-----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, CjY/EG7S8uVF8HNNJpW6z8gsjcS/n366HBDAIDJq27mXAGKP92+3BKOc3meOnaMw usO6v+d0/hqH+HMZrGWt0Q== 0001047469-99-022169.txt : 19990624 0001047469-99-022169.hdr.sgml : 19990624 ACCESSION NUMBER: 0001047469-99-022169 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARMEDIA NETWORK INC CENTRAL INDEX KEY: 0001057334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-74659 FILM NUMBER: 99634397 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/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 25, 1999 REGISTRATION NO. 333-74659 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 7 TO 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. / / 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 MAY 25, 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. 7,000,000 Shares STARMEDIA NETWORK, INC.
Common Stock ------------------ This is an initial public offering of shares of common stock of StarMedia Network, Inc. All of the 7,000,000 shares of common stock are being sold by StarMedia. At the request of StarMedia, the underwriters have reserved at the initial public offering price up to 1,150,000 shares of common stock for sale to certain directors, stockholders, employees and associates of 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 $13.00 and $15.00 per share. The common stock has been approved for quotation on the Nasdaq National Market under the symbol "STRM". SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT 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, subject to the terms of the underwriting agreement, purchase up to an additional 1,050,000 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 ------------------------ WIT CAPITAL CORPORATION FACILITATOR OF INTERNET DISTRIBUTION ------------------------------ Prospectus dated , 1999. [A FOLD-OUT WITH COLOR PICTURES OF THE STARMEDIA WEB SITE HOME PAGE AND VARIOUS OTHER PAGES WITHIN THE STARMEDIA WEB SITE; THE STARMEDIA LOGO AND WEB SITE ADDRESS; AND THE FOLLOWING TEXT: "TARGETING 500 MILLION PEOPLE . . . 23 COUNTRIES . . . 1 COMMUNITY"; "PAN-REGIONAL COMMUNITY AND EXTENSIVE LOCAL CONTENT"; "HIGHLY ATTRACTIVE ADVERTISING PLATFORM"; "MARKET LEADERSHIP THROUGH BRAND"; AND "THE LEADING ONLINE NETWORK TARGETING LATIN AMERICA WITH 17 TOPICAL AREAS AND EXTENSIVE WEB-BASED COMMUNITY FEATURES IN SPANISH AND PORTUGUESE".] 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 targeting Latin America. Our network consists of 17 interest-specific areas or channels, extensive Web-based community features, sophisticated search capabilities and access to online shopping in Spanish and Portuguese. These channels cover topics of interest to Latin Americans online, including local and regional news, business and sports. We promote user affinity to the StarMedia community by providing Spanish and Portuguese language e-mail, chat rooms, instant messaging and personal homepages. We provide our content and community features to our users for free. We derive our revenues principally from the sale of advertisements and sponsorships on our network. 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 develop our product offerings both internally and through strategic relationships with third parties, including Netscape, Disney, Reuters and Ziff-Davis. We also provide advertisers and merchants targeted access to Latin American Internet users, an audience with a highly desirable demographic profile. The total number of Web pages our users access on our network in a month, referred to as our monthly page views, have grown from approximately 7 million in December 1997 to approximately 60 million in March 1999. In addition, as of March 31, 1999, we had approximately 425,000 registered e-mail users. Our growing user base provides advertisers and merchants with a highly attractive platform to reach their target audience and provides us with additional revenue opportunities. In addition, 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 - dedicated client services team that assists advertisers in developing, targeting and analyzing their campaigns. Consequently, we have been able to attract leading advertisers and sponsors such as Banco Santander, Bradesco, Ford, Fox Television, IBM, Nokia, Outpost.com, SkyTel, Sony and USA Networks. These customers, in the aggregate, accounted for approximately 25.63% of total revenues in the three months ended March 31, 1999 and 34.70% of total revenues for the year ended December 31, 1998. 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; 3 - enhancing and expanding our network of Spanish and Portuguese content and pan-regional community; - pursuing strategic acquisitions and alliances; - offering Internet access service to our community of users; and - expanding into additional Spanish- and Portuguese-speaking markets. RECENT DEVELOPMENTS In April and May 1999, we completed the private placement of 3,727,272 shares of our common stock to a number of strategic investors for $41 million. These investors include: - Critical Path, Inc. - eBay Inc.; - Europortal Holding S.A.; - Hearst Communications, Inc.; - National Broadcasting Company, Inc.; and - Reuters Holdings Switzerland SA. We intend to work closely with our strategic investors in order to develop new content and to add new features to our network. OUR HISTORY We were incorporated in Delaware in March 1996. We commenced operations in September 1996 and launched the StarMedia network in December 1996. As of March 31, 1999, we had an accumulated deficit of approximately $72.4 million. 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... 7,000,000 shares Shares to be outstanding after this offering............... 53,150,939 shares Nasdaq National Market symbol...................... STRM Use of proceeds............... For working capital and general corporate purposes. Please see "Use of Proceeds".
This information is based on our shares of common stock outstanding as of March 31, 1999 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 and 3,727,272 additional shares of common stock issued to strategic investors at $11.00 per share subsequent to March 31, 1999. This information excludes: - 8,229,100 shares subject to options outstanding as of March 31, 1999 at a weighted average exercise price of $1.92 per share; - 8,770,900 additional shares that could be issued under our stock option plans; and - 1,500,000 additional shares available for issuance under our employee stock purchase plan. 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 THREE MONTHS ENDED PERIOD FROM MARCH 5, DECEMBER 31, MARCH 31, 1996 (INCEPTION) TO ----------------------- ------------------------- DECEMBER 31, 1996 1997 1998 1998 1999 --------------------- --------- ------------ --------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................... $ -- $ 460 $ 5,329 $ 256 $ 1,541 Operating expenses: Product and technology development... 36 1,229 6,816 794 3,562 Sales and marketing.................. 12 2,108 29,274 1,816 9,657 General and administrative........... 78 648 4,600 450 2,410 Depreciation and amortization........ 2 38 774 79 467 Stock-based compensation expense..... -- -- 10,421 2 1,417 -------- --------- ------------ --------- -------------- Total operating expenses............. 128 4,023 51,885 3,141 17,513 -------- --------- ------------ --------- -------------- Operating loss......................... (128) (3,563) (46,556) (2,885) (15,972) Interest income, net................. -- 35 670 28 421 -------- --------- ------------ --------- -------------- Net loss............................... (128) (3,528) (45,886) (2,857) (15,551) -------- --------- ------------ --------- -------------- Preferred stock dividends and accretion............................ -- (185) (4,536) (295) (2,541) Net loss available to common shareholders......................... $ (128) $ (3,713) $(50,422) $ (3,152) $ (18,092) -------- --------- ------------ --------- -------------- -------- --------- ------------ --------- -------------- Basic and diluted net loss per share... $ (0.01) $ (.37) $ (4.94) $ (.31) $ (1.74) -------- --------- ------------ --------- -------------- Shares used in computing basic and diluted net loss per share........... 9,147 10,012 10,202 10,012 10,410 -------- --------- ------------ --------- -------------- Pro forma basic and diluted net loss per share............................ $ (1.09) $ (.37) ------------ -------------- ------------ -------------- Shares used in computing pro forma basic and diluted net loss per share................................ 42,199 42,406 ------------ -------------- ------------ --------------
The following table is a summary of our balance sheet at March 31, 1999. The pro forma data give effect to the conversion of our redeemable convertible preferred stock and the sale of 3,727,272 shares of common stock at $11.00 per share subsequent to March 31, 1999 and the application of the net proceeds therefrom. The pro forma as adjusted data reflect the sale of 7,000,000 shares of common stock at an assumed initial public offering price of $14.00 per share, after deducting underwriting discounts and estimated offering expenses.
AS OF MARCH 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................................. $ 40,588 $ 79,948 $ 169,824 Working capital........................................................... 31,383 70,743 161,194 Total assets.............................................................. 53,889 93,249 182,314 Redeemable convertible preferred stock.................................... 99,035 -- -- Total stockholders' (deficit) equity...................................... (60,232) 78,163 167,803
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 CONDITION 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. RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT 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. These risks include our ability to: - 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; and - continue to develop and upgrade our technology. If we are unsuccessful in addressing these risks, our business, financial condition and results of operations will be materially and adversely affected. WE HAVE NEVER MADE MONEY AND EXPECT OUR LOSSES TO CONTINUE We have never been profitable. As of March 31, 1999, we had an accumulated deficit of approximately $72.4 million. We expect to continue to incur significant losses for the foreseeable future. Although our revenues have grown in recent quarters, our expenses have grown even faster and we expect to increase our spending significantly. Accordingly, we will need to generate significant revenues to achieve profitability. We may not be able to do so. WE HAVE DERIVED A PORTION OF OUR REVENUES FROM RECIPROCAL ADVERTISING AGREEMENTS, WHICH DO NOT GENERATE CASH REVENUE We derive a portion of our revenues from reciprocal advertising arrangements under which we exchange advertising space on our network predominantly for advertising space on television and radio stations, rather than cash payments. In the three months ended March 31, 1999, we derived approximately $424,000, or 28% of revenues, from these arrangements. In the year ended December 31, 1998, we derived approximately $2.4 million, or 45% of revenues, from these arrangements. We expect that revenues from reciprocal advertising arrangements will continue to account for a portion of our revenues in the foreseeable future. Reciprocal advertising arrangements do not generate any cash revenues. YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS Our future revenues and results of operations may significantly fluctuate due to a combination of factors. Accordingly, 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. OUR OPERATING RESULTS MAY ALSO FLUCTUATE DUE TO SEASONAL FACTORS The level of use on our network is highly seasonal. This may cause fluctuations in our revenues and operating results. Visitor traffic on our network has historically been 6 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. As a result, advertisers have historically spent less in the first and second calendar quarters. We believe that these seasonal trends will continue to affect our results of operations. If our expenses increase during these periods, we may not generate sufficient revenue to offset these expenses. WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS We intend to continue to grow our business. Because we expect to generate losses for the foreseeable future, we do not expect that income from our operations will be sufficient to meet these needs. Therefore, we will likely have substantial future capital requirements 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 to raise additional capital, our growth could be impeded. RISKS RELATED TO OUR MARKETS AND STRATEGY IF THE INTERNET IS NOT WIDELY ACCEPTED AS A MEDIUM FOR ADVERTISING AND COMMERCE, OUR BUSINESS WILL SUFFER We expect to derive most of our revenue for the foreseeable future from Internet advertising, and to a lesser extent, from electronic commerce. If the Internet is not accepted as a medium for advertising and commerce, our business will suffer. 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. Advertisers and advertising agencies must direct a portion of their budgets to the Internet and, specifically, to our network. Many of our current or potential advertising and electronic commerce partners have limited experience using the Internet for advertising purposes and historically have not devoted a significant portion of their advertising budgets to Internet-based advertising. 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. In addition, companies may choose not to advertise on the StarMedia network if they do not perceive our audience demographic to be desirable or advertising on our network to be effective. THE ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ADVERTISING DEPENDS ON THE DEVELOPMENT OF A MEASUREMENT STANDARD No standards have been widely accepted for the measurement of the effectiveness of Internet advertising. 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 would have a material adverse effect on our business, financial condition and results of operations. SOCIAL AND POLITICAL CONDITIONS IN LATIN AMERICA MAY CAUSE VOLATILITY IN OUR OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS We have and expect to continue to derive substantially all of our revenues from the Latin American markets. Social and political conditions in Latin America are volatile and may cause our operations to fluctuate. This volatility could make it difficult for us to sustain our expected growth in revenues and earnings, 7 which could have an adverse effect on our stock price. Historically, volatility has been caused by: - significant governmental influence over many aspects of local economies; - political instability; - unexpected changes in regulatory requirements; - social unrest; - slow or negative growth; - imposition of trade barriers; and - wage and price controls. We have no control over these matters. Volatility resulting from these matters may decrease Internet availability, create uncertainty regarding our operating climate and adversely affect our customers' advertising budgets, all of which may adversely impact our business. CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN LATIN AMERICA MAY ADVERSELY AFFECT OUR BUSINESS The currencies of many countries in Latin America, including Brazil and Argentina, have experienced substantial depreciation and volatility. The currency fluctuations, as well as high interest rates, inflation and high unemployment, have materially and adversely affected the economies of these countries. Poor general economic conditions in Latin American countries may cause our customers to reduce their advertising spending, which could adversely impact our business and could cause our revenue to decline unexpectedly. WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF LOCAL LATIN AMERICAN CURRENCIES DEPRECIATE RELATIVE TO THE U.S. DOLLAR Our reporting currency is the U.S. dollar. 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. Although we may enter into hedging transactions in the future, we may not be able to do so successfully. In addition, our currency exchange losses may be magnified if we become subject to exchange control regulations restricting our ability to convert local currencies into U.S. dollars. IF INTERNET USE IN LATIN AMERICA DOES NOT GROW, OUR BUSINESS WILL SUFFER 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. 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. 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. UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE MAY LIMIT THE GROWTH OF THE INTERNET IN LATIN AMERICA AND ADVERSELY AFFECT OUR BUSINESS 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. HIGH COST OF INTERNET ACCESS MAY LIMIT THE GROWTH OF THE INTERNET IN LATIN AMERICA AND IMPEDE OUR GROWTH Each country in Latin America has its own telephone rate structure which, if too 8 expensive, may cause consumers to be less likely to access and transact business over the Internet. Although rates charged by Internet service providers and local telephone companies have been reduced recently in some countries, we do not know whether this trend will continue. Unfavorable rate 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. OUR PAN-REGIONAL APPROACH TO CONTENT DELIVERY MAY NOT BE APPEALING TO LATIN AMERICAN USERS 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. If users do not find the pan-regional content on our network appealing, they will decrease in number and advertisers will find our network an unattractive medium on which to advertise. WE MAY NOT BE ABLE TO SUCCESSFULLY PROVIDE INTERNET ACCESS SERVICES IN LATIN AMERICA We intend to offer Internet access services beginning in the second half of 1999. We have contracted with IBM to provide these services. We may also acquire or develop additional Internet access services in the future. We have no experience in marketing or operating an Internet access service, and we may not be able to do so successfully. If we are not able to successfully develop, market or operate our Internet access services, our expenses could increase substantially without generating significant additional revenue, our management's time may be wasted and our business may otherwise be materially and adversely affected. WE MAY NOT BE ABLE TO DEVELOP THE STARMEDIA BRAND AND ATTRACT USERS TO OUR NETWORK Maintaining the StarMedia brand is critical to our ability to expand our user base and our 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. OUR ADVERTISING PRICING MODEL, THAT IS BASED ON THE NUMBER OF TIMES AN ADVERTISEMENT IS DELIVERED TO USERS, MAY NOT BE SUCCESSFUL Different pricing models are used to sell advertising on the Internet, and the models we adopt may prove to not be the most profitable. Advertising based on impressions, or the number of times an advertisement is delivered to users, currently 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. WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT TO NEW INTERNET ADVERTISING PRICING MODELS It is difficult to predict which pricing model, if any, will emerge as the industry standard. 9 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 or we do not adopt the most profitable form. WE MAY NOT BE ABLE TO TRACK THE DELIVERY OF ADVERTISEMENTS ON OUR NETWORK IN A WAY THAT MEETS THE NEEDS OF OUR ADVERTISERS It is important to our advertisers that we accurately measure the demographics of our user base and the delivery of advertisements on our network. Companies may choose to not advertise on our network or may pay less for advertising if they do not perceive our ability to track and measure the delivery of advertisements to be reliable. 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. THE LOSS OF ONE OF OUR TOP ADVERTISERS COULD SIGNIFICANTLY REDUCE OUR ADVERTISING REVENUE AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS In 1998, our top advertiser, Fox Latin America, accounted for approximately 23% of our total advertising revenues. In 1998, our top five advertisers accounted for approximately 62% of our total revenues. In the first quarter of 1999, our top advertiser, Netscape, accounted for approximately 19% of our total revenues. In the first quarter of 1999, our top 5 advertisers accounted for approximately 60% of our total revenues. Our business, results of operations and financial condition could be materially and adversely affected by the loss of one 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 EXPECT TO CONTINUE TO RELY HEAVILY ON ADVERTISING REVENUES AND IF WE DO NOT INCREASE OUR ADVERTISING SALES, OUR BUSINESS WILL NOT GROW AS EXPECTED We depend on our advertising sales department to maintain and increase our advertising sales. Our business, financial condition and results of operations could be materially and adversely affected if our advertising sales department is not effective. As of March 31, 1999, our advertising sales department consisted of over 75 employees. Although we expect our advertising sales department to grow, it can take a relatively long period of time before new sales personnel become productive. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE 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 cause our expenses to grow, our revenues to decline or grow more slowly than expected and could otherwise have a material adverse effect on our business, financial condition and results of operations. OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL THAT ARE IN HIGH DEMAND We depend on the services of our senior management and key technical 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, sales or technical personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our success is largely 10 dependent on our ability to hire highly qualified managerial, sales and technical personnel. These individuals are in high demand and we may not be able to attract the staff we need. The difficulties and costs in connection with our personnel growth are compounded by the fact that many of our operations are internationally based. OUR JOINT VENTURES, ACQUISITIONS AND ALLIANCES MAY STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES AND MAY BE DISRUPTIVE TO OUR BUSINESS In the past, we have acquired or developed alliances or joint ventures with complementary businesses, technologies, services or products. In particular, in the first and second quarter of 1999, we acquired two Internet companies in Brazil and have entered into an agreement to acquire an Internet company in Spain. The closing of our acquisition in Spain is subject to a number of conditions. Therefore, we may not be able to complete the acquisition as planned. Moreover, we may be unable to integrate or implement these joint ventures, acquisitions or alliances effectively. Any difficulties in this process could disrupt our ongoing business, distract our management and employees, increase our expenses and otherwise adversely affect our business. FINANCING FOR FUTURE JOINT VENTURES, ACQUISITIONS OR ALLIANCES MAY NOT BE AVAILABLE OR MAY DILUTE EXISTING STOCKHOLDERS We do not know if we will be able to identify any future joint ventures, acquisitions or alliances or that we will be able to successfully finance these transactions. A failure to identify or finance future transactions may impair our growth. In addition, 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. WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS There are many companies that provide Web sites and online destinations targeted to Latin Americans and Spanish- and Portuguese-speaking people in general. 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. In addition, 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. A loss of users to our competitors may have a material and adverse effect on our business, financial condition and results of operations. WE WILL NOT BE ABLE TO ATTRACT VISITORS OR ADVERTISERS IF WE DO NOT CONTINUALLY ENHANCE AND DEVELOP THE CONTENT AND FEATURES OF OUR NETWORK 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 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 reduce our visitor traffic and materially and adversely affect our business, financial condition and results of operations. 11 WE RELY FOR OUR CONTENT ON THIRD PARTIES WHO MAY MAKE THEIR CONTENT AVAILABLE TO OUR COMPETITORS 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. IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH CONTENT PROVIDERS, ELECTRONIC COMMERCE MERCHANTS AND TECHNOLOGY PROVIDERS, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN USERS We have focused on establishing relationships with leading content providers, electronic commerce merchants, and technology and infrastructure providers. Our business 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, we may have more difficulty attracting and maintaining visitors to our network and 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 UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION In the past, we have experienced: - system disruptions; - inaccessibility of our network; - long response times; - impaired quality; and - loss of important reporting data. Although we are in the process of improving our network, we may not be successful in implementing these measures. If we experience delays and interruptions, visitor traffic may decrease and our brand could be adversely affected. Because our revenues depend on the number of individuals who use our network, our business may suffer if our improvement efforts are unsuccessful. We maintain our 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 ELECTRONIC COMMERCE TRANSACTIONS AND CONFIDENTIALITY OF INFORMATION ON THE INTERNET MAY REDUCE THE USE OF OUR NETWORK AND IMPEDE OUR GROWTH A significant barrier to electronic commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. Unauthorized persons could attempt to penetrate our network security. If successful, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations. 12 COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY ADVERSELY AFFECT OUR BUSINESS Computer viruses may cause our systems to incur delays or other service interruptions. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. Moreover, if a computer virus affecting our system is highly publicized, our reputation could be materially damaged and our visitor traffic may decrease. YEAR 2000 PROBLEMS MAY DISRUPT OUR INTERNAL OPERATIONS 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. 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 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. RISKS RELATED TO LEGAL UNCERTAINTY WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR BUSINESS To date, governmental regulations have not materially restricted use of the Internet in our markets. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. Uncertainty and new regulations could increase our costs of doing business and prevent us from delivering our products and services over the Internet. The growth of the Internet may also be significantly slowed. This could delay growth in demand for our network and limit the growth of our revenues. In addition to new laws and regulations being adopted, existing laws may be applied to the Internet. New and existing laws may cover issues which include: - 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. WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS WHICH MAY BE EXPENSIVE, TIME CONSUMING AND DISTRACTING Because we have employees, property and business operations 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 based on foreign jurisdictions for violations of their laws. In addition, these laws may be changed or new laws may be enacted in the future. International litigation is often expensive, time consuming and distracting. Accordingly, any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. 13 UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY ADVERSELY AFFECT OUR BUSINESS We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and our reputation. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS We cannot be certain that our products do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business. WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE OVER OUR NETWORK The laws in the United States and in Latin American countries relating to the liability of companies which provide online services, like ours, for activities of their visitors are currently unsettled. Claims have been made against online service providers and networks in the past for defamation, negligence, copyright or trademark infringement, obscenity, personal injury or other theories based on the nature and content of information that was posted online by their visitors. We could be subject to similar claims and incur significant costs in their defense. In addition, we could be exposed to liability for the selection of listings that may be accessible through our network or through content and materials that our visitors may post in classifieds, message boards, chat rooms or other interactive services. It is also possible that if any information provided through our services contains errors, third parties could make claims against us for losses incurred in reliance on the information. We offer Web-based e-mail services, which expose us to potential liabilities or claims resulting from: - unsolicited e-mail; - lost or misdirected messages; - illegal or fraudulent use of e-mail; or - interruptions or delays in e-mail service. Investigating and defending these claims is expensive, even if they do not result in liability. WE MAY BE SUBJECT TO CLAIMS BASED ON PRODUCTS SOLD ON OUR NETWORK 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. These claims may require us to incur significant expenses in their defense or satisfaction. While our agreements with these parties often provide that we will be 14 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 MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE We have not committed the net proceeds of this offering to any particular purpose. Our management will therefore have significant flexibility in applying the net proceeds of this offering, including ways in which stockholders may disagree. If we do not apply the funds we receive effectively, our accumulated deficit will increase and we may lose significant business opportunities. See "Use of Proceeds". OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY Following this offering, the price at which our common stock will trade is likely to be highly volatile and may fluctuate substantially. 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 companies, particularly Internet companies. As a result, investors in our common stock may experience a decrease in the value of their common stock regardless of our operating performance or prospects. IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES 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. Many companies in our industry have been subject to this type of litigation in the past. We may also become involved in this type of litigation. 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 The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market after this offering, or the perception that these sales could occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that stockholders consider favorable or beneficial. If a change of control or change in management is delayed or prevented, the market price of our common stock could suffer. 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 approximately 62.3% of the outstanding shares 15 of our common stock, and after the offering will beneficially own approximately 54.6% of the 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. 16 FORWARD-LOOKING STATEMENTS; MARKET DATA Many statements made in this prospectus under the captions "Prospectus Summary", "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere are forward-looking statements that are not based on historical facts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under "Risk Factors". This prospectus contains market data related to our business and the Internet. This market data includes projections that are based on a number of assumptions. The assumptions include that: - no catastrophic failure of the Internet will occur; - the number of people online and the total number of hours spent online will increase significantly over the next five years; - the value of online advertising dollars spent per online user hour will increase; - the download speed of content will increase dramatically; and - Internet security and privacy concerns will be adequately addressed. If any one or more of the foregoing assumptions turns out to be incorrect, actual results may differ from the projections based on these assumptions. The Internet-related markets may not grow over the next three to four years at the rates projected by these market data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations and financial condition, and the market price of our common stock. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. 17 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 $89.6 million, assuming an initial public offering price of $14.00 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 we will receive will be $103.3 million. As of the date of this prospectus, we have not made any specific expenditure plans with respect to the proceeds of this offering. Therefore, we cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this offering. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. In addition, we intend to use our existing cash and cash equivalents, cash from operations as well as the net proceeds of this offering for working capital and to fund our operations. The principal purposes of this offering are to increase our working capital, to create a public market for our common stock, to facilitate future access to the public capital markets, and to increase our visibility in the marketplace. 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. 18 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999: - on an actual basis; - on a pro forma basis after giving effect to (1) the automatic conversion of all outstanding shares of our convertible preferred stock into common stock, (2) the sale of 3,727,272 additional shares of our common stock at $11.00 per share subsequent to March 31, 1999 and the application of the net proceeds therefrom, and (3) an increase in our authorized common stock to 200,000,000 shares and a decrease in our authorized preferred stock to 10,000,000 shares; 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 $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus.
AS OF MARCH 31, 1999 ------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED --------- ----------- ------------- (IN THOUSANDS) Capital lease obligations--current portion................................. $ 166 $ 166 $ 166 Long-term debt............................................................. 3,626 3,626 3,626 Preferred stock, 60,000,000 shares authorized (actual); 10,000,000 shares authorized (pro forma and pro forma as adjusted): 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)............................................................ 4,311 -- -- 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)............................................................ 13,246 -- -- 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)............................................................ 81,478 -- -- Stockholders' (deficit) equity: Common stock, $.001 par value; 100,000,000 shares authorized (actual); 200,000,000 shares authorized (pro forma and pro forma as adjusted); 10,427,000 shares issued and outstanding (actual); 46,150,939 shares issued and outstanding (pro forma); 53,150,939 shares issued and outstanding (pro forma as adjusted).................................. 10 46 53 Additional paid in capital................................................. 24,185 162,544 252,177 Deferred compensation...................................................... (11,854) (11,854) (11,854) Other comprehensive income................................................. (218) (218) (218) Accumulated deficit........................................................ (72,355) (72,355) (72,355) --------- ----------- ------------- Total stockholders' (deficit) equity....................................... (60,232) 78,163 167,803 --------- ----------- ------------- Total capitalization....................................................... $ 42,595 $ 81,955 $ 171,595 --------- ----------- ------------- --------- ----------- -------------
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 1999. It does not include: - 8,229,100 shares subject to options outstanding as of March 31, 1999 at a weighted average exercise price of $1.92 per share; - 8,770,900 additional shares that could be issued under our stock option plans; and - 1,500,000 additional shares available for issuance under our employee stock purchase plan. 19 DILUTION Our pro forma net tangible book value as of March 31, 1999 was approximately $75.9 million, or $1.65 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 and the sale of 3,727,272 additional shares of our common stock at $11.00 per share after deducting related commissions. 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 March 31, 1999 would have been $166.4 million, or $3.13 per share. This represents an immediate increase in pro forma net tangible book value of $1.48 per share to existing stockholders and an immediate dilution of $10.87 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............................ $ 14.00 Pro forma net tangible book value per share at March 31, 1999.............. $ 1.65 Increase in pro forma net tangible book value per share attributable to this offering 1.48 --------- Pro forma net tangible book value per share after this offering 3.13 --------- Dilution per share to new investors........................................ $ 10.87 ---------
------------------------ The following table summarizes, on a pro forma basis, as of March 31, 1999, 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 $11.00 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...................... 46,150,939 86.8% $ 137,168,000 58.3% $ 2.97 New investors.............................. 7,000,000 13.2 98,000,000 41.7 14.00 -------------- ----- ---------------- ----- Total.................................. 53,150,939 100.0% $ 235,168,000 100.0% -------------- ----- ---------------- ----- -------------- ----- ---------------- -----
This discussion and table assume no exercise of any stock options outstanding as of March 31, 1999. As of March 31, 1999, there were options outstanding to purchase a total of 8,229,100 shares of common stock with a weighted average exercise price of $1.92 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 20 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 March 31, 1999 and the consolidated statement of operations for the three months ended March 31, 1998 and 1999 have been derived from unaudited 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 unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of our consolidated financial position and the consolidated results of operations for those periods. Results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the entire year or for any future period. 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 YEAR ENDED DECEMBER THREE MONTHS DECEMBER 31, 31, ENDED MARCH 31, --------------- --------------------- --------------------- 1996 1997 1998 1998 1999 --------------- --------- ---------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................................... $ -- $ 460 $ 5,329 $ 256 $ 1,541 ------- --------- ---------- --------- ---------- Operating expenses: Product and technology development................... 36 1,229 6,816 794 3,562 Sales and marketing.................................. 12 2,108 29,274 1,816 9,657 General and administrative........................... 78 648 4,600 450 2,410 Depreciation and amortization........................ 2 38 774 79 467 Stock-based compensation expense..................... -- -- 10,421 2 1,417 ------- --------- ---------- --------- ---------- Total operating expenses........................... 128 4,023 51,885 3,141 17,513 Operating loss......................................... (128) (3,563) (46,556) (2,885) (15,972) Interest income, net................................. -- 35 670 28 421 ------- --------- ---------- --------- ---------- Net loss............................................... (128) (3,528) (45,886) (2,857) (15,551) ------- --------- ---------- --------- ---------- Preferred stock dividends and accretion................ -- (185) (4,536) (295) (2,541) Net loss available to common shareholders.............. $ (128) $ (3,713) $ (50,422) $ (3,152) $ (18,092) ------- --------- ---------- --------- ---------- ------- --------- ---------- --------- ---------- Basic and diluted net loss per share................... $ (0.01) $ (0.37) $ (4.94) $ (.31) $ (1.74) ------- --------- ---------- --------- ---------- Shares used in computing basic and diluted net loss per share................................................ 9,147 10,012 10,202 10,012 10,410 ------- --------- ---------- --------- ---------- ------- --------- ---------- --------- ---------- Pro forma basic and diluted net loss per share(1)...... $ (1.09) $ (.37) ---------- ---------- ---------- ---------- Shares used in computing pro forma basic and diluted net loss per share(1)................................ 42,199 42,406 ---------- ---------- ---------- ----------
- ------------------------ (1) Assumes conversion of all outstanding shares of redeemable convertible preferred stock into 31,996,667 shares of common stock. See note 4 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to determine the number of shares used to compute pro forma net loss per share. 21
AS OF DECEMBER 31, MARCH 31, -------------------------------- ---------- 1996 1997 1998 1999 --------- --------- ---------- ---------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................................ $ 230 $ 436 $ 53,141 $ 40,588 Working capital...................................................... 284 146 47,512 31,383 Total assets......................................................... 313 786 60,986 53,889 Capital lease obligations............................................ 18 220 166 Total current liabilities............................................ 324 7,763 12,419 Long-term debt....................................................... 2,541 Redeemable convertible preferred stock............................... 3,833 96,494 99,035 Total stockholders' (deficit) equity................................. 313 (3,400) (43,393) (60,232)
22 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. OVERVIEW StarMedia is the leading online network targeting Latin America. 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. In 1999, we expanded our operations in Latin America by acquiring two leading Brazilian Internet guides, Achei Internet Promotion Ltda. and KD Sistemas de Informacao Ltda., which primarily categorize and review Portuguese-language Web sites. The aggregate purchase price paid by us for these acquisitions was approximately $6.1 million. We are obligated to make additional payments, estimated to be $7 million, to the former stockholders of KD Sistemas if various performance targets are achieved. These acquisitions were accounted for as purchases. In May 1999, we entered into an agreement to purchase Wass Net S.L., a Spanish-language online service with extensive community applications. The aggregate purchase price for this acquisition is $17 million. The purchase price is payable in our common stock at the initial public offering price. The closing of the acquisition is contingent on the satisfaction of a number of conditions, including the completion of our initial public offering. As a result, we may not be able to successfully complete this acquisition. In addition, we recently completed the sale of 3,727,272 shares of our common stock to a number of strategic investors for $41 million. 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; - reciprocal advertising arrangements, under which we exchange advertising space on our network predominantly for advertising on television and radio stations; and - design, coordination and integration of advertising campaigns and sponsorships to be placed on our network. 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 23 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 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 reciprocal advertising arrangements with various media companies, including Fox Latin America and USA Networks. We do not receive any cash payments for these arrangements. 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 estimated fair value of the goods or services received or the estimated fair value of the advertisements given, whichever is more readily determinable. 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 reciprocal advertising arrangements 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. We have incurred significant net losses and negative cash flows from operations since our inception. At March 31, 1999, we had an accumulated deficit of $72.4 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 cumulative deferred compensation of approximately $23.7 million through March 31, 1999, which represents the difference between the exercise price of some stock options granted in 1998 and 1999, 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 over three years. Of the total deferred compensation amount, approximately $10.4 million and $1.4 million was amortized during the year ended December 31, 1998 and the three months ended March 31, 1999, respectively. In the second quarter of 1999, we expect to record additional deferred compensation of approximately $2.5 million due to options granted in this period. 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--$6.3 million; - 2000--$5.4 million; - 2001--$3.2 million; - 2002--$850,000; and - 2003--$50,000. 24 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 REVENUE Revenues increased to $1.5 million for the three months ended March 31, 1999 from $256,000 for the three months ended March 31, 1998. The increase in revenues was primarily due to an increase in the volume of advertising impressions and sponsorships. During 1999, we continued to: - expand our sales force; and - increase the number of impressions available on our network by adding channels and by increasing our marketing efforts. In the three months ended March 31, 1998, two advertisers each accounted for greater than 10% of total revenues and four advertisers during the same period accounted for 100% of total revenues. In the three months ended March 31, 1999, three advertisers, Netscape, Teleglobe and Outpost.com, each accounted for greater than 10% of total revenues. Our five largest advertisers during the same period accounted for 60% of total revenues. In the three months ended March 31, 1999, 28% of our total revenues were derived from reciprocal advertising arrangements with our media partners, which consist primarily of television network operators. We do not receive any cash payments from these arrangements. We have not engaged in any reciprocal advertising arrangements 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 related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. Product and technology expenses increased to $3.6 million, or 231% of total revenues, for the three months ended March 31, 1999, from $794,000, or 310% of total revenues, for the three months ended March 31, 1998. The increase in product and technology expenses was primarily attributable to an increase of approximately $1.5 million related to staffing levels required to support the StarMedia network and related systems and approximately $700,000 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 is 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 $9.7 million, or 627% of total revenues, for the three months ended March 31, 1999, from $1.8 million, or 709% of total revenues, for the three months ended March 31, 1998. The 25 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 of approximately $5.9 million; and - higher personnel expenses, including sales commissions, of approximately $1.8 million. 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 $2.4 million, or 156% of total revenues, for the three months ended March 31, 1999, from $450,000, or 176% of total revenues, for the three months ended March 31, 1998. The increase in general and administrative expenses was primarily due to increased salaries and related expenses associated with the hiring of additional personnel of approximately $700,000 to support the growth of our business. 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 $467,000, or 30% of revenues, for the three months ended March 31, 1999, from $79,000, or 31% of revenues, for the three months ended March 31, 1998. The dollar increases were primarily attributable to the increase in fixed assets of approximately $2.4 million during 1999 and $5.8 million during 1998. STOCK-BASED COMPENSATION EXPENSE We recorded additional deferred compensation of $4.6 million during the three months ended March 31, 1999. Of the cumulative deferred compensation amount, $1.4 million was recorded as an expense during the three months ended March 31, 1999. The unamortized balance is being amortized over the vesting period for the individual options, which is typically three years. INTEREST INCOME, NET Interest income, net includes income from our cash and investments. Interest income, net increased to $421,000 for the three months ended March 31, 1999 from $28,000 for the three months ended March 31, 1998. 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. YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MARCH 5, 1996 (INCEPTION) TO DECEMBER 31, 1996 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 an increase in the volume of advertising impressions and sponsorships. During 1998, we: 26 - 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, Netscape and Fox Latin America, 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 do not receive any cash payments from these arrangements. We have not engaged in any reciprocal advertising arrangements under which we received online advertising. Electronic commerce revenues were not material during these periods. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. 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 an increase of approximately $3.1 million in 1998 and $668,000 in 1997 related to staffing levels required to support the StarMedia network and related systems and approximately $1.5 million in 1998 and $310,000 in 1997 to enhance the content and features on the StarMedia network. We have, to date, expensed all product and technology costs as incurred. SALES AND MARKETING. 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 of approximately $22.3 million in 1998 and $1.7 million in 1997; and - higher personnel expenses, including sales commissions, of approximately $2.9 million in 1998 and $222,000 in 1997. 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. GENERAL AND ADMINISTRATIVE. 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 of approximately $1.4 million in 1998 and $200,000 in 1997 to support the growth of our business. General and administrative expenses decreased on a percentage basis because of the growth in revenues. 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 27 million was recorded as an expense in 1998. The unamortized balance is being amortized over the vesting period for the individual options, which is 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 five quarters ended March 31, 1999. 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.
THREE MONTHS ENDED -------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1998 1998 1998 1998 1999 --------- -------- ------------- ------------ --------- (IN THOUSANDS) Revenues...................... $ 256 $ 589 $ 1,308 $ 3,176 $ 1,541 Operating expenses: Product and technology development............... 794 2,384 1,552 2,086 3,562 Sales and marketing......... 1,816 4,199 7,725 15,534 9,657 General and administrative............ 450 574 857 2,719 2,410 Depreciation and amortization.............. 79 169 204 322 467 Stock-based compensation expense................... 2 3,248 666 6,505 1,417 --------- -------- ------------- ------------ --------- Total operating expenses................ 3,141 10,574 11,004 27,166 17,513 --------- -------- ------------- ------------ --------- Loss from operations.......... (2,885) (9,985) (9,696) (23,990) 15,972 --------- -------- ------------- ------------ --------- Net loss...................... $(2,857) $(9,922) $(9,624) $(23,483) $(15,551) --------- -------- ------------- ------------ ---------
The operating 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. 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 28 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. LIQUIDITY AND CAPITAL RESOURCES To date, we have primarily financed our operations through the sale of our preferred stock. As of March 31, 1999, we had approximately $40.6 million in cash and cash equivalents. Net cash used in operating activities was $12.3 million for the three months ended March 31, 1999, $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 $3.7 million for the three months ended March 31, 1999, $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 $3.6 million for the three months ended March 31, 1999, $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. In April and May 1999, we completed the sale of 3,727,272 shares of our common stock for $41 million. Our principal commitments consist of obligations outstanding under capital and operating leases. As of March 31, 1999, we have spent approximately $8.1 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. In March 1999, we entered into a $12 million credit line for the acquisition of computer equipment and furniture and fixtures. At March 31, 1999, approximately $3.6 million was outstanding under the equipment line. Amounts outstanding are payable in monthly installments of principal and interest of approximately $126,000, bear interest at approximately 13.7% per annum and are secured by certain computer equipment and furniture and fixtures of the Company. The credit line requires us to maintain of at least $10 million in cash and cash equivalents. We have entered into an agreement with IBM under which we will offer Internet access services in Argentina, Brazil, Chile, Colombia and Mexico. Under the agreement, we are obligated to pay IBM a minimum of approximately $7.6 million in 1999 and approximately $16.6 million in 2000. Our capital requirements depend on numerous factors, including: - 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 29 and technologies, and plan to expand our sales and marketing programs and conduct more aggressive brand promotions. We believe that 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. YEAR 2000 COMPLIANCE The Year 2000 issue refers to the potential for system and processing failures of date-related calculations, and is 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 have made a preliminary assessment of the Year 2000 readiness of our operating, financial and administrative systems, including the hardware and software that support our systems. As part of our assessment plan, we are evaluating our date-dependent code, internally-developed software, software developed by third parties and hardware. We plan to complete this evaluation by October 1999. All internally-developed code will be checked, and any problematic code identified, fixed and tested by November 1999. All material externally-developed software that is not Year 2000 compliant will be upgraded or replaced by November 1999. More specifically: - We are quality assurance testing our internally-developed proprietary software and systems related to the delivery of our service to our users. We plan to complete this testing by November 1999. - We have contacted our principal third-party vendors and licensors of material hardware, software, and services that are related to the delivery of our services to our users, and requested their confirmation of our Year 2000 compliance of the software, hardware and services they provide to us. All of these contacted vendors and licensors have notified us that the hardware, software and services that they have provided to us are Year 2000 compliant. - We have contacted our principal vendors of material non-information technology systems and services used by us, and requested their confirmation of the Year 2000 compliance of their systems and services. We have received notification from the majority of these vendors that the systems and services that they have provided to us are Year 2000 compliant. By the end of the third quarter of 1999, we will either have received this confirmation from the remaining vendors or have replaced the systems and services they provide with compliant systems and services. - We are formulating repair or replacement requirements and implementing corrective measures. These requirements will be completed by October 1999, and, if necessary, corrective measures and repair procedures will be implemented by the end of November 1999. - We are currently evaluating the need for, and preparing and implementing a contingency plan, if required. The results of our assessment and simulation testing will be taken into account when 30 we determine the need for and the extent of any contingency plans. We plan to finalize our contingency plans, if any, by November 1999. COSTS To date, we have spent an immaterial amount on Year 2000 compliance issues but expect to incur an additional $200,000 to $350,000 in connection with identifying, evaluating and addressing Year 2000 compliance issues. Most of our expenses have related to, and are expected to continue to relate to, the operating costs associated with time spent by employees and consultants in the evaluation process and Year 2000 compliance matters generally. Such expenses, if higher than anticipated, could have a material adverse effect on our business, results of operations, and financial condition. 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 network, or change the behavior of advertising customers or persons accessing our network. 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 network, 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 and have developed no contingency plans to address the worst-case scenario that might occur if technologies we are dependent on actually are not Year 2000 compliant. The results of our Year 2000 simulation testing and the responses received from all third-party vendors and service providers will be taken into account in determining the need for and nature and extent of any contingency plans. We intend to develop any required contingency plans by November 1999. 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. 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, 31 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. However, revenues derived from foreign currencies historically have not comprised a material portion of our revenues. As a result, we have not tried to reduce our exposure to exchange rate fluctuations by using hedging transactions. 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 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. 32 BUSINESS OVERVIEW StarMedia is the leading online network targeting Latin America. Our network consists of 17 interest-specific channels, extensive Web-based community features, sophisticated search capabilities and access to online shopping in Spanish and Portuguese. These channels cover topics of interest to Latin Americans online, including local and regional news, business and sports. We promote user affinity to the StarMedia community by providing Spanish and Portuguese language e-mail, chat rooms, instant messaging and personal homepages. 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. 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 500 million people. These countries consist of: - - Argentina - Guyana - - Belize - Guatemala - - Bolivia - Honduras - - Brazil - Mexico - - Chile - Nicaragua - - Colombia - Panama - - Costa Rica - Paraguay - - Dominican Republic - Peru - - Ecuador - Suriname - - El Salvador - Uruguay - - Falkland Islands - Venezuela - - French Guiana
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. A substantial portion of the buying power in Latin America is concentrated within 20% of the population, according to Strategy 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. According to the Forrester Research, Internet advertising in Latin America was $20 million in 1998 and is estimated to grow to $230 million in 2001. 33 While Internet use in Latin America is in a relatively early stage of development, it has grown rapidly 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 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 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 targeting Latin America. We provide original and third-party branded content through 17 interest-specific channels, extensive Web-based 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 60 million in March 1999. In addition, as of March 31, 1999, we had approximately 425,000 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 a business infrastructure to support our focus on this market. We designed our network around the needs of our users, providing them with: 34 - 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 them. We have 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 community of Internet users throughout Latin America, gives us a competitive advantage and is key to our continued leadership as the Internet destination of choice in the region. 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 attract a larger population of users and consequently, provide them with greater outlets for online interaction. 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 technical advice, 24 hours a day, seven days a week in Spanish or Portuguese. 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. 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. 35 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. 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 Latin America, IBM, Microsoft, Motorola, Nokia and Sony; - enter into relationships with leading electronic commerce companies, including barnesandnoble.com, 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. Since January 1998, we have added 10 new channels to our network and expect to add a number of other new channels in the remainder of 1999. We currently have relationships with leading content providers, including Fox Latin America, 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 and to further enhance the features and functions of our network. We are also seeking to aggressively expand our electronic commerce business. We are developing relationships with credit card, 36 fulfillment and transaction software companies, as well as merchants. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We plan to expand our user base, revenues and competitive position through strategic acquisitions and alliances. Since January 1999, we have broadened our operations by acquiring KD Sistemas de Informacao Ltda. and Achei Internet Promotion Ltda. Through these acquisitions, we acquired two leading Brazilian Internet sites, Cade? and Zeek!, which are free Web-based portals that provide topical directories of Portuguese- language Web sites. We believe that these acquisitions significantly enhance our presence in the Brazilian market and enable us to reach a broader base of users and advertisers. In May 1999, we entered into an agreement to acquire Wass Net S.L., a Spanish-language online community offering e-mail, chat, classifieds, bulletin boards, home pages and search capabilities. We believe that Wass Net's presence in the Spanish and U.S. Hispanic market complements the StarMedia network and gives us a competitive advantage in these markets. We anticipate closing this acquisition after the completion of our initial public offering. We intend to aggresively seek other opportunities to acquire or form alliances with other companies that will complement our network. OFFER INTERNET ACCESS TO USERS IN THE LOCAL LATIN AMERICAN MARKETS. Beginning in the second half of 1999, we plan to offer Internet access to users in a number of Latin American markets. We believe this service will enable us to develop an additional source of revenue and to create closer ties with Internet users in Latin America. We have entered into an agreement with IBM under which we will offer Internet access services in Argentina, Brazil, Chile, Colombia and Mexico. IBM will provide us with its existing infrastructure, billing, operations and customer service capabilities necessary to provide these services. We will market the service under the StarMedia brand and StarMedia will be the pre-programmed home page for the service. We will charge users monthly access fees with pricing based on rates that are competitive in each local market. 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 7.7 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. 37 THE STARMEDIA NETWORK The StarMedia network is currently organized around 17 channels, all of which may be accessed by our users for free. These channels are grouped into: - community services; and - 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, dialect and country. 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 group 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 currently have over 500,000 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 our network.
38
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. STARMEDIA JOGOS/JUEGOS The newest StarMedia channel, StarMedia Jogos/Juegos, offers a compilation of (ONLINE GAMES) interactive games in which our users can participate and compete for prizes. These games include fantasy sport games such as Beisbol Virtual and Ole, as well as a variety of trivia games. In addition, StarMedia Jogos/Juegos offers a host of free, downloadable games, which are updated several times per week. This channel also includes a guide to our editors' picks of the best in Spanish and Portuguese online game sites.
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, one the world's most popular syndicated radio talk shows about soccer, hosted by Andres Cantor.
39
CHANNEL DESCRIPTION - -------------------------------- -------------------------------------------------------------------------------- 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. STARMEDIA ENTRETENIMENTO/ Entertainment and music are united in the StarMedia Entretenimento/ ENTRETENIMIENTOS (ENTERTAINMENT) Entretenimientos channel. Our partnerships with USA Networks, Fox Latin America, Billboard, 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. It utilizes Inktomi's GUIDE) 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 give us various exclusive rights. For example, some of these partners have agreed that StarMedia will be the only Internet company to display their content in Spanish or Portuguese. Others have agreed that they will not enter into agreements with other companies targeting the Spanish or Portuguese Internet markets. These relationships are typically for a period of one to five years. 40 These relationships are designed to: - enhance our network; - expand our community of users; - increase traffic; and - provide us with additional revenues. Our partners allow us to display their content or technology on our network, within one or many of our channels, in exchange for a share of revenue or a licensing fee. We receive some of this content in a format that is ready to publish on our network. We also receive content that we must modify in order to publish. For example, some of our partners provide us with English-language content. In these cases, we translate the content into Spanish and Portuguese prior to publishing it on our network. Our commerce partners typically pay us a flat fee for placement on our network. This fee is based on location of links that allow for entry into their online store and the number of links present throughout our network. These content partners also share with us a percentage of transaction revenues generated when our users purchase their products or services. CONTENT AND APPLICATION PROVIDERS We have a number of relationships with leading content and application providers, including: - Agence France Press--news and sports information - Billboard--entertainment news and featured content - 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 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 - 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 41 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. RECENT STRATEGIC INVESTORS In April and May 1999, we completed the private placement of 3,727,272 shares of our common stock to a number of strategic investors for $41 million. These investors include: - Critical Path, Inc.; - eBay Inc.; - Europortal Holding S.A.; - Hearst Communications, Inc.; - National Broadcasting Company, Inc.; and - Reuters Holdings Switzerland SA. We intend to work closely with our strategic investors in order to develop new content and to add new features to our network. 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. SALES ORGANIZATION 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. ADVERTISING PROGRAMS 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. 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, which are representative of our customer base: Banco Santander Nokia Bradesco Outpost.com Ford Sony Fox Television SkyTel IBM USA Networks
These customers, in the aggregate, accounted for approximately 25.63% of total revenues in the three months ended March 31, 1999 and 34.70% of total revenues for the year ended December 31, 1998. We have derived substantially all of our revenues to date from the sale of advertisements and sponsorships. In the first quarter of 1999, we had 45 advertisers, up from four advertisers in the first quarter of 1998. In the first quarter of 1999, three advertisers, Netscape, Teleglobe and Outpost.com, each accounted for greater than 10% of total revenues. During the same period, our five largest advertisers accounted for 60% of total 42 revenues. In 1998, two advertisers, Fox Latin America and Netscape, each accounted for greater than 10% of total revenues. During the same period, our five largest advertisers accounted for 62% of total revenues. MARKETING AND BRAND AWARENESS We use multiple advertising media, like 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 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 Internet service providers in each country. All facilities are protected by multiple uninterruptible power supplies. For reliability, availability, and serviceability, we have implemented an environment in which each server can function separately. 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. These events did not have a material adverse effect on our business. LATIN AMERICAN TELECOMMUNICATION INFRASTRUCTURE Many of the largest markets in Latin America, including Argentina, Brazil, Chile, Colombia and Mexico, have privatized and begun to deregulate their telephone industries. As a result, many Latin American telephone companies in recent years have undertaken significant investments in their infrastructure. These investments have resulted in an improvement in the quality of telephone service in these countries. In addition, deregulation has had a direct impact on the cost and quality of Internet access as competition has driven down 43 both monthly access fees and per minute usage charges. A few years ago, Internet service providers, or ISPs, in Latin America charged an average of more than $80 per month for basic Internet access. In addition to access charges, local calls to connect to the ISP range in cost from $.01 - $.03 per minute in some countries, including Peru, Chile and Colombia, and up to $.12-$.15 per minute in Mexico and Argentina. These per minute charges, which are in addition to access charges, may make total cost of Internet access substantially greater in Latin America than in the United States, where users typically only pay a monthly access fee and nominal local charges, if any. Long distance charges, if required, would make the total cost of Internet access in Latin America even greater. Recently, monthly ISP access fees have decreased to an average of $20-25 per month. While per minute charges have not declined as rapidly, we believe that they will trend downward as the effects of deregulation spread. Because our target market consists of a relatively affluent part of the population across Latin America, we do not believe that Internet access costs are a significant deterrent for many of our users. However, if rates were to increase substantially or fail to decline in the future, the number of visitors to our network may decline or fail to grow. The majority of Latin Americans access the Internet via traditional analog dial-up accounts. Digital access is still relatively expensive and is not widely available throughout Latin America. We do not believe that the quality of telephone service has to date been a deterrent to the number of users that visit our network. 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, Internet service providers and sites maintained by government and educational institutions. Our current and anticipated competitors include: - Spanish- and Portuguese-language versions of U.S. services like Yahoo!, America Online and Prodigy Communications; and - services like Zaz (Brazil), Telefonos de Mexico (Mexico) and Universo Online (Brazil), that target particular Latin American countries. 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. 44 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. 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. 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. An action has been filed in Spain against our application for registration of the StarMedia trademark, which we are currently contesting. In addition, there have been 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 45 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 were aware of an unauthorized use of our PIZARRAS trademark and successfully pursued enforcement of our rights against that party. Similar actions like 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. 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 March 31, 1999, we had 270 full-time employees, of whom 76 worked in sales, 10 in editorial, 20 in marketing, 116 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. 46 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 Chief Financial Officer Adriana J. Kampfner.......................... 26 President, StarMedia de Mexico and Senior Vice President, Global Sales James D. Granlund............................ 35 Chief Technology Officer Justin K. Macedonia.......................... 40 Senior Vice President, General Counsel Douglas M. Karp.............................. 43 Director Christopher T. Linen(1)...................... 49 Director Gerardo M. Rosenkranz(2)..................... 48 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 consulting firm, 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 the Chief Financial Officer of StarMedia since May 1999, 47 and prior to that served as StarMedia's Vice President, Finance and Administration since 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. from The American University. ADRIANA J. KAMPFNER is President of StarMedia de 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. JUSTIN K. MACEDONIA joined StarMedia as its Senior Vice President, General Counsel in April 1999. Prior to joining StarMedia, Mr. Macedonia was employed by the law firm of Winthrop, Stimson, Putnam & Roberts from 1994 until 1999, most recently in the position of Counsel. Prior to joining Winthrop, Stimson, Mr. Macedonia was a corporate associate with the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel from 1988 to 1994. He is a member of the Bar of the State of New York. Mr. Macedonia received a J.D. from Harvard Law School and a B.A. from Fordham College. DOUGLAS M. KARP has been a Director of StarMedia since September 1998. Mr. Karp is currently a Managing Director and a member of the Operating Committee of E.M. Warburg, Pincus & Co., 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 48 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 1987, Mr. Rosenkranz 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. Upon expiration of the term of a class of directors, the directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. Our board of directors has resolved that Messrs. Chen and Karp will be Class I directors whose terms expire at the 2000 annual meeting of stockholders, Messrs. Linen and Wilson will be Class II directors whose terms expire at the 2001 annual meeting of stockholders, and Messrs. Espuelas and Rosenkranz and Ms. Segal will be Class III directors whose terms expire at the 2002 annual meeting of stockholders. With respect to each class, a director's term will be subject to the election and qualification of their successors, or their earlier death, resignation or removal. In addition, our directors may be removed only for cause and only by the affirmative vote of holders of not less than 66.67% of our outstanding capital stock entitled to vote generally in the election of directors. These provisions, when coupled with the provision of our amended and restated certificate of incorporation authorizing the board of directors to fill vacant directorships, 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 49 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 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 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. 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 Chief Financial Officer Adriana J. Kampfner.................................................. 138,750 -- 230,000 President, StarMedia de 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 $100,000. The options shown for each executive officer do not include options cancelled under our 1997 Plan, but do include the immediate reissuance of options equal to the cancelled options under our 1998 Plan. We have never granted any stock appreciation rights. The potential realizable value is calculated based on the term of the option at its time of grant. It is 50 calculated assuming that the fair market value of common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect our estimate of future stock price growth. The percentage of total options granted to employees in the last fiscal year is based on options to purchase an aggregate of 5,782,000 shares of common stock granted under our 1998 Plan to our employees, consultants and directors and under our 1997 Plan to Messrs. Espuelas and Chen in the year ended December 31, 1998. All options granted under our 1997 Plan, other than those granted to Messrs. Espuelas and Chen, have been cancelled and reissued under our 1998 Plan.
POTENTIAL REALIZABLE VALUE AT ASSUMED OPTION GRANTS IN LAST FISCAL YEAR ANNUAL RATES INDIVIDUAL GRANTS OF --------------------------------------------------------------------------- STOCK PRICE NUMBER OF APPRECIATION SECURITIES PERCENT OF TOTAL EXERCISE FOR OPTION UNDERLYING OPTIONS GRANTED TO PRICE PER FMV ON THE TERM OPTIONS EMPLOYEES IN SHARE DATE OF GRANT EXPIRATION ------------- NAME GRANTED(#) FISCAL YEAR (%) ($/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
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 $14.00 per share, less the exercise price per share, multiplied by the number of shares underlying the options. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR-END (#) AT FISCAL YEAR END ($) ----------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------- ------------- -------------- -------------- -------------- Fernando J. Espuelas............................. 1,750,000 -- $ 22,800,000 $ -- Jack C. Chen..................................... 1,750,000 -- 22,800,000 -- Tracy J. Leeds................................... 82,639 467,361 1,115,627 6,309,374 Steven J. Heller................................. 36,111 153,889 487,499 2,077,502 Adriana J. Kampfner.............................. 13,333 216,667 179,996 2,925,005
51 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. Each employment agreement provides for an initial annual base salary of $150,000 that will be automatically increased effective each January 1 by not less than 10% of the previous year's base salary. Each employment agreement also provides for an initial annual bonus of not less than $100,000, that will also be increased annually by not less than 10% of the previous year's bonus amount. Each executive is also entitled to participate in our stock option plans as well as all health, welfare and other benefit plans provided by us to key executive employees. Each employment agreement expires on July 31, 2000, subject to earlier termination or extension. Each employment agreement provides that, if Messrs. Espuelas or Chen is terminated by us without cause, or if they choose to terminate their employment with us for good reason, they will be entitled to receive from us: - their base salary through the termination date; - any accrued but unpaid vacation pay; - the amount of all compensation previously deferred, if any, together with any accrued interest or earnings on any deferred compensation; - a termination payment of 200% of the annual base salary and guaranteed minimum bonus amount applicable to the year in which the termination occurs; and - health and disability benefits for twenty-four months following the termination date. Under the agreements, good reason includes: - a material breach of the compensation provisions of the employment agreements; - assignment of Messrs. Espuelas or Chen to duties that are inconsistent with their roles as executive officers; - relocation of Messrs. Espuelas or Chen outside of the New York metropolitan area; - a change of the reporting relationship of Messrs. Espuelas or Chen; or - a change of control. In addition, in the event Messrs. Espuelas or Chen is terminated by us without cause, or if they choose to terminate their employment with us for good reason, all stock options previously granted to them that have not been exercised and are outstanding will remain outstanding and continue to become exercisable pursuant to their respective terms. Each employment agreement prohibits Messrs. Espuelas and Chen from competing with us for a period of two years from the date of their termination of employment, if they are terminated either by us for cause or if they choose to terminate their employment with us without good reason. If we terminate their employment without cause, the non-compete period lasts for one year from the date of termination. We have agreed to indemnify Messrs. Espuelas and Chen for all liabilities relating to their status as officers or directors, and any actions committed or omitted by them in this capacity, to the maximum extent permitted by the laws of the State of Delaware. 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. 52 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 17,000,000 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: - 4 million shares; - 4% of the outstanding shares on such date; or - 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 option grants or stock issuances are to be made, the number of shares subject to each 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: - the date determined by the board; - the date on which all shares available for issuance under the 1998 Plan have been issued as fully-vested shares; or 53 - the termination of all outstanding options in connection with an acquisition of StarMedia. 1999 EMPLOYEE STOCK PURCHASE PLAN Our 1999 Employee Stock Purchase Plan was adopted by the Board of Directors in May 1999. A total of 1,500,000 shares of common stock has been reserved for issuance under the purchase plan, plus annual increases, on July 1 of each year beginning in 2000, equal to the lesser of: - 500,000 shares; - 1% of the outstanding shares on such date; or - a lesser amount determined by the Board. The purchase plan is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. It contains successive, overlapping 24-month offering periods, each consisting of four six-month purchase periods. The offering periods generally start on the first trading day on or after May 15 and November 15 of each year, except for the first offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before May 14, 2001. Our employees are eligible to participate in the stock plan if they work with StarMedia for at least 20 hours per week and more than five months in any calendar year. However, any employee who: - immediately after grant owns stock representing 5% or more of the total combined voting power or value of all classes of our capital stock, or - whose rights to purchase stock under all of our employee stock purchase plans exceed $25,000 worth of stock for any calendar year may not be granted any rights to purchase stock under the purchase plan. The purchase plan permits participants to purchase common stock through payroll deductions of not less than 2% and up to 10% of their "cash earnings". Cash earnings is defined as the participant's base salary plus all overtime payments, bonuses, commissions, current profit sharing distributions and other incentive- type payments. Cash earnings are calculated before the deduction of any income or employment tax withholdings or any pre-tax contributions made by the participant to a 401(k) plan or cafeteria benefit program. The maximum number of shares a participant may purchase during a single purchase period is 2,500 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the purchase plan is 85% of the lower of the fair market value of the common stock at the beginning or end of the offering period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of a participant's employment. Rights granted under the purchase plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the purchase plan. The purchase plan provides that, in the event that we merge with or into another corporation or sell substantially all of our assets, each outstanding right to purchase stock will be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding rights to purchase stock, the offering period then in progress will be shortened and a new exercise date will be set. The purchase plan will terminate in 2009. The Board has the authority to amend or terminate the purchase plan, except that, subject to certain exceptions, no such action may adversely affect any outstanding rights to purchase stock under the purchase plan. 54 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. These options were granted to Messrs. Rosenkranz and Linen in connection with services provided to us. 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 our chief financial officer. 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. 55 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. In May 1999, we granted Steve Heller, our chief financial officer, options to purchase 140,000 shares of common stock at the initial public offering price. 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. 56 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock, as of May 7, 1999 and as adjusted to reflect the sale of common stock offered by us in this offering for: - each person known by us to beneficially own more than 5% of our common stock; - each executive officer named in the Summary Compensation Table; - each of our directors and - all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. 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 May 7, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 46,346,328 shares of common stock outstanding as of May 7, 1999, assuming the conversion of the redeemable convertible preferred stock, and 53,346,328 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 13.0% 11.3% Jack C. Chen(2).................................................. 6,290,000 13.1 11.4 Tracy J. Leeds(3)................................................ 357,391 * * Steven J. Heller(4).............................................. 52,778 * * Adriana J. Kampfner(5)........................................... 62,777 * * Douglas M. Karp(6)............................................... 4,760,417 10.3 8.9 Christopher T. Linen(7).......................................... 300,000 * * Gerardo M. Rosenkranz(8)......................................... 588,055 1.3 1.1 Susan L. Segal(9)................................................ 11,378,333 24.6 21.3 Frederick R. Wilson(10).......................................... 1,155,000 2.5 2.2 Chase Venture Capital Associates, L.P.(11)....................... 11,378,333 24.6 21.3 Warburg, Pincus Equity Partners, L.P.(12)........................ 2,380,209 5.1 4.5 Warburg, Pincus Ventures International, L.P.(12)................. 2,380,208 5.1 4.5 All directors and executive officers as a group (12 persons)..... 31,194,751 62.3 54.6
- ------------------------ * Indicates less than one percent of the common stock. (1) Includes (a) 1,750,000 shares issuable upon the exercise of currently exercisable stock options and (b) 1,000,000 shares held by a trust, of which Ms. Espuelas and Mr. Chen are trustees. (2) Includes (a) 1,750,000 shares issuable upon the exercise of currently exercisable stock options, (b) 2,150,000 shares owned by Mr. Chen's spouse and (c) an aggregate of 2,246,600 shares held by three trusts, of which Mr. Chen is trustee. 57 (3) Includes (a) 31,250 shares issuable upon the exercise of currently exercisable stock options and stock options which vest within 60 days and (b) an aggregate of 250,000 shares held by a trust, of which Ms. Leeds is trustee. (4) Consists of 52,778 shares issuable upon the exercise of currently exercisable stock options and stock options which vest within 60 days. (5) Consists of 62,777 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 (a) 520,833 shares owned by Mr. Rosenkranz, (b) 43,055 shares owned by a trust, of which Mr. Rosenkranz is managing trustee, and (c) 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 Associates, L.P. is 380 Madison Avenue, 12(th) Floor, New York, NY 10017. Chase has expressed an interest to purchase additional shares of common stock in this offering at the initial public offering price. (12) THE WARBURG, PINCUS STOCKHOLDERS. The Warburg, Pincus stockholders are comprised of Warburg, Pincus Equity Partners, L.P., including three related limited partnerships, and Warburg Pincus Ventures International, L.P. Warburg, Pincus & Co. is the sole general partner of each of these entities and has a 20% interest in each of their profits. The Warburg Pincus stockholders are each managed by E.M. Warburg Pincus & Co., LLC. Lionel I. Pincus is the managing partner of Warburg, Pincus & Co. and the managing member of E.M. Warburg, Pincus & Co., LLC, and may be deemed to control both entities. MR. KARP. Mr. Karp, a director of StarMedia, is a managing director and member of E.M. Warburg, Pincus & Co., LLC and a general partner of Warburg, Pincus & Co. Mr. Karp may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange of 1934, as amended) in an indeterminate portion of the shares beneficially owned by the Warburg, Pincus stockholders. ADDRESS. The address of the Warburg, Pincus entities is 466 Lexington Avenue, New York, NY 10017. 58 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 May 7, 1999, 14,349,661 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 May 7, 1999, StarMedia had 97 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 our 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 that 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 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 59 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 require us to register the common stock issuable upon conversion of their preferred stock when we register stock for our own account or the account of other stockholders. This type of registration right is known as a "piggyback" registration right. 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 any demand, S-3 or piggyback 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 that 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 those 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 the terms of our amended and restated registration rights agreement. In connection with our private placement of an aggregate of 3,727,272 shares of common stock in May 1999, we granted the investors registration rights. As a result, each of the investors may require us to register the shares of common stock they purchased. If at any time between the first and third anniversary of the private placement we propose to register any of our common stock, we have agreed, upon their written request, to include the investors' shares of common stock in the registration. The number of shares of common stock which we will be required to register for the investors may be reduced in an underwritten offering by the managing underwriter. We are generally required to bear all of the expenses of registering the investors' shares of common stock, other than underwriting discounts and commissions. Registration of any of the shares of common stock held by the investors would result in those shares becoming freely tradable without restriction under the Securities Act immediately after effectiveness of the registration. We have agreed to indemnify the investors in connection with the registration of their shares of common stock under the terms of the registration rights agreements. ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, which 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. Upon expiration of the term of a class of directors, the directors in that class will be elected for three-year terms at the annual 60 meeting of stockholders in the year in which their term expires. Our board of directors has resolved that Messrs. Chen and Karp will be Class I directors whose terms expire at the 2000 annual meeting of stockholders, Messrs. Linen and Wilson will be Class II directors whose terms expire at the 2001 annual meeting of stockholders, and Messrs. Espuelas and Rosenkranz and Ms. Segal will be Class III directors whose terms expire at the 2002 annual meeting of stockholders. With respect to each class, a director's term will be subject to the election and qualification of their successors, or their earlier death, resignation or removal. In addition, our board of directors may be removed only for cause and only by the affirmative vote of holders of not less than 66.67% of our outstanding capital stock entitled to vote generally in the election of directors. These provisions, when coupled with the provision of our amended and restated certificate of incorporation authorizing the board of directors to fill vacant directorships, 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. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS Our amended and restated certificate of incorporation eliminates the ability of stockholders to act by written consent. Our amended and restated bylaws further provide that special meetings of our stockholders may be called only by the chairman of the board of directors or the president at the request of two- thirds 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 received at our principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. In the event that the annual meeting is called for a date that is not within 30 days before or 70 days after the anniversary date, in order to be timely, notice from the stockholder must be received: - not earlier than 120 days prior to the annual meeting of stockholders, and - not later than 90 days prior to the annual meeting of stockholders or the tenth day following the date on which notice of the annual meeting was made public. 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 earlier than 120 days prior to the special meeting, and - not later than 90 days prior to the special meeting or the close of business on the tenth day following the day on which public disclosure of the date of the special meeting was made. 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. 61 AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS The Delaware General Corporation 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 various business combination transactions and the amendment of various provisions of our amended and restated certificate of incorporation and amended and restated bylaws, including those provisions relating to the classified board of directors and the ability of stockholders to call special meetings. RIGHTS AGREEMENT Under Delaware law, every corporation may create and issue rights entitling the holders of such rights to purchase from the corporation shares of its capital stock of any class or classes, subject to any provisions in its certificate of incorporation. The price and terms of such shares must be stated in the certificate of incorporation or in a resolution adopted by the board of directors for the creation or issuance of such rights. We have entered into a stockholder rights agreement. As with most stockholder rights agreements, the terms of our rights agreement are complex and not easily summarized, particularly as they relate to the acquisition of our common stock and to exercisability. This summary may not contain all of the information that is important to you. Our rights agreement provides that each share of our prospective common stock outstanding will have one right to purchase one ten-thousandth of a preferred share attached to it. The purchase price per one ten-thousandth of a preferred share under the stockholder rights agreement is four times the average closing price of our common stock for the first five days of trading after the consummation of this offering. Initially, the rights under our rights agreement are attached to outstanding certificates representing our common stock and no separate certificates representing the rights will be distributed. The rights will separate from our common stock and be represented by separate certificates on the day someone acquires 15% of our common stock, or approximately 10 days after someone commences a tender offer for 15% of our outstanding common stock. After the rights separate from our common stock, certificates representing the rights will be mailed to record holders of the common stock. Once distributed, the rights certificates alone will represent the rights. All shares of our common stock issued prior to the date the rights separate from the common stock will be issued with the rights attached. The rights are not exercisable until the date the rights separate from the common stock. The rights will expire on the tenth anniversary of the date of the completion of this offering unless earlier redeemed or exchanged by us. If an acquiror obtains or has the rights to obtain 15% or more of our common stock, then each right will entitle the holder to purchase a number of one ten-thousandths of a preferred share having a market value of twice the purchase price of each right. Each right will entitle the holder to purchase a number of shares of common stock of the acquiror having a then current market value of twice the purchase price if an acquiror obtains 15% or more of our common stock and any of the following occurs: - we merge into another entity; - an acquiring entity merges into us; or - we sell more than 50% of our assets or earning power. Under our rights agreement, any rights that are or were owned by an acquiror of more than 15% of our outstanding common stock will be null and void. Our rights agreement contains exchange provisions which provide that after an acquiror obtains 15% or more, but less than 50% of our respective outstanding common stock, our 62 board of directors may, at its option, exchange all or part of the then outstanding and exercisable rights for common shares. In such an event, the exchange ratio is one common share per right, adjusted to reflect any stock split, stock dividend or similar transaction. Our board of directors may, at its option, redeem all of the outstanding rights under our rights agreement prior to the earlier of (1) the time that an acquiror obtains 15% or more of our outstanding common stock or (2) the final expiration date of the rights agreement. The redemption price under our rights agreement is $0.001 per right, subject to adjustment. The right to exercise the rights will terminate upon the action of our board ordering the redemption of the rights and the only right of the holders of the rights will be to receive the redemption price. Holders of rights will have no rights as our stockholders including the right to vote or receive dividends, simply by virtue of holding the rights. Our rights agreement provides that the provisions of the rights agreement may be amended by the board of directors prior to the day someone acquires 15% of our outstanding common stock or 10 days after someone commences a tender offer for 15% of our outstanding common stock without the approval of the holders of the rights. However, after that date, the rights agreement may not be amended in any manner which would adversely effect the interests of the holders of the rights, excluding the interests of any acquiror. In addition, our rights agreement provides that no amendment may be made to adjust the time period governing redemption at a time when the rights are not redeemable. Our rights agreement contains rights that have anti-takeover effects. The rights may cause substantial dilution to a person or group that attempts to acquire us without conditioning the offer on a substantial number of rights being acquired. Accordingly, the existence of the rights may deter acquirors from making takeover proposals or tender offers. However, the rights are not intended to prevent a takeover, but rather are designed to enhance the ability of our board to negotiate with an acquiror on behalf of all the stockholders. In addition, the rights should not interfere with a proxy contest. 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 Our common stock has been approved for quotation on the Nasdaq National Market under the trading symbol "STRM". 63 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 the 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 53,346,328 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 the shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 46,346,328 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 substantially all 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 some 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 42,619,056 will be available for sale in the public market, subject in the case of shares held by affiliates to the volume restrictions contained in those rules, 180 days after the date of this prospectus. In addition, the holders of 3,727,272 shares of our common stock have agreed not to transfer or dispose of any of their shares of common stock for a period of one year after the date on which they purchased the shares in April and May 1999. 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 533,463 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 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 64 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 those 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 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 some of the restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS Upon completion of this offering, the holders of 42,017,272 shares of our common stock, or their transferees will be entitled to request that we register their shares under the Securities Act. STOCK PLANS Immediately after this offering, we intend to file a registration statement under the Securities Act covering 18,875,140 shares of common stock reserved for issuance under our 1997, 1998 and 1999 Plans. This registration statement is expected to be filed as soon as practicable after the effective date of this offering. At March 31, 1999, options to purchase 8,229,100 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. WHERE YOU CAN FIND MORE 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 65 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. 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 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. 66 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS STARMEDIA NETWORK, INC. Report of Independent Auditors.................................................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (Unaudited)................................................................... 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 and the three months ended March 31, 1998 and 1999 (Unaudited)................ 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 and the three months ended March 31, 1998 and 1999 (Unaudited)................................................................... 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 and the three months ended March 31, 1998 and 1999 (Unaudited)................ F-6 Notes to Consolidated Financial Statements...................................... F-7 - F-19
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 12, as to which the date is March 14, 1999 F-2 STARMEDIA NETWORK, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 PRO FORMA ------------------------- MARCH 31, MARCH 31, 1997 1998 1999 1999 ----------- ------------ ------------ ------------- (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents.............................. $ 436,000 $ 53,141,000 $ 40,588,000 $ 40,588,000 Accounts receivable net of allowance for bad debts of $0, $60,000 and $141,000 as of December 31, 1997 and 1998 and March 31, 1999, respectively................ 27,000 460,000 973,000 973,000 Other current assets................................... 7,000 1,674,000 2,241,000 2,241,000 ----------- ------------ ------------ ------------- Total current assets..................................... 470,000 55,275,000 43,802,000 43,802,000 Fixed assets, net........................................ 263,000 5,403,000 7,308,000 7,308,000 Intangible assets, net of accumulated amortization of $1,000, $93,000 and $124,000 as of December 31, 1997 and 1998 and March 31, 1999, respectively.............. 30,000 179,000 492,000 492,000 Goodwill, net............................................ 920,000 920,000 Other assets............................................. 23,000 129,000 1,367,000 1,367,000 ----------- ------------ ------------ ------------- $ 786,000 $ 60,986,000 $ 53,889,000 $ 53,889,000 ----------- ------------ ------------ ------------- ----------- ------------ ------------ ------------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable....................................... $ $ 286,000 $ 3,732,000 $ 3,732,000 Accrued expenses....................................... 227,000 6,442,000 6,845,000 6,845,000 Due to principal stockholders.......................... 67,000 Loan payable, current portion.......................... 1,085,000 1,085,000 Capital lease obligations, current portion............. 10,000 220,000 166,000 166,000 Deferred revenues...................................... 20,000 815,000 591,000 591,000 ----------- ------------ ------------ ------------- Total current liabilities................................ 324,000 7,763,000 12,419,000 12,419,000 Capital lease obligations................................ 8,000 Loan payable, long term.................................. 2,541,000 2,541,000 Deferred rent............................................ 21,000 122,000 126,000 126,000 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 and March 31, 1999, respectively, stated at liquidation value, net of related expenses........... 3,833,000 4,218,000 4,311,000 Series B Redeemable Convertible Preferred Stock, $.001 par value, 8,000,000 shares authorized, 8,000,000 shares issued and outstanding at December 31, 1998 and March 31, 1999, respectively, stated at liquidation value, net of related expenses........... 12,944,000 13,246,000 Series C Redeemable Convertible Preferred Stock, $.001 par value, 16,666,667 shares authorized, 16,666,667 shares issued and outstanding at December 31, 1998 and March 31, 1999, respectively, stated at liquidation value, net of related expenses........... 79,332,000 81,478,000 Stockholders' deficit: Common stock, $.001 par value, 100,000,000 shares authorized, 10,012,000 shares, 10,392,000 shares and 10,427,000 shares issued and outstanding at December 31, 1997 and 1998 and March 31, 1999, respectively, and 42,423,667 shares outstanding on a pro forma basis................................................ 10,000 10,000 10,000 42,000 Additional paid-in capital............................. 431,000 19,563,000 24,185,000 123,188,000 Deferred compensation.................................. (8,666,000) (11,854,000) (11,854,000) Other comprehensive loss............................... (37,000) (218,000) (218,000) Accumulated deficit.................................... (3,841,000) (54,263,000) (72,355,000) (72,355,000) ----------- ------------ ------------ ------------- Total stockholders' (deficit)............................ (3,400,000) (43,393,000) (60,232,000) 38,803,000 ----------- ------------ ------------ ------------- Total liabilities and stockholders' deficit.............. $ 786,000 $ 60,986,000 $ 53,889,000 $ 53,889,000 ----------- ------------ ------------ ------------- ----------- ------------ ------------ -------------
SEE ACCOMPANYING NOTES. F-3 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 5,1996 (DATE OF THREE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31, DECEMBER ----------------------------- ----------------------------- 31, 1996 1997 1998 1998 1999 -------------- ------------- -------------- ------------- -------------- (UNAUDITED) Revenues................................. $ $ 460,000 $ 5,329,000 $ 256,000 $ 1,541,000 Operating expenses: Product and technology development..... 36,000 1,229,000 6,816,000 794,000 3,562,000 Sales and marketing.................... 12,000 2,108,000 29,274,000 1,816,000 9,657,000 General and administrative............. 78,000 648,000 4,600,000 450,000 2,410,000 Depreciation and amortization.......... 2,000 38,000 774,000 79,000 467,000 Stock-based compensation expense....... 10,421,000 2,000 1,417,000 -------------- ------------- -------------- ------------- -------------- Total operating expenses................. 128,000 4,023,000 51,885,000 3,141,000 17,513,000 -------------- ------------- -------------- ------------- -------------- Loss from operations..................... (128,000) (3,563,000) (46,556,000) (2,885,000) (15,972,000) Other income (expense): Interest income........................ 35,000 715,000 56,000 459,000 Interest expense....................... (45,000) (28,000) (38,000) -------------- ------------- -------------- ------------- -------------- Net loss................................. (128,000) (3,528,000) (45,886,000) (2,857,000) (15,551,000) Preferred stock dividends and accretion.............................. -- (185,000) (4,536,000) (295,000) (2,541,000) -------------- ------------- -------------- ------------- -------------- Net loss available to common shareholders........................... $ (128,000) $ (3,713,000) $ (50,422,000) $ (3,152,000) $ (18,092,000) -------------- ------------- -------------- ------------- -------------- -------------- ------------- -------------- ------------- -------------- Historical basic and diluted net loss per common share........................... $ (0.01) $ (0.37) $ (4.94) $ (0.31) $ (1.74) -------------- ------------- -------------- ------------- -------------- -------------- ------------- -------------- ------------- -------------- Historical number of shares used in computing basic and diluted net loss per share.............................. 9,147,223 10,012,000 10,202,000 10,012,000 10,409,500 -------------- ------------- -------------- ------------- -------------- -------------- ------------- -------------- ------------- -------------- Pro forma basic and diluted net loss per share.................................. $ (1.09) $ (0.37) -------------- -------------- -------------- -------------- Number of shares used in computing pro forma basic and diluted net loss per share.................................. 42,198,667 42,406,167 -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES. F-4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996, AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
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) Deferred compensation related to stock options, net of cancellations........ 4,605,000 (4,605,000) Amortization of deferred compensation......... 1,417,000 1,417,000 Exercise of common stock options........ 35,000 17,000 17,000 Preferred stock dividends and accretion............ (2,541,000) (2,541,000) Net loss for the period............... (15,551,000) (15,551,000) Translation adjustment........... (181,000) (181,000) Comprehensive loss..... (15,732,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ Balance at March 31, 1999 (unaudited)..... 10,427,000 $ 10,000 $24,185,000 $(72,355,000) $(11,854,000) $(218,000) $(60,232,000) ---------- ----------- ----------- ------------- -------------- --------------- ------------ ---------- ----------- ----------- ------------- -------------- --------------- ------------
SEE ACCOMPANYING NOTES. F-5 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 5, 1996 (DATE OF THREE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31, DECEMBER --------------------------- ---------------------------- 31, 1996 1997 1998 1998 1999 -------------- ------------ ------------- ------------- ------------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................................... $ (128,000) $ (3,528,000) $ (45,886,000) $ (2,857,000) $ (15,551,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........... 1,000 38,000 774,000 79,000 467,000 Provision for bad debts................. 60,000 81,000 Amortization of deferred compensation... 10,421,000 2,000 1,417,000 Deferred rent........................... 21,000 101,000 20,000 4,000 Changes in operating assets and liabilities: Accounts receivable................... (27,000) (493,000) (12,000) (542,000) Other assets.......................... (30,000) (1,773,000) (708,000) (1,805,000) Accounts payable and accrued expenses............................ 227,000 5,356,000 907,000 3,828,000 Deferred revenues..................... 20,000 795,000 (224,000) -------------- ------------ ------------- ------------- ------------- Net cash used in operating activities....... (127,000) (3,279,000) (30,645,000) (2,569,000) (12,325,000) INVESTING ACTIVITIES Purchase of fixed assets.................... (30,000) (249,000) (4,395,000) (253,000) (2,420,000) Intangible assets........................... (31,000) (241,000) (98,000) (344,000) Cash paid for acquisition................... (921,000) -------------- ------------ ------------- ------------- ------------- Net cash used in investing activities....... (30,000) (280,000) (4,636,000) (351,000) (3,685,000) FINANCING ACTIVITIES Issuance of common stock.................... 441,000 45,000 17,000 Issuance of redeemable convertible preferred stock, net of related expenses............ 3,647,000 88,125,000 11,936,000 Issuance of convertible subordinated notes.. 6,000,000 4,000,000 Proceeds from long-term debt................ 3,752,000 Repayment of long-term debt................. (126,000) Repayment of convertible subordinated notes..................................... (6,000,000) (4,000,000) Loans (to) from stockholders................ (54,000) 67,000 Repayments (to) from stockholders........... 54,000 (67,000) (67,000) Payments under capital leases............... (3,000) (112,000) (1,000) (54,000) -------------- ------------ ------------- ------------- ------------- Net cash provided by financing activities... 387,000 3,765,000 87,991,000 11,868,000 3,589,000 Effect of exchange rate changes on cash and cash equivalents.......................... (5,000) (132,000) -------------- ------------ ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents............................... 230,000 206,000 52,705,000 8,948,000 (12,553,000) Cash and cash equivalents, beginning of period.................................... 230,000 436,000 436,000 53,141,000 -------------- ------------ ------------- ------------- ------------- Cash and cash equivalents, end of period.... $ 230,000 $ 436,000 $ 53,141,000 9,384,000 40,588,000 -------------- ------------ ------------- ------------- ------------- -------------- ------------ ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid............................... $ $ $ 45,000 $ 28,000 $ -------------- ------------ ------------- ------------- ------------- -------------- ------------ ------------- ------------- ------------- 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, THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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 March 31, 1999. INTERIM FINANCIAL STATEMENTS The financial statements as of March 31, 1999, and for the three months ended March 31, 1998 and 1999 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 1999 and the results of operations and cash flows for the three months ended March 31, 1998 and 1999 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or eliminated. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31, 1999. 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 F-7 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) 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, which range from one month to two years, are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of minimum number of "impressions," 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 a percentage of revenues from electronic commerce transactions conducted by advertisers who are selling goods or services to users of the Network. These revenues are recognized by the Company upon notification from the advertiser of its share of revenues earned by the Company and, to date, have not been significant. 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 estimated fair market value of the goods or services received or the estimated fair market value of the advertisements given, whichever is more readily determinable. 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 and the three months ended March 31, 1998 and 1999, revenues derived from barter transactions, were approximately $2.4 million, $224,000 and $424,000, respectively. 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. F-8 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Goodwill consists of the excess of the purchase price paid over the tangible net assets of acquired companies. Goodwill is amortized using the straight-line method over three years. Amortization expense and accumulated amortization as of March 31, 1999 and for the three months ended March 31, 1999 was approximately $1,000. The Company assesses the recoverability of its goodwill and intangible assets by determining whether the amortization of the unamortized balance over its remaining life can be recovered through forecasted cash flows. If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce the net amounts to an amount consistent with forecasted future cash flows discounted at the Company's incremental borrowing rate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. INCOME TAXES The Company uses the liability method of accounting for income taxes, whereby deferred income taxes are provided on items recognized for financial reporting purposes over different periods than for income tax purposes. Valuation allowances are provided when the expected realization of tax assets does not meet a more likely than not criteria. ADVERTISING COSTS Advertising costs are expensed as incurred. For the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999, advertising expense amounted to approximately $0, $1,610,000, $21,246,000, $1,068,000 and $5,380,000, respectively. For the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999, advertising expense includes F-9 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) approximately $460,000, $2.4 million, $224,000 and $424,000 of charges related to barter advertising transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. 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-10 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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, accounts payable and loan payable approximate their fair values. FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile 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. Commencing January 1, 1999, the functional currency of the Company's Mexican subsidiary changed from the U.S. dollar to the local currency as Mexico was no longer considered a hyper-inflationary economy. 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 and March 31, 1999, 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-11 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 2. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31 -------------------------- MARCH 31, 1997 1998 1999 ----------- ------------- ------------- Computer equipment................................. $ 172,000 $ 4,738,000 6,782,000 Furniture and fixtures............................. 7,000 446,000 759,000 Leasehold improvements............................. 121,000 938,000 921,000 ----------- ------------- ------------- 300,000 6,122,000 8,462,000 Less accumulated depreciation and amortization..... (37,000) (719,000) (1,154,000) ----------- ------------- ------------- $ 263,000 $ 5,403,000 $ 7,308,000 ----------- ------------- ------------- ----------- ------------- -------------
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 March 31, 1999. At December 31, 1997 and 1998, and March 31, 1999, total cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $183,000, $4,233,000 and $6,625,000, 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-12 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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 THREE MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 MARCH 31, DECEMBER ----------------------------- -------------------------------- 31, 1996 1997 1998 1998 1999 -------------- ------------- -------------- --------------- --------------- Numerator: Net loss..................... $ (128,000) $ (3,528,000) $ (45,886,000) $ (2,857,000) $ (15,551,000) Preferred stock dividends and accretion.................. -- (185,000) (4,536,000) (295,000) (2,541,000) -------------- ------------- -------------- --------------- --------------- Numerator for basic and diluted loss per share-- net loss available for common stockholders................. $ (128,000) $ (3,713,000) $ (50,422,000) $ (3,152,000) $ (18,092,000) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Denominator: Denominator for basic and dilutive loss per share--weighted average shares..................... 9,147,223 10,012,000 10,202,000 10,012,000 10,409,500 -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Basic and diluted net loss per share........................ $ (0.01) $ (0.37) $ (4.94) $ (0.31) $ (1.74) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- ---------------
Diluted net loss per share for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the three month period ended March 31, 1998 and 1999, does not include the effect of options to purchase 0, 1,804,933, 6,131,933, 1,889,933 and 8,229,100 shares of common stock, respectively, or 0, 7,330,000, 31,996,667, 15,330,000 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-13 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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:
THREE MONTH YEAR ENDED ENDED DECEMBER MARCH 31, 1998 31, 1999 --------------- --------------- Numerator: Net loss available to common stockholders................ $ (50,422,000) $ (18,092,000) Preferred Stock dividends and accretion.................. 4,536,000 2,541,000 --------------- --------------- Numerator for pro forma loss available to common stockholders............................................. $ (45,886,000) $ (15,551,000) --------------- --------------- --------------- --------------- Denominator: Weighted average number of common shares................. 10,202,000 10,409,500 Assumed conversion of Preferred Stock to common shares (if converted method).................................. 31,996,667 31,996,667 --------------- --------------- Denominator for pro forma basic and diluted loss per share.................................................... 42,198,667 42,406,167 --------------- --------------- --------------- --------------- Pro forma basic and diluted net loss per share............. $ (1.09) $ (0.37) --------------- --------------- --------------- ---------------
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. In connection with the granting of stock options in 1999, the Company recorded additional deferred compensation of approximately $4,605,000. Deferred compensation is being amortized for financial reporting purposes over the vesting period of the options. The amount recognized as expense during the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999 amounted to approximately $10,421,000, $2,000 and $1,417,000, respectively. F-14 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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 .81 Granted........................................................ 2,232,500 4.88 Canceled....................................................... (100,333) .66 Exercised...................................................... (35,000) .50 ------------ Outstanding, March 31,1999 8,229,100 $ 1.92 ------------ ------------
The following table summarizes information concerning outstanding options at December 31, 1998:
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 ------------ ------------
The following table summarizes information concerning outstanding options at March 31, 1999:
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......................................... 4,295,100 6.75 $ 0.50 3,127,157 $ 0.50 $1.60......................................... 2,120,000 7.00 $ 1.60 1,507,500 $ 1.60 $5.64......................................... 1,814,000 9.9 $ 5.64 ------------ ------------ 8,229,100 4,634,657 ------------ ------------
Pro forma information regarding net loss is required by SFAS No. 123 which also requires that the information be determined as if the Company has accounted for its stock option under the fair F-15 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 5. STOCK OPTIONS (CONTINUED) value method of the statement. The fair value for these options was estimated using the minimum value method with the following assumptions:
ASSUMPTIONS 1997 1998 - ------------------------------------------------------------------------------ --------------- ---------------- 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 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) -------------- --------------- $ -- $ -- -------------- --------------- -------------- ---------------
F-16 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 6. INCOME TAXES (CONTINUED) 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............................................................. --% --% --% ----- --------- --------- ----- --------- ---------
7. LONG-TERM DEBT The Company has entered into a $12 million credit line for the acquisition of computer equipment and furniture and fixtures. At March 31, 1999, approximately $3.6 million was outstanding under the credit line. Amounts outstanding are payable in monthly installments of principal and interest of approximately $126,000, bear interest at approximately 13.7% per annum and are secured by some of our computer equipment and furniture and fixtures. The credit line requires the Company to maintain at least $10,000,000 in cash and cash equivalents. 8. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ---------------------------- MARCH 31, 1997 1998 1999 ------------- ------------- ------------- Product and technology development........................ $ 14,000 $ 490,000 $ 618,000 Sales and marketing....................................... 64,000 3,639,000 4,215,000 General and administrative................................ 132,000 1,108,000 728,000 Accrued fixed asset and intangible purchases.............. 17,000 1,059,000 1,080,000 Other..................................................... -- 146,000 204,000 ------------- ------------- ------------- $ 227,000 $ 6,442,000 $ 6,845,000 ------------- ------------- ------------- ------------- ------------- -------------
The nature of the accrued expenses is as follows: (i) product and technology development primarily represents content acquisition costs and telecommunication and hosting costs related to the Company's operations; (ii) sales and marketing primarily represent advertising expenses related to the Company's print, television and radio advertisements; (iii) general and administrative primarily represent professional fees and employee bonuses; (iv) accrued fixed asset and intangible purchases primarily represent the purchase of fixed assets which have been placed in service and certain costs incurred in connection with the Company's trademarks and trade names. F-17 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 9. 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 as of December 31, 1998 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, $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. 10. 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. 11. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION For the three months ended March 31, 1999, three customers accounted for approximately 19%, 12% and 12% of the Company's total revenue, respectively. For the three months ended March 31, 1998, two customers accounted for approximately 45% and 42% of the Company's total revenue, respectively. 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. F-18 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 12. ACQUISITION On March 10, 1999, the Company acquired all of the outstanding stock of Achei Internet Promotion Ltda. in exchange for cash of $810,000. The Company accounted for the acquisition under the purchase method of accounting and the results of the operations have been included in the financial statements of the Company from the date of acquisition. The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. On a pro forma basis, if the acquisition had taken place at the beginning of 1998, the effect on the Company's net sales, net loss, and loss per share would have been immaterial. 13. SUBSEQUENT EVENTS (UNAUDITED) On April 13, 1999, the Company acquired all of the outstanding stock of KD Sistemas de Informacao Ltda. ("KD Sistemas") in exchange for a cash payment of $5,320,000 at closing, $570,000 due in March 2000 and additional estimated cash payments of up to $6,400,000, in the aggregate, due in March 2000, 2001 and 2002 upon the achievement of certain performance targets (the "Earn-out"). As a portion of the Earn-out is contingent upon the continued employment of certain key individuals, the Company will record a portion of such payments as compensation expense, estimated to be $3,000,000, when and if such performance targets are met. Under Rule 3:05 of Regulation S-X the Company is required to file with the SEC audited financial statements of KD Sistemas as soon as possible, but in no event more than 75 days from the consummation of the acquisition. Between April 30 and May 5, 1999, the Company sold an aggregate of 3,727,272 shares of common stock at $11 per share, or approximately $39,400,000, net of related commissions, to a group of third party investors. The new investors are subject to a one year restriction on the sale or transfer of such shares after which such investors have been granted certain registration rights. On May 4, 1999, the Company entered into an agreement to acquire all of the outstanding stock of Wass Net, S.L. The agreement is subject to, among other matters, the successful consummation of the Company's IPO. The aggregate purchase price of $17,000,000 is to be paid in common stock of the Company valued at the IPO price. F-19 UNDERWRITING StarMedia and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to the terms of the underwriting agreement, 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 of those securities dealers may resell any shares purchased from the underwriters to 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 substantially all of its 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 transfer restrictions. At the request of StarMedia, the underwriters have reserved for sale, at the initial public offering price, up to 1,150,000 shares of common stock for certain directors, stockholders, 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 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 U-1 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. The common stock has been approved for quotation 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 $1,500,000. 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. Goldman, Sachs & Co. acted as a placement agent for StarMedia in connection with the private placement of shares of StarMedia's common stock in April and May 1999. StarMedia incurred customary placement fees of $1,640,000 to Goldman, Sachs & Co. for such services. Upon the mutual agreement of the parties, StarMedia will pay the fee in cash or shares of common stock priced at the private placement price of $11.00 per share. If the fee is paid in stock, Goldman, Sachs & Co. will receive a maximum of 149,091 shares and will agree with StarMedia not to sell, transfer, assign, pledge or hypothecate any such shares for one year after the date of this offering. 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. Bayview Investors has agreed with StarMedia not to sell, transfer, assign, pledge or hypothecate any of its 20,834 series C shares for one year after the date of this offering. StarMedia has agreed to indemnify the several underwriters against various liabilities, including liabilities under the Securities Act of 1933. U-2 [EXAMPLE OF STARMEDIA PRINT MEDIA ADVERTISEMENT PREPARED BY OGILVY & MATHER. TEXT OF AD STATES: (1) WITH A TARGET MARKET OF MORE THAN 10 MILLION LATIN AMERICANS USING THE INTERNET, ACCORDING TO A 1997 NAZCA SAATCHI & SAATCHI STUDY, THE CHOICES ARE CLEAR: YOU EITHER INCLUDE INTERNET IN YOUR MIX AND ENJOY THE OPPORTUNITIES, OR YOU IGNORE IT, AND FACE THE CONSEQUENCES - SEE LEFT. (2) STARMEDIA IS THE LEADING ONLINE NETWORK TARGETING LATIN AMERICA WITH 17 TOPICAL AREAS AND EXTENSIVE WEB-BASED COMMUNITY FEATURES IN SPANISH AND PORTUGUESE. WE OFFER OUR USERS A WIDE RANGE OF FREE CHOICES - FROM CHAT TO NEWS, FROM EMAIL TO SHOPPING, PERSONAL HOMEPAGES AND MORE. OUR CONTENT IS TAILORED TO REGIONAL AND COUNTRY-SPECIFIC INTERESTS AND IS ENTIRELY IN SPANISH AND PORTUGUESE; (3) A SURVEY OF STARMEDIA VISITORS CONDUCTED BY THE LAREDO GROUP IN DECEMBER 1998 REVEALED THAT OUR USERS SPEND APPROXIMATELY 37% OF THEIR ONLINE TIME ON STARMEDIA, 87% ARE EMPLOYED OR UNIVERSITY ATTENDEES AND 61% HOLD CREDIT CARDS. ADDITIONALLY, IN LATIN AMERICA, 20% OF THE POPULATION CONTROLS AN ESTIMATED 65% OF THE BUYING POWER; (4) AND WE BELIEVE THE MARKET HOLDS SIGNIFICANT OPPORTUNITY. BY THE END OF YEAR 2000, NAZCA SAATCHI & SAATCHI ESTIMATES THAT 34 MILLION LATIN AMERICANS WILL BE ONLINE, SIGNIFICANTLY OUTPACING THE GROWTH OF INTERNET USAGE WORLDWIDE; AND (5) WITH A DEDICATED SALES TEAM IN EIGHT COUNTRIES AND A FOCUS ON THE NEEDS OF THE LATIN AMERICAN POPULATION, STARMEDIA IS WELL POSITIONED TO TAKE ADVANTAGE OF THE GROWING LATIN AMERICAN INTERNET MARKET.] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Forward-Looking Statements; Market Data............................... 17 Use of Proceeds...................... 18 Dividend Policy...................... 18 Capitalization....................... 19 Dilution............................. 20 Selected Consolidated Financial Data............................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23 Business............................. 33 Management........................... 47 Certain Transactions................. 55 Principal Stockholders............... 57 Description of Capital Stock......... 59 Shares Eligible for Future Sale...... 64 Validity of Common Stock............. 65 Experts.............................. 65 Where You Can Find More Information.. 65 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. 7,000,000 Shares STARMEDIA NETWORK, INC. Common Stock --------------- [LOGO] ------------ GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS J.P. MORGAN & CO. SALOMON SMITH BARNEY Representatives of the Underwriters ------------------------ WIT CAPITAL CORPORATION FACILITATOR OF INTERNET DISTRIBUTION ------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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........................................... $ 26,885 NASD filing fee................................................ 10,160 NASDAQ listing fee............................................. 95,500 Legal fees and expenses........................................ 500,000 Accountants' fees and expenses................................. 400,000 Printing expenses.............................................. 250,000 Blue sky fees and expenses..................................... 5,000 Transfer Agent and Registrar fees and expenses................. 15,000 Miscellaneous.................................................. 197,455 ---------- Total.................................................... $1,500,000 ---------- ----------
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 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 to twenty-two purchasers, including officers, directors and other accredited investors, at prices ranging from $0.0056 to $0.50 per share. 2. In 1997, the registrant issued and sold 7,330,000 shares of series A redeemable convertible preferred stock to twenty-nine purchasers, including officers, directors and other accredited investors, for an aggregate purchase price of $3,665,000. II-1 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 to thirty-two purchasers, including officers, directors and other accredited investors, 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 to thirty-seven purchasers, including officers, directors and other accredited investors, for an aggregate purchase price of $80,000,000. 7. Since December 31, 1998, the registrant has issued and sold 1,624,860 shares of common stock to twenty purchasers, including five officers and thirteen employees, upon the exercise of options for an aggregate purchase price of $1,619,123. 8. In May 1999, the registrant completed the sale of 3,727,272 shares of its common stock at $11.00 per share to six accredited investors for the aggregate purchase price of $41,000,000. 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+ Bylaws. 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.
II-2
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 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. 10.9u IBM Business Partner Agreement, dated as of April 1, 1999, by and between StarMedia and International Business Machines Corporation. 10.10+ Quota Purchase Agreement, dated as of April 13, 1999, by and between StarMedia, StarMedia do Brasil Ltda., Quotaholders of KD Sistemas de Informacao Ltda. and KD Sistemas de Informacao Ltda. 10.11+ Master Loan and Security Agreement No. 4231, dated as of March 31, 1999, by and between StarMedia and Charter Financial, Inc. 10.12+ StarMedia 1999 Employee Stock Purchase Plan. 10.13+ Stock Purchase Agreement between StarMedia and Hearst Communications, Inc. dated as of April 30, 1999. 10.14+ Stock Purchase Agreement between StarMedia and Reuters Holding Switzerland SA dated as of April 30, 1999. 10.15+ Stock Purchase Agreement between StarMedia and eBay Inc. dated as of April 30, 1999. 10.16+ Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of April 30, 1999. 10.17+ Stock Purchase Agreement between StarMedia and Critical Path, Inc. dated as of May 3, 1999. 10.18+ Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of May 5, 1999. 10.19+ Share Purchase Agreement dated as of May 4, 1999 between StarMedia and Wass Net S.L., Geradons, S.L., Salvador Porte and Eduardo Kawas. 10.20+ Stock Purchase Agreement between StarMedia and National Broadcasting Company, Inc. dated as of May 4, 1999. 10.21+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Hearst Communications, Inc. 10.22+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Reuters Holdings Switzerland SA. 10.23+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and eBay Inc. 10.24+ Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Europortal Holding S.A. 10.25+ Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Critical Path, Inc. 10.26+ Registration Rights Agreement dated as of May 5, 1999 between StarMedia and Europortal Holding S.A. 10.27+ Registration Rights Agreement dated as of May 4, 1999 between StarMedia and Geradons, S.L. 10.28+ Registration Rights Agreement dated as of May 4, 1999 between StarMedia and National Broadcasting Company, Inc. 10.29+ Employment Agreement dated as of April 29, 1999 by and between StarMedia and Fernando J. Espuelas. 10.30+ Employment Agreement dated as of April 29, 1999 by and between StarMedia and Jack C. Chen. 10.31+ Form of Rights Agreement. 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.
- ------------------------ + Previously filed. II-3 u Application has been made to the Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Commission. (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 of 1933 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 Securities Act of 1933 and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 7 to the 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 25th day of May, 1999. STARMEDIA NETWORK, INC. BY: /S/ FERNANDO J. ESPUELAS ----------------------------------------- Fernando J. Espuelas CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 7 to the registration statement has been signed by the following persons in the capacities indicated below: Dated: May 25, 1999 /s/ FERNANDO J. ESPUELAS -------------------------------------------- Fernando J. Espuelas Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: May 25, 1999 * -------------------------------------------- Jack C. Chen President and Director Dated: May 25, 1999 * -------------------------------------------- Steven J. Heller Chief Financial Officer(Principal Financial and Accounting Officer) Dated: May 25, 1999 * -------------------------------------------- Douglas M. Karp Director Dated: May 25, 1999 * -------------------------------------------- Christopher T. Linen Director Dated: May 25, 1999 * -------------------------------------------- Gerardo M. Rosenkranz Director Dated: May 25, 1999 * -------------------------------------------- Susan L. Segal Director Dated: May 25, 1999 * -------------------------------------------- Frederick R. Wilson Director
/s/ FERNANDO J. ESPUELAS ------------------------------------------ Fernando J. Espuelas *By: ATTORNEY-IN-FACT
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 BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 60,000 $ 81,000 -- -- 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 THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 141,000 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. 10.9u IBM business partner agreement, dated as of April 1, 1999 by and between StarMedia and International Business Machines Corporation. 10.10+ Quota purchase agreement, dated as of April 13, 1999, by and between StarMedia, StarMedia do Brasil Ltda., Quotaholders of KD Sistemas de Informacao Ltda. and KD Sistemas de Informacao Ltda. 10.11+ Master Loan and Security Agreement No. 4231, dated as of March 31, 1999, by and between StarMedia and Charter Financial, Inc. 10.12+ StarMedia 1999 Employee Stock Purchase Plan. 10.13+ Stock Purchase Agreement between StarMedia and Hearst Communications, Inc. dated as of April 30, 1999. 10.14+ Stock Purchase Agreement between StarMedia and Reuters Holdings Switzerland SA dated as of April 30, 1999. 10.15+ Stock Purchase Agreement between StarMedia and eBay Inc. dated as of April 30, 1999. 10.16+ Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of April 30, 1999. 10.17+ Stock Purchase Agreement between StarMedia and Critical Path, Inc. dated as of May 3, 1999. 10.18+ Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of May 5, 1999. 10.19+ Share Purchase Agreement dated as of May 4, 1999 between StarMedia and Wass Net S.L., Geradons, S.L., Salvador Porte and Eduardo Kawas. 10.20+ Stock Purchase Agreement between StarMedia and National Broadcasting Company, Inc. dated as of May 4, 1999.
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.21+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Hearst Communications, Inc. 10.22+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Reuters Holdings Switzerland S.A. 10.23+ Registration Rights Agreement dated as of April 30, 1999 between StarMedia and eBay Inc. 10.24+ Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Europortal Holding S.A. 10.25+ Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Critical Path, Inc. 10.26+ Registration Rights Agreement dated as of May 5, 1999 between StarMedia and Europortal Holding S.A. 10.27+ Registration Rights Agreement dated as of May 4, 1999 between StarMedia and Geradons, S.L. 10.28+ Registration Rights Agreement dated as of May 4, 1999 between StarMedia and National Broadcasting Company, Inc. 10.29+ Employment Agreement dated as of April 29, 1999 by and between StarMedia and Fernando J. Espueles. 10.30+ Employment Agreement dated as of April 29, 1999 by and between StarMedia and Jack. C. Chen. 10.31+ Form of Rights Agreement. 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.
- ------------------------ + Previously filed. u Application has been made to the Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Commission. EX-10.9 2 IBM BUSINESS PARTNER AGREEMENT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. IBM Business Partner Agreement International Solution Provider Profile - -------------------------------------------------------------------------------- We welcome you as an IBM Business Partner-Solution Provider. This Agreement covers the details of your approval to actively market Eligible Services. As our Solution Provider, you enhance Eligible Services with your solution to provide Services capable of satisfying the Customer's requirements. By signing below, each of us agrees to the terms of the following (collectively called the "Agreement"): (a) this Profile; (a) General Terms (BXGT-02-00 11/98); (a) the applicable Attachments referred to in this Profile; and (a) the Exhibit and applicable Transaction Documents. This Agreement and its applicable transaction documents are the complete agreement regarding this relationship, and replace any prior oral or written communications between us. Once this Agreement is signed, 1) any reproduction of this Agreement or a transaction document made by reliable means (for example, photocopy or facsimile) is considered an original, to the extent permissible under applicable law, and 2) all Products and Services you market and Services you perform under this Agreement are subject to it. If you have not already signed an Agreement for Exchange of Confidential Information (AECI), your signature on this Agreement includes your acceptance of the AECI provided to you. After signing this Agreement, please return a copy to the IBM address shown below. Agreed to: Agreed to: StarMedia Network Inc. International Business Machines Corporation By: /s/ Betsy Scolnik By: /s/ Roger L. Dudley ------------------------------- --------------------------------- Authorized Signature Authorized Signature Name (type or print): Betsy Scolnik Name (type or print): Roger L. Dudley Date: 3/31/99 Date: 4/1/99 Agreement number: IBM Business Partner number: Business Partner Address: IBM Address: 29 W. 36th Street IBM Global Services New York City, NY 10018 3405 W. Dr. M. L. King, Jr. Blvd. Tampa, FL 33607 Attention: Order Fulfillment Services Page 1 of 4 1. DETAILS OF OUR AGREEMENT 1. 1. Contract Start Date: March xx, 1999 Duration: 5 years 1. This Agreement shall commence on March xx, 1999, and terminate on March xx, December 2004. The effective date of this Agreement and all modifications to this Agreement are effective on the first day of the month after signature by you and acceptance by IBM. Should each of us decide to continue our relationship for an additional term upon expiration of the term of this Agreement, this Agreement shall remain in effect until terminated by both parties or replaced by a new Agreement. Relationship Approval/Acceptance of AdditionalTerms: Each of us agrees to the terms of the following by signing this Agreement. Copies of the Attachments are included. Approved Relationship Attachment Reference Solution Provider Attachment BXSP-02-00 11/98 Remarketer Terms Attachment BXRT-02-00 11/98 IBM Global Services' Network Services BPIGN 4/99 (SM) Terms Attachment for Remarketing International Attachment BPIA-00 1/99 Draft 3 You are approved to remarket Eligible Services to Customers in the countries specified in this Profille. Eligible Services Approval: You are approved to market under Remarketer Terms Eligible Services in the following IBM Global Services offering categories from the Network Services business segment. The terms of the Exhibit apply to these Eligible Services. o Managed Internet and Intranet Services o IBM Internet Connection Services o Customized Internet Access Kit Redistribution, Supplement for Custom Solution Number ____________ 1. Minimum Revenue Commitment The minimum gross revenue commitment for the Agreement will be based on the number of End Users as follows: For each month of this agreement and for each country shown, StarMedia Network shall commit to a monthly base level of end users asshown below, for the five year term of End Users as shown below, from the Contract Start Date of this Agreement, for the five year term for IBM Services outlined in this Agreement. This volume commitment shall come from StarMedia Network's remarketing of IBM Internet Connection Services (IBM ICS) directly to End Users in the countries identified in this Agreement. All the End Users registering for IBM ICS using a StarMedia offer code in each calendar month of the term of this Agreement shall count toward this volume commitment. Volume Commitment --------------------------------------------------------------------------- Country Argentina Brazil Chile Colombia Mexico --------------------------------------------------------------------------- Volume Commitment [****] [****] [****] [****] [****] --------------------------------------------------------------------------- Months in Contract Year One [****] [****] [****] [****] [****] --------------------------------------------------------------------------- **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. Page 2 of 4 (Note: Contracts Year two thru five require 12 month commitment in each country) At the first annual reconciliation, the number of months in Contract Year One will be adjusted for any delay in the start of service in each country. Annual Reconciliation The volume commitment will be reconciled annually based on the annual volume commitments shown above. If StarMedia Network fails to achieve the annual volume commitment levels specified above, IBM will assess an annual adjustment charge. Such adjustment charge shall be calculated as follows: 1. Calculate the actual number of hours billed to StarMedia Network in the contract year being reconciled in each country. 1. Calculate the committed hourly volume for each country by multiplying the number of committed months in the contract year being reconciled by the committed volume from the table above and multiplying the result by the projected hours in the table below. 1. If the result from the calculation in item 2 is greater than the calculation in item 1, a shortfall will exist and an adjustment charge will be calculated by multiplying the corresponding hourly charge (basic charge + help desk + billing) times the shortfall. Projected Hourly Usage ------------------------------------- Projected Country Hourly Usage ------------------------------------- Argentina [****] hours ------------------------------------- Brazil [****] hours ------------------------------------- Chile [****] hours ------------------------------------- Columbia [****] hours ------------------------------------- Mexico [****] hours ------------------------------------- In the event you terminate this Agreement and you have not met your minimum annual revenue commitment, the adjustment charges shall be calculated as of the termination date and may be due and payable based on the terms of Section 1.7 of the Exhibit. In the event IBM terminates this Agreement with cause, you will be required to pay the adjustment charges. In the event IBM terminates this Agreement without cause, you will not be required to pay the adjustment charges. In no instance will the billing volumes used during the Wind Down Period be counted toward the committed volume. 1. Value-Added Enhancement Description You will provide the following value-added enhancement and support services with Eligible Services: o StarMedia Network Internet Home Page o Identification of End Users Participating Business Partner Companies and IBM Companies - -------------------------------------------------------------------------------- Country Business Partner Company IBM Company Address Address - -------------------------------------------------------------------------------- Argentina StarMedia Network Inc. IBM Argentina S.A. Av. Alicia Moreau deJusto 170 Ing. Enrique Butty 275 Piso 3, Dock 1 (1107) 1300 Buenos Aires Buenos Aires, Argentina - -------------------------------------------------------------------------------- **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. Page 3 of 4 - -------------------------------------------------------------------------------- Brazil StarMedia Network Inc. IBM Brasil Ave. das Nacoes Unidas Rua Tutoia, 1157 12.551 15o. Andar, cjs.1508 10 Andar Cep 04707-900 Sao Paulo, SP Brazil Sao Paulo SP 04578-903 - -------------------------------------------------------------------------------- Chile StarMedia Network Inc. ISSC Chile Alcantra 44, Piso 12 Avenida Providencia 655 Las Condes Santiago Chile Castilla 3630 Santiago - -------------------------------------------------------------------------------- Colombia StarMedia Network Inc. IBM Colombia S.A. Carrera 11 A, No. 93A-22 Transversal 38 No. 100-25 Oficina 405 Bogota Santa Fe de Bogata, Colombia - -------------------------------------------------------------------------------- Mexico StarMedia Network Inc. IBM Global Services Andres Bello, No. 10 Piso 12 Colonia Irrigacion Colonia Polanco 11560 C.P. 11520 Mexico D.F. Mexico D.F., Mexico - -------------------------------------------------------------------------------- Page 4 of 4 [LOGO] IBM IBM Business Partner Agreement IBM Global Services' Network Services Exhibit - -------------------------------------------------------------------------------- This Transaction Document describes special charges, additional terms, and modifications to the General Terms, Solution Provider Terms, Remarketer Terms, and IBM Global Services' Network Services Terms Attachment for Remarketing, which apply to your remarketing of IBM Global Services' network Services, to which both of us have agreed. 1. Charges Unless otherwise stated, all charges are measured and assessed at a country level. Except as provided in section 1.1, the charges specified in this Exhibit will not be increased during the Agreement term. 1.1 Internet Dial Services Charges Charges for IBM Internet Connection Services are measured on an hourly "per access" basis, from the initiation of the link to the IBM Global Network until the connection terminates (modem synchronization to modem hang-up at the Local Internet Gateways (LIGs)). Charges apply for each physical connection regardless of the number of concurrent logical sessions within that physical connection. Accordingly, the charge for Internet Services shall be billed to StarMedia for each hour, or portion of hour, of usage, per user ID and per physical connection. IBM will bill StarMedia Network for the usage of this Service based on the total number of hours of connection time to the LIG for all End Users. Session time is calculated in 36 second intervals for every access, by rounding up to the next 36 second interval, which is equivalent to rounding up to the next 100th of an hour. IBM Internet Connection Services are usage based, per connection session. IBM will multiply the session time by the appropriate charges specified in this section 1.1. At the end of each calendar month, IBM will total the cumulative session times and charges for all of StarMedia's End Users. IBM will use a Consolidated Statement to invoice you for all local user IDs in US currency in the US. Consolidated statement terms are described in the Attachment for Consolidated Statement. The Consolidated Statement will not be used in countries where it would have an adverse tax effect on either party or would not comply with local laws. The hourly charges for the IBM Internet Connection Services are: Charges for IBM Internet Connection Services ------------------------------------- Country Hourly Charges ------- -------------- ------------------------------------- Argentina US$[****] ------------------------------------- Brazil US$[****] ------------------------------------- Chile US$[****] ------------------------------------- Colombia US$[****] ------------------------------------- Mexico US$[****] ------------------------------------- 31 March 1999 Page 1 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. IBM and StarMedia Network agree to establish baseline prices for each country. The baseline price shall be the average published price offered by a mutually agreed to set (not to exceed four) of the largest Internet service providers (ISP) in the respective countries, for unlimited service. The initial baseline price shall be set by selecting the four largest ISPs as identified in the 1998 International Data Corporation (IDC) Latin America Internet Access Provider as of the Contract Start Date. The baseline market price for the delivery of IBM Internet Connection Services as of the Contract Start Date, for each country, shall be for each country, determined by mutual agreement of the parties within 30 days following the date of the signing of this Agreement. Every six months IBM and StarMedia Network agree to review the baseline price in each country to determine its currency and competitiveness in relationship to the current market conditions and price in the respective countries at the time of such review. Such review shall be based on a comparison between the current baseline price and the average of the then current published unlimited usage price of a mutually agreed set (not to exceed four) of the largest ISPs as identified in any mutually agreed to independent publication. Further, either party may request such review at any time but no more often than once per calendar quarter. If after such review, the baseline price in a country varies by plus or minus 10% from the calculated average price as described above, the baseline price for that country shall be reset to the calculated average price as described above. In the event the baseline is reset during a review, either party shall have the right to request that the parties adjust the hourly charges for the IBM Internet Connection Services by the same percentage as the adjustment in the baseline price with the exception that, if IBM does not agree to reduce the price by this percentage, StarMedia Network will have the option to terminate this Agreement with respect to the country being adjusted. Upon such termination the non-PTT related termination charges will be reduced by 50%. 1.2 Custom End User Support Services Charges The charges for custom End User Support Services as specified in section 8 are as follows: ---------------------------------------- Country Charges Excess Per Hour Call Rate Charge Per Ticket ---------------------------------------- Argentina US$[****] $[****] ---------------------------------------- Brazil US$[****] $[****] ---------------------------------------- Chile US$[****] $[****] ---------------------------------------- Colombia US$[****] $[****] ---------------------------------------- Mexico US$[****] $[****] ---------------------------------------- 1.3 Global Roaming Charges "Global Roaming Charges" are the rate surcharges applicable when use of the IBM Internet Connection Services are used at a location outside of the Geographic Region, as subsequently defined, in which a user ID was issued. The four "Geographic Regions" used to determine such charges are: (i) Europe, Middle East and Africa, (ii) Latin America, (iii) North America, and (iv) Asia Pacific. Such Global Roaming Charges are charged in addition to those rates normally charged for IBM Internet Connection Services usage in the particular country within a Geographic Region in which a user ID was issued. Under the terms of section 9, "Billing," IBM will invoice you for End Users' Global Roaming Charges generated by their usage of the IBM Internet Connection Service outside of the Geographic Region in which their user ID was issued. The "Global Roaming Rates" applicable to IBM Internet Connection Service End Users will be the generally 31 March 1999 Page 2 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. available rates in effect as of the Contract Start Date and specified by country in the IBM Global Services Managed Internet and Intranet Services Schedule of Charges. Such Global Roaming Rates are subject to change as IBM adjusts its generally available Global Roaming Rates for all IBM Internet Connection Services customers from time to time. IBM Internet Connection Services shall not be available to End Users who (i) reside or travel in a single country for more than thirty one (31) consecutive days in a calendar year outside of the country in which their user ID was issued or (ii) who reside or travel in a single country for more than ninety (90) non-consecutive days in a calendar year outside of the country in which their user ID was issued. Such End Users residing or traveling for longer than said periods described above must secure new user IDs from the appropriate local IBM Affiliate. 1.4 Billing Charges There are ongoing monthly charges for the development, customization and provisioning of the billing services as described in section 8. Billing Charges - -------------------------------------------------------------------------------- Argentina Brazil Chile Colombia Mexico - -------------------------------------------------------------------------------- Monthly US$[****] US$[****] US$[****] US$[****] US$[****] Charge per hour - -------------------------------------------------------------------------------- 1.5 Project Office Charges There shall be an on-going monthly charge for the IBM Project Management as described in section 4. These charges will be billed in the United States. - -------------------------------------------------------------------------------- Contract Contract Contract Contract Contract Year 1 Year 2 Year 3 Year 4 Year 5 - -------------------------------------------------------------------------------- Annual Project Management Charges $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- 1.6 Taxes All prices are exclusive of any applicable taxes. 1.7 Termination Charges In the absence of any material default by IBM under this Agreement, there are one time charges, payable by StarMedia Network, in the event of StarMedia Network's termination of this Agreement prior to the expiration of the term of this Agreement. Upon termination of this Agreement by StarMedia Network without cause, StarMedia Network shall be liable for the greater of (1) the adjustment charges calculated under the terms of the Profile or (2) the termination charges specified below. In either case IBM will additionally invoice StarMedia Network the actual termination charges imposed on IBM by local Post Telegraph Telephone (PTT) or other telecommunication circuit providers. The parties agree to work together with the PTT to minimize the PTT termination charges and develop an appropriate wind down plan. StarMedia Network shall have the right to particpate in all discussions related to the discontinuance of PTT services and have access to the relevant documents. The charges associated with the volume commitment stated in the Profile are shown in the following table: 31 March 1999 Page 3 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. Base Termination Charges - -------------------------------------------------------------------------------- Argentina Brazil Chile Colombia Mexico - -------------------------------------------------------------------------------- Contract Year One $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- Contract Year Two $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- Contract Year Three $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- Contract Year Four $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- Contract Year Five $[****] $[****] $[****] $[****] $[****] - -------------------------------------------------------------------------------- If, during any month prior to StarMedia Network's termination of this Agreement without cause, the actual number of End Users exceeds the committed number of End Users (based on a monthly proration) additional termination charges will be due and payable by StarMedia Network. For each additional increment of users shown below, the additional charges shall be assessed. The charges shall be based on eighty percent (80%) of the number of End Users in excess of the committed volume. Such usage and termination charges shall be prorated for usage not in multiples of 10,000. Excess Usage Termination Charges ---------------------------- Excess Usage Termination Excess Usage Charge ---------------------------- [****] End Users $[****] ---------------------------- 1.8 Favored Business Partner IBM will extend to StarMedia Network the benefit of prices, terms and conditions at least as favorable as those IBM offers to other Business Partner Remarketers providing private branded Internet access services to individual end users in Latin America, who have made commitments and agreed to terms substantially similar to those in this Agreement. 2. Implementation Dates IBM agrees to implement the Services, capable of supporting the specified volumes, on the dates specified below: - -------------------------------------------------------------------------------- Country Implementation Date Month 4 forecast volume - -------------------------------------------------------------------------------- Brazil 30 June 1999 [****] - -------------------------------------------------------------------------------- Mexico 31 July 1999 [****] - -------------------------------------------------------------------------------- Argentina 31 July 1999 [****] - -------------------------------------------------------------------------------- Chile 31 July 1999 [****] - -------------------------------------------------------------------------------- Colombia 30 August 1999 [****] - -------------------------------------------------------------------------------- 3. Project Office As part of a global Project Office, IBM shall appoint the following qualified staff members to act as the principal points of interface between IBM and StarMedia Network during the country-specific roll-out of any IAK to new End Users and to provide on-going management of the delivery of IBM Services during the term of this Agreement. The IBM Project Office personnel shall be staffed based on the staffing levels identified in the table below and shall perform the services described below. Part of the responsibility of the Project Office is to be responsible to monitor the IBM web site for changes in the information that has been downloaded by StarMedia Network to its web site. For major changes to the structure and/or content of the IBM web site IBM will use commercially reasonable effort to provide StarMedia Network 60 days' prior notice of such change to the IBM web site. IBM Project Executive 31 March 1999 Page 4 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. The Project Executive shall act as an overall project manager with respect to the performance by IBM of its obligations hereunder. The IBM PE will serve as StarMedia Network's single-point-of-contact for the complete range of services contracted. To effectively respond to StarMedia Network's needs, StarMedia Network will provide its list of authorized representatives to act as interface to the IBM PE. The PE has his staff as well as the resources of IBM Global Services' Network Services at his disposal to ensure an efficient transition and delivery of high quality services. The IBM PE, being the central point of contact for StarMedia, has authority and responsibility for all aspects of IBM's performance including customer service and customer satisfaction. IBM Service Executive The Service Executive shall act as the focal point for service delivery and reporting issues. The Service Manager will review and analyze StarMedia Network's service performance and will sustain communication channels with the customer to review action plans to resolve service issues. In addition, he/she will inform StarMedia Network of scheduled changes being performed to enhance the Service. IBM Project Manager The IBM Project Manager shall have responsibility for the coordination of IBM support for the production ramp up of the IBM Services. This person shall be the key day-to-day contact during the transition phases of this project. The Project Manager works with the PE and focuses on the implementation of specific phases of the implementation of IBM Services, including initial network installation and IAK development and deployment. The Project Manager provides StarMedia Network a focal point for planning, scheduling and resolution of any issues that may arise throughout the deployment of IBM Services. In addition to the lead Project Manager, IBM may assign Project Managers in other countries or geographies to support the lead Project Manager. These support personnel will take direction from the lead Project Manager. IBM Delivery Executive The IBM Delivery Executive is responsible for the coordination of day to day delivery of IBM Services. Working directly with the IBM Service Executive the Delivery Executive is responsible for among other things addressing network operation issues, coordinating help desk services and billing. StarMedia Network Service Executive StarMedia Network shall have a single point of contact for the IBM Project Executive. Project Office Staffing Levels - -------------------------------------------------------------------------------- Support Classification Contract Contract Contract Contract Contract - -------------------------------------------------------------------------------- Year 1 Year 2 Year 3 Year 4 Year 5 - -------------------------------------------------------------------------------- Project Executive [****] [****] [****] [****] [****] - -------------------------------------------------------------------------------- Project Manager [****] [****] [****] [****] [****] - -------------------------------------------------------------------------------- Service Executive [****] [****] [****] [****] [****] - -------------------------------------------------------------------------------- Delivery Executive [****] [****] [****] [****] [****] - -------------------------------------------------------------------------------- While not reducing the total amount of support provided to StarMedia Network during the term of the contract, and in order to maintain flexibility to allocate resources to support the complete range of issues and service requirements, except for the Project Executive, IBM shall have the sole right to determine the specific levels of each support classification and the selection of individuals providing such support. 4. End User Charges 31 March 1999 Page 5 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. StarMedia Network is solely responsible for establishing its End User Internet access charges. StarMedia Network will notify IBM by the tenth day of the calendar month preceeding the month in which a plan change or new plan is to take effect. 31 March 1999 Page 6 of 17 5. Forecast On a monthly basis, beginning on the Contract Start Date, StarMedia Network shall provide IBM with a good faith eight month rolling forecast by LIG area as specified below, forecasting by month the anticipated number of IBM Intenet Connection Service End Users. Each StarMedia Network forecast shall include a commentary on potential forecasting variances which may result from marketing campaigns or special promotions. StarMedia Network will use commercially reaasonable efforts to provide IBM 120 days' advance notice of major marketing campaigns. Each rolling eight month forecast shall be provided to IBM by StarMedia Network by the fifth business day of each month. In the absence of a city by city forecast, it is understood that a situation may temporarily occur where an overage or underage of physical infrastructure may exist in one or more locations. IBM capacity planning for the LIG infrastructure in each country shall include the StarMedia Network forecast. In conjunction with the StarMedia Network forecast, IBM shall make commercially reasonable efforts to expand the physical infrastructure required to meet its obligations under this Agreement relative to the actual and forecasted number of StarMedia Network End Users. Such expansion will be based on IBM's capacity planning models, taking into consideration the StarMedia Network forecast. IBM shall maintain the physical infrastructure capable of supporting the StarMedia Network End User forecast at a month ahead of the current month's forecast. At its sole discretion, IBM shall determine the required physical infrastructure to support the number of forecasted StarMedia Network End Users. IBM will review with StarMedia Network, on a quarterly basis upon StarMedia Network's request, technology status for the purpose of exploring more efficient means of providing Services hereunder. In the event the actual number of StarMedia Network End Users in a single month falls more than 10% below the forecasted number of End Users for that month (Variance Factor), IBM's obligation to continue the expansion of the physical infrastructure shall be waived until such time as the StarMedia Network forecast to actual comparison is within the Variance Factor. ------------------------- LIG area ------------------------- Buenos Aires ------------------------- Remainder of Argentina ------------------------- Rio de Janeiro ------------------------- Sao Paulo ------------------------- Remainder of Brazil ------------------------- Chile ------------------------- Colombia ------------------------- Mexico City ------------------------- Remainder of Mexico ------------------------- 6. Compliance With Laws The following terms are added to item 1 in section 2 in the IBM Global Services' Network Services Terms Attachment for Remarketing. "Further, you agree to comply with the laws and business practices of each country outside of the United States where you are enabling or marketing Eligible Services as an IBM Business Partner, including, but not limited to -- a. obtaining a business license is each country as required by local law, b. to the extent reasonably possible, establishing a presence by engaging an agent, representative or any other satisfactory means to receive mail, business notices, legal notices, and the like, 31 March 1999 Page 7 of 17 c. paying business, income, service, VAT or any other taxes required by the country as required by law, d. representing StarMedia Network to your customers and prospects consistent with the terms or this Agreement, local business practices and local laws, and e. becoming aware of and staying current with local laws and business practices in each country where you conduct business as an authorized IBM Business Partner;" The following terms are added at the end of the paragraph titled "Your Liability" in section 9 of the IBM Business Partner Agreement - General Terms. "..., or your failure to comply with local laws and regulations for doing business in each country where you are an IBM Business Partner for network services, as specified in the Profile." 7. End User Customer Care 7.1 Support Services Upon StarMedia Network's request, as an option under this Exhibit and for the charges stated in Section 1.2, IBM will provide End User Support Services via help desk services for the following: o Installation, setup and usage of the IAK, o Connectivity related access, problems and outages, o registering for and using the Internet Connection Service, o obtaining IAK updates we may provide, and o billing. This help desk will provide native language telephone contact for StarMedia Network End Users, and will be available in each country during the hours shown in the table below, and can be accessed via a number specified in the IAK, such number to be a local call in Sao Paulo and toll free elsewhere in Brazil. IBM will use commercially reasonable efforts to implement toll free numbers in all other countries. We will identify ourselves as "StarMedia Network" or such other identity which StarMedia Network reasonably designates. All calls received will be logged and assigned a unique ticket number. There may be instances where undetected, non-network management, End User related issues may arise during the non-operational help desk hours. IBM and StarMedia Network agree to implement procedures to minimize such occurences. IBM shall also provide support to StarMedia Network End Users by providing StarMedia Network the ability to receive relevant customer care and support content from the IBM web site. StarMedia Network shall be solely responsible for any changes it makes to the customer care and support content it downloads from IBM. IAK program updates may be made available at StarMedia Network's Internet web site. StarMedia Network may translate and make such content available on its Internet web site. ------------------------------------------------ Country Customer Care Hours ------------------------------------------------ Argentina 9 am to midnight 7 days/week 9 am to 11 pm 7 days/week (winter) ------------------------------------------------ Brazil 7 am to 1 am 5 days per week (Brasilia 7 am to 7 pm S/S/national Time) holidays ------------------------------------------------ Chile 9 am to Midnight 7 days/week 9 am to 11 pm 7 days/week (winter) ------------------------------------------------ Colombia 7 am to 10 pm 5 days per week 10 am to 3 pm Saturday ------------------------------------------------ Mexico 8am - 7pm M-F ------------------------------------------------ IBM will direct all other End User suppport issues to StarMedia Network for resolution. Accordingly, StarMedia Network will establish procedures for handling all other End User Support issues not related to 31 March 1999 Page 8 of 17 those specified above and IBM and StarMedia Network shall establish mutually agreed procedures for call transfer to StarMedia Network. The charges specified in section 1.2 are based on an assumption of an End User Support call rate of 1.1% per day. This means that 1.1% of the End User population will contact the End User Support Center, requiring the opening of a problem ticket, each day. IBM will supply StarMedia Network an End User Support report identifying the total number of monthly calls handled. Call rates per country in excess of this 1.1% shall be charged to StarMedia Network at the rates shown in section 1.2. Calls placed to the help desk during normal maintenance windows as specified in section 12.1 and unscheduled network outages that are calls related to network outages whether taken through the VRU or ticketed as a result of the outage will not be counted toward the 1.1% call rate calculation and will not be charged to StarMedia Network. 7.2 Customer Care Measurements The service design objective of the IBM Customer Care Service is that an IBM Customer Care representative will answer calls from StarMedia Network or End Users within the Average Speed of Answer shown below during the hours shown in section 7.1. When a help desk telephone call is received by IBM, a single help desk representative will be assigned the responsibility for such telephone call and such representative will manage the problem reported or the request made until the matter is resolved and StarMedia Network or the End User is contacted. IBM Customer Care Service shall perform to the following measurements: One-stop servicing [****] Average Speed of [****] Answer Calls abandoned [****] "One-stop servicing" means the IBM representative taking a help desk call is responsible to resolve the reported problem. Average Speed of Answer is measured from the time a call leaves the IBM VRU via option selection and enters the agent queue until such time as an IBM representative takes the call. 7.3 Customer Care Response The response time measurements for the IBM Customer Care Service are shown below. IBM prioritizes work to resolve StarMedia Network and End User reported problems based on the severity levels described below: --------------------------------------------------------------------------- Severity Level Reported Problems Assigned to IBM Help Desk Representative --------------------------------------------------------------------------- 1 Within [****] minutes --------------------------------------------------------------------------- 2 Within [****] hours --------------------------------------------------------------------------- 3 Within [****] hours --------------------------------------------------------------------------- 4 Within [****] hours --------------------------------------------------------------------------- IBM will achieve the response times stated above for [****] of the problems reported. The following definitions are the guidelines for the assignment of problem management severity levels: 31 March 1999 Page 9 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. ---------------------------------------------------------------------------- Severity Level Description ---------------------------------------------------------------------------- SEV1 (Critical) The End User or StarMedia Network has described a problem which causes a severe and pervasive impact to the use of the IBM Services. The IBM Services are unusable and/or not available. The End User is completely out of service and unable to do any productive work. ---------------------------------------------------------------------------- SEV2 (Major) End Users can connect to the network but normal service and/or functions are either interrupted or severely degraded: work may be performed by the End User but not at expected levels of performance and productivity. ---------------------------------------------------------------------------- SEV3 (Minor) The End User is experiencing a problem which does not affect product or network availability and functionality. ---------------------------------------------------------------------------- SEV4 (Miscellaneous) There is no significant impact to the End User. This code may reflect either dissatisfaction with some aspects of the product or service or that a circumvention to the problem has been found. ---------------------------------------------------------------------------- IBM may reassign, with StarMedia Network's consent, the severity level of a reported problem if the requested severity differs from the above definitions. IBM will notify StarMedia Network of all changes of severity level for a problem impacting End Users. 7.4 Web Site Information for End User Support IBM will provide and StarMedia Network will use the IBM provided facility to create a private branded, customized account center environment in which the following tools will be available to End Users: o Manage your account: change address, change credit card, change access plan if applicable, cancel account, obtain billing information o Manage your user ID: add user ID, change user ID, cancel user ID, change password, reset password, obtain user information. o Manage your IBM provided e-mail, forward your IBM provided e-mail, change IBM provided e-mail ID, delete IBM provided e-mail, delete IBM provided e-mail ID. IBM will also provide StarMedia Network with areas linked from the account center, described above, containing facilities for downloading StarMedia Network's Internet access kit, frequently asked questions, help desk files, network status and access numbers. StarMedia Network will be responsible for all translations from the English language and will be required to work with IBM's web development team to create their own custom environment. IBM and StarMedia Network agree to jointly establish procedures for the development and maintenance of the account center environment. 8. Billing Services IBM shall provide to StarMedia Network administrative billing services to facilitate the billing of End Users on StarMedia Network's behalf at rates solely determined by StarMedia Network. The parties agree to modify the individual responsibilities in each country to conform to with local and national laws and customs. IBM shall be responsible for the following: 1. real time credit card verification. Such verification will include the fee for the first month's charges based 31 March 1999 Page 10 of 17 on StarMedia Network's rate plan unless otherwise specified by StarMedia Network; 2. initiating access only upon valid credit verification; 3. monthly billing for the base rate in advance, excess usage billing in arrears; 4. including all appropriate taxes in the amount passed to the credit card company to be billed to each End User's credit card. The credit card company will remit collected taxes and a report concerning such taxes to StarMedia Network for direct payment by StarMedia Network to the appropriate governmental agency; 5. following StarMedia Network's approval, termination, and communication guidelines; 6. recording End User usage; 7. extracting the StarMedia Network End User billing data on a 30 day delay basis and posting the data to an IBM web site branded for StarMedia Network under IBM's functional design and operational control; 8. supporting international credit cards and national credit cards which are co-branded with international credit cards. The support for national credit cards will be limited to those supported by the international banking system. IBM will work with StarMedia Network to develop and maintain the list of accepted credit cards; 9. dispute resolution with the credit card company with StarMedia Network's assistance; 10. making current billing data for End Users available to Customer Care; and 11. ensuring that the remitted funds are deposited to the account specified by StarMedia Network. IBM will indemnify and hold StarMedia Network harmless for losses arising out of billing activities that IBM performs at its sole discretion, without direction from StarMedia Network, under this section. StarMedia Network shall be responsible for the following: 1. setting the rate plan; 2. providing IBM End User approval, termination, and communications guidelines; 3. referring End Users to the web site identified in item 7 above for current billing issues; 4. providing IBM appropriate StarMedia Network branding for the web site in item 7 above; 5. providing IBM the necessary information to allow credit card companies to remit funds to StarMedia Network; 6. assumption and collection of bad debt; 7. the direct relationship with each governmental agency; 8. working with IBM, upon request, to resolve issues arising from End User questions and or issues. 9. Wind-Down Period Upon receipt of the other party's notice of termination of this Agreement for convenience or for cause, the party receiving such notice may exercise the wind-down period described in this section. Notwithstanding the foregoing, if StarMedia Network is in default of its payment obligations, and has failed to place all disputed amounts in a standard escrow account, StarMedia Network shall not be entitled to a wind-down period, as hereinafter defined. The wind-down period will commence upon receipt of the other party's request to exercise this option, and will continue until such date as StarMedia Network specifies in writing to IBM that the IBM Services are no longer required to be provided; provided, however, that in no event shall IBM be required to provide wind-down period support for more than 270 days following commencement of the wind-down period. During the wind-down period, IBM will provide the IBM Services in accordance with the terms and conditions of this Agreement. IBM will provide mutually agreeable transition assistance to StarMedia Network, and will cooperate with StarMedia Network and any successor service provider designated by StarMedia Network to ensure a coordinated orderly transition for StarMedia Network and StarMedia Network End Users without service disruptions or service quality issues. Throughout the wind-down period, this Agreement shall continue in effect without modification. StarMedia Network shall make any other undisputed payments as set forth in this Agreement during the Service Wind-Down Period. 31 March 1999 Page 11 of 17 StarMedia Network will use reasonable efforts to advise IBM initially and on a continuing basis of its plan to transfer StarMedia Network End Users to a successor service provider. Thirty days after the termination date of this Agreement, StarMedia Network and IBM shall prepare, review with their respective Project Executives, modify and approve a detailed wind-down period project plan to be effective over the remaining days of the wind-down period. To the extent feasible and upon request by StarMedia Network, during the wind-down period, IBM will transfer all applicable electronic and/or magnetic information to any successor service provider, including but not limited to, the registered user names of and billing information for all users of the StarMedia Network services. 10. Cure Period In the event of IBM's written notification to you of your failure to comply with material business or financial terms of this Agreement, IBM will provide you 30 days to cure such default. This cure period does not apply to network usage issues, where IBM may have to act immediately to prevent damage to the network and other customer and users. However, IBM will take reasonable steps to implement less disruptive protective measures before exercising termination or service disconnection where reasonably possible. You agree to provide IBM with 30 days to cure IBM's default following your written notification. 11. Withdrawal of Services from Marketing IBM shall provide StarMedia Network 12 months' prior written notice of the withdrawal of Eligible Services from marketing. In the event of such written notice by IBM to StarMedia Network, StarMedia Network may terminate this Agreement without obligation to pay the termination charges specified in section 1.7 and exercise the wind-down provisions described in this Exhibit. Such notice of termination shall be made within 90 days of receipt of the IBM written notice to withdraw an Eligible Service from marketing. 12. Network Maintenance Windows, Availability, and Reports 12.1 Network Maintenance Windows The normal network maintenance window for changes is 2:00 AM to 6:00 AM EST on Sunday. For Brazil, the normal network maintenance window for changes is 1:00 AM to 5:00 AM local time. Should a change be planned that extends beyond this designated window, IBM shall make reasonable effort to provide StarMedia Network 14 days' advance notice of such outage. IBM may perform scheduled Local Interface Gateway (LIG) maintenance for individual LIGs between 3:00 am and 5:00 am local time on a single morning per week other than Sunday. IBM will use reasonable efforts to limit such scheduled maintenance outside the standard Sunday morning maintenance window to an assigned day of the week for each city. Although we use reasonable efforts to notify customers in advance of emergency maintenance outages, we are unable to provide advance notice to customers in some situations. We use reasonable effort to schedule extended maintenance and emergency maintenance during regularly scheduled maintenance windows or at times which will minimize disruption to customers' network Services usage. 12.2 Backbone Availability The IBM Latin America network backbone availability shall be [****] (not including the scheduled maintenance windows) as measured on a monthly basis in each country in which IBM delivers IBM Services under this Agreement. IBM will report the availability of the backbone to StarMedia Network on a monthly basis. If IBM fails to meet this service level objective in one or more countries, IBM will pay StarMedia Network [****] percent ([****]%) of the gross charges invoiced by IBM to StarMedia Network for IBM ICS in the particular month in which the failure occurred for the countries in which IBM has failed to meet this service level objective. 12.3 LIG Availability The IBM Latin America network LIG availability shall be [****]% (not including the scheduled maintenance windows) as measured on a monthly basis in each country in which IBM delivers IBM Services under this 31 March 1999 Page 12 of 17 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. Agreement. IBM will report LIG availability to StarMedia Network on a monthly basis. If IBM fails to meet this service level objective in one or more countries, IBM will pay StarMedia Network one percent (1%) of the gross charges invoiced by IBM to StarMedia Network for IBM Services in the particular month in which the failure occurred for the countries in which IBM has failed to meet this service level objective. 12.4 Availability Action Plans Failure to meet the monthly performance measurements stated above shall require the development of action plans by IBM which shall include documentation and implemention plans for any needed corrections to the IBM Services. 12.5 Reports IBM shall provide StarMedia Network with quantitative and qualitative reports for the purpose of measuring and analyzing End User usage activities and trends. The reports below shall be generated and distributed to StarMedia Network on a monthly basis: o LIG Availability o Backbone Network Availability o Help Desk tickets by Severity Level with associated mean time to repair (MTTR) data o Average Speed of Answer o Calls Abandoned Rate o Billing information. 12.6 Additional Terms You agree that your sole remedy for our failure to meet service level objectives is as specified in this Exhibit. You may terminate this Agreement for IBM's failure to comply with IBM's service level objectives if you do not accept payment for failure to meet backbone or LIG availability in any month, by providing notice and a cure period to IBM as provided in this Agreement. IBM will not be responsible for our failure to meet service level objectives because of: 1. major network upgrade and maintenance activities up to four times per year communicated to you in writing or electronically via the IBM Global Network with at least 30 days' prior notice; 2. local or international regulatory or governmentally imposed ethical issues that limit or prevent the ability of IBM to offer or comply with service level objectives; and 3. your lack of availability to respond to incidents which require your participation for resolution. Times you are not available may include times that you have requested IBM not to contact you, such as times outside your normal business hours. The following terms amend or otherwise modify the terms in the referenced parts of the IBM Business Partner Agreement only for your remarketing of IBM Global Services' network Services. All terms not modifed or amended remain in effect. 13. Customers and End Users For the purpose of this Agreement, references to "your Customers and their End Users" in the IBM Global Services' Network Services Attachment for Remarketing mean StarMedia Network's End Users, because StarMedia Network is remarketing Services directly to End Users rather than through intermediary companies. IBM may use the data it gathers from End Users in the management of the IBM Global Network and the delivery of the Services described herein. However, IBM shall not use the data gathered from End Users in any direct marketing campaign or sell the data. Except as may be necessary for the management of the IBM 31 March 1999 Page 13 of 17 Global Network, IBM agrees to use commercally reasonable efforts to locate and transfer to StarMedia Network all End User data in its possession in the event of termination or expiration of the Agreement. With the exception of the End User data gathered by IBM for the purposes of managing the IBM Global Network, StarMedia shall have the right to use End User data in any way. StarMedia Network shall indemnify IBM against all claims arising out of its use of such End User data. 14. General Terms 14.1 Section 2, "Agreement Structure and Contract Duration" Conflicting Terms, item 1, is modified: 1. a transaction document prevail over those of all the other documents; 14.2 Section 3, "Our Relationship" Responsibilities Item 3 is replaced with the following: 3. neither of us will disclose the terms of this Agrement, unless both of us agree in writing to do so, or unless required by law. However, either of us may disclose the existence of and purpose of this Agreement without further permission from the other; Item 10 is replaced with the following: 10. each of the parties shall be excused from any delay or failure in its performance hereunder caused by reason of any acts of God, fires, floods, wars, civil disturbances, sabotage or disputes with organized labor; provided however, that each party agrees to use reasonable effort to minimize the extent and the impact of any inability by it to perform hereunder. The obligations and rights of the party so excused shall be extended on a day-to-day basis for the period of time equal to that of the underlying cause of the delay; Other Responsibilities Item 1 is replaced with the following: 1. to be responsible for customer satisfaction for all your activities, and to participate in the development and implementation of customer satisfaction programs that we jointly determine; Item 5 is replaced with the following: 5. not to assign or otherwise transfer this Agreement, your rights under this Agreement, or any of its approvals, or delegate any duties, unless expressly permitted to do so in this Agreement or as we otherwise agree, such permission not to be unreasonably withheld. Otherwise, any attempt to do so is void; Item 6 is deleted as not applicable. If network services other than IBM Internet Connection Services are added to this Agreement, both of us will agree to appropriate processes for order entry. Item 8 is replaced with the following: 8. to promptly provide us with documents relevant to the Services we provide to you, which we may reasonably require from you or the End User when applicable; and Our Review of Your Compliance with this Agreement The first two sentences of the first paragraph are replaced with the following: 31 March 1999 Page 14 of 17 We may periodically review your compliance with this Agreement. Upon our request, but no more than once per year, you agree to provide us with records that are relevant to your performance under the terms of this Agreement. The following is added as an additional paragraph between the existing first and second paragraphs: Upon your request, but no more than once per year, we agree to provide you with a billing tape and such other reasonable information to allow you to verify our charges to you and to your End Users. 14.3 Section 4, "Status Change" The following sentences replace the last sentence of this section, beginning "Upon notification ...": Upon notification of such change, (or in the event of failure to give notice of such change) IBM may, at its sole discretion, immediately terminate this Agreement if such change materially and adverse affects our business relationship or your ability to perform your responsibilities under this Agreement. IBM will not terminate this Agreement if the only change to your status is an ownership change due to an initial public stock offering. You will notify IBM of such a status change when it takes effect. Advance notification is not required. 14.4 Section 9, "Liability" The following is added to this Section: Items for Which You are Liable Circumstances may arise where, because of a default on your part or other liability, we are entitled to recover damages from you. In each such instance, regardless of the basis on which we are entitled to claim damages from you (including fundamental breach, negligence, misrepresentation, or other contract or tort claim), you are liable for no more than: 1. damages for bodily injury (including death) and damage to real property and tangible personal property; 2. any damages associated with your infringement or violation of IBM's intellectual property rights, specifically including, but not limited to, your violation of your obligations with respect to Programs specified in the section entitled "Programs" in the Remarketer Terms Attachment and your obligations with respect to licensed internal code, or your infringement or violation of a third party's intellectual property rights; and 3. the amount of any other actual direct damages, including any lost profits associated with the product or Service which were inherent in the Agreement, up to the greater of US $100,000 (or equivalent in local currency) or the charges (if recurring or usage, 12 months' charges apply) for the Service or Program that is the subject of the claim. Items for Which You are Not Liable Under no circumstances are you liable for any of the following: 1. third party claims against us for any losses or damages (other than those in the first two items listed above); or 2. special, incidental, or indirect damages or for any economic consequential damages (including lost profits or savings), even if you are informed of their possibility; however, notwithstanding the foregoing, you shall be liable for consequential or incidental damages associated with the damages for which you are liable as set forth above in items 1 and 2, "Items For Which You are Liable." 14.5 Section 11, "Changes to the Agreement Terms" An additional sentence is added following the first sentence in this section: 31 March 1999 Page 15 of 17 Notwithstanding the foregoing, IBM will give you at least three months' advance written notice of any changes to the IBM Global Services' Network Services Exhibit. Further, the sections titled "Eligible Services Approval," Minimum Revenue Commitment," "Annual Reconciliation," and "Value-Added Enhancement Description" in the Solution Provider Profile will not be changed except upon mutual agreement of both of us. Upon your receipt of notice of an IBM change which materially and adversely affects your business relationship with IBM, you may terminate this Agreement without obligation to pay the termination charges specified in section 1.7 and may exercise the wind-down provisions described in the IBM Global Services' Network Services Exhibit. 14.6 Section 12, "Internal Use Products" This section is replaced by section 3 in the IBM Global Services' Network Services Terms Attachment for Remarketing. 14.7 Section 13, "Demonstration, Development and Evaluation Products" This section is deleted because it does not apply to this engagement. 15. Solution Provider Terms Attachment 15.1 Section 3, "Your Responsibilities to IBM" Item 1 is replaced with the following: 1. to develop a business plan with us, if we require one. Such plan will document each of our marketing plans as they apply to our relationship. We will review the plan, at a minimum, once a year. Such business plan will include a basic go-to-market strategy outlining marketing plans, advertising campaigns, market segmentation and other business items relevant to the attraction of End Users to StarMedia Network services and IBM Services: Item 5 is replaced with the following: 5. to provide us, on our request but no more than once a year, reasonably relevant financial information about your business, indicating your ability to perform your responsibilities under this Agreement. Such information shall not be unreasonably withheld; 15.2 Section 4, "Your Responsibilities to End Users" Item 1 is replaced with the following: 1. assist the End Users to select the appropriate services you provide to meet the End Users' needs, to achieve productive use of your solution, and assist IBM as reasonably necessary to communicate with the End User about IBM Products and Services you remarket under this Agreement; Item 2 is deleted because it does not apply to this business engagement. Item 3 is deleted. Its terms have been included in the revised item 1 above. Item 4 is replaced with the following: 4. not make representations that IBM is responsible for the Product configurations and/or Services and their ability to satisfy the End User's requirements; Item 5 is replaced with the following: 5. advise the End User of Product installation requirements as provided by IBM; 31 March 1999 Page 16 of 17 Item 6 is deleted. Its terms have been included in the revised item 1 above. Item 7 is deleted because it does not apply to this business engagement. Item 8 is deleted because it is replaced by more pertinent terms in the Statement of Work for Custom Solution and the IBM Global Services' Network Services Exhibit. Item 9 is deleted because it does not apply to this business engagement. Item 10 is deleted because it does not apply to this business engagement. Item 11 is replaced with the following: 11. provide warranty information to the End User. This requirement is satisfied by your use of license and Service terms provided by IBM that are included in your license and service terms to your End Users. 16. Remarketer Terms Attachment 16.1 Section 1, "Our Relationship" Item 4 is deleted because it does not apply to this business engagement. 16.2 Section 2, "Ordering and Delivery" This section is deleted because it does not apply to this business engagement. 16.3 Section 3, "Inventory Adjustments" This section is deleted because it does not apply to this business engagement. 16.4 Section 4, "Price, Invoicing, Payment and Taxes" Failure to Pay Any Amounts Due Item 1 is replaced with the following: 1. impose a finance charge, up to 1.5 percent per month on the unpaid balance of your invoice which was not paid during the required period; Item 3 is deleted because it does not apply to this business engagement. 16.5 Section 6, "Machine Code" This section is deleted because it does not apply to this business engagement. 16.6 Section 16, "Ending the Agreement" The following sentence is added to the end of the first paragraph of this section: Upon either party's termination of this Agreement for convenience, the wind-down provisions described in section 9, "Wind-Down Period," of the IBM Global Services' Network Services Exhibit may be exercised. Additionally, in the event of either party's notice of termination for cause, the cure provisions in section 10, "Cure Period," in that Exhibit will apply. StarMedia Network may terminate this Agreement, for convenience or for cause, entirely or separately for any participating country listed in the Profile 17. IBM Global Services' Network Services Terms Attachment for Remarketing 31 March 1999 Page 17 of 17 17.1 Section 2, "Our Relationship" Item 6 is modified to add the following sentence at the end of the item: For the purpose of this business engagement, provision of the service license containing IBM terms to End Users, is sufficient to satisfy this requirement for End Users; Item 9 is modified to add the following sentence at the end of the item: For the purpose of this business engagement, including a statement in your terms to End Users to the effect that "No third party provider of network connectivity services is liable to the End User for information and data the End User transmits using the services," is sufficient to satisfy this requirement; 17.2 Section 5, "Price, Invoicing, Payment, and Taxes" Price and Discount Changes The first paragraph of this subsection is replaced with the following: Mutually agreed to increases become effective on the first day of a month. If the effective date as we mutually agree is other than the first day of a month, the increase applies on the first day of the following month. 31 March 1999 Page 18 of 17 IBM Business Partner Agreement [IBM LOGO] Remarketer Terms Attachment - -------------------------------------------------------------------------------- 1. Our Relationship As our IBM Business Partner, you market to your Customers the Products and Services (including shrink-wrap Services) we provide to you. These terms apply to a Business Partner whose method or distribution is under our remarketer terms, and includes Distributors, Resellers, Solution Providers, and Systems Integrators. Responsibilities Each of us agrees: 1. each of us is free to set its own prices and terms; and 2. neither of us will discuss its Customer prices and terms in the presence of the other. Other Responsibilities You agree to: 1. refund the amount paid for a Product or Service returned to you if such return is provided for in its warranty or license. You may return the Product to us for credit at our expense, as we specify in the operations guide; 2. provide us with sufficient, free and safe access to your facilities, at a mutually convenient time, for us to fulfill our obligations; 3. retain records, as we specify in the operations guide, of each Product and Service transaction (for example, a sale or credit) for three years; 4. provide us with marketing, soles, installation reporting and inventory information for our Products and Services, as we specify in the operations guide; 5. when you are approved to market to Remarketers, market Products and Services which require certification, only to Remarketers who are certified to market them; 6. comply with all terms regarding Program upgrades; 7. provide a dated sales receipt (or its equivalent, such as an invoice) as we specify in the operations guide, to your Customers, before or upon delivery of Products and Services; and 8. report to us any suspected Product defects or safety problems, and to assist us in tracing and locating Products. 2. Ordering and Delivery You may order Products and Services from us as we specify in the operations guide. You agree to order them in sufficient time to count toward your minimum annual attainment, if applicable. We will agree to a location to which we will ship. We may establish criteria for you to maintain at such location (for example, certain physical characteristics, such as a loading dock), as we specify in the operations guide. Upon becoming aware of any discrepancy between cur shipping manifest and the Products and Services received from us, you agree to notify us immediately. We will work with you to reconcile any differences. BXRT-02-00 11/98 Page 2 of 28 IBM Business Partner Agreement [IBM LOGO] Remarketer Terms Attachment - -------------------------------------------------------------------------------- Table of Contents Section Title Page 1. Our Relationship ............................................ 2 2. Ordering and Delivery ....................................... 2 3. Inventory Adjustments ....................................... 3 4. Price, Invoicing, Payment and Taxes ......................... 3 5. Licensed Internal Code ...................................... 4 6. Machine Code ................................................ 5 7. Programs .................................................... 5 8. Export ...................................................... 5 9. Title ....................................................... 5 10. Risk of Loss ................................................ 6 11. Installation and Warranty ................................... 6 12. Warranty Service ............................................ 7 13. Marketing of Services ....................................... 7 14. Marketing of Financing ...................................... 8 15. Engineering Changes ......................................... 8 16. Ending the Agreement ........................................ 9 BXRT-02-00 11/98 Page 1 of 28 Although we do not warrant delivery dates, we will use reasonable efforts to meet your requested delivery dates. We select the method of transportation and pay associated charges for Products and Services we ship. We may not be able to honor your request for modification or cancellation of an order. We may apply a cancellation charge for orders you cancel within 10 business days before the order is scheduled to be shipped. If a cancellation charge applies, we will specify the cancellation percentage in the Exhibit. We will advise you if the cancellation charge applies to an order you cancel. 3. Inventory Adjustments We will specify in your Exhibit the Products and Services to which this section applies. Products and Services you return to us for credit must have been acquired directly from us. You must request and receive approval from us to return the Products and Services. Products and Services must be received by us within one month of our approving their return, unless we specify otherwise to you in writing. We will issue a credit to you when we accept the returned Products and Services. Certain Products may be acquired only as Machines and Programs packaged together as a solution. These Products must be returned with all their components intact. For certain Products and Services you return, a handling charge applies. We will specify the handling charge percentage in the Exhibit. We determine your total handling charge by multiplying the inventory adjustment credit amount for the Products and Services by the handling charge percent. You agree to pay transportation and associated charges for Products and Services you return. Unless we specify otherwise, returned Products and Services must be in their unopened and undamaged packages. You agree to ensure the returned Products and Services are free of any legal obligations or restrictions that prevent their return. We accept them only from locations within the country to which we ship Products and Services. We will reject any returned Products and Services that do not comply with these terms. 4. Price, Invoicing, Payment and Taxes Price and Discount The price, and discount if we specify one, for each Product and Service will be made available to you in a communication which we provide to you in published form or through our electronic information systems or a combination of both. The price for each Product and Service is the lower of the price in effect on the date we receive your order, or the date we ship a product or "shrink wrap" Service, or the start date of a Service, if it is within six months of the date we receive your order. Price and Discount Changes We may change prices and increase discounts at any time. We may decrease discounts on one month's written notice. We will specify in your Exhibit if the following credit terms do not apply to Products and Services we approve you to market. BXRT-02-00 11/98 Page 3 of 28 If we decrease the price or increase the discount for a Product or Service, you will be eligible to receive a price decrease credit or a discount increase credit for those you acquired directly from us that are in your inventory, or in transit, or if the Products date of installation or Service start date has not occurred. However, Products acquired from us under a special offering (for example, a promotional price or a special incentive) may not be eligible for a full credit. You must certify your inventory to us in writing within one month of the effective date of the change. The credit is the difference between the price you paid, after any adjustments, and the new price. The following terms apply to Programs licensed on a recurring-charge basis: We may increase a recurring charge for a Program by giving you three months' written notice. An increase applies on the first day of the invoice or charging period on or after the effective date we specify in the notice. Invoicing Payment and Taxes Amounts are due upon receipt of invoice and payable as specified in a transaction document. You agree to pay accordingly, including any late payment fee. Details of any late payment fee will be provided upon request at the time of order and will be included in the notice. You may use a credit only after we issue it. If any authority requires us to include in our invoice to you a duty, tax, levy, or fee which they impose, excluding those based on our net income, upon any transaction under this Agreement then you agree to pay that amount. Failure to Pay Any Amounts Due If you fail to pay any amounts due in the required period of time, you agree that we may do one or more of the following, unless precluded by law: 1. impose a finance charge, as we specify to you in writing, up to the maximum permitted by law, on the portion which was not paid during the required period; 2. require payment on or before delivery of Products and Services; 3. repossess any Products and Services for which you have not paid. If we do so, you agree to pay all expenses associated with repossession and collection, including reasonable attorneys' fees. You agree to make the Products and Services available to us at a site that is mutually convenient; 4. not accept your order until any amounts due are paid; 5. terminate this Agreement; or 6. pursue any other remedy available at law. We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against amounts due us or any of our Related Companies. In addition, if your account with any of our Related Companies becomes delinquent, we may invoke any of these options when allowable by applicable law. 5. Licensed Internal Code Machines (Specific Machines) containing Licensed Internal Code (Code) will be identified in the Exhibit. We grant the rightful possessor of a Specific Machine a license to use the Code (or any replacement we provide) on, or in conjunction with, only the Specific Machine, designated by serial number, for which the Code is provided. We license the Code to only one rightful possessor at a time. You agree that you are bound by the terms of the separate license agreement that we will provide to you. BXRT-02-00 11/98 Page 4 of 28 Your Responsibilities You agree to inform your Customer, and record on the sales receipt, that the Machine you provide is a Specific Machine using Licensed Internal Code. The license agreement must be provided to the Customer before the sale is finalized. 6. Machine Code For certain Machines we may provide basic input/output system code, utilities, diagnostics, device drivers, or microcode (collectively called "Machine Code"). This Machine Code is licensed to the End User under the terms of the agreement provided with it. You agree to ensure the End User is provided such agreement. 7. Programs You agree to ensure the End User has signed the license agreement for a Program requiring a signature, as we specify in the Exhibit, before such Program is provided to the End User, and to provide any required documentation to us. All other Programs are licensed under the terms of the agreement provided with them. You agree, where applicable, to provide the Program license to the End User before such Program is provided to the End User. We will ship the media and documentation to you or to the End User, as specified in your order transaction document. Programs licensed to you on a recurring-charge basis are licensed for the period indicated in our invoice. You may market such Programs only on the same basis as licensed to you. You may not charge an End User a one-time charge for a Program you license from us on a recurring-charge basis. However, you may charge the End User whatever amount you wish for the recurring-charge. Program Services Program Services are described in the Program's license agreement. You are responsible to provide your Customers, who are licensed for a Program, the Program Services we make available to you. If the End User agrees in writing, you may: 1. delegate this responsibility to another IBM Business Partner who is approved to market the Program, or 2. provide an enhanced version of this support through the applicable IBM Service you market to the End User. If you delegate your support responsibilities to another IBM Business Partner, you retain customer satisfaction responsibility. However, if you market our applicable Services to the End User, we assume customer satisfaction responsibility for such support. 8. Export You may actively market Products and Services only within the geographic scope specified in this Agreement. You may not market outside this scope, and you agree not to use anyone else to do so. If a Customer acquires a Product for export, our responsibilities, if any, under this Agreement no longer apply to that Product unless the Product's warranty or license terms state otherwise. You agree to use your best efforts to ensure that your Customer complies with all export laws and regulations, including those of the United States and the country specified in the Governing Law Section of this Agreement, and any laws and regulations of the country in which the Product is imported or exported. Before your sale of such Product, you agree to prepare a support plan for it and obtain your Customer's agreement to that plan. Within one month of sale, you agree to provide us with the Customers name and address, Machine type/model, and serial number if applicable, date of sale, and destination country. We exclude these Products from: BXRT-02-00 11/98 Page 5 of 28 1. any of your attainment toward your objectives; and 2. qualification for applicable promotional offerings and marketing funds. We may also reduce future supply allocations to you by the number of exported Products. 9. Title When you order a Machine, we transfer title to you upon payment of all amounts due. Any prior transfer to you of title to a Machine reverts back to IBM when it is accepted by us as a returned Machine. We do not transfer a Program's title. 10. Risk of Loss We bear the risk of loss of, or damage to, a Product or Service up to and including its initial delivery from us to you or, if you request and we agree, delivery from us to your Customer. Thereafter, you assume the risk. 11. Installation and Warranty We will ensure that Machines we install are free from defects in materials and workmanship and conform to specifications, We provide instructions to enable the setoup of Customer-Set-Up Machines. We are not responsible for the installation of Programs or non-IBM Machines, We do, however, preload Programs onto certain Machines. We provide a copy of our applicable warranty statement to you. You agree to provide it to the End User for review before the sale is finalized, unless we specify otherwise. We calculate the expiration date of an IBM Machine's warranty period from the Machine's Date of Installation. Warranty terms for Programs are described in the Programs' license terms. We provide non-IBM Products WITHOUT WARRANTIES OF ANY KIND, unless we specify otherwise. However, non-IBM manufacturers, suppliers, or publishers may provide their own warranties to you. For non-IBM Products we approve you to market, you agree to inform your Customer in writing 1) that the Products are non-IBM, 2) the manufacturer or supplier who is responsible for warranty (if any), and 3) of the procedure to obtain any warranty service. Date of Installation for a Machine We are Responsible to install The Date of Installation for a Machine we are responsible to install is the business day after the day 1) we install it or, 2) it is made available for installation, if you (or the End User) defer installation. Otherwise (for example, if others install or break its warranty seal), it is the day we deliver the Machine to you (or the End User). In such event, we reserve the right to inspect the Machine to ensure its qualification for warranty entitlement. The Date at Installation for a Customer-Set-Up Machine The Date of Installation for a Customer-Set Up Machine is the date the Machine is installed which you or your Remarketer, if applicable, record on the End Users sales receipt, You must also notify us of this date upon our request. BXRT-02-00 11/98 Page 6 of 28 Installation of Machine Features, Conversions, and Upgrades We sell features, conversions and upgrades for installation on Machines, and, in certain instances, only for installation on a designated, serial numbered Machine. Many of these transactions involve the removal of parts and their return to us. As applicable, you represent that you have the permission from the owner and any lien holders to 1) install features, conversions and upgrades and 2) transfer the ownership and possession of removed parts (which become our property) to us. You further represent that all removed parts are genuine, and unaltered, and free from defects in materials and workmanship and conform to specifications. A part that replaces a removed part will assume the warranty and maintenance Service status of the replaced part. You agree to allow us to install the feature, conversion, or upgrade within 30 days of its delivery. Otherwise, we may terminate the transaction and you must return the feature, conversion, or upgrade to us at your expense. 12. Warranty Service We will specify in the Exhibit whether you or we are responsible to provide Warranty Service for a Machine. When we are responsible for providing Warranty Service for Machines, you are not authorized to provide such Service, unless we specify otherwise in the Exhibit. When you are responsible for providing Warranty Service, you agree to do so according to the terms we specify in the Warranty Service Attachment. 13. Marketing of Services The following are the conditions under which you may market Services: 1. if you marketed a Product to the End User, you may market the Services, specified in the Exhibit; or 2. regardless of whether you marketed a Product to the End User you may market the Services we specify in your Profile. If you are an IBM Distributor the following paragraph applies: The following are the conditions under which you may market Services: 1. If your Remarketer marketed a Product to the End User, you may market the Services, specified in the Exhibit, to your Remarketer only for the Remarketer's marketing to such End User; and 2. regardless of whether your Remarketer marketed a Product to the End User you may market the Services we specify in your Profile to your Remarketer, who may market such Services. You may market Services on eligible non-IBM Products regardless of whether you marketed a Machine or Program to the End User. Marketing of Services for a Fee The terms of this subsection apply when we perform the Services to the End User at prices we set and under the terms of our Service agreement, signed by the End User. We pay you a fee for marketing such Services. You will receive a fee for marketing eligible Services when 1) you identify the opportunity and perform the marketing activities, 2) you provide us with the order and any required documents signed by the End User, and 3) a standard Statement of Work is used and there are no changes, and no marketing assistance from us is required. BXRT-02-00 11/98 Page 7 of 28 Alternatively, you will receive a fee for a lead for eligible Services when it 1) is submitted on the form we provide to you, 2) is for an opportunity which is not known to us, and 3) results in the End User ordering the Service from us within six months from the date we receive the lead from you. We will not pay you the fee if 1) the machine or program is already under the applicable Service, 2) we have an agreement with the End User to place the machine or program under the applicable Service, or 3) the Service was terminated by the End User within the last six months. If the Service is terminated within three months of the date payment from the End User was due us, you agree to reimburse us for any associated payments we made to you. The reimbursement may be prorated if the Service is on a recurring charge basis. We periodically reconcile amounts we paid you to amounts you actually earned. We may deduct amounts due us from future payments we make to you, or ask you to pay amounts due us. Each of us agrees to promptly pay the other any amounts due. Remarketing of Services We provide terms in an applicable Service Attachment governing your remarketing of eligible Services the End User acquires from you and which we perform under the terms of the IBM Service agreement with the End User. Shrink-wrap Services are performed under the terms or the agreement provided with them. If the terms of the agreement are not visible on the shrink-wrap package, you agree to provide (or, if applicable, request your Remarketer to provide) the Services terms to the End User before such Services are acquired by the End User. Services We Perform As Your Subcontractor If approved on your Profile, we will provide terms in an applicable Service Attachment governing our provision of the Services we perform as your subcontractor. Such Services are those an End User purchases from you under the terms of your service agreement. 14. Marketing of Financing If we approve you on your Profile, you may market our Financing Services for Products and Services and any associated products and services you market to the End User. If you market our Financing Services, we will pay you a fee as we specify to you in your Exhibit. We provide Financing Services to the End User under the terms of our applicable agreements signed by the End User. You agree, that for the items that will be financed, 1) you will promptly provide us any required documents including invoices, with serial numbers, if applicable, 2) the supplier will transfer clear title to us, and 3) you will not transfer to us any obligations under your agreements with the End User. We will make payment for the items to be financed when the End User has initiated financing and acknowledged acceptance of the items being financed. Payment will be made to you, or the supplier, as appropriate. 15. Engineering Changes You agree to allow us to install mandatory engineering changes (such as those required for safety) on all Machines in your inventory, and to use your best efforts to enable us to install such engineering changes on your Customers' Machines. Mandatory engineering changes are installed at our expense and any removed parts become our property. During the warranty period, we manage and install engineering changes at: 1. your or your Customer's location for Machines for which we provide Warranty Service; and 2. your location for other Machines. BXRT-02-00 11/98 Page 8 of 28 Alternatively, we may provide you with the parts (at no charge) and instructions to do the installation yourself. We will reimburse you for your labor as we specify. 16. Ending the Agreement Regardless of the contract duration specified in the Profile, or any renewal period in effect, either of us may terminate this Agreement, with or without cause, on three months' written notice. if, under applicable law, a longer period is mandatory, then the notice period is the minimum notice period allowable. If we terminate for cause (such as you not meeting your minimum annual attainment), we may, at our discretion, allow you a reasonable opportunity to cure. If you fail to do so, the date of termination is that specified in the notice. However, if either party breaches a material term of the Agreement, the other party may terminate the Agreement on written notice. Examples of such breach by you are: if you do not maintain customer satisfaction; if you do not comply with the terms of a transaction document; if you repudiate this Agreement; or if you make any material misrepresentations to us. You agree that our only obligation is to provide the notice called for in this section and we are not liable for any claims or losses if we do so. At the end of this Agreement, you agree to: 1. pay for or return to us, at our discretion, any Products or shrink-wrap Services for which you have not paid; and 2. allow us, at our discretion, to acquire any that are in your possession or control, at the price you paid us, less any credits issued to you. Products and shrink-wrap Services to be returned must be in their unopened and undamaged packages and in your inventory (or in transit from us) on the day this Agreement ends. We will inspect them, and reserve the right of rejection. You agree to pay all the shipping charges. At the end of this Agreement, each of us agrees to immediately settle any accounts with the other. We may offset any amounts due you against amounts due us, or any of our Related Companies as allowable under applicable law. You agree that if we permit you to perform certain activities after this Agreement ends, you will do so under the terms of this Agreement. BXRT-02-00 11/98 Page 9 of 28 COUNTRY UNIQUE TERMS FOR THE REMARKETER TERMS ATTACHMENT The following modify the terms of this Attachment in the specific countries, as noted. ASIA PACIFIC The following terms apply to all countries in Asia Pacific: Section 4- Price, Invoicing, Payment and Taxes Add the following term as the last paragraph in the subsection entitled "Invoicing, Payment and Taxes": If you are claiming any income or transaction tax exemption relating to the Products and Services you acquired from us or that we provided, then you agree to provide us with all appropriate documentation. The following terms apply to the specific countries in Asia Pacific, as noted: ASEAN COUNTRIES The following terms apply to all the Asean countries: Section 2- Ordering and Delivery The following replaces the fifth paragraph: You or your carrier will take delivery at a location we specify. Section 10- Risk of loss The following replaces the first sentence in this Section: We bear the risk of loss of, or damage to, a Product until its initial delivery from us to you or your agent or carrier. AUSTRALIA Section 4- Price Invoicing Payment and Taxes Add the following as the third paragraph of the subsection entitled "Invoicing, Payment and Taxes": You agree to pay importation cost recovery charges where applicable. Such charges include freight, insurance, duties and taxes. INDOCHINA COUNTRIES The following terms apply to all the Indochina countries (Cambodia, Laos, Myanmar and Vietnam): Section 4- Price, Invoicing, Payment and Taxes The following is added as the last sentence in the first paragraph: All products are provided F.O.B. at the designated shipping location unless we specify otherwise in the operations guide. The following replaces the first sentence in the subsection entitled "Invoicing, Payment and Taxes": BXRT-02-00 11/98 Page 10 of 28 You agree to pay in full all prices and charges in accordance with our invoice, in United States Dollars, by irrevocable confirmed letters of credit in favor of IBM, drawn on a bank acceptable to IBM, at least 45 days prior to our shipment to you, or by telegraphic transfer. Mode of payment will be determined at IBM's discretion. Section 9- Title The following replaces the first sentence: When you order a Machine, we transfer title to you over international waters, prior to entry into the port of importation in (country name). The following terms apply to the specific country in Asia Pacific, as noted: JAPAN Section 4- Price, Invoicing, Payment and Taxes Delete Item 1 in the subsection entitled "Failure To Pay Any Amounts Due". Section 7- Programs The following follows the first sentence of the first paragraph of this Section: Alternatively, if we specify approval in your Profile, we authorize you to sign the applicable license agreement on behalf of IBM under the following conditions: 1. Agreements a. The agreement that you are authorized to sign on behalf of IBM will be the IBM designated agreement entitled "Terms and Conditions for IBM Licensed Programs and IBM Internal Code" (called "IBM Licensed Terms and Conditions"). b. If you acquire prior written approval from us, you may use your own contract document with the IBM License Terms and Conditions incorporated into it in lieu of the IBM License Terms and Conditions. c. You agree to fill in any details regarding the program on the IBM License Terms and Conditions in accordance with IBM's guidance. 2. Scope of Authorization a. Your authorization is limited to signing the IBM License Terms and Conditions with the End User on behalf of IBM. You have no authority or rights to add, amend, modify or delete any of its terms. You will be liable for any damages resulting from your addition, amendment, modification or deletion of its terms. b. You agree to obtain the End User's signature on the IBM License Terms and Conditions prior to ordering an applicable Program or a Machine containing Licensed Internal Code (called Specific Machine) from IBM. c. Unless we give you prior written authorization, you are not authorized to delegate, assign or transfer your authority to sign the IBM License Terms and Conditions on behalf of IBM to any third party. d. Your authorization to sign on behalf of IBM is limited to the IBM License Terms and Conditions and IBM does not authorize any rights regarding system integration, software development, outsourcing nor procurement of machines or equipment. 3. Custody of Agreements a. You agree to keep the applicable IBM license agreements or your contract documents that are signed by End Users, and present or submit them to us immediately on our request. BXRT-02-00 11/98 Page 11 of 28 Section 11- Installation and Warranty The following replaces the first sentence of the subsection entitled "Date of Installation for a Machine We Are Responsible To Install": The Date of Installation for a Machine we are responsible to install is 1) the expiration date of the inspection period (the inspection period for a Machine commences on the day following the day IBM installs it and will expire on the tenth day), or 2) the business day after the day it is made available for installation, if you or the End User defer installation, Section 16- Ending the Agreement Delete the following from the next to last paragraph in this Section: or any of our Related Companies. NEW ZEALAND Section 4- Price, Invoicing, Payment and Taxes The following term replaces Item 1 in the subsection entitled "Failure to Pay Any Amounts Due": Impose a penalty interest, as we specify in writing, up to the maximum permitted by law, on the portion that was not paid during the required period: PEOPLE'S REPUBLIC OF CHINA Section 4 Price, Invoicing, Payment and Taxes The following replaces the first sentence of the third paragraph of the subsection entitled "Price and Discount Changes": If we decrease the price or increase the discount for a Product or Service, you will be eligible to receive a price decrease credit or discount increase credit for those you acquired directly from us during the two months prior to the effective date of the change. The following are additional terms in the subsection entitled "Invoicing, Payment and Taxes": You will pay by Letter of Credit for each shipment, or other form of payment as instructed by us. If the government imposes a duty, tax (other than an income tax) or fee on the Agreement or any Product or Service provided under it, not otherwise provided for in our prices and charges, you agree to pay it when we invoice you. Letter of Credit for Each Shipment Payment in full for each Product and Service and for other charges referred to herein will be made in United States dollars through an irrevocable and confirmed Letter of Credit which shall be in a form acceptable to us. You agree to open such an irrevocable Letter of Credit no later than 14 days prior to our scheduled shipment date on the basis of a pro forma invoice indicating the current price of the Product and Service and other estimated charges. Such Letter of Credit shall expire no earlier than 30 days after the latest shipment date on which the Products and Services are delivered to your designated location as agreed to by us. You further agree to adjust the amount of such Letter of Credit on the basis of shipment and other charges referred to herein. The irrevocable Letter of Credit shall be negotiable by us upon submission to the bank of the related commercial invoices and the shipping documents specified in the credit, evidencing shipment. Any fees, however designated, levied by a bank to open or amend a Letter of Credit, or effect payment in United States dollars by the opening bank, shall be borne by you. Any fees, however designated, levied by the advising or collecting bank shall be borne by the IBM World Trade Corporation. Other invoices for adjustments, additional charges, taxes, etc., if any, payable or reimbursable by you to us under this Agreement, may be issued subsequent to delivery to you and shall be payable in full in United States dollars within thirty days of the date of the invoice. BXRT-02-00 11/98 Page 12 of 28 Failure by you to establish a Letter of Credit in accordance with the provisions of this Section will entitle us to cancel this Agreement without liability on our part. Section 9- Title The following replaces the first paragraph: We transfer title to a Product to you at the point of entry into the People's Republic of China unless we specify otherwise in the Exhibit. EMEA The following terms apply to all countries in EMEA: Section 1- Our Relationship In the subsection entitled "Other Responsibilities" the following replaces Item 5: 5. when you are approved to market to Remarketers selective distribution Products and Services, market them only to Remarketers that IBM specifically approves to market such Products and Services; Section 4- Price, Invoicing, Payment and Taxes In the subsection entitled "Price and Discount", in the second paragraph, replace "six months" with "three months" In the subsection entitled "Price and Discount Changes", paragraph four which applies to Programs licensed on a recurring charge, is not applicable. The following replaces the first paragraph in the subsection entitled "Invoicing Payment and Taxes": Amounts are due upon receipt of invoice and payable in accordance with the payment option you selected. Details of any payment options will be specified in the operations guide. You agree to pay accordingly, including any late payment fee. In the subsection entitled "Failure to Pay Any Amounts Due": In item 1, replace the words "in writing" with "in the operations guide" The following replaces the second paragraph: We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against any amounts due us. The third paragraph is not applicable. BXRT-02-00 11/98 Page 13 of 28 Section 7- Programs The following replaces the first sentence in the first paragraph: You agree to ensure the End User and you have signed the license agreement for a Program requiring a signature, as we specify in the Exhibit, before such Program is provided to the End User, and to provide any required documentation to us. The third paragraph is not applicable. Section 11- Installation and Warranty The following replaces the first sentence of the second paragraph: We calculate the expiration date of an IBM Machine's warranty period from the Machine's Date of Installation for Machines we install and from the Warranty Start Date for Customer-Set-Up Machines. Change the title of the subsection entitled Date of Installation for a Customer Set-Up-Machine" to "Warranty Start Date For a Customer Set-Up-Machine" and replace the first sentence in the subsection with the following: The Warranty Start Date is the date of first purchase by an End User, which you or your Remarketer, if applicable, record on the End Users sales receipt. Section 13- Marketing of Services The following replaces the first paragraph: You may market the Services we specify in your applicable Profile. Paragraphs two and three are not applicable. Add the following as the first paragraph in the subsection entitled "Marketing of Services for a Fee": Refer to your applicable Profile to determine whether the terms of this subsection apply. The subsection entitled "Services We Perform As Your Subcontractor" is not applicable. Section 14- Marketing of Financing The following two paragraphs replace the first paragraph: Refer to your applicable Profile to determine whether the terms of this section apply. If we approve you on your Profile, you may market our Financing Services, as we specify in the Exhibit, for Products and Services and any associated products and services you market to the End User. Section 15- Engineering Changes The following replaces the last sentence in this Section: We will reimburse you for your labor as we specify in the operations guide. Section 16- Ending the Agreement The following replaces the second sentence in the sixth paragraph: We may offset any amounts due you against amounts due us. BXRT-02-00 11/98 Page 14 of 28 The following terms apply to the countries in EMEA, as noted: Section 8- Export The following terms apply to all countries in Western Europe: The following replaces the entire Section: You may actively market Products and Services only within Western Europe. You may market Programs as permitted by their licensing terms. You may not market outside this scope, and you agree not to use anyone else to do so. Your responsibilities under this Agreement apply wherever you provide Products and Services in Western Europe. If a Customer acquires a Product for export outside Western Europe, our responsibilities, if any, under this Agreement no longer apply to that Product unless the Product's warranty or license terms state otherwise. Before your sale of such Product, you agree to prepare a support plan for it and obtain your Customer's agreement to that plan. Within one month of sale, you agree to provide us with the Customer's name and address, Machine type/model, and serial number if applicable, date of sale, and destination country. We exclude such Products from: 1. any of your attainment toward your objectives; and 2. qualification for applicable promotional offerings and marketing funds. We may also reduce future supply allocations to you by the number of exported Products. In all cases, you agree to use your best efforts to ensure that your Customer complies with all export laws and regulations, including those or the United States and the country specified in the Governing Law Section of this Agreement, and any laws and regulations of the country in which the Product is imported or exported. The following terms apply to the Republic of South Africa. Namibia, Swaziland and Lesotho. The following replaces the entire Section: You may actively market Products and Services only within the Republic of South Africa, Namibia, Swaziland and Lesotho. You may market Programs as permitted by their licensing terms. You may not market outside this scope, and you agree not to use anyone else to do so. Your responsibilities under this Agreement apply wherever you provide Products and Services in such countries. If a Customer acquires a Product for export outside such countries, our responsibilities, if any, under this Agreement no longer apply to that Product unless the Product's warranty or license terms state otherwise. Before your sale of such Product, you agree to prepare a support plan for it and obtain your customers agreement to that plan. Within one month of sale, you agree to provide us with the Customer's name and address, Machine type/model, and serial number if applicable, date of sale, and destination country. We exclude such Products from: 1. any of your attainment toward your objectives; and 2. qualification for applicable promotional offerings and marketing funds. We may also reduce future supply allocations to you by the number of exported Products. in all cases, you agree to use your best efforts to ensure that your Customer complies with all export laws and regulations, including those of the United States and the country specified in the Governing Law Section of this Agreement and any laws and regulations of the country in which the Product is imported or exported. The following terms apply to all other countries in EMEA: The following replaces the first paragraph: BXRT-02-00 11/98 Page 15 of 28 You may actively market Products and Services only within (country name). You may market Programs as permitted by their licensing terms. You may not market outside this scope, and you agree not to use anyone else to do so. The following terms apply to the specific country, or group of countries, in EMEA, us noted: AFRICAN COUNTRIES The following terms apply to all countries in Africa: Section 3- Inventory Adjustments The terms of this Section are not applicable. The following terms apply to the following African countries: Algeria, Benin, Burkina Faso, Cameroon, Cape Verde, Central African Republic, Chad, Congo, Djibouti, D.R. of Congo, Equatorial Guinea, Gabon, Gambia, Guinea, Guinee Bissau, Ivory Coast, Mali, Mauritania, Morocco, Niger, Senegal, Togo, and Tunisia. Section 2- Ordering and Delivery The following replaces the second paragraph: We will deliver the Products and Services in France to the forwarding agent you designate in accordance with the 1990 FCA Incoterm. The fifth paragraph (starting with "We select...") is not applicable. Section 9- Title The following replaces the first paragraph in this Section: When you order a Machine, we transfer title to you upon delivery in France to your forwarding agent. Section 10- Risk of Loss The following replaces the entire section: We bear risk of loss, or damage to, a Product or Service until its initial delivery from us to your forwarding agent in France or, if you request and we agree, delivery from us to your Customer in France. Thereafter, you assume the risk. AUSTRIA Section 9- Title The following replaces the first paragraph in this Section: We retain title to Machines until full payment has been received. You agree to assign your claim against your Customer in the event you sell Products before we receive full payment. Section 11- Installation and Warranty The following replaces the fourth paragraph: For non-IBM Products we provide to you, the same warranties apply as for IBM Products, unless we specify otherwise in a transaction document Warranty Service for non-IBM Products may be performed by other than IBM personnel. CENTRAL AFRICA BXRT-02-00 11/98 Page 16 of 28 The following terms apply to all countries in Central Africa: Section 2- Ordering and Delivery The following replaces the second paragraph: Products ordered will be delivered Free Carrier at Schipol Airport, Amsterdam or any other exporting point as IBM may direct from time to time. The following replaces the fifth paragraph; You pay all transportation and associated charges from the IBM shipping location. Section 4- Price, Invoicing, Payment and Taxes: The following replaces the first sentence in the subsection entitled "Invoicing, Payment and Taxes"; Unless otherwise agreed to by us in writing, payment for each order shall be due and payable to our account in New York, U.S.A. (or another such account as is designated by IBM in writing) by means of a confirmed and irrevocable Letter of Credit, in a form acceptable to us, to be issued prior to delivery to Free Carrier in accordance with INCOTERMS 1980 of the International Chamber of Commerce. Add the following as the second paragraph: All payments by either party to the other under any provisions of this Agreement shall be made in United States dollars. Section 9- Title The following replaces the first paragraph: When you order a Machine, we transfer title to you upon payment of all amounts due, or upon delivery, whichever occurs later. CENTRAL EUROPE and RUSSIA The following terms apply to all countries in Central Europe and Russia except Czech Republic: Section 2- Ordering and Delivery The following two paragraphs replace the second paragraph: The Products are delivered to the local country platform under standard delivery terms. In this connection, if the Agreement refers to shipment to you or your End User, it is understood as the designation of the party entitled to receive the Products at the local country platform. In specific situations we may agree to deliver Products to your platform. You will act as importer and pay customs duties. In specific situations we may agree to deliver Products to a different location, provided you comply with the relevant provisions set forth in the operations guide or as we otherwise specify to you in writing. Add the following as the last sentence in the fifth paragraph: However, you agree to pay handing and transportation charges when we specify. Section 3- inventory Adjustments The following replaces the second sentence in the third paragraph: We will issue a credit or refund the price you paid, to your account at our discretion. BXRT-02-00 11/98 Page 17 of 28 Section 4- Price, Invoicing, Payment and Taxes In the subsection entitled "Invoicing, Payment and Taxes" the following replaces the first paragraph: You agree to pay in accordance with the payment terms specified on the invoice or as otherwise agreed and communicated by IBM, including any late payment fee. Details of payment terms are specified in the operations guide. Add the following at the end of the second paragraph: However, IBM reserves the right to make the respective payment at its election in U.S. dollars or in local currency, based on the official exchange rate on the date of payment, to your account in the country in which you are located instead of crediting your account with IBM. Section 8- Export The following replaces the entire Section: You may actively market Products and Services only within your applicable Territory. You may market Programs as permitted by their licensing terms. You may not market outside this scope, and you agree not to use anyone else to do so. Your responsibilities under this Agreement apply whenever you provide Products and Services in your applicable Territory. If a Customer acquires a Product for export, our responsibilities, if any, under this Agreement no longer apply to that Product unless the Product's warranty or license terms or our own separate agreement with this Customer state otherwise. Before your sale of such Product, you agree to prepare a support plan for it and obtain your Customers agreement to that plan. Within one month of sale, you agree to provide us with the Customer's name and address, Machine type/model and serial number if applicable, date of sale, and destination country. Unless such export is otherwise approved in our own separate agreement with this Customer we exclude Products exported outside your approved Territory from any of your attainment objectives and qualification for applicable promotional offerings and marketing funds. In all cases, you agree to use your best efforts to ensure that your Customer complies with all export laws and regulations including those of the United States and the original county of export, and any laws and regulations of the country in which the Product is imported or exported. Section 9- Title The following replaces the first sentence in the first paragraph: When you order a Machine, title passes to you upon shipment provided IBM has received payment in full. Otherwise, title passes when IBM receives payment in full. Section 13- Marketing of Services Add the following as the first paragraph of the Section: Where IBM Services are available, this Section is assigned to the local IBM Company, listed in the operations guide. Local law and local jurisdiction will apply to such transactions. Payment terms will be included in the operations guide. All other provisions of the Agreement apply. DENMARK Section 9- Title The following replaces the first sentence in this Section: BXRT-02-00 11/98 Page 18 of 28 When you order a Machine, we transfer title to you on the date you receive delivery from IBM. EGYPT Section 3- Inventory Adjustments The terms of this Section are not applicable. Section 4- Price, Invoicing, Payment and Taxes The following are additional terms in the subsection entitled "Invoicing, Payment and Taxes": You will pay by Letter of Credit for each shipment, or other form of payment as instructed by us. If the government imposes a duty, tax (other than an income tax), or fee on the Agreement or any Product or Service provided under it, not otherwise provided for in our prices and charges, you agree to pay it when we invoice you. Letter of Credit for Each Shipment Payment in full for each Product and Service and for other charges referred to herein will be made in United States dollars through an irrevocable and confirmed Letter of Credit which shall be in a form acceptable to us. You agree to open such an irrevocable Letter of Credit no later than 14 days prior to our scheduled shipment date on the basis of a pro forma invoice indicating the current price of the Product and Services and other estimated charges. Such Letter of Credit shall expire no earlier than 30 days after the latest shipment date on which they are delivered to your designated location as agreed to by us. You further agree to adjust the amount of such Letter of Credit on the basis of shipment and other charges referred to herein. The irrevocable Letter of Credit shall be negotiable by us upon submission to the bank of the related commercial invoices and the shipping documents specified in the credit, evidencing shipment. Any fees, however designated, levied by a bank to open or amend a Letter of Credit, or effect payment in United States dollars by the opening bank, shall be borne by you. Any fees, however designated, levied by the advising or collecting bank shall be borne by the IBM World Trade Corporation. Other invoices for adjustments, additional charges, taxes, etc., if any, payable or reimbursable by you to us under this Agreement, may be issued subsequent to delivery to you and shall be payable in full in United States dollars within thirty days of the date of the invoice. Failure by you to establish a Letter of Credit in accordance with the provisions of this Section will entitle us to cancel this Agreement without liability on our part. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you when the Machine is shipped. ESTONIA Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date you receive delivery from IBM. FINLAND Section 9- Title The following replaces the first sentence in this Section: BXRT-02-00 11/98 Page 19 of 28 When you order a Machine, we transfer title to you on the date of delivery from IBM. GERMANY Section 9- Title The following replaces the first paragraph in this Section: We retain title to Machines until full payment has been received. You agree to assign your claim against your Customer in the event you sell Products before we receive full payment. Section 11- Installation and Warranty Add the following as the first paragraph: We provide warranty to you only by repair or replacement. If we are unable to do so in reasonable time, you may request either a partial refund equal to the reduced value of the unrepaired Machine or return the Machine and receive a full refund of the amount paid. The following replaces the terms in the fourth paragraph: For non-IBM Products we provide to you, the same warranties apply as for IBM Products, unless we specify otherwise in a transaction document. Warranty Service for non-IBM Products may be performed by other than IBM personnel. Section 13- Marketing of Services The following replaces the first sentence in the fifth paragraph in the subsection entitled "Marketing of Services for a Fee": If the Service is terminated within three months of the date the payment from the End User was due us and IBM is not responsible for the termination, you agree to reimburse us for any payments we made to you associated with it. ITALY Section 1- Our Relationship The following replaces the second sentence in Item 1 in the subsection entitled "Other Responsibilities": You may return the Products to us at our expense, as we specify in the operations guide. We will issue credit to you after we accept the returned Products and we receive your invoice for them. Section 3- Inventory Adjustments The following replaces the second sentence in paragraph three: We will issue a credit to you after we accept the returned Products and we receive your invoice for the returned Products. Section 4- Price, Invoicing, Payment and Taxes Add the following at the end of the first paragraph in the subsection entitled "Invoicing, Payment and Taxes": Such fees will be apportioned to the number of days of the delay. We may transfer the credit to a factoring company. If we do so we will advise you in writing. Section 9- Title The following replaces the first sentence in this Section: BXRT-02-00 11/98 Page 20 of 28 When you order a Machine, we transfer title to you on delivery from IBM to you. LATVIA Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date you receive delivery from IBM. LITHUANIA Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date you receive delivery from IBM. NAMIBIA Section 4- Price Invoicing, Payment and Taxes Add the following as the last paragraph of the subsection entitled "Price and Discount": The price of Index-Linked Machines shall be increased or decreased by a currency adjustment which is equal to the price specified in the order, adjusted, if applicable, in terms of any price changes, multiplied by a percentage specified in the Order (Index-Link Percentage), multiplied by (Closing index minus Base index) divided by the Base Index. Definitions Base Index: means the index on which IBM's current Product prices are based, and is specified on the invoice and upon request from IBM. Closing Index: means the Index ruling on the Business Day prior to Shipment and is specified on the invoice and upon request from IBM. Index: means the South African Rand, equivalent to one European Currency Unit (ECU), at any time, and any other currency unit as specified by IBM in the Order. Index-Linked Machine: means any Machine so designated by IBM, which is subject to a currency adjustment. NORWAY Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date you receive delivery from IBM. SOUTH AFRICA Section 4- Price, Invoicing, Payment and Taxes. Add the following as the last paragraph of the subsection entitled "Price and Discount": The price of Index-Linked Machines shall be increased or decreased by a currency adjustment which is equal to the price specified in the order, adjusted, if applicable, in terms of any price changes, multiplied by a percentage specified in the Order (Index-Link Percentage), multiplied by (Closing Index minus Base Index) divided by the Base Index. Definitions BXRT-02-00 11/98 Page 21 of 28 Base Index: means the Index on which IBM's current Product prices are based, and is specified on the invoice and upon request from IBM. Closing Index: means the Index ruling on the Business Day prior to Shipment and is specified on the invoice and upon request from IBM. Index: means the South African Rand. equivalent to one European Currency Unit (ECU), at any time, and any other currency unit as specified by IBM in the Order, Index-Linked Machine: means any Machine so designated by IBM, which is subject to a currency adjustment. SPAIN Section 4- Price, Invoicing, Payment and Taxes And the following at the end of the first paragraph in the subsection entitled "Invoicing. Payment and Taxes: Such fee will be apportioned to the number of days of the delay. We may transfer the credit to a factoring company. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you when the Machine is shipped. Section 16- Ending the Agreement The following replaces the first sentence: Regardless of the contract duration specified in the Profile, or any renewal period in effect, you may terminate this Agreement, with or without cause, on three months' written notice and we may terminate, with or without cause, on six months' written notice. SWEDEN Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date you receive delivery from IBM. TURKIYE Section 2- Ordering and Delivery The following replaces the fifth paragraph in this Section: We select the method of transportation. We will specify in the related transaction document the party who is responsible for the associated transportation charges. Section 4- Price, Invoicing, Payment and Taxes Add the following as the last sentence of the subsection entitled "Failure To Pay Any Amounts Due": For future legal obligations, the related party will be responsible for its own part. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you when the Machine is shipped. BXRT-02-00 11/98 Page 22 of 28 United Kingdom Section 9- Title The following terms replace the entire Section: When you order a Product we transfer title to you upon payments of all amounts due under this Agreement to 1) IBM, or 2) IBM United Kingdom Financial Services Limited (FSL), if you have entered into a Dealer Financing Agreement with FSL. We do not transfer a Program's title. Products are owned by IBM until title has been transferred to you. You shall clearly identify Products as IBM property. Such Products are presumed to belong to IBM unless you can prove otherwise. Your right to possession of Products owned by IBM will cease if 1) your actions entitle any person to appoint a receiver or administrative receiver of your property, 2) you become subject to any form of insolvency proceedings (or IBM has reason to believe any of the preceding events is likely to occur), 3) you fail to make payments hereunder when due, or 4) the Agreement is terminated. We may then, in addition to any other remedies available to us, enter any premises to recover our property and require you not to resell or part with possession or Products until you have paid us, in full, all sums due us. You will pass title to any returned Products to IBM free from all encumbrances. ZIMBABWE Section 4- Price, Invoicing, Payment and Taxes Add the following as the last paragraph of the subsection entitled "Price and Discount": The price of a Machine shall be increased or decreased by a currency adjustment which is equal to the currency exchange differential between the Opening Index and the Closing index. Definitions: Closing index: means the Index specified on the Customs Bill of Entry. Customs Bill of Entry: means the document provided by the Zimbabwean Customs Authority to IBM upon clearance of the Machine through such Customs into Zimbabwe. Index: means the Zimbabwean Dollar equivalent, at any time, to one United States of America dollar. Opening Index: means the index specified in the order. LATIN AMERICA The following terms apply to all countries in Latin America: Section 2- Ordering and Delivery The following replaces the fifth paragraph in this Section: We select the method of transportation. We are responsible for payment of transportation charges unless we specify otherwise to you in writing. Section 4- Price, Invoicing, Payment and Taxes BXRT-02-00 11/98 Page 23 of 28 In the subsection entitled "Price and Discount Changes", paragraph four which applies to Programs licensed on a recurring charge, is not applicable. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you on the date of delivery from IBM. The following terms apply to the specific countries in Latin America, as noted: BRAZIL Section 4- Price, Invoicing, Payment and Taxes Add the following as the last paragraph of the subsection entitled "Price and Discount": If country law regarding price policies is altered, allowing monetary readjustment of price in shorter periods of time than the one already in effect, each of us agrees that our prices to you may be revised as frequently and as soon as the law allows. However, it for any reason the official adjustment index becomes extinct or worthless, it is agreed that monetary readjustment will be based upon any similar index produced by the second most important economic institution in the country, or by a new official index the local government establishes. In the subsection entitled "Price and Discount Changes", paragraph four which applies to Programs licensed on a recurring charge, is not applicable. The following replaces the second paragraph in the subsection entitled "Failure To Pay Any Amounts Due": We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against any amounts due us. The third paragraph is not applicable. Section 9- Title The following replaces the entire Section: Property to an IBM Machine is not transferred when the Machine is delivered to the Business Partner. IBM holds domain, property and the constructive possession of a Machine and the Business Partner holds only actual possession of such Machine until IBM receives payments of all amounts due, at which time title passes to the Business Partner. We do not transfer a Program's title. We only grant a license to a Program. Section 16- Ending the Agreement The following replaces the second sentence in the sixth paragraph: We may offset any amounts due you against amounts due us. CHILE Section 4- Price, Invoicing, Payment and Taxes Add the following as the second paragraph in the subsection entitled "Price and Price Discount Changes": When our price to you is in local currency, price increases or discount reductions apply. When our price to you is in United States dollars, price increases do not apply. LATIN AMERICA SOUTH BXRT-02-00 11/98 Page 24 of 28 The following terms apply to all countries in Latin America South: Section 4- Price, Invoicing, Payment and Taxes Add the following as the second paragraph of the subsection entitled "Invoicing, Payment and Taxes": The invoiced amounts shall be paid in United States dollars or their equivalent in legal currency, at the exchange rate applicable to dividends and/or, profits, foreign transfers made by private natural or legal persons, on the payment date, at the domicile of IBM, or whatever it may be determined by the latter, on the dates established in the respective invoices. In the case of a bank holiday, the opening exchange rate shall be applied. The payment shall be considered as duly made when IBM effectively receives the funds. in the subsection entitled "Failure to Pay Any Amounts Duet The following replaces the second paragraph: We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against any amounts due us. The third paragraph is not applicable. Section 18- Ending the Agreement The following replaces the second sentence in the sixth paragraph: We may offset any amounts due you against amounts due us. MEXICO Section 4- Price, Invoicing, Payment and Taxes Add the following as the second paragraph in the subsection entitled "Price and Discount Changes": When our price to you is in local currency, price increases are effective on the date of announcement. Add the following after the first paragraph in the subsection entitled "Invoicing, Payment and Taxes": The invoiced amounts shall be paid in United States dollars or their equivalent in legal currency, at the exchange rate applicable to dividends end/or profits, foreign transfers made by private natural or legal persons, on the payment date, at the domicile of IBM, or whatever it may be determined by the latter, on the dates established in the respective invoices. In the case of a bank holiday, the opening exchange rate shall be applied. The payment shall be considered as duly made when IBM effectively receives the funds. The following replaces the first item in the list in the subsection entitled "Failure to Pay Any Amounts Due": Impose a finance charge, as we specify to you in writing, on the portion which was not paid during the required period; PERU Section 4- Price, Invoicing, Payment and Taxes In the subsection entitled "Failure to Pay Any Amounts Due" the following replaces the second paragraph: BXRT-02-00 11/98 Page 25 of 28 We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against any amounts due us. The last paragraph is not applicable. VENEZUELA Section 4- Price, Invoicing. Payment and Taxes Add the following as the last paragraph of the subsection entitled "Price and Discount": If country law regarding price policies is altered, allowing monetary readjustment of price in shorter periods of time than the one already in effect, each of us agrees that our prices to you may be revised as frequently and as soon as the law allows. However, if for any reason the official adjustment index becomes extinct or worthless, it is agreed that monetary readjustment will be based upon any similar index produced by the second most important economic institution in the country, or by a new official index the local government establishes. The following replaces the second paragraph in the subsection entitled "Failure To Pay Any Amounts Due": We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against any amounts due us. The third paragraph is not applicable. Section 16- Ending the Agreement The following replaces the second sentence in the sixth paragraph: We may offset any amounts due you against amounts due us. NORTH AMERICA The following terms apply to the specific countries in North America, as noted: CANADA Section 4- Price, Invoicing, Payment and Taxes The following is an additional subsection and follows the subsection entitled "Invoicing, Payment and Taxes": Purchase Money Security Interest You grant us a purchase money security interest in your proceeds from the sale of, and your accounts receivable for, Products and Services, until we receive the amounts due. You agree to sign an appropriate document, to permit us to perfect our purchase money security interest. Section 7- Programs The following replaces the second paragraph: We will ship the media and documentation to you. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you when we ship the Machine. BXRT-02-00 11/98 Page 26 of 28 CARIBBEAN NORTH DISTRICT Section 4- Price, Invoicing, Payment and Taxes Add the following as the next to last paragraph in the section: If any authority requires us to withhold taxes from our payments to you, we will do so and remit such to the taxing authority. if we are assessed withholding taxes, interest or penalties by such authority with respect to payments we made to you, you will reimburse us for such tax and for interest and penalties which are not due to IBM's negligence. UNITED STATES OF AMERICA Section 1- Our Relationship Add the following as the first item in the subsection entitled "Responsibilities": 1. we offer a money-back guarantee to End Users for certain Products. You agree to inform the End User of the terms of this guarantee before the applicable sale. For any such Product, you agree to 1) accept its return in the time frame we specify 2) refund the full amount paid to you for it, and 3) dispose of it (including all its components) as we specify. We will pay a transportation charge for return of the Product to us and will give you an appropriate credit. Section 2- Ordering and Delivery Add the following as the last paragraph in the Section: If we are unable to stop shipment of an order you cancel, and you return such Product to us after shipment, our inventory adjustment terms apply. The following replaces the last two sentences in the last paragraph: The Exhibit will specify if a cancellation charge applies and where we will specify the charge. Section 4- Price, Invoicing, Payment and Taxes Add the following as the second sentence, in the first paragraph, in the subsection entitled "Price and Discount": Unless we specify otherwise, discounts do not apply to Program upgrades, accessories, or field-installed Machine features conversions, or upgrades. The following are additional subsections and follow the subsection entitled "Invoicing, Payment and Taxes": Reseller Tax Exemption You agree to provide us with your valid reseller exemption documentation for each applicable taxing jurisdiction to which we ship Products and Services, if we do not receive such documentation, we will charge you applicable taxes and duties. You agree to notify us promptly if this documentation is rescinded or modified. You are liable for any claims or assessments that result from any taxing jurisdiction refusing to recognize your exemption. Purchase Money Security Interest You grant us a purchase money security interest in your proceeds from the sale of, and your accounts receivable for, Products and Services, until we receive the amounts due. You agree to sign an appropriate document (for example, a "UCC-1") to permit us to perfect our purchase money security interest. Section 7- Programs The following replaces the second paragraph: BXRT-02-00 11/98 Page 27 of 28 We will designate in the Exhibit if 1) we will ship the media and documentation to you or, if you request and we agree, to the End User, 2) you may copy and redistribute the media and documentation to the End User, or 3) you must copy and redistribute the media and documentation to the End User. If we ship the media and documentation, we may charge you. We will specify such charge 10 you in writing. If you copy and redistribute, you must be licensed to use the Program from which you make the copies. A Program license you acquired for use under the Demonstration, Development and Evaluation Products terms fulfill this requirement. Section 9- Title The following replaces the first sentence in this Section: When you order a Machine, we transfer title to you when we ship the Machine. BXRT-02-00 11/98 Page 28 of 28 IBM Business Partner Agreement [IBM LOGO] Solution Provider Attachment - -------------------------------------------------------------------------------- These terms prevail over and are in addition to or modify the Remarketer Terms Attachment and the Complementary Marketing Terms Attachment. 1. Marketing Approval You may be approved as a Solution Provider under a remarketer relationship or under a complementary marketing relationship, or both, if we approve you to market the same Products and Services under both remarketer and complementary marketing terms, all transactions will be under remarketer terms. You may unilaterally elect not to participate under remarketer terms for a specific transaction or business segment by providing us a signed IBM Business Partner Statement of Election. if you meet the requirements of the Marketing Approval section of the Complementary Marketing Terms Attachment, you may participate under those terms. 2. Value Added Enhancement For Products we specify in the Exhibit, you are required to have a solution which is a value added enhancement that we approve and specify on your Profile and which significantly adds to the Product's function and capability. 3. Your Responsibilities To IBM You agree: 1. to develop a mutually acceptable business plan with us, if we require one. Such plan will document each of our marketing plans as they apply to our relationship. We will review the plan, at a minimum, once a year; 2. that, unless precluded by applicable law, one of the requirements for you to retain this relationship is that you achieve the minimum annual attainment we specify in your Profile; 3. to order Products and Services, as we specify in the operations guide; 4. to maintain trained personnel, as we specify in your Profile or Exhibit, as applicable; 5. to provide us, on our request, relevant financial information about your business so we may, for example, use this information in our consideration to extend credit terms to you; 6. to have access to the Products you are approved to market for 1) demonstration purposes, 2) providing support to your End Users and 3) supporting your value added enhancement; 7. to maintain the capability to demonstrate Products we approve you to market; and 8. that the products and deliverables you market in conjunction with IBM Products and Services are Year 2000 Ready. A product (for example, a machine or program) or a deliverable is Year 2000 Ready if the product or deliverable when used in accordance with its associated documentation is capable of correctly processing, providing and/or receiving date data within and between the twentieth and twenty-first centuries, provided that all products used with the product or deliverable properly exchange accurate date data with it. BXSP-02-00 11/98 Page 1 of 5 4. Your Responsibilities To End Users You agree to: 1. assist the End User to achieve productive use of your solution and the Products and Services you marketed; 2. configure Products we approve you to market. On your request, we may assist you; 3. identify and select the required technology based upon the End User's requirements, and confirm that the Product configuration is fully capable of the satisfactory performance of your solution; 4. not make representations that IBM is responsible for the Products' configuration and their ability to satisfy the End Users requirements; 5. advise the End User of Product installation requirements; 6. develop a plan, agreed to by the End User, for installation and post-installation support for the offering you market. For Products and Services we approve you to market, such support includes your being the primary contact for Product and Services Information, technical advice and operational advice associated with the offering. However, you may delegate these support responsibilities for Products and any other associated products to another IBM Business Partner who is approved to market such Products. If you do, you retain customer satisfaction responsibility. Alternatively, such support responsibilities will be provided by IBM if you market the applicable IBM Services to the End User. If you do, we assume customer satisfaction responsibility for such support; 7. assist the End User in Product problem determination and resolution, unless this responsibility is delegated as specified in Item 6 above; 8. give written notice to the End User of any modification you make to a Product and the name of the warranty service provider and advise that such modification may void the warranty for the Product; 9. support the End User in planning fulfillment of Product training and education requirements, including informing the End User of educational offerings, as applicable; 10. inform the End User that the sales receipt (or other documentation, such as Proof of Entitlement, if it is required) will be necessary for proof of warranty entitlement or for Program upgrades; and 11. provide warranty information to the End User. BXSP-02-00 11/98 Page 2 of 5 Country Unique Terms For The Solution Provider Attachment The following modify the terms of this Attachment in the specific countries, as noted: ASIA PACIFIC The following applies to all countries in Asia Pacific: Section 1- Marketing Approval The following replaces all the terms of the Section: You may be approved as a Business Partner under a remarketer relationship or under a complementary marketing relationship, or both, but not for the same Product or Service. The following applies to all countries in Asia Pacific, except Australia: Section 1- Marketing Approval The following is an additional term: We may specify the type of account in your Profile or specific industry codes to which you may market Products and Services. if we do so, you agree to comply. The following applies to the countries in Asia Pacific, as noted: AUSTRALIA Section 2- Value Added Enhancement The following are additional terms to this Section: Your value added enhancement must be the primary justification for the End User's acquisition of the Products and Services you market. The exception to this is when the End User is acquiring an upgrade to a system you installed with your value added enhancement which is still in productive use. However, your value added enhancement must be the primary justification for a processor upgrade requiring a processor serial number change. Upgrades include processor upgrades, peripherals, and programs. A sale to an End User without your value added enhancement, when it is required, is a material breach of the Agreement. EMEA The following terms apply to ill the countries in EMEA: Section 4- Your Responsibilities To End Users Delete items 8 and 11 and add the following as the last item in the Section: Inform the End User, in writing, from whom to obtain warranty service and of any other applicable warranty information, as well as any modification made to a Product and advise that such modification may void the warranty. BXSP-02-00 11/98 Page 3 of 5 NORTH AMERICA The following applies to the countries in North America, as noted: CANADA Section 1- Marketing Approval The following are additional terms to this Section: We may specify the type of account or specific industry codes to which you may market Products and Services. When you do so, you agree that, at a minimum, 80% of your annual IBM system unit sales (measured by the price you paid IBM) will be to those accounts. Section 2- Value Added Enhancement The following are additional terms to this Section: You agree to market Products and Services only with your approved value added enhancement as part of an integrated solution for End Users. Certain Products we specify do not require a value added enhancement. In the event we withdraw approval of your value added enhancement, we also withdraw your approval as an IBM Business Partner for that value added enhancement. We may, at any time, modify the criteria for approval of your value added enhancement. You are responsible to modify your value added enhancement to meet these criteria. You agree to market Products, including processor upgrades requiring a processor serial number change, to only End Users for whom your value added enhancement is their primary reason for acquiring the Products, and who intend the on-going use of such enhancement. A sale to an End User without a value added enhancement, when required, is a material breach of the Agreement. However, your value added enhancement is not required to be the End User's primary reason for acquiring upgrades to systems you previously installed with your enhancement and where your enhancement is still in productive use. Upgrades include processor upgrades (non-serial number change), peripherals and programs. Unless we specify otherwise in writing, you may market upgrades only to those End Users where you have installed your value added enhancement, and who intend on-going use of that value added enhancement. UNITED STATES OF AMERICA Section 1- Marketing Approval The following is an additional term to this Section: We may specify the specific industry codes to which you may market Products and Services, if we do so, you agree to comply. Section 2- Value Added Enhancement The following are additional terms to this Section: BXSP-02-00 11/98 Page 4 of 5 You agree to market Products and Services only with your approved value added enhancement as part of an integrated solution for End Users. Certain Products we specify do not require a value added enhancement. In the event we withdraw approval of your value added enhancement we also withdraw your approval as an IBM Business Partner for that value added enhancement. We may, at any time modify the criteria for approval of your value added enhancement. You are responsible to modify your value added enhancement to meet these criteria. You agree to market Products, including processor upgrades requiring a processor serial number change, to only End Users for whom your value added enhancement is their primary reason for acquiring the Products, and who intend the on-going use of such enhancement. A sale to an End User without a value added enhancement, when required, is a material breach of the Agreement. However, your value added enhancement is not required to be the End User's primary reason for acquiring upgrades to systems you previously installed with your enhancement and where your enhancement is still in productive use. Upgrades include processor upgrades (non-serial number change), peripherals and programs. Unless we specify otherwise in writing, you may market upgrades only to those End Users where you have installed your value added enhancement, and who intend on-going use of that value added enhancement. Section 4- Your Responsibilities to End Users Add the following as the preamble to this Section: When you market Products and Services under complementary marketing terms, Items 2 and 5 only apply when you use our central order facility. Items 10 and 11 are not applicable. BXSP-02-00 11/98 Page 5 of 5 IBM Business Partner Agreement - General Terms - -------------------------------------------------------------------------------- Table of Contents Section Title Page 1. Definitions .......................................................2 2. Agreement Structure and Contract Duration .........................3 3. Our Relationship ..................................................4 4. Status Change .....................................................5 5. Confidential Information ..........................................5 6. Marketing Funds and Promotional Offerings .........................6 7. Production Status .................................................6 8. Patents and Copyrights ............................................6 9. Liability .........................................................7 10. Trademarks ........................................................7 11. Changes to the Agreement Terms ....................................8 12. Internal Use Products .............................................8 13. Demonstration, Development and Evaluation Products ................8 14. Electronic Communications .........................................9 15. Geographic Scope ..................................................9 18. Governing Law .....................................................9 BXGT-02-00 11/98 Page 1 of 25 IBM Business Partner Agreement - General Terms - -------------------------------------------------------------------------------- 1. Definitions Business Partner is a business entity which is approved by us to market Products and Services under this Agreement. Customer is either an End User or a Remarketer. We specify in your Profile if we approve you to market to End Users or Remarketers, or both. End User is anyone, who is not part of the Enterprise of which you are a part, who uses Services or acquires Products for its own use and not for resale. Enterprise is any legal entity (such as a corporation) and the subsidiaries it owns by more than 50 percent. An Enterprise also includes other entities as IBM and the Enterprise agree in writing. Licensed Internal Code is called "Code". Certain Machines we specify (called "Specific Machines") use Code. International Business Machines Corporation or one of its subsidiaries owns copyrights in Code or has the right to license Code. IBM or a third party owns all copies of Code, including all copies made from them. Machine is a machine, its features, conversions, upgrades, elements, accessories, or any combination of them. The term "Machine" includes an IBM Machine and any non-IBM Machine (including other equipment) that we approve you to market. Product is a Machine or Program, that we approve you to market, as we specify in your Profile. Program is an IBM Program or a non-IBM Program provided by us, under its applicable license terms, that we approve you to market. Related Company is any corporation, company or other business entity: 1. more than 50 percent of whose voting shares are owned or controlled, directly or indirectly, by either of us, or 2. which owns or controls, directly or indirectly, more than 50 percent of the voting shares of either of us, or 3. more than 50 percent of whose voting shares are under common ownership or control, directly or indirectly, with the voting shares of either of us. However, any such corporation, company or other business entity is considered to be a Related Company only so long as such ownership or control exists. "Voting shares" are outstanding shares or securities representing the right to vote for the election of directors or other managing authority. Remarketer is a business entity which acquires Products and Services, as applicable, for the purpose of marketing. Service is performance of a task, provision of advice and counsel, assistance, or access to a resource (such as a network and associated enhanced communication and support) that we approve you to market. BXGT-02-00 11/98 Page 2 of 25 2. Agreement Structure and Contract Duration Profiles We specify the details of our relationship (for example, the type of Business Partner you are) in a document called a "Profile." Each of us agrees to the terms of the Profile, the General Terms, the applicable Attachments referred to in the Profile, and the Exhibit (collectively called the "Agreement") by signing the Profile. General Terms The General Terms apply to all of our Business Partners. Attachments We describe, in a document entitled an "Attachment", additional terms that apply. Attachments may include, for example, terms that apply to the method of Product distribution (Remarketer Terms Attachment or Complementary Marketing Terms Attachment) and terms that apply to the type of Business Partner you are, for example, the terms that apply to a Distributor relationship as described in the Distributor Attachment. We specify in your Profile the Attachments that apply. Exhibits We describe in an Exhibit, specific information about Products and Services, for example, the list of Products and Services, and warranty information about the Products. Transaction Documents We will provide to you the appropriate "transaction documents." The following are examples of transaction documents, with examples of the information and responsibilities they may contain: 1. invoices (item, quantity, payment terms and amount due); and 2. order acknowledgements (confirmation of Products and quantities ordered). Conflicting Terms If there is a conflict among the terms in the various documents, the terms of: 1. a transaction document prevail over those of all the documents; 2. an Exhibit prevail over the terms of the Profile, Attachments and the General Terms; 3. a Profile prevail over the terms of an Attachment and the General Terms; and 4. an Attachment prevail over the terms of the General Terms. If there is an order of precedence within a type of document, such order will be stated in the document (for example, the terms of the Distributor Attachment prevail over the terms of the Remarketer Terms Attachment, and will be so stated in the Distributor Attachment). Our Acceptance of Your Order Products and Services become subject to this Agreement when we accept your order by: 1. sending you a transaction document; or 2. providing the Products or Services. BXGT-02-00 11/98 Page 3 of 25 Acceptance of the Terms in a Transaction Document You accept the terms in a transaction document by doing any of the following: 1. signing it (those requiring a signature must be signed); 2. accepting the Product or Services; 3. providing the Product or Services to your Customer; or 4. making any payment for the Product or Services. Contract Duration We specify the contract start date and the duration in your Profile. Unless we specify otherwise in writing, the Agreement will be renewed automatically for subsequent two year periods. However, you may advise us in writing not to renew the Agreement. Each of us is responsible to provide the other three months' written notice if this Agreement will not be renewed. 3. Our Relationship Responsibilities Each of us agrees that: 1. you are an independent contractor, and this Agreement is non-exclusive. Neither of us is a legal representative or legal agent of the other. Neither of us is legally a partner of the other (for example, neither of us is responsible for debts incurred by the other), and neither of us is an employee or franchise of the other, nor does this Agreement create a joint venture between us: 2. each of us is responsible for our own expenses regarding fulfillment of our responsibilities and obligations under the terms of this Agreement; 3. neither of us will disclose the terms of this Agreement, unless both of us agree in writing to do so, or unless required by law; 4. neither of us will assume or create any obligations on behalf of the other or make any representations or warranties about the other, other than those authorized; 5. any terms of this Agreement, which by their nature extend beyond the date this Agreement ends, remain in effect until fulfilled and apply to respective successors and assignees; 6. we may withdraw a Product or Service from marketing at any time; 7. we will allow the other a reasonable opportunity to comply before it claims the other has not met its obligations, unless we specify otherwise in the Agreement; 8. neither of us will bring a legal action against the other more than two years after the cause of action arose, unless otherwise provided by local law without the possibility of contractual waiver; 9. failure by either of us to insist on strict performance or to exercise a right when entitled does not prevent either of us from doing so at a later time, either in relation to that default or any subsequent one; 10. neither of us is responsible for failure to fulfill obligations due to causes beyond the reasonable control of either of us: 11. IBM reserves the right to assign, in whole or in part, this Agreement to a Related Company, but may assign its rights to payment or orders placed hereunder to any third party; 12. IBM does not guarantee the results of any of its marketing plans; and 13. each of us will comply with all applicable laws and regulations (such as those governing consumer transactions). BXGT-02-00 11/98 Page 4 of 25 Other Responsibilities You agree: 1. to be responsible for customer satisfaction for all your activities, and to participate in customer satisfaction programs as we determine: 2. that your rights under this Agreement are not property rights and, therefore, you can not transfer them to anyone else or encumber them in any way. For example, you can not sell your approval to market our Products or Services or your rights to use our Trademarks; 3. to maintain the criteria we specified when we approved you; 4. to achieve and maintain the certification requirements for the Products and Services you are approved to market, as we specify in your Profile; 5. not to assign or otherwise transfer this Agreement, your rights under this Agreement, or any of its approvals, or delegate any duties, unless expressly permitted to do so in this Agreement. Otherwise, any attempt to do so is void; 6. to conduct business activities with us (including placing orders) which we specify in the operations guide, using our automated electronic system if available. You agree to pay all your expenses associated with it such as your equipment and communication costs; 7. that when we provide you with access to our information systems, it is only in support of your marketing activities. Programs we provide to you for your use with our information systems, which are in support of your marketing activities, are subject to the terms of their applicable license agreements, except you may not transfer them; 6. to promptly provide us with documents we may require from you or the End User (for example, our license agreement signed by the End User) when applicable; and 9. to comply with the highest ethical principles in performing under the Agreement. You will not offer or make payments or gifts (monetary or otherwise) to anyone for the purpose of wrongfully influencing decisions in favor of IBM, directly or indirectly. IBM may terminate this Agreement immediately in case of 1) a breach of this clause or 2) when IBM reasonably believes such a breach has occurred or is likely to occur. Our Review of Your Compliance with this Agreement We may periodically review your compliance with this Agreement. You agree to provide us with relevant records on request. We may reproduce and retain copies of these records. We, or an independent auditor, may conduct a review of your compliance with this Agreement on your premises during your normal business hours. If, during our review of your compliance with this Agreement, we find you have materially breached the terms of this relationship, in addition to our rights under law and the terms of this Agreement, for transactions that are the subject of the breach, you agree to refund the amount equal to the discount (or fee, if applicable) we gave you for the Products or Services or we may offset any amounts due to you from us. 4. Status Change You agree to give us prompt written notice (unless precluded by law or regulation) of any change or anticipated change in your financial condition, business structure, or operating environment (for example, a material change in equity ownership or management or any substantive change to information supplied in your application). Upon notification of such change, (or in the event of failure to give notice of such change) IBM may, at its sole discretion, immediately terminate this Agreement. 5. Confidential Information This section comprises a Supplement to the IBM Agreement for Exchange of Confidential information. "Confidential Information" means: 1. all information IBM marks or otherwise states to be confidential; 2. any of the following prepared or provided by IBM; BXGT-02-00 11/98 Page 5 of 25 a. sales leads, b. information regarding prospects or Customers c. unannounced information about Products and Services, d. business plans, or e. market intelligence; 3. any of the following written information you provide to us on our request and which you mark as confidential; a. reporting data, b. financial data, or c. the business plan. All other information exchanged between us is nonconfidential, unless disclosed under a separate Supplement to the IBM Agreement for Exchange of Confidential Information. 6. Marketing Funds and Promotional Offerings We may provide marketing funds and promotional offerings to you. If we do, you agree to use them according to our guidelines and to maintain records of your activities regarding the use of such funds and offerings for three years. We may withdraw or recover marketing funds and promotional offerings from you if you breach any terms of the Agreement. Upon notification of termination of the Agreement, marketing funds and promotional offerings will no longer be available for use by you, unless we specify otherwise in writing. 7. Production Status Each IBM Machine is manufactured from new parts, or new and used parts. In some cases, the IBM Machine may not be new and may have been previously installed. Regardless of the IBM Machine's production status, our appropriate warranty terms apply. You agree to inform your Customer of these terms in writing (for example, in your proposal or brochure). 8. Patents and Copyrights For the purpose of this section only, the term Product includes Licensed Internal Code (if applicable). If a third party claims that a Product we provide under this Agreement infringes that party's patents or copyrights, we will defend you against that claim at our expense and pay all costs, damages, and attorneys' fees that a court finally awards, provided that you: 1. promptly notify us in writing of the claim; and 2. allow us to control, and cooperate with us in, the defense and any related settlement negotiations. If you maintain an inventory, and such a claim is made or appears likely to be made about a Product in your inventory, you agree to permit us either to enable you to continue to market and use the Product, or 10 modify or replace it. If we determine that none of these alternatives is reasonably available, you agree to return the Product to us on our written request. We will then give you a credit, as we determine, which will be either 1) the price you paid us for the Product (less any price-reduction credit), or 2) the depreciated price. This is our entire obligation to you regarding my claim of infringement. Claims for Which We Are Not Responsible We have no obligation regarding any claim based on any of the following: 1. anything you provide which is incorporated into a Product; BXGT-02-00 11/98 Page 6 of 25 2. your modification of a Product, or a Program's use in other than its specified operating environment; 3. the combination, operation, or use of a Product with any Products not provided by us as a system, or the combination, operation, or use of a Product with any product, data, or apparatus that we did not provide; or 4. infringement by a non-IBM Product alone, as opposed to its combination with Products we provide to you as a system. 9. Liability Circumstances may arise where, because of a default or other liability, one of us is entitled to recover damages from the other. In each such instance, regardless of the basis on which damages can be claimed, the following terms apply as your exclusive remedy and our exclusive liability. Our Liability We are responsible for no more than: 1. payments referred to in the "Patents and Copyrights" section above; 2. damages for bodily injury (including death) caused by our negligence; 3. actual direct loss or damage to real property or tangible personal property caused by our negligence; and 4. the amount of any other actual direct loss or damage arising from our negligence or breach of this Agreement, up to the greater of U.S. $100,000 (or equivalent) or the charges for the Product or Service that is the subject of the claim. Items for Which We Are Not Liable Under no circumstances (except as required by law) are we liable for any of the following: 1. third-party claims against you for damages (other than those under the first three items above in the subsection entitled "Our Liability"); 2. loss of, or damage to, your records or data; or 3. special, incidental, or indirect damages, or for any economic consequential damages (including lost profits or savings) even if we are informed of their possibility. Your Liability In addition to damages for which you are liable under law and the terms of this Agreement, you will indemnify us for claims made against us by others (particularly regarding statements, representations or warranties not authorized by us) arising out of your conduct under this Agreement or as a result of your relations with anyone else. 10. Trademarks We will notify you in written guidelines of the IBM Business Partner title and emblem which you are authorized to use. You may not modify the emblem in any way. You may use our Trademarks (which include the title, emblem, IBM trade marks and service marks) only: 1. within the geographic scope of this Agreement; 2. in association with Products and Services we approve you to market; and 3. as described in the written guidelines provided to you. The royalty normally associated with non-exclusive use of the Trademarks will be waived, since the use of this asset is in conjunction with marketing activities for Products and Services. You agree to promptly modify any advertising or promotional materials that do not comply with our guidelines. If you receive any complaints about your use of a Trademark, you agree to promptly notify us. When this Agreement ends, you agree to promptly stop using our BXGT-02-00 11/98 Page 7 of 25 Trademarks, if you do not, you agree to pay any expenses and fees we incur in getting you to stop. You agree not to register or use any mark that is confusingly similar to any of our Trademarks. Our Trademarks, and any goodwill resulting from your use of them, belong to us. 11. Changes to the Agreement Terms We may change the terms of this Agreement by giving you one month's written notice. We may, however, change the following terms without advance notice: 1. those we specify in this Agreement as not requiring advance notice; 2. those of the Exhibit unless otherwise limited by this Agreement; and 3. those relating to safety and security. Otherwise, for any other change to be valid, both of us must agree in writing. Changes are not retroactive. Additional or different terms in any written communication from you (such as an order), are void. 12. Internal Use Products You may acquire Products you are approved to market for your internal use within your Business Partner operations. Except for personal computer Products, you are required to advise us when you order Products for your internal use. We will specify in your Exhibit the discount or price, as applicable, at which you may acquire the Products for internal use. Except for personal computer Products, such Products do not count toward 1) your minimum annual attainment 2) determination of your discount or price, as applicable or 3) determining your marketing or promotional funds. Any value added enhancement or systems integration services otherwise required by your relationship is not applicable when you acquire Products for internal use. You must retain such Products for a minimum of 12 months, unless we specify otherwise in the Exhibit. 13. Demonstration, Development and Evaluation Products You may acquire Products you are approved to market for demonstration, development and evaluation purposes, unless we specify otherwise in the Exhibit. Such Products must be used primarily in support of your Product marketing activities. We will specify in your Exhibit the Products we make available to you for such purposes, the applicable discount or price, and the maximum quantity of such Products you may acquire and the period they are to be retained. The maximum number of input/output devices you may acquire is the number supported by the system to which they attach. If you acquired the maximum quantity of Machines, you may still acquire a field upgrade, if available. We may decrease the discount we provide for such Products on one month's written notice. You may make these Products available to Customer for the purpose of demonstration and evaluation. Such Products may be provided to an End User for no more than three months. For a Program, you agree to ensure the Customer has been advised of the requirement to accept the terms of a license agreement before using the Program. BXGT-02-00 11/98 Page 8 of 25 14. Electronic Communications Each of us may communicate with the other by electronic means, and such communication is acceptable as a signed writing to the extent permissible under applicable law. Both of us agree that for all electronic communications, an identification code (called a "user ID") contained in an electronic document is sufficient to verify the sender's Identity and the document's authenticity. 15. Geographic Scope All the rights and obligations of both of us are valid only in (country name). 16. Governing Law The laws of (country name) govern this Agreement. The "United Nations Convention on Contracts for the International Sale of Goods" does not apply. BXGT-02-00 11/98 Page 9 of 25 IBM Business Partner Agreement - General Terms - -------------------------------------------------------------------------------- Country Unique General Terms The following terms amend the General Terms, in the specific Countries, as noted. ASIA PACIFIC The following terms apply to all countries in Asia Pacific except Australia and New Zealand. Section 1- Definitions The following replaces the definition of End User End User is anyone who uses Services or acquires Products for its own use and not for resale Section 12- Internal Use Products The following paragraph replaces the second paragraph: We will specify in your Exhibit the discount or price, as applicable, at which you may acquire the Products for Internal use. The following terms apply to the specific countries in Asia Pacific, as noted: ASEAN COUNTRIES Section 16- Governing Law For personal computer Products acquired X-hub, add the following at the end of this Section: Disputes and differences arising out of or in connection with this Agreement shall be finally settled by arbitration which shall be held in Singapore in accordance with the Rules of the International Chamber of Commerce (ICC). The arbitrator or arbitrators designated in conformity with those rules shall have power to rule on their own competence and on the validity of the Agreement to submit to arbitration. The arbitration award shall be final and binding for the parties, without appeal, and the arbitral award shall be in writing and set forth the findings of fact and the conclusion of law. All proceedings shall be conducted, including all documents presented in such proceedings, in the English language. The number of arbitrators shall be three, with each side to the dispute being entitled to appoint one arbitrator. The two arbitrators appointed by the Parties shall appoint a third arbitrator before proceeding upon the reference. The third arbitrator shall act as chairman of the proceedings. Vacancies to the post of chairman shall be filled by the president of the ICC. Other vacancies shall be filled by the respective nominating party. Proceedings shall continue from the stage they were at when the vacancy occurred. If one of the parties refuses or otherwise fails to appoint an arbitrator within one month of the date the other party appoints its, the first appointed arbitrator shall be the sole arbitrator, provided that the arbitrator was validly and properly appointed. AUSTRALIA Section 9- Liability Add the following after the subsection entitled "Our Liability": Where we are in breach of a condition or warranty implied by the Trade Practices Act of 1974: 1) our liability is limited to, for services, the payment of the cost of having the services supplied again, and for goods, the repair or replacement of the goods or the supply of equivalent goods; and 2) where this condition or warranty relates to the right to sell, quiet possession or clear title (i.e., BXGT-02-00 11/98 Page 10 of 25 Section 69 of the Trade Practices Act), or the goods are of a kind ordinarily acquired for personal, domestic, or household use or consumption, then none of the limitations in this Section apply. INDIA Section 3- Our Relationship In the subsection entitled "Responsibilities" the following replaces Item 8: If no suit or other legal action is brought within two years after the cause of action arose, in respect to any claim that either of us may have against the other, the rights of the concerned party in respect to such claim shall be forfeited and the other party shall stand released from its obligations in respect to such claim; Section 9- Liability In the subsection entitled "Our Liability" the following replaces Items 2, 3, and 4: 2. liability for bodily injury (including death) or damage to real property and tangible personal property shall be limited to that caused by our negligence; and 3. as to any other actual loss or damage arising in any situation involving non-performance by us pursuant to, or in any way related to the subject of this Agreement, our liability will be limited to the charge paid by you for the individual Product or Service that is the subject of the claim. For purposes of this tern, the term "Product" includes License Internal Code and Materials. INDOCHINA COUNTRIES The following terms apply to all countries in Indochina (Cambodia, Laos, Myanmar and Vietnam): Section 8. Patents and Copyrights Add the following after the third paragraph in the Section: We make no representation or warranties regarding the copyright status of Products and Services in (country name). Section 16- Governing Law Add the following after the second paragraph in this Section: Disputes and differences arising out of or in connection with this Agreement shall be finally settled by arbitration which shall be held in Singapore in accordance with the Rules of the International Chamber of Commerce (ICC). The arbitrator or arbitrators designated in conformity with those rules shall have power to rule on their own competence and on the validity of the Agreement to submit to arbitration. The arbitration award shall be final and binding for the parties without appeal and the arbitral award shall be in writing and set forth the findings of fact and the conclusions of law. All proceedings shall be conducted, including all documents presented in such proceedings, in the English language. The number of arbitrators shall be three, with each side to the dispute being entitled to appoint one arbitrator. The two arbitrators appointed by the parties shall appoint a third arbitrator before proceeding upon the reference. The third arbitrator shall act as chairman of the proceedings. Vacancies in the post of chairman shall be filled by the president of the ICC. Other vacancies shall be filled by the respective nominating party. Proceedings shall continue from the stage they were at when the vacancy occurred. If one or the parties refuses or otherwise fails to appoint an arbitrator within 3D days of the date the other party appoints its, the first appointed arbitrator shall be the sole arbitrator, provided that the arbitrator was validly and properly appointed. The English language version of this Agreement prevails over any (country name) language version. JAPAN BXGT-02-00 11/98 Page 11 of 25 When creating the local Japan contract do not include items 9 and 10 in Section 3- Our Relationship, subsection "Responsibilities". Section 8- Patents and Copyrights After the word "patents" in the second paragraph, add the following: (including utility model registrations and design registrations) Section 9- Liability The following is an additional term and follows item 4 in the subsection entitled "Our Liability": However, if you cancel the contract for the Machine that is the subject of the claim and you purchase a substitute Machine as a replacement for that Machine during its warranty period, IBM will only be liable for the difference of the price between the substitute Machine and the subject Machine. You agree to insert the following IBM Limitation of Liability statement into your contract with your End User. If you do not, you agree to compensate IBM for any End User claim, which we settle and pay, which exceeds IBM's limitation of liabilities as described in this Section. "For any defects in an IBM Machine which an End User acquires from you, IBM (for the purpose of this article only, the term IBM includes IBM Corporation and its direct or indirect Related Companies) will be liable, including but not limited to, liability under Japan's Product Liability Law, to the End User only within the limit set forth hereunder: 1. repair or replacement of the IBM Machine as specified in the Statement of Limited Warranty provided with the IBM Machine; and 2. bodily injury, including death, or damage to tangible property for which IBM is legally liable. In no event will IBM be liable for loss of intangible property including, but not limited to, data or programs. If there is a conflict between the terms of the Statement of Limited Warranty and these terms, the term of the Statement of Limited Warranty will prevail." Section 16- Governing Law Add the following after the first paragraph in this Section: Any doubts concerning this Agreement will be initially resolved between us in good faith and in accordance with the principle of mutual trust. NEW ZEALAND Section 9- Liability Add the following after the subsection entitled "Our Liability": The Consumer Guarantees Act 1993 will not apply in respect to any goods and services which we provide if you require the goods or services for the purpose of a business as defined in the Act. The implied warranties of merchantability and fitness for a particular purpose are also excluded. Where services are not required for the purposes of a business as defined in the Consumer Guarantees Act 1993 the limitations in this Section are subject to the limitations in that Act. BXGT-02-00 11/98 Page 12 of 25 PEOPLE'S REPUBLIC OF CHINA Section 16- Governing Law The following replaces the first paragraph in this Section: The laws of the State of New York govern this Agreement. EMEA (EUROPE, MIDDLE EAST, AFRICA) Listings of the countries or group of countries follows: ALGERIA CAPE VERDE CENTRAL AFRICAN REPUBLIC CHAD D.R. OF CONGO EGYPT EQUATORIAL GUINEA ESTONIA GUINEE BISSAU ISRAEL IVORY COAST LATVIA LITHUANIA MOROCCO PAKISTAN SOUTH AFRICA TUNISIA TURKIYE IBM CENTRAL AFRICA Benin Eritrea Malta Sudan Botswana Ethiopia Mauritania Tanzania Burkina Faso Gabon Mozambique Toga Burundi Gambia Niger Uganda Cabo Verde Ghana Nigeria Zambia Cameroon Guinea Republique Centre Africaine Zimbabwe Congo Kenya Rwanda Cote d'Ivoire Malawi Senegal Djibouti Mali Sierra IBM CENTRAL EUROPE AND RUSSIA Albania Croatia Kirghizia Russia Armenia Czech Republic Moldavia Slovakia Azerbaijan Belarus Georgia Poland Slovenia Tajikistan Turkmenistan Bosnia-Hercegovina Hungary Romania Ukraine Uzbekistan Bulgaria Kazakhstan FR Yugoslavia Former Yugoslav Republic of Macedonia-FYROM WESTERN EUROPE Austria Germany Luxembourg Sweden Belgium Greece Netherlands Switzerland Denmark Iceland Norway United Kingdom Finland Ireland Portugal France Italy Spain BXGT-02-00 11/98 Page 13 of 25 EMEA The following terms apply to all countries in EMEA: Section 1- Definitions Enterprise The second sentence of the definition is not applicable. Section 3- Our Relationship The following replaces item 6 of the subsection entitled "Responsibilities": we may withdraw a Product or Service from 1) a type of Business Partner or a method of distribution with six months notice, and 2) marketing at any time; In the subsection entitled "Other Responsibilities": - the following replaces item 3 - - to maintain the criteria we specify, if any, in the Exhibit; - Item 4 is not applicable. - in item 5, add at the end of the first sentence: "or in writing" the following replaces item 8: to promptly provide us with documents we may require from you or the End User (for example, our license agreement signed by the End User and you) when applicable; Section 15- Geographic Scope The terms of this section are not applicable. The following terms apply to the countries in EMEA, as noted: The following terms apply to Western Europe: Section 1- Definitions Add the following definition: Western Europe is the following countries: Austria Germany Luxembourg Sweden Belgium Greece Netherlands Switzerland Denmark Iceland Norway United Kingdom Finland Ireland Portugal France Italy Spain The following terms apply to all countries in EMEA except Austria, Germany, Italy, South Africa and Switzerland, and the countries of Central Europe and Russia: Section 3- Our Relationship Add the following as the last item of the subsection entitled "Other Responsibilities"; that we may use data about your organization, including your addresses, contact names revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. BXGT-02-00 11/98 Page 14 of 25 Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name), you agree to inform that person of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 10- Trademarks The following terms of the TRADEMARKS Section apply to the countries in EMEA, as noted: The following terms apply to all countries in Western Europe: The following replaces item 1 in the first paragraph; within Western Europe; The following terms apply to the Republic of South Africa, Namibia, Swaziland and Lesotho: The following replaces item 1 in the first paragraph; in the Republic of South Africa, Namibia, Swaziland and Lesotho; The following terms apply to all countries in Central Europe and Russia, except Czech Republic: The following replaces item 1 in the first paragraph: within your applicable Territory. The following terms apply to all other countries in EMEA: The following replaces item 1 in the first paragraph: within (country name); The following terms apply to the specific countries in EMEA, as noted: AFRICAN COUNTRIES The following terms apply to the following African countries: Algeria, Benin, Burkina Paso, Cameroon, Cape Verde, Central African Republic, Chad, Congo, Djibouti, D.R. of Congo, Equatorial Guinea, Gabon, Gambia, Guinea, Guinee Bissau, Ivory Coast, Mali, Mauritania, Morocco, Niger, Senegal, Togo, and Tunisia. Section 16- Governing Law The following replaces the entire section: The laws of France govern this Agreement. The "United Nations Convention on Contracts for the International Sale of Goods" does not apply. All disputes arising out of this Agreement or relating to its violation or execution, shall be settled by the Commercial Courts of Paris even in matters concerning multiple parties or impleader actions or emergency protective actions in summary proceedings or on ex parte motion, AUSTRIA Section 3- Our Relationship BXGT-02-00 11/98 Page 15 of 25 Add the following as the last item of the subsection entitled "Other Responsibilities": that we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name) or a legal person (for example, your customer's data), you agree to inform these persons of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 9- Liability The following replaces item 4 in the subsection entitled "Our Liability": the amount of any other actual direct loss or damage arising from our slight negligence in case of the violation of essential contractual terms or breach of this Agreement, up to the greater of ATS 1,500,000 or the charges for the Product that is the subject of the claim. This limitation does not apply to damages caused by us with fraud or gross negligence and for express warranty. Section 16- Governing Law The following replaces the first paragraph in this Section: This Agreement is governed by the substantive laws of Austria. CENTRAL AFRICA The following terms apply to all countries in Central Africa: Section 9- Liability The following replaces item 4 in the subsection entitled "Our Liability": the amount of any other actual direct loss or damage arising from our negligence or breach of this Agreement up to the charges for the Product or Service that is the subject of the claim. CENTRAL EUROPE AND RUSSIA The following terms apply to all countries in Central Europe and Russia except Czech Republic: Section 1- Definitions Add the following at the end of the definition of "Service": Any reference to IBM with regard to Service shall mean the respective local IBM Company to which such part of the Agreement has been assigned. Section 2- Agreement Structure and Contract Duration Add the following as a new paragraph before the subsection entitled "Pro files": IBM World Trade Corporation's signature may be replaced by a written confirmation by IBM Central Europe and Russia Inc. or the relevant IBM country organization, that IBM World Trade Corporation has accepted the subject Agreement or other documents as applicable. The following replaces the terms of the subsection entitled "Our Acceptance of Your Order": BXGT-02-00 11/98 Page 16 of 25 Products and Services become subject to this Agreement when we accept your order by confirming our acceptance of your order in writing, but no later than when the Products or Services are provided to you. Section 3- Our Relationship In the subsection entitled "Responsibilities": Add the following as the second sentence of item 3: However, you agree that IBM may disclose the terms of the Agreement and submit relevant documents to a financial institution under a non-disclosure obligation if you request deviations from the pre-payment terms. For this purpose, such information shall not be considered confidential even if so marked. In item 8 replace the words "local law" with "applicable law". The following is added to Item 11: IBM reserves the right to have this Agreement or any part thereof performed by another IBM organization or designee. The names of the local IBM organizations and designees are provided in the operations guide. Add the following as the last items in the Section: 14. IBM's or its designee's performance under this Agreement is subject to export licensing, and that such licensing is beyond IBM's control and that IBM does not assume any responsibility for it. You agree to provide any information necessary to apply for such approvals and to comply with all conditions of such approvals. Notwithstanding the definition of your authorization to market Products and Services, you should be aware that export, relocation or re-direction of Products and Services and related items is subject to regulations, for example, of the country of installation, the United States of America and the original country of export, and may be prohibited by law. It is your responsibility to comply with any such regulations and to obtain all necessary licenses as applicable. We may terminate this Agreement on written notice if we have reason to believe that you have violated these terms or that such violation is likely to occur; 15. IBM will make any payments under this Agreement at its election in U.S. dollars or in the local currency of the country in which the responsibilities have been performed, based on the official exchange rate on the date of payment, to your bank account held in your name in the country in which the responsibilities have been performed or in which you are located. Add the following as the last item in the subsection entitled "Other Responsibilities": that, to the extent permitted by applicable law, we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties. Including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name), you agree to inform that person of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 16- Governing Law BXGT-02-00 11/98 Page 17 of 25 Change the title of the "Governing Law" section to "Governing Law and Arbitration/Jurisdiction". The following replaces the first paragraph in this Section: All disputes arising out of this Agreement or related to its violation, termination or nullity shall be finally settled under Rules of Arbitration and Conciliation of the Federal Economic Chamber in Vienna (Vienna Rules) by three arbitrators appointed in accordance with these rules. The arbitration shall be held in Vienna, Austria and the official language of the proceedings shall be English. The decision of the arbitrators shall be final and binding upon both parties and therefore the parties pursuant to paragraph 598 (2) of the Austrian Code of Civil Procedure expressly waive the application of paragraph 595 (1) Figure 7 of the said code. The clause set forth above shall, however, in no way limit IBM's right to institute proceedings in any competent court. This Agreement is governed by the substantive laws of Austria exclusive or its conflict of laws provisions. CZECH REPUBLIC Section 3. Our Relationship Add the following as the last item in the subsection entitled "Other Responsibilities": that, to the extent permitted by applicable law, we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name), you agree to inform that person of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 18- Governing Law Add the following as the second paragraph of this Section: All disputes arising out of this Agreement or related to its violation, termination or nullity shall be finally settled by Commercial Court in Prague. ESTONIA Section 15- Governing Law The following replaces the first paragraph of this Section: All disputes arising in conjunction with this Agreement shall be settled in arbitration. Each party shall appoint an arbitrator and the parties shall jointly appoint the Chairman. If the parties can not agree on who the Chairman will be, then the Central Chamber of Commerce in Helsinki will appoint the Chairman. In arbitration, the Law on Arbitration will be binding. The arbitrators shall come together in Helsinki. Finnish law will apply. FRANCE Section 16- Governing Law Add the following as the second paragraph of this Section: BXGT-02-00 11/98 Page 18 of 25 All disputes arising out of this Agreement or related to its violation or execution, including summary proceedings, shall be settled exclusively by the Commercial Court of Paris. GERMANY Section 1- Definitions Add the following at the end of the definition of End User: The End User may also be a lessor when it finances Products for use by a designated End User and a Certification is signed by the lessor and the designated End User. Section 3- Our Relationship Add the following to the beginning of item 5 in the subsection entitled "Other Responsibilities": notwithstanding the regulations set forth in 354a HGB. Add the following in bold typeface, as the last item of the subsection entitled "Other Responsibilities": that we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement including personal data (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name), you agree to inform that person of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 9- Liability The following replaces item 4 in the subsection entitled "Our Liability": The amount of any other actual direct loss or damage arising from our slight negligence in case of the violation of essential contractual terms or breach of this Agreement, up to the greater of DM 1.000.000 or the charges for the Product that is the subject of the claim. This limitation does not apply to damages caused by us with fraud or gross negligence and for express warranty. IRELAND Section 9- Liability The following replaces the fourth item in the subsection entitled "Our Liability": The amount of any other actual direct loss or damage arising from our negligence or breach of this Agreement up to the greater of U.S. $100,000 (or equivalent) or 125% of the charges for the Product or Service that is the subject of the claim. Add the following as the last item in the subsection entitled "Items for Which We Are Not Responsible": except as expressly provided in these terms and Section 12 of the Sale of Goods Act 1893 as amended by (Section 39 of) the Sale of Goods and Supply of Services Act 1980, all conditions and warranties (express or implied, statutory or otherwise) are excluded, including without limitation any warranties implied by the Sale of Goods Act 1893 as amended by the Sale of Goods and Supply of Services Act 1980. BXGT-02-00 11/98 Page 19 of 25 ITALY Section 2- Agreement Structure and Contract Duration Add the following as the last paragraph of the subsection entitled "Acceptance of the Terms in a Transaction Document": You must give your express acceptance of specific clauses. Section 3- Our Relationship Add the following as the last item of the subsection entitled "Other Responsibilities": that we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name) or a legal person (for example, your customers data), you agree to inform these persons of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 7- Production Status The following replaces the first sentence: Each IBM Machine is manufactured from new parts, or new and recycled parts. Section 9- Liability The following replaces, in its entirety, the subsection entitled "Our Liability": Unless otherwise provided by mandatory law, we are liable only for: 1. payments referred to in the "Patents and Copyrights" section above; 2. damages for bodily injury (including death) and damage to real property and tangible personal property caused solely by our negligence; and 3. as to any other actual loss or damage arising in all situations involving non-performance by us pursuant to, or in any way related to, the subject matter of this Agreement, our liability will be limited to the total amount you paid for the Product or Service that is the subject of the claim. For purposes of this Item, the term "Product" includes Licensed internal Code and Materials. This limit also applies to any of our subcontractors and Program developers. It is the maximum for which we and our subcontractors and Program developers are collectively responsible. The following replaces in its entirety the terms in the subsection entitled "Items for Which We Are Not Liable": Unless otherwise provided by mandatory law, we, our subcontractors and our Program developers are not liable for any of the following: 1. third party claims against you for damages (other than those under the first two items above in the subsection entitled "Our Liability"): 2. loss of, or damage to, your records or data; or 3. indirect damages, even if we are informed of their possibility. Section 16- Governing Law BXGT-02-00 11/98 Page 20 of 25 Add the following as the second paragraph in this Section: All disputes arising out of this Agreement or related to its violation and execution shall be exclusively settled by the court of Milan. LATVIA Section 16- Governing Law The following replaces the first paragraph in this Section: All disputes arising in conjunction with this Agreement shall be settled in arbitration. Each party shall appoint an arbitrator and the parties shall jointly appoint the Chairman. If the parties can not agree on who the Chairman will be, then the Central Chamber of Commerce in Helsinki will appoint the Chairman. In arbitration, the Law on Arbitration will be binding. The arbitrators shall come together in Helsinki. Finnish law will apply. LITHUANIA Section 16- Governing Law The following replaces the first paragraph in this Section: All disputes arising in conjunction with this Agreement shall be settled in arbitration. Each party shall appoint an arbitrator and the parties shall jointly appoint the Chairman. If the parties can not agree on who the Chairman will be, then the Central Chamber of Commerce in Helsinki will appoint the Chairman. In arbitration, the Law on Arbitration will be binding. The arbitrators shall come together in Helsinki. Finnish law will apply. SOUTH AFRICA Section 3- Our Relationship Add the following as the last item of the subsection entitled "Other Responsibilities": that we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties, including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name) or a legal person (for example, your customer's data), you agree to inform these persons of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. Section 9- Liability The following replaces item 4 in the subsection entitled "Our Liability": the amount of any other actual direct loss or damage arising from our negligence or breach of this Agreement, up to the charges for the Product or Service that is the subject of the claim. SPAIN BXGT-02-00 11/98 Page 21 of 25 Section 2- Agreement Structure and Contract Duration The following replaces the last sentence in the subsection entitled "Contract Duration": You are responsible to provide us with three months' written notice if you will not be renewing this Agreement. We are responsible to provide you with six months' written notice if we will not be renewing this Agreement. SWITZERLAND Section 3- Our Relationship Add the following as the last item of the subsection entitled "Other Responsibilities": that we may use data about your organization, including your addresses, contact names, revenue data and any other types of data you provide under this Agreement (Your Data), for the purpose of this Agreement, other related purposes including the marketing of, and provisions of information about, Products, offerings and other activities, and for any other business purpose. Additionally, you agree that for the above purposes we may disclose or transfer Your Data to any of our Related Companies (which may also use and transfer Your Data as described) and to third parties including subcontractors and consultants. You agree that Your Data may be transferred to such Related Company or third party in any country whether or not a member of the European Union. To the extent that Your Data comprises data about a natural person (for example, a contact name) or a legal person (for example, your customer's date), you agree to inform these persons of the purpose for which such data are disclosed to us, to obtain their informed consent to that disclosure and the subsequent use or transfer of that data by us, and to fulfill all other legal requirements necessary to make such use and transfers legal. TURKIYE Section 3- Our Relationship The following replaces the last item in the subsection entitled "Responsibilities": each of us will comply with all laws and regulations (such as the provisions of the Consumer Protection Law and all related communiques). Section 7- Production Status The following replaces the terms in the Section: IBM fulfills Customer orders for IBM Machines as newly manufactured in accordance with IBM's production standards. Section 15.. Governing Law Add the following as the second paragraph in this Section: All conflicts arising from this Agreement will be finally settled by the Courts of Commerce and Execution Offices of the Main Courthouse of Istanbul (Sultanahmet). UNITED KINGDOM Section 9- Liability The following replaces item 4 in the subsection entitled "Our Liability": the amount of any other actual direct loss or damage arising from our negligence or breach of this Agreement up to the greater of U.S. $100,000 (or equivalent) or 125% of the charges for the Product or Service that is the subject of the claim. BXGT-02-00 11/98 Page 22 of 25 Add the following as item 5 in the subsection entitled "Our Liability": any breach of the obligations implied by Section 12 of the Sales of Goods Act 1979 or Section 2 of the Supply of Goods and Services Act 1982. LATIN AMERICA Listings of the countries and groups of countries follow: Brazil Costa Rica Dominican Republic* El Salvador* Guatemala* Honduras' Mexico Nicaragua* Panama* Andean Bolivia Colombia Ecuador Peru Venezuela Latin America South Argentina Chile Paraguay Uruguay (*) This country is covered by General Business Machines (GBM) and not by IBM locally. The following terms apply to all countries in Latin America: Section 2- Agreement Structure and Contract Duration The following term replaces Item 1 in the subsection entitled "Conflicting Terms" a transaction document if it is a signed document, prevails over those of all the documents; The following terms apply in the specific country in Latin America, as noted: COLOMBIA Section 1- Definitions Add the following at the end of the End User definition: and who is not on the Colombia Denial List. NORTH AMERICA Listing of the countries and group of countries follows: CANADA CARIBBEAN NORTH DISTRICT BXGT-02-00 11/98 Page 23 of 25 Bahamas and its sales territories of: Turks and Caicos Islands Barbados and its sales territories of: Antigua Dominica, Grenada, St Kitts, St Lucia and Tortolla Bermuda Jamaica and its sales territory of: Cayman Islands Netherlands Antilles and its sales territories of: St. Maarten, Bonaire and Aruba Suriname Trinidad and its sales territory of: Guyana UNITED STATES OF AMERICA The following terms apply to Canada and the United States of America: Section 12- Internal Use Products The following replaces the second sentence in the second paragraph in this Section: Such Products do not count, unless we specify otherwise in the Exhibit, toward 1) your minimum annual attainment, 2) determination of your discount or price, as applicable, or 3) determining your marketing or promotional funds. Section 13- Demonstration, Development and Evaluation Products: Add the following as the third sentence in the first paragraph in this Section; Additionally, such Products do not count, unless we specify otherwise in the Exhibit, toward 1) your minimum annual attainment, 2) determination of your discount or price, as applicable, or 3) determining your marketing or promotional funds. The following terms apply in the specific country in North America. as noted; CANADA Section 9- Liability The following replaces items 2, 3 and 4 in the subsection entitled "Our Liability": 2) bodily injury (including death), and damage to real property and tangible personal property caused by our negligence: and 3) the amount of any other actual direct damage arising from our negligence or breach of this Agreement, including fundamental breach, tort or our misrepresentation, up to the greater of $100,000 or the charges (if recurring, 12 months' charges apply) for the Product or Service that is the subject of the claim. The following replaces item 1 the subsection entitled "Items for Which We Are Not Liable": 1) third-party claims against you for damages (other than those under the first two items above in the subsection entitled `Our Liability'):" Section 16- Governing Law The following replaces the first paragraph in this Section: The laws of the Province of Ontario govern this Agreement. BXGT-02-00 11/98 Page 24 of 25 CARIBBEAN NORTH DISTRICT Section 9 - Liability The following replaces items 2, 3 and 4 in the subsection entitled "Our Liability": 2) bodily injury (including death), and damage to real property and tangible personal property caused by our negligence; and 3) the amount of any other actual direct damage arising from our negligence or breach of this Agreement, including fundamental breach, tort or our misrepresentation, up to the greater of US $100,000 or the charges (if recurring, 12 months' charges apply) for the Product that is the subject of the claim. The following replaces item 1 in the subsection entitled "Items for Which We Are Not Liable": 1) third-party claims against you for damages (other than those under the first two items above in the subsection entitled `Our Liability');" UNITED STATES OF AMERICA Section 9- Liability The following replaces items 2, 3 and 4 in the subsection entitled "Our Liability": 2) bodily injury (including death), and damage to real property and tangible personal property caused by our Products; and 3) the amount of any other actual loss or damage, up to the greater of $100,000 or the charges (if recurring, 12 months' charges apply) for the Product or Service that is the subject of the claim. The following replaces Item 1 in the subsection entitled "Items for Which We Are Not Liable": 1) third-party claims against you for damages (other than those under the first two items above in the subsection entitled `Our Liability');" Section 16- Governing Law The following replaces the first paragraph in this Section: The laws of the State of New York govern this Agreement. BXGT-02-00 11/98 Page 25 of 25 International Business Partner Agreement [IBM LOGO] Attachment for Consolidated Statement - -------------------------------------------------------------------------------- 1. Description The IBM Lead Company ("we") will provide to the Business Partner Lead Company ("you") a consolidation of your Invoices and those of your local Business Partner Companies and others we approve (for the purpose of this Attachment, collectively referred to as "Business Partner Companies") into a single billing statement (called a "Consolidated Statement"). The local IBM Companies also will send invoices to you or, at your request, to the applicable local Business Partner Companies. There is no charge for the Consolidated Statement Service. 2. Your Responsibilities You agree to: 1. give us the names and addresses of your Business Partner Companies that will be included in the Consolidated Statement; 2. notify your Business Partner Companies that you are receiving this Service and ensure that they have a copy of the IBM Business Partner Agreement, or any equivalent agreement, that has been signed by you and us; - -------------------------------------------------------------------------------- Each of us agrees that the complete agreement between us about this transaction consists of 1) this Attachment, any other applicable Attachments and Transaction Documents, and 3) the IBM Business Partner Agreement (or any equivalent agreement signed by both of us). Agreed to: (Business Partner Lead Company name) StarMedia Network Inc. By: /s/ Betsy Scolnik ------------------------ Authorized Signature Name (type or print): Date: Agreement Number: Business Partner Lead Company number: Business Partner Lead Company address: 29 W 36th Street New York, NY 10016 Agreed to: (IBM Lead Company name) International Business Machines Corporation By: /s/ R.L. Dudley ------------------------ Authorized Signature Name (type or print): Date: Attachment number: IBM Lead Company address: 3405 W. Dr. M. L. King, Jr. Blvd. Tampa, FL 33607 Attention: Order Fulfillment Services - -------------------------------------------------------------------------------- After signing, please return a copy of this Agreement to the "IBM Lead Company address" shown above. - -------------------------------------------------------------------------------- 3/99 Page 1 of 3 3. comply with the applicable terms we provide to you covering invoices you will pay on behalf of organizations outside your Enterprise that you desire to be included in your Consolidated Statement; 4. let us know which currency you want to use to pay the amount invoiced to you in your Consolidated Statement. Your currency of choice is subject to our approval. The approved currency will be specified in the Consolidated Statement. It is the only currency you may use to make payment under these terms; 5. pay the following by wire (electronic transfer) -- a. undisputed amounts specified in the Consolidated Statement. Payment must be made to the bank we designate. You must notify the responsible IBM Lead Company coordinator of any disputed items in an invoice. The IBM Lead Company coordinator is identified on each Consolidated Statement; b. the late payment fee described in section 3, if applicable. You will not be responsible for payment of late payment fees on reasonably disputed items; and c. any banking fees related to your use of this Service, including any foreign exchange losses suffered by us due to your fault: and 6. verify that this Service is adequate to meet your needs. 3. Overdue Payments Your account will be overdue unless you have paid the full amount specified in your Consolidated Statement within 30 days after the statement date. When your account becomes overdue, and for each 30 day period thereafter, we will charge you a late payment fee equal to 1 1/2% of the unpaid balance. If payment has not been received within 90 days after the statement date, we will: 1. suspend Invoice consolidation and send unpaid current invoices and all future invoices to your local Business Partner Companies, who will be responsible to pay the invoices upon receipt; and 2. keep open unpaid outstanding Consolidated Statements until payment has been received by our facilitator bank. When all outstanding amounts due from you and your Business Partner Companies have been paid, we will reactivate the Consolidated Statement Service. However, if any Consolidated Statement is not fully paid after six months, we will immediately terminate the Consolidated Statement Service and you will be responsible for the charges associated with our then canceling outstanding Consolidated Statements with our facilitator bank. Upon cancellation of a Consolidated Statement, we will refer unpaid balances to the applicable local IBM Companies for collection under their terms. 4. Credits and Adjustments Credit entries referring to a previous month's invoice will be converted to the single currency specified in the Consolidated Statement, using the current month's foreign exchange rate, not the foreign exchange rate in effect for the previous month. Invoices received prior to the consolidation date from a local IBM Company will be included in your monthly consolidated statement. Invoices received after the consolidation date will be included in the next month's Consolidated Statement. 5. Termination You may terminate this Attachment and discontinue your use of the Service provided under this Attachment, at the end of any month, by giving one month's written notice to us. 3/99 Page 2 of 3 We may terminate this Attachment and discontinue the provision of the Service provided under this Attachment upon three months' written notice to you, and for late payment as described in section 3 above. Your obligation to pay in full to us certain charges (for example, applicable late fees) will survive the termination of this Attachment or a Consolidated Statement. If applicable, we will inform you of the charges you are required to pay. 3/99 Page 3 of 3 [IBM LOGO] Business Partner Agreement Statement of Work for Custom Solution - -------------------------------------------------------------------------------- 1. Term This Statement of Work for Custom Solution ("SOW") began upon execution of the Letter of Authorization to Begin Services between IBM and StarMedia Networks, dated February 10, 1999, ("Start Date") and shall end concurrently with the term of your IBM Business Partner Agreement. 2. Definitions a. "Dialer and Registration Client program" (DRC) shall mean the IBM owned interactive, communication driven, event-oriented code, including enhancements and maintenance modifications thereto, which provides automated dialer, setup and help screen function to the branded Internet access that will be provided to StarMedia Network for access to the IBM network and/or IBM Global Network. b. "StarMedia-branded" shall mean products or services bearing or reflecting the trademarks or service marks of StarMedia Network. c. "Enhancements" shall mean any changes or additions to the DRC and related documentation, including new releases or updates and all local versions, that improve function, add new function, or improve performance by changes in system design or coding. d. "Internet Access Kit" shall mean packaging material, documentation supplied with and/or containing the DRC customized for StarMedia Network, StarMedia Network and third party trademarks or service marks required by all parties. - -------------------------------------------------------------------------------- Each of us agrees that the complete agreement between us about this transaction consists of 1) this Statement of Work, 2) the IBM Business Partner Agreement and its applicable Attachments (or any equivalent agreement signed by both or us), and 3) other applicable Transaction Documents. Agreed to StarMedia Network Inc. By: /s/ Betsy Scolnik ------------------------ Authorized Signature Name(type or print): Betsy Scalnik Date: 3/31/99 Enterprise number: Business Partner address: 29 W. 36th Street New York, NY 10018 Agreed to: International Business Machines Corporation By: /s/ R.L. Dudley ------------------------ Authorized Signature Name(type or print): R.L. Dudley Date: 4-1-99 Agreement number: Custom Solution number: IBM Office address: 3405 W. Dr. M. L. King, Jr. Blvd. Tampa, FL 33607 Attention: Order Fulfillment Services - -------------------------------------------------------------------------------- After signing, please return a copy of this Statement of Work to the IBM Office address above. - -------------------------------------------------------------------------------- March 31, 1999 Page 1 of 6 3. Description IBM will provide to you, as a Service ("Custom Solution"), a package of programs ("Internet Access Kit" or "IAK") that you will remarket to your End Users for accessing the Internet through the IBM Internet Connection Service. End Users install the IAK on personal computers that they provide. We assist End Users with installing the IAK and registering and connecting to your service. We will customize the IAK program (for example, to access a World Wide Web home page of your choice) and the packaging of the IAK (for example, to identify your company). We provide an Internet electronic mailbox for each registered User Identification. Each End User will contract with you via an Agreement for Access to Internet Services and its associated fee schedule that appear when the End User initially installs the IAK and registers for the Service and which the End User accepts by using the Service. We will charge the End User for IBM Internet Connection Service usage by invoicing a credit card number that the End User provides us during registration. An End User of the IBM Internet Connection Service may access a range of Internet applications and utilities such as e-mail, news groups and the World Wide Web. Some of the networks through which an End User may access the Internet will be neither owned nor under the control of IBM. We provide the entry point through which the End User may access these other networks and the Internet. End Users that register for your Internet Connection Service will be identified with a unique identification code ("Offer Code") we assign to you. This Offer Code enables us to recognize the IAKs you distribute. IBM does not provide any information or data content hosting services to you under this SOW and assumes no liability for data or information you may provide to End Users of the IAK or others. Neither party makes any representations, or assumes or creates any obligations, on behalf of the other. 3.1 IAK Components The IAK consists of: 1. the following programs and documentation on CD-ROM media: a. an IBM Dialer and Registration Client program ("DRC"), b. a third party Transmission Control Protocol/Internet Protocol ("TCP/IP") program, c. a third party World Wide Web browser program, either Microsoft Internet Explorer or Netscape Navigator as selected by StarMedia Network, including an integrated e-mail program, and d. files containing an online user's installation guide; and 2. the following hard copy documents: a. an IBM Program License Agreement for the IAK branded for StarMedia Network; and b. End User instructions for Installing the IAK branded for StarMedia Network, registering for the Service, and requesting assistance from IBM. The DRC provides: 1. dialing to the IBM Internet Connection Service. End Users can dial any access number provided by IBM Global Services. End Users are responsible for selecting their initial dial access number during registration. End Users may subsequently change their dial access number; and 2. End User registration to the IBM Internet Connection Service. This includes presenting the End User with the Agreement for StarMedia Network Access to Internet Services, which contains the terms for use of the IBM Internet Connection Service, and a fee schedule specifying the charges March 31, 1999 Page 2 of 6 for the IBM Internet Connection Service usage. StarMedia Network may include customized header and trailer text around IBM'S standard service agreement and licensing terms. The IAK Is provided for installation on personal computers running Windows(R) 3.1, Windows(R) 95, Windows(R) 98, or Windows(R) NT 4.0 with Service Pack 3 only, and Apple(R) Macintosh. We license TCP/IP programs, World Wide Web browser programs, and e-mail programs from third party providers, and we provide them in the IAK as a convenience to End Users. IBM (or its licensors) retains all title and ownership of the IAK; the individual programs in the IAK; and any fixes, updates, enhancements or revisions thereto. IBM reserves the right to change the program components of the AK without notice to you. You or any other party shall have no right to modify the IAK or to create derivative works thereof You agree not to: 1. reverse assemble, reverse compile, or translate the AK programs except as permitted bylaw without the possibility of contractual waiver; 2. transfer, rent, lease, or assign the IAK programs, or any copy of them, except as specifically set forth herein; and 3. modify, patch, alter, or otherwise change the IAK programs, except as specifically set forth herein You agree not to alter the terms of the IBM Program License Agreement, the Agreement for IBM Global Network Access to Internet Services, and its associated fee schedule, except by adding a customized header and trailer to which we mutually agree. THE SERVICE AND ANY PROGRAM OR PRODUCT WE PROVIDE TO YOU AS PART OF THE SERVICE ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WE AND OUR LICENSORS DO NOT WARRANT THAT THE SERVICE OR ANY PROGRAM OR PRODUCT WE PROVIDE WILL MEET YOUR REQUIREMENTS OR THE REQUIREMENTS OF THE END USERS, OR THAT THEIR OPERATION WILL BE UNINTERRUPTED OR ERROR-FREE. IN ADDITION, WE DO NOT WARRANT THAT THE SERVICE OR ANY PROGRAM OR PRODUCT WE PROVIDE TO YOU AS PART OF THE SERVICE IS CAPABLE OF CORRECTLY TRANSMITTING, PROCESSING, PROVIDING AND/OR RECEIVING DATE DATA WITHIN AND BETWEEN THE TWENTIETH AND TWENTY-FIRST CENTURIES. 3.2 Traveling User Support Traveling User Support is intended for incidental travel usage and not to be used for longer than thirty consecutive days or for more than ninety nonconsecutive days in a year. Traveling User Support is provided under the terms and conditions of the IBM Global Services local country network services provider. End Users who use the IAK and the IBM Internet Connection Service to access the Internet from countries other than the United States are responsible for complying with all applicable laws, including (but not limited to) all matters related to the import and export of technical data, computer equipment, and software. End Users are responsible for local country dial telephone access charges as applicable, 3.3 IAK Program Customization We will provide you with a copy of the "Customizing the IBM Internet Connection" document, which specifies the guidelines for customization of the IAK programs. At your request, we will customize the programs to meet your requirements subject to these guidelines. IBM agrees that we will customize the IAK Programs so the entire End User interface shall be in Spanish or Portuguese languages, depending on the local native language. March 31, 1999 Page 3 of 6 3.4 IAK Packaging Customization StarMedia Network shall have the right to distribute the IAK to personal computer manufacturers and vendors. We will provide you a copy of the "IBM Internet Connection Packaging Guidelines" document, and all customized packaging shall be in strict accordance with this document and this Section 3.4. At your request, we will customize the packaging to meet your requirements subject to these guidelines. You agree to provide IBM a sample or representative mockup of your desired IAK package. CD-ROM labels, and flyers and/or hard copy inserts for our review and you agree to make changes that IBM may request before distributing the AK. Only StarMedia Network's branding and branding of third parties designated by StarMedia Network will appear on the IAK shipping package, CD-ROM, installation screens; registration; icon and program group names: default installation directory; dialer message screens during installation and documentation; marketing materials, press releases, promotional or sales presentations; and in advertising, (collectively "Marketing Materials") Some IBM and third party trademarks, service marks, and logos may be necessary on the packaging to refer to product content, as opposed to branding. Each party acknowledges the other party's rights in and to their respective trademarks, service marks. logos, and other proprietary marks (collectively "Marks"). Nothing in this SOW shall be construed to grant either party any rights in or to the other party's Marks. Each party shall use its specific trademark(s), trade name(s) and product name(s) (designated as either "IBM Marks" (which shall include third party Marks licensed to IBM) or "Your Marks") as mutually agreed between the parties from time to time in conjunction with the advertising and marketing of the IAK and the IBM Service. Each party shall be responsible for determining the artwork and communication standards related to the use of its Marks. The parties shall mutually review and comment on any proposed Marketing Materials which reference its Marks and take reasonable steps (at such part/s sole expense) to modify such Marketing Materials if necessary. Each party must obtain written approval from the other in order to use the other's Marks. The use of each party's Marks shall comply with any local laws or customs. Any goodwill generated by the use of the IBM Marks shall accrue to the sole benefit of IBM or its licensors, as the case may be. Any goodwill generated by the use of Your Marks shall accrue to your sole benefit. Neither party nor its successors in interest shall (or shall cause others to) challenge, file suit, or initiate proceedings, or contest in any manner the other party's ownership rights or rights to use such party's Marks to identify any goods of such party. The owner or licensor of the Mark may discontinue the use of any or all of its Marks on any Marketing Materials or the like if the other party fails to abide by the conditions set forth herein, or if the owner or licensor of the Mark is threatened with a claim of infringement by a third party relating to the use of such Mark. Neither party shall disclose, publish or release any advertising, publicity, press release or the like which references the other party's name or Marks, without the prior written approval of the other party. 3.5 IAK Indemnification Notwithstanding anything to the contrary, IBM shall indemnify, defend, and hold you and your directors, officers, and employees harmless from and against any claim or action and expenses (including reasonable attorney's fees and court costs) arising out of your marketing of the DRC where it is alleged that the DRC contains defects or the DRC or IBM Marks infringe on any US copyright trademark, trade secret, patent, or any other proprietary right protected under US law of any third party or where IBM has misrepresented the capabilities of the DRC. Such indemnification shall be predicated upon your providing IBM with prompt written notice of any such claim; your providing all reasonable assistance and cooperation to IBM in its defense against such claim; IBM having control over the litigation, March 31, 1999 Page 4 of 6 defense of such claim, and any settlement related thereto; and your not making any admission or taking any action which may be prejudicial to the defense of the claim or which may adversely affect IBM's ability to negotiate settlement to the claim. Notwithstanding the foregoing, IBM will have no liability under this Section for any claim or suit of copyright, trademark, trade secret, patent or other intellectual property right infringement to the extent such claim or suit is based upon the IAK programs (except as otherwise specifically set forth above relating to IBM's indemnification obligations for the DRC); the integration, combination, or modification of the DRC or IAK programs with any other programs or equipment not provided by IBM; or use of the DRC or IAK programs in a manner not intended by IBM or its licensors in the respective published specifications. Notwithstanding anything to the contrary, you shall indemnify, defend, and hold IBM and its licensors and their respective affiliates, directors, officers, and employees harmless from and against any claim or action and expenses (including reasonable attorney's fees and court costs) arising out of your marketing of the INC where it is alleged that you have misrepresented the capabilities of the IAK (including, but not limited to. the DRC and/or the IBM Service) or any other claim relating to your distribution of the IAK for which IBM is not otherwise liable hereunder. Such indemnification shall be predicated upon IBM providing you with prompt written notice of any such claim: IBM providing all reasonable assistance and cooperation to you in your defense against such claim; your having control over the litigation, defense of such claim, and any settlement related thereto; and IBM not making any admission or taking any action which may be prejudicial to the defense of the claim or which may adversely affect your ability to negotiate settlement to the claim, 3.6 IAK Enhancements or Other Modifications IBM shall promptly notify StarMedia Networks of any proposed enhancements (other than bug fixes) not less than 45 days prior to such enhancements becoming available, and subject to StarMedia Network's consent, which consent shall not be unreasonably withheld or delayed, IBM shall include such enhancement in the IAK and notify StarMedia Network's End Users by e-mail of such enhancement, or such notification will be posted on StarMedia Network's Internet home page. IBM shall offer such enhancements or other modifications (1) if provided to other similar regular customers of IBM at no additional charge, then at no additional charge to you, and/or your End Users, or (2) if provided to other users at an additional charge, then at an additional charge to you and/or your End Users, such charge not to exceed the additional charge that IBM charges to other similar End Users. Such enhancements shall automatically become a part of the IAK. 3.7 Registration Each End User is responsible for complying with all applicable terms and conditions, including but not limited to, payment of all applicable charges. During registration, each End User will be asked to provide, among other information, your Offer Code and their credit card number to which charges will be invoiced. 3.8 Ordering the IAK When you place your order for this Custom Solution, specify that you are using the "Bulk order option." You must order the IAK in minimum order quantities of 100,000 with the lead times specified in the table below. IBM grants you the right to distribute to your End Users these IAKs only in the countries specified in your Solution Provider Profile, Nothing herein shall be deemed to grant you a license to distribute any program in the IAK separately or otherwise unbundle the IAK. You are responsible for the distribution of the IAK and for all costs associated with the distribution of the IAK. - -------------------------------------------------------------------------------- IAK Order Quantity Minimum Lead Order Time - -------------------------------------------------------------------------------- 100,000 - 499,999 2 weeks - -------------------------------------------------------------------------------- 500,000 - 999,999 3 weeks - -------------------------------------------------------------------------------- 1,000,000 or greater 4 weeks - -------------------------------------------------------------------------------- March 31, 1999 Page 5 of 6 4. Your Additional Responsibilities You agree: 1. not to promote the use of applications involving the transmission of voice or fax with this Custom Solution. This does not apply to third party advertisements about their separate services that do not use this Custom Solution; 2. to be responsible for invoicing and collection of any fees which you charge to users of the Internet who access your home page information and data content; and 3. to be solely responsible for all support relating to the use of your home page information and data content and for ensuring that your information and data does not contain any data or information which violates any law or regulation. 5. Charges 5.1 IAK Customization and Updates You agree to pay: 1. a $[****] one time charge for our customization of the IAK packaging and a $[****] one time charge for each artwork change you request after our initial production of the IAK packaging. This version will allow StarMedia Network to brand the IAK with its brand, graphics, trademarks and service marks or those of a third party designated by StarMedia Network, with the exception of trademarks, service marks required by our third party software providers. StarMedia Network is responsible for providing all artwork, graphics in accordance with "Customizing IBM Internet Connection Packaging Guidelines. 2. a $[****] charge for each subsequent changes to the packaging, per occurrence; 3. a $[****] one time charge for our customization of the IAK programs for each operating system client code based upon the parameters outlined in "Customizing IBM Internet Connection Service;" and 4. a $[****] one time charge for any program customization you request after the completion of our initial program testing. 5.2 CD-ROM Manufacturing You agree to pay $1.50 for each CD-ROM ordered under this Statement of Work for CD-ROM manufacturing. This charge does not include shipping costs, taxes, and broker's fees which will be mutually agreed upon by the parties and documented separately from this Statement of Work. 6. Changes and Termination Changes to and termination of this SOW are subject to the terms of your IBM Business Partner Agreement. March 31, 1999 Page 6 of 6 **** Represents material which has been redacted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. IBM Business Partner Agreement [IBM LOGO] International Attachment - -------------------------------------------------------------------------------- The terms at this Attachment are in addition to and prevail over the terms of the IBM Business Partner Agreement. Under the terms of this Attachment, the Business Partner Lead Company agrees to coordinate the activities of its local Business Partner Companies, and the IBM Lead Company agrees to coordinate the activities of the local IBM organizations (local IBM Companies). All such local Business Partner Companies and local IBM Companies are specified in your Profile in the Schedule of Participating Local Companies. The IBM Lead Company may, through notice to the Business Partner Lead Company, terminate approval or any such local Business Partner Company. The "Schedule of Local Participating Companies" identifies for each country the Local Business Partner Company and the Local IBM Company that are approved to transact under this Agreement For each such country 1) all references in the Agreement to "Country Name" are deemed to be the country associated with the two parties, 2) terms that are unique to such country are included in each of the Agreement's applicable documents, and 3) Products and Services acquired from the Local IBM Company may be marketed only in such country unless specified otherwise in this Agreement. The Business Partner Lead Company will distribute copies of the Agreement (including this Attachment) to their local Business Partner Companies. The IBM Lead Company will distribute copies of the Agreement (including this Attachment) to their local IBM Companies. The local Business Partner Company and the local IBM Company will acknowledge between each other, written acceptance of the Agreement either by the initial order or Products and Services under this Agreement, or by other written confirmation. As the Business Partner Lead Company, you warrant that, in accepting the terms of this Attachment, all your local Business Partner Companies are Related Companies. The Agreement (including this Attachment, but not necessarily transaction documents and the Exhibit) is written in English. BPIA-00 1/99 Draft 3 Page 1 of 1 -----END PRIVACY-ENHANCED MESSAGE-----