Common Stock, Fred Wilson, __________ and __________ as the directors elected solely by the holders of the Series A Convertible Preferred Stock, and _______ and _________ as the two directors with relevant industry expertise as the directors elected by both the holders of a majority of the Common Stock, voting as a separate class, and the holders of a majority of the Series A Convertible Preferred Stock, voting as a separate series. (o) Key Person Insurance. An insurance company of national standing shall have executed a binding commitment to provide the Key Person Insurance (as defined in Section 5.5). (p) Preemptive Rights. All stockholders of the Company having any preemptive, first refusal or other rights with respect to the issuance of the Preferred Shares or the Conversion Shares shall have irrevocably waived the same in writing. (q) Fees of Purchasers' Counsel and Consultants. The Company shall have paid in accordance with Section 6.1 the fees and disbursements of Purchasers' counsel and consultants invoiced at the Closing. All such documents shall be reasonably satisfactory in form and substance to the Purchasers and their counsel. ARTICLE V. COVENANTS OF THE COMPANY The Company covenants and agrees with each of the Purchasers that: Section 5.1 Financial Statements, Reports, Etc. Until the consummation of an underwritten public offering of the Company's Common Stock conducted by a major bracket underwriter that results in net proceeds to the Company of at least $20 million and at a price per share of at least $4.00 (as adjusted for stock splits, combinations and the like) (a "Qualified Public Offering") the Company shall furnish to each Purchaser that shall hold at least 200,000 Preferred Shares: -16- (a) within ninety (90) days after the end of each fiscal year of the Company a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year then ended, prepared in accordance with generally accepted accounting principles and certified by a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company; (b) on or before September 30, 1998, consolidated statements of income of the Company and its subsidiaries, if any, for the period beginning July 1, 1997 and ending June 30, 1998 for such period, prepared in accordance with generally accepted accounting principles and certified by a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company; (c) within twenty (20) days after the end of each month in each fiscal year (other than the last month in each fiscal year), a consolidated balance sheet of the Company and its subsidiaries, if any, and the related consolidated statements of income, stockholders' equity and cash flows, unaudited but prepared in accordance with generally accepted accounting principles and certified by the Chief Financial Officer of the Company, such consolidated balance sheet to be as of the end of such month and such consolidated statements of income, stockholders' equity and cash flows to be for such month and for the period from the beginning of the fiscal year to the end of such month, in each case with comparative statements for the prior fiscal year; (d) at the time of delivery of each annual financial statement pursuant to Section 5.1(a), a certificate executed by the Chief Financial Officer of the Company stating that such officer has caused this Agreement and the Series A Convertible Preferred Stock to be reviewed and has no knowledge of any default by the Company in the performance or observance of any of the provisions of this Agreement or the Series A Convertible Preferred Stock or, if such officer has such knowledge, specifying such default and the nature thereof; (e) at the time of delivery of each monthly statement pursuant to Section 5.1(c), a management narrative report explaining all significant variances from forecasts and all significant current developments in staffing, marketing, sales and operations; (f) no later than thirty (30) days prior to the start of each fiscal year, consolidated capital and operating expense budgets, cash flow projections and income and loss projections for the Company and its subsidiaries in respect of such fiscal year, all itemized in reasonable detail and prepared on a monthly basis, and, promptly after preparation, any revisions to any of the foregoing; (g) promptly following receipt by the Company, each audit response letter, accountants management letter and other written report submitted to the Company by its independent public accountants in connection with an annual or interim audit of the books of the Company or any of its subsidiaries; (h) promptly after the commencement thereof, notice of all actions, suits, claims, proceedings, investigations and inquiries of the type described in Section 2.7 that could materially adversely affect the Company or any of its subsidiaries, if any; (i) promptly upon sending, making available or filing the same, all press releases, reports and financial statements that the Company sends or makes available to its stockholders or directors or files with the Commission; and (j) promptly, from time to time, such other information regarding the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries -17- as such Purchaser reasonably may request. Section 5.2 [RESERVED] Section 5.3 Reserve for Conversion Shares. The Company shall at all times keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Preferred Shares and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of the Preferred Shares from time to time outstanding or otherwise to comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Preferred Shares or otherwise to comply with the terms of this Agreement, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company will use its best efforts to obtain any authorization, consent, approval or other action by, and will make any filing with, any court or administrative body that may be required under applicable state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Preferred Shares. Section 5.4 Corporate Existence. The Company shall maintain and, except as otherwise permitted by Section 5.17 cause each of its subsidiaries (if any) to maintain their respective corporate existence, rights and franchises in full force and effect. Section 5.5 Properties, Business, Insurance. The Company shall maintain and cause each of its subsidiaries (if any) to maintain as to their respective properties and business, with financially sound and reputable insurers, insurance against such casualties and contingencies and of such types and in such amounts as is customary for companies similarly situated, which insurance shall be deemed by the Company to be sufficient. The Company shall also maintain in effect "key person" life insurance policies, payable to the Company, on the lives of Fernando Espuelas and Jack Chen (so long as they remain employees of the Company), in the amount of $2,000,000 each (the "Key Person Insurance"). The Company shall not cause or permit any assignment or change in beneficiary and shall not borrow against any such policy. If requested by Purchasers holding at least a majority of the outstanding Preferred Shares, the Company will add one designee of the Purchasers as a notice party for each such policy and shall request that the issuer of each policy provide such designee with ten (10) days' notice before such policy is terminated (for failure to pay premiums or otherwise) or assigned or before any change is made in the beneficiary thereof. Section 5.6 Inspection, Consultation and Advice. The Company shall permit and cause each of its subsidiaries (if any) to permit each Purchaser which holds at least 200,000 Preferred Shares and covenants to preserve the confidentiality of the Company's proprietary information and its agents and representatives, at such Purchaser's expense, to visit and inspect any of the properties of the Company and its subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of the Company and its subsidiaries with their officers, employees and public accountants (and the Company hereby authorizes said accountants to discuss with such Purchaser and such designees such affairs, finances and accounts), and consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. Section 5.7 Restrictive Agreements Prohibited. Neither the Company nor any of its subsidiaries shall become a party to any agreement which by its terms restricts the Company's -18- performance of any of this Agreement, the Transaction Documents or the Charter. Section 5.8 Transactions with Affiliates. Except for transactions contemplated by this Agreement or as otherwise approved by the Board of Directors, neither the Company nor any of its subsidiaries shall enter into any transaction with any director, officer, employee or holder of more than 5% of the outstanding capital stock of any class or series of capital stock of the Company or any of its subsidiaries, member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, except for transactions on customary terms related to such person's employment. Section 5.9 Expenses of Directors. The Company shall promptly reimburse in full, each director of the Company who is not an employee of the Company and who was elected as a director solely or in part by the holders of Series A Convertible Preferred Stock, for all of his reasonable out-of-pocket expenses incurred in attending each meeting of the Board of Directors of the Company or any Committee thereof. Section 5.10 Use of Proceeds. The Company shall use the proceeds from the sale of the Preferred Shares solely for working capital. Section 5.11 Board of Directors Meetings. The Company shall use its best efforts to ensure that meetings of its Board of Directors are held at least once per month. Section 5.12 Compensation. The Company shall not pay to its management compensation in excess of that compensation customarily paid to management in companies of similar size, of similar maturity, and in similar businesses without the unanimous written consent of the members of the Compensation Committee of the Company's Board of Directors. Section 5.13 By-laws. The Company shall at all times cause its By-laws to provide that, (a) unless otherwise required by the laws of the State of Delaware, (i) any two directors and (ii) any holder or holders of at least 1,500,000 shares of Series A Convertible Preferred Stock shall have the right to call a meeting of the Board of Directors or stockholders and (b) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Series A Convertible Preferred Stock as set forth in the Charter. The Company shall at all times maintain provisions in its By-laws and/or Charter indemnifying all directors against liability and absolving all directors from liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Delaware. Section 5.14 Performance of Contracts. The Company shall not amend, modify, terminate, waive or otherwise alter, in whole or in part any of the Employee Nondisclosure and Developments Agreements or the Founders Agreements without the unanimous written consent of those members of the Company's Board of Directors elected solely by the holders of Series A Convertible Preferred Stock. Section 5.15 Vesting of Reserved Employee Shares. The Company shall not grant to any of its employees options to purchase Reserved Employee Shares which will become exercisable at a rate in excess of 33-1/3% per annum from the date of such grant without the unanimous written consent of those members of the Company's Board of Directors elected solely by the holders of Series A Convertible Preferred Stock. Section 5.16 Employee Nondisclosure and Developments Agreements. The Company shall use its best efforts to obtain, and shall cause its subsidiaries (if any) to use their best efforts -19- to obtain, an Employee Nondisclosure and Developments Agreement in substantially the form of Exhibit E from all future officers, key employees and other employees who will have access to confidential information of the Company or any of its subsidiaries, upon their employment by the Company of its subsidiaries, and, within 30 days following the Closing Date, from all current employees who have not previously provided such agreement. Section 5.17 Activities of Subsidiaries. The Company will not organize or acquire any entity that is a subsidiary unless such subsidiary is wholly-owned (directly or indirectly) by the Company. The Company shall not permit any subsidiary to consolidate or merge into or with or sell or transfer all or substantially all its assets, except that any subsidiary may (i) consolidate or merge into or with or sell or transfer assets to any other subsidiary, or (ii) merge into or sell or transfer assets to the Company. The Company shall not sell or otherwise transfer any shares of capital stock of any subsidiary, except to the Company or another subsidiary, or permit any subsidiary to issue, sell or otherwise transfer any shares of its capital stock or the capital stock of any subsidiary, except to the Company or another subsidiary. The Company shall not permit any subsidiary to purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of its stock, except for dividends or other distributions payable to the Company or another subsidiary. Section 5.18 Compliance with Laws. The Company shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could materially adversely affect its business or condition, financial or otherwise. Section 5.19 Keeping of Records and Books of Account. The Company shall keep, and cause each subsidiary to keep, adequate records and books of account, in which complete entries regarding its transactions will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. Section 5.20 Change in Nature of Business. The Company shall not make, or permit any subsidiary to make, any material change in the nature of its business as set forth in the Business Plan. Section 5.21 Rule 144A Information. The Company shall, at all times during which it is neither subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide in writing, upon the written request of any Purchaser or a prospective buyer of Preferred Shares or Conversion Shares from any Purchaser, all information required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the Commission under the Securities Act ("Rule 144A Information"). The Company also shall, upon the written request of any Purchaser, cooperate with and assist such Purchaser or any member of the National Association of Securities Dealers, Inc. PORTAL system in applying to designate and thereafter maintain the eligibility of the Preferred Shares or Conversion Shares, as the case may be, for trading through PORTAL. The Company's obligations under this Section 5.24 shall at all times be contingent upon the relevant Purchaser's obtaining from the prospective buyer of Preferred Shares or Conversion Shares a written agreement to take all reasonable precautions to safeguard the Rule 144A Information from disclosure to anyone other than a person who will assist such buyer in evaluating the purchase of any Preferred Shares or Conversion Shares. Section 5.22 Compensation and Audit Committees. The Company shall, by amending -20- its By-laws or otherwise, establish and maintain a Compensation Committee and an Audit Committee of the Board of Directors, each of which shall consist of two non-management directors. No increase in compensation, bonuses or other remuneration shall be paid to, and no capital stock or options to acquire capital stock of the Company shall be issued or granted to, any director or executive officer of the Company or any of its subsidiaries, without the approval of the Compensation Committee. No employee stock option plan, employee stock purchase plan, employee restricted stock plan or other employee stock plan shall be established without the approval of the Compensation Committee. The Audit Committee shall select (subject to the approval of the Board of Directors) and provide instructions to the Company's auditors and shall approve the Company's annual audit prior to its issuance each year. Section 5.23. Termination of Covenants. The covenants contained in this Article V will terminate and be of no further force or effect upon the earlier of (i) the date of a Qualified Public Offering and (ii) the date on which at least 4,500,000 Conversion Shares have been sold in one or more public offerings. ARTICLE VI. MISCELLANEOUS Section 6.1 Expenses. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated, provided, however, that the Company will reimburse the fl@tiron Fund LLC for consultant expenses of $2,250 and that upon closing the Company shall pay the fees of the Purchasers' special counsel, Brown Raysman Millstein Felder & Steiner LLP, and O'Sullivan Graev & Karabell, LLP, in connection with such transactions and any subsequent amendment, waiver, consent or enforcement thereof, and all related disbursements incurred by any of such counsel. Section 6.2 Survival of Representatives; Termination of Agreements. All covenants, agreements, representations and warranties made in this Agreement or any Transaction Document or any certificate or instrument delivered to the Purchasers pursuant to or in connection with this Agreement or any Transaction Document, shall survive the execution and delivery of this Agreement or the Transaction Documents, the issuance, sale and delivery of the Preferred Shares, and the issuance and delivery of the Conversion Shares (i) in the case of covenants and agreements, an indefinite period of time (subject to the provisions of Section 5.23 hereof), and (ii) in the case of representations and warranties, for a period of five (5) years, and all statements contained in any certificate or other instrument delivered by the Company hereunder or thereunder or in connection herewith or therewith shall be deemed to constitute representations and warranties made by the Company. Section 6.3 Brokerage. Each party hereto will indemnify and hold harmless the others against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party. If the party to be indemnified shall be a Purchaser, then such indemnification shall include without limitation losses which may be suffered as a result of diminution in value of such Purchaser's investment hereunder in the case of loss. Section 6.4 Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or -21- not. Without limiting the generality of the foregoing, all representations, covenants and agreements benefiting the Purchasers shall inure to the benefit of any and all subsequent holders from time to time of Preferred Shares or Conversion Shares, unless the conversion shares were purchased by such subsequent holders in a public offering. Section 6.5. Lock-Up Agreement. Each Purchaser and its successors and assigns will agree, to the extent reasonably requested by any underwriter of securities of the Company in connection with an initial public offering of the Company's Common Stock, to enter into an agreement consistent with then market practice for major bracket underwriters not to sell or otherwise transfer or dispose of any shares of Common Stock for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, which agreement shall also bind the Founders, executive officers, directors, and other shareholders on terms and conditions substantially similar to those which shall apply to the Purchasers and said successors and assigns. Section 6.6 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: (a) if to the Company, to it at StarMedia Network, Inc., 1076 East Putnam Avenue, Riverside, Connecticut 06878, Attention: President, with a copy to Justin K. Macedonia, Esq., Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, NY 10004; and (b) if to any Purchaser, at the address of such Purchaser set forth in Schedule I with a copy to Jay S. Rand, Esq., Brown Raysman Millstein Felder & Steiner, 120 West 45th Street, New York, New York 10036; or, in any such case, at such other address or addresses as shall have been furnished in writing by such party to the others. Section 6.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 6.8 Entire Agreement. This Agreement, including the Schedules and Exhibits hereto, constitutes the sole and entire agreement of the parties with respect to the subject matter hereof. All Schedules and Exhibits hereto are hereby incorporated herein by reference. Section 6.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 6.10 Amendments. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the holders of at least two-thirds of the outstanding shares of Common Stock issued or issuable upon conversion of the Preferred Shares. Section 6.11 Severability. If any provision of this Agreement shall be declared void or unenforceable by any judicial or administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby. Section 6.12 Titles and Subtitles. The titles and subtitles used in this Agreement are for -22- convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. Section 6.13 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "person" shall mean an individual, corporation, trust, partnership, joint venture, unincorporated organization, government or any agency or political subdivision thereof, or other entity. (b) "subsidiary" shall mean, as to the Company, any corporation of which more than 50% of the outstanding stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -23- IN WITNESS WHEREOF, the Company and the Purchasers have executed this Agreement as of the day and year first above written. StarMedia Network, Inc. By: /s/ Fernando Espuelas --------------------------------- Name: Fernando Espuelas Title: CEO Purchasers named in Schedule I to the Purchase Agreement: The fl@tiron Fund LLC By: /s/ Frederick Wilson --------------------------------- Title: Managing Member ------------------------------ Chase Venture Capital Associates, L.P. By: Chase Capital Partners, its General Partner By: /s/ [ILLEGIBLE] --------------------------------- Title: ------------------------------ -24- /s/ Christopher T. Linen - -------------------------------------------- Christopher T. Linen Caramia LLC By: /s/ [ILLEGIBLE] ---------------------------------------- Title: Member/Trustee ------------------------------------- /s/ Benjamin Gitlow, Jr. & Joan Gitlow - -------------------------------------------- Benjamin Gitlow, Jr. & Joan H Gitlow /s/ Peter M. Feldman - -------------------------------------------- Peter M. Feldman /s/ Lynda H. Feldman - -------------------------------------------- Lynda H. Feldman /s/ Kevin & Paige Guidotti - -------------------------------------------- Kevin & Paige Guidotti /s/ [ILLEGIBLE] - -------------------------------------------- Stephen M. Kosslyn & Robin Rosenberg /s/ [ILLEGIBLE] - -------------------------------------------- Steven Rosenberg /s/ Rhonda Roland Scherer - -------------------------------------------- Rhonda Roland Scherer /s/ Katherine G. Bramante and A. Donald Bramante - ------------------------------------------------ Katherine G. Bramante and A. Donald Bramante Leigh Ellen Feldman Trust Fund By: /s/ Peter M. Feldman ---------------------------------------- Title: TTE ------------------------------------- /s/ Tracy Leeds - -------------------------------------------- Tracy Leeds /s/ Laurence Leeds, Jr. - -------------------------------------------- Laurence Leeds, Jr. /s/ Adele Morrissette - -------------------------------------------- Adele Morrissette Katherine Yu-ting Chen Trust By: /s/ Jack C. Chen ---------------------------------------- Title: Trustee ------------------------------------- /s/ [ILLEGIBLE] - -------------------------------------------- Ralph & Rebecca Clark Niki Francesca Bramante Custodial Account By: /s/ Katherine G. Bramante ---------------------------------------- Title: Custodian ------------------------------------- /s/ Daniel D. & Lois F. Chabris - -------------------------------------------- Daniel D. & Lois F. Chabris /s/ William T. End - -------------------------------------------- William T. End /s/ Douglas & Elizabeth McLaury - -------------------------------------------- Douglas & Elizabeth McLaury /s/ Sidney Landau - -------------------------------------------- Sidney Landau /s/ Matthew J. Whitehead II - -------------------------------------------- Matthew J. Whitehead II /s/ Matthew J. Whitehead III - -------------------------------------------- Matthew J. Whitehead III /s/ Richard Davies - -------------------------------------------- Richard Davies /s/ Harold & Judith Edelman - -------------------------------------------- Harold & Judith Edelman /s/ [ILLEGIBLE] - -------------------------------------------- Walter J. Boyles /s/ Herbert L. Wasserman, Ph.D. - -------------------------------------------- Herbert L. Wasserman, Ph.D. SCHEDULE I Purchasers Number of Preferred Name and Shares Purchase Price for Address of Purchaser to be Purchased Preferred Shares - -------------------- --------------- ---------------- Chase Venture Capital Associates, L.P. 380 Madison Avenue, 12th floor New York, NY 10017 Attn: Mr. I. Robert Greene The fl@tiron Fund LLC do Chase Capital Partners 380 Madison Avenue, 12th Floor New York, NY 10017 Attn: Mr. Fred Wilson StarMedia Network, Inc. List of Preferred Shareholders Name Preferred Shares to be Purchased in this Placement - -------------------------------------------------------------------------------- The fl@tiron Fund LLC 465,000 Chase Venture Capital 5,535,000 Associates, L.P. Christopher Linen 100,000 Caramia LUC 100,000 Tracy Leeds 100,000 Laurence Leeds, Jr. 100,000 Benjamin & Joan H. Gitlow 100,000 Peter M. Feldman & Associates, Inc. 80,000 Kevin & Paige Guidotti 70,000 Professor Stephen M. Kosslyn 50,000 Steven Rosenberg 50,000 Rhonda Scherer 50,000 Daniel D. Chabris 50,000 William T. End 50,000 Douglas & Elizabeth McLaury 50,000 Sidney Landau 50,000 Matt Whitehead II 50,000 Matt Whitehead III 50,000 Richard Davies 40,000 Harold & Judith Edelman 30,000 Walter Boyles 30,000 Herbert L. Wasserman 30,000 Katherine and Donald Bramante 25,000 Leigh Ellen Feldman Trust 20,000 Adele Morrissette 20,000 Katherine Yu-ting Chen Trust 20,000 Ralph & Rebecca Clark 10,000 Bramante Custodian Account 5,000 --------- Total 7,330,000 Schedule II: Disclosure Schedule Article II Section 2.4 There are twenty (20) holders of Common Stock whom in aggregate hold 10,012,000 shares of Common Stock. There are nineteen (19) holders of options on Common Stock whom in aggregate hold options to purchase 1,839,933 shares of Common Stock. Upon closing of this placement, there will be twenty-eight (28) holders of the Series A Convertible Preferred Stock whom in aggregate will hold 7,330,000 shares of the Series A Convertible Preferred Stock. Section 2.6 Accounts payable to Wunderman Cato Johnson, an advertising agency, of approximately $75,000. Promissory note debt to Fernando Espuelas date May 3, 1997 for $18,5000 and paid down on July 24, 1997. Promissory note debt to S.L. Chen & Associates, Inc. dated May 3, 1997 for $30,000 and paid down on July 24, 1997. S.L. Chen & Associates is controlled by family members of Jack Chen, President of StarMedia Network, Inc. Promissory note debt to Jack Chen date May 17, 1997 for $100,000 and paid down on July 24, 1997. Section 2.7 Violation of trademark alleged by Starmedia, Inc. in letter received from Handal & Morofsky dated January 24, 1997. Section 2.9 Trademark applications have been made with the US patent & Trademark Office for the following marks: StarMedia, StarMedia with design, TalkPlanet. Violation of trademark alleged by Starmedia, Inc. in letter received from Handal & Morofsky dated January 24, 1997. Section 2.14 Stockholders' Agreement dated July 25, 1997. Registration Rights Agreement dated July 25, 1997. Agreement between StarMedia Network, Inc. and CBS Telenoticias dated June 20, 1997. Agreement between America Economia and StarMedia Network, Inc. dated May 14, 1997. Internet Services and Products Master Agreement between StarMedia Network, Inc. and BBN Planet dated August 9, 1996. Netline Reporting Services Agreement with Internet Profiles Corporation dated January 15, 1997. Nielsen-I/PRO I/COUNT Software License Agreement with Internet Profiles Corporation dated January 21, 1997. Content Licensing Agreement with Quote.com, Inc. dated November 25, 1996. Oral Agreement between StarMedia Network, Inc. and Fox Latin America with respect to co-markting arrangement dated January 22, 1997. Oral Agreement between StarMedia Network, Inc. and Spelling Satellite Networks with respect to co-marketing arrangement dated February 10, 1997. Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. Oral compensation agreement with Anne Andiorio, Senior Vice President, Corporate Relations dated June 1, 1997. Oral agreement with Mokonet, Inc. with respect to developing an electronic mail system dated April 21, 1997. Oral lease for 1076 East Putnam Avenue dated September 1, 1996 with JC Corporation, which is owned and controlled by family members of Jack Chen, President of StarMedia Network, Inc. Lease dated June 5, 1997 for office in Bogota, Colombia. Medical Insurance plan available to all employees. Stock option plan available to certain employees. Disability Insurance for Fernando Espuelas and Jack Chen. Section 2.19 Expect to be delayed by approximately 2 to 3 months on revenue and profit & loss model given that model assumed completion of financing in May 1997. The level of investment since the Private Placement Memorandum dated March 1997 has been substantially below the level which was budgeted; further described in electronic mail correspondence with Flatiron Partners dated June 19, 1997. Section 2.22 Office Total Estimated 1997 Compensation (not including any bonuses, option grants or other such compensation TBD by the Board or benefit costs) Fernando J. Espuelas $73,000 Chairman and CEO Jack C. Chen $73,000 President Anne Andiorio $166,000 Senior Vice President, Corporate Relations Alfredo Escobedo $43,000 General Manager, Andinos Region Jonathan Hirschman $40,000 Vice President, Operations Tracy Leeds $35,000 Vice President, Product Development and Marketing Brian Stauffer $60,000 Vice President and Creative Director Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. Oral compensation agreement with Anne Andiorio, Senior Vice President, Corporate Relations dated June 1, 1997. Section 2.23 Promissory note debt to Fernando Espuelas dated May 3, 1997 for $18,500 and paid down on July 24, 1997. Promissory note debt to S.L. Chen & Associates, Inc. dated May 3, 1997 for $30,000 and paid down on July 24, 1997. S.L. Chen & Associates is controlled by family members of Jack Chen, President of StarMedia Network, Inc. Promissory note debt to Jack Chen dated May 17, 1997 for $100,000 and paid down on July 24, 1997. Oral lease for 1076 East Putnam Avenue dated September 1, 1996 with JC Corporation, which is owned and controlled by family members of Jack Chen, President of StarMedia Network, Inc. Section 2.24 Jonathan Hirschman, Vice President, Operations, David Baker, Director of Technology, and Tracy Leeds, Vice President of Product Development & Marketing, have not signed the Non-Disclosure and Development Agreements. Section 2.27 Medical insurance plan available to all employees. Disability insurance for Fernando Espuelas and Jack Chen. The company has made oral commitments to its employees regarding providing the medical insurance plan available to all employees. The company has obligations in Employment Agreements dated July 25, 1997 to provide the disability insurance for Fernando Espuelas and Jack Chen. EX-10.7 11 SERIES B - STOCK PURCHASE AGREEMENT EXHIBIT-10.7 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT between STARMEDIA NETWORK, INC. and THE SEVERAL PURCHASERS NAMED IN SCHEDULE I HERETO Dated as of February 20, 1998 - 1 - ARTICLE I THE PREFERRED SHARES ............................................ 1 Section 1.1 Issuance, Sale and Delivery of the Preferred Shares .... 1 Section 1.2 Closing ................................................ 2 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................. 2 Section 2.1 Organization, Qualifications and Corporate Power ....... 2 Section 2.2 Authorization of Agreements, Etc ....................... 3 Section 2.3 Validity ............................................... 4 Section 2.4 Authorized Capital Stock ............................... 4 Section 2.5 Financial Statements ................................... 5 Section 2.6 Events Subsequent to the Date of the Balance Sheet ..... 5 Section 2.7 Litigation; Compliance with Law ........................ 5 Section 2.8 Proprietary Information ................................ 6 Section 2.9 Proprietary Rights ..................................... 7 Section 2.10 Title to Properties ................................... 7 Section 2.11 Leasehold Interests ................................... 8 Section 2.12 Insurance ............................................. 8 Section 2.13 Taxes ................................................. 8 Section 2.14 Other Agreements ...................................... 9 Section 2.15 Loans and Advances .................................... 11 Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons ........................ 11 Section 2.17 Significant Customers and Suppliers ................... 11 Section 2.18 Governmental Approvals ................................ 11 Section 2.19 Disclosure ............................................ 11 Section 2.20 Offering of the Preferred Shares ...................... 12 Section 2.21 Brokers ............................................... 12 Section 2.22 Officers .............................................. 12 Section 2.23 Transactions With Affiliates .......................... 12 Section 2.24 Employees ............................................. 13 Section 2.25 U.S. Real Property Holding Corporation ................ 13 Section 2.26 Environmental Protection .............................. 13 Section 2.27 ERISA ................................................. 14 Section 2.28 [RESERVED] ............................................ 15 Section 2.29 Qualified Small Business .............................. 15 Section 2.30 Foreign Corrupt Practices Act ......................... 15 Section 2.31 Federal Reserve Regulation ............................ 15 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS ............. 15 ARTICLE IV. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS ............... 17 4.1 Conditions to the Obligations of the Purchasers on the First Closing Date ..................................... 17 Section 4.2 Condition to the Obligations of the Purchasers on the Second Closing Date ............................ 19 ARTICLE V. COVENANTS OF THE COMPANY ....................................... 19 Section 5.1 Financial Statements, Reports, Etc ..................... 20 Section 5.2 [RESERVED] ............................................. 21 Section 5.3 Reserve for Conversion Shares .......................... 21 Section 5.4 Corporate Existence .................................... 21 Section 5.5 Properties, Business, Insurance ........................ 21 Section 5.6 Inspection, Consultation and Advice .................... 22 Section 5.7 Restrictive Agreements Prohibited ...................... 22 Section 5.8 Transactions with Affiliates ........................... 22 Section 5.9 Expenses of Directors .................................. 22 Section 5.10 Use of Proceeds ....................................... 22 Section 5.11 Board of Directors Meetings ........................... 22 Section 5.12 Compensation .......................................... 22 Section 5.13 By-laws ............................................... 23 Section 5.14 Performance of Contracts .............................. 23 Section 5.15 [RESERVED] ............................................ 23 iii Section 5.16 Employee Nondisclosure and Developments Agreements .... 23 Section 5.17 Activities of Subsidiaries ............................ 23 Section 5.18 Compliance with Laws .................................. 24 Section 5.19 Keeping of Records and Books of Account ............... 24 Section 5.20 Change in Nature of Business .......................... 24 Section 5.21 Rule 144A Information ................................. 24 Section 5.22 Compensation and Audit Committees ..................... 24 Section 5.23 Termination of Covenants .............................. 25 ARTICLE VI. MISCELLANEOUS ................................................. 25 Section 6.1 Expenses ............................................... 25 Section 6.2 Survival of Representations; Termination of Agreements ......................................... 25 Section 6.3 Brokerage .............................................. 25 Section 6.4 Parties in Interest .................................... 25 Section 6.5 Lock-Up Agreement ...................................... 26 Section 6.6 Notices ................................................ 26 Section 6.7 Governing Law .......................................... 26 Section 6.8 Entire Agreement ....................................... 26 Section 6.9 Counterparts ........................................... 26 Section 6.10 Amendments ............................................ 26 Section 6.11 Severability .......................................... 26 Section 6.12 Titles and Subtitles .................................. 27 Section 6.13 Certain Defined Terms ................................. 27 iv SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of February 20, 1998, between StarMedia Network, Inc., a Delaware corporation (the "Company"), and the several purchasers named in the attached Schedule I (individually a "Purchaser" and collectively the "Purchasers"). WHEREAS, the Company wishes to issue and sell to the Purchasers up to an aggregate of 8,000,000 shares (the "Purchased Shares") of the authorized but unissued Series B Convertible Preferred Stock, $0.001 par value, of the Company (the "Series B Convertible Preferred Stock"); and WHEREAS, the Purchasers, severally but not jointly, wish to purchase the number of Purchased Shares set forth below, on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I THE PREFERRED SHARES Section 1.1 Issuance, Sale and Delivery of the Purchased Shares. (a) The Company agrees to issue and sell to each Purchaser, and each Purchaser hereby agrees to purchase from the Company, on the First Closing Date (as hereinafter defined), the number of Purchased Shares set forth opposite the name of such Purchaser under the heading "Number of Purchased Shares" on Schedule I (said aggregate number of Purchased Shares being hereinafter collectively referred to at times as the "Initial Purchased Shares"). (b) The Company may also issue and sell on the Second Closing Date (as hereinafter defined), on the terms and conditions of this Agreement, up to a number of additional shares of Series B Convertible Preferred Stock equal to (i) 8,000,000 minus (ii) the number of Initial Purchased Shares purchased at the First Closing (such aggregate number of Purchased Shares sold in accordance with this subsection (b) being hereinafter collectively referred to at times as the "Additional Purchased Shares"), at the price of $1.50 per share, to one or more additional purchasers mutually acceptable to the Company, on the one hand, and a majority in interest of the Purchasers of Initial Purchased Shares (said additional purchasers being hereinafter collectively referred to at times as the "Additional Purchasers"). Any Additional Purchaser who or which purchases any of the Additional Purchased Shares shall, as a condition to his or its purchase of Additional Purchased Shares, execute and deliver to the Company and the Purchasers of the Initial Purchased Shares a written instrument, in form and substance acceptable to the Company and a majority in interest of such Purchasers, by which such Additional Purchaser agrees to become, and be bound by the obligations of, and entitled to the benefits of, a Purchaser under this Agreement and, in the case of an Additional Purchaser who shall purchase at least 666,667 Additional Purchased Shares, a holder of Restricted Stock under the Registration Rights Agreement (as hereinafter defined). Section 1.2 Closing. Each of the closings of the purchase and sale of Purchased Shares (individually, a "Closing" and collectively the "Closings") shall take place at the offices of Brown Raysman Millstein Felder & Steiner LLP, 120 West 45th Street, New York, New York 10036. The first closing for the purchase and sale of the Initial Purchased Shares (the "First Closing") shall be held on February 20, 1998, at 10:00 a.m., New York time, or at such other date and time as may be agreed upon between the applicable Purchasers and the Company (such date and time being called the "First Closing Date"). The second closing, if any, for the purchase and sale of the Additional Purchased Securities (the "Second Closing"; each of the First Closing and the Second Closing being at times referred to herein as a "Closing") shall be at such date and time as may be agreed upon between the Additional Purchasers and the Company, provided that the Second Closing shall not be later than March 19, 1998 (such date and time being called the "Second Closing Date"; each of the First Closing Date and the Second Closing Date being at times referred to herein as a "Closing Date"). At each Closing, the Company shall issue and deliver to each Purchaser participating in such Closing a stock certificate or certificates in definitive form, registered in the name of such Purchaser, representing the Purchased Shares being purchased by it at such Closing. As payment in full for the Purchased Shares being purchased by it on a Closing Date under this Agreement, and against delivery of the stock certificate or certificates therefor as aforesaid, on such Closing Date, each Purchaser shall (i) deliver to the Company a certified check payable to the order of the Company, in the amount set forth opposite the name of such Purchaser under the heading "Aggregate Purchase Price for Purchased Shares" on Schedule I, (ii) transfer such sum to the account of the Company by wire transfer, (iii) deliver to the Company for cancellation promissory notes issued by the Company in the amount of such sum, or (iv) deliver or transfer such sum to the Company by any combination of such methods of payments. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchasers that, except as set forth in the Disclosure Schedule attached as Schedule II (which Disclosure Schedule makes explicit reference to the particular representation or warranty as to which exception is taken, which in each case shall constitute the sole representation and warranty as to which such exception shall apply): Section 2.1 Organization, Qualifications and Corporate Power. (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so licensed or qualified 2 would not have material and adverse effect on the business, prospects, financial condition, operations, property or affairs of the company ("Material Adverse Effect"). The Company has the corporate power and authority to own and hold its properties and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and that certain Amendment No. 1 to Registration Rights Agreement with the Purchasers, Fernando Espuelas, and Jack Chen in the form attached as Exhibit A (the "Registration Rights Amendment" and together with this Agreement, the "Transaction Documents"), to issue, sell and deliver the Purchased Shares and to issue and deliver the shares of Common Stock, $0.001 par value, of the Company ("Common Stock") issuable upon conversion of the Purchased Shares (the "Conversion Shares"). (b) Except as set forth in the attached Disclosure Schedule, the Company does not (i) own of record or beneficially, directly or indirectly, (A) any shares of capital stock or securities convertible into capital stock of any other corporation or (B) any participating interest in any partnership, joint venture or other non-corporate business enterprise or (ii) control, directly or indirectly, any other entity. Section 2.2 Authorization of Agreements, Etc. (a) The execution and delivery by the Company of the Transaction Documents; the performance by the Company of its obligations hereunder and thereunder, the issuance, sale and delivery of the Purchased Shares and the issuance and delivery of the Conversion Shares have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation of the Company, as amended (the "Charter"), or the By-laws of the Company, as amended, or any provision of any indenture, agreement or other instrument to which the Company or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. To the Company's knowledge, without having investigated such matter, no provision of the Registration Rights Amendment violates, conflicts with, results in a breach of or constitutes (with due notice or lapse of time or both) a default by any other party under any other indenture, agreement or instrument. (b) The Purchased Shares have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Series B Convertible Preferred Stock, with no personal liability attaching to the ownership thereof, and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in the Registration Rights Agreement dated as of July 25, 1997, as amended by the Registration Rights Amendment, between the Company and the other persons named therein as signatories (as so amended, the "Registration Rights Agreement"). The Conversion Shares have been duly reserved for issuance upon conversion of the Purchased Shares and, when so issued, will be duly authorized, validly issued, 3 fully paid and nonassessable shares of Common Stock, with no personal liability attaching to the ownership thereof, and except as set forth in the Disclosure Schedule will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company. Except as set forth in the Disclosure Schedule, neither the issuance, sale or delivery of the Purchased Shares nor the issuance or delivery of the Conversion Shares is subject to any preemptive right to stockholders of the Company or to any right of first refusal or other right in favor of any person, and all such rights have been exercised or waived by all such persons with respect to the transactions contemplated hereby. Section 2.3 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. The Registration Rights Amendment, when executed and delivered in accordance with this Agreement, will constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. Section 2.4 Authorized Capital Stock. The authorized capital stock of the Company consists of (i) 40,000,000 shares of Preferred Stock, $0.001 par value (the "Preferred Stock"), of which 7,330,000 shares have been designated Series A Convertible Preferred Stock and 8,000,000 shares have been designated Series B Convertible Preferred Stock, and (ii) 70,000,000 shares of Common Stock, $0.001 par value. Immediately prior to the First Closing, 10,012,000 shares of Common Stock will be validly issued and outstanding, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and 7,330,000 shares of Series A Convertible Preferred Stock will be validly issued and outstanding, fully paid and nonassessable, with no personal liability attached to the ownership thereof. An aggregate of 15,330,000 shares of Common Stock has been reserved for issuance upon conversion of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock. An aggregate of 5,000,000 shares of Common Stock (the "Reserved Employee Shares") has been reserved for issuance pursuant to the Company's Stock Option Plan, of which options to purchase 1,656,000 shares have been granted to date. The designations, powers, preferences, rights, qualifications, limitation and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Charter, a copy of which is attached as Exhibit B, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. Except as set forth in the attached Disclosure Schedule, (i) no person owns of record or is known to the Company to own beneficially any share of Common Stock or Preferred Stock, (ii) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding and (iii) there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as provided for in the Charter or as set forth in the attached Disclosure Schedule, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. Except as set forth in the Disclosure Schedule, neither the Company nor, to the Company's knowledge, without having investigated such matter, any other person is party to any voting trusts or agreements, stockholders' agreements, pledge agreements, 4 buy-sell agreements, rights of first refusal, preemptive rights or proxies relating to any securities of the Company (whether or not the Company is a party thereto), and all such rights under any such agreement have been waived or exercised by all such persons with respect to the transactions contemplated hereby. All of the outstanding securities of the Company were issued in compliance with all applicable Federal and state securities laws. Section 2.5 Financial Statements. The Company has furnished to the Purchasers the balance sheet of the Company as of December 31, 1997 (the "Balance Sheet"), and the related unaudited statements of income and stockholders' equity for the year then ended. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for the absence of footnotes) and fairly present the financial position of the Company and results of operation for and as of the dates set forth therein. Since the date of the Balance Sheet, except as set forth in the attached Disclosure Schedule, (i) there has been no change in the assets, liabilities or financial condition of the Company from that reflected in the Balance Sheet except for changes in the ordinary course of business which in the aggregate have not been materially adverse and (ii) none of the business, prospects, financial condition, operations, property or affairs of the Company has been materially adversely affected by any occurrence or development, individually or in the aggregate, whether or not insured against. Section 2.6 Events Subsequent to the Date of the Balance Sheet. Since the date of the Balance Sheet, except as set forth in the attached Disclosure Schedule, the Company has not (i) issued any stock, bond or other corporate security, (ii) borrowed any amount or incurred or become subject to any liability (absolute, accrued or contingent), except current liabilities incurred and liabilities under contracts entered into in the ordinary course of business, (iii) discharged or satisfied any lien or encumbrance or incurred or paid any obligation or liability (absolute, accrued or contingent) other than current liabilities shown on the Balance Sheet and current liabilities incurred since the date of the Balance Sheet in the ordinary course of business, (iv) declared or made any payment or distribution to stockholders or purchased or redeemed any share of its capital stock or other security, (v) mortgaged, pledged, encumbered or subjected to lien any of its assets, tangible or intangible, other than liens of current real property taxes not yet due and payable, (vi) sold, assigned or transferred any of its tangible assets except in the ordinary course of business, or canceled any debt or claim, (vii) sold, assigned, transferred or granted any exclusive license with respect to any patent, trademark, trade name, service mark, copyright, trade secret or other intangible asset, (viii) suffered any loss of property or waived any right of substantial value whether or not in the ordinary course of business, (ix) made any change in officer compensation except in the ordinary course of business and consistent with past practice, (x) made any material change in the manner of business or operations of the Company, (xi) entered into any transaction except in the ordinary course of business or as otherwise contemplated hereby or (xii) entered into any commitment (contingent or otherwise) to do any of the foregoing. Section 2.7 Litigation; Compliance with Law. Except as set forth on the attached Disclosure Schedule, there is no (i) action, suit, claim, proceeding or investigation pending or, to the best of the Company's knowledge, threatened against or affecting the Company, at law or in 5 equity, or before or by any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau agency or instrumentality, except to the extent that any of the foregoing, if determined adversely to the Company, would not have a Material Adverse Effect, (ii) arbitration proceeding relating to the Company pending under collective bargaining agreements or otherwise or (iii) foreign or domestic governmental inquiry pending or, to the best of the Company's knowledge, threatened against or affecting the Company (including without limitation any inquiry as to the qualification of the Company to hold or receive any license or permit), and there is no basis for any of the foregoing. The Company has not received any opinion or memorandum or legal advice from foreign or domestic legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business, prospects, financial condition, operations, property or affairs. The Company is not in default with respect to any order, writ, injunction or decree known to or served upon the Company of any court or of any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action or suit by the Company pending, threatened or contemplated against others. The Company has complied with all foreign and domestic laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services, the Company has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as proposed to be conducted, and the Company has been operating its business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations, except to the extent that the failure to do any of the foregoing would not have a Material Adverse Effect. There is no existing law, rule, regulation or order, and the Company is not aware of any proposed law, rule, regulation or order, whether foreign or domestic. Federal, state, county or local, which would prohibit or restrict the Company from, or otherwise materially adversely affect the Company in, conducting its business in any jurisdiction in which it is now conducting business or in which it proposes to conduct business. Section 2.8 Proprietary Information. (a) To the best of the Company's knowledge, no third party has claimed or has reason to claim that any officer or director or other person employed by or engaged by the Company has (i) violated or may be violating any of the terms or conditions of his employment, non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. No third party has requested information from the Company which suggests that such a claim might be contemplated. To the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company has employed or proposes to employ any trade secret or any information or documentation proprietary to any former employer, and to the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company has violated any confidential relationship which such person may have had with any third party, in connection with the development, manufacture or sale of any product or proposed product or the development or sale of any service or proposed service of the Company, and the Company has no reason to believe there will be any such employment or violation. To the best of the Company's knowledge, none of the execution or delivery of this Agreement, or the carrying on of the business of the Company as officers, 6 employees or agents by any officer, director or key employee of the Company, or the conduct or proposed conduct of the business of the Company, will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument under which any such person is obligated. Section 2.9 Proprietary Rights. Set forth in the Disclosure Schedule is a list of (i) all domestic and foreign patents, patent rights, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names and copyrights, and all applications for such which have been filed, owned by or registered in the name of the Company, or of which the Company is a licensor or licensee or in which the Company has any right, and (ii) all licenses and other agreements with third parties (the "Third Party Licenses") relating to any software, copyrights, technology, know-how or processes that the Company has licensed or is otherwise authorized by such third parties to use, market, distribute or incorporate into products distributed or services provided by the Company (such software, technology, know-how and processes being collectively referred to as "Third Party Technology"). The Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets, customer lists and know-how, including without limitation the Third Party Technology (collectively, "Intellectual Property") necessary or desirable to the conduct of its business as conducted and as proposed to be conducted, free and clear of all liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims, security interests, rights of others and encumbrances (including, without limitation, distribution rights). The foregoing representation as it relates to Third Party Technology is limited to the Company's interest pursuant to the Third Party Licenses, all of which are valid and enforceable and in full force and effect and which grant the Company such rights to Third Party Technology as are employed in or necessary to the business of the Company as conducted or proposed to be conducted. All of the Company's registered patents, trademarks and copyrights in any of the Company Products and applications therefor, if any, are valid and in full force and effect, and consummation of the transactions contemplated hereby will not alter or impair any such rights. Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that the operations of the Company infringe upon or conflict with, constitute misappropriation of or in any way involve unfair competition with respect to, the asserted rights of any other person under any Intellectual Property, and there is no basis for any such claim (whether or not pending or threatened). Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that any such Intellectual Property owned or licensed by the Company or which the Company otherwise has the right to use, is invalid or unenforceable by the Company, and there is no basis for any such claim (whether or not pending or threatened). To the best of the Company's knowledge, all trade secrets developed by and belonging to the Company which has not been patented has been kept confidential. Section 2.10 Title to Properties. The Company has good, clear and valid title to its properties and assets reflected on the Balance Sheet or acquired by it since the date of the Balance Sheet (other than properties and assets disposed of in the ordinary course of business since the date of the Balance Sheet), and all such properties and assets are free and clear of 7 mortgages, pledges, security interests, liens, charges, claims, restrictions and other encumbrances (including without limitation, easements and licenses), except for liens for or current taxes not yet due and payable and minor imperfections of title, if any, not material in nature or amount and not materially detracting from the value or impairing the use of the property subject thereto or impairing the operations or proposed operations of the Company, including, without limitation, the ability of the Company to secure financing using such properties and assets as collateral. To the best of the Company's knowledge, there are no condemnation, environmental, zoning or other land use regulation proceedings, either instituted or planned to be instituted, which would adversely affect the use or operation of the Company's properties and assets for their respective intended uses and purposes, or the value of such properties, and the Company has not received notice of any special assessment proceedings which would affect such properties and assets. Section 2.11 Leasehold Interests. Each lease or agreement to which the Company is a party under which it is a lessee of any property, real or personal, is a valid and subsisting agreement, duly authorized and entered into, without any default of the Company thereunder and, to the best of the Company's knowledge, without any default thereunder of any other party thereto. No event has occurred and is continuing which, with due notice or lapse of time or both, would constitute a default or event of default by the Company under any such lease or agreement or, to the best of the Company's knowledge, by any other party thereto. The Company's possession of such property has not been disturbed and, to the best of the Company's knowledge, no claim has been asserted against the Company adverse to its rights in such leasehold interests. Section 2.12 Insurance. The Company holds valid policies covering all of the insurance required to be maintained by it under Section 5.5. Section 2.13 Taxes. The Company has filed all tax returns, Federal, state, county and local, required to be filed by it, and the Company has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges which have become due or payable, including without limitation all taxes which the Company is obligated to withhold from amounts owing to employees, creditors and third parties. The Company has established adequate reserves for all taxes accrued but not yet payable. All material tax elections of any type which the Company has made as of the date hereof are set forth in the financial statements referred to in Section 2.5. The Federal income tax returns of the Company have never been audited by the Internal Revenue Service. No deficiency assessment with respect to or proposed adjustment of the Company's Federal, state, county or local taxes is pending or, to the best of the Company's knowledge, threatened. There is no tax lien (other than for current taxes not yet due and payable), whether imposed by any Federal, state, county or local taxing authority, outstanding against the assets, properties or business of the Company. Neither the Company nor any of its present or former stockholders has ever filed an election pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code") that the Company be taxed as an S corporation. The Company's net operating losses for Federal income tax purposes, as set forth in the financial statements referred to in Section 2.5, are not subject to any limitations imposed by Section 382 of the Code and the full amount of such net operating losses are available to offset the taxable income of the Company for the current fiscal year and, to the extent not so used, succeeding fiscal years. Consummation of the transactions contemplated by this Agreement or 8 by any other agreement, understanding or commitment (contingent or otherwise) to which the Company is a party or by which it is otherwise bound will not have the effect of limiting the Company's ability to use such net operating losses in full to offset such taxable income. Section 2.14 Other Agreements. Except as set forth in the attached Disclosure Schedule, the Company is not a party to or otherwise bound by any written or oral agreement, instrument, commitment or restriction which individually or in the aggregate could materially adversely affect the business, prospects, financial condition, operations, property or affairs of the Company. Except as set forth in the attached Disclosure Schedule, the Company is not a party to or otherwise bound by any written or oral: (a) distributor, dealer, manufacturer's representative or sales agency agreement which is not terminable on less than ninety (90) days' notice without cost or other liability to the Company (except for agreements which, in the aggregate, are not material to the business of the Company); (b) sales agreement which entitles any customer to a rebate or right of set-off, to return any product to the Company after acceptance thereof or to delay the acceptance thereof, or which varies in any material respect from the Company's standard form agreements; (c) agreement with any labor union (and, to the knowledge of the Company, no organizational effort is being made with respect to any of its employees); (d) agreement with any supplier containing any provision permitting any party other than the Company to renegotiate the price or other terms, or containing any pay-back or other similar provision, upon the occurrence of a failure by the Company to meet its obligations under the agreement when due or the occurrence of any other event; (e) agreement for the future purchase of fixed assets or for the future purchase of materials, supplies or equipment in excess of its normal operating requirements; (f) agreement for the employment of any officer, employee or other person (whether of a legally binding nature or in the nature of informal understandings) on a full-time or consulting basis which is not terminable on notice without cost or other liability to the Company, except normal severance arrangements and accrued vacation pay; (g) bonus, pension, profit-sharing, retirement, hospitalization, insurance, stock purchase, stock option or other plan, agreement or understanding pursuant to which benefits are provided to any employee of the Company (other than group insurance plans which are not self-insured and are applicable to employees generally); (h) agreement relating to the borrowing of money or to the mortgaging or pledging of, or otherwise placing a lien or security interest on, any asset of the Company; 9 (i) guaranty of any obligation for borrowed money or otherwise; (j) voting trust or agreement, stockholders' agreement, pledge agreement, buy-sell agreement or first refusal or preemptive rights agreement relating to any securities of the Company; (k) agreement, or group of related agreements with the same party or any group of affiliated parties, under which the Company has advanced or agreed to advance money or has agreed to lease any property as lessee or lessor; (l) agreement or obligation (contingent or otherwise) to issue, sell or otherwise distribute or to repurchase or otherwise acquire or retire any share of its capital stock or any of its other equity securities; (m) assignment, license or other agreement with respect to any form of intangible property; (n) agreement under which it has granted any person any registration rights, other than the Registration Rights Agreement; (o) agreement under which it has limited or restricted its right to compete with any person in any respect; (p) other agreement or group of related agreements with the same party involving more than $50,000 or continuing over a period of more than six months from the date or dates thereof (including renewals or extensions optional with another party), which agreement or group of agreements is not terminable by the Company without penalty upon notice of thirty (30) days or less, but excluding any agreement or group of agreements with a customer of the Company for the sale, lease or rental of the Company's products or services if such agreement or group of agreements was entered into by the Company in the ordinary course of business; or (q) other agreement, instrument, commitment, plan or arrangement, a copy of which would be required to be filed with the Securities and Exchange Commission (the "Commission") as an exhibit to a registration statement on Form S-1 if the Company were registering securities under the Securities Act of 1933, as amended (the "Securities Act"). Any agreement specified in the Disclosure Schedule pursuant to this Section 2.14 is hereinafter referred to as a "Material Agreement". The Company, and to the best of the Company's knowledge after due inquiry, each other party thereto have in all material respects performed all the obligations required to be performed by them to date (or such non-performing party has received a valid, enforceable and irrevocable written waiver with respect to its non-performance), have received no notice of default and are not in default (with due notice or lapse of time or both) under any Material Agreement. The Company has no present expectation or intention of not 10 fully performing all its obligations under each such Material Agreement, and the Company has no knowledge of any breach or anticipated breach by the other party to any Material Agreement, to which the Company is a party. The Company is in full compliance with all of the terms and provisions of its Charter and By-laws, as amended. Section 2.15 Loans and Advances. The Company does not have any outstanding loans or advances to any person and is not obligated to make any such loans or advances, except, in each case, for advances to employees of the Company in respect of reimbursable business expenses anticipated to be incurred by them in connection with their performance of services for the Company. Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons. The Company has not assumed, guaranteed, endorsed or otherwise become directly or continently liable on any indebtedness of any other person (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor, or otherwise to assure the creditor against loss), except for guaranties by endorsement of negotiable instruments for deposit in collection in the ordinary course of business. Section 2.17 Significant Customers and Suppliers. Except as set forth in the Disclosure Schedule, no customer or supplier which was significant to the Company during the period covered by the financial statements referred to in Section 2.5 or which has been significant to the Company thereafter has terminated, materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company, as the case may be. Section 2.18 Governmental Approvals. Subject to the accuracy of the representations and warranties of the Purchasers set forth in Article III, no registration or filing with, or consent or approval of or other action by, any Federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance by the Company of the Transaction Documents, the issuance, sale and delivery of the Purchased Shares or the issuance and delivery of the Conversion Shares, other than (i) filings pursuant to Federal and state securities laws (all of which filings have been made by the Company, other than those which are required to be made after the Closing and which will be duly made on a timely basis) in connection with the sale of the Purchased Shares and (ii) with respect to the Registration Rights Agreement, the registration of the shares covered thereby with the Commission and filings pursuant to state securities laws. Section 2.19 Disclosure. Neither this Agreement, nor any Schedule or Exhibit to this Agreement, nor the Offering Memorandum of the Company dated November, 1997 (the "Offering Memorandum"), contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading. None of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not misleading. There is 11 no fact which the Company has not disclosed to the Purchasers and their counsel in writing and of which the Company is aware which materially and adversely affects or is reasonably likely to materially and adversely affect the business, prospects, financial condition, operations, property or affairs of the Company. The financial projections and other estimates contained in the Offering Memorandum were prepared by the Company based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of the issuance of the Offering Memorandum, believed to be reasonable, but which the Company cannot and does not assure or guarantee the attainment of in any manner. Except as set forth in the Disclosure Schedule, as of the date hereof no facts have come to the attention of the Company which would, in its opinion, require the Company to revise or amplify the assumptions underlying such projections and other estimates or the conclusions derived therefrom. Section 2.20 Offering of the Purchased Shares. Neither the Company nor any person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Purchased Shares or any security of the Company similar to the Purchased Shares has offered the Purchased Shares or any such similar security for sale to, or solicited any offer to buy the Purchased Shares or any such similar security from, or otherwise approached or negotiated with respect thereto with, any person or persons, and neither the Company nor any person acting on its behalf has taken or will take any other action (including, without limitation, any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Purchased Shares under the Securities Act or the rules and regulations of the Commission thereunder), in either case so as to subject the offering, issuance or sale of the Purchased Shares or the Conversion Shares to the registration provisions of the Securities Act. Section 2.21 Brokers. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. Section 2.22 Officers. Set forth in the Disclosure Schedule is a list of the names of the officers of the Company, together with the title or job classification of each such person and the total compensation anticipated to be paid to each such person by the Company in 1997. Except as set forth in the Disclosure Schedule, none of such persons has an employment agreement or understanding, whether oral or written, with the Company, which is not terminable on notice by the Company without cost or other liability to the Company. Section 2.23 Transactions With Affiliates. Except as set forth in the Disclosure Schedule, no director, officer, employee or stockholder of the Company, or member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or any member of the family of any such person, has a substantial interest or is an officer, director, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, is a party to any transaction with the Company, including any contract, agreement or other arrangement providing for the employment of, furnishing of services by rental of real or personal property from or otherwise requiring payments to any such person or firm, other than employment-at-will arrangements in the ordinary course of business. 12 Section 2.24 Employees. Except as set forth on the Disclosure Schedule, each of the officers of the Company, each key employee and each other employee now employed by the Company or any consultant retained by the Company who has access to confidential information of the Company has executed a nondisclosure agreement in a form previously approved by the counsel to the Purchasers described in Section 6.1 hereof (the "Nondisclosure and Developments Agreement"), and such agreements are in full force and effect. To the best knowledge of the Company, no employee or former employee of the Company is in violation of any term of any employment contract, patent disclosure agreement, confidentiality agreement or any other contract or agreement relating to the relationship of any such employee with the Company. No officer or key employee of the Company has advised the Company (orally or in writing) that he intends to terminate employment with the Company. The Company has complied in all material respects with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes. Section 2.25 U.S. Real Property Holding Corporation. The Company is not now and has never been a "United States real property holding corporation", as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the Regulations promulgated by the Internal Revenues Service, and the Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under Section 1.897-2(h) of such Regulations. Section 2.26 Environmental Protection. The Company has not caused or allowed, or contracted with any party for, the generation, use, transportation, treatment, storage or disposal of any Hazardous Substances (as defined below) in connection with the operation of its business or otherwise. The Company, the operation of its business, and, to the best knowledge of the Company, any real property that the Company owns, leases or otherwise occupies or uses (the "Premises"), are in compliance with all applicable Environmental Laws (as defined below) and orders or directives of any governmental authorities having jurisdiction under such Environmental Laws, including, without limitation, any Environmental Laws or orders or directives with respect to any cleanup or remediation of any release or threat of release of Hazardous Substances. The Company has not received any citation, directive, letter or other communication, written or oral, or any notice of any proceeding, claim or lawsuit, from any person arising out of the ownership or occupation of the Premises, or the conduct of its operations, and the Company is not aware of any basis therefor. The Company has obtained and is maintaining in full force and effect all necessary permits, licenses and approvals required of it by all Environmental Laws applicable to the Premises and the business operations conducted thereon (including operations conducted by tenants on the Premises), and is in compliance with all such permits, licenses and approvals. The Company has not caused or allowed a release, or a threat of release, of any Hazardous Substance unto, at or near the Premises, and, to the best of the Company's knowledge, neither the Premises nor any property at or near the Premises has ever been subject to a release, or a threat of release, of any Hazardous Substance. For the purposes of this Agreement, the term "Environmental Laws" shall mean any Federal, state or local law or ordinance or regulation pertaining to the protection of human health or the environment, 13 including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource Conservation and Recovery Act, 42 U.S.C Sections 6901, et seq. For purposes of this Agreement, the term "Hazardous Substances" shall include oil and petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials classified as hazardous or toxic under any Environmental Laws. Section 2.27 ERISA. (a) Except as set forth on the Disclosure Schedule, the Company, prior to the date of this Agreement, has not maintained, adopted or established, contributed to or been required to contribute to, or otherwise participated in or been required to participate in, and, as of the date of this Agreement, has not adopted or established, does not maintain, does not contribute to an is not required to contribute to, and does not otherwise participate in and is not required to participate in, (i) any "employee welfare benefit plan" or "welfare plan" as defined under Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) any "employee pension benefit plan" or "pension plan" as defined under Section 3(2) of ERISA; (iii) any "excess benefit plan" as defined under Section 3(36) of ERISA; (iv) any "multiemployer plan" as such term is defined under Section 3(37)(A) of ERISA; (v) any multiple employer welfare arrangement" as defined under Section 3(40) of ("ERISA"); (vi) any plan, fund, program, agreement or arrangement which is unfunded and which is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as such term is referred to in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA; or; (vii) any other plan, fund program, agreement of arrangement, whether oral or written, which was or could have been prior to the date of this Agreement, or which is or could be as of the date of this Agreement, subject to any of the provisions of ERISA or the Code: (b) The Company has not committed itself, orally or in writing, to create, 14 establish, adopt, maintain or participate in any plan, fund, program, agreement or arrangement described in paragraph (a) hereof. In addition, except as disclosed in the Disclosure Schedule, the Company has not committed itself, orally or in writing, to provide or to cause to be provided any severance, salary continuation, termination, disability, death, retirement, health or medical benefit, or similar benefit to any person (including, without limitation, any former or current employee). (c) Notwithstanding anything else set forth herein, except as set forth in the Disclosure Schedule, there exists no condition or set of circumstances which has resulted in, or which could result in the imposition of liability under ERISA, the Code, or other applicable law with respect to any plan, fund, program agreement or arrangement described in paragraph (a) of this Section 2. Section 2.28 [RESERVED] Section 2.29 Qualified Small Business. The Company represents that, as of the date of this Agreement, it qualifies as a "Qualified Small Business" as defined in Section 1202(d) of the Code and covenants that so long as its shares are held by the Purchasers (or a transferee in whose hands the shares are eligible to qualify as Qualified Small Business Stock as defined in Section 1202(c) of the Code), it will use its reasonable efforts to cause the shares to qualify as Qualified Small Business Stock; provided that, notwithstanding the foregoing, the Company shall not be obligated to take any action, or refrain from any action, which in its good faith business judgment is not in the best interests of the Company or its stockholders. Section 2.30 Foreign Corrupt Practices Act. The Company has not taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules and regulations thereunder. To the best of the Company's knowledge, there is not now, and there has never been, any employment by the Company of, or beneficial ownership in the Company by, any governmental or political official in any country in the world. Section 2.31 Federal Reserve Regulation. The Company is not engaged in the business of extending credit for the purpose of purchasing or carrying margin securities (within the meaning of Regulation G of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Purchased Shares will be used to purchase or carry any margin security or to extend credit to others for the purpose of purchasing or carrying any margin security or in any other manner which would involve a violation of any of the regulations of the Board of Governors of the Federal Reserve System. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser, severally and not jointly, represents and warrants to the Company that: (a) such Purchaser, if not a natural person, is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the power and 15 authority to execute, deliver and perform its duties and obligations under the Transaction Documents to which it is a party, and to purchase the Purchased Shares being purchased by it hereunder; (b) the execution and delivery by such Purchaser of the Transaction Documents, the performance by such Purchaser of its obligations hereunder and thereunder, and the purchase of the Purchased Shares have been duly authorized by all requisite organizational action; (c) this Agreement has been duly executed and delivered by such Purchaser and constitutes the legal, valid and binding obligation of such Purchaser, enforceable in accordance with its terms. The Registration Rights Amendment, when executed and delivered in accordance with this Agreement, will constitute the legal, valid and binding obligation of such Purchaser executing the same, enforceable in accordance with its terms; (d) such Purchaser is an "accredited investor" within the meaning of Rule 501 under the Securities Act and was not organized for the specific purpose of acquiring the Purchased Shares; (e) such Purchaser has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof; (f) such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management; (g) the Purchased Shares being purchased by such Purchaser are being acquired for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof; (h) such Purchaser understands that (i) the Purchased Shares and the Conversion Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, (ii) the Purchased Shares and, upon conversion thereof, the Conversion Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, (iii) the Purchased Shares and the Conversion Shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect; and (i) if such Purchaser sells any Conversion Shares pursuant to Rule 144A promulgated under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including (i) obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a qualified institutional buyer and (ii) advising such purchaser that Rule 144A is being relied upon 16 with respect to such resale. ARTICLE IV. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS Section 4.1 Conditions to the Obligations of the Purchasers on the First Closing Date. The obligation of each Purchaser to purchase and pay for the Initial Purchased Shares being purchased by it on the First Closing Date is, at its option, subject to the satisfaction, on or before the First Closing Date, of the following conditions: (a) Opinion of Company's Counsel. The Purchasers shall have received from Winthrop, Stimson, Putnam & Roberts, counsel for the Company, an opinion dated the First Closing Date, in form and scope satisfactory to the Purchasers and their counsel, to the effect set forth in Exhibit D hereto. (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II shall be true, complete and correct on and as of the First Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the President and Treasurer of the Company shall have certified to such effect to the Purchasers in writing. (c) Performance. The Company shall have performed and complied with all agreements contained herein required to be performed or complied with by it prior to or at the First Closing Date, and the President and Treasurer of the Company shall have certified to the Purchasers in writing to such effect and to the further effect that all of the conditions set forth in this Article IV have been satisfied. (d) All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in form and substance to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Supporting Documents. The Purchasers and their counsel shall have received copies of the following documents: (i) (A) the Charter, certified as of a recent date by the Secretary of State of the State of Delaware, (B) a certificate of said Secretary, dated as of a recent date, as to the due incorporation and good standing of the Company, the payment of all excise taxes by the Company and listing all documents of the Company on file with said Secretary and (C) a certificate of the Secretary of State of the State of New York, dated as of a recent date, as to the good standing of the Company in such states. 17 (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated the First Closing Date and certifying: (A) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of the Transaction Documents, the issuance, sale and delivery of the Purchased Shares and the reservation, issuance, sale and delivery of the Conversion Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by the Transaction Documents; (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; and (D) to the incumbency and specimen signature of each officer of the Company executing any of the Transaction Documents, the stock certificates representing the Purchased Shares and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); and (iii) such additional supporting documents and other information with respect to the operations and affairs of the Company as the Purchasers or their counsel reasonably may request. (f) Charter. The Charter shall read in its entirety as set forth in Exhibit B. (g) Election of Directors. The number of directors constituting the entire Board of Directors shall have been fixed at seven and the following persons shall have been elected as the directors and shall each hold such position as of the Closing Date: Fernando Espuelas and Jack Chen as the directors elected solely by the holders of the Common Stock, Fred Wilson, Susan Segal and _________ as the directors elected solely by the holders of the Preferred Stock, and Gerardo Rosenkranz and Christopher Linen as the two directors with relevant industry expertise as the directors elected by both the holders of a majority of the Common Stock, voting as a separate class, and the holders of a majority of the Preferred Stock, voting as a separate series. (h) [Reserved] (i) Key Person Insurance. The Key Person Insurance (as defined in Section 5.5) shall be in full force and effect on the First Closing Date. (j) Preemptive Rights. All stockholders of the Company having any preemptive, first refusal or other rights with respect to the issuance of the Purchased Shares or the Conversion Shares shall have exercised or irrevocably waived the same in writing. (k) Fees of Purchasers' Counsel and Consultants. The Company shall have paid in accordance with Section 6.1 the fees and disbursements of Purchasers' counsel and consultants 18 invoiced at the Closing. All such documents shall be reasonably satisfactory in form and substance to the Purchasers and their counsel. Section 4.2 Condition to the Obligations of the Purchasers on the Second Closing Date. The obligation of each Additional Purchaser to purchase and pay for the Additional Purchased Securities being purchased by it on the Second Closing Date is, at its option, subject to the satisfaction, on or before the Second Closing Date, of the following conditions: (a) Opinion of Company's Counsel. The Additional Purchasers shall have received from Winthrop, Stimson, Putnam & Roberts, counsel for the Company, an opinion, dated the Second Closing Date, in form and scope satisfactory to the Additional Purchasers and their counsel, to the effect set forth in Exhibit D hereto (except that for purposes hereof, references therein to the First Closing Date shall be deemed to be references to the Second Closing Date). (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II shall be true, complete and correct on and as of the Second Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the President and Treasurer of the Company shall have certified to such effect to the Additional Purchasers in writing. (c) Performance. The Company shall have performed and complied with all agreements contained herein required to be performed or complied with by it prior to or at the Second Closing Date, and the President and Treasurer of the Company shall have certified to the Additional Purchasers in writing to such effect and to the further effect that all of the conditions set forth in Section 4.1 and Section 4.2 have been satisfied. (d) No Adverse Change. The Company's business and assets shall not have been adversely affected in any material respect prior to the Second Closing Date. (e) Supporting Documents. The Additional Purchasers and their respective counsel shall have received copies of the documentation described in Section 4.1(e), except that all documents required in clause (ii) therein to have been dated as of the First Closing Date shall be dated as of the Second Closing Date. All such documents shall be satisfactory in form and substance to the Additional Purchasers and their counsel. ARTICLE V. COVENANTS OF THE COMPANY 19 The Company covenants and agrees with each of the Purchasers that: Section 5.1 Financial Statements, Reports, Etc. Until the consummation of an underwritten public offering of the Company's Common Stock conducted by a nationally recognized reputable underwriter that results in net proceeds to the Company of at least $20 million and at a price per share of at least $4.00 (as adjusted for stock splits, combinations and the like) (a "Qualified Public Offering"), the Company shall furnish to each Purchaser that shall hold at least 666,667 Purchased Shares: (a) within ninety (90) days after the end of each fiscal year of the Company a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year then ended, prepared in accordance with generally accepted accounting principles and certified by a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company; (b) within twenty (20) days after the end of each month in each fiscal year (other than the last month in each fiscal year), a consolidated balance sheet of the Company and its subsidiaries, if any, and the related consolidated statements of income, stockholders' equity and cash flows, unaudited but prepared in accordance with generally accepted accounting principles and certified by the Chief Financial Officer of the Company, such consolidated balance sheet to be as of the end of such month and such consolidated statements of income, stockholders' equity and cash flows to be for such month and for the period from the beginning of the fiscal year to the end of such month, in each case with comparative statements for the prior fiscal year; (c) at the time of delivery of each annual financial statement pursuant to Section 5.1(a), a certificate executed by the Chief Financial Officer of the Company stating that such officer has caused this Agreement and the Series A and Series B Convertible Preferred Stock to be reviewed and has no knowledge of any default by the Company in the performance or observance of any of the provisions of this Agreement or the Series A and Series B Convertible Preferred Stock or, if such officer has such knowledge, specifying such default and the nature thereof; (d) at the time of delivery of each monthly statement pursuant to Section 5.1(c), a management narrative report explaining all significant variances from forecasts and all significant current developments in staffing, marketing, sales and operations; (e) no later than thirty (30) days prior to the start of each fiscal year, consolidated capital and operating expense budgets, cash flow projections and income and loss projections for the Company and its subsidiaries in respect of such fiscal year, all itemized in reasonable detail and prepared on a monthly basis, and, promptly after preparation, any revisions to any of the foregoing; (f) promptly following receipt by the Company, each audit response letter, accountants management letter and other written report submitted to the Company by its 20 independent public accountants in connection with an annual or interim audit of the books of the Company or any of its subsidiaries; (g) promptly after the commencement thereof, notice of all actions, suits, claims, proceedings, investigations and inquiries of the type described in Section 2.7 that could materially adversely affect the Company or any of its subsidiaries, if any; (h) promptly upon sending, making available or filing the same, all press releases, reports and financial statements that the Company sends or makes available to its stockholders or directors or files with the Commission; and (i) promptly, from time to time, such other information regarding the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries as such Purchaser reasonably may request. Section 5.2 [RESERVED] Section 5.3 Reserve for Conversion Shares. The Company shall at all times keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Purchased Shares and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of the Purchased Shares from time to time outstanding or otherwise to comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Purchased Shares or otherwise to comply with the terms of this Agreement, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company will use its best efforts to obtain any authorization, consent, approval or other action by, and will make any filing with, any court or administrative body that may be required under applicable state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Purchased Shares. Section 5.4 Corporate Existence. The Company shall maintain and, except as otherwise permitted by Section 5.17 cause each of its subsidiaries (if any) to maintain their respective corporate existence, rights and franchises in full force and effect. Section 5.5 Properties, Business, Insurance. The Company shall maintain and cause each of its subsidiaries (if any) to maintain as to their respective properties and business, with financially sound and reputable insurers, insurance against such casualties and contingencies and of such types and in such amounts as is customary for companies similarly situated, which insurance shall be deemed by the Company to be sufficient. The Company shall also maintain in effect "key person" life insurance policies, payable to the Company, on the lives of Fernando Espuelas and Jack Chen (so long as they remain employees of the Company) (collectively, the "Founders"), in the amount of $2,000,000 each (the "Key Person Insurance"). The Company shall not cause or permit any assignment or change in beneficiary and shall not borrow against 21 any such policy. If requested by Purchasers holding at least a majority of the outstanding Preferred Stock, the Company will add one designee of the Purchasers as a notice party for each such policy and shall request that the issuer of each policy provide such designee with ten (10) days' notice before such policy is terminated (for failure to pay premiums or otherwise) or assigned or before any change is made in the beneficiary thereof. Section 5.6 Inspection, Consultation and Advice. The Company shall permit and cause each of its subsidiaries (if any) to permit each Purchaser which holds at least 666,667 Purchased Shares and covenants to preserve the confidentiality of the Company's proprietary information and its agents and representatives, at such Purchaser's expense, to visit and inspect any of the properties of the Company and its subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of the Company and its subsidiaries with their officers, employees and public accountants (and the Company hereby authorizes said accountants to discuss with such Purchaser and such designees such affairs, finances and accounts), and consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. Section 5.7 Restrictive Agreements Prohibited. Neither the Company nor any of its subsidiaries shall become a party to any agreement which by its terms, restricts the Company's performance of either of the Transaction Documents or the Charter. Section 5.8 Transactions with Affiliates. Except for transactions contemplated by this Agreement or as otherwise approved by the Board of Directors, neither the Company nor any of its subsidiaries shall enter into any transaction with any director, officer, employee or holder of more than 5% of the outstanding capital stock of any class or series of capital stock of the Company or any of its subsidiaries, member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, except for transactions on customary terms related to such person's employment. Section 5.9 Expenses of Directors. The Company shall promptly reimburse in full each director of the Company who is not an employee of the Company and who was elected as a director solely or in part by the holders of Preferred Stock, for all of his reasonable out-of-pocket expenses incurred in attending each meeting of the Board of Directors of the Company or any Committee thereof. Section 5.10 Use of Proceeds. The Company shall use the proceeds from the sale of the Purchased Shares solely for working capital. Section 5.11 Board of Directors Meetings. The Company shall use its best efforts to ensure that meetings of its Board of Directors are held at least once per month. Section 5.12 Compensation. The Company shall not pay to its management compensation in excess of that compensation customarily paid to management in companies of 22 similar size, of similar maturity, and in similar businesses without the unanimous written consent of the members of the Compensation Committee of the Company's Board of Directors. Section 5.13 By-laws. The Company shall at all times cause its By-laws to provide that, (a) unless otherwise required by the laws of the State of Delaware, (i) any two directors and (ii) any holder or holders of at least 1,500,000 shares of Preferred Stock shall have the right to call a meeting of the Board of Directors or stockholders and (b) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Preferred Stock as set forth in the Charter. The Company shall at all times maintain provisions in its By-laws and/or Charter indemnifying all directors against liability and absolving all directors from liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Delaware. Section 5.14 Performance of Contracts. The Company shall not amend, modify, terminate, waive or otherwise alter, in whole or in part any of the Employee Nondisclosure and Developments Agreements or the Founders Agreements dated as of July 25, 1997, between the Company and each of the Founders, without the unanimous written consent of those members of the Company's Board of Directors elected solely by the holders of Preferred Stock. Section 5.15 [RESERVED]. Section 5.16 Employee Nondisclosure and Developments Agreements. The Company shall use its best efforts to obtain, and shall cause its subsidiaries (if any) to use their best efforts to obtain, an Employee Nondisclosure and Developments Agreement from all future officers, key employees and other employees who will have access to confidential information of the Company or any of its subsidiaries, upon their employment by the Company of its subsidiaries, and, within 30 days following the Closing Date, from all current employees who have not previously provided such agreement. Section 5.17 Activities of Subsidiaries. The Company will not organize or acquire any entity that is a subsidiary unless such subsidiary is wholly-owned (directly or indirectly) by the Company (other than qualifying shares owned by nominees to the extent required by the jurisdiction in which such subsidiary shall be domiciled) without the approval of a majority vote of the Board of Directors which majority must include at least one director elected solely by the holders of Preferred Stock. The Company shall not permit any subsidiary to consolidate or merge into or with or sell or transfer all or substantially all its assets, except that any subsidiary may (i) consolidate or merge into or with or sell or transfer assets to any other subsidiary, or (ii) merge into or sell or transfer assets to the Company. The Company shall not sell or otherwise transfer any shares of capital stock of any subsidiary, except to the Company or another subsidiary, or permit any subsidiary to issue, sell or otherwise transfer any shares of its capital stock or the capital stock of any subsidiary, except to the Company or another subsidiary. The Company shall not permit any subsidiary to purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of its stock, except for dividends or other distributions payable to the Company or another subsidiary. 23 Section 5.18 Compliance with Laws. The Company shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could materially adversely affect its business or condition, financial or otherwise. Section 5.19 Keeping of Records and Books of Account. The Company shall keep, and cause each subsidiary to keep, adequate records and books of account, in which complete entries regarding its transactions will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. Section 5.20 Change in Nature of Business. The Company shall not make, or permit any subsidiary to make, any material change in the nature of its business as set forth in the Offering Memorandum. Section 5.21 Rule 144A Information. The Company shall, at all times during which it is neither subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide in writing, upon the written request of any Purchaser or a prospective buyer of Purchased Shares or shares of Common Stock issued upon conversion of the Preferred Stock ("Conversion Stock") from any Purchaser, all information required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the Commission under the Securities Act ("Rule 144A Information"). The Company also shall, upon the written request of any Purchaser, cooperate with and assist such Purchaser or any member of the National Association of Securities Dealers, Inc. PORTAL system in applying to designate and thereafter maintain the eligibility of the Preferred Stock or Conversion Stock, as the case may be, for trading through PORTAL. The Company's obligations under this Section 5.21 shall at all times be contingent upon the relevant Purchaser's obtaining from the prospective buyer of Purchased Shares or Conversion Shares a written agreement to take all reasonable precautions to safeguard the Rule 144A Information from disclosure to anyone other than a person who will assist such buyer in evaluating the purchase of any Purchased Shares or Conversion Shares. Section 5.22 Compensation and Audit Committees. The Company shall, by amending its By-laws or otherwise, maintain a Compensation Committee and an Audit Committee of the Board of Directors, each of which shall consist of two non-management directors and which currently consist of Fred Wilson and Christopher Linen on the Compensation Committee and Gerardo Rosenkranz and Fred Wilson on the Audit Committee. No increase in compensation, bonuses or other remuneration shall be paid to, and no capital stock or options to acquire capital stock of the Company shall be issued or granted to, any director or executive officer of the Company or any of its subsidiaries, without the approval of the Compensation Committee. No employee stock option plan, employee stock purchase plan, employee restricted stock plan or other employee stock plan shall be established without the approval of the Compensation Committee. The Audit Committee shall select (subject to the approval of the Board of Directors) and provide instructions to the Company's auditors and shall approve the Company's annual audit 24 prior to its issuance each year. Section 5.23 Termination of Covenants. The covenants contained in this Article V will terminate and be of no further force or effect upon the earlier of (i) the date of a Qualified Public Offering and (ii) the date on which at least 2,700,000 Conversion Shares have been sold in one or more public offerings. ARTICLE VI. MISCELLANEOUS Section 6.1 Expenses. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated, provided, however, that upon closing the Company shall pay the fees of the Purchasers' special counsel, Brown Raysman Millstein Felder & Steiner LLP, and O'Sullivan Graev & Karabell, LLP, in connection with such transactions and any subsequent amendment, waiver, consent or enforcement thereof, and all related disbursements incurred by any of such counsel. Section 6.2 Survival of Representations; Termination of Agreements. All covenants, agreements, representations and warranties made in this Agreement or the Registration Rights Amendment or any certificate or instrument delivered to the Purchasers pursuant to or in connection with the Transaction Documents, shall survive the execution and delivery of the Transaction Documents, the issuance, sale and delivery of the Purchased Shares, and the issuance and delivery of the Conversion Shares (i) in the case of covenants and agreements, an indefinite period of time (subject to the provisions of Section 5.23 hereof), and (ii) in the case of representations and warranties, for a period of five (5) years, and all statements contained in any certificate or other instrument delivered by the Company hereunder or thereunder or in connection herewith or therewith shall be deemed to constitute representations and warranties made by the Company. Section 6.3 Brokerage. Each party hereto will indemnify and hold harmless the others against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party. If the party to be indemnified shall be a Purchaser, then such indemnification shall include without limitation losses which may be suffered as a result of diminution in value of such Purchaser's investment hereunder in the case of loss. Section 6.4 Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, all representations, covenants and agreements benefiting the Purchasers shall inure to the benefit of any and all subsequent holders from time to time of Purchased Shares or Conversion Shares, unless the Conversion Shares were 25 purchased by such subsequent holders in a public offering. Section 6.5 Lock-Up Agreement. Each Purchaser and its successors and assigns will agree, to the extent reasonably requested by any underwriter of securities of the Company in connection with an initial public offering of the Company's Common Stock, to enter into an agreement consistent with then market practice for major bracket underwriters not to sell or otherwise transfer or dispose of any shares of Common Stock for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, which agreement shall also bind the Founders, executive officers, directors, and other shareholders on terms and conditions substantially similar to those which shall apply to the Purchasers and said successors and assigns. Section 6.6 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: (a) if to the Company, to it at StarMedia Network, Inc., 29 West 36th Street, 5th Floor, New York, New York 10018, Attention: President, with a copy to Justin K. Macedonia, Esq., Winthrop, Stimson, Putnam & Roberts, One Battery Park Plan, New York, NY 10004; and (b) if to any Purchaser, at the address of such Purchaser set forth in Schedule I, with a copy to Jay S. Rand, Esq., Brown Raysman Millstein Felder & Steiner, 120 West 45th Street, New York, New York 10036; or, in any such case, at such other address or addresses as shall have been furnished in writing by such party to the others. Section 6.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 6.8 Entire Agreement. This Agreement, including the Schedules and Exhibits hereto, constitutes the sole and entire agreement of the parties with respect to the subject matter hereof. All Schedules and Exhibits hereto are hereby incorporated herein by reference. Section 6.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 6.10 Amendments. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the holders of at least two-thirds of the outstanding shares of Common Stock issued or issuable upon conversion of the Purchased Shares. Section 6.11 Severability. If any provision of this Agreement shall be declared void or 26 unenforceable by any judicial or administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby. Section 6.12 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. Section 6.13 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "person" shall mean an individual, corporation, trust, partnership, joint venture, unincorporated organization, government or any agency or political subdivision thereof, or other entity. (b) "subsidiary" shall mean, as to the Company, any corporation of which more than 50% of the outstanding stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 27 IN WITNESS WHEREOF, the Company and the Purchasers have executed this Agreement as of the day and year first above written. STARMEDIA NETWORK, INC. By: /s/ JACK CHEN --------------------------------- Name: JACK CHEN Title: PRESIDENT Purchasers named in Schedule I to the Purchase Agreement: THE FL@TIRON FUND LLC By: /s/ [ILLEGIBLE] --------------------------------- Title: Managing Member ------------------------------ CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: /s/ [ILLEGIBLE] --------------------------------- Title: ------------------------------ 28 NEW YORK CITY INVESTMENT FUND, LLC By: /s/ [ILLEGIBLE] --------------------------------- Title: PRESIDENT & CEO /s/ Albert S. Waxman, Ph.D. ------------------------------------ Albert S. Waxman, Ph.D. /s/ David Rockefeller ------------------------------------ David Rockefeller 29 SCHEDULE I Purchasers Number of Purchased Aggregate Purchase Name and Shares Price for Address of Purchaser to be Purchased Purchased Shares - -------------------- --------------- ---------------- Chase Venture Capital Associates, L.P. 2,393,333 $3,590,000 380 Madison Avenue, 12th floor New York, NY 10017 Attn: Mr. I. Robert Greene The fl@tiron Fund LLC 273,333 $ 410,000 257 Park Avenue South New York, NY 10010 Attn: Mr. Fred Wilson New York City Investment Fund, LLC 166,667 $ 250,000 One Battery Park Plaza New York, NY 10004 Attn: Lexy Schmertz David Rockefeller 666,667 $1,000,000 Rockefeller & Co. 30 Rockefeller Plaza New York, NY 10112 --------- ---------- TOTAL: 3,500,000 $5,250,000 Schedule II: Disclosure Schedule Section 2.1 The Company owns capital stock of the following corporations: StarMedia Network Americas S.A. Section 2.2 With respect to the Purchased Shares of those Purchasers which are party thereto, the Registration Rights Agreement, as amended. Section 2.4 8% Convertible Subordinated Note Payable in the amount of $3,590,000 to Chase Venture Capital Associates, L.P. dated January 21, 1998, due July 21, 1998 and 8% Convertible Subordinated Note Payable in the amount of $410,000 to Flatiron Fund, LLC dated January 21, 1998, due July 21, 1998 (the "Bridge Notes"). There are twenty (20) holders of Common Stock whom in the aggregate hold 10,012,000 shares of Common Stock. There are twenty-nine (29) holders of Series A Preferred Stock whom in the aggregate hold 7,330,000 shares of Preferred Stock. There are thirty-six (36) holders of options on Common Stock whom in the aggregate hold options to purchase 1,656,000 shares of Common Stock. Stockholders Agreement, dated as of July 25, 1997, among the Company and certain stockholders of the Company named therein (the "Stockholders Agreement"). Section 2.5 The Bridge Notes. Section 2.6 The Bridge Notes. Section 2.7 Company has recently applied for incorporation in Brazil, Colombia and Chile. Confidential Page 1 Section 2.9 (i) REGISTERED TRADEMARKS
- ----------------------------------------------------------------------------------------- Mark Country Registration No. Registration Date - ----------------------------------------------------------------------------------------- STARMEDIA United Stares 2,123,636 12/23/97 - ----------------------------------------------------------------------------------------- STARMEDIA and United States 2,121,588 12/16/97 design - ----------------------------------------------------------------------------------------- PENDING APPLICATIONS - ----------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date - ----------------------------------------------------------------------------------------- STARMEDIA Argentina 2,111,343 10/28/97 - ----------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------- Brazil 8203336 11/5/97 - ----------------------------------------------------------------------------------------- Chile 396794 11/12/97 - ----------------------------------------------------------------------------------------- Colombia 97-0661 11/11/97 - ----------------------------------------------------------------------------------------- Costa Rica 01/14/98 - ----------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------- Ecuador 84003 12/30/97 - ----------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------- Honduras 507-98 01/09/98 - ----------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------- Mexico 317243 12/11/97 - ----------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------- Paraguay 26121 12/23/97 - ----------------------------------------------------------------------------------------- Peru 54493 12/30/97 - ----------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------- Uruguay 300399 12/22/97 - ----------------------------------------------------------------------------------------- Venezuela 97-0223 11/04/97 - -----------------------------------------------------------------------------------------
Confidential Page 2 PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date - ----------------------------------------------------------------------------------------- STARMEDIA and Argentina 2,120,115 12/11/97 design - ----------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------- Brazil 8204342 12/29/97 - ----------------------------------------------------------------------------------------- Chile 400806 12/19/97 - ----------------------------------------------------------------------------------------- Colombia 9707514 12/26/97 - ----------------------------------------------------------------------------------------- Costa Rica 01/14/98 - ----------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------- Ecuador 83999 12/30/97 - ----------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------- Honduras 508-98 01/09/98 - ----------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------- Mexico 318106 12/18/97 - ----------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------- Paraguay 26122 12/23/97 - ----------------------------------------------------------------------------------------- Peru 54492 12/30/97 - ----------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------- Uruguay 300400 12/22/97 - ----------------------------------------------------------------------------------------- Venezuela 97-0253 12/15/97 - -----------------------------------------------------------------------------------------
Confidential Page 3 PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date - ----------------------------------------------------------------------------------------- TALK PLANET United States 75/212492 12/13/96 - ----------------------------------------------------------------------------------------- Argentina 2115045 11/17/97 - ----------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------- Brazil 8203570 11/18/97 - ----------------------------------------------------------------------------------------- Chile 398407 11/26/97 - ----------------------------------------------------------------------------------------- Colombia 116662 11/21/97 - ----------------------------------------------------------------------------------------- Costa Rica 01/14/98 - ----------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------- Ecuador 84007 12/30/97 - ----------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------- Honduras 509-98 01/09/98 - ----------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------- Mexico 317244 12/11/97 - ----------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------- Paraguay 26123 12/23/97 - ----------------------------------------------------------------------------------------- Peru 54494 12/30/97 - ----------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------- Uruguay 300401 12/22/97 - ----------------------------------------------------------------------------------------- Venezuela 97-0232 11/17/97 - -----------------------------------------------------------------------------------------
Confidential Page 4 PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------- Country Serial No. Film Date - ----------------------------------------------------------------------------------------- COPAMUNDIAL.COM United States 75/396626 11/26/97 - ----------------------------------------------------------------------------------------- Argentina 2,120,116 12/11/97 - ----------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------- Brazil 820412317 12/12/97 - ----------------------------------------------------------------------------------------- Chile 400809 12/19/97 - ----------------------------------------------------------------------------------------- Colombia 97,072,337 12/11/97 - ----------------------------------------------------------------------------------------- Costa Rica - ----------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------- Ecuador 84004 12130/97 - ----------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------- Honduras - ----------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------- Mexico 318105 12/15/97 - ----------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------- Paraguay - ----------------------------------------------------------------------------------------- Peru - ----------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------- Uruguay 300402 12/22/97 - ----------------------------------------------------------------------------------------- Venezuela 97-025196 12/12/97 - -----------------------------------------------------------------------------------------
Confidential Page 5 PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date - ----------------------------------------------------------------------------------------- COPADOMUNDO.COM United States 75/396625 11/26/97 - ----------------------------------------------------------------------------------------- Argentina 2123249 12/30/97 - ----------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------- Brazil 820,412,317 12/12/97 - ----------------------------------------------------------------------------------------- Chile - ----------------------------------------------------------------------------------------- Colombia - ----------------------------------------------------------------------------------------- Costa Rica - ----------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------- Ecuador - ----------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------- Honduras - ----------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------- Mexico - ----------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------- Paraguay - ----------------------------------------------------------------------------------------- Peru - ----------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------- Uruguay - ----------------------------------------------------------------------------------------- Venezuela - ----------------------------------------------------------------------------------------- PENDING APPLICATIONS - ----------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date - ----------------------------------------------------------------------------------------- INFORMATICA HOY United States 12/19/97 - ----------------------------------------------------------------------------------------- INFORMATICA HOJE United States 12/19/97 - -----------------------------------------------------------------------------------------
(ii) See Section 2.14 below. Section 2.14 Licensing Agreement with eShare Technologies for chat software dated January 7, 1998. Agreement with Excite for cobranding and content and technology dated November 17, 1997. Agreement with CBS Telenoticias for cobranding and content dated June 20, 1997. Confidential Page 6 Letter of Intent with Agence France Presse for use of content dated January 19, 1998. Agreement with Reuters for use of content dated December 18, 1997. Letter of Intent with Ziff-Davis for cobranding and content dated July 24, 1997 Agreement with America Economia for use of content dated May 14, 1997 Agreement with Quote.com for use of content dated November 25, 1996 Agreement with Citibank Colombia for development and advertising of promotional site dated January 23, 1998. Letter of Intent with Lucid Media for development of games dated January 20, 1998. Agreement with Fox Latin America for co-marketing dated January 22, 1997. Agreement with Compaq for e-commerce of computers dated October 22, 1997. Agreement with Barnes & Noble for e-commerce of books dated September 13, 1997. Agreement with N2K Entertainment for e-commerce of compact disks dated October 20, 1997. Agreement with Snickelways Interactive for web design and development dated November 14, 1997. Agreement with ANS for hosting services dated September 16, 1997. Agreement with ANS for sublicense of NetGravity advertising management software dated September 16, 1997. Software license with Oracle Corporation for database software dated September 1997 Software license with Vignette Corporation for Story Server translation software dated September 1997 Oral agreement with Exodus Communications for hosting services dated February 6, 1998 (expected to be formalized within thirty days). Agreement with Internet Profiles Corporation for Netline Reporting Services dated January 15, 1997. Agreement with Internet Profiles Corporation for Nielsen-I/PRO I/COUNT Software dated January 21, 1997. 8% Convertible Subordinated Note Payable in the amount of $3,590,000 to Chase Venture Capital Associates, L.P. dated January 21, 1998, due July 21, 1998. 8% Convertible Subordinated Note Payable in the amount of $410,000 to Flatiron Fund, LLC dated January 21, 1998, due July 21, 1998. Stockholders Agreement. Registration Rights Agreement. Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. Confidential Page 7 Compensation Agreement with Anne Andiorio, Senior Vice President, Corporate Relations dated June 1, 1997. Office Lease for New York City offices with Bernstein Real Estate dated September 15, 1997. Office Lease for Bogota, Colombia offices with Cemco dated June 1, 1997. Office Lease for Santiago, Chile offices with HQ Business Centers dated November 14, 1997. Agreement with Ifrontier to do web advertising buying dated October 28, 1997. Oral Agreement with Ogilvy & Mather to represent StarMedia as advertising agency dated October 1997. "Key-man" life insurance policy for Fernando Espuelas dated February 6, 1998. "Key-man" life insurance policy for Jack Chen dated February 6, 1998. Medical insurance plan available to all employees. Stock option plan available to certain employees and directors. Disibility insurance for Fernando Espuelas and Jack Chen. Section 2.17 Oral agreement with Spelling/TeleUno for co-marketing has expired. Renewal discussions in progress. Oral agreement with USA Networks for co-marketing has expired. Renewal discussions in progress. Section 2.22 Fernando Espuelas Chairman and CEO $81,500 Jack C. Chen President $81,500 Anne Andiorio Senior Vice President, Corporate Relations $185,774 Steven J. Heller Vice President, Finance & Administration $15,726 Tracy Leeds Vice President, Marketing & Product Development $32,167 Jonathan Hirschman Vice President, Technology & Operations $36,667 Janis Kern Vice President, Sales $15,417 Confidential Page 8 Adziana Kampfner Vice President, General Manager, Mexico $20,833 Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dared July 25, 1997. Compensation Agreement with Anne Andiorio, Senior Vice President, Corporate Relations dated June 1, 1997. Section 2.24 The majority of employees have not yet executed a non-disclosure agreement. Consistent with Section 5.16, the Company will use its best efforts to have all current employees execute non-disclosure agreements within thirty days. The founders (Fernando Espuelas and Jack Chen) have executed non-disclosure agreements. Alfredo Escobedo, General Manager, Colombia is no longer an employee of the company. Section 2.27 Medical insurance plan available to all employees. Disability insurance for Fernando Espuelas and Jack Chen. Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. The company has made oral commitments to its employees regarding the provision of dental and vision insurance as well as a 401(k) plan. Employee contribution is intended and communicated. The 401(k) plan will not contain employer "matching". Implementation is expected in mid-1998. Confidential Page 9 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ JEFF AUERBACH ------------------------------------------- Signature JEFF AUERBACH ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ DONNA M. AQUILINA ------------------------------------------- Signature DONNA M. AQUILINA ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ DAVID C. BOWEN ------------------------------------------- Signature DAVID C. BOWEN ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ A. Donald Bramante & /s/ Katherine G. Bramante -------------------------------------------------- Signature A. Donald Bramante & Katherine G. Bramante ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Clark E. Bromberg /s/ Marcia R. Bromberg ------------------------------------------- Signature Clark E. Bromberg Marcia R. Bromberg ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Roszell Mack ------------------------------------------- Signature Roszell Mack III ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Eric D. Mullin ------------------------------------------- Signature Eric D. Mullin ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Adele Morrissette ------------------------------------------- Signature Adele Morrissette ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): THE PAPAGENO TRUST /s/ Ricardo T. Rosenkranz ------------------------------------------- Signature Ricardo T. Rosenkranz, Trustee ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ [ILLEGIBLE] ------------------------------------------- Signature The Grapa Trust ------------------------------------------- Print Name Roberto Rosenkranz, Trustee 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ KALMAN M. HELLER /s/ Ellen S. Heller ------------------------------------------- Signature KALMAN M. HELLER Ellen S. Heller ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ LAURENCE C. LEEDS JR. ------------------------------------------- Signature LAURENCE C. LEEDS JR. ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ TRACY LEEDS /s/ Evan C. Marwell ------------------------------------------- Signature TRACY LEEDS Evan C. Marwell ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ E. John Rice Jr. ------------------------------------------- Signature E. John Rice Jr. ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT PURCHASER(S): /s/ U. Bertram Ellis ------------------------------------------- Signature U. Bertram Ellis, Jr. ------------------------------------------- Print Name: 30 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ [ILLEGIBLE] ------------------------------------------- Signature Bayview Investors, Ltd ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT PURCHASER(S): KELSO INVESTMENT PARTNERS, L.P. /s/ George F. Matelich ------------------------------------------- Signature George F. Matelich, General Partner ------------------------------------------- Print Name: 30 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ RALPH CLARK ------------------------------------------- Signature RALPH CLARK ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Henry R. Kravis ------------------------------------------- Signature Henry R. Kravis ------------------------------------------- Print Name: 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ David Lanter ------------------------------------------- Signature David Lanter ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Susan A. Lanter ------------------------------------------- Signature SUSAN A. LANTER ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Laura End ------------------------------------------- Signature Laura End ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Janis Kern ------------------------------------------- Signature Janis Kern ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): HAROLD EDELMAN JUDITH EDELMAN /s/ Harold Edelman /s/ Judith Edelman ------------------------------------------- Signature HAROLD EDELMAN JUDITH EDELMAN ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE 2 SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT STARMEDIA NETWORK, INC. By: ---------------------------------------- Name: Title: Purchaser(s): /s/ Darryl E. Wash ------------------------------------------- Signature Darryl E. Wash ------------------------------------------- Print Name 28 COUNTERPART SIGNATURE PAGE TO SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR STARMEDIA NETWORK, INC. PURCHASER(S): INTEL CORPORATION /s/ Arvind Sodhani ----------- ------------------------------------------- LEGAL OK Signature ----------- [ILLEGIBLE] ----------- ARVIND SODHANI ------------------------------------------- Print Name Vice President and Treasurer 30 EX-10.8 12 SERIES C - STOCK PURCHASE AGREEMENT EXHIBIT-10.8 SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT between STARMEDIA NETWORK, INC. and THE SEVERAL PURCHASERS NAMED IN SCHEDULE I HERETO Dated as of August 24, 1998 TABLE OF CONTENTS Page ---- ARTICLE I THE PURCHASED SHARES Section 1.1 Issuance, Sale and Delivery of the Purchased Shares ........1 Section 1.2 Closing ....................................................2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 2.1 Organization, Qualifications and Corporate Power ...........2 Section 2.2 Authorization of Agreements, Etc ...........................3 Section 2.3 Validity ...................................................3 Section 2.4 Authorized Capital Stock ...................................4 Section 2.5 Financial Statements .......................................4 Section 2.6 Events Subsequent to the Date of the Balance Sheet .........5 Section 2.7 Litigation; Compliance with Law ............................5 Section 2.8 Proprietary Information ....................................6 Section 2.9 Proprietary Rights .........................................7 Section 2.10 Title to Properties ........................................7 Section 2.11 Leasehold Interests ........................................8 Section 2.12 Insurance ..................................................8 Section 2.13 Taxes ......................................................8 Section 2.14 Other Agreements ...........................................9 Section 2.15 Loans and Advances ........................................11 Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons ..........................................11 Section 2.17 Significant Customers and Suppliers .......................11 Section 2.18 Governmental Approvals ....................................11 Section 2.19 Disclosure ................................................11 Section 2.20 Offering of the Purchased Shares ..........................12 Section 2.21 Brokers ...................................................12 Section 2.22 Officers ..................................................12 Section 2.23 Transactions With Affiliates ..............................12 Section 2.24 Employees .................................................13 Section 2.25 U.S. Real Property Holding Corporation ....................13 Section 2.26 Environmental Protection ..................................13 Section 2.27 ERISA .....................................................14 Section 2.28 [Reserved] ................................................15 Section 2.29 Foreign Corrupt Practices Act .............................15 Section 2.30 Federal Reserve Regulation ................................15 i ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS AND ADDITIONAL PURCHASERS .......................15 ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS AND ADDITIONAL PURCHASERS Section 4.1 Conditions to the Obligations of the Purchasers on the First Closing Date .................................17 (a) Opinion of Company's Counsel .....................17 (b) Representations and Warranties to be True and Correct .................................17 (c) Performance ......................................17 (d) All Proceedings to be Satisfactory ...............17 (e) Supporting Documents .............................17 (f) Charter ..........................................18 (g) Election of Directors ............................18 (h) [Reserved] .......................................18 (i) Key Person Insurance .............................18 (j) Preemptive Rights ................................18 (k) Fees of Purchasers' Counsel ......................18 Section 4.2 Condition to the Obligations of the Additional Purchasers on each Additional Closing Date ................18 (a) Opinion of Company's Counsel .....................19 (b) Representations and Warranties to be True and Correct .................................19 (c) Performance ......................................19 (d) No Adverse Change ................................19 (e) Supporting Documents .............................19 ARTICLE V COVENANTS OF THE COMPANY Section 5.1 Financial Statements, Reports, Etc. .......................19 Section 5.2 [Reserved] ................................................20 Section 5.3 Reserve for Conversion Shares .............................20 Section 5.4 Corporate Existence .......................................21 Section 5.5 Properties, Business, Insurance ...........................21 Section 5.6 Inspection, Consultation and Advice .......................21 Section 5.7 Restrictive Agreements Prohibited .........................21 Section 5.8 Transactions with Affiliates ..............................22 Section 5.9 Expenses of Directors .....................................22 Section 5.10 Use of Proceeds ...........................................22 Section 5.11 Compensation ..............................................22 Section 5.12 By-laws ...................................................22 Section 5.13 Employee Nondisclosure and Developments Agreements ........22 ii Section 5.14 Activities of Subsidiaries ................................22 Section 5.15 Compliance with Laws ......................................23 Section 5.16 Keeping of Records and Books of Account ...................23 Section 5.17 Change in Nature of Business ..............................23 Section 5.18 Rule 144A Information .....................................23 Section 5.19 Compensation and Audit Committees .........................23 Section 5.20 Termination of Covenants ..................................24 ARTICLE VI MISCELLANEOUS Section 6.1 Expenses ..................................................24 Section 6.2 Survival of Representations; Termination of Agreements ....24 Section 6.3 Brokerage .................................................24 Section 6.4 Parties in Interest .......................................25 Section 6.5 Lock-Up Agreement .........................................25 Section 6.6 Notices ...................................................25 Section 6.7 Governing Law .............................................25 Section 6.8 Entire Agreement ..........................................25 Section 6.9 Counterparts ..............................................25 Section 6.10 Amendments ................................................26 Section 6.11 Severability ..............................................26 Section 6.12 Titles and Subtitles ......................................26 Section 6.13 Certain Defined Terms .....................................26 iii SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of August 24, 1998, between StarMedia Network, Inc., a Delaware corporation (the "Company"), and the several purchasers named in the attached Schedule I (individually a "Purchaser" and collectively the "Purchasers"). WHEREAS, the Company wishes to issue and sell to the Purchasers up to an aggregate of 16,666,667 shares (the "Purchased Shares") of the authorized but unissued Series C Convertible Preferred Stock, $0.001 par value, of the Company (the "Series C Convertible Preferred Stock"); and WHEREAS, the Purchasers, severally but not jointly, wish to purchase the number of Purchased Shares set forth below, on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I THE PURCHASED SHARES Section 1.1 Issuance, Sale and Delivery of the Purchased Shares. (a) The Company agrees to issue and sell to each Purchaser, and each Purchaser hereby agrees to purchase from the Company, on the First Closing Date (as hereinafter defined), the number of Purchased Shares set forth opposite the name of such Purchaser under the heading "Number of Purchased Shares" on Schedule I (the aggregate number of such Purchased Shares being hereinafter collectively referred to at times as the "Initial Purchased Shares") in exchange for the amount set forth opposite the name of such Purchaser under the heading "Aggregate Purchase Price for Purchased Shares" (the "Initial Purchase Price"). (b) The Company may also issue and sell on each Additional Closing Date (as hereinafter defined), on the terms and conditions of this Agreement, up to a number of additional shares of Series C Convertible Preferred Stock equal to (i) 16,666,667 minus (ii) the number of Initial Purchased Shares purchased at the First Closing (the aggregate number of such Purchased Shares sold in accordance with this subsection (b) being hereinafter collectively referred to at times as the "Additional Purchased Shares"), at the price of $4.80 per share (such amount in the aggregate referred to at times as the "Additional Purchase Price"), to one or more additional purchasers (such additional purchasers being hereinafter collectively referred to at times as the "Additional Purchasers"). Any Additional Purchaser who or which purchases any of the Additional Purchased Shares shall, as a condition to his, her or its purchase of Additional Purchased Shares, execute and deliver to the Company a written instrument, substantially in the form attached as Exhibit A (each, a "Counterpart"), by which such Additional Purchaser agrees to become a party hereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser under this Agreement. Section 1.2 Closing. Each of the closings of the purchase and sale of Purchased Shares shall take place at the offices of Winthrop, Stimson, Putnam and Roberts, One Battery Park Plaza, New York, New York 10004. The closing for the purchase and sale of the Initial Purchased Shares (the "First Closing") shall be held on August 24, 1998, at 10:00 a.m., New York time, or at such other date and time as may be agreed upon between the applicable Purchasers and the Company (such date and time being called the "First Closing Date"). Each additional closing, if any, for the purchase and sale of the Additional Purchased Shares (each, an "Additional Closing"; each of the First Closing and any Additional Closings being at times referred to herein as a "Closing") shall be at such date and time as may be agreed upon between the Additional Purchasers and the Company (each, an "Additional Closing Date;" each of the First Closing Date and any Additional Closing Date being at times referred to herein as a "Closing Date"), provided that no Additional Closing shall take place later than October 15, 1998. At each Closing, the Company shall issue and deliver to each Purchaser or Additional Purchaser participating in such Closing a stock certificate or certificates in definitive form, registered in the name of such Purchaser or Additional Purchaser, representing the Purchased Shares being purchased by it at such Closing. As payment in full for the Purchased Shares being purchased by it on a Closing Date under this Agreement, and against delivery of the stock certificate or certificates therefor as aforesaid, on such Closing Date, each Purchaser and Additional Purchaser shall deliver to the Company the Initial Purchase Price or the Additional Purchase Price, as the case may be, payable by (i) delivery to the Company of a certified check payable to the order of the Company, (ii) wire transfer to the account of the Company, (iii) delivery to the Company for cancellation of promissory notes issued by the Company, or (iv) any combination of the foregoing. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchasers and any Additional Purchasers that, except as set forth in the Disclosure Schedule attached as Schedule II (which Disclosure Schedule makes explicit reference to the particular representation or warranty as to which exception is taken, which in each case shall constitute the sole representation and warranty as to which such exception shall apply): Section 2.1 Organization, Qualifications and Corporate Power. (a) The Company and each of its subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so licensed or qualified would not have material and adverse effect on the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries, taken as a whole ("Material Adverse Effect"). The Company and each of its subsidiaries has the corporate power and authority to own and hold its properties and to carry on its business as now conducted and as proposed to be conducted in the Offering Memorandum of the Company dated June 1998 (the 2 "Offering Memorandum"), and the Company has the corporate power and authority to execute, deliver and perform this Agreement, to issue, sell and deliver the Purchased Shares and to issue and deliver the shares of Common Stock, $0.001 par value, of the Company ("Common Stock") issuable upon conversion of the Purchased Shares (the "Conversion Shares"). (b) Except as set forth in the attached Disclosure Schedule, the Company does not (i) own of record or beneficially, directly or indirectly, (A) any shares of capital stock or securities convertible into capital stock of any other corporation or (B) any participating interest in any partnership, joint venture or other non-corporate business enterprise or (ii) control, directly or indirectly, any other entity. Section 2.2 Authorization of Agreements, Etc. (a) The execution and delivery by the Company of this Agreement; the performance by the Company of its obligations hereunder, the issuance, sale and delivery of the Purchased Shares and the issuance and delivery of the Conversion Shares have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation of the Company, as amended (the "Charter"), or the By-laws of the Company, as amended, the organizational documents of any subsidiary or any provision of any indenture, agreement or other instrument to which the Company or any of its subsidiaries or any of their respective properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or any subsidiary. (b) The Purchased Shares have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Series C Convertible Preferred Stock, with no personal liability attaching to the ownership thereof, and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company. The Conversion Shares have been duly reserved for issuance upon conversion of the Purchased Shares and, when so issued, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, with no personal liability attaching to the ownership thereof, and except as set forth in the Disclosure Schedule will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company. Except as set forth in the Disclosure Schedule, neither the issuance, sale or delivery of the Purchased Shares nor the issuance or delivery of the Conversion Shares is subject to any preemptive right to stockholders of the Company or to any right of first refusal or other right in favor of any person, and all such rights have been exercised or waived by all such persons with respect to the transactions contemplated hereby. Section 2.3 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. 3 Section 2.4 Authorized Capital Stock. The authorized capital stock of the Company consists of (i) 60,000,000 shares of Preferred Stock, $0.001 par value (the "Preferred Stock"), of which 7,330,000 shares have been designated Series A Convertible Preferred Stock, 8,000,000 shares have been designated Series B Convertible Preferred Stock and 16,666,667 shares have been designated Series C Convertible Preferred Stock, and (ii) 100,000,000 shares of Common Stock, $0.001 par value. Immediately prior to the First Closing, (A) 10,392,000 shares of Common Stock will be validly issued and outstanding, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, (B) 7,330,000 shares of Series A Convertible Preferred Stock will be validly issued and outstanding, fully paid and nonassessable, with no personal liability attached to the ownership thereof, and 8,000,000 shares of Series B Convertible Preferred Stock will be validly issued and outstanding, fully paid and non-assessable, with no personal liability attached to the ownership thereof. An aggregate of 31,996,667 shares of Common Stock has been reserved for issuance upon conversion of the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock. An aggregate of 8,000,000 shares of Common Stock (the "Reserved Employee Shares") has been reserved for issuance pursuant to the Company's Stock Option Plan, of which options to purchase 4,210,433 shares have been granted to date. The designations, powers, preferences, rights, qualifications, limitation and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Charter, a copy of which is attached as Exhibit B, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. The equity interests in each of the Company's subsidiaries is set forth in Section 2.1 of the Disclosure Schedule, which interests are validly issued and outstanding and free of all liens, charges, restrictions, claims and encumbrances. Except as set forth in the attached Disclosure Schedule, (i) no person owns of record or is known to the Company to own beneficially any share of Common Stock or Preferred Stock or any equity securities of any of the Company's subsidiaries, (ii) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company or any of its subsidiaries is authorized or outstanding and (iii) there is no commitment by the Company or any of its subsidiaries to issue shares, subscriptions, warrants, options, convertible securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as provided for in the Charter or as set forth in the attached Disclosure Schedule, neither the Company nor any of its subsidiaries has any obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. Except as set forth in the Disclosure Schedule, neither the Company or any of its subsidiaries nor, to the Company's knowledge, without having investigated such matter, any other person is party to any voting trusts or agreements, stockholders' agreements, pledge agreements, buy-sell agreements, rights of first refusal, preemptive rights or proxies relating to any securities of the Company or any of its subsidiaries (whether or not the Company or any of its subsidiaries is a party thereto), and all such rights under any such agreement have been waived or exercised by all such persons with respect to the transactions contemplated hereby. All of the outstanding securities of the Company and its subsidiaries were issued in compliance with all applicable Federal, foreign and state securities laws. Section 2.5 Financial Statements. The Company has furnished to the Purchasers and the Additional Purchasers (i) the audited balance sheet of the Company as of December 31, 4 1997, and the related audited statements of income and stockholders' equity for the year then ended and (ii) the unaudited consolidated balance sheet of the Company as of June 30, 1998 (the "Balance Sheet"), and the related unaudited consolidated statements of income and stockholders' equity for the six months then ended. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except, in the case of the unaudited financial statements, for the absence of footnotes) and fairly present the financial position of the Company and results of operation for and as of the dates set forth therein. Since the date of the Balance Sheet, except as set forth in the attached Disclosure Schedule, (x) there has been no change in the assets, liabilities or financial condition of the Company and its subsidiaries, taken as a whole, from that reflected in the Balance Sheet except for changes in the ordinary course of business which in the aggregate have not been materially adverse and (y) none of the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries, taken as a whole, has been materially adversely affected by any occurrence or development, individually or in the aggregate, whether or not insured against. Section 2.6 Events Subsequent to the Date of the Balance Sheet. Since the date of the Balance Sheet, except as set forth in the attached Disclosure Schedule, neither the Company nor any of its subsidiaries has (i) issued any stock, bond or other corporate security, (ii) borrowed any amount or incurred or become subject to any liability (absolute, accrued or contingent), except current liabilities incurred and liabilities under contracts entered into in the ordinary course of business, (iii) discharged or satisfied any lien or encumbrance or incurred or paid any obligation or liability (absolute, accrued or contingent) other than current liabilities shown on the Balance Sheet and current liabilities incurred since the date of the Balance Sheet in the ordinary course of business, (iv) declared or made any payment or distribution to stockholders or purchased or redeemed any share of its capital stock or other security, (v) mortgaged, pledged, encumbered or subjected to lien any of its assets, tangible or intangible, other than liens of current real property taxes not yet due and payable, (vi) sold, assigned or transferred any of its tangible assets except in the ordinary course of business, or canceled any debt or claim, (vii) sold, assigned, transferred or granted any exclusive license with respect to any patent, trademark, trade name, service mark, copyright, trade secret or other intangible asset, (viii) suffered any loss of property or waived any right of substantial value whether or not in the ordinary course of business, (ix) made any change in officer compensation except in the ordinary course of business and consistent with past practice, (x) made any material change in the manner of business or operations of the Company and its subsidiaries, taken as a whole,, (xi) entered into any transaction except in the ordinary course of business or as otherwise contemplated hereby or (xii) entered into any commitment (contingent or otherwise) to do any of the foregoing. Section 2.7 Litigation; Compliance with Law. Except as set forth on the attached Disclosure Schedule, there is no (i) action, suit, claim, proceeding or investigation pending or, to the best of the Company's knowledge, threatened against or affecting the Company or any of its subsidiaries, at law or in equity, or before or by any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau agency or instrumentality, except to the extent that any of the foregoing, if determined adversely to the Company or any of its subsidiaries, would not have a Material Adverse Effect, (ii) arbitration proceeding relating to the Company or any of its subsidiaries pending under collective bargaining agreements or otherwise or (iii) foreign or domestic governmental inquiry pending or, to the best of the Company's 5 knowledge, threatened against or affecting the Company or any of its subsidiaries (including without limitation any inquiry as to the qualification of the Company or any of its subsidiaries to hold or receive any license or permit), and there is no basis for any of the foregoing. Neither the Company nor any of its subsidiaries has received any opinion or memorandum or legal advice from foreign or domestic legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business, prospects, financial condition, operations, property or affairs. Neither the Company nor any of its subsidiaries is in default with respect to any order, writ, injunction or decree known to or served upon the Company or any of its subsidiaries of any court or of any foreign or domestic Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action or suit by the Company or any of its subsidiaries pending, threatened or contemplated against others. The Company and each of its subsidiaries has complied with all foreign and domestic laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services, the Company and each of its subsidiaries has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as proposed to be conducted, and the Company and each of its subsidiaries has been operating its business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations, except to the extent that the failure to do any of the foregoing would not have a Material Adverse Effect. There is no existing law, rule, regulation or order, and the Company is not aware of any proposed law, rule, regulation or order, whether foreign or domestic, Federal, state, county or local, which would prohibit or restrict the Company or any of its subsidiaries from, or otherwise materially adversely affect the Company or any of its subsidiaries in, conducting its business in any jurisdiction in which it is now conducting business or in which it proposes to conduct business. Section 2.8 Proprietary Information. (a) To the best of the Company's knowledge, no third party has claimed or has reason to claim that any officer or director or other person employed by or engaged by the Company or any of its subsidiaries has (i) violated or may be violating any of the terms or conditions of his employment, non-competition or non-disclosure agreement with such third party, (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. No third party has requested information from the Company or any of its subsidiaries which suggests that such a claim might be contemplated. To the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company or any of its subsidiaries has employed or proposes to employ any trade secret or any information or documentation proprietary to any former employer, and to the best of the Company's knowledge, no officer or director or other person employed by or engaged by the Company or any of its subsidiaries has violated any confidential relationship which such person may have had with any third party, in connection with the development, manufacture or sale of any product or proposed product or the development or sale of any service or proposed service of the Company or any of its subsidiaries, and the Company has no reason to believe there will be any such employment or violation. To the best of the Company's knowledge, none of the execution or delivery of this Agreement, or the carrying on of the business of the Company or any of its subsidiaries as officers, employees or agents by any officer, director or key employee of the Company or any of its subsidiaries, or the conduct or proposed conduct of the business of the Company or any of its subsidiaries, will conflict with or result in a breach of the terms, 6 conditions or provisions of or constitute a default under any contract, covenant or instrument under which any such person is obligated. Section 2.9 Proprietary Rights. Set forth in the Disclosure Schedule is a list of (i) all domestic and foreign patents, patent rights, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names and copyrights, and all applications for such which have been filed, owned by or registered in the name of the Company or any of its subsidiaries, or of which the Company or any of its subsidiaries is a licensor or licensee or in which the Company or any of its subsidiaries has any right, and (ii) all licenses and other agreements with third parties (the "Third Party Licenses") relating to any software, copyrights, technology, know-how or processes that the Company or any of its subsidiaries has licensed or is otherwise authorized by such third parties to use, market, distribute or incorporate into products distributed or services provided by the Company or any of its subsidiaries (such software, technology, know-how and processes being collectively referred to as "Third Party Technology"). The Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets, customer lists and know-how, including without limitation the Third Party Technology (collectively, "Intellectual Property") necessary or desirable to the conduct of its business as conducted and as proposed to be conducted, free and clear of all liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims, security interests, rights of others and encumbrances (including, without limitation, distribution rights). The foregoing representation as it relates to Third Party Technology is limited to the Company's interest pursuant to the Third Party Licenses, all of which are valid and enforceable and in full force and effect and which grant the Company such rights to Third Party Technology as are employed in or necessary to the business of the Company as conducted or proposed to be conducted. All of the Company's registered patents, trademarks and copyrights in any of the Company's products and applications therefor, if any, are valid and in full force and effect, and consummation of the transactions contemplated hereby will not alter or impair any such rights. Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that the operations of the Company or any of its subsidiaries infringe upon or conflict with, constitute misappropriation of or in any way involve unfair competition with respect to, the asserted rights of any other person under any Intellectual Property, and there is no basis for any such claim (whether or not pending or threatened). Except as set forth in the attached disclosure schedule, no claim is pending or, to the best of the Company's knowledge, threatened to the effect that any such Intellectual Property owned or licensed by the Company or any of its subsidiaries or which the Company or any of its subsidiaries otherwise has the right to use, is invalid or unenforceable by the Company or any such subsidiary, and there is no basis for any such claim (whether or not pending or threatened). To the best of the Company's knowledge, all trade secrets developed by and belonging to the Company or any of its subsidiaries which have not been patented have been kept confidential. Section 2.10 Title to Properties. Either the Company or its subsidiaries has good, clear and valid title to its properties and assets reflected on the Balance Sheet or acquired by it since the date of the Balance Sheet (other than properties and assets disposed of in the ordinary course of business since the date of the Balance Sheet), and all such properties and assets are free and clear of mortgages, pledges, security interests, liens, charges, claims, restrictions and other 7 encumbrances (including without limitation, easements and licenses), except for liens for or current taxes not yet due and payable and minor imperfections of title, if any, not material in nature or amount and not materially detracting from the value or impairing the use of the property subject thereto or impairing the operations or proposed operations of the Company and its subsidiaries, taken as a whole, including, without limitation, the ability of the Company to secure financing using such properties and assets as collateral. To the best of the Company's knowledge, there are no condemnation, environmental, zoning or other land use regulation proceedings, either instituted or planned to be instituted, which would adversely affect the use or operation of the Company's or any of its subsidiaries' properties and assets for their respective intended uses and purposes, or the value of such properties, and the Company has not received notice of any special assessment proceedings which would affect such properties and assets. Section 2.11 Leasehold Interests. Each lease or agreement to which the Company or any of its subsidiaries is a party under which it is a lessee of any property, real or personal, is a valid and subsisting agreement, duly authorized and entered into, without any default of the Company or any of its subsidiaries thereunder and, to the best of the Company's knowledge, without any default thereunder of any other party thereto. No event has occurred and is continuing which, with due notice or lapse of time or both, would constitute a default or event of default by the Company or any of its subsidiaries under any such lease or agreement or, to the best of the Company's knowledge, by any other party thereto. The Company's or any of its subsidiaries' possession of such property has not been disturbed and, to the best of the Company's knowledge, no claim has been asserted against the Company or any of its subsidiaries adverse to its rights in such leasehold interests. Section 2.12 Insurance. The Company and its subsidiaries hold valid policies covering all of the insurance required to be maintained by it under Section 5.5. Section 2.13 Taxes. The Company and each of its subsidiaries has filed all tax returns, Federal, state, foreign, county and local, required to be filed by it, and the Company and each of its subsidiaries has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges which have become due or payable, including without limitation all taxes which the Company and each of its subsidiaries is obligated to withhold from amounts owing to employees, creditors and third parties. The Company and each of its subsidiaries has established adequate reserves for all taxes accrued but not yet payable. All material tax elections of any type which the Company has made as of the date hereof are set forth in the financial statements referred to in Section 2.5. The Federal income tax returns of the Company have never been audited by the Internal Revenue Service, and the Company's and its subsidiaries' foreign income tax returns have neither been audited or challenged by any foreign tax authority. No deficiency assessment with respect to or proposed adjustment of the Company's or any of its subsidiaries' Federal, state, foreign, county or local taxes is pending or, to the best of the Company's knowledge, threatened. There is no tax lien (other than for current taxes not yet due and payable), whether imposed by any Federal, state, foreign, county or local taxing authority, outstanding against the assets, properties or business of the Company. Neither the Company nor any of its present or former stockholders has ever filed an election pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code") that the Company be taxed as an S corporation. The Company's net operating losses for Federal income tax purposes, as set forth in the financial statements referred to in Section 2.5, are not subject to any 8 limitations imposed by Section 382 of the Code and the full amount of such net operating losses are available to offset the taxable income of the Company for the current fiscal year and, to the extent not so used, succeeding fiscal years. Consummation of the transactions contemplated by this Agreement or by any other agreement, understanding or commitment (contingent or otherwise) to which the Company is a party or by which it is otherwise bound will not have the effect of limiting the Company's ability to use such net operating losses in full to offset such taxable income. Section 2.14 Other Agreements. Except as set forth in the attached Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to or otherwise bound by any written or oral agreement, instrument, commitment or restriction which individually or in the aggregate could materially adversely affect the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries, taken as a whole. Except as set forth in the attached Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to or otherwise bound by any written or oral: (a) distributor, dealer, manufacturer's representative or sales agency agreement which is not terminable on less than ninety (90) days' notice without cost or other liability to the Company or its subsidiaries (except for agreements which, in the aggregate, are not material to the business of the Company or its subsidiaries); (b) sales agreement which entitles any customer to a rebate or right of set-off, to return any product to the Company or its subsidiaries after acceptance thereof or to delay the acceptance thereof, or which varies in any material respect from the Company's or its subsidiaries' standard form agreements; (c) agreement with any labor union (and, to the knowledge of the Company, no organizational effort is being made with respect to any of its employees); (d) agreement with any supplier containing any provision permitting any party other than the Company or its subsidiaries to renegotiate the price or other terms, or containing any pay-back or other similar provision, upon the occurrence of a failure by the Company or its subsidiaries to meet its obligations under the agreement when due or the occurrence of any other event; (e) agreement for the future purchase of fixed assets or for the future purchase of materials, supplies or equipment in excess of its normal operating requirements; (f) agreement for the employment of any officer, employee or other person (whether of a legally binding nature or in the nature of informal understandings) on a full-time or consulting basis which is not terminable on notice without cost or other liability to the Company or its subsidiaries, except normal severance arrangements and accrued vacation pay; (g) bonus, pension, profit-sharing, retirement, hospitalization, insurance, stock purchase, stock option or other plan, agreement or understanding pursuant to which benefits are provided to any employee of the Company or its subsidiaries (other than 9 group insurance plans which are not self-insured and are applicable to employees generally); (h) agreement relating to the borrowing of money or to the mortgaging or pledging of, or otherwise placing a lien or security interest on, any asset of the Company or its subsidiaries; (i) guaranty of any obligation for borrowed money or otherwise; (j) voting trust or agreement, stockholders' agreement, pledge agreement, buy-sell agreement or first refusal or preemptive rights agreement relating to any securities of the Company or its subsidiaries; (k) agreement, or group of related agreements with the same party or any group of affiliated parties, under which the Company or its subsidiaries has advanced or agreed to advance money or has agreed to lease any property as lessee or lessor; (l) agreement or obligation (contingent or otherwise) to issue, sell or otherwise distribute or to repurchase or otherwise acquire or retire any share of its capital stock or any of its other equity securities; (m) assignment, license or other agreement with respect to any form of intangible property; (n) agreement under which it has granted any person any registration rights; (o) agreement under which it has limited or restricted its right to compete with any person in any respect; (p) other agreement or group of related agreements with the same party involving more than $250,000 or continuing over a period of more than six months from the date or dates thereof (including renewals or extensions optional with another party), which agreement or group of agreements is not terminable by the Company or its subsidiaries without penalty upon notice of thirty (30) days or less, but excluding any agreement or group of agreements entered into by the Company or its subsidiaries in the ordinary course of business; or (q) other agreement, instrument, commitment, plan or arrangement, a copy of which would be required to be filed with the Securities and Exchange Commission (the "Commission") as an exhibit to a registration statement on Form S-1 if the Company were registering securities under the Securities Act of 1933, as amended (the "Securities Act"). Any agreement specified in the Disclosure Schedule pursuant to this Section 2.14 is hereinafter referred to as a "Material Agreement". The Company and its subsidiaries, and to the best of the Company's knowledge after due inquiry, each other party thereto have in all material respects performed all the obligations required to be performed by them to date (or such non-performing party has received a valid, enforceable and irrevocable written waiver with respect to its non- 10 performance), have received no notice of default and are not in default (with due notice or lapse of time or both) under any Material Agreement. The Company has no present expectation or intention of not fully performing, or causing any of its subsidiaries to not fully perform, all its obligations under each such Material Agreement, and the Company has no knowledge of any breach or anticipated breach by the other party to any Material Agreement. The Company and its subsidiaries are in full compliance with all of the terms and provisions of their respective organizational documents, as amended. Section 2.15 Loans and Advances. Neither the Company nor any of its subsidiaries has any outstanding loans or advances to any person and is not obligated to make any such loans or advances, except, in each case, for advances to employees of the Company or any of its subsidiaries in respect of reimbursable business expenses anticipated to be incurred by them in connection with their performance of services for the Company or any of its subsidiaries. Section 2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons. Neither the Company nor any of its subsidiaries has assumed, guaranteed, endorsed or otherwise become directly or continently liable on any indebtedness of any other person (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor, or otherwise to assure the creditor against loss), except for guaranties by endorsement of negotiable instruments for deposit in collection in the ordinary course of business. Section 2.17 Significant Customers and Suppliers. Except as set forth in the Disclosure Schedule, no customer or supplier which was significant to the Company and its subsidiaries, taken as a whole, during the period covered by the financial statements referred to in Section 2.5 or which has been significant to the Company and its subsidiaries, taken as a whole, thereafter has terminated, materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company or its subsidiaries, as the case may be. Section 2.18 Governmental Approvals. Subject to the accuracy of the representations and warranties of the Purchasers and the Additional Purchasers set forth in Article III, no registration or filing with, or consent or approval of or other action by, any foreign or domestic Federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance by the Company of this Agreement, the issuance, sale and delivery of the Purchased Shares or the issuance and delivery of the Conversion Shares, other than (i) filings pursuant to Federal and state securities laws (all of which filings have been made by the Company, other than those which are required to be made after any Closing and which will be duly made on a timely basis) in connection with the sale of the Purchased Shares. Section 2.19 Disclosure. Neither this Agreement, nor any Schedule or Exhibit to this Agreement, nor the Offering Memorandum, contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading. None of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not misleading. There is no fact which the Company has not disclosed to the Purchasers 11 and Additional Purchasers and their counsel in writing and of which the Company is aware which materially and adversely affects or is reasonably likely to materially and adversely affect the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries, taken as a whole. The financial projections and other estimates contained in the Offering Memorandum were prepared by the Company based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of the issuance of the Offering Memorandum, believed to be reasonable, but which the Company cannot and does not assure or guarantee the attainment of in any manner. Except as set forth in the Disclosure Schedule, as of the date hereof no facts have come to the attention of the Company which would, in its opinion, require the Company to revise or amplify the assumptions underlying such projections and other estimates or the conclusions derived therefrom. Section 2.20 Offering of the Purchased Shares. Neither the Company nor any person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Purchased Shares or any security of the Company similar to the Purchased Shares has offered the Purchased Shares or any such similar security for sale to, or solicited any offer to buy the Purchased Shares or any such similar security from, or otherwise approached or negotiated with respect thereto with, any person or persons, and neither the Company nor any person acting on its behalf has taken or will take any other action (including, without limitation, any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Purchased Shares under the Securities Act or the rules and regulations of the Commission thereunder), in either case so as to subject the offering, issuance or sale of the Purchased Shares or the Conversion Shares to the registration provisions of the Securities Act. Section 2.21 Brokers. Except as set forth on the Disclosure Schedule, the Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. Section 2.22 Officers. Set forth in the Disclosure Schedule is a list of the names of the officers of the Company and each of its subsidiaries, together with the title or job classification of each such person and the total compensation anticipated to be paid to each such person by the Company in 1998. Except as set forth in the Disclosure Schedule, none of such persons has an employment agreement or understanding, whether oral or written, with the Company which is not terminable on notice by the Company without cost or other liability to the Company. Section 2.23 Transactions With Affiliates. Except as set forth in the Disclosure Schedule, no director, officer, employee or stockholder of the Company or any of its subsidiaries, or member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or any member of the family of any such person, has a substantial interest or is an officer, director, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, is a party to any transaction with the Company or any of its subsidiaries, including any contract, agreement or other arrangement providing for the employment of, furnishing of services by rental of real or personal property from or otherwise requiring payments to any such person or firm, other than employment-at-will arrangements in the ordinary course of business. 12 Section 2.24 Employees. Except as set forth on the Disclosure Schedule, each of the officers of the Company and each of its subsidiaries, each key employee and each other employee now employed by the Company and each of its subsidiaries or any consultant retained by the Company or any of its subsidiaries who has access to confidential information of the Company or any of its subsidiaries has executed a nondisclosure agreement substantially in a form previously approved by the counsel to the Purchasers and Additional Purchasers described in Section 6.1 hereof (the "Nondisclosure and Developments Agreement"), and such agreements are in full force and effect. To the best knowledge of the Company, no employee or former employee of the Company or any of its subsidiaries is in violation of any term of any employment contract, patent disclosure agreement, confidentiality agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any of its subsidiaries. No officer or key employee of the Company or any of its subsidiaries has advised the Company or any of its subsidiaries (orally or in writing) that he intends to terminate employment with the Company or any of its subsidiaries. The Company and each of its subsidiaries has complied in all material respects with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes. Section 2.25 U.S. Real Property Holding Corporation. Neither the Company nor any of its subsidiaries is now and or has never been a "United States real property holding corporation", as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the Regulations promulgated by the Internal Revenues Service, and the Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under Section 1.897-2(h) of such Regulations. Section 2.26 Environmental Protection. Neither the Company nor any of its subsidiaries has caused or allowed, or contracted with any party for, the generation, use, transportation, treatment, storage or disposal of any Hazardous Substances (as defined below) in connection with the operation of its business or otherwise. The Company, its subsidiaries, the operation of their respective business, and, to the best knowledge of the Company, any real property that the Company of any of its subsidiaries owns, leases or otherwise occupies or uses (the "Premises"), are in compliance with all applicable Environmental Laws (as defined below) and orders or directives of any governmental authorities having jurisdiction under such Environmental Laws, including, without limitation, any Environmental Laws or orders or directives with respect to any cleanup or remediation of any release or threat of release of Hazardous Substances. Neither the Company nor any if its subsidiaries has received any citation, directive, letter or other communication, written or oral, or any notice of any proceeding, claim or lawsuit, from any person arising out of the ownership or occupation of the Premises, or the conduct of its operations, and the Company is not aware of any basis therefor. The Company and each of its subsidiaries has obtained and is maintaining in full force and effect all necessary permits, licenses and approvals required of it by all Environmental Laws applicable to the Premises and the business operations conducted thereon (including operations conducted by tenants on the Premises), and is in compliance with all such permits, licenses and approvals. Neither the Company nor any of its subsidiaries has caused or allowed a release, or a threat of release, of any Hazardous Substance onto, at or near the Premises, and, to the best of the Company's knowledge, neither the Premises nor any property at or near the Premises has ever been subject to a release, or a threat of release, of any Hazardous Substance. For the purposes of 13 this Agreement, the term "Environmental Laws" shall mean any foreign or domestic Federal, state or local law or ordinance or regulation pertaining to the protection of human health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource Conservation and Recovery Act, 42 U.S.C Sections 6901, et seq. For purposes of this Agreement, the term "Hazardous Substances" shall include oil and petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials classified as hazardous or toxic under any Environmental Laws. Section 2.27 ERISA. (a) Except as set forth on the Disclosure Schedule, neither the Company nor any of its subsidiaries, prior to the date of this Agreement, has maintained, adopted or established, contributed to or been required to contribute to, or otherwise participated in or been required to participate in, and, as of the date of this Agreement, has not adopted or established, does not maintain, does not contribute to an is not required to contribute to, and does not otherwise participate in and is not required to participate in, (i) any "employee welfare benefit plan" or "welfare plan" as defined under Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) any "employee pension benefit plan" or "pension plan" as defined under Section 3(2) of ERISA; (iii) any "excess benefit plan" as defined under Section 3(36) of ERISA; (iv) any "multiemployer plan" as such term is defined under Section 3(37)(A) of ERISA; (v) any "multiple employer welfare arrangement" as defined under Section 3(40) of ("ERISA"); (vi) any plan, fund, program, agreement or arrangement which is unfunded and which is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as such term is referred to in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA; or; (vii) any other plan, fund program, agreement of arrangement, whether oral or written, which was or could have been prior to the date of this Agreement, or which is or could be as of the date of this Agreement, subject to any of the provisions of ERISA or the Code or any foreign law, statute or regulation analogous thereto; (b) Neither the Company nor any of its subsidiaries has committed itself, orally or in writing, to create, establish, adopt, maintain or participate in any plan, fund, program, agreement or arrangement described in paragraph (a) hereof. In addition, except as disclosed in the Disclosure Schedule, neither the Company nor any of its subsidiaries has committed itself, 14 orally or in writing, to provide or to cause to be provided any severance, salary continuation, termination, disability, death, retirement, health or medical benefit, or similar benefit to any person (including, without limitation, any former or current employee). (c) Notwithstanding anything else set forth herein, except as set forth in the Disclosure Schedule, there exists no condition or set of circumstances which has resulted in, or which could result in the imposition of liability under ERISA, the Code, or other applicable law with respect to any plan, fund, program agreement or arrangement described in paragraph (a) of this Section 2. Section 2.28 [Reserved] Section 2.29 Foreign Corrupt Practices Act. Neither the Company nor any of its subsidiaries has taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules and regulations thereunder. To the best of the Company's knowledge, there is not now, and there has never been, any employment by the Company or any of its subsidiaries of, or beneficial ownership in the Company or any of its subsidiaries by, any governmental or political official in any country in the world. Section 2.30 Federal Reserve Regulation. Neither the Company nor any of its subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying margin securities (within the meaning of Regulation G of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Purchased Shares will be used to purchase or carry any margin security or to extend credit to others for the purpose of purchasing or carrying any margin security or in any other manner which would involve a violation of any of the regulations of the Board of Governors of the Federal Reserve System. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS AND ADDITIONAL PURCHASERS Each Purchaser and Additional Purchaser, severally and not jointly, represents and warrants to the Company that: (a) such Purchaser or Additional Purchaser, if not a natural person, is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and, whether or not a natural person, has the power and authority (and if a natural person, the legal capacity and competence) to execute, deliver and perform its duties and obligations under this Agreement, and to purchase the Purchased Shares being purchased by it hereunder; (b) the execution and delivery by such Purchaser or Additional Purchaser of this Agreement, the performance by such Purchaser or Additional Purchaser of its obligations hereunder, and the purchase of the Purchased Shares have been duly authorized by all requisite organizational action; 15 (c) this Agreement has been duly executed and delivered by such Purchaser or Additional Purchaser and constitutes the legal, valid and binding obligation of such Purchaser or Additional Purchaser, enforceable in accordance with its terms; (d) such Purchaser or Additional Purchaser is an "accredited investor" within the meaning of Rule 501 under the Securities Act and was not organized for the specific purpose of acquiring the Purchased Shares; (e) such Purchaser or Additional Purchaser has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof; (f) such Purchaser or Additional Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management; (g) such Purchaser or Additional Purchaser is acquiring the Purchased Shares being purchased by it hereunder (and the Conversion Shares relating thereto) for its own account, not as a nominee or agent, for the purpose of investment and not with a view to the resale or distribution of any part thereof, and such Purchaser or Additional Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of such Purchased Shares or Conversion Shares; (h) such Purchaser or Additional Purchaser understands that (i) the Purchased Shares and the Conversion Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 506 promulgated under the Securities Act, (ii) the Purchased Shares and, upon conversion thereof, the Conversion Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, (iii) the Purchased Shares and the Conversion Shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect; (i) if such Purchaser or Additional Purchaser sells any Conversion Shares pursuant to Rule 144A promulgated under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including (i) obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a qualified institutional buyer and (ii) advising such purchaser that Rule 144A is being relied upon with respect to such resale; and (j) if such Purchaser or Additional Purchaser (or if such Purchaser or Additional Purchaser is a trust, any beneficiary thereof) is not a citizen or resident of the United States or Canada, or any state, territory or possession thereof, or a corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing, the consummation of the transactions contemplated hereby, including, without limitation, the purchase of the Purchased shares to be purchased by it hereunder, shall not violate any applicable securities or other laws of such Purchaser's or Additional Purchaser's jurisdiction, 16 and such Purchaser or Additional Purchaser is aware of and satisfied with (i) any foreign exchange restrictions applicable to such purchase, (ii) any governmental or other consents which may need to be obtained by it, and (iii) the income and other tax consequences, if any, in each case which may be relevant to the purchase, holding, redemption, sale or transfer of such Purchased Shares and the related Conversion Shares. ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS AND ADDITIONAL PURCHASERS Section 4.1 Conditions to the Obligations of the Purchasers on the First Closing Date. The obligation of each Purchaser to purchase and pay for the Initial Purchased Shares being purchased by it on the First Closing Date is, at its option, subject to the satisfaction, on or before the First Closing Date, of the following conditions: (a) Opinion of Company's Counsel. The Purchasers shall have received from Winthrop, Stimson, Putnam & Roberts, counsel for the Company, an opinion dated the First Closing Date, in form and scope satisfactory to the Purchasers and their counsel, to the effect set forth in Exhibit C hereto. (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II shall be true, complete and correct on and as of the First Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the President and Treasurer of the Company shall have certified to such effect to the Purchasers in writing. (c) Performance. The Company shall have performed and complied with all agreements contained herein required to be performed or complied with by it prior to or at the First Closing Date, and the President and Treasurer of the Company shall have certified to the Purchasers in writing to such effect and to the further effect that all of the conditions set forth in this Article IV have been satisfied. (d) All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Supporting Documents. The Purchasers and their counsel shall have received copies of the following documents: (i) (A) the Charter, certified as of a recent date by the Secretary of State of the State of Delaware, (B) a certificate of said Secretary, dated as of a recent date, as to the due incorporation and good standing of the Company, the payment of all excise taxes by the Company and listing all documents of the Company on file with said Secretary 17 and (C) a certificate of the Secretary of State of the State of New York, dated as of a recent date, as to the good standing of the Company in such state. (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated the First Closing Date and certifying: (A) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of this Agreement, the issuance, sale and delivery of the Purchased Shares and the reservation, issuance, sale and delivery of the Conversion Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby; (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; and (D) to the incumbency and specimen signature of each officer of the Company executing this Agreement, the stock certificates representing the Purchased Shares and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); and (iii) such additional supporting documents and other information with respect to the operations and affairs of the Company as the Purchasers or their counsel reasonably may request. (f) Charter. The Charter shall read in its entirety as set forth in Exhibit B. (g) Election of Directors. The number of directors constituting the entire Board of Directors shall have been fixed at seven and the following persons shall have been elected as the directors and shall each hold such position as of the First Closing Date: Fernando Espuelas, Jack Chen, Fred Wilson, Susan Segal, Gerardo Rosenkranz and Christopher Linen. (h) [Reserved] (i) Key Person Insurance. Key Person Insurance in an amount equal to $2,000,000 on the life of each Founder (as each such term is defined in Section 5.5) shall be in full force and effect on the First Closing Date. (j) Preemptive Rights. All stockholders of the Company having any preemptive, first refusal or other rights with respect to the issuance of the Purchased Shares or the Conversion Shares shall have exercised or irrevocably waived the same in writing. (k) Fees of Purchasers' Counsel. The Company shall have paid in accordance with Section 6.1, the fees and disbursements of Purchasers' counsel invoiced at the First Closing. All such documents shall be reasonably satisfactory in form and substance to the Purchasers and their counsel. Section 4.2 Condition to the Obligations of the Additional Purchasers on each Additional Closing Date. The obligation of each Additional Purchaser to purchase and pay for 18 the Additional Purchased Shares being purchased by it on each Additional Closing Date is, at its option, subject to the satisfaction, on or before each Additional Closing Date, of the following conditions: (a) Opinion of Company's Counsel. The Additional Purchasers shall have received from Winthrop, Stimson, Putnam & Roberts, counsel for the Company, an opinion, dated each Additional Closing Date, in form and scope satisfactory to the Additional Purchasers and their counsel, to the effect set forth in Exhibit C hereto (except that for purposes hereof, references therein to the First Closing Date shall be deemed to be references to each Additional Closing Date). (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II shall be true, complete and correct on and as of each Additional Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the President and Treasurer of the Company shall have certified to such effect to the Additional Purchasers in writing. (c) Performance. The Company shall have performed and complied with all agreements contained herein required to be performed or complied with by it prior to or at each Additional Closing Date, and the President and Treasurer of the Company shall have certified to the Additional Purchasers in writing to such effect and to the further effect that all of the conditions set forth in Section 4.1 and Section 4.2 have been satisfied. (d) No Adverse Change. The Company's business and assets shall not have been adversely affected in any material respect prior to each Additional Closing Date. (e) Supporting Documents. The Additional Purchasers and their counsel shall have received copies of the documentation described in Section 4.1(e), except that all documents required in clause (ii) therein to have been dated as of the First Closing Date shall be dated as of each Additional Closing Date. All such documents shall be satisfactory in form and substance to the Additional Purchasers and their counsel. ARTICLE V COVENANTS OF THE COMPANY The Company covenants and agrees with each of the Purchasers and Additional Purchasers that: Section 5.1 Financial Statements, Reports, Etc. Until the consummation of an underwritten public offering of the Company's Common Stock conducted by a nationally recognized reputable underwriter that results in net proceeds to the Company of at least $30 million and at a price per share of at least $7.00 (as adjusted for stock splits, combinations and the like) (a "Qualified Public Offering"), the Company shall furnish to each Purchaser and 19 Additional Purchaser that purchased hereunder and which continues to hold at least 666,667 Purchased Shares: (a) within ninety (90) days after the end of each fiscal year of the Company a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year then ended, prepared in accordance with generally accepted accounting principles and certified by a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company; (b) within forty-five (45) days after the end of each of the first three quarters in each fiscal year, a consolidated balance sheet of the Company and its subsidiaries, if any, and the related consolidated statements of income, stockholders' equity and cash flows, unaudited but prepared in accordance with generally accepted accounting principles and certified by the Chief Financial Officer of the Company, such consolidated balance sheet to be as of the end of such quarter and such consolidated statements of income, stockholders' equity and cash flows to be for such quarter and for the period from the beginning of the fiscal year to the end of such quarter, in each case with comparative statements for the prior fiscal year; (c) at the time of delivery of each annual financial statement pursuant to Section 5.1(a), a certificate executed by the Chief Financial Officer of the Company stating that such officer has caused this Agreement and the Series A, Series B and Series C Convertible Preferred Stock to be reviewed and has no knowledge of any default by the Company in the performance or observance of any of the provisions of this Agreement or the Series A, Series B or Series C Convertible Preferred Stock or, if such officer has such knowledge, specifying such default and the nature thereof; (d) promptly following receipt by the Company, each accountants management letter and other written report submitted to the Company by its independent public accountants in connection with an annual or interim audit of the books of the Company or any of its subsidiaries; (e) promptly after the Company learns of the commencement thereof, notice of all actions, suits, claims, proceedings, investigations and inquiries of the type described in Section 2.7 that could materially adversely affect the Company or any of its subsidiaries, if any; and (f) promptly upon sending, making available or filing the same, all reports and financial statements that the Company sends or makes available to its stockholders or files with the Commission. Section 5.2 [Reserved] Section 5.3 Reserve for Conversion Shares. The Company shall at all times keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Purchased Shares and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of the Purchased Shares from time to time outstanding or otherwise to 20 comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Purchased Shares or otherwise to comply with the terms of this Agreement, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company will use its best efforts to obtain any authorization, consent, approval or other action by, and will make any filing with, any court or administrative body that may be required under applicable state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Purchased Shares. Section 5.4 Corporate Existence. The Company shall maintain and, except as otherwise permitted by Section 5.17 cause each of its subsidiaries (if any) to maintain their respective corporate existence, rights and franchises in full force and effect. Section 5.5 Properties, Business, Insurance. The Company shall maintain and cause each of its subsidiaries (if any) to maintain as to their respective properties and business, with financially sound and reputable insurers, insurance against such casualties and contingencies and of such types and in such amounts as is customary for companies similarly situated, which insurance shall be deemed by the Company to be sufficient. The Company shall also maintain in effect its current "key person" life insurance policies, payable to the Company (the "Key Person Insurance"), on the lives of Fernando Espuelas and Jack Chen (so long as they remain employees of the Company) (collectively, the "Founders"), in the amount of $2,000,000 each, and use its best efforts to obtain not later than November 15, 1998, and thereafter maintain in effect, Key Person Insurance on the lives of the Founders (so long as they remain employees of the Company), in the amount of $5,000,000 each. The Company shall not cause or permit any assignment or change in beneficiary and shall not borrow against any such policy. If requested by Purchasers holding at least a majority of the outstanding Preferred Stock, the Company will add one designee of the Purchasers as a notice party for each such policy and shall request that the issuer of each policy provide such designee with ten (10) days' notice before such policy is terminated (for failure to pay premiums or otherwise) or assigned or before any change is made in the beneficiary thereof. Section 5.6 Inspection, Consultation and Advice. The Company shall permit and cause each of its subsidiaries (if any) to permit each Purchaser which has purchased hereunder and continues to hold at least 3,125,000 Purchased Shares and which covenants to preserve the confidentiality of the Company's proprietary information and its agents and representatives, at such Purchaser's expense, to visit and inspect any of the properties of the Company and its subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of the Company and its subsidiaries with their officers, employees and public accountants (and the Company hereby authorizes said accountants to discuss with such Purchaser and such designees such affairs, finances and accounts), and consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. Section 5.7 Restrictive Agreements Prohibited. Neither the Company nor any of its subsidiaries shall become a party to any agreement which by its terms restricts the Company's performance of either this Agreement or the Charter. 21 Section 5.8 Transactions with Affiliates. Except for transactions contemplated by this Agreement or as otherwise approved by the Board of Directors, neither the Company nor any of its subsidiaries shall enter into any transaction with any director, officer, employee or holder of more than 5% of the outstanding capital stock of any class or series of capital stock of the Company or any of its subsidiaries, member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, except for transactions on customary terms related to such person's employment. Section 5.9 Expenses of Directors. The Company shall promptly reimburse in full each director of the Company who is not an employee of the Company for all of his or her reasonable out-of-pocket expenses incurred in attending each meeting of the Board of Directors of the Company or any committee thereof. Section 5.10 Use of Proceeds. The Company shall use the proceeds from the sale of the Purchased Shares for working capital and for such other purposes as may be approved by the Board of Directors of the Company. Section 5.11 Compensation. The Company shall not pay to its management compensation in excess of that compensation customarily paid to management in companies of similar size, of similar maturity, and in similar businesses without the unanimous written consent of the members of the Compensation Committee of the Company's Board of Directors. Section 5.12 By-laws. The Company shall at all times cause its By-laws to provide that, (a) unless otherwise required by the laws of the State of Delaware, (i) any two directors and (ii) any holder or holders of at least 8,500,000 shares of Preferred Stock shall have the right to call a meeting of the Board of Directors or stockholders and (b) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Preferred Stock as set forth in the Charter. The Company shall at all times maintain provisions in its By-laws and/or Charter indemnifying all directors against liability and absolving all directors from liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Delaware. Section 5.13 Employee Nondisclosure and Developments Agreements. The Company shall use its best efforts to obtain, and shall cause its subsidiaries (if any) to use their best efforts to obtain, an Employee Nondisclosure and Developments Agreement from all future officers, key employees and other employees who will have access to confidential information of the Company or any of its subsidiaries, upon their employment by the Company or its subsidiaries, and, within 30 days following the Closing Date, from all current employees who have not previously provided such agreement. Section 5.14 Activities of Subsidiaries. The Company will not (a) organize or acquire any entity that is a subsidiary unless such subsidiary is wholly-owned (directly or indirectly) by the Company (other than qualifying shares owned by nominees to the extent required by the jurisdiction in which such subsidiary shall be domiciled), (b) permit any subsidiary to consolidate or merge into or with or sell or transfer all or substantially all its assets, except that 22 any subsidiary may (i) consolidate or merge into or with or sell or transfer assets to any other subsidiary, or (ii) merge into or sell or transfer assets to the Company, (c) sell or otherwise transfer any shares of capital stock of any subsidiary, except to the Company or another subsidiary, or permit any subsidiary to issue, sell or otherwise transfer any shares of its capital stock or the capital stock of any subsidiary, except to the Company or another subsidiary, or (d) permit any subsidiary to pay any dividend or make any distribution on, any shares of its stock, except for dividends or other distributions payable to the Company or another subsidiary, in each case without the approval of a majority vote of the Board of Directors which majority must include at least one director not designated by the holders of Common Stock. Section 5.15 Compliance with Laws. The Company shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could materially adversely affect its business or condition, financial or otherwise. Section 5.16 Keeping of Records and Books of Account. The Company shall keep, and cause each subsidiary to keep, adequate records and books of account, in which complete entries regarding its transactions will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. Section 5.17 Change in Nature of Business. The Company shall not make, or permit any subsidiary to make, any material change in the nature of its business as set forth in the Offering Memorandum. Section 5.18 Rule 144A Information. The Company shall, at all times during which it is neither subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide in writing, upon the written request of any Purchaser or Additional Purchaser or a prospective buyer of Purchased Shares or shares of Common Stock issued upon conversion of the Preferred Stock ("Conversion Stock") from any Purchaser or Additional Purchaser, all information required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the Commission under the Securities Act ("Rule 144A Information"). The Company also shall, upon the written request of any Purchaser or Additional Purchaser, cooperate with and assist such Purchaser or Additional Purchaser or any member of the National Association of Securities Dealers, Inc. PORTAL system in applying to designate and thereafter maintain the eligibility of the Preferred Stock or Conversion Stock, as the case may be, for trading through PORTAL. The Company's obligations under this Section 5.21 shall at all times be contingent upon the relevant Purchaser's or Additional Purchaser's obtaining from the prospective buyer of Purchased Shares or Conversion Shares a written agreement to take all reasonable precautions to safeguard the Rule 144A Information from disclosure to anyone other than a person who will assist such buyer in evaluating the purchase of any Purchased Shares or Conversion Shares. Section 5.19 Compensation and Audit Committees. The Company shall maintain a Compensation Committee and an Audit Committee of the Board of Directors, each of which 23 shall consist of two non-management directors and which currently consist of Fred Wilson and Christopher Linen on the Compensation Committee and Gerardo Rosenkranz and Fred Wilson on the Audit Committee. No increase in compensation, bonuses or other remuneration shall be paid to, and no capital stock or options to acquire capital stock of the Company shall be issued or granted to, any director or executive officer of the Company or any of its subsidiaries, without the approval of the Compensation Committee. No employee stock option plan, employee stock purchase plan, employee restricted stock plan or other employee stock plan shall be established without the approval of the Compensation Committee. The Audit Committee shall select (subject to the approval of the Board of Directors) and provide instructions to the Company's auditors and shall approve the Company's annual audit prior to its issuance each year. Section 5.20 Termination of Covenants. The covenants contained in this Article V will terminate and be of no further force or effect upon the earlier of (i) the date of a Qualified Public Offering and (ii) the date on which at least 2,700,000 Conversion Shares have been sold in one or more public offerings. ARTICLE VI MISCELLANEOUS Section 6.1 Expenses. Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated; provided, however, that if there shall be a Closing, the Company shall pay the reasonable fees of the Purchasers' and Additional Purchasers' special counsel, Kalow, Springut & Bressler, in connection with such transactions, in an aggregate amount not to exceed $75,000, and any subsequent amendment, waiver, consent or enforcement thereof, and all related disbursements incurred by such counsel. Section 6.2 Survival of Representations; Termination of Agreements. All covenants, agreements, representations and warranties made in this Agreement or in any certificate or instrument delivered to the Purchaser or Additional Purchasers pursuant to or in connection with this Agreement, shall survive the execution and delivery hereof, the issuance, sale and delivery of the Purchased Shares, and the issuance and delivery of the Conversion Shares (i) in the case of covenants and agreements, an indefinite period of time (subject to the provisions of Section 5.20 hereof), and (ii) in the case of representations and warranties, for a period of five (5) years, and all statements contained in any certificate or other instrument delivered by the Company hereunder or in connection herewith shall be deemed to constitute representations and warranties made by the Company. Section 6.3 Brokerage. Each party hereto will indemnify and hold harmless the others against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party, other than as described in Section 2.21 of the Disclosure Schedule. If the party to be indemnified shall be a Purchaser or Additional Purchaser, then such indemnification shall include, without limitation, losses which may be suffered as a result of diminution in value of such Purchasers' or Additional Purchasers' investment hereunder. 24 Section 6.4 Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Section 6.5 Lock-Up Agreement. Each Purchaser and Additional Purchaser and its successors and assigns will agree, to the extent reasonably requested by any underwriter of securities of the Company in connection with an initial public offering of the Company's Common Stock, to enter into an agreement consistent with then market practice for major bracket underwriters not to sell or otherwise transfer or dispose of any shares of Common Stock for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, which agreement shall also bind the Founders, executive officers, directors, and other shareholders on terms and conditions substantially similar to those which shall apply to the Purchasers and Additional Purchasers and said successors and assigns. Section 6.6 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: (a) if to the Company, to it at StarMedia Network, Inc., 29 West 36th Street, 5th Floor, New York, New York 10018, Attention: President, with a copy to Justin K. Macedonia, Esq., Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, NY 10004; (b) if to any Purchaser, at the address of such Purchaser set forth in Schedule I, with a copy to Jay S. Rand, Esq., Kalow, Springut & Bressler, 488 Madison Avenue, New York, New York 10022; and (c) if to any Additional Purchaser, at the address of such Additional Purchaser set forth on the Counterpart, with a copy to Jay S. Rand, Esq., Kalow, Springut & Bressler, 488 Madison Avenue, New York, New York 10022; or, in any such case, at such other address or addresses as shall have been furnished in writing by such party to the others. Section 6.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 6.8 Entire Agreement. This Agreement, including the Schedules and Exhibits hereto, constitutes the sole and entire agreement of the parties with respect to the subject matter hereof. All Schedules and Exhibits hereto are hereby incorporated herein by reference. Section 6.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 25 Section 6.10 Amendments. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the holders of a majority of the outstanding shares of Common Stock issued or issuable upon conversion of the Purchased Shares. Section 6.11 Severability. If any provision of this Agreement shall be declared void or unenforceable by any judicial or administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby. Section 6.12 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. Section 6.13 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "person" shall mean an individual, corporation, trust, partnership, joint venture, unincorporated organization, government or any agency or political subdivision thereof, or other entity. (b) "subsidiary" shall mean, as to the Company, any corporation of which more than 50% of the outstanding stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. STARMEDIA NETWORK, INC. By: /s/ Jack Chen ------------------------------------------- Name: Jack Chen Title: President Purchasers named in Schedule I to the Purchase Agreement: THE FLATIRON FUND 1998/99, LLC By: /s/ Fred Wilson ------------------------------------------- Name: Fred Wilson Title: Managing Member CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, its General Partner By: /s/ Brian J. Richmand ------------------------------------------- Name: Brian J. Richmand Title: General Partner NEW YORK CITY INVESTMENT FUND, LLC By: /s/ [ILLEGIBLE] ------------------------------------------- Name: Title: President & CEO FLATIRON ASSOCIATES, LLC By: Flatiron Partners, LLC, Manager By: /s/ Fred Wilson ------------------------------------------- Name: Fred Wilson Title: Managing Member 27 AURORA INVESTMENT LLC By: /s/ [ILLEGIBLE] ------------------------------------ Name: Title: THE PYRAMID TRUST By: /s/ Gerardo Rosenkranz ------------------------------------ Name: Gerardo Rosenkranz Title: Trustee CARAMIA LLC By: /s/ Fay Holleschultz ------------------------------------ Name: Fay Holleschultz Title: Asst. Secretary THE GRAPA TRUST By: /s/ Dr. Roberto P. Rosenkranz ------------------------------------ Name: Dr. Roberto P. Rosenkrantz Title: Trustee THE PAPAGENO TRUST By: /s/ Ricardo T. Rosenkranz, M.D. ------------------------------------ Name: Ricardo T. Rosenkranz Title: Trustee /s/ William L. Asmundson ---------------------------------------- By: Rockefeller & Co., Inc., as Attorney-in-Fact Name: William L. Asmundson Title: Authorized Signatory -------------------------------------------- David Rockefeller /s/ Gerardo Rosenkranz ---------------------------------------- Gerardo Rosenkranz 28 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser* thereunder. WARBURG, PINCUS EQUITY PARTNERS, L.P. By: /s/ [ILLEGIBLE] --------------------------------- Name: Title: WARBURG, PINCUS VENTURE INTERNATIONAL, L.P. By: /s/ [ILLEGIBLE] --------------------------------- Name: Title: ADDRESS: 466 Lexington Avenue New York, NY 10017-3147 APPROVED AND AGREED: STARMEDIA NETWORK, INC. By: /s/ Jack Chen --------------------------------- Name: JACK CHEN Title: PRESIDENT Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 3,125,000 $15,000,000 - ---------- * Warburg, Pincus Equity Partners, L.P. and Warburg Pincus Venture International, L.P. shall be deemed an Additional Purchaser for all purposes under the Series C Convertible Preferred Stock Purchase Agreement and any entered documents. COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: PLATINUM VENTURE PARTNERS II, L.P. /s/ Michael A. Santer ---------------------------------- Signature MICHAEL A. SANTER ---------------------------------- Print Name: ADDRESS: 1815 South Meyers Road - --------------------------- Oakbrook Terrace, IL 60181 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 208,333 $1,000,000 STARMEDIA NETWORK, INC. COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature ESRU Investments LLC ---------------------------------- Print Name: ADDRESS: 9 East Loockerman Street - --------------------------- Dover, Delaware 19901 - --------------------------- U S A - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 476,190 US$2,285,712 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: New Crussol Holdings Inc. /s/ Artur Peixoto ---------------------------------- Signature Artur Peixoto ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 476,190 $2,285,712 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature Rosewood Ventures Ltd ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 476,190 $2,285,712 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature Integrity Holdings Ltd. ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 634,923 $3,047,632 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Robert K. Hamshaw ---------------------------------- Signature ROBERT K. HAMSHAW /s/ Nicolas Berggruen ---------------------------------- Print Name: NICOLAS BERGGRUEN For: Brentwood Corporation Apartado 87-2106, Zona 7 Panama, Republica de Panama ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 634,920 $3,047,616 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ [ILLEGIBLE] ---------------------------------- Signature JEMIAK LTD. ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 634,920 $3,047,616 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: GENERAL ELECTRIC CAPITAL CORPORATION /s/ Tony J. Pantuso ---------------------------------- Signature Tony J. Pantuso ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 1,041,667 $5,000,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Terry F. Otter ---------------------------------- Signature Terry F. Otter ---------------------------------- Print Name: [ILLEGIBLE] ADDRESS: Bayview Investors, Ltd - --------------------------- [ILLEGIBLE] - --------------------------- [ILLEGIBLE] - --------------------------- [ILLEGIBLE] - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 20,833 $100,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: Chacallit Associates /s/ Richard Beattie, General Partner ---------------------------------- Signature Richard Beattie ---------------------------------- Print Name: ADDRESS: Chacallit Associates - --------------------------- P.O. Box 1047 - --------------------------- Washington, CT 06793-0047 - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 20,833 $100,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ E. John Rice Jr. ---------------------------------- Signature E. John Rice Jr. ---------------------------------- Print Name: ADDRESS: 770 [ILLEGIBLE] Island Dr. - --------------------------- # 610 - --------------------------- Miami, FL 33131 - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 18,750 $90,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ David Lanter ---------------------------------- Signature DAVID LANTER ---------------------------------- Print Name: ADDRESS: 7306 PETER PLACE - --------------------------- McLEAN, VA 22102 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 20,833 $100,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ William T. End ---------------------------------- Signature William T. End ---------------------------------- Print Name: ADDRESS: 34 CASTLE RD - --------------------------- P.O. Box 339 - --------------------------- S. Freeport, ME - --------------------------- 04078 - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 10,417 $50,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Eric D. Mullins ---------------------------------- Signature Eric D. Mullins ---------------------------------- Print Name: ADDRESS: 3350 Parkwood Dr. - --------------------------- Houston, TX - --------------------------- 77021 - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 8,333 $40,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ David C. Bowen ---------------------------------- Signature David C. Bowen ---------------------------------- Print Name: ADDRESS: 323 Sterling Pl. - --------------------------- Brooklyn, NY 11238 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 5,208 $25,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Darryl E. Wash ---------------------------------- Signature Darryl E. Wash ---------------------------------- Print Name: ADDRESS: 61 West 62nd #9D - --------------------------- New York, NY 10023 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 4,167 $20,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Salek Brodsky ---------------------------------- Signature Salek Brodsky ---------------------------------- Print Name: ADDRESS: 5 E. 22nd St. - --------------------------- Apt. 4s - --------------------------- New York, NY 10010 - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 3,125 $15,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Roszell Mack III ---------------------------------- Signature Roszell Mack III ---------------------------------- Print Name: ADDRESS: 155 West 70th St. #7G - --------------------------- NY, NY 10023 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 2,000 $9,600 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Jesse Hertzburg ---------------------------------- Signature Jesse Hertzburg ---------------------------------- Print Name: ADDRESS: 105 50th St. - --------------------------- Virgina Beach, VA 23451 - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 2,000 $9,600 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Cindy Loren Lupatkin ---------------------------------- Signature Cindy Loren Lupatkin ---------------------------------- Print Name: ADDRESS: 151 EAST 31st St. - --------------------------- Apt 12C - --------------------------- New York, NY 10016 - --------------------------- USA - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 417 $2,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: ----------- LEGAL OK /s/ Diane R. Labrador ----------- ---------------------------------- TUR 9/24/98 Signature ----------- Diane R. Labrador ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 625,000 $3,000,000 Intel/StarMedia -- Stock Purchase Agreement COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Albert S. Waxman ---------------------------------- Signature Albert S. Waxman, PhD ---------------------------------- Print Name: ADDRESS: - --------------------------- - --------------------------- - --------------------------- - --------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 208,333 $1,000,000 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: MORGAN STANLEY DEAN WITTER EQUITY FUNDING, INC. /s/ David R. Powers ---------------------------------- Signature David R. Powers ---------------------------------- Print Name: ADDRESS: c/o Morgan Standley Dean Witter - ------------------------------- 1585 Broadway - ------------------------------- 36th Floor - ------------------------------- New York, NY 10036 - ------------------------------- Attn: David Powers Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 208,333 $999,998.40 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser thereunder. ADDITIONAL PURCHASER: /s/ Tracy Leeds ---------------------------------- Signature Tracy Leeds ---------------------------------- Print Name: ADDRESS: 927 Broadway - ------------------------------- New York, NY - ------------------------------- 10010 - ------------------------------- - ------------------------------- Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 28,918 $138,798.40 COUNTERPART SIGNATURE PAGE TO SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 1998 IN WITNESS WHEREOF, the undersigned has executed this counterpart signature page to the Series C Convertible Preferred Stock Purchase Agreement dated as of August 24, 1998, intending to become a party thereto, and be bound by the obligations of, and entitled to the benefits of, an Additional Purchaser* thereunder. WARBURG, PINCUS EQUITY PARTNERS, L.P. By: /s/ [ILLEGIBLE] --------------------------------- Name: Title: WARBURG, PINCUS VENTURE INTERNATIONAL, L.P. By: /s/ [ILLEGIBLE] --------------------------------- Name: Title: ADDRESS: 466 Lexington Avenue New York, NY 10017-3147 APPROVED AND AGREED: STARMEDIA NETWORK, INC. By: /s/ Jack Chen --------------------------------- Name: JACK CHEN Title: PRESIDENT Number of Aggregate Purchased Shares Purchase Price for to be Purchased Purchased Shares ---------------- ------------------ 1,635,417 $7,850,000 - ---------- * Warburg, Pincus Equity Partners, L.P. and Warburg Pincus Venture International, L.P. shall be deemed as Additional Purchaser for all purposes under the Series C Convertible Preferred Stock Purchase Agreement and any entered documents. SCHEDULE I Purchasers Number of Aggregate Name and Purchased Shares Purchase Price for Address of Purchaser to be Purchased Purchased Shares - -------------------- ---------------- ------------------ Chase Venture Capital Associates, L.P. 3,750,000 $18,000,000 380 Madison Avenue, 12th floor New York, NY 10017 Attn: Mr. I. Robert Greene The Flatiron Fund 1998/99, LLC 416,667 $ 2,000,000 257 Park Avenue South New York, NY 10010 Attn: Mr. Fred Wilson Flatiron Associates, LLC 41,667 $ 200,000 257 Park Avenue South New York, NY 10010 Attn: Mr. Fred Wilson New York City Investment Fund, LLC 156,250 $ 750,000 One Battery Park Plaza New York, NY 10004 Attn: Janice Roberts Aurora Investments LLC 1,250,000 $ 6,000,000 c/o Kohlberg Kravis Roberts & Co. 9 West 57th Street, Suite 4200 New York, NY 10019 David Rockefeller 416,667 $ 2,000,000 Rockefeller & Co. 30 Rockefeller Plaza New York, NY 10112 Gerardo Rosenkranz 20,833 $ 100,000 60 Arch Street Greenwich, CT 06830 The Pyramid Trust 20,833 $ 100,000 60 Arch Street Greenwich, CT 06830 Caramia LLC 20,833 $ 100,000 110 East 59th Street, 29th Floor New York, NY 10021 Attn: Fay Holloschutz The Grapa Trust 20,833 $ 100,000 110 East 59th Street, 29th Floor New York, NY 10021 Attn: Fay Holloschutz The Papageno Trust 20,833 $ 100,000 1200 N. Lakeshore Drive #1002 Chicago, IL 60610 --------- ----------- TOTAL: 6,135,416 $29,450,000 SCHEDULE II Disclosure Schedule Section 2.1 The Company maintains ownership in the following corporations: StarMedia Network Americas Sociedad Anonima Financera de Inversion (SAFI) an Uruguayan corporation owned 100% by StarMedia Network, Inc. (US). StarMedia Chile Sociedad de Responsabilidad Limitada (SRL), a Chilean corporation owned 99% by StarMedia Network, Inc. (US) and 1% by StarMedia Network Americas SAFI (Uruguay). StarMedia Argentina Sociedad de Responsabilidad Limitada (SRL), an Argentine corporation owned 99% by StarMedia Network, Inc. (US) and 1% by StarMedia Network Americas SAFI (Uruguay). StarMedia Colombia Sociedad de Responsabilidad Limitada (SRL), a Colombian corporation owned 99% by StarMedia Network, Inc. (US) and 1% by StarMedia Network Americas SAFI (Uruguay). StarMedia Brazil Limitada, a Brazilian corporation owned 96% by StarMedia Network, Inc. (US) and 4% by Peter Blacker--VP, GM, Southern Cone for StarMedia (transfer to StarMedia Network Americas SAFI (Uruguay) in process). SMN de Mexico (SRL), a Mexican corporation owned 99% by StarMedia Network, Inc. (US) and 1% by StarMedia Network Americas SAFI (Uruguay). Section 2.2 With respect to the Purchased Shares of those Purchasers which are party thereto, the Registration Rights Agreement dated as of July 25, 1997, among the Company and certain stockholders of the Company named therein (as amended, the "Registration Rights Agreement") and the Voting Agreement, dated as of August 24, 1998, among the Company and certain stockholders of the Company named therein (the "Voting Agreement"). The Preemptive Rights Agreement, dated as of August 24, 1998, among the Company and certain stockholders of the Company named therein (the "Preemptive Rights Agreement"). Section 2.4 8% Convertible Subordinated Note Payable in the amount of $1,800,000 to Chase Venture Capital Associates, L.P. dated August 14, 1998, due December 31, 1998 and 8% Convertible Subordinated Note Payable in the amount of $200,000 to The Flatiron Fund, LLC dated August 14, 1998, due December 31, 1998 (the "Bridge Notes"). There are twenty (25) holders of Common Stock whom in the aggregate hold 10,392,000 shares of Common Stock. There are twenty-nine (29) holders of Series A Preferred Stock whom in the aggregate hold 7,330,000 shares of Preferred Stock. There are thirty-four (34) holders of Series B Preferred Stock whom in the aggregate hold 8,000,000 shares of Preferred Stock. There are fifty-nine (59) holders of options on Common Stock whom in the aggregate hold options to purchase 3,830,433 shares of Common Stock. Stockholders Agreement, dated as of July 25, 1997, among the Company and certain stockholders of the Company named therein (the "Stockholders Agreement"). The Preemptive Rights Agreement. The Voting Agreement. Section 2.5 The Bridge Notes. Section 2.6 The Bridge Notes. Section 2.7 On August 7, 1998, StarMedia commenced a trademark infringement suit against Wasnet, S.L. and NSI Web, Inc. (the "Defendants") concerning, among other things, the Defendants' (i) infringement and dilution of StarMedia's PIZARRAS service mark; (ii) dilution of the trade dress of StarMedia's PIZARRAS bulletin board service; and (iii) misappropriation of other elements of StarMedia's Internet site. StarMedia is seeking a permanent injunction enjoining the Defendants from using the PIZARRAS service mark, any element of the PIZARRAS bulletin board service, and any other element of StarMedia's Internet Site, as well as damages, costs and attorneys' fees. Company has recently applied for incorporation in Venezuela. Section 2.9 (i) STARMEDIA NETWORK, INC.
- -------------------------------------------------------------------------------------------- Registered Marks Country Registration No. Registration Date - -------------------------------------------------------------------------------------------- STARMEDIA United States 2,123,636 12/23/97 - -------------------------------------------------------------------------------------------- STARMEDIA Peru 014792 06/19/98 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Pending Marks Country Serial No. Filing Date Publication Date - -------------------------------------------------------------------------------------------- STARMEDIA Argentina 2,111,343 10/29/97 Published 5/6/98 - -------------------------------------------------------------------------------------------- Bolivia 18490 12/23/97 - -------------------------------------------------------------------------------------------- Brazil (38) 820333646 11/5/97 Published 3/3/98 - -------------------------------------------------------------------------------------------- Brazil (9) - -------------------------------------------------------------------------------------------- Brazil (42) - -------------------------------------------------------------------------------------------- Brazil (35) - -------------------------------------------------------------------------------------------- Chile 396794 11/12/97 Published 3/5/98 - -------------------------------------------------------------------------------------------- Colombia 97-066116 11/11/97 Published 3/31/98 - -------------------------------------------------------------------------------------------- Costa Rica Ref No. 116939 01/14/98 - -------------------------------------------------------------------------------------------- Cuba 309-98 03/03/98 - -------------------------------------------------------------------------------------------- Dominican 06/24/98 Republic - -------------------------------------------------------------------------------------------- Ecuador 84003 12/30/97 - -------------------------------------------------------------------------------------------- El Salvador 1321-98 03/05/98 - -------------------------------------------------------------------------------------------- Guatemala 0848-8 02/06/98 - -------------------------------------------------------------------------------------------- Honduras 507-98 01/09/98 Published 3/27/98 - -------------------------------------------------------------------------------------------- Nicaragua 98-00524 02/10/98 - -------------------------------------------------------------------------------------------- Mexico 317243 12/11/97 - -------------------------------------------------------------------------------------------- Panama 93523 04/17/98 - -------------------------------------------------------------------------------------------- Paraguay 26121 12/23/97 Published 2/28/98 - -------------------------------------------------------------------------------------------- Portugal 328214 01/20/98 Published 4/30/98 - -------------------------------------------------------------------------------------------- Spain 2138590 1/26/98 Published 3/16/98 - -------------------------------------------------------------------------------------------- Uruguay 300399 12/22/97 - -------------------------------------------------------------------------------------------- Venezuela 97-022325 11/04/97 Published 06/12/98 - --------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ---------------------------------------------------------------------------------------------------- Registered Marks Country Registration No. Registration Date - ---------------------------------------------------------------------------------------------------- STARMEDIA and design United States 2,121,588 12/16/97 - ---------------------------------------------------------------------------------------------------- STARMEDIA and design Peru 014756 06/19/98 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Pending Marks Country Serial No. Filing Date Publication Date - ---------------------------------------------------------------------------------------------------- STARMEDIA and design Argentina 2,120,115 12/11/97 Published 03/18/98 - ---------------------------------------------------------------------------------------------------- Bolivia 18492 12/23/97 - ---------------------------------------------------------------------------------------------------- Brazil(Cl. 38) 820434248 12/29/97 Published 04/07/98 - ---------------------------------------------------------------------------------------------------- Chile 400806 12/19/97 Published 05/05/98 - ---------------------------------------------------------------------------------------------------- Colombia 97075145 12/26/97 Published 3/31/98 - ---------------------------------------------------------------------------------------------------- Costa Rica Ref. No. 116940 01/14/98 - ---------------------------------------------------------------------------------------------------- Cuba 308-98 03/03/98 - ---------------------------------------------------------------------------------------------------- Dominican 06/24/98 Republic - ---------------------------------------------------------------------------------------------------- Ecuador 83999 12/30/97 - ---------------------------------------------------------------------------------------------------- El Salvador 1354-98 03/05/98 Published 4/29/98 - ---------------------------------------------------------------------------------------------------- Guatemala 0850-8 02/06/98 - ---------------------------------------------------------------------------------------------------- Honduras 508-98 01/09/98 Published 3/27/98 - ---------------------------------------------------------------------------------------------------- Nicaragua 98-00664 02/16/98 - ---------------------------------------------------------------------------------------------------- Mexico 318106 12/18/97 - ---------------------------------------------------------------------------------------------------- Panama 93526 04/17/98 - ---------------------------------------------------------------------------------------------------- Paraguay 26122 12/23/97 - ---------------------------------------------------------------------------------------------------- Portugal 328215 01/20/98 Published 4/30/98 - ---------------------------------------------------------------------------------------------------- Spain 2138591 1/26/98 Published 3/16/98 - ---------------------------------------------------------------------------------------------------- Uruguay 300400 12/22/97 - ---------------------------------------------------------------------------------------------------- Venezuela 97-025325 12/15/97 - ----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ---------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ---------------------------------------------------------------------------------------------------- STARMEDIA.COM United States - ----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Registered Marks Country Registration No. Registration Date - ----------------------------------------------------------------------------------------------------- TALK PLANET Peru 014757 06/19/98 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Pending Marks Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- TALK PLANET United States 75/212492 10/3/98 - ----------------------------------------------------------------------------------------------------- Argentina 2115045 11/17/97 Published 01/11/98 - ----------------------------------------------------------------------------------------------------- Bolivia 18489 12/23/97 - ----------------------------------------------------------------------------------------------------- Brazil 8203570 11/18/97 Published 03/03/98 - ----------------------------------------------------------------------------------------------------- Chile 398407 11/26/97 Published 04/01/98 - ----------------------------------------------------------------------------------------------------- Colombia 97-068302 11/21/97 Published 03/31/98 - ----------------------------------------------------------------------------------------------------- Costa Rica Ref No. 116941 01/14/98 Published 04/16/98 - ----------------------------------------------------------------------------------------------------- Cuba 307-98 03/03/98 - ----------------------------------------------------------------------------------------------------- Dominican Republic 06/25/98 - ----------------------------------------------------------------------------------------------------- Ecuador 84007 12/30/97 - ----------------------------------------------------------------------------------------------------- El Salvador 1320-98 03/05/98 - ----------------------------------------------------------------------------------------------------- Guatemala 0847-8 02/06/98 - ----------------------------------------------------------------------------------------------------- Honduras 509-98 01/09/98 - ----------------------------------------------------------------------------------------------------- Nicaragua 98-00525 02/10/98 - ----------------------------------------------------------------------------------------------------- 12/11/97 Office Action Mexico 317244 pending - ----------------------------------------------------------------------------------------------------- Panama 93524 04/17/98 - ----------------------------------------------------------------------------------------------------- Paraguay 26123 12/23/97 - ----------------------------------------------------------------------------------------------------- Portugal 328216 01/20/98 - ----------------------------------------------------------------------------------------------------- Spain 2138592 1/26/98 - ----------------------------------------------------------------------------------------------------- Uruguay 300401 12/22/97 - ----------------------------------------------------------------------------------------------------- Venezuela 97-023267 11/17/97 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Registered Marks Country Registration No. Registration Date - ----------------------------------------------------------------------------------------------------- COPAMUNDIAL.COM Peru 014760 06/19/98 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Pending Marks Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- COPAMUNDIAL.COM United States 75/396626 11/26/97 - ----------------------------------------------------------------------------------------------------- Argentina 2,120,116 12/11/97 Published 03/18/98 - ----------------------------------------------------------------------------------------------------- Bolivia 18491 12/23/97 - ----------------------------------------------------------------------------------------------------- Brazil 820412317 12/12/97 Published 04/07/98 - ----------------------------------------------------------------------------------------------------- Chile 400809 12/19/97 Published 05/05/98 - ----------------------------------------------------------------------------------------------------- Colombia 97,072,337 12/11/97 Published 06/19/98 - ----------------------------------------------------------------------------------------------------- Costa Rica Ref. No. 117392 02/25/98 - ----------------------------------------------------------------------------------------------------- Cuba 311-98 03/03/98 - ----------------------------------------------------------------------------------------------------- Dominican 06/24/98 Republic - ----------------------------------------------------------------------------------------------------- Ecuador 84004 12/30/97 - ----------------------------------------------------------------------------------------------------- El Salvador 1322-98 03/05/98 - ----------------------------------------------------------------------------------------------------- Guatemala 0849-8 02/06/98 - ----------------------------------------------------------------------------------------------------- Honduras 2499/98 02/25/98 - ----------------------------------------------------------------------------------------------------- Nicaragua 98-00787 02/26/98 - ----------------------------------------------------------------------------------------------------- Mexico 318105 12/15/97 - ----------------------------------------------------------------------------------------------------- Panama 93522 04/17/98 - ----------------------------------------------------------------------------------------------------- Paraguay 3738 02/23/98 - ----------------------------------------------------------------------------------------------------- Portugal 329014 03/03/98 Published 06/30/98 - ----------------------------------------------------------------------------------------------------- Spain 2138593 1/26/98 - ----------------------------------------------------------------------------------------------------- Uruguay 300402 12/22/97 - ----------------------------------------------------------------------------------------------------- Venezuela 97-025196 12/12/97 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Registered Marks Country Registration No. Registration Date - ----------------------------------------------------------------------------------------------------- COPADOMUNDO.COM Peru 014761 06/19/98 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Pending Marks Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- COPADOMUNDO.COM United States 75/396625 11/26/97 - ----------------------------------------------------------------------------------------------------- Argentina 2123249 12/30/97 Published 4/1/98 - ----------------------------------------------------------------------------------------------------- Bolivia 02707 03/02/98 - ----------------------------------------------------------------------------------------------------- Brazil 820,412,309 12/12/97 - ----------------------------------------------------------------------------------------------------- Chile 408563 03/16/98 - ----------------------------------------------------------------------------------------------------- Colombia 98-00953 02/23/98 - ----------------------------------------------------------------------------------------------------- Costa Rica Ref. No. 117393 02/25/98 - ----------------------------------------------------------------------------------------------------- Cuba 310-98 03/03/98 - ----------------------------------------------------------------------------------------------------- Dominican 06/24/98 Republic - ----------------------------------------------------------------------------------------------------- Ecuador 85762 03/06/98 - ----------------------------------------------------------------------------------------------------- El Salvador 1353-98 03/05/98 - ----------------------------------------------------------------------------------------------------- Guatemala 1609-98 03/03/98 - ----------------------------------------------------------------------------------------------------- Honduras 2498/98 02/25/98 - ----------------------------------------------------------------------------------------------------- Nicaragua 98-00788 02/26/98 Published 06/19/98 - ----------------------------------------------------------------------------------------------------- Mexico 326233 03/17/98 - ----------------------------------------------------------------------------------------------------- Panama 93527 04/17/98 - ----------------------------------------------------------------------------------------------------- Paraguay 3737 02/23/98 - ----------------------------------------------------------------------------------------------------- Portugal 329013 03/03/98 - ----------------------------------------------------------------------------------------------------- Spain 2138594 1/26/98 - ----------------------------------------------------------------------------------------------------- Uruguay 301697 02/26/98 - ----------------------------------------------------------------------------------------------------- Venezuela 08-002981 02/20/98 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- BUSCAWEB United States 03/06/98 - ----------------------------------------------------------------------------------------------------- Argentina 2142387 04/03/98 - ----------------------------------------------------------------------------------------------------- Bolivia 05054 04/16/98 - ----------------------------------------------------------------------------------------------------- Brazil 820590967 04/03/98 - ----------------------------------------------------------------------------------------------------- Chile 412239 04/20/98 - ----------------------------------------------------------------------------------------------------- Colombia 98018980 04/03/98 Published 07/01/98 - ----------------------------------------------------------------------------------------------------- Costa Rica 4/13/98 - ----------------------------------------------------------------------------------------------------- Cuba 442-98 04/03/98 - ----------------------------------------------------------------------------------------------------- Dominican 06/24/98 Republic - ----------------------------------------------------------------------------------------------------- Ecuador 86681 04/07/98 - ----------------------------------------------------------------------------------------------------- El Salvador 1997-98 04/03/98 - ----------------------------------------------------------------------------------------------------- Guatemala 2620-98 04/15/98 - ----------------------------------------------------------------------------------------------------- Honduras 4830-98 04/17/98 - ----------------------------------------------------------------------------------------------------- Nicaragua 98-01399 04/17/98 - ----------------------------------------------------------------------------------------------------- Mexico 328863 04/07/98 - ----------------------------------------------------------------------------------------------------- Panama 93525 04/17/98 - ----------------------------------------------------------------------------------------------------- Paraguay 6948 04/03/98 - ----------------------------------------------------------------------------------------------------- Peru 60005 04/03/98 - ----------------------------------------------------------------------------------------------------- Portugal 329774 04/14/98 - ----------------------------------------------------------------------------------------------------- Spain 2157119 04/20/98 - ----------------------------------------------------------------------------------------------------- Uruguay 302671 04/03/98 - ----------------------------------------------------------------------------------------------------- Venezuela 98-006005 04/06/98 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- ORBITA United States 05/20/98 - ----------------------------------------------------------------------------------------------------- Argentina 2153128 05/27/98 - ----------------------------------------------------------------------------------------------------- Bolivia 08770 07/03/98 - ----------------------------------------------------------------------------------------------------- Brazil 820691046 05/27/98 - ----------------------------------------------------------------------------------------------------- Chile 417546 06/12/98 - ----------------------------------------------------------------------------------------------------- Colombia 98-030007 05/28/97 - ----------------------------------------------------------------------------------------------------- Costa Rica 07/01/98 - ----------------------------------------------------------------------------------------------------- Cuba 1022/98 06/30/98 - ----------------------------------------------------------------------------------------------------- Dominican 07/09/98 Republic - ----------------------------------------------------------------------------------------------------- Ecuador 89227 07/10/98 - ----------------------------------------------------------------------------------------------------- El Salvador 3704-98 06/26/98 - ----------------------------------------------------------------------------------------------------- Guatemala 5242-98 07/10/98 - ----------------------------------------------------------------------------------------------------- Honduras 8152-98 07/02/98 - ----------------------------------------------------------------------------------------------------- Mexico 335328 06/08/98 - ----------------------------------------------------------------------------------------------------- Nicaragua 98-02408 07/01/98 - ----------------------------------------------------------------------------------------------------- Panama 09-5155 07/29/98 - ----------------------------------------------------------------------------------------------------- Paraguay 13975 06/29/98 07/23/98 - ----------------------------------------------------------------------------------------------------- Peru 66392 07/14/98 - ----------------------------------------------------------------------------------------------------- Portugal 331379 07/08/98 - ----------------------------------------------------------------------------------------------------- Spain 2172995 07/07/98 - ----------------------------------------------------------------------------------------------------- Uruguay 305255 07/03/98 - ----------------------------------------------------------------------------------------------------- Venezuela 9500 05/27/98 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- GALAFON United States 75/508029 06/24/98 - ----------------------------------------------------------------------------------------------------- Argentina - ----------------------------------------------------------------------------------------------------- Bolivia - ----------------------------------------------------------------------------------------------------- Brazil - ----------------------------------------------------------------------------------------------------- Chile - ----------------------------------------------------------------------------------------------------- Colombia - ----------------------------------------------------------------------------------------------------- Costa Rica - ----------------------------------------------------------------------------------------------------- Cuba - ----------------------------------------------------------------------------------------------------- Dominican Republic - ----------------------------------------------------------------------------------------------------- Ecuador - ----------------------------------------------------------------------------------------------------- El Salvador - ----------------------------------------------------------------------------------------------------- Guatemala - ----------------------------------------------------------------------------------------------------- Honduras - ----------------------------------------------------------------------------------------------------- Mexico - ----------------------------------------------------------------------------------------------------- Nicaragua - ----------------------------------------------------------------------------------------------------- Panama - ----------------------------------------------------------------------------------------------------- Paraguay - ----------------------------------------------------------------------------------------------------- Peru - ----------------------------------------------------------------------------------------------------- Portugal - ----------------------------------------------------------------------------------------------------- Spain - ----------------------------------------------------------------------------------------------------- Uruguay - ----------------------------------------------------------------------------------------------------- Venezuela - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- INFORMATICA HOY United States 75/408200 12/19/97 - ----------------------------------------------------------------------------------------------------- INFORMATICA HOJE United States 12/19/97 - -----------------------------------------------------------------------------------------------------
PENDING APPLICATIONS
- ----------------------------------------------------------------------------------------------------- Mark Country Serial No. Filing Date Publication Date - ----------------------------------------------------------------------------------------------------- PIZARRAS United States - ----------------------------------------------------------------------------------------------------- Spain - -----------------------------------------------------------------------------------------------------
(ii) See Section 2.14 below. Section 2.14 The Company's employees in Brazil have indicated they are considering becoming members of the Sindicato dos Trabalhadores em Processamento de Dados e Empregados de Empresas de Processamento de Dados do Estado de Sao Paulo (SINDPD) - ------------------------------------------ StarMedia Network, Inc. - ------------------------------------------ Agreements - ------------------------------------------ Date - ------------------------------------------ Company Signed - ------------------------------------------ AFP 6/1/98 - ------------------------------------------ Allied Domecq 6/5/98 - ------------------------------------------ Banco Real 6/30/98 - ------------------------------------------ BMW 8/1/98 - ------------------------------------------ Bottle Rocket 8/5/98 - ------------------------------------------ Charles Schwab 8/17/98 International - ------------------------------------------ Chrysler-Dodge 8/6/98 - ------------------------------------------ Citibank 3/18/98 - ------------------------------------------ Clemons Management 4/8/98 - ------------------------------------------ Critical Path 7/6/98 Cyberian Outpost 7/16/98 - ------------------------------------------ eDrive 6/10/98 - ------------------------------------------ Epson 6/24/98 - ------------------------------------------ Fenasoft 8/10/98 - ------------------------------------------ Ford 7/9/98 - ------------------------------------------ Fox Latin America 1/22/97 - ------------------------------------------ Futbol de Primera 4/6/98 - ------------------------------------------ Galaxy/DirecTV 4/16/98 - ------------------------------------------ Hispanic Radio Network 8/1/98 - ------------------------------------------ IDT 5/1/98 - ------------------------------------------ Inter-Continental 6/3/98 - ------------------------------------------ Internet Profiles Corp. 1/15/97 - ------------------------------------------ Kenny Rogers Casinos 6/24/98 - ------------------------------------------ Leasetec 5/15/98 - ------------------------------------------ Manhattan House 5/5/98 - ------------------------------------------ N2K 2/16/98 - ------------------------------------------ - ------------------------------------------ Netscape 5/1/98 - ------------------------------------------ Once TV 7/29/98 - ------------------------------------------ Oracle Corporation 5/8/98 - ------------------------------------------ Pager@ccess 7/1/98 - ------------------------------------------ Teleglobe/Galafon 5/14/98 - ------------------------------------------ Tropcom 7/20/98 - ------------------------------------------ UPI 4/22/98 - ------------------------------------------ USA 5/15/98 - ------------------------------------------ Weatherlabs 5/5/98 - ------------------------------------------ World Capital Financial 8/6/98 - ------------------------------------------ - ------------------------------------------ - ------------------------------------------ Bridge Notes. Stockholders Agreement. Preemptive Rights Agreement. Voting Agreement. Registration Rights Agreement. The Company's 1997 Stock Option Plan The Company's 1998 Stock Plan Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. Office Lease for New York City offices with Bernstein Real Estate dated September 15, 1997. Office Lease for Miami offices with Manhattan House, Inc. dated May 6, 1998. Office Lease for Sao Paulo, Brazil offices with Condominio Civil do World Trade Center de Sao Paulo dated July 1, 1998. Office Lease for Bogota, Colombia offices with Restrepo Y Uribe Ltda. dated August 6, 1998. Office Lease for Mexico City offices with Informix Software De Mexico, S.A. de C.V. dated June 2, 1998. "Key-man" life insurance policy for Fernando Espuelas dated February 6, 1998. "Key-man" life insurance policy for Jack Chen dated February 6, 1998. Disability insurance for Fernando Espuelas and Jack Chen. Engagement Agreements with J.P. Morgan Securities, Inc. and Chase Securities Inc. Section 2.15 As of July 31, 1998, the Company was due advances to employees and expected employees of approximately $42,000. Section 2.17 Oral agreement with Spelling/TeleUno for co-marketing has expired. Section 2.21 J.P. Morgan Securities, Inc. and Chase Securities Inc. are acting as agents on this transaction. Section 2.22 Fernando Espuelas Chairman and CEO $135,416 Jack C. Chen President $135,416 Anne Andiorio Senior Vice President, Corporate Relations $118,750 Tracy Leeds Senior Vice President, Business Operations $104,375 Steven J. Heller Vice President, Finance & Administration $90,000 Janis Kern Vice President, Sales $150,000 Adriana Kampfner, Vice President, General Manager, Mexico $87,499 Peter Blacker Vice President, General Manager, Southern Cone $104,167 Betsy Scolnik Vice President, Business Development, Latin America $84,167 Jean Sanchez General Manager, Argentina $73,843 Indio Brasiliero Neto General Manager, Brazil $89,307 Juan Pablo Crespi Manager, Chile $36,000 Juan Pablo Gonzalez Manager, Colombia $36,000 Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. Section 2.24 The majority of employees have executed a non-disclosure agreement. Consistent with Section 5.16, the Company will use its best efforts to have all current employees execute non-disclosure agreements within thirty days. The founders (Fernando Espuelas and Jack Chen) and all members of senior management have executed non-disclosure agreements. Section 2.27 The Company's U.S. benefit plan includes medical, dental, vision, life and long-term disability insurance and a 401(k) program and is available to all U.S. employees. The Company's non-U.S. offices provide benefits in accordance with corresponding local law. Disability insurance for Fernando Espuelas and Jack Chen. Employment Agreement with Fernando Espuelas dated July 25, 1997. Employment Agreement with Jack Chen dated July 25, 1997. EX-21.1 13 SUBSIDIAIRIES OF THE REGISTRANT EXHIBIT-21.1 StarMedia Network, Inc. List of Subsidiaries StarMedia Argentina Sociedad de Responsabilidad Limitada (SRL) Buenos Aires, Argentina StarMedia do Brazil LTDA. Sao Paulo, Brazil StarMedia Colombia Ltda., Sociedad de Responsabilidad Limitada Bogota, Colombia StarMedia Chile Limitada Santiago, Chile SMN de Mexico, Sociedad de Responsabilidad Limitada (S. de R.L.) Mexico City, Mexico Servicios Star Mexico, Sociedad de Responsabilidad Limitada de Capital Variable (S. de R.L. de C.V.) Mexico City, Mexico StarMedia Network, S.L. (Sociedad de Responsabilidad Limitada) Madrid, Spain StarMedia Network Americas, Sociedad Anonima (S.A.) Montevideo, Uruguay StarMedia (SRL) Caracas, Venezuela EX-23.1 14 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated March 5, 1999 (except Note 10, as to which the date is March 14, 1999) in the Registration Statement (Form S-1) and the related Prospectus of StarMedia Network, Inc. for the registration of its common stock. ERNST & YOUNG LLP /s/ Ernst & Young LLP New York, New York March 17, 1999 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 53,141 0 520 60 0 55,275 6,122 719 60,986 7,763 0 96,494 0 10 (43,403) 60,986 5,329 5,329 0 51,885 0 0 45 (45,886) 0 0 0 0 0 (45,886) (4.94) (4.94)
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