-----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, AvTJLQ18bRF3lLlohNVE6731GPWhe99dmjsJAkNZP6u/wIS0mXD/R5yz3E4NajgO ohag+lM6OeV4wwITLHDtpg== 0001047469-99-036824.txt : 19990928 0001047469-99-036824.hdr.sgml : 19990928 ACCESSION NUMBER: 0001047469-99-036824 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARMEDIA NETWORK INC CENTRAL INDEX KEY: 0001057334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 061461770 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87169 FILM NUMBER: 99717228 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 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1999 REGISTRATION NO. 333-87169 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 1 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. SUBJECT TO COMPLETION. DATED SEPTEMBER 27, 1999. 6,500,000 Shares STARMEDIA NETWORK, INC.
Common Stock ------------------ StarMedia Network, Inc. is offering 6,000,000 of the shares to be sold in the offering. The selling stockholder identified in this prospectus is offering an additional 500,000 shares. StarMedia will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder. The common stock is quoted on the Nasdaq National Market under the symbol "STRM". On September 24, 1999, the last reported sale price of the common stock was $40.125 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 8 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 price to public................................... $ $ Underwriting discount..................................... $ $ Proceeds, before expenses, to StarMedia................... $ $ Proceeds, before expenses, to the selling stockholder..... $ $
To the extent that the underwriters sell more than 6,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 975,000 shares from StarMedia at the initial price to public 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. MERRILL LYNCH & CO. SALOMON SMITH BARNEY THOMAS WEISEL PARTNERS L.L.C. ------------------ Prospectus dated , 1999. 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 Internet media company targeting Latin America and other Spanish- and Portuguese-speaking markets worldwide. Our network consists of seven branded Internet properties: - StarMedia.com, our flagship Internet media property; - StarMedia Acesso, our premium Internet access service; - Cade?, a topical directory of Portuguese-language Web sites; - LatinRed, one of the largest Spanish-language online communities; - OpenChile, a local Chilean portal; - Periscopio.com, our personalized search and retrieval property; and - Zeek!, a topical directory of Portuguese-language Web sites. Through these properties, we offer our users a variety of in-language interest-specific areas or channels, extensive Web-based community features, sophisticated search capabilities, online shopping and Internet access services. Our content covers a broad array of topics of interest to Latin Americans and other Spanish- and Portuguese-speaking audiences, 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 our users an in-language 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, SkyBox and Ziff-Davis. We also provide advertisers and merchants targeted access to Latin American and other Spanish- and Portuguese-speaking Internet users, an audience with a highly desirable demographic profile. The total number of Web pages our users access on our network, referred to as our page views, has grown to over 686 million in the three months ended June 30, 1999. In addition, our active e-mail accounts have grown to 1.2 million as of June 30, 1999. 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 the StarMedia network appeals to advertisers and merchants because of our: - focus on Latin America and other Spanish- and Portuguese-speaking markets; - powerful brand image across Latin America and in each of our local markets; and - a user base with a highly attractive demographic profile. Consequently, we had 160 advertisers and sponsors on our network during the three months ended June 30, 1999. Our customers included such leading advertisers and sponsors as Banco Santander, Bradesco, Ford, Fox Sports America, IBM, Nokia, Outpost.com, SkyTel, Sony and USA Networks. These named customers, in the aggregate, accounted for approximately 20% of total revenues in the three months ended June 30, 1999 and 33% of total revenues for the year ended December 31, 1998. 3 OUR STRATEGY Our objective is to strengthen our position as the leading Internet media company targeting Latin America and other Spanish- and Portuguese-speaking markets worldwide by: - aggressively extending the recognition of our brands; - enhancing and expanding our Spanish and Portuguese content and community features; - furthering our penetration into additional Spanish- and Portuguese-speaking markets; - continuing to pursue strategic acquisitions and alliances; - expanding our Internet access service to users across Latin America; and - developing and deploying next generation content and service distribution platforms such as wireless and broadband capabilities. OUR HISTORY AND RECENT DEVELOPMENTS We were incorporated in Delaware in March 1996. We commenced operations in September 1996 and launched the StarMedia network in December 1996. In May 1999, we completed the initial public offering of our common stock for aggregate net proceeds of approximately $110.4 million. In April and May 1999, we completed a $41 million private placement to the following strategic investors: - Critical Path, Inc.; - eBay Inc.; - Europortal Holding, S.A.; - Hearst Communications, Inc.; - National Broadcasting Company, Inc.; and - Reuters Holdings Switzerland SA. In September 1999, we launched StarMedia Acesso, our Internet access service in Brazil, and Periscopio, our personalized search and retrieval property. We recently acquired Webcast Solutions, a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. We have agreed to acquire PageCell International Holdings, a provider of advanced mobile technologies and services. As of June 30, 1999, we had an accumulated deficit of approximately $96.3 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 Barcelona, Bogota, Buenos Aires, Caracas, Madrid, Mexico City, Miami, Montevideo, Rio de Janeiro, San Francisco, San Juan, Santiago and Sao Paulo. OUR TRADEMARKS We own numerous trademarks and service marks. As used in this prospectus, STARMEDIA and the STARMEDIA logo are registered U.S. trademarks and service marks of StarMedia, and have been registered and applications are pending in the other markets in which we register our marks. TALKPLANET, BUSCAWEB, ORBITA, PIZARRAS and (V)PULSE are registered trademarks and service marks of StarMedia in several non-U.S. jurisdictions and applications are pending in the U.S. and the other markets in which we register our marks. Applications for STARMEDIA.COM, PERISCOPIO, PERISCOPIO.COM and the PERISCOPIO logo are currently pending in the United States. CADE?, STARMEDIA ACESSO, LATINRED, ZEEK!, OPENCHILE and PANORAMAS are trademarks and service marks of StarMedia. All other trademarks and service marks used in this prospectus are the property of their respective owners. 4 THE OFFERING Shares offered by StarMedia... 6,000,000 shares Shares offered by the selling stockholder................. 500,000 shares Shares to be outstanding after this offering............... 64,006,198 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 June 30, 1999 after giving effect to the Webcast acquisition. This information excludes: - 7,271,533 shares subject to options outstanding as of June 30, 1999 at a weighted average exercise price of $2.72 per share; - 7,594,831 additional shares that could be issued under our stock option plans; - 1,500,000 additional shares available for issuance under our employee stock purchase plan; - 58,689 additional shares of our common stock issued in exchange for outstanding shares of series A preferred stock of Webcast, issued by Webcast subsequent to June 30, 1999; and - approximately 200,000 shares of our common stock and 65,000 shares of our junior non-voting convertible preferred stock issuable upon the consummation of the acquisition of PageCell. 5 SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA The following tables summarize the supplemental financial data for our business and include the acquisitions of Wass Net, commonly referred to as LatinRed, and Webcast, which have each been accounted for as a pooling of interests. Accordingly, for all periods presented the supplemental consolidated financial data includes the results of Wass Net/LatinRed since its inception on August 29, 1997 and the results of Webcast since its inception on July 24, 1998. The condensed consolidated pro forma statement of operations data for the year ended December 31, 1998 and for the six months ended June 30, 1999 assumes that the acquisition of KD Sistemas occurred on January 1, 1998. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations", our pro forma condensed consolidated financial statements and our supplemental consolidated financial statements and notes to those statements included elsewhere in this prospectus.
PRO FORMA PRO FORMA SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED ENDED ENDED PERIOD FROM MARCH 5, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1996 (INCEPTION) TO -------------------- -------------- -------------------- ----------- DECEMBER 31, 1996 1997 1998 1998 1998 1999 1999 ----------------------- --------- --------- -------------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues....................... $ -- $ 472 $ 5,758 $ 6,741 $ 850 $ 5,474 $ 5,694 Operating expenses: Product and technology development................ 36 1,233 7,101 7,452 3,178 10,019 10,137 Sales and marketing.......... 12 2,110 29,281 29,343 6,015 22,926 22,876 General and administrative... 78 650 4,810 4,965 1,033 6,665 6,787 Depreciation and amortization............... 2 38 785 2,715 248 1,644 2,125 Stock-based compensation expense.................... -- -- 10,421 10,421 3,250 3,012 3,012 ------ --------- --------- -------------- --------- --------- ----------- Total operating expenses....... 128 4,031 52,398 54,896 13,724 44,266 44,937 ------ --------- --------- -------------- --------- --------- ----------- Operating loss................. (128) (3,559) (46,640) (48,155) (12,874) (38,792) (39,243) Interest income, net......... -- 34 667 702 90 1,135 1,148 ------ --------- --------- -------------- --------- --------- ----------- Loss before provision for income taxes................. (128) (3,525) (45,973) (47,453) (12,784) (37,657) (38,095) ------ --------- --------- -------------- --------- --------- ----------- Provision for income taxes..... (83) ------ --------- --------- -------------- --------- --------- ----------- Net loss....................... (128) (3,525) (45,973) (47,536) (12,784) (37,657) (38,095) Preferred stock dividends and accretion.................... -- (185) (4,536) (4,536) (720) (4,266) (4,266) ------ --------- --------- -------------- --------- --------- ----------- Net loss available to common shareholders................. $ (128) $ (3,710) $ (50,509) $ (52,072) $ (13,504) $ (41,923) $ (42,361) ------ --------- --------- -------------- --------- --------- ----------- ------ --------- --------- -------------- --------- --------- ----------- Basic and diluted net loss per share........................ $ (0.01) $ (0.37) $ (4.51) $ (1.32) $ (1.91) ------ --------- --------- --------- --------- ------ --------- --------- --------- --------- Shares used in computing basic and diluted net loss per share........................ 9,147 10,040 11,204 10,221 21,927 ------ --------- --------- --------- --------- ------ --------- --------- --------- --------- Pro forma basic and diluted net loss per share............... $ (1.06) $ (1.10) $ (0.79) $ (0.80) --------- -------------- --------- ----------- --------- -------------- --------- ----------- Shares used in computing pro forma basic and diluted net loss per share............... 43,200 43,200 47,737 47,737 --------- -------------- --------- ----------- --------- -------------- --------- -----------
6 The following table is a summary of our supplemental balance sheet at June 30, 1999. The as adjusted data reflect the sale of 6,000,000 shares of common stock at an assumed public offering price of $40.125 per share, after deducting underwriting discounts and estimated offering expenses.
AS OF JUNE 30, 1999 ----------------------- ACTUAL AS ADJUSTED --------- ------------ (IN THOUSANDS) SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 164,719 $ 392,632 Working capital.......................................................................... 153,990 381,903 Total assets............................................................................. 192,466 420,379 Total stockholders' equity............................................................... 173,447 401,360
7 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 our Internet brands 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 June 30, 1999, we had an accumulated deficit of approximately $96.3 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 six months ended June 30, 1999, we derived approximately $1.9 million, or 34% of revenues, from these arrangements. In the year ended December 31, 1998, we derived approximately $2.4 million, or 42% 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, including: - growth and acceptance of the Internet, particularly in Latin America; - our ability to attract and retain users; 8 - demand for advertising on the Internet in general and on our network in particular; - our ability to upgrade and develop our systems and infrastructure; - technical difficulties that users may experience on our network; - technical difficulties or system downtime resulting from the developing telecommunications infrastructure in Latin America; - competition in our markets; - foreign currency exchange rates that affect our international operations; and - general economic conditions, particularly in Latin America. 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 significantly lower during the first calendar quarter of the year because it includes the summer months in much of Latin America during which: - our target audience tends to take extended vacations; and - schools and universities are generally closed. As a result, advertisers have historically spent less in the first calendar quarter. 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 9 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, 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 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. 10 IF INTERNET USE IN LATIN AMERICA AND OTHER SPANISH- AND PORTUGUESE-SPEAKING MARKETS DOES NOT GROW, OUR BUSINESS WILL SUFFER The Internet market in Latin America and other Spanish- and Portuguese-speaking markets is in an early stage of development. Our future success depends on the continued growth of the Internet in these markets. Our business, financial condition and results of operations will be materially and adversely affected if Internet usage in these markets does not continue to grow or grows more slowly than we anticipate. Internet usage in these markets 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 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 OUR USERS Our target markets are made up of a number of diverse regions that differ historically, culturally, economically and politically. We generally use a pan-regional approach to community development and to advertisements. Users, however, may prefer content and community features which are specifically created for a local audience 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 OR PROFITABLY PROVIDE INTERNET ACCESS SERVICES IN LATIN AMERICA We recently began to offer Internet access services in Brazil and intend to offer these services in other Latin American markets during the second half of 1999. We have contracted with AT&T Global Network Services, formerly the IBM Global Network, 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 11 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. In addition, prices for Internet access services have fallen historically, a trend we expect will continue. Accordingly, we cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain our pricing level as our competition increases. This could have a material adverse effect on our business, financial condition and results of operations. WE MAY NOT BE ABLE TO DEVELOP OUR BRANDS AND ATTRACT USERS TO OUR NETWORK Maintaining our brands 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 our target markets 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 our brands will also depend on our success in providing high quality content, features and functionality. If we fail to promote our brands successfully or if visitors to our network or advertisers do not perceive our services to be of high quality, the value of our brands could be diminished. This could have a material and adverse effect on our 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. 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. 12 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 Sports America, accounted for approximately 21% of our total advertising revenues. In 1998, our top five advertisers accounted for approximately 57% of our total revenues. In the six months ended June 30, 1999, our top 5 advertisers accounted for approximately 33% 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 June 30, 1999, our advertising sales department consisted of 99 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 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, during 1999, we have made five acquisitions. Acquisitions could result in a number of financial consequences, including: - potentially dilutive issuances of equity securities; - large non-recurring write-offs; - reduced cash balances and related interest income; - higher fixed expenses which require a higher level of revenues to maintain gross margins; 13 - the incurrence of debt and contingent liabilities; and - amortization expenses related to goodwill and other intangible assets. Furthermore, acquisitions involve numerous operational risks, including: - difficulties in the integration of operations, personnel, technologies, products and the information systems of the acquired companies; - diversion of management's attention from other business concerns; - diversion of resources from our existing businesses, products or technologies; - risks of entering geographic and business markets in which we have no or limited prior experience; and - potential loss of key employees of acquired organizations. We could have difficulty in effectively assimilating and integrating these, or any future joint ventures, acquisitions or alliances, into our operations. 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 14 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. 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. A failure by Exodus to protect its 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 15 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. 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 continue to develop 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. 16 WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS WHICH MAY BE EXPENSIVE, TIME CONSUMING AND DISTRACTING Because we have employees, property and business operations throughout the world, we are subject to the laws and the court systems of many jurisdictions. We may become subject to claims based on foreign jurisdictions for violations of their laws. In addition, these laws may be changed or new laws may be enacted in the future. International litigation is often expensive, time consuming and distracting. Accordingly, any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. 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 our target markets relating to the liability of companies which provide online services, like ours, for activities of their visitors are currently unsettled. Claims have been made against online service providers and networks in the past for defamation, negligence, copyright or trademark infringement, obscenity, personal injury or other theories based on the nature and content of information that was posted online by their visitors. We could be subject to similar claims and incur significant costs in their defense. In addition, we could be exposed to liability for the selection of listings that may be accessible through our network or through content and materials that our visitors may post in classifieds, message boards, chat rooms or other interactive services. It is also possible that if any information provided through our services contains errors, third parties could make claims against us for losses incurred in reliance on the information. We offer Web-based e-mail services, which expose us to potential liabilities or claims resulting from: 17 - 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 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. 18 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 53.0% of the outstanding shares of our common stock, and after the offering will beneficially own approximately 48.2% 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 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. 19 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. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. 20 USE OF PROCEEDS The net proceeds we will receive from the sale of the shares of common stock offered by us are $227.9 million, at an assumed public offering price of $40.125 per share and after deducting the estimated underwriting discount and offering expenses. If the underwriters' over-allotment option is exercised in full, the net proceeds we will receive will be $265.1 million. We will not receive any proceeds from the sale of shares being sold by the selling stockholders. The principal purpose of this offering is to increase our working capital. As of the date of this prospectus, we have not made any specific expenditure plans with respect to the proceeds of this offering. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. We may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, services or products; however, we currently have no commitments or agreements with respect to any such transactions. Pending any use, the net proceeds of this offering will be invested in short-term, interest-bearing securities. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol STRM since our initial public offering on May 25, 1999. The following table sets forth, for the periods indicated, the high and low closing prices per share of our common stock as reported on the Nasdaq National Market:
1999: HIGH LOW --------- --------- Second Quarter (from May 25, 1999)...................... $ 64.125 $ 26.0625 Third Quarter (through September 24, 1999).............. $ 63.50 $ 29.8438
On September 24, 1999, the closing price of our common stock on the Nasdaq National Market was $40.125. As of June 30, 1999, there were 162 holders of record of our common stock. 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. 21 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999 after giving retroactive effect to the Webcast acquisition: - on an actual basis; and - on an as adjusted basis to reflect our sale of 6,000,000 shares of common stock at an assumed public offering price of $40.125 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. You should read this information together with our supplemental consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus.
AS OF JUNE 30, 1999 ---------------------- AS ACTUAL ADJUSTED ---------- ---------- (IN THOUSANDS) Capital lease obligations--current portion................................................ $ 110 $ 110 Long-term debt and other.................................................................. 5,086 5,086 Stockholders' (deficit) equity: Common stock, $.001 par value; 200,000,000 shares authorized; 58,006,198 shares issued and outstanding (actual); 64,006,198 issued and outstanding (as adjusted)........... 58 64 Additional paid in capital................................................................ 281,588 509,495 Deferred compensation..................................................................... (11,609) (11,609) Other comprehensive loss.................................................................. (320) (320) Accumulated deficit....................................................................... (96,270) (96,270) ---------- ---------- Total stockholders' equity................................................................ 173,447 401,360 ---------- ---------- Total capitalization...................................................................... $ 178,643 $ 406,556 ---------- ---------- ---------- ----------
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of June 30, 1999. It does not include: - 7,271,533 shares subject to options outstanding as of June 30, 1999 at a weighted average exercise price of $2.72 per share; - 7,594,831 additional shares that could be issued under our stock option plans; - 1,500,000 additional shares available for issuance under our employee stock purchase plan; - 58,689 additional shares of our common stock issued in exchange for outstanding shares of series A preferred stock of Webcast, issued by Webcast subsequent to June 30, 1999; and - approximately 200,000 shares of our common stock and 65,000 shares of our junior non-voting convertible preferred stock issuable upon the consummation of the acquisition of PageCell. 22 DILUTION Our net tangible book value as of June 30, 1999 was approximately $165.4 million, or $2.85 per share of common stock after giving retroactive effect to the Webcast acquisition. Net tangible book value per share is determined by dividing the amount of our total tangible assets less total liabilities by the number of shares of common stock outstanding at that date. 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 net tangible book value as of June 30, 1999 after giving retroactive effect to the Webcast acquisition would have been $393.3 million, or $6.15 per share. This represents an immediate increase in net tangible book value of $3.30 per share to existing stockholders and an immediate dilution of $33.98 per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Public offering price per share............................................ $ 40.13 Net tangible book value per share at June 30, 1999......................... $ 2.85 Increase in net tangible book value per share attributable to this offering................................................................. 3.30 --------- Net tangible book value per share after this offering...................... 6.15 --------- Dilution per share to new investors........................................ $ 33.98 ---------
------------------------ The following table summarizes, as of June 30, 1999, after giving retroactive effect to the Webcast acquisition 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 a public offering price of $40.125 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...................... 58,006,198 90.6% $ 260,014,000 51.9% $ 4.48 New investors.............................. 6,000,000 9.4 240,750,000 48.1 40.13 -------------- ----- ---------------- ----- Total.................................. 64,006,198 100.0% $ 500,764,000 100.0% -------------- ----- ---------------- ----- -------------- ----- ---------------- -----
This discussion and table assume no exercise of any stock options outstanding as of June 30, 1999 and do not include the issuance of (1) 58,689 additional shares of our common stock issued in exchange for outstanding shares of series A preferred stock of Webcast, issued by Webcast subsequent to June 30, 1999 and (2) approximately 200,000 shares of our common stock and 65,000 shares of our junior non-voting convertible preferred stock issuable upon the consummation of the acquisition of PageCell. As of June 30, 1999, after giving retroactive effect to the Webcast acquisition, there were options outstanding to purchase a total of 7,271,533 shares of common stock with a weighted average exercise price of $2.72 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 23 SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA The selected supplemental consolidated balance sheet data as of December 31, 1997 and 1998 and June 30, 1999 and the selected supplemental consolidated statement of operations data for the period from March 5, 1996 (inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999 have been derived from our audited supplemental consolidated financial statements included elsewhere in this prospectus. The selected supplemental consolidated statement of operations for the six months ended June 30, 1998 have been derived from the unaudited supplemental 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 supplemental consolidated statement of operations data includes the acquisitions of Wass Net and Webcast, which have each been accounted for as a pooling of interests. Accordingly, our supplemental consolidated financial data includes for all periods presented the results of Wass Net since its inception on August 29, 1997 and Webcast since its inception on July 24, 1998. The pro forma statement of operations data for the year ended December 31, 1998 and for the six months ended June 30, 1999 assumes that the acquisition of KD Sistemas occurred on January 1, 1998. The unaudited supplemental 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 such period. Results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the entire year or for any future period. The selected supplemental consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the pro forma condensed consolidated financial statements and the consolidated financial statements and the notes to those statements and supplemental consolidated financial statements and notes to those statements included elsewhere in this prospectus. 24
PRO FORMA PERIOD FROM PRO FORMA SIX MONTHS MARCH 5, 1996 YEAR ENDED YEAR ENDED SIX MONTHS ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, ENDED JUNE 30, JUNE 30, DECEMBER 31, ----------------------- ------------ -------------------- ----------- 1996 1997 1998 1998 1998 1999 1999 --------------- --------- ------------ ------------ --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues........................... $ -- $ 472 $ 5,758 $ 6,741 $ 850 $ 5,474 $ 5,694 Product and technology development.................... 36 1,233 7,101 7,452 3,178 10,019 10,137 Sales and marketing.............. 12 2,110 29,281 29,343 6,015 22,926 22,876 General and administrative....... 78 650 4,810 4,965 1,033 6,665 6,787 Depreciation and amortization.... 2 38 785 2,715 248 1,644 2,125 Stock-based compensation expense........................ -- -- 10,421 10,421 3,250 3,012 3,012 ------ --------- ------------ ------------ --------- --------- ----------- Total operating expenses........... 128 4,031 52,398 54,896 13,724 44,266 44,937 ------ --------- ------------ ------------ --------- --------- ----------- Operating loss..................... (128) (3,559) (46,640) (48,155) (12,874) (38,792) (39,243) Interest income, net............. -- 34 667 702 90 1,135 1,148 ------ --------- ------------ ------------ --------- --------- ----------- Loss before provision for income taxes............................ (128) (3,525) (45,973) (47,453) (12,784) (37,657) (38,095) ------ --------- ------------ ------------ --------- --------- ----------- Provision for income taxes......... (83) ------ --------- ------------ ------------ --------- --------- ----------- Net loss........................... (128) (3,525) (45,973) (47,536) (12,784) (37,657) (38,095) Preferred stock dividends and accretion........................ -- (185) (4,536) (4,536) (720) (4,266) (4,266) ------ --------- ------------ ------------ --------- --------- ----------- Net loss available to common shareholders..................... $ (128) $ (3,710) $ (50,509) $ (52,072) $ (13,504) $ (41,923) $ (42,361) ------ --------- ------------ ------------ --------- --------- ----------- ------ --------- ------------ ------------ --------- --------- ----------- Basic and diluted net loss per share............................ $ (0.01) $ (0.37) $ (4.51) $ (1.32) $ (1.91) ------ --------- ------------ --------- --------- ------ --------- ------------ --------- --------- Shares used in computing basic and diluted net loss per share....... 9,147 10,040 11,204 10,221 21,927 ------ --------- ------------ --------- --------- ------ --------- ------------ --------- --------- Pro forma basic and diluted net loss per share(1)................ $ (1.06) $ (1.10) $ (0.79) $ (0.80) ------------ ------------ --------- ----------- ------------ ------------ --------- ----------- Shares used in computing pro forma basic and diluted net loss per share(1)......................... 43,200 43,200 47,737 47,737 ------------ ------------ --------- ----------- ------------ ------------ --------- -----------
- -------------------------- (1) Assumes conversion of all outstanding shares of redeemable convertible preferred stock into 31,996,667 shares of common stock. See note 5 to our supplemental consolidated financial statements and the pro forma condensed 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.
AS OF DECEMBER 31, --------------------------------- 1996 1997 1998 ----- --------- --------- (IN THOUSANDS) SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 230 $ 443 $ 53,147 Working capital........................................................................ 284 149 47,500 Total assets........................................................................... 313 810 61,156 Capital lease obligations.............................................................. 229 Total current liabilities.............................................................. 342 7,870 Long-term debt......................................................................... Redeemable convertible preferred stock................................................. 3,833 96,494 Total stockholders' (deficit) equity................................................... 313 (3,394) (43,339) JUNE 30, --------- 1999 --------- SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 164,719 Working capital........................................................................ 153,990 Total assets........................................................................... 192,466 Capital lease obligations.............................................................. 110 Total current liabilities.............................................................. 15,306 Long-term debt......................................................................... 4,705 Redeemable convertible preferred stock................................................. -- Total stockholders' (deficit) equity................................................... 173,447
25 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 Internet media company targeting Latin America and other Spanish- and Portuguese- speaking audiences worldwide. 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 March and April 1999, we acquired two leading Brazilian Internet guides, Zeek!, otherwise known as Achei, and Cade?, otherwise known as KD Sistemas, which primarily categorize and review Portuguese-language Web sites. The aggregate purchase price paid by us for these acquisitions was approximately $6.1 million plus $0.9 million due before March 2000. We are obligated to make additional payments, estimated to be up to $6.4 million, to the former stockholders of KD Sistemas if various performance targets are achieved. These acquisitions were accounted for as purchases. Effective May 1999, we acquired LatinRed, otherwise known as Wass Net, a Spanish-language online community offering e-mail, chat, classified, bulletin boards, home pages and search capabilities. We issued 1,133,334 shares of our common stock for all of the outstanding capital stock of Wass Net. This acquisition was accounted for as a pooling of interests. In June 1999, we acquired all of the outstanding stock of OpenChile, otherwise known as Servicios Interactivos Limitada, for 20,000 shares of our common stock. This acquisition was accounted for as a purchase. In September 1999, we acquired Webcast, a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. We issued 842,887 shares of our common stock for all of the outstanding capital stock of Webcast. This acquisition was accounted for as a pooling of interests, which requires the restatement of all relevant periods as if StarMedia and Webcast had always been combined. Accordingly, the following discussion reflects the combined results of operations of StarMedia and Webcast. The only significant effect of the restatement was the inclusion of Webcast's revenues of $411,000 for the year ended December 31, 1998 and $175,000 for the six months ended June 30, 1999 as well as Webcast's net loss of $15,000 for the year ended December 31, 1998 and $212,000 for the six months ended June 30, 1999. On September 18, 1999, we entered into an agreement to purchase substantially all of the assets of PageCell International Holdings, Inc., a provider of advanced mobile technologies and services, in exchange for common stock and junior non-voting convertible preferred stock of the Company valued at $10 million at the closing date and additional consideration valued at up to $15 million upon the achievement of certain quarterly performance related targets through December 2000. The consummation of the acquisition is subject to certain closing conditions. 26 To date, we have derived our revenues primarily from the sale of advertisements and sponsorships on our network as well as consulting and technical services. 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; - the size and placement of the advertisement; and - the number of guaranteed impressions, if any. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. To the extent minimum guaranteed impression levels are not met, we defer recognition of the corresponding revenues until guaranteed levels are achieved. Payments received from advertisers prior to displaying their advertisements on our network are recorded as deferred revenues. Revenues from sponsorship arrangements are recognized ratably over the contract term, provided that we have no significant obligations remaining. Revenue related to the design, coordination and integration of content under sponsorship arrangements are recognized ratably over the contract term or using the percentage of 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 Sports America and MTV Latin America. 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 27 markets, including the Internet advertising market. We have incurred significant net losses and negative cash flows from operations since our inception. At June 30, 1999, we had an accumulated deficit of $96.3 million. These losses have been funded primarily through the issuance of our equity securities. 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 $25.0 million through June 30, 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. Options granted through February 1999 typically vest over three years, although a portion of those options vested immediately. Options granted after February 1999 generally vest over four years. Of the total deferred compensation amount, approximately $10.4 million and $3.0 million was amortized during the year ended December 31, 1998 and the six months ended June 30, 1999, respectively. 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--$6.2 million; - 2000--$5.0 million; - 2001--$2.8 million; - 2002--$700,000; and - 2003--$50,000. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 AND 1998 REVENUE Revenues increased to $5.5 million for the six months ended June 30, 1999 from $850,000 for the six months ended June 30, 1998. The increase in revenues was primarily due to an increase in the volume of advertising impressions and sponsorships sold. During 1999, we continued to: - expand our sales force; - increase the number of impressions available on our network by adding channels and by increasing our marketing efforts; and - expand through acquisitions. In the six months ended June 30, 1998, four advertisers each accounted for greater than 10% of total revenues. For the six months ended June 30, 1999, no advertiser accounted for more than 10% of our revenue. For the six months ended June 1998, our top five advertisers accounted for 81% of our revenue. For the six months ended June 1999, our top five advertisers accounted for 33% of our revenue. In the six months ended June 30, 1999, we derived approximately $1.9 million, or 35% of total revenues, from reciprocal advertising arrangements. We do not receive any cash payments for these arrangements. OPERATING EXPENSES PRODUCT AND TECHNOLOGY. Product and technology expenses include: - personnel costs - hosting and telecommunication costs; and - content acquisition fees and revenue sharing arrangements related to agreements with third-party content providers under which we pay guaranteed fees and/or a portion of our revenues. 28 For the six months ended June 30, 1999, product and technology expenses increased to $10.0 million, or 182% of total revenues, from $3.2 million, or 376% of total revenues, for the six months ended June 30, 1998. The increase was primarily due to an increase of approximately $2.9 million related to staffing levels and approximately $1.3 million to enhance the content and features of 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 and technological infrastructure. 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 $22.9 million, or 416% of total revenues, for the six months ended June 30, 1999 from $6.0 million, or 706% of total revenues, for the six months ended June 30, 1998. The increase in sales and marketing expenses was primarily attributable to: - expansion of our advertising, public relations and other promotional expenditures related to our branding campaign of approximately $11.1 million; and - higher personnel expenses, including sales commissions, of approximately $3.4 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 $6.7 million, or 122% of total revenues, for the six months ended June 30, 1999, from $1.0 million, or 118% of total revenues, for the six months ended June 30, 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 $2.1 million, additional rental costs of approximately $600,000 and additional taxes and insurance charges of approximately $500,000. General and administrative expenses for the six months ended June 30,1999 include one-time charges of $1.0 million related to the acquisition of Wass Net. Since the acquisition was accounted for as a pooling of interests, these costs were expensed at the consummation of the acquisition. 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. 29 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 $1.6 million, or 29% of total revenues, for the six months ended June 30, 1999 from $248,000, or 29% of total revenues, for the six months ended June 30, 1998. The dollar increases were primarily attributable to the increase in fixed assets of approximately $6.3 million during 1999 and $5.9 million during 1998. We also incurred goodwill amortization expenses of $0.5 million related to the acquisitions of Achei and KD Sistemas. We expect that depreciation and amortization expenses will continue to increase as we build the structure necessary to improve our products and acquire other businesses. STOCK-BASED COMPENSATION EXPENSE We recorded additional deferred compensation of $6.0 million during the six months ended June 30, 1999. Of the cumulative deferred compensation amount, $3.0 million was recorded as an expense during the six months ended June 30, 1999. The unamortized balance is being amortized over the vesting period for the individual options, which is typically three years for options issued earlier than February 1999 and four years for options issued since that date. INTEREST INCOME, NET Interest income, net includes income from our cash and investments. Net interest income increased from $90,000 for the six months ended June 30, 1998 to $1.1 million for the six months ended June 30, 1999. Interest income increased as a result of capital raised from the sale of preferred shares in 1998, the issuance of 3.7 million shares of common stock to a group of third party investors in April and May 1999, and the initial public offering of shares of our common stock in May 1999. YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MARCH 5, 1996 (INCEPTION) TO DECEMBER 31, 1996 REVENUES Revenues increased to $5.8 million for the year ended December 31, 1998 from $472,000 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 sold. During 1998, we: - expanded our sales force; and - increased the number of impressions available on our network by adding channels and by increasing our marketing efforts. In 1997, three advertisers each accounted for greater than 10% of total revenues and the five largest advertisers accounted for 98% of total revenues. In 1998, two advertisers, Netscape and Fox Latin America, each accounted for greater than 10% of total revenues and the five largest advertisers accounted for 57% of total revenues. In 1998, 42% 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 $7.1 million, or 122% of total revenues, for the year ended December 31, 1998, from $1.2 million, or 254% 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 30 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 505% of total revenues, for the year ended December 31, 1998, from $2.1 million, or 445% 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 $4.8 million, or 83% of total revenues, for the year ended December 31, 1998, from $650,000, or 138% 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 $785,000, or 14% 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 $5.9 million during 1998 and $270,000 during 1997. STOCK-BASED COMPENSATION EXPENSE We recorded deferred compensation of $19.1 million during the year ended December 31, 1998. Of this amount, $10.4 million 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 $667,000 for the year ended December 31, 1998 from $34,000 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. LIQUIDITY AND CAPITAL RESOURCES To date, we have primarily financed our operations through the sale of our equity securities. At June 30, 1999, we had $164.7 million in cash and cash equivalents, an increase of $111.6 million from December 31, 1998. In the six months ended June 30, 1999, we used $36.0 million in operating activities, mostly related to our $37.7 million loss during the period which included non-cash activities such as $1.6 million in depreciation and amortization and $3.0 million in non-cash charges related to stock option grants. In the 31 six months ended June 30, 1998, we used $7.0 million in operating activities, consisting mostly of $12.8 million for our net loss, partly offset by $3.2 million in non-cash charges related to stock option grants and $3.1 million in additional liabilities. Net cash used in operating activities was $30.7 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 in part by: - the amortization of deferred compensation; - depreciation and amortization; - increases in accrued expenses and accounts payable; and - deferred revenues. For the six months ended June 30, 1999, we used $11.1 million in investing activities, including $6.0 million for fixed assets and $5.1 million in connection with acquisitions and related costs. Net cash used in investing activities was $4.7 million for the year ended December 31, 1998, $283,000 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 $159.1 million for the six months ended June 30, 1999, $88.1 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. In May 1999, we raised approximately $110.4 million, net of underwriting discounts and commissions and related expenses, from the initial public offering of shares of our common stock. We also entered into a credit line, utilizing $5.1 million of a $12.0 million facility. Our principal commitments consist of obligations outstanding under capital and operating leases. 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 $12.0 million credit line for the acquisition of computer equipment and furniture and fixtures. At June 30, 1999, approximately $4.7 million was outstanding under the equipment line. Amounts outstanding are payable in monthly installments of principal and interest of approximately $170,000, bear interest at approximately 13.6% per annum and are secured by certain computer equipment and furniture and fixtures. The credit line requires us to maintain at least $10 million in cash and cash equivalents. We have entered into an agreement with AT&T Global Network Services, formerly IBM Global Network, under which we can offer Internet access services in Argentina, Brazil, Chile, Colombia and Mexico. Under the agreement, we are obligated to pay AT&T a minimum of approximately $4.3 million in 1999 and approximately $16.0 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 and technologies, and plan to expand our sales and marketing programs and conduct more aggressive brand promotions. 32 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 establish an additional credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. 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 we determine the need for and the extent of any contingency plans. We 33 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, 34 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. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of Effective Date of FASB Statement No. 133", which deferred the effective date of SFAS 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. The statement is not expected to affect us as we currently do not have any derivative instruments or hedging activities. 35 BUSINESS OVERVIEW StarMedia is the leading Internet media company targeting Latin America and other Spanish- and Portuguese-speaking markets worldwide. Our network consists of seven branded Internet properties: - - StarMedia.com, our flagship Internet media property; - - StarMedia Acesso, our premium Internet access service; - - Cade?, a topical directory of Portuguese-language Web sites; - - LatinRed, one of the largest Spanish-language online communities; - - OpenChile, a local Chilean portal; - - Periscopio.com, our personalized search and retrieval property; and - - Zeek!, a topical directory of Portuguese-language Web sites. Through these properties, we offer our users a variety of in-language interest-specific areas or channels, extensive Web-based community features, sophisticated search capabilities, online shopping and Internet access services. Our content covers a broad array of topics of interest to Latin Americans and other Spanish- and Portuguese-speaking audiences, 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 our users an in-language community experience, combined with a broad array of Spanish and Portuguese content tailored for regional dialects and local cultural norms. As a result, we provide advertisers and merchants targeted access to Latin American and other Spanish-and Portuguese-speaking 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 142 million at the end of 1998 to approximately 399 million by the end of 2002, representing a compound annual growth rate of 29%. 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 $2.1 billion in 1998 to approximately $8.8 billion in 2002, representing a compound annual growth rate of 43%. The growth in the use of the Internet is also providing businesses with a platform to conduct electronic commerce. According to IDC, spending on the Internet is expected to increase from $50.4 billion in 1998 to approximately $733.6 billion in 2002, representing a compound annual growth rate of 95%. INTERNET USE IN LATIN AMERICA Latin America is comprised of 23 countries with a total population of approximately 500 million people. This region consists of the following countries: - - Argentina - Guyana - - Belize - Guatemala - - Bolivia - Honduras - - Brazil - Mexico - - Chile - Nicaragua - - Colombia - Panama - - Costa Rica - Paraguay - - Cuba - Peru - - Dominican Republic - Suriname - - Ecuador - Uruguay - - El Salvador - Venezuela - - French Guiana
36 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 60% 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, the Latin American market represents a highly desirable demographic profile for advertisers and businesses. According to a study published in July 1999 by Zenith Media, overall advertising spending across all media in Latin America was $24 billion in 1998 and is estimated to grow to $26 billion in 2001. According to Forrester Research, Internet advertising in Latin America was $20 million in 1998 and is estimated to grow to $259 million in 2001. 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 Audits & Surveys Worldwide, the number of Internet users in Latin America is currently over 15 million. Nazca Saatchi & Saatchi estimates that there will be 34 million Internet users in Latin America 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; - govermental Internet initiatives; - 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, approximately 85 to 90% of the content on the Internet remains in English, according to Audits & Surveys Worldwide. We believe that an increasing number of Latin American Internet users are seeking a full-service Internet offering 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; - fast and reliable Internet access; - sophisticated Internet applications and tools like e-mail, chat, instant messaging, bulletin boards, personal homepages and search capabilities; and - the ability to easily and securely buy goods and services online. 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 generally been 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 37 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 base. THE STARMEDIA SOLUTION We are the leading Internet media company targeting Latin America and other Spanish- and Portuguese-speaking markets worldwide. Our network consists of seven branded Internet properties: - StarMedia.com, our flagship Internet media property; - StarMedia Acesso, our premium Internet access service; - Cade?, a topical directory of Portuguese-language Web sites; - LatinRed, one of the largest Spanish-language online communities; - OpenChile, a local Chilean portal; - Periscopio.com, our personalized search and retrieval property; and - Zeek!, a topical directory of Portuguese-language Web sites. Through these properties, we offer our users a variety of in-language interest-specific areas or channels, extensive Web-based community features, sophisticated search capabilities, online shopping and Internet access services. We believe that we have created an online network that uniquely addresses the needs of Latin American and other Spanish- and Portuguese-speaking Internet users and provides advertisers and merchants with a highly desirable platform for targeting affluent consumers in our markets. Our page views have grown to over 686 million in the three months ended June 30, 1999. In addition, our active e-mail accounts have grown to 1.2 million as of June 30, 1999. We believe that our success to date is attributable to the following key factors: FOCUS ON LATIN AMERICA AND OTHER SPANISH-AND PORTUGUESE-SPEAKING MARKETS. We serve the interests and needs of Latin American and other Spanish- and Portuguese-speaking Internet users and have developed both a product and a business infrastructure to support our focus on these markets. We designed our network around the needs of our users, providing them with: - customized global, regional and local content covering a variety of topics in the appropriate Spanish and Portuguese dialect; - 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 each other; - easy-to-use interfaces and consistent navigation experiences that facilitate usage by the growing number of Latin Americans and other Spanish- and Portuguese-speaking users coming online for the first time; - search capabilities that can be customized by country, region and/or language; - sophisticated electronic commerce capabilities; and - premium Internet access service with high quality customer care and international account access through a single network. In addition, we have developed a business infrastructure designed to address the needs of our users by maintaining a strong local presence and employing a high percentage of Spanish- and Portuguese-speaking employees, both in the U.S. and abroad. These employees are critical to maintaining our network's focus and flavor. Our 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. Our local offices include Barcelona, Bogota, 38 Buenos Aires, Caracas, Madrid, Mexico City, Montevideo, Rio de Janeiro, San Juan, Santiago and Sao Paulo. Each office is staffed predominantly with 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 StarMedia 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 brands 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 COMMUNITY AND CONTENT OFFERINGS. We believe that our extensive local and pan-regional content, combined with our community of Internet users, gives us a competitive advantage and is key to our continued leadership as the Internet destinations of choice in the region. We provide our users with a broad array of relevant and in-depth local content. In addition, our network serves as a virtual central plaza for our users to 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. 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: - leading Internet brands in Latin America and other Spanish- and Portuguese-speaking markets; - a user base with a highly desirable demographic profile; and - users with a high degree of affinity and involvement through e-mail, chat, bulletin boards and personal homepages. Internet advertising is new in our markets, 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 targeting Spanish- and Portuguese-speaking audiences. 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 competitive Web sites and provides us with a significant competitive advantage. 39 As a result, we have been able to: - attract high-profile advertisers, including Bradesco, Ford, Fox Sports America, IBM, Nokia and Sony; - enter into relationships with leading electronic commerce companies, including barnesandnoble.com, CDNow, Disney, Latin Grocer and Outpost.com; and - charge premium advertising rates. STRATEGY Our objective is to strengthen our position as the leading online network across Latin America and other Spanish- and Portuguese-speaking markets. In order to accomplish this, we will: AGGRESSIVELY EXTEND THE RECOGNITION OF OUR BRANDS. Our goal is to make our brands synonymous with the Internet in our markets. We believe that continuing to enhance our brand recognition will enable us to capitalize on our leading position and will make us more attractive to advertisers and businesses conducting electronic commerce. This will increase in importance as more Spanish- and Portuguese-speaking consumers move online and as additional Internet sites compete for these users. We intend to continue to build our brands through: - extensive television, print, Internet and outdoor advertising; - public relations programs; - conference sponsorships; - new strategic alliances; and - additional distribution relationships. ENHANCE AND EXPAND OUR SPANISH AND PORTUGUESE CONTENT AND COMMUNITY FEATURES. We intend to continue to add new content and features to the StarMedia network. We believe that this will: - further differentiate our brands 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. We currently have relationships with leading content providers, including Agencia EFE, Fox Sports America, Internet Securities, Mpath, Patagon.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 110 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 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, fulfillment and transaction software companies, as well as merchants. We have entered into a relationship with SkyBox Services Corporation, a provider of logistics solutions, to facilitate the delivery of goods sold over our network. FURTHERING OUR PENETRATION INTO ADDITIONAL SPANISH- AND PORTUGUESE-SPEAKING MARKETS. We seek to make StarMedia network 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 8.6 million Spanish- and Portuguese-speaking Internet users dispersed through the United States, Spain and Portugal. In the U.S., the Hispanic population is growing more rapidly than any other minority group. 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. Hispanic households 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. 40 We have expanded our presence outside of Latin America through the acquisition of LatinRed, which has an established user base in the Spanish and U.S. Hispanic markets. In addition, we recently launched our Puerto Rican operations by opening an office in San Juan to focus on advertising sales and new business development. Additionally, we are expanding our advertising and marketing campaigns in the United States and Spain. CONTINUE TO PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We plan to continue to expand our user base, revenues and competitive position through strategic acquisitions and alliances. In 1999, we made a number of strategic acquisitions to further this goal. These include: - Cade?, a topical directory of Portuguese-language Web sites; - LatinRed, one of the largest Spanish-language online communities; - OpenChile, a local Chilean portal; - Webcast, a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media; and - Zeek!, a topical directory of Portuguese-language Web sites. We believe that these acquisitions have significantly enhanced our presence in our markets and have enabled us to reach a broader base of users and advertisers. We have also agreed to acquire PageCell, a provider of advanced mobile technologies and services. We intend to aggressively seek other opportunities to acquire or form alliances with other companies that will complement our network. EXPAND OUR INTERNET ACCESS SERVICES TO USERS ACROSS LATIN AMERICA. We recently began to offer Internet access services in Brazil and intend to offer these services in other Latin American markets during the second half of 1999. We believe this service will enable us to develop an additional source of revenue and to create closer ties with Internet users in our markets. We have entered into an agreement with AT&T Global Network Services, formerly known as IBM Global Network. AT&T 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 Acesso brand and StarMedia will be the pre-programmed homepage for the service. We will charge users monthly access fees with pricing based on rates that are competitive in each local market. DEVELOP AND DEPLOY NEXT GENERATION CONTENT AND SERVICE DISTRIBUTION PLATFORMS. We intend to seek opportunities to extend our brands beyond personal computers to wireless products, consumer electronics and entertainment media. To that end, we have created two new divisions, StarMedia Broadband and StarMedia Mobile. StarMedia Broadband will provide Spanish- and Portuguese-speaking users with premium streaming media services and programming, including audio, video and interactive multimedia via the Internet. Webcast, our recent acquisition, will serve as the core of this new division. An additional goal of StarMedia Broadband is the enhancement of our users' interactive experience by enabling rich media programming to be delivered quickly and efficiently via high speed distribution platforms. StarMedia Mobile advances our strategy to provide our users worldwide with a richer Internet experience by allowing them to bring Internet content and applications to a wide range of wireless devices. We have also agreed to acquire PageCell and intend to take advantage of its advanced mobile technologies and services to enable our users to handle their mobile communications needs through one central service. We intend to continue to seek similar acquisition or investment opportunities. We believe this strategy will: - augment our user base by enabling access to StarMedia's content and services by users offline; - enhance our brand recognition by extending our presence to new viewership; - increase our revenues by providing new advertising and sponsorship opportunities to our clients; and - prepare StarMedia for the future convergence of interactive and entertainment technologies, and further distinguish our network from traditional Internet portals. 41 THE STARMEDIA NETWORK The StarMedia network currently consists of seven branded Internet properties: - StarMedia.com, our flagship Internet media property; - StarMedia Acesso, our premium Internet access service; - Cade?, a topical directory of Portuguese-language Web sites; - LatinRed, one of the largest Spanish-language online communities; - OpenChile, a local Chilean portal; - Periscopio.com, our personalized search and retrieval property; and - Zeek!, a topical directory of Portuguese-language Web sites. STARMEDIA.COM StarMedia.com, our principal branded destination and flagship Internet media property, is organized around 19 topical channels. These channels are grouped into: - community services; and - content and commerce services. StarMedia.com's Welcome Screen-- www.starmedia.com-- provides a guide to the network channels, features special content and promotions, offers direct access to our search, e-mail and chat services and displays real-time news headlines. When users first visit StarMedia.com, 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. StarMedia.com's unique design and layout provides a consistent navigation experience allowing users to access any channel on StarMedia.com from any other channel on the service. Additionally, this design allows for persistent branding. StarMedia.com's broad range of community features enables users throughout Latin America and other Spanish- and Portuguese-speaking markets to interact with each other. These community features include: - StarMedia TalkPlanet--chat - StarMedia Mail--e-mail - StarMedia Orbita/Orbita--personal homepages - StarMedia Forum/Pizarras--bulletin boards - StarMedia Express--instant messenger - StarMedia Classificados/Clasificados-- classifieds - Namoro Personet/Romance Personet-- personals - StarMedia Jogos/Juegos--games - StarMedia Saude--health and wellness We have built StarMedia.com's content and commerce services around a successful community environment. We enhance the effectiveness of StarMedia.com's community services by wrapping them around engaging content channels. These include: - StarMedia Noticias/Noticias--news - StarMedia Esportes/Deportes--sports - StarMedia Money--finance - StarMedia Digital--technology - StarMedia Entretenimento/ Entretenimientos--entertainment - StarMedia Shopping--electronic commerce - StarMedia BuscaWeb--search and guide - StarMedia Viagens/Viajes--travel - StarMedia Tempo/Tiempo--weather - StarMedia Horoscopo--horoscopes 42 STARMEDIA ACESSO We recently launched StarMedia Acesso, our premium Internet access service. StarMedia Acesso is designed to offer Latin Americans fast, reliable Internet connectivity, 24 hour customer support, international account access through a single global network, a selection of pricing plans, and direct links to all of our Internet properties. We have contracted with AT&T Global Network Services, formerly the IBM Global Network, to create this new service. Acesso leverages AT&T's network infrastructure, operational, billing, and customer service capabilities. We have begun to offer access services through Acesso in Brazil and intend to expand our Internet access services in other Latin American markets during the second half of 1999. We will charge users monthly access fees with pricing based on rates that are competitive in each local market. CADE? Cade? is among the leading Internet portals in Brazil. The service provides a topical directory of Portuguese-language Web sites and is one of the largest directories in Brazil. The service currently provides over 165,000 listings. More than 2,500 Web sites are added to the Cade? directory each week by experienced editors who analyze and review every site. In addition to its search and guide resources, Cade? offers other services such as Cade Voce? (www.cadevoce.com.br), a personalized email list subscription service, and Aqui (www.aqui.com.br), an area featuring local news, interviews, forums and other sections developed by Cade? staff. LATINRED LatinRed (www.latinred.net) is one of the largest Spanish-speaking community services on the Internet. It is comprised of a variety of free services, such as LatinMail (www.latinmail.com), an e-mail service, and LatinChat (www.latinchat.com), a chat community, each of which can be accessed independently. In addition to e-mail and chat, LatinRed's products include: - GratisWeb (www.gratisweb.com)-- personal homepages - LatinCards (www.latincards.com)-- electronic greeting cards - LatinTiempo--weather - LatinGuia--directory - LatinBanners--advertising distribution network - Futbolmania--local soccer news - Usados--classifieds - Solidaridad--news - Tableros--forum OPENCHILE OpenChile consists of three brands: - OpenChile (www.openchile.cl), a leading Chilean portal that provides national content, search capabilities, free electronic mail, chat, international daily newspaper and magazine directories; - Panoramas (www.panoramas.cl), an interactive Internet product that supplies a guide to the latest in local Chilean entertainment and culture; and - Servicios Interactivos Limitada, a developer of online content, portals and electronic commerce platforms and a provider of design services in Chile. ZEEK! Zeek! offers a well-organized, user-friendly Brazilian guide with a universal search capability that reaches more than 95,000 sites. Recognized for its efficient segmented guide, the site allows users to perform specific searches in areas such as shopping, human resources, education and health & beauty. Additional Zeek! products include games, news, classifieds, Zeek! Plus, where users can access a daily updated selection of links in diverse categories, and Zeek! Cities, which 43 provides local information about the main Brazilian cities. PERISCOPIO We recently launched a new product, Periscopio.com, which is designed for users seeking streamlined and customizable information retrieval. This product provides online Spanish-speakers with a powerful search and information destination. It is a functionality-driven product focused on fast information retrieval and personalization. Periscopio.com's search engine has indexed more than 110 million documents worldwide that can be searched by language, country and date. Coupled with Guia Periscopio, which features over 24,000 selected Spanish-language sites across various topics, as well as a host of advanced personalization features, Periscopio is a powerful destination for finding Spanish-language information on the Internet. Using the personalization tools on Mi Pagina, users can customize their Internet experience by editing each of the 16 guides, 22 news subjects, weather from several major cities worldwide and horoscopes. Periscopio.com is organized into four sections: - Mi Pagina--personalized pages - Guia--directory of Spanish-language Web sites - Canales--news and information channels - Comunidad--community features 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 properties will be the only Internet companies 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. 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 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 - Agencia EFE--news and information - Billboard--entertainment news and featured content - Bottle Rocket--interactive sports games - BusinessWire--business news - Critical Path--email services - DYN--Argentinian news and information 44 - eDrive--entertainment news and featured content - eShare--chat software - 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 - Mpath--multi-player game software - Patagon.com--financial news and 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--online bookstore - CDNow--music products, CDs, clothing, posters and books - CIM--Brazilian music - Disney--branded merchandise - GoChile--Chilean travel service - Gradiente--Brazilian consumer electronics - Jungla--Chilean bookstore - Latin Grocer--Latin products - Outpost.com--computer and technology merchandise - SportsSuperstore--sports merchandise - Viajo.com--travel services 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 StarMedia.com. StarMedia Noticias/Noticias appears as a ticker on the Netscape Latin America and Brazil homepages and directs users to our news areas. In addition, Netscape promotes StarMedia throughout its Spanish and Portuguese offerings. REALNETWORKS In February 1999, we entered into a relationship with RealNetworks, the leading provider of streaming audio/video over the Internet. StarMedia.com is the only in-language Internet destination 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. SKYBOX We have entered into an exclusive distribution relationship with SkyBox Services Corporation, a provider of logistics solutions for electronic commerce clients and U.S. merchandisers targeting Latin America. Through our relationship with SkyBox, we provide our Latin American users with the ability to make purchases with an ease of transaction similar to that available to those living in the U.S. As part of the StarMedia/ SkyBox service, non-U.S. resident clients are provided with a U.S. suite address at which SkyBox receives correspondence and 45 merchandise, and from which it then forwards these items to the clients' home or office. SkyBox systems handle the receipt of merchandise, the international transportation, customs clearance and home delivery, all at very competitive rates. 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 continue to work closely with our strategic investors in order to develop new content and to add new features to our network. RECENT ACQUISITIONS We have made a number of acquisitions in order to further expand the breadth of the services we provide to Latin American and other Spanish- and Portuguese-speaking Internet users. WEBCAST SOLUTIONS We acquired Webcast as the foundation of our StarMedia Broadband division, which will allow us to develop and deploy next generation content and service distribution platforms. Webcast is a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. Webcast combines the latest streaming media technologies with expert on-location media production, Web site design, content hosting, media management and online promotion for use in dynamic, media rich Web sites and broadband applications. Webcast has accumulated significant expertise in the deployment of international webcasting and on-site production, particularly in Latin America. PAGECELL On September 18, 1999, we entered into an agreement to purchase substantially all of the assets of PageCell. PageCell is a provider of advanced mobile technologies and services. It brings Internet content and applications to wireless devices such as pagers and cell phones. PageCell's key offerings include its mobile software technologies, including its mobile Internet platforms, wireless portal services and messaging services. Through these technologies, we will be able to deliver content and features such as e-mail, weather, horoscopes, sports, finance and other personalized information to wireless devices including pagers, cellular phones and personal digital assistants. PageCell will serve as the core of our new division, StarMedia Mobile. ADVERTISING SALES We have built a direct sales organization of 99 professionals located in Bogota, Buenos Aires, Caracas, Dallas, Los Angeles, Madrid, Mexico City, Miami, New York, Rio de Janeiro, San Juan, Santiago and Sao Paulo. SALES ORGANIZATION Our sales organization is dedicated to maintaining close relationships with top advertisers and leading advertising agencies throughout our target markets. 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 46 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 advertisements are 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 We had 160 advertisers and sponsors on our network during the three months ended June 30, 1999. 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 SkyTel Fox Sports America Sony IBM USA Networks
These customers, in the aggregate, accounted for approximately 20% of total revenues in the three months ended June 30, 1999 and 33% 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 six months ended June 30, 1999, no advertiser accounted for greater than 10% of total revenues. During the same period, our five largest advertisers accounted for 33% of total revenues. In 1998, two advertisers, Fox Sports America and Netscape, each accounted for greater than 10% of total revenues. During the same period, our five largest advertisers accounted for 57% 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 Sports America and MTV Latin America and 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 maintain regional network operating centers in Brazil and Argentina. Our operations depend on the ability of Exodus to protect its systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins, or other events. Exodus provides comprehensive facilities management services, including human and 47 technical monitoring of all production servers 24 hours per day, 7 days per week. Exodus also provides 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 both monthly access fees and per minute usage charges. In the past, Internet service providers, or ISPs, in Latin America charged an average of more than $80 per month for basic Internet access. Today, monthly Internet access fees have decreased to an average of $20 to $25 per month. In addition to access charges, local calls to connect to the ISP range in cost from $.02-$.05 per minute in some countries, including Venezuela, Peru, Argentina, Chile and Brazil and up to $.12 per minute in Mexico. These per minute charges may make the 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. While per minute charges have not declined as rapidly as access costs, 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 48 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 Spanish-and Portuguese-language 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: - America Online; - Telefonica Interactiva; - Telefonos de Mexico/Prodigy; - Universo Online; and - Yahoo! en espanol/Yahoo! Brasil. Many of our competitors and potential new competitors have: - longer operating histories; - greater name recognition in some markets; - larger customer bases; and - significantly greater financial, technical and marketing resources. These competitors may also be able to: - undertake more extensive marketing campaigns for their brands and services; - adopt more aggressive advertising pricing policies; - use superior technology platforms to deliver their products and services; and - make more attractive offers to potential employees, distribution partners, commerce companies, advertisers and third-party content providers. Our competitors may develop content that is better than ours or that achieves greater market acceptance. It is also possible that new competitors may emerge and acquire significant market share. This could have a material and adverse effect on our business, financial condition and results of operations. We also compete with traditional forms of media, like newspapers, magazines, radio and television for advertisers and advertising revenue. If advertisers perceive the Internet or our network to be a limited or an ineffective advertising medium, they may be reluctant to devote a portion of their advertising budget to Internet advertising or to advertising on our network. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES To date, regulations have not materially restricted use of the Internet in our markets. 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: 49 - 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 Chile opposing our STARMEDIA and design mark, 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 service mark or trademark registrations in the United States, Peru, Uruguay, Colombia and Paraguay for the StarMedia mark and registrations for other marks in some of these and other countries. Effective trademark protection may not be available in all the countries in which we conduct business. Policing unauthorized use of our marks is also difficult and expensive. In addition, it is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. We actively seek to protect our marks against similar and confusing marks of third parties by: - using a watch service which identifies applications to register trademarks; - filing oppositions to third parties' applications for trademarks; and - bringing lawsuits against infringers. For example, we 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 50 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 June 30, 1999, we had 409 full-time employees, of whom 99 worked in sales, 10 in editorial, 24 in marketing, 203 in product and technology and 73 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: - Barcelona, Spain; - Bogota, Colombia; - Buenos Aires, Argentina; - Caracas, Venezuela; - Madrid, Spain; - Mexico City, Mexico; - Miami, Florida; - Montevideo, Uruguay; - Rio de Janeiro, Brazil; - San Francisco, California; - San Juan, Puerto Rico; - Santiago, Chile; and - Sao Paulo, Brazil. LEGAL PROCEEDINGS There are no material legal proceedings pending or, to our knowledge, threatened against us. 51 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......................... 33 Chairman of the Board of Directors and Chief Executive Officer Jack C. Chen................................. 33 President and Director Tracy J. Leeds............................... 35 Senior Vice President, Corporate Development Steven J. Heller............................. 33 Chief Financial Officer Adriana J. Kampfner.......................... 27 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 Senior Vice President, Corporate Development since September 1999. Ms. Leeds served as StarMedia's Chief Operating Officer since 1998 and prior to that was Vice President, Business Operations beginning in July 1997 when she joined the company. 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. 52 STEVEN J. HELLER has been the Chief Financial Officer of StarMedia since May 1999, 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 53 ventures. Prior to his employment with Time Warner Direct, Mr. Linen held various top-level executive positions at Time Life, including President and Chief Executive Officer and Managing Director for Latin America, and currently serves on the board of directors of Allied Devices Corporation. Mr. Linen received a B.S. from Williams College and attended the Graduate School of Business Administration at New York University. GERARDO M. ROSENKRANZ has been a Director of StarMedia since November 1996. Mr. Rosenkranz is a private investor and founder and Chief Executive Officer of Ventech International, Inc. Ventech provides consulting services to telecommunications and information technology companies. Prior to establishing Ventech in 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 54 to the adequacy of our internal accounting controls. The audit committee consists of Gerardo M. Rosenkranz and Frederick R. Wilson. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies and all forms of compensation to be provided to our executive officers and directors. In addition, the compensation committee reviews bonus and stock compensation arrangements for all of our other employees. The current members of the compensation committee are Christopher T. Linen and Frederick R. Wilson. No interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any 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 Senior Vice President, Corporate Development 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 $100,000. The options shown for each executive officer do not include options cancelled under our 1997 Plan, but do include the immediate reissuance of options equal to the cancelled options under our 1998 Plan. We have never granted any stock appreciation rights. The potential 55 realizable value is calculated based on the term of the option at its time of grant. It is calculated assuming that the fair market value of common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect our estimate of future stock price growth. The percentage of total options granted to employees in the last fiscal year is based on options to purchase an aggregate of 5,782,000 shares of common stock granted under our 1998 Plan to our employees, consultants and directors and under our 1997 Plan to Messrs. Espuelas and Chen in the year ended December 31, 1998. All options granted under our 1997 Plan, other than those granted to Messrs. Espuelas and Chen, have been cancelled and reissued under our 1998 Plan.
POTENTIAL REALIZABLE VALUE AT ASSUMED OPTION GRANTS IN LAST FISCAL YEAR ANNUAL RATES INDIVIDUAL GRANTS OF --------------------------------------------------------------------------- STOCK PRICE NUMBER OF APPRECIATION SECURITIES PERCENT OF TOTAL EXERCISE FOR OPTION UNDERLYING OPTIONS GRANTED TO PRICE PER FMV ON THE TERM OPTIONS EMPLOYEES IN SHARE DATE OF GRANT EXPIRATION ------------- NAME GRANTED(#) FISCAL YEAR (%) ($/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 $15.00 per share, less the exercise price per share, multiplied by the number of shares underlying the options. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR-END (#) AT FISCAL YEAR END ($) ----------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------- ------------- -------------- -------------- -------------- Fernando J. Espuelas............................. 1,750,000 -- $ 24,550,000 $ -- Jack C. Chen..................................... 1,750,000 -- 24,550,000 -- Tracy J. Leeds................................... 550,000 -- 7,975,001 -- Steven J. Heller................................. 190,000 -- 2,755,001 -- Adriana J. Kampfner.............................. 230,000 -- 3,335,001 --
56 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. 57 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 58 - 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. 59 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. All of the series A redeemable convertible preferred stock automatically converted into an aggregate of 7,330,000 shares of common stock upon the closing of our initial public offering. 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. The series B redeemable convertible preferred stock automatically converted into an aggregate of 8,000,000 shares of common stock upon the closing of our initial public offering. 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 60 Fund 1998/99 is controlled by Mr. Wilson. The notes were repaid in full. 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. The series C redeemable convertible preferred stock automatically converted into an aggregate of 16,666,667 shares of common stock upon the closing of our initial public offering. 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. 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. 61 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock, as of June 30, 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 June 30, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 58,006,198 shares of common stock outstanding as of June 30, 1999, and 64,006,198 shares of common stock outstanding after completion of this offering.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING OFFERING -------------------------- SHARES OFFERED --------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT HEREBY NUMBER PERCENT - -------------------------------------------- ------------- ----------- --------------- -------------- ----------- Fernando J. Espuelas(1)..................... 6,250,000 10.5% 0 6,250,000 9.5% Jack C. Chen(2)............................. 6,290,000 10.5 0 6,290,000 9.6 Tracy J. Leeds(3)........................... 813,251 1.4 0 813,251 1.3 Steven J. Heller(4)......................... 481,000 * 0 481,000 * Adriana J. Kampfner(5)...................... 376,000 * 0 376,000 * Douglas M. Karp(6).......................... 4,760,417 8.2 0 4,760,417 7.5 Christopher T. Linen(7)..................... 300,000 * 0 300,000 * Gerardo M. Rosenkranz(8).................... 598,055 1.0 0 598,055 * Susan L. Segal(9)........................... 11,378,333 19.6 500,000 10,878,333 17.0 Frederick R. Wilson(10)..................... 1,236,000 2.1 0 1,236,000 1.9 Chase Venture Capital Associates, L.P.(11).................................. 11,378,333 19.6 500,000 10,878,333 17.0 Warburg, Pincus Equity Partners, L.P.(12)... 2,380,209 4.1 0 2,380,209 3.7 Warburg, Pincus Ventures International, L.P.(12).................................. 2,380,208 4.1 0 2,380,208 3.7 All directors and executive officers as a group (12 persons)........................ 33,384,623 53.0 500,000 32,884,623 48.2
- ------------------------ * Indicates less than one percent of the common stock. (1) Includes (a) 1,687,500 shares issuable upon the exercise of currently exercisable stock options and (b) 1,000,000 shares held by a trust, of which Mr. Chen and the spouse of Mr. Espuelas are trustees. 62 (2) Includes (a) 1,687,500 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. (3) Includes (a) options to purchase 125,304 shares of common stock that are immediately exercisable, all of which are unvested, and (b) 336,112 shares of common stock which we have a right to repurchase if Ms. Leeds' services with us are terminated prior to vesting. Also includes 250,000 shares held by a trust of which Ms. Leeds is trustee. (4) Includes (a) options to purchase 140,000 shares of common stock that are immediately exercisable, 101,111 of which are unvested, and (b) 288,500 shares of common stock which we have a right to repurchase if Mr. Heller's services with us are terminated prior to vesting. (5) Includes (a) options to purchase 146,000 shares of common stock that are immediately exercisable, all of which are unvested, and (b) 172,778 shares of common stock which we have a right to repurchase if Ms. Kampfner's services with us are terminated prior to vesting. (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) 530,833 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. (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. 63 DESCRIPTION OF CAPITAL STOCK GENERAL StarMedia's amended and restated certificate of incorporation 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 June 30, 1999, 58,006,198 shares of common stock were outstanding and no shares of preferred stock were outstanding. As of June 30, 1999, StarMedia had 162 stockholders of record. 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. 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. We currently have no shares of preferred stock outstanding. Our board of directors has authorized the issuance of shares of junior non-voting convertible preferred stock in connection with our pending acquisition of PageCell. Holders of our junior non-voting convertible preferred stock will rank junior or PARI PASSU to any other series of our preferred stock that we may subsequently issue in terms of distribution of assets upon the liquidation, dissolution or winding up of our company and the payment of dividends. If and when we pay a dividend on our common stock, the holders of our junior non-voting convertible preferred stock will be entitled to receive a dividend equal to the amount they would have received if their shares had been converted into shares of common stock immediately prior to the record date for the dividend. Also, in the event of the liquidation, dissolution or winding up of our company, the holders of the preferred stock will receive, before the payment or distribution of our assets to the holders of our common stock, a payment or distribution equal to the amount the holders would have received if their shares were converted into shares of common stock. The holders of the junior non-voting convertible preferred stock are not entitled to vote on any matter to be voted upon by our stockholders, except as required by Delaware law. After the first anniversary of the issuance 64 of the junior non-voting convertible preferred stock, the holders of the junior non-voting convertible preferred stock will be entitled to convert all of their shares into shares of our common stock at a one-to-one conversion rate. REGISTRATION RIGHTS Under the terms of our amended and restated registration rights agreement, at any time on or after June 1, 2000, each of Chase Venture Capital Associates, Warburg, Pincus Equity Partners and the holders of a majority of the outstanding shares of common 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 held by them. We are also obligated to register any of the shares of common stock 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 common stock which is a party to the registration rights agreement may require us to file a registration statement on Form S-3 under the Securities Act with respect to their shares of common stock. We are also obligated to register the shares of common stock 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 common stock which are parties to the registration rights agreement will be entitled to require us to register the common 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 65 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 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 66 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. 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 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. 67 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 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 is quoted on the Nasdaq National Market under the trading symbol "STRM". 68 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, many sales of substantial amounts of common stock in the public market after contractual and legal 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 64,006,198 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. Of the remaining 58,006,198 shares of common stock held by existing stockholders, 49,902,032 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 Our officers, directors and 5% stockholders have signed lock-up agreements under which they have 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 90 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. Approximately 44,076,962 shares of our common stock are subject to lock-up agreements entered into in connection with our initial public offering that expire on November 22, 1999, and approximately 3,876,363 additional shares of our common stock are subject to one-year lock-up agreements that expire in April and May 2000. Subject to the provisions of Rule 144, 144(k) and 701, restricted shares totaling 1,951,707 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. RULE 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year 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 635,062 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 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 69 provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold at any time. 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 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 41,271,818 shares of our common stock, or their transferees will be entitled to request that we register their shares under the Securities Act. STOCK PLANS At June 30, 1999, options to purchase 7,271,533 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. Legal matters relating to the offering will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts. Certain attorneys at Brobeck, Phleger & Harrison LLP own shares of our common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule and our supplemental financial statements and schedule at December 31, 1997 and 1998 and at June 30, 1999 and for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999 as set forth in their reports. We have included our consolidated financial statements and schedule and supplemental consolidated 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. The financial statements of KD Sistemas de Informacao Ltda. included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of the firm as experts in giving such reports. 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 70 statement. We file annual, quarterly and special reports, proxy statements and other information with the Commission. 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. 71 INDEX TO FINANCIAL STATEMENTS STARMEDIA NETWORK, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.................................................. F-3 Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999.. F-4 Consolidated Statements of Operations for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (Unaudited) and 1999................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999............. F-6 Consolidated Statements of Cash Flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (Unaudited) and 1999................... F-7 Notes to Consolidated Financial Statements...................................... F-8 - F-22 KD SISTEMAS DE INFORMACAO LTDA. FINANCIAL STATEMENTS Report of Independent Public Accountants........................................ F-23 Balance Sheet as of December 31, 1998........................................... F-24 Statement of Income for the year ended December 31, 1998........................ F-25 Statement of Changes in Stockholders' Equity for the year ended December 31, 1998.......................................................................... F-26 Statement of Cash Flows for the year ended December 31, 1998.................... F-27 F-28 - Notes to Financial Statements................................................... F-31 Unaudited Balance Sheets as of March 31, 1999 and 1998.......................... F-32 Unaudited Statements of Income for the three months ended March 31, 1999 and 1998.......................................................................... F-33 Unaudited Statements of Changes in Stockholders' Equity for the three month periods ended March 31, 1999 and 1998......................................... F-34 Unaudited Statements of Cash Flows for the three month periods ended March 31, 1999 and 1998................................................................. F-35 F-36 - Notes to Unaudited Financial Statements......................................... F-40 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1998............................................................. F-42 Unaudited Pro Forma Consolidated Statement of Operations for the six months ended June 30, 1999........................................................... F-43 Notes to Unaudited Pro Forma Consolidated Financial Statements.................. F-44
F-1 INDEX TO FINANCIAL STATEMENTS (CONTINUED) STARMEDIA NETWORK, INC. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS(*) Report of Independent Auditors.................................................. F-45 Supplemental Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999................................................................. F-46 Supplemental Consolidated Statements of Operations for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (Unaudited) and 1999..... F-47 Supplemental Consolidated Statements of Changes in Stockholders' Equity for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999....... F-48 Supplemental Consolidated Statements of Cash Flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (Unaudited) and 1999..... F-49 F-50 - Notes to Supplemental Consolidated Financial Statements......................... F-65
(*) On September 14, 1999, a subsidiary of the Company merged with Webcast Solutions, Inc (the "Webcast Merger"). The supplemental consolidated financial statements have been prepared to give retroactive effect to the Webcast Merger. These supplemental consolidated financial statements will become the historical consolidated financial statements of the Company after financial statements covering the consummation date of the Webcast Merger are issued. F-2 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 June 30, 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999. 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 June 30, 1999 and the results of their operations and their cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP /s/ Ernst & Young LLP New York, New York September 14, 1999 F-3 STARMEDIA NETWORK, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------- JUNE 30, 1997 1998 1999 ----------- ------------ ------------- ASSETS Current assets: Cash and cash equivalents............................................ $ 443,000 $ 53,141,000 164,716,000 Accounts receivable net of allowance for bad debts of $0, $60,000 and $239,000 as of December 31, 1997 and 1998 and June 30, 1999, respectively....................................................... 38,000 460,000 2,122,000 Other current assets................................................. 10,000 1,675,000 2,403,000 ----------- ------------ ------------- Total current assets................................................... 491,000 55,276,000 169,241,000 Fixed assets, net...................................................... 266,000 5,457,000 10,616,000 Intangible assets, net of accumulated amortization of $1,000, $93,000, and $132,000 as of December 31, 1997 and 1998 and June 30, 1999, respectively......................................................... 30,000 179,000 583,000 Goodwill, net of accumulated amortization of $538,000 at June 30, 1999................................................................. 7,429,000 Other assets........................................................... 23,000 129,000 4,467,000 ----------- ------------ ------------- $ 810,000 $ 61,041,000 $ 192,336,000 ----------- ------------ ------------- ----------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable..................................................... $ 18,000 $ 308,000 $ 3,810,000 Accrued expenses..................................................... 227,000 6,442,000 8,644,000 Due to principal stockholders........................................ 67,000 Loan payable, current portion........................................ 1,497,000 Capital lease obligations, current portion........................... 10,000 220,000 110,000 Deferred revenues.................................................... 20,000 815,000 924,000 ----------- ------------ ------------- Total current liabilities.............................................. 342,000 7,785,000 14,985,000 Capital lease obligations.............................................. 8,000 Loan payable, long term................................................ 3,208,000 Other long-term liabilities............................................ 381,000 Deferred rent.......................................................... 21,000 122,000 124,000 Preferred stock, authorized 60,000,000 shares at December 31, 1997 and 1998 and 10,000,000 shares at June 30, 1999: 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 -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 3,833,000 4,218,000 Series B Redeemable Convertible Preferred Stock, $.001 par value, 8,000,000 shares authorized, 8,000,000 shares issued and outstanding at December 31, 1998 and -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 12,944,000 Series C Redeemable Convertible Preferred Stock, $.001 par value, 16,666,667 shares authorized, 16,666,667 shares issued and outstanding at December 31, 1998 and -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 79,332,000 Stockholders' (deficit) equity: Common stock, $.001 par value, 100,000,000 shares authorized at December 31, 1997 and 1998 and 200,000,000 shares at June 30, 1999, 10,092,952 shares, 11,525,334 shares and 57,222,000 shares issued and outstanding at December 31, 1997 and 1998 and June 30, 1999, respectively....................................................... 11,000 12,000 57,000 Additional paid-in capital........................................... 433,000 19,658,000 281,553,000 Deferred compensation................................................ (8,666,000) (11,609,000) Other comprehensive loss............................................. (32,000) (320,000) Accumulated deficit.................................................. (3,838,000) (54,332,000) (96,043,000) ----------- ------------ ------------- Total stockholders' (deficit) equity................................... (3,394,000) (43,360,000) 173,638,000 ----------- ------------ ------------- Total liabilities and stockholders' (deficit) equity................... $ 810,000 $ 61,041,000 $ 192,336,000 ----------- ------------ ------------- ----------- ------------ -------------
SEE ACCOMPANYING NOTES. F-4 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 5,1996 (DATE OF SIX MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 JUNE 30, DECEMBER ----------------------------- ------------------------------ 31, 1996 1997 1998 1999 -------------- ------------- -------------- 1998 -------------- -------------- (UNAUDITED) Revenues............................... $ $ 472,000 $ 5,347,000 $ 850,000 $ 5,299,000 Operating expenses: Product and technology development... 36,000 1,233,000 6,825,000 3,178,000 9,930,000 Sales and marketing.................. 12,000 2,110,000 29,281,000 6,015,000 22,922,000 General and administrative........... 78,000 650,000 4,665,000 1,033,000 6,378,000 Depreciation and amortization........ 2,000 38,000 781,000 248,000 1,637,000 Stock-based compensation expense..... 10,421,000 3,250,000 3,012,000 -------------- ------------- -------------- -------------- -------------- Total operating expenses............... 128,000 4,031,000 51,973,000 13,724,000 43,879,000 -------------- ------------- -------------- -------------- -------------- Loss from operations................... (128,000) (3,559,000) (46,626,000) (12,874,000) (38,580,000) Other income (expense): Interest income...................... 34,000 715,000 119,000 1,404,000 Interest expense..................... (47,000) (29,000) (269,000) -------------- ------------- -------------- -------------- -------------- Net loss............................... (128,000) (3,525,000) (45,958,000) (12,784,000) (37,445,000) Preferred stock dividends and accretion............................ -- (185,000) (4,536,000) (720,000) (4,266,000) -------------- ------------- -------------- -------------- -------------- Net loss available to common stockholders......................... $ (128,000) $ (3,710,000) $ (50,494,000) $ (13,504,000) $ (41,711,000) -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Historical basic and diluted net loss per common share..................... $ (0.01) $ (0.37) $ (4.64) $ (1.32) $ (1.97) -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Historical number of shares used in computing basic and diluted net loss per share............................ 9,147,223 10,039,502 10,877,000 10,220,866 21,142,904 -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Pro forma basic and diluted net loss per share............................ $ (1.07) $ (.80) -------------- -------------- -------------- -------------- Number of shares used in computing pro forma basic and diluted net loss per share................................ 42,873,667 46,952,370 -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES. F-5 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996, AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
COMMON STOCK ADDITIONAL OTHER ------------------------ PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME ----------- ----------- ------------- -------------- --------------- ----------------- Balance at March 5, 1996 (date of inception)...................... $ $ $ $ $ Sale of common stock.............. 10,012,000 10,000 431,000 Net loss for the period........... (128,000) ----------- ----------- ------------- -------------- --------------- ----------------- Balance at December 31, 1996...... 10,012,000 10,000 431,000 (128,000) Accretion of preferred stock...... (185,000) Issuance of common stock-- Wass Net, S.L. ...................... 80,952 1,000 2,000 Net loss for the year............. (3,525,000) ----------- ----------- ------------- -------------- --------------- ----------------- Balance at December 31, 1997...... 10,092,952 11,000 433,000 (3,838,000) Deferred compensation related to stock options, net of cancellations................... 19,087,000 (19,087,000) Amortization of deferred compensation.................... 10,421,000 Exercise of common stock options......................... 380,000 45,000 Issuance of common stock-- Wass Net, S.L. ...................... 1,052,382 1,000 93,000 Preferred stock dividends and accretion....................... (4,536,000) Net loss for the year............. (45,958,000) Translation adjustment............ (32,000) Comprehensive loss................ ----------- ----------- ------------- -------------- --------------- ----------------- Balance at December 31, 1998...... 11,525,334 12,000 19,658,000 (54,332,000) (8,666,000) (32,000) Deferred compensation related to stock options, net of cancellations................... 5,955,000 (5,955,000) Amortization of deferred compensation.................... 3,012,000 Issuance of common stock, net of offering costs.................. 11,926,363 12,000 151,435,000 Shares issued for acquisition of Services Interactivos Limitada.. 20,000 1,000,000 Conversion of redeemable convertible preferred stock..... 31,996,667 31,000 100,728,000 Exercise of common stock options......................... 1,753,636 2,000 2,014,000 Stock options issued for services........................ 31,000 Transaction expenses related to Wass Net, S.L. acquisition payable by Wass Net shareholders.................... 732,000 Preferred stock dividends and accretion....................... (4,266,000) Net loss for the period........... (37,445,000) Translation adjustment............ (288,000) Comprehensive loss................ ----------- ----------- ------------- -------------- --------------- ----------------- Balance at June 30, 1999.......... 57,222,000 $ 57,000 $ 281,553,000 $(96,043,000) $ (11,609,000) $ (320,000) ----------- ----------- ------------- -------------- --------------- ----------------- ----------- ----------- ------------- -------------- --------------- ----------------- TOTAL -------------- Balance at March 5, 1996 (date of inception)...................... $ Sale of common stock.............. 441,000 Net loss for the period........... (128,000) -------------- Balance at December 31, 1996...... 313,000 Accretion of preferred stock...... (185,000) Issuance of common stock-- Wass Net, S.L. ...................... 3,000 Net loss for the year............. (3,525,000) -------------- Balance at December 31, 1997...... (3,394,000) Deferred compensation related to stock options, net of cancellations................... Amortization of deferred compensation.................... 10,421,000 Exercise of common stock options......................... 45,000 Issuance of common stock-- Wass Net, S.L. ...................... 94,000 Preferred stock dividends and accretion....................... (4,536,000) Net loss for the year............. (45,958,000) Translation adjustment............ (32,000) -------------- Comprehensive loss................ (45,990,000) -------------- Balance at December 31, 1998...... (43,360,000) Deferred compensation related to stock options, net of cancellations................... Amortization of deferred compensation.................... 3,012,000 Issuance of common stock, net of offering costs.................. 151,447,000 Shares issued for acquisition of Services Interactivos Limitada.. 1,000,000 Conversion of redeemable convertible preferred stock..... 100,759,000 Exercise of common stock options......................... 2,016,000 Stock options issued for services........................ 31,000 Transaction expenses related to Wass Net, S.L. acquisition payable by Wass Net shareholders.................... 732,000 Preferred stock dividends and accretion....................... (4,266,000) Net loss for the period........... (37,445,000) Translation adjustment............ (288,000) -------------- Comprehensive loss................ (37,733,000) -------------- Balance at June 30, 1999.......... $ 173,638,000 -------------- --------------
SEE ACCOMPANYING NOTES. F-6 STARMEDIA NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------- SIX MONTHS ENDED SIX MONTHS ENDED 1997 1998 JUNE 30, 1998 JUNE 30, 1999 ------------ ------------- ------------------ ------------------ (Unaudited) OPERATING ACTIVITIES Net loss......................................... $ (3,525,000) $ (45,958,000) $ (12,784,000) $ (37,445,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 38,000 781,000 248,000 1,637,000 Provision for bad debts...................... 60,000 9,000 179,000 Amortization of deferred compensation........ 10,421,000 3,250,000 3,012,000 Stock options issued for services............ 31,000 Deferred rent................................ 21,000 101,000 27,000 2,000 Transaction expenses related to Wass Net, S.L........................................ 732,000 Changes in operating assets and liabilities: Accounts receivable........................ (38,000) (485,000) (411,000) (1,844,000) Other assets............................... (33,000) (1,771,000) (695,000) (5,264,000) Accounts payable and accrued expenses...... 245,000 5,356,000 3,102,000 2,995,000 Deferred revenues.......................... 20,000 795,000 305,000 109,000 ------------ ------------- ------------------ ------------------ Net cash used in operating activities............ (3,272,000) (30,700,000) (6,949,000) (35,856,000) INVESTING ACTIVITIES Purchase of fixed assets......................... (252,000) (4,446,000) (2,397,000) (5,988,000) Intangible assets................................ (31,000) (241,000) (371,000) (360,000) Cash paid for acquisitions....................... (4,711,000) ------------ ------------- ------------------ ------------------ Net cash used in investing activities............ (283,000) (4,687,000) (2,768,000) (11,059,000) FINANCING ACTIVITIES Issuance of common stock......................... 3,000 87,000 11,978,000 154,422,000 Issuance of redeemable convertible preferred stock, net of related expenses................. 3,647,000 88,125,000 Capital contribution--Wass Net, S.L.............. 51,000 Issuance of convertible subordinated notes....... 6,000,000 Proceeds from long-term debt..................... 5,074,000 Repayment of long-term debt...................... (369,000) Repayment of convertible subordinated notes...... (6,000,000) Loans (to) from stockholders..................... 67,000 Repayments (to) from stockholders................ 54,000 (67,000) (67,000) Payments under capital leases.................... (3,000) (112,000) 285,000 (110,000) ------------ ------------- ------------------ ------------------ Net cash provided by financing activities........ 3,768,000 88,084,000 12,196,000 159,017,000 Effect of exchange rate changes on cash and cash equivalents.................................... 1,000 (527,000) ------------ ------------- ------------------ ------------------ Net increase in cash and cash equivalents........ 213,000 52,698,000 2,479,000 111,575,000 Cash and cash equivalents, beginning of period... 230,000 443,000 443,000 53,141,000 ------------ ------------- ------------------ ------------------ Cash and cash equivalents, end of period......... $ 443,000 $ 53,141,000 $ 2,922,000 $ 164,716,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid.................................... $ $ 45,000 $ 29,000 $ 66,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of fixed assets and intangible assets......................................... $ $ $ $ 477,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Accrued costs for acquisitions................... $ $ $ $ 1,174,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Accrued costs related to issuance of common stock.......................................... $ $ $ $ 959,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Acquisition of fixed assets through capital leases......................................... $ 21,000 $ 314,000 $ $ ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------
SEE ACCOMPANYING NOTES. F-7 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 SIX MONTHS ENDED JUNE 30, 1999 (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 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 is the leading Internet media company targeting Latin America and other Spanish-and Portuguese-speaking markets worldwide. The Company's network consists of 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. The Company promotes user affinity to the StarMedia community by providing Spanish- and Portuguese-language e-mail, chat rooms, instant messaging and personal homepages. During 1999, the Company also launched sales offices in Spain and Puerto Rico and began hiring regional sales managers throughout the United States, focusing on those regions with large Spanish-speaking populations. The accompanying consolidated financial statements have been restated to reflect the May 26, 1999 acquisition of Wass Net, S.L. ("Wass Net"), which was accounted for as a pooling-of-interests. (See Note 4.) INTERIM FINANCIAL STATEMENTS The financial statements as of June 30, 1998, and for the six months ended June 30, 1998 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 June 30, 1998 and the results of operations and cash flows for the six months ended June 30, 1998 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. REVENUE RECOGNITION The Company's revenues are derived principally from the sale of banner advertisements and sponsorships, some of which also involve more integration, design and coordination of the customer's content with the Company's services, such as the placement of sponsor buttons in specific areas of the Network. The sponsor buttons generally provide users with direct links to sponsor homepages that exist within the Network which are usually focused on selling sponsor F-8 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 six months ended June 30, 1998 and 1999, revenues derived from barter transactions, were approximately $2,400,000, $500,000 and $1,900,000, 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. 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. F-9 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 June 30, 1999 and for the six months ended June 30, 1999 were approximately $538,000. 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 six months ended June 30, 1998 and 1999, advertising expense amounted to approximately $0, $1,610,000, $21,246,000, $4,578,000 and $15,657,000, respectively. For the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999, advertising expense includes approximately $460,000, $2,400,000, $483,000 and $1,900,000 of charges related to barter advertising transactions. F-10 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 6). 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. 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. F-11 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS The functional currency of the Company's active subsidiaries in Argentina, Brazil, Chile, Spain and Colombia is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of stockholders' equity. The functional currency of the Company's 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 period-end date, while nonmonetary assets and liabilities are translated at historical rates. Operations are generally translated at the weighted average exchange rate in effect during the period. The resulting foreign exchange gains and losses are recorded in the consolidated 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, 1998 and June 30, 1999. 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 June 30, 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-12 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 2. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31 -------------------------- JUNE 30, 1997 1998 1999 ----------- ------------- ------------- Computer equipment................................. $ 173,000 $ 4,797,000 10,379,000 Furniture and fixtures............................. 9,000 448,000 579,000 Leasehold improvements............................. 121,000 938,000 1,476,000 ----------- ------------- ------------- 303,000 6,183,000 12,434,000 Less accumulated depreciation and amortization..... (37,000) (726,000) (1,818,000) ----------- ------------- ------------- $ 266,000 $ 5,457,000 10,616,000 ----------- ------------- ------------- ----------- ------------- -------------
3. STOCKHOLDERS' (DEFICIT) EQUITY Between April 30 and May 5, 1999, a group of third party investors purchased an aggregate of 3,727,272 shares of the Company's common stock at $11 per share, or approximately $41,000,000, less fees and commissions of $1,640,000 paid by issuing 149,091 shares of the Company's common stock. These investors 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 25, 1999, the Company's initial public offering ("IPO") was declared effective by the SEC. The Company realized proceeds of approximately $110,400,000, net of underwriting discounts and commissions and related expenses, from the initial public offering of 8,050,000 shares of its common stock. On May 26, 1999, the Company issued 1,133,334 shares of its common stock in connection with the Wass Net merger. On June 26, 1999, the Company issued 20,000 shares of its common stock in connection with an acquisition valued at $1,000,000. During the six months ended June 30, 1999, the Company issued 1,753,636 shares of its common stock for $2,016,000 in connection with the exercise of stock options. 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") were 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 were entitled to the number of votes equal to the number of common shares that could be obtained upon conversion on the date of the vote and are entitled to a discretionary noncumulative dividend. F-13 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 3. STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED) 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 were 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 had not been converted as of December 31, 2004, the holders of the Preferred Stock could elect to have the Company redeem their Preferred Stock for an amount equal to their original investment plus any dividends declared but unpaid. The Preferred Stock was converted into 31,996,667 shares common stocks on a one-for-one basis, upon the consummation of the IPO. No Preferred Stock dividends had been declared or paid. At December 31, 1997 and 1998, and at the date of conversion total cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $183,000, $4,233,000 and $8,499,000, respectively. The Company has recorded issuance costs incurred in connection with the Preferred Stock as discounts at issuance and accreted the discounts from the date of issuance through the date of mandatory redemption on December 31, 2004. 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. ACQUISITIONS ACHEI INTERNET PROMOTION, LTDA On March 10, 1999, the Company acquired all of the outstanding stock of Achei Internet Promotion Ltda. ("Achei"), a Brazilian company, in exchange for cash of $810,000. KD SISTEMAS DE INFORMACAO LTDA. On April 13, 1999, the Company acquired all of the outstanding stock of KD Sistemas de Informacao Ltda. ("KD Sistemas"), a Brazilian company, in exchange for a cash payment of $5,000,000 at closing, $890,000 payable 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"), plus related expenses of approximately $250,000. 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. F-14 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 4. ACQUISITIONS (CONTINUED) SERVICIOS INTERACTIVOS LIMITADA In June 1999, the Company acquired all the outstanding stock of Servicios Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock. The Company accounted for the aforementioned acquisitions under the purchase method of accounting and the results of their operations have been included in the financial statements of the Company from the respective dates of the acquisitions. The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. Goodwill resulting from the acquisitions of approximately $7,967,000 is being amortized using the straight-line method over three years. The pro forma unaudited consolidated results of operations, assuming the consummation of the KD Sistemas acquisition as of January 1, 1998, are as follows:
SIX MONTHS ENDED JUNE 30 -------------------------------- 1998 1999 --------------- --------------- Revenues................................................... $ 1,250,000 $ 5,519,000 Net loss................................................... $ (13,553,000) $ (37,883,000) Net loss available for common stockholders................. $ (14,273,000) $ (42,149,000) Basic and diluted net loss per share....................... $ (1.40) $ (1.99)
On a pro forma basis, if the Achei and SIL acquisitions 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. WASS NET, S.L. Effective May 26, 1999, the Company acquired all of the outstanding stock of Wass Net, a company organized under the laws of Spain. The acquisition was completed pursuant to the terms of a Share Purchase Agreement, whereby Wass Net became a wholly-owned subsidiary of the Company. Under the terms of the agreement, the Wass Net shareholders received 161.9 shares of the Company's common stock for each outstanding Wass Net share. Accordingly, the Company issued 1,133,334 shares of its common stock for all the outstanding shares of Wass Net stock. Wass Net is a Spanish-language online community offering e-mail, chat, classifieds, bulletin boards, home pages and search capabilities. The acquisition was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of Wass Net for all periods presented. F-15 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 4. ACQUISITIONS (CONTINUED) Unaudited combined and separate results of StarMedia and Wass Net during the periods preceding the merger were as follows:
STARMEDIA WASS NET INTERCOMPANY COMBINED -------------- ----------- -------------- -------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues............................................ $ 5,293,000 $ 11,000 $ (5,000) $ 5,299,000 Net Loss............................................ $ 36,560,000 $ 885,000 $ $ 37,445,000 YEAR ENDED DECEMBER 31, 1998 Revenues............................................ $ 5,329,000 $ 21,000 $ (3,000) $ 5,347,000 Net Loss............................................ $ 45,886,000 $ 72,000 $ $ 45,958,000
In connection with the Wass Net merger, Wass Net recorded a one-time charge of $773,000 for transaction costs. In addition, the Company recorded a one-time charge of approximately $250,000 in transaction costs. 5. LOSS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
PERIOD FROM MARCH 5, 1996 (DATE OF SIX MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 JUNE 30, DECEMBER ----------------------------- -------------------------------- 31, 1996 1997 1998 1998 1999 -------------- ------------- -------------- --------------- --------------- (Unaudited) Numerator: Net loss..................... $ (128,000) $ (3,525,000) $ (45,958,000) $ (12,784,000) $ (37,445,000) Preferred stock dividends and accretion.................. (185,000) (4,536,000) (720,000) (4,266,000) -------------- ------------- -------------- --------------- --------------- Numerator for basic and diluted loss per share-- net loss available for common stockholders................. $ (128,000) $ (3,710,000) $ (50,494,000) $ (13,504,000) $ (41,711,000) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Denominator: Denominator for basic and dilutive loss per share--weighted average shares..................... 9,147,223 10,039,502 10,877,000 10,220,866 21,142,904 -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Basic and diluted net loss per share........................ $ (0.01) $ (0.37) $ (4.64) $ (1.32) $ (1.97) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- ---------------
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 six month period ended June 30, 1998 and 1999, does not include the effect of options to purchase 0, 1,804,933, 6,131,933, 4,117,000 and 7,175,388 shares of common stock, respectively. Diluted net loss per share for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years F-16 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 5. LOSS PER SHARE (CONTINUED) ended December 31, 1997 and 1998 and the six months ended June 30, 1998 does not include the effect of 0, 7,330,000, 31,996,667, and 15,330,000 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. The following table sets forth the computation of the unaudited pro forma basic and diluted loss per share, assuming conversion of the Preferred Stock:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1998 1999 --------------- --------------- Numerator: Net loss available to common stockholders.......................... $ (50,494,000) $ (41,711,000) Preferred Stock dividends and accretion............................ 4,536,000 4,266,000 --------------- --------------- Numerator for pro forma loss available to common stockholders........ $ (45,968,000) $ 37,445,000 --------------- --------------- --------------- --------------- Denominator: Weighted average number of common shares........................... 10,877,000 21,142,904 Assumed conversion of Preferred Stock to common shares (if converted method)................................................ 31,996,667 25,809,466 --------------- --------------- Denominator for pro forma basic and diluted loss per share........... 42,873,667 46,952,370 --------------- --------------- Pro forma basic and diluted net loss per share....................... $ (1.07) $ (.80) --------------- --------------- --------------- ---------------
6. 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 $5,955,000. Deferred compensation is being F-17 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 6. STOCK OPTIONS (CONTINUED) 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 six months ended June 30, 1998 and 1999 amounted to approximately $10,421,000, $3,250,000 and $3,012,000, respectively. In May 1999, 1,500,000 shares of common stock were reserved for issuance under the Company's 1999 Employee Stock Purchase Plan. 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........................................................ 2,928,424 5.80 Canceled....................................................... (131,333) 2.19 Exercised...................................................... (1,753,636) 1.16 Outstanding, June 30,1999 7,175,388 $ 2.73 ------------ ------------
The following table summarizes information concerning outstanding exercisable options at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------- WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL PRICE OUTSTANDING LIFE - ---------------------------------------------------------------------------- ------------ --------------- $0.50....................................................................... 4,415,433 6.75 $1.60....................................................................... 1,716,500 7.00 ------------ 6,131,933 ------------ ------------
F-18 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 6. STOCK OPTIONS (CONTINUED) The following table summarizes information concerning outstanding exercisable options at June 30, 1999:
OPTIONS OUTSTANDING ----------------------------- WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL PRICE OUTSTANDING LIFE - ---------------------------------------------------------------------------- ------------ --------------- $ 0.50...................................................................... 3,059,229 6.25 $ 1.60...................................................................... 2,093,000 6.50 $ 5.64...................................................................... 1,590,659 9.66 $11.00...................................................................... 180,500 9.90 $15.00...................................................................... 252,000 9.81 ------------ 7,175,388 ------------ ------------
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 value method of the statement. The fair value for these options was estimated using the minimum value method with the following assumptions:
YEAR ENDED DECEMBER 31, --------------------------------- SIX MONTHS ENDED ASSUMPTIONS 1997 1998 JUNE 30, 1999 - ---------------------------------------------------------- --------------- ---------------- ------------------ Average risk-free interest rate........................... 6.00%-6.40% 4.440%-5.70% 5.0% Dividend yield............................................ 0.0% 0.0% 0.0% Average life.............................................. 5 years 5 years 5 years
Because the determination of fair value of all options granted after the Company became 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. No options were granted subsequent to the consummation of the IPO through June 30, 1999. The Company's pro forma information is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- SIX MONTHS ENDED 1997 1998 JUNE 30, 1999 -------------- --------------- ------------------ Pro forma net loss available to common stockholders......... $ (3,737,000) $ (49,927,863) $ (41,231,078) Pro forma basic and diluted loss per share.................. $ (0.37) $ (4.59) $ (1.95)
7. INCOME TAXES For Federal income tax purposes, at June 30, 1999, the Company had net operating loss carryforwards of approximately $51,742,000 which expire from 2011 through 2019. 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. F-19 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 7. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31 JUNE 30 ------------------------------- --------------- 1997 1998 1999 -------------- --------------- --------------- Federal net operating loss carryforwards...... $ 1,200,000 $ 12,422,000 $ 17,592,000 Depreciation and amortization................. (6,000) (227,000) 553,000 Deferred rent................................. 9,000 55,000 59,000 Other......................................... 27,000 31,000 -------------- --------------- --------------- 1,203,000 12,277,000 18,235,000 Valuation allowance........................... (1,203,000) (12,277,000) (18,235,000) -------------- --------------- --------------- $ $ $ -------------- --------------- --------------- -------------- --------------- ---------------
The effective income tax rate differs from the statutory rate as follows:
PERIOD FROM MARCH 5, 1996 YEAR ENDED DECEMBER (DATE OF 31 SIX MONTHS INCEPTION) TO -------------------- ENDED JUNE 30, DECEMBER 31, 1996 1997 1998 1999 --------------------- --------- --------- ----------------- Statutory rate............................................ (34%) (34%) (34%) (34%) Non deductible losses from foreign operations............. 2 Permanent differences..................................... 8 5 Valuation allowance....................................... 33 33 23 28 Other..................................................... 1 1 1 1 ----- --------- --------- ----- Effective tax rate........................................ % % % % ----- --------- --------- ----- ----- --------- --------- -----
8. LONG-TERM DEBT The Company has a $12 million credit line for the acquisition of computer equipment and furniture and fixtures. At June 30, 1999, approximately $4.7 million was outstanding under the credit line. Amounts outstanding are payable in monthly installments of principal and interest of approximately $170,000, bear interest at approximately 13.6% per annum and are secured by certain computer equipment and furniture and fixtures. The credit line requires the Company to maintain at least $10,000,000 in cash and cash equivalents. F-20 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 9. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ---------------------------- 1997 1998 JUNE 30, 1999 ------------- ------------- ------------- Product and technology development........................ $ 14,000 $ 490,000 1,169,000 Sales and marketing....................................... 64,000 3,639,000 3,859,000 General and administrative................................ 132,000 1,108,000 758,000 Accrued fixed asset and intangible purchases.............. 17,000 1,059,000 477,000 Costs related to issuance of common stock................. 959,000 Costs for acquisitions.................................... 1,174,000 Other..................................................... 146,000 248,000 ------------- ------------- ------------- $ 227,000 $ 6,442,000 $ 8,644,000 ------------- ------------- ------------- ------------- ------------- -------------
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. 10. 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 June 30, 1999 are as follows: Year ended June 30,: 2000........................................................... $ 898,000 2001........................................................... 740,000 2002........................................................... 385,000 2003........................................................... 297,000 2004........................................................... 51,000 ---------- $2,371,000 ---------- ----------
F-21 STARMEDIA NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 10. COMMITMENTS (CONTINUED) Rent expense amounted to approximately $0, $66,000, $392,000, $135,000 and $495,000 for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the six months ended June 30, 1998 and 1999, respectively. 11. 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. 12. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION For the six months ended June 30, 1999, three customers accounted for approximately 8%, 7% and 7% of the Company's total revenue, respectively. For the six months ended June 30, 1998, two customers accounted for approximately 27% and 25% of the Company's total revenue, respectively. For the year ended December 31, 1998, two customers accounted for approximately 23% and 15% of the Company's total revenue, respectively. For the year ended December 31, 1997, three customers accounted for approximately 36%, 23%, and 16% of the Company's total revenue, respectively. 13. SUBSEQUENT EVENTS WEBCAST On September 14, 1999, a newly formed wholly owned subsidiary of the Company merged with and into Webcast (the "Webcast Merger"). Under the terms of the Webcast Merger, 842,887 shares of the Company's common stock were issued in exchange for all of the outstanding shares of Webcast common stock based on an exchange ratio of .1084 shares of the Company's common stock for each share of Webcast common stock. Webcast is a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. The Webcast Merger will be accounted for as a pooling of interests. PAGECELL (UNAUDITED) On September 18, 1999, the Company entered into an agreement to purchase substantially all of the assets of PageCell International Holdings, Inc. ("PageCell"), a provider of advanced mobile technologies and services, in exchange for common stock and junior non-voting convertible preferred stock of the Company (the "Equity Consideration") valued at $10,000,000 at the closing date and additional Equity Consideration valued at up to $15,000,000 upon the achievement of certain quarterly performance related targets through December 2000. The consummation of the acquisition is subject to certain closing conditions. F-22 ARTHUR ANDERSEN S/C REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of KD Sistemas de Informacao Ltda.: (1) We have audited the accompanying balance sheets of KD Sistemas de Informacao Ltda. (a Brazilian corporation), translated into U.S. dollars, as of December 31, 1998, and the related translated statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. (2) We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides a reasonable basis for our opinion. (3) In our opinion, the financial statements referred to in paragraph (1) present fairly, in all material respects, for the purpose described in the preceding paragraph, the financial position of KD Sistemas de Informacao Ltda., as of December 31, 1998, and the results of its operations, the changes in its stockholders' equity and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States. /s/ Arthur Andersen S/C - ------------------------------------------------------------------ Rio de Janeiro, Brazil, June 10, 1999. F-23 KD SISTEMAS DE INFORMACAO LTDA. BALANCE SHEET AS OF DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) ASSETS CURRENT ASSETS: Cash and banks................................................................. $ 8,957 Short-term investments......................................................... 258,593 Accounts receivable............................................................ 191,783 Other current assets........................................................... 3,723 --------- Total current assets....................................................... 463,056 PROPERTY, PLANT AND EQUIPMENT, net............................................... 96,127 --------- Total assets............................................................... $ 559,183 --------- --------- LIABILITIES CURRENT LIABILITIES: Accounts payable............................................................... $ 27,848 Accrued payroll and income taxes............................................... 46,391 Accrued salaries............................................................... 6,246 --------- Total current liabilities.................................................. 80,485 STOCKHOLDERS' EQUITY: Capital stock.................................................................. 107,127 Other comprehensive income- Cumulative translation adjustments........................................... (35,962) Restricted retained earnings................................................... 668 Unrestricted retained earnings................................................. 406,865 --------- Total stockholders' equity................................................. 478,698 --------- Total liabilities and stockholders' equity................................. $ 559,183 --------- ---------
The accompanying notes are an integral part of this balance sheet. F-24 KD SISTEMAS DE INFORMACAO LTDA. STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) OPERATIONS REVENUES, NET OF DISCOUNTS: Sales........................................................................ $1,151,948 Value-added tax.............................................................. (69,076) ---------- Net operating revenues................................................... 1,082,872 OPERATING COSTS AND EXPENSES: Costs of services rendered................................................... (272,746) Selling, general and administrative expenses................................. (422,066) ---------- (694,812) ---------- INCOME FROM OPERATIONS......................................................... 388,060 NONOPERATING INCOME: Financial income on Investment funds......................................... 34,911 ---------- INCOME BEFORE TAXES............................................................ 422,971 INCOME TAX AND SOCIAL CONTRIBUTION............................................. (82,517) ---------- NET INCOME FOR THE YEAR........................................................ 340,454 ---------- ---------- OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustment...................................... (25,503) ---------- COMPREHENSIVE INCOME FOR THE YEAR.............................................. $ 314,951 ---------- ----------
The accompanying notes are an integral part of this statement. F-25 KD SISTEMAS DE INFORMACAO LTDA. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) CAPITAL STOCK: Initial balance as of January 1............................................... $ 60,347 Change in the year............................................................ 46,780 ---------- Balance December 31....................................................... $ 107,127 ---------- PAID FOR NOT YET SUBSCRIBED: Initial balance as of January 1............................................... $ 46,780 Change in the year............................................................ (46,780) ---------- Balance December 31....................................................... $ -- ---------- OTHER COMPREHENSIVE INCOME: Cumulative translation adjustments- Initial balance as of January 1............................................. $ (10,459) Change in the year.......................................................... (25,503) ---------- Balance December 31....................................................... $ (35,962) ---------- RESTRICTED RETAINED EARNINGS: Legal reserve................................................................. $ 668 ---------- UNRESTRICTED RETAINED EARNINGS: Balance January 1............................................................. $ 66,411 Net income for the year....................................................... 340,454 ---------- Balance December 31....................................................... 406,865 ---------- Total stockholders' equity................................................ $ 478,698 ---------- ----------
The accompanying notes are an integral part of these statements. F-26 KD SISTEMAS DE INFORMACAO LTDA. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................... $ 340,454 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation............................................................... 5,987 ----------- 346,441 ----------- Decrease (increase) in assets-- Accounts receivable........................................................ (173,316) Other...................................................................... (3,871) ----------- (177,187) ----------- Increase (decrease) in liabilities-- Accounts payable........................................................... 27,499 Accrued payroll and income taxes........................................... 41,368 Accrued salaries........................................................... 6,494 ----------- 75,361 ----------- Net cash provided by operating activities.................................. 244,615 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................................... (74,411) ----------- Net cash used in financing activities...................................... (74,411) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term investment............................................. (171,749) ----------- Net cash used in financing activities...................................... (171,749) ----------- Effects of exchange rate changes on cash................................... (198) DECREASE IN CASH AND EQUIVALENTS............................................... (1,743) CASH AND EQUIVALENTS, BEGINNING OF YEAR........................................ 10,700 ----------- CASH AND EQUIVALENTS, END OF YEAR.............................................. $ 8,957 ----------- -----------
The accompanying notes are an integral part of this statement. F-27 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 1. BACKGROUND KD Sistemas de Informacao Ltda. was incorporated on January 2, 1996 under the laws of the Federal Republic of Brazil. Initially denominated Skynet Sistemas Ltda., the Company developed and maintains www.cade.com.br, a branded Internet on-line network ("the network") located in the World Wide Web ("the Web"). The network develops, trains and provides systems and a search engine for Internet network purposes. The Company also provides graphic arts, editing of virtual programs, publicity, consulting, and other community Internet features targeted to the Brazilian market. 2. BASIS OF PRESENTATION The Company is required to maintain its books and records in local currency (Brazilian reais) and in the Portuguese language, based on generally accepted accounting principles in Brazil. All of the Company's sales and other transactions are denominated in local currency. The Company's official financial statements as of December 31, 1998 were originally prepared in local currency and in the Portuguese language. The accompanying financial statements herein presented have been translated into U.S. dollars and adjusted to be in conformity with generally accepted accounting principles in the United States (U.S. GAAP), in accordance with the criteria set forth in Statement of Financial Accounting Standards 52 (SFAS 52). As from July 1, 1997, the Brazilian economy had ceased to be highly inflationary so the functional currency (U.S. dollars) was changed to the local currency (Brazilian reais). The accompanying financial statements stated in U.S. dollars have been translated at the official exchange rate prevailing at December 31, 1998 of R$1.2087 to US$1.00. The criteria for translating the revenue and expense accounts is the average rate of January 31, 1998 and December 31, 1998 or R$1.1626, which does not differ significantly from using the average monthly rate. The gain or loss resulting from this translation process is included in the Cumulative Translation Adjustments component of stockholders' equity. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation and presentation of the financial statements are summarized as follows: a. Cash and banks are stated at cost. b. Short-term investments are stated at the lower of the market value of the investment funds quota value at the balance sheet date or cost plus income accrued to the balance sheet date. c. Assets and liabilities to be realized or paid within 12 months following the balance sheet dates are classified as current assets and current liabilities, respectively. d. Property, plant and equipment are stated at cost of purchase or construction less accumulated depreciation. Depreciation is calculated using the straight-line method. The annual rates used take into consideration the estimated useful lives of the assets. F-28 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. Revenues, costs and expenses are recognized on the accrual basis. The Company's revenues are derived from the sale of advertisements. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain outstanding and collection of the resulting receivable is probable. f. Accrued salaries are fully accrued liabilities for future compensation to employees for vacations vested during the year. g. The Company pays the corporate income tax and social contribution on profits based on the Presumed Profit Computation. Such method consists, basically, of the calculation of the above taxes through the calculation of 32% and 12%, respectively, on the revenues of the Company. On this amount, called Presumed Profits, the income tax, at the rate of 15% plus surtax of 10% on presumed profits exceeding 20,000 Brazilian reais per month, and the social contribution, at the rate of 8%, apply. 4. SHORT-TERM INVESTMENTS Short-term investments were comprised of financial investment funds - fixed income, denominated in Brazilian reais, at the following banks: Banco Brasileiro de Descontos - BRADESCO......................... $ 207,890 Lloyd's Bank..................................................... 50,703 --------- $ 258,593 --------- ---------
5. ACCOUNTS RECEIVABLE Accounts receivable were comprised of: LG Electronics de Sao Paulo Ltda................................. $ 24,952 Itanet Itamarati On Line Ltda.................................... 31,174 Lloyd's Asset Management......................................... 19,856 Petroleo Brasileiro S.A.......................................... 13,066 Souza Cruz S.A................................................... 13,238 Others........................................................... 99,499 --------- 201,785 --------- Allowance for doubtful accounts.................................. (10,002) --------- $ 191,783 --------- ---------
F-29 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment were comprised of:
ANNUAL RATE OF DEPRECIATION ACCUMULATED NET (%) COST DEPRECIATION BALANCE ------------ ----------- ------------- --------- Computer equipment..................... 20 $ 90,652 $ (8,545) $ 82,107 Furniture and fixtures................. 10 to 20 12,643 (939) 11,704 Telephone lines........................ -- 2,316 -- 2,316 ----------- ------------- --------- Total $ 105,611 $ (9,484) $ 96,127 ----------- ------------- --------- ----------- ------------- ---------
7. ACCOUNTS PAYABLE Accounts payable were comprised of: Netgravity........................................................ $ 15,293 MM Eventos........................................................ 8,042 Others............................................................ 4,513 --------- $ 27,848 --------- ---------
8. ACCRUED PAYROLL AND OTHER TAXES Accrued payroll and other taxes were comprised of:
RATE (%) --------- Government Severance Indemnity Fund for Employees--FGTS................. 8 $ 1,453 National Institute of Social Security--INSS............................. 27.8 8,129 --------- Total of accrued payroll taxes...................................... 9,582 --------- Income tax on gross revenue............................................. 4.8-8.0 19,362 Social contribution..................................................... 0.96 2,522 Service Tax--ISS........................................................ 3 7,964 Tax for Social Security Financing--COFINS............................... 3 5,254 Employees' Profit Participation Program--PIS............................ 0.65 1,707 --------- Total of accrued taxes.............................................. 36,809 --------- $ 46,391 --------- ---------
F-30 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 9. CAPITAL STOCK Capital stock is fully paid-in and is comprised of 110,000 quotas, as follows:
NUMBER OF QUOTAS ------------------ Gustavo Guillermo Viberti..................................................................... 23,760 Fabio Goncalves de Oliveira................................................................... 23,760 Guillermo Jose Viberti........................................................................ 21,780 Carlos Augusto Saade Montenegro............................................................... 9,900 Luiz Paulo Saade Montenegro................................................................... 9,900 Jose Caetano Paula de Lacerda................................................................. 9,900 ROTHKO - Empreendimentos Participacoes e Assessoria Ltda...................................... 11,000 -------- 110,000 -------- --------
10. SUBSEQUENT EVENT EXCHANGE POLICY On January 13, 1999, the Brazilian Central Bank changed its exchange policy, discontinuing the so-called exchange band through which it controlled the real fluctuation margin in relation to the U.S. dollar; therefore, the exchange rate was freely negotiated in the market. As a consequence of such change, the real had devalued in relation to the U.S. dollar, from R$1.2087 per U.S. dollar at December 31, 1998 to R$1.7597 per U.S. dollar at June 10, 1999. It is still not possible to determine if the U.S. dollar quotation will remain at this level and its impact on the Company's transactions and financial position. CHANGE IN CONTROL On April 13, 1999 the stockholders' entered into an agreement with StarMedia Network Inc., an U.S. corporation, and sold all the outstanding equity interest in the Company. F-31 KD SISTEMAS DE INFORMACAO LTDA. UNAUDITED BALANCE SHEETS AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS)
1999 1998 ------------ ------------ ASSETS CURRENT ASSETS: Cash and banks...................................................................... $ 31,804 $ 68,099 Short-term investments.............................................................. 216,091 112,437 Accounts receivable................................................................. 88,154 42,336 ------------ ------------ Total current assets............................................................ 336,049 222,872 PROPERTY, PLANT AND EQUIPMENT, net.................................................... 92,306 34,831 ------------ ------------ Total assets.................................................................... $ 428,355 $ 257,703 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................... $ 19,908 $ 2,498 Accrued payroll and income taxes.................................................... 14,563 14,065 Accrued salaries.................................................................... 17,604 5,461 ------------ ------------ Total current liabilities....................................................... 52,075 22,024 ------------ ------------ STOCKHOLDERS' EQUITY: Capital stock....................................................................... 107,127 60,347 Paid for not yet subscribed......................................................... -- 46,780 Other comprehensive income--cumulative translation adjustments...................... (174,438) (14,181) Restricted retained earnings........................................................ 668 668 Unrestricted retained earnings...................................................... 442,923 142,065 ------------ ------------ Total stockholders' equity...................................................... 376,280 235,679 ------------ ------------ Total liabilities and stockholders' equity...................................... $ 428,355 $ 257,703 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these balance sheets. F-32 KD SISTEMAS DE INFORMACAO LTDA. UNAUDITED STATEMENTS OF INCOME FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS)
1999 1998 ------------ ----------- OPERATIONS REVENUES, NET OF DISCOUNTS: Sales................................................................................ $ 247,959 $ 185,618 Value-added tax...................................................................... (23,511) (11,963) ------------ ----------- Net operating revenues............................................................... 224,448 173,655 ------------ ----------- OPERATING COSTS AND EXPENSES: Costs of services rendered........................................................... (59,077) (18,188) Selling, general and administrative expenses......................................... (121,670) (75,029) ------------ ----------- (180,747) (93,217) ------------ ----------- INCOME FROM OPERATIONS................................................................. 43,701 80,438 NONOPERATING INCOME (EXPENSES): Income On Investment Funds........................................................... 12,016 6,889 Financial income (expense), net...................................................... (561) (366) ------------ ----------- INCOME BEFORE TAXES.................................................................... 55,156 86,961 INCOME TAX AND SOCIAL CONTRIBUTION..................................................... (19,098) (11,307) ------------ ----------- NET INCOME FOR THE PERIOD.............................................................. $ 36,058 $ 75,654 ------------ ----------- ------------ ----------- OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustments............................................. (138,476) (3,722) ------------ ----------- COMPREHENSIVE INCOME (LOSS)............................................................ (102,418) 71,932 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these statements. F-33 KD SISTEMAS DE INFORMACAO LTDA. UNAUDITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS)
1999 1998 ------------ ------------ CAPITAL STOCK......................................................................... $ 107,127 $ 60,347 ------------ ------------ PAID FOR NOT YET SUBSCRIBED........................................................... -- 46,780 ------------ ------------ OTHER COMPREHENSIVE INCOME: Cumulative translation adjustments-- Initial balance as of January 1................................................... $ (35,962) $ (10,459) Change in the period.............................................................. (138,476) (3,722) ------------ ------------ Balance March 31.................................................................. $ (174,438) $ (14,181) ------------ ------------ RESTRICTED RETAINED EARNINGS: Legal reserve....................................................................... $ 668 $ 668 ------------ ------------ UNRESTRICTED RETAINED EARNINGS: Balance January 1................................................................... $ 406,865 $ 66,411 Net income for the period........................................................... 36,058 75,654 ------------ ------------ Balance March 31.................................................................. 442,923 142,065 ------------ ------------ Total stockholders' equity........................................................ $ 376,280 $ 235,679 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. F-34 KD SISTEMAS DE INFORMACAO LTDA. UNAUDITED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS)
1999 1998 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................................ $ 36,058 $ 75,654 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation...................................................................... 3,662 2,525 ------------ ---------- 39,720 78,179 ------------ ---------- Decrease (increase) in assets- Accounts receivable............................................................... 41,599 (15,687) Other............................................................................. 2,340 -- ------------ ---------- 43,939 (15,687) ------------ ---------- Increase (decrease) in liabilities- Accounts payable.................................................................. 17,494 955 Accrued payroll and income taxes.................................................. (33,287) 7,028 Accrued salaries.................................................................. 11,835 5,461 ------------ ---------- (3,958) 13,444 ------------ ---------- Net cash provided by operating activities....................................... 79,701 75,936 ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment............................................ (21,290) (5,147) ------------ ---------- Net cash provided by (used in) investing activities............................... (21,290) (5,147) ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term investment...................................................... (30,961) (13,188) ------------ ---------- Net cash provided by (used in) financing activities............................... (30,961) (13,188) ------------ ---------- Effect of Exchange Rate Changes On Cash................................................. (4,603) (202) ------------ ---------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS............................................. 22,847 57,399 CASH AND EQUIVALENTS, BEGINNING OF QUARTER.............................................. 8,957 10,700 ------------ ---------- CASH AND EQUIVALENTS, END OF QUARTER.................................................... $ 31,804 $ 68,099 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these statements. F-35 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 1. BACKGROUND KD Sistemas de Informacao Ltda. was incorporated on January 2, 1996 under the laws of the Federative Republic of Brazil. Initially denominated Skynet Sistemas Ltda., the Company developed and maintains www.cade.com.br, a branded Internet on-line network ("the network") located in the World Wide Web ("the Web"). The network develops, trains and provides systems and a search engine for Internet network purposes. The Company also provides graphic arts, editing of virtual programs, publicity, consulting, and other community Internet features targeted to the Brazilian market. 2. BASIS OF PRESENTATION The Company is required to maintain its books and records in local currency (Brazilian reais) and in the Portuguese language, based on generally accepted accounting principles in Brazil. The Company's official financial statements as of March 31, 1999 and 1998 were originally prepared in local currency and in the Portuguese language. The accompanying financial statements herein presented have been translated into U.S. dollars and adjusted to be in conformity with generally accepted accounting principles in the United States (U.S. GAAP), in accordance with the criteria set forth in Statement of Financial Accounting Standards 52 (SFAS 52). As from July 1, 1997, the Brazilian economy had ceased to be highly inflationary so the functional currency (U.S. dollars) was changed to the local currency (Brazilian reais). The accompanying financial statements stated in U.S. dollars have been translated at the official exchange rate prevailing at March 31, 1999 (R$1.7220 to US$1.00) and March 31, 1998 (R$1.1374 to US$1.00). The criteria for translating the revenue and expense accounts are the average rates prevailing during the period. The gain or loss resulting from this translation process is included in the Cumulative Translation Adjustment component of stockholders' equity. The unaudited financial statements as of March 31, 1999 and 1998 include, in the opinion of the management, all adjustments (which are of a normal recurring nature) necessary for fair presentation thereof. The results of operations for the three-month period ended March 31, 1999 are not necessarily indicative of the results for the full fiscal year ending December 31, 1999. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation and presentation of the financial statements are summarized as follows: a. Cash and banks are stated at cost. b. Short-term investments are stated at the lower of the market value of the investment funds quota value at the balance sheet date or cost plus income accrued to the balance sheet date. c. Assets and liabilities to be realized or paid within 12 months following the balance sheet dates are classified as current assets and current liabilities, respectively. F-36 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Property, plant and equipment are stated at cost of purchase or construction less accumulated depreciation. Depreciation is calculated using the straight-line method. The annual rates used take into consideration the estimated useful lives of the assets. e. Revenues, costs and expenses are recognized on the accrual basis. The Company's revenues are derived from the sale of advertisements. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that no significant Company obligations remain outstanding and collection of the resulting receivable is probable. f. Accrued salaries are fully accrued liabilities for future compensation to employees for vacations vested during the year. g. The Company pays the corporate income tax and social contribution on profits based on the Presumed Profit Computation. Such method consists, basically, of the calculation of the above taxes through the calculation of 32% and 12%, respectively, on the revenues of the Company. On this amount, called Presumed Profits, the income tax, at the rate of 15% plus surtax of 10% on all amounts exceeding 20,000 Brazilian reais of presumed profit per month, and the social contribution, at the rate of 8%, apply. 4. SHORT-TERM INVESTMENTS As of March 31, 1999 and 1998, short-term investments were comprised of financial investment fund--fixed income, denominated in Brazilian reais at Banco Brasileiro de Descontos--BRADESCO, in the total amount of US$216,091 and US$112,437, respectively. F-37 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 5. ACCOUNTS RECEIVABLE Accounts receivable were comprised of:
1999 1998 --------- --------- Centrais Eletricas Brasileiras S.A......................................................... $ 13,141 $ -- Itanet Itamarati On Line Ltda.............................................................. 11,614 -- Petroleo Brasileiro S.A.................................................................... 20,014 -- Souza Cruz S.A............................................................................. 9,292 -- Wild Tecnologies do Brasil................................................................. -- 4,396 STI Sao Paulo On Line...................................................................... -- 3,681 Unisys do Brasil Ltda...................................................................... -- 3,077 Others..................................................................................... 41,114 31,182 --------- --------- 95,175 42,336 Allowance for doubtful accounts............................................................ (7,021) -- --------- --------- $ 88,154 $ 42,336 --------- --------- --------- ---------
6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment were comprised of:
ANNUAL RATE OF DEPRECIATION (%) 1999 1998 -------------- ----------- ----------- Computer equipment..................................................... 20 $ 91,973 $ 35,754 Furniture and fixtures................................................. 10 to 20 9,454 5,561 Telephone lines........................................................ -- 1,626 -- ----------- ----------- 103,053 41,315 Accumulated depreciation............................................... (10,747) (6,484) ----------- ----------- $ 92,306 $ 34,831 ----------- ----------- ----------- -----------
F-38 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 7. ACCOUNTS PAYABLE Accounts payable were comprised of:
1999 1998 --------- --------- MM Eventos........................................................................ $ 3,213 $ -- Bradesco Saude.................................................................... 1,634 -- RM Cine e Video Ltda.............................................................. 2,613 -- Fund. Parque de Alta Tecnologia de Petropolis..................................... 3,194 2,417 Others............................................................................ 9,254 81 --------- --------- $ 19,908 $ 2,498 --------- --------- --------- ---------
8. ACCRUED PAYROLL AND OTHER TAXES Accrued payroll and other taxes were comprised of:
RATE (%) 1999 1998 ----------- --------- --------- Government Severance Indemnity Fund for Employees - FGTS........... 8 $ 1,129 $ 270 National Institute of Social Security - INSS....................... 27.8 5,513 2,232 Income and Tax Withholdings Return - IRRF.......................... 9 953 --------- --------- Total of accrued payroll taxes................................. 6,651 3,455 --------- --------- Income tax on gross revenue........................................ -- 5,015 Social contribution................................................ 4.8 to 8.0 -- 813 Service Tax - ISS.................................................. 3 3,570 2,540 Tax for Social Security Financing - COFINS......................... 3 3,570 1,692 Employees' Profit Participation Program - PIS...................... 0.65 772 550 --------- --------- Total of accrued taxes......................................... 7,912 10,610 --------- --------- $ 14,563 $ 14,065 --------- --------- --------- ---------
F-39 KD SISTEMAS DE INFORMACAO LTDA. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 (AMOUNTS EXPRESSED IN U.S. DOLLARS) 9. CAPITAL STOCK As of March 31, capital stock is fully paid-in and is comprised of 110,000 and 60,000 quotas, in 1999 and 1998, respectively, as follows:
1999 1998 --------- --------- Gustavo Guillermo Viberti......................................................... 23,760 15,600 Fabio Goncalves de Oliveira....................................................... 23,760 13,200 Guillermo Jose Viberti............................................................ 21,780 13,200 Carlos Augusto Saade Montenegro................................................... 9,900 -- Luiz Paulo Saade Montenegro....................................................... 9,900 9,000 Jose Caetano Paula de Lacerda..................................................... 9,900 4,500 ROTHKO -- Empreendimentos Participacoes e Assessoria Ltda................................................. 11,000 -- Marcos Spinola Montenegro......................................................... -- 4,500 --------- --------- 110,000 60,000 --------- --------- --------- ---------
10. RELEVANT ISSUE On January 13, 1999, the Brazilian Central Bank changed its exchange policy, discontinuing the so-called exchange band through which it controlled the real fluctuation margin in relation to the U.S. dollar; therefore, the exchange rate was freely negotiated in the market. As a consequence of such change, the real had devalued in relation to the U.S. dollar, from R$1.2087 per U.S. dollar at December 31, 1998 to R$1.7597 per U.S. dollar at June 10, 1999. It is still not possible to determine if the U.S. dollar quotation will remain at this level and its impact on the Company's transactions and financial position. 11. SUBSEQUENT EVENT On April 13, 1999 the Company's stockholders' entered into an agreement with StarMedia Network Inc., a U.S. corporation, and sold all the outstanding equity interest in the Company. F-40 STARMEDIA NETWORK, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On April 13, 1999, StarMedia Network, Inc. (the "Company") acquired all of the outstanding stock of KD Sistemas De Informacao Ltda. ("KD Sistemas"), a Brazilian company. As a result of the acquisition, KD Sistemas became a wholly-owned subsidiary of the Company. The purchase price consisted of a cash payment of $5,000,000 at closing, $890,000 payable 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"), plus related expenses of approximately $250,000. 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. The KD Sistemas acquisition was accounted for as a purchase. The pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and the six months ended June 30, 1999 assume that the KD Sistemas acquisition occurred as of January 1, 1998. The unaudited pro forma statements of operations for the year ended December 31, 1998 and the six months ended June 30, 1999 are based on the supplemental consolidated statements of operations for the Company for the year ended December 31, 1998 and the six months ended June 30, 1999, the historical financial statements of KD Sistemas for the year ended December 31, 1998 and the period from January 1, 1999 through April 13, 1999. The pro forma condensed consolidated statements of operations have been prepared by the Company's management. The pro forma consolidated financial statements may not be indicative of the results that actually would have occurred if the acquisitions had been consummated on the respective dates indicated or which may be obtained in the future. The pro forma condensed consolidated financial statements should be read in conjunction with financial statements and notes of the Company and KD Sistemas. The Company's supplemental consolidated financial statements have been prepared to give retroactive effect to the Webcast Merger which is being accounted as a pooling of interests. These supplemental consolidated financial statements will become the historical consolidated financial statements of the Company after financial statements covering the consummation date of the Webcast Merger are issued. F-41 STARMEDIA NETWORK, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
KD SISTEMAS PRO FORMA STARMEDIA HISTORICAL ADJUSTMENTS CONSOLIDATED ---------------- ------------- --------------- ---------------- Revenues....................... $ 5,758,000 $ 1,083,000 $ (100,000 (a) $ 6,741,000 Operating expenses: Product and technology development................ 7,101,000 273,000 78,000(d) 7,452,000 Sales and marketing.......... 29,281,000 422,000 (360,000 (c) 29,343,000 General and administrative... 4,810,000 155,000(c) 4,965,000 Depreciation and amortization............... 785,000 1,930,000 ,(c 2,715,000 Stock-based compensation expense.................... 10,421,000 10,421,000 ---------------- ------------- --------------- ---------------- Total operating expenses..... 52,398,000 695,000 1,803,000 54,896,000 ---------------- ------------- --------------- ---------------- Net (loss) income from operations................... (46,640,000) 388,000 (1,903,000) (48,155,000) Interest income, net........... 667,000 35,000 702,000 ---------------- ------------- --------------- ---------------- Net (loss) income before income tax.......................... (45,973,000) 423,000 (1,903,000) (47,453,000) Provision for income tax....... (83,000) (83,000) ---------------- ------------- --------------- ---------------- Net (loss) income.............. $ (45,973,000) $ 340,000 $ (1,903,000) $ (47,536,000) ---------------- ------------- --------------- ---------------- ---------------- ------------- --------------- ---------------- Pro forma basic and diluted net loss per common share (d).... $ (1.06) $ (1.10) ---------------- ---------------- ---------------- ---------------- Number of shares used in computing pro forma basic and diluted net loss per share (d).......................... 43,200,416 43,200,416 ---------------- ---------------- ---------------- ----------------
SEE ACCOMPANYING NOTES. F-42 STARMEDIA NETWORK, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999
KD SISTEMAS HISTORICAL JANUARY 1, PRO FORMA STARMEDIA 1999 THROUGH CONSOLIDATED SIX MONTHS ENDED APRIL 13, SIX MONTHS ENDED JUNE 30, 1999 1999 ADJUSTMENTS JUNE 30, 1999 ---------------- ------------- ------------ ---------------- Revenues............................................... $ 5,474,000 $ 256,000 $ (36,000 (a) $ 5,694,000 Operating expenses: Product and technology development................... 10,019,000 94,000 24,000(c) 10,137,000 Sales and marketing.................................. 22,926,000 49,000 (99,000 (c) 22,876,000 General and administrative........................... 6,665,000 84,000 38,000(c) 6,787,000 Depreciation and amortization........................ 1,644,000 481,000 ,(c 2,125,000 Stock-based compensation expense..................... 3,012,000 3,012,000 ---------------- ------------- ------------ ---------------- Total operating expenses........................... 44,266,000 227,000 444,000 44,937,000 ---------------- ------------- ------------ ---------------- Net (loss) income from operations...................... (38,792,000) 29,000 (480,000) (39,243,000) Interest income, net................................... 1,135,000 13,000 1,148,000 ---------------- ------------- ------------ ---------------- Net (loss) income...................................... $ (37,657,000) $ 42,000 $ (480,000) $ (38,095,000) ---------------- ------------- ------------ ---------------- ---------------- ------------- ------------ ---------------- Pro forma basic and diluted net loss per common share (d).................................................. $ (.79) $ (.80) ---------------- ---------------- ---------------- ---------------- Number of shares used in computing pro forma basic and diluted net loss per share (d)....................... 47,736,568 47,736,568 ---------------- ---------------- ---------------- ----------------
See accompanying notes F-43 STARMEDIA NETWORK, INC NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1998 and the six months ended June 30, 1999 gives effect to the acquisition of KD Sistemas as if it occurred on January 1, 1998. Such unaudited pro forma financial statements sets forth the supplemental results of operations of the Company for the year ended December 31, 1998 and the six months ended June 30, 1999 and the historical results of operations of KD for the year ended December 31, 1998 and the period from January 1, 1999 through April 13, 1999. The operations of KD for the period April 14, 1999 through June 30, 1999 are included in the operations of the Company. PRO FORMA ADJUSTMENTS For purposes of determining the pro forma effects of the acquisition of KD on the consolidated statement of operations the following pro forma adjustments have been made:
YEAR ENDED DECEMBER SIX MONTHS ENDED 31, 1998 JUNE 30, 1999 ------------------- ------------------ (a) Revenues......................................................... $ (100,000) $ (36,000) Sales and marketing............................................... (100,000) (36,000) ---------- ---------- Net (loss) income from operations................................. -- -- ---------- ---------- ---------- ---------- To eliminate the inter-company revenue of KD earned from the Company.
(b) Amortization of goodwill.......................... $ 1,921,000 $ 480,000 --------------- -------------- --------------- --------------
Amortization expense of the goodwill over 3 years on a straight line basis. (c) Product and technology development................ $ 78,000 $ 24,000 Sales and marketing................................ (260,000) (63,000) General and amortization........................... 155,000 38,000 Depreciation and amortization...................... 9,000 1,000 --------------- -------------- (18,000) -- --------------- -------------- --------------- --------------
To reclassify KD Sistemas' historical operating expenses to conform to StarMedia's historical presentation. (d) In conjunction with the Company's initial public offering, all outstanding shares of series A, B, C redeemable convertible preferred stock automatically converted into common stock on a one for one basis. Accordingly, the effect of the conversions have been reflected in the computation of pro forma basic and diluted net loss per common share. F-44 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the accompanying supplemental consolidated balance sheets of Starmedia Network, Inc. (the "Company") (formed as a result of the consolidation of the Company and Webcast Solutions, Inc. ("Webcast")) as of December 31, 1997 and 1998 and June 30, 1999 and the related supplemental consolidated statements of operations, changes in stockholders' equity and cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999. The supplemental consolidated financial statements give retroactive effect to the merger of the Company and Webcast on September 14, 1999, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these supplemental 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 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 supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1997 and 1998 and June 30, 1999, and the results of their operations and their cash flows for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999, after giving retroactive effect to the merger of Webcast as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP /s/ Ernst & Young LLP New York, New York September 14, 1999 F-45 STARMEDIA NETWORK, INC. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------- JUNE 30, 1997 1998 1999 ----------- ------------ ------------- ASSETS Current assets: Cash and cash equivalents............................................ $ 443,000 $ 53,147,000 164,719,000 Accounts receivable net of allowance for bad debts of $0, $65,000 and $244,000 as of December 31, 1997 and 1998 and June 30, 1999, respectively....................................................... 38,000 511,000 2,180,000 Other current assets................................................. 10,000 1,712,000 2,397,000 ----------- ------------ ------------- Total current assets................................................... 491,000 55,370,000 169,296,000 Fixed assets, net...................................................... 266,000 5,478,000 10,687,000 Intangible assets, net of accumulated amortization of $1,000, $93,000, and $538,000 as of December 31, 1997 and 1998 and June 30, 1999, respectively......................................................... 30,000 179,000 583,000 Goodwill, net of accumulated amortization of $538,000 at June 30, 1999................................................................. 7,429,000 Other assets........................................................... 23,000 129,000 4,471,000 ----------- ------------ ------------- $ 810,000 $ 61,156,000 $ 192,466,000 ----------- ------------ ------------- ----------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable..................................................... $ 18,000 $ 346,000 $ 3,858,000 Accrued expenses..................................................... 227,000 6,489,000 8,767,000 Due to principal stockholders........................................ 67,000 131,000 Loan payable, current portion........................................ 1,497,000 Capital lease obligations, current portion........................... 10,000 220,000 110,000 Deferred revenues.................................................... 20,000 815,000 943,000 ----------- ------------ ------------- Total current liabilities.............................................. 342,000 7,870,000 15,306,000 Capital lease obligations.............................................. 8,000 9,000 Loan payable, long term................................................ 3,208,000 Other long-term liabilities............................................ 381,000 Deferred rent.......................................................... 21,000 122,000 124,000 Preferred stock, authorized 60,000,000 shares at December 31, 1997 and 1998 and 10,000,000 shares at June 30, 1999: 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 -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 3,833,000 4,218,000 Series B Redeemable Convertible Preferred Stock, $.001 par value, 8,000,000 shares authorized, 8,000,000 shares issued and outstanding at December 31, 1998 and -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 12,944,000 Series C Redeemable Convertible Preferred Stock, $.001 par value, 16,666,667 shares authorized, 16,666,667 shares issued and outstanding at December 31, 1998 and -0- at June 30, 1999, respectively, stated at liquidation value, net of related expenses........................................................... 79,332,000 Stockholders' (deficit) equity: Common stock, $.001 par value, 100,000,000 shares authorized at December 31, 1997 and 1998 and 200,000,000 shares at June 30, 1999, 10,092,952 shares, 12,309,532 shares and 58,006,198 shares issued and outstanding at December 31, 1997 and 1998 and June 30, 1999, respectively....................................................... 11,000 13,000 58,000 Additional paid-in capital........................................... 433,000 19,693,000 281,588,000 Deferred compensation................................................ (8,666,000) (11,609,000) Other comprehensive loss............................................. (32,000) (320,000) Accumulated deficit.................................................. (3,838,000) (54,347,000) (96,270,000) ----------- ------------ ------------- Total stockholders' (deficit) equity................................... (3,394,000) (43,339,000) 173,447,000 ----------- ------------ ------------- Total liabilities and stockholders' (deficit) equity................... $ 810,000 $ 61,156,000 $ 192,466,000 ----------- ------------ ------------- ----------- ------------ -------------
SEE ACCOMPANYING NOTES. F-46 STARMEDIA NETWORK, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 5,1996 (DATE OF SIX MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 JUNE 30, DECEMBER ----------------------------- ------------------------------ 31, 1996 1997 1998 1999 -------------- ------------- -------------- 1998 -------------- -------------- (UNAUDITED) Revenues............................... $ $ 472,000 $ 5,758,000 $ 850,000 $ 5,474,000 Operating expenses: Product and technology development... 36,000 1,233,000 7,101,000 3,178,000 10,019,000 Sales and marketing.................. 12,000 2,110,000 29,281,000 6,015,000 22,926,000 General and administrative........... 78,000 650,000 4,810,000 1,033,000 6,665,000 Depreciation and amortization........ 2,000 38,000 785,000 248,000 1,644,000 Stock-based compensation expense..... 10,421,000 3,250,000 3,012,000 -------------- ------------- -------------- -------------- -------------- Total operating expenses............... 128,000 4,031,000 52,398,000 13,724,000 44,266,000 -------------- ------------- -------------- -------------- -------------- Loss from operations................... (128,000) (3,559,000) (46,640,000) (12,874,000) (38,792,000) Other income (expense): Interest income...................... 34,000 715,000 119,000 1,404,000 Interest expense..................... (48,000) (29,000) (269,000) -------------- ------------- -------------- -------------- -------------- Net loss............................... (128,000) (3,525,000) (45,973,000) (12,784,000) (37,657,000) Preferred stock dividends and accretion............................ -- (185,000) (4,536,000) (720,000) (4,266,000) -------------- ------------- -------------- -------------- -------------- Net loss available to common stockholders......................... $ (128,000) $ (3,710,000) $ (50,509,000) $ (13,504,000) $ (41,923,000) -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Historical basic and diluted net loss per common share..................... $ (0.01) $ (0.37) $ (4.51) $ (1.32) $ (1.91) -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Historical number of shares used in computing basic and diluted net loss per share............................ 9,147,223 10,039,502 11,203,749 10,220,866 21,927,102 -------------- ------------- -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- Pro forma basic and diluted net loss per share............................ $ (1.06) $ (.79) -------------- -------------- Number of shares used in computing pro forma basic and diluted net loss per share................................ 43,200,416 47,736,568 -------------- -------------- -------------- --------------
SEE ACCOMPANYING NOTES. F-47 STARMEDIA NETWORK, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY PERIOD FROM MARCH 5, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996, AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
COMMON STOCK ADDITIONAL OTHER ------------------------ PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME ----------- ----------- ------------ -------------- --------------- ----------------- Balance at March 5, 1996 (date of inception)....................... $ $ $ $ $ Sale of common stock............... 10,012,000 10,000 431,000 Net loss for the period............ (128,000) ----------- ----------- ------------ -------------- --------------- ----------------- Balance at December 31, 1996....... 10,012,000 10,000 431,000 (128,000) Accretion of preferred stock....... (185,000) Issuance of common stock--Wass Net S.L. ............................ 80,952 1,000 2,000 Net loss for the year.............. (3,525,000) ----------- ----------- ------------ -------------- --------------- ----------------- Balance at December 31, 1997....... 10,092,952 11,000 433,000 (3,838,000) Deferred compensation related to stock options, net of cancellations.................... 19,087,000 (19,087,000) Amortization of deferred compensation..................... 10,421,000 Exercise of common stock options... 380,000 45,000 Issuance of common stock--Wass Net S.L. ............................ 1,052,382 1,000 93,000 Issuance of common stock-- Webcast.......................... 784,198 1,000 35,000 Preferred stock dividends and accretion........................ (4,536,000) Net loss for the year.............. (45,973,000) Translation adjustment............. (32,000) Comprehensive loss................. ----------- ----------- ------------ -------------- --------------- ----------------- Balance at December 31, 1998....... 12,309,532 13,000 19,693,000 (54,347,000) (8,666,000) (32,000) Deferred compensation related to stock options, net of cancellations.................... 5,955,000 (5,955,000) Amortization of deferred compensation..................... 3,012,000 Issuance of common stock, net of offering costs................... 11,926,363 12,000 151,435,000 Shares issued for acquisition of Services Interactivos Limitada... 20,000 1,000,000 Conversion of redeemable convertible preferred stock...... 31,996,667 31,000 100,728,000 Exercise of common stock options... 1,753,636 2,000 2,014,000 Stock options issued for services.. 31,000 Transaction expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders..................... 732,000 Preferred stock dividends and accretion........................ (4,266,000) Net loss for the period............ (37,657,000) Translation adjustment............. (288,000) Comprehensive loss................. ----------- ----------- ------------ -------------- --------------- ----------------- Balance at June 30, 1999........... 58,006,198 $ 58,000 $ 281,588,00 $(96,270,000) $ (11,609,000) $ (320,000) ----------- ----------- ------------ -------------- --------------- ----------------- ----------- ----------- ------------ -------------- --------------- ----------------- TOTAL -------------- Balance at March 5, 1996 (date of inception)....................... $ Sale of common stock............... 441,000 Net loss for the period............ (128,000) -------------- Balance at December 31, 1996....... 313,000 Accretion of preferred stock....... (185,000) Issuance of common stock--Wass Net S.L. ............................ 3,000 Net loss for the year.............. (3,525,000) -------------- Balance at December 31, 1997....... (3,394,000) Deferred compensation related to stock options, net of cancellations.................... Amortization of deferred compensation..................... 10,421,000 Exercise of common stock options... 45,000 Issuance of common stock--Wass Net S.L. ............................ 94,000 Issuance of common stock-- Webcast.......................... 36,000 Preferred stock dividends and accretion........................ (4,536,000) Net loss for the year.............. (45,973,000) Translation adjustment............. (32,000) -------------- Comprehensive loss................. (46,005,000) -------------- Balance at December 31, 1998....... (43,339,000) Deferred compensation related to stock options, net of cancellations.................... Amortization of deferred compensation..................... 3,012,000 Issuance of common stock, net of offering costs................... 151,447,000 Shares issued for acquisition of Services Interactivos Limitada... 1,000,000 Conversion of redeemable convertible preferred stock...... 100,759,000 Exercise of common stock options... 2,016,000 Stock options issued for services.. 31,000 Transaction expenses related to Wass Net, S.L. acquisition payable by Wass Net Shareholders..................... 732,000 Preferred stock dividends and accretion........................ (4,266,000) Net loss for the period............ (37,657,000) Translation adjustment............. (288,000) -------------- Comprehensive loss................. (37,945,000) -------------- Balance at June 30, 1999........... $ 173,447,000 -------------- --------------
SEE ACCOMPANYING NOTES. F-48 STARMEDIA NETWORK, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------- SIX MONTHS ENDED SIX MONTHS ENDED 1997 1998 JUNE 30, 1998 JUNE 30, 1999 ------------ ------------- ------------------ ------------------ (Unaudited) OPERATING ACTIVITIES Net loss......................................... $ (3,525,000) $ (45,973,000) $ (12,784,000) $ (37,657,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 38,000 785,000 248,000 1,643,000 Provision for bad debts...................... 65,000 9,000 179,000 Amortization of deferred compensation........ 10,421,000 3,250,000 3,012,000 Stock options issued for services............ 31,000 Deferred rent................................ 21,000 101,000 27,000 2,000 Transaction expenses related to Wass Net, S.L........................................ 732,000 Changes in operating assets and liabilities: Accounts receivable........................ (38,000) (541,000) (411,000) (1,851,000) Other assets............................... (33,000) (1,772,000) (731,000) (5,261,000) Accounts payable and accrued expenses...... 245,000 5,448,000 3,102,000 3,081,000 Deferred revenues.......................... 20,000 795,000 305,000 128,000 ------------ ------------- ------------------ ------------------ Net cash used in operating activities............ (3,272,000) (30,671,000) (6,985,000) (35,961,000) INVESTING ACTIVITIES Purchase of fixed assets......................... (252,000) (4,478,000) (2,397,000) (6,044,000) Intangible assets................................ (31,000) (241,000) (371,000) (360,000) Cash paid for acquisition........................ (4,711,000) ------------ ------------- ------------------ ------------------ Net cash used in investing activities............ (283,000) (4,719,000) (2,768,000) (11,115,000) FINANCING ACTIVITIES Issuance of common stock......................... 3,000 87,000 12,014,000 154,458,000 Issuance of redeemable convertible preferred stock, net of related expenses................. 3,647,000 88,125,000 Capital contribution--Wass Net, S.L.............. 51,000 Issuance of convertible subordinated notes....... 6,000,000 Proceeds from long-term debt..................... 5,074,000 Repayment of long-term debt...................... (369,000) Repayment of convertible subordinated notes...... (6,000,000) Loans (to) from stockholders..................... 67,000 9,000 122,000 Repayments (to) from stockholders................ 54,000 (67,000) (67,000) Payments under capital leases.................... (3,000) (112,000) 285,000 (110,000) ------------ ------------- ------------------ ------------------ Net cash provided by financing activities........ 3,768,000 88,093,000 12,232,000 159,175,000 Effect of exchange rate changes on cash and cash equivalents.................................... 1,000 (527,000) ------------ ------------- ------------------ ------------------ Net increase (decrease) in cash and cash equivalents.................................... 213,000 52,704,000 2,479,000 111,572,000 Cash and cash equivalents, beginning of period... 230,000 443,000 443,000 53,147,000 ------------ ------------- ------------------ ------------------ Cash and cash equivalents, end of period......... $ 443,000 $ 53,147,000 $ 2,922,000 $ 164,719,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid.................................... $ $ 45,000 $ 29,000 $ 66,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of fixed assets and intangible assets........................ $ $ $ $ 477,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Accrued costs for acquisitions............. $ $ $ $ 1,174,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Accrued costs related to issuance of common stock.................................... $ $ $ $ 959,000 ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------ Acquisition of fixed assets through capital leases......................................... $ 21,000 $ 314,000 $ $ ------------ ------------- ------------------ ------------------ ------------ ------------- ------------------ ------------------
SEE ACCOMPANYING NOTES. F-49 StarMedia Network, Inc. Notes to Supplemental 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 six months ended June 30, 1999 (information as of June 30, 1998 and for the six months ended June 30, 1998 is unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND DESCRIPTION OF BUSINESS The supplemental consolidated financial statements of Starmedia Network, Inc. and its wholly-owned subsidiaries (collectively the "Company") have been prepared to give retroactive effect to the merger with Webcast Solutions, Inc. ("Webcast") on September 14, 1999, (the "Webcast Merger"). The pooling-of-interest method of accounting requires the restatement of all periods as if the Company and Webcast had always been combined. Webcast was incorporated on July 24, 1998. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for as a pooling-of-interests that do not include the date of combination. These supplemental consolidated financial statements included do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Company after financial statements covering the consummation date of the Webcast Merger are issued. (See Notes 3, 4 and 6). All intercompany account balances and transactions have been eliminated in consolidation. StarMedia Network, Inc. was incorporated under Delaware law in March 1996. The Company is the leading Internet media company targeting Latin America and other Spanish-and Portuguese-speaking markets worldwide. The Company's network consists of 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. The Company promotes user affinity to the StarMedia community by providing Spanish- and Portuguese-language e-mail, chat rooms, instant messaging and personal homepages. During 1999, the Company also launched sales offices in Spain and Puerto Rico and began hiring regional sales managers throughout the United States, focusing on those regions with large Spanish-speaking populations. The accompanying consolidated financial statements have been restated to reflect the May 26, 1999 acquisition of Wass Net, S.L. ("Wass Net"), which was accounted for as a pooling-of-interests. (See Note 4). INTERIM FINANCIAL STATEMENTS The financial statements as of June 30, 1998, and for the six months ended June 30, 1998 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 June 30, 1998 and the results of operations and cash flows for the six months ended June 30, 1998 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. F-50 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION The Company's revenues are derived principally from the sale of banner advertisements and sponsorships, some of which also involve more integration, design and coordination of the customer's content with the Company's services, such as the placement of sponsor buttons in specific areas of the Network. The sponsor buttons generally provide users with direct links to sponsor homepages that exist within the Network which are usually focused on selling sponsor merchandise and services to users of the Network. Advertising revenues on both banner and sponsorship contracts, 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 six months ended June 30, 1998 and 1999, revenues derived from barter transactions, were approximately $2,400,000, $500,000 and $1,900,000, respectively. Revenues derived from the Company's Webcast subsidiary related to webcasting services are recognized during the period in which the webcasting services are delivered. Revenues related to consulting and technical services from time and material contracts are recognized during the period in which the related services are provided and revenue from fixed price contracts is recognized using the percentage-of-completion method. 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 F-51 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based upon the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. CASH AND CASH EQUIVALENTS The Company considers all financial instruments with a maturity of three months or less when purchased to be cash equivalents. Such amounts are stated at cost which approximates market value. FIXED ASSETS Fixed assets, including those acquired under capital leases, are stated at cost and depreciated by the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining period of the lease. INTANGIBLE ASSETS Intangible assets consist of trademarks and trade names and are being amortized on a straight-line basis over a period of five years. 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 June 30, 1999 and for the six months ended June 30, 1999 was approximately $538,000. 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. F-52 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS Advertising costs are expensed as incurred. For the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999, advertising expense amounted to approximately $0, $1,610,000, $21,246,000, $4,578,000 and $15,661,000, respectively. For the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999, advertising expense includes approximately $460,000, $2,400,000, $483,000 and $1,900,000 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 6). 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 F-53 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the supplemental 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, Spain and Colombia is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of stockholders' equity. The functional currency of the Company's 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 period-end date, while nonmonetary assets and liabilities are translated at historical rates. Operations are generally translated at the weighted average exchange rate in effect during the period. The resulting foreign exchange gains and losses are recorded in the consolidated 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, 1998 and June 30, 1999. 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 June 30, 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-54 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 2. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31 -------------------------- JUNE 30, 1997 1998 1999 ----------- ------------- ------------- Computer equipment................................. $ 173,000 $ 4,822,000 10,421,000 Furniture and fixtures............................. 9,000 448,000 618,000 Leasehold improvements............................. 121,000 938,000 1,476,000 ----------- ------------- ------------- 303,000 6,208,000 12,515,000 Less accumulated depreciation and amortization..... (37,000) (730,000) (1,828,000) ----------- ------------- ------------- $ 266,000 $ 5,478,000 10,687,000 ----------- ------------- ------------- ----------- ------------- -------------
3. STOCKHOLDERS' (DEFICIT) EQUITY Between April 30 and May 5, 1999, a group of third party investors purchased an aggregate of 3,727,272 shares of the Company's common stock at $11 per share, or approximately $41,000,000, less fees and commissions of $1,640,000 paid by issuing 149,091 shares of the Company's common stock. These investors 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 25, 1999, the Company's initial public offering was declared effective by the SEC. The Company realized proceeds of approximately $110,400,000, net of underwriting discounts and commissions and related expenses, from the initial public offering of 8,050,000 shares of its common stock. On May 26, 1999, the Company issued 1,133,334 shares of its common stock in connection with the Wass Net merger. On June 26, 1999, the Company issued 20,000 shares of its common stock in connection with an acquisition valued at $1,000,000. During the six months ended June 30, 1999, the Company issued 1,753,636 shares of its common stock for $2,016,000 in connection with the exercise of stock options. 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") were 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 were entitled to the number of votes equal to the number of common shares that could be obtained upon conversion on the date of the vote and are entitled to a discretionary noncumulative dividend. F-55 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 3. STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED) 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 were 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 had 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. The Preferred Stock were converted into 31,996,667 shares common stocks on a one-for-one basis, upon the consummation of the IPO. No Preferred Stock dividends had been declared or paid. At December 31, 1997 and 1998, and at the date of conversion total cumulative dividends in arrears, that would be payable upon a liquidation, were approximately $183,000, $4,233,000 and $8,499,000, respectively. The Company has recorded issuance costs incurred in connection with the Preferred Stock as discounts at issuance and accreted the discounts from the date of issuance through the date of mandatory redemption on December 31, 2004. 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. WEBCAST As of June 30, 1999 Webcast had 7,237,500 shares of common stock outstanding. On July 1, 1999 Webcast issued 541,650 shares of Series A Preferred Stock for $1.80 per share. The Series A Preferred Stock was convertible into Webcast common stock at $1.80 per share at any time. In connection with the Webcast Merger, all the outstanding Webcast common stock and Series A Preferred Stock were exchanged for 842,887 shares of the Company's common stock. (See Notes 1, 4 and 6). 4. ACQUISITIONS ACHEI INTERNET PROMOTION, LTDA On March 10, 1999, the Company acquired all of the outstanding stock of Achei Internet Promotion Ltda. ("Achei"), a Brazilian company, in exchange for cash of $810,000. KD SISTEMAS DE INFORMACAO LTDA. On April 13, 1999, the Company acquired all of the outstanding stock of KD Sistemas de Informacao Ltda. ("KD Sistemas"), a Brazilian company, in exchange for a cash payment of $5,000,000 at closing, $890,000 payable in March 2000, and additional estimated cash payments of F-56 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 4. ACQUISITIONS (CONTINUED) 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"), plus related expenses of approximately $250,000. 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. SERVICIOS INTERACTIVOS LIMITADA In June 1999, the Company acquired all the outstanding stock of Servicios Interactivos Limitada ("SIL") for 20,000 shares of the Company's common stock. The Company accounted for the aforementioned acquisitions under the purchase method of accounting and the results of their operations have been included in the financial statements of the Company from the respective dates of the acquisitions. The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. Goodwill resulting from the acquisitions of approximately $7,967,000 is being amortized using the straight-line method over three years. The pro forma unaudited consolidated results of operations, assuming the consummation of the KD Sistemas acquisition as of January 1, 1998, are as follows:
SIX MONTHS ENDED JUNE 30 -------------------------------- 1998 1999 --------------- --------------- Revenues................................................... $ 1,250,000 $ 5,694,000 Net loss................................................... $ (13,553,000) $ (38,024,000) Net loss available for common stockholders................. $ (14,273,000) $ (42,290,000) Basic and diluted net loss per share....................... $ (1.40) $ (1.93)
On a pro forma basis, if the Achei and SIL acquisitions 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. WASS NET, S.L. Effective May 26, 1999, the Company acquired all of the outstanding stock of Wass Net, a company organized under the laws of Spain. The acquisition was completed pursuant to the terms of a Share Purchase Agreement, whereby Wass Net became a wholly-owned subsidiary of the Company. Under the terms of the agreement, the Wass Net shareholders received 161.9 shares of the Company's common stock for each outstanding Wass Net share. Accordingly, the Company issued 1,133,334 shares of its common stock for all the outstanding shares of Wass Net stock. Wass Net is a Spanish-language online community offering e-mail, chat, classifieds, bulletin boards, home pages and search capabilities. The acquisition was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of Wass Net for all periods presented. F-57 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 4. ACQUISITIONS (CONTINUED) Unaudited combined and separate results of StarMedia and Wass Net during the periods preceding the merger were as follows:
STARMEDIA AND WASS NET STARMEDIA WASS NET INTERCOMPANY COMBINED -------------- ----------- -------------- -------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues............................................ $ 5,293,000 $ 11,000 $ (5,000) $ 5,299,000 Net Loss............................................ $ 36,560,000 $ 885,000 $ -- $ 37,445,000 YEAR ENDED DECEMBER 31, 1998 Revenues............................................ $ 5,329,000 $ 21,000 $ (3,000) $ 5,347,000 Net Loss............................................ $ 45,886,000 $ 72,000 $ -- $ 45,958,000
In connection with the Wass Net merger, Wass Net recorded a one-time charge of $773,000 for transaction costs. In addition, the Company recorded a one-time charge of approximately $250,000 in transaction costs. WEBCAST On September 14, 1999, a newly formed wholly owned subsidiary of the Company merged with and into Webcast (the "Webcast Merger"). See Notes 1 and 3. Under the terms of the Webcast Merger, 842,887 shares of the Company's common stock were issued in exchange for all of the outstanding share of Webcast common stock based on an exchange ratio of .1084 shares of the Company's common stock for each share of Webcast common stock. Webcast is a streaming media company focused on the global delivery of audio, video and other Internet-based interactive media. Unaudited combined and separate results of Starmedia and Webcast during the periods preceding the merger were as follows:
STARMEDIA AND WASS NET WEBCAST COMBINED -------------- ----------- -------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues............................................................ $ 5,299,000 $ 175,000 $ 5,474,000 Net Loss............................................................ $ 37,445,000 $ 212,000 $ 37,657,000 YEAR ENDED DECEMBER 31, 1998 Revenues............................................................ $ 5,347,000 $ 411,000 $ 5,758,000 Net Loss............................................................ $ 45,958,000 $ 15,000 $ 45,973,000
F-58 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 5. LOSS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
PERIOD FROM MARCH 5, 1996 (DATE OF SIX MONTHS ENDED INCEPTION) TO YEAR ENDED DECEMBER 31 JUNE 30, DECEMBER ----------------------------- -------------------------------- 31, 1996 1997 1998 1998 1999 -------------- ------------- -------------- --------------- --------------- (Unaudited) Numerator: Net loss..................... $ (128,000) $ (3,525,000) $ (45,973,000) $ (12,784,000) $ (37,657,000) Preferred stock dividends and accretion.................. -- (185,000) (4,536,000) (720,000) (4,266,000) -------------- ------------- -------------- --------------- --------------- Numerator for basic and diluted loss per share-- net loss available for common stockholders................. $ (128,000) $ (3,710,000) $ (50,509,000) $ (13,504,000) $ (41,923,000) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Denominator: Denominator for basic and dilutive loss per share--weighted average shares..................... 9,147,223 10,039,502 11,203,749 10,220,866 21,927,102 -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- --------------- Basic and diluted net loss per share........................ $ (0.01) $ (0.37) $ (4.51) $ (1.32) $ (1.91) -------------- ------------- -------------- --------------- --------------- -------------- ------------- -------------- --------------- ---------------
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 six month period ended June 30, 1998 and 1999, does not include the effect of options to purchase 0, 1,804,933, 6,131,933, 4,117,000 and 7,277,000 shares of common stock, respectively. Diluted net loss per share for the period from March 5, 1996 (date of inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 does not include the effect of 0, 7,330,000, 31,996,667, and 15,330,000 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-59 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 5. 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:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1998 1999 --------------- --------------- Numerator: Net loss available to common stockholders................ $ (50,509,000) $ (41,923,000) Preferred Stock dividends and accretion.................. 4,536,000 4,266,000 --------------- --------------- Numerator for pro forma loss available to common stockholders............................................. $ (45,973,000) $ (37,657,000) --------------- --------------- --------------- --------------- Denominator: Weighted average number of common shares................. 11,203,749 21,927,102 Assumed conversion of Preferred Stock to common shares (if converted method).................................. 31,996,667 25,809,466 --------------- --------------- Denominator for pro forma basic and diluted loss per share.................................................... 43,200,416 47,736,568 --------------- --------------- Pro forma basic and diluted net loss per share............. $ (1.06) $ (.79) --------------- --------------- --------------- ---------------
6. 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 $5,955,000. 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 six months ended June 30, 1998 and 1999 amounted to approximately $10,421,000, $3,250,000 and $3,012,000, respectively. F-60 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 6. STOCK OPTIONS (CONTINUED) In May 1999, 1,500,000 shares of common stock were reserved for issuance under the Company's Employee Stock Purchase Plan. As of June 30, 1999 Webcast had granted options to purchase 886,951 shares of Webcast common stock under the Webcast 1999 Stock Plan. In July and August 1999 an additional 46,000 options were granted. In connection with the Webcast Merger all the Webcast options were exchanged for options to purchase 101,132 shares of the Company's common stock at an exchange ratio of .1084 shares of the Company's common stock for each option outstanding. The following transactions occurred with respect to the Option Plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ --------------- 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........................................................ 3,024,569 5.67 Canceled....................................................... (131,333) 2.19 Exercised...................................................... (1,753,636) 1.16 ------------ ----- Outstanding, June 30,1999 7,271,533 $ 2.72 ------------ ----- ------------ -----
The following table summarizes information concerning outstanding exercisable options at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------- WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL PRICE OUTSTANDING LIFE - ------------------------------------------------------------------ ------------ --------------- $0.50............................................................. 4,415,433 6.75 $1.60............................................................. 1,716,500 7.00 ------------ 6,131,933 ------------ ------------
F-61 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 6. STOCK OPTIONS (CONTINUED) The following table summarizes information concerning outstanding exercisable options at June 30, 1999:
OPTIONS OUTSTANDING ----------------------------- WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL PRICE OUTSTANDING LIFE - ------------------------------------------------------------------ ------------ --------------- $ 0.50............................................................ 3,059,229 6.25 $ 1.60............................................................ 2,093,000 6.50 $ 1.66............................................................ 96,145 9.62 $ 5.64............................................................ 1,590,659 9.66 $11.00............................................................ 180,500 9.90 $15.00............................................................ 252,000 9.81 ------------ 7,271,533 ------------ ------------
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 value method of the statement. The fair value for these options was estimated using the minimum value method with the following assumptions:
YEAR ENDED DECEMBER 31, --------------------------------- SIX MONTHS ENDED ASSUMPTIONS 1997 1998 JUNE 30, 1999 - ---------------------------------------------------------- --------------- ---------------- ------------------ Average risk-free interest rate........................... 6.00%-6.40% 4.440%-5.70% 5.0% Dividend yield............................................ 0.0% 0.0% 0.0% Average life.............................................. 5 years 5 years 5 years
Because the determination of fair value of all options granted after the Company became 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. No options were granted subsequent to the consummation of the IPO through June 30, 1999. The Company's pro forma information is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- SIX MONTHS ENDED 1997 1998 JUNE 30, 1999 -------------- --------------- ------------------ Pro forma net loss available to common stockholders......... $ (3,710,000) $ (49,942,863) $ (41,443,078) Pro forma basic and diluted loss per share.................. $ (0.37) $ (4.46) $ (1.89)
7. INCOME TAXES For Federal income tax purposes, at June 30, 1999, the Company had net operating loss carryforwards of approximately $51,742,000 which expire from 2011 through 2019. 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. F-62 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 7. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31 JUNE 30 ------------------------------- --------------- 1997 1998 1999 -------------- --------------- --------------- Federal net operating loss carryforwards... $ 1,200,000 $ 12,422,000 $ 17,592,000 Depreciation and amortization.............. (6,000) (227,000) 553,000 Deferred rent.............................. 9,000 55,000 59,000 Other...................................... 27,000 31,000 -------------- --------------- --------------- 1,203,000 12,277,000 18,235,000 Valuation allowance........................ (1,203,000) (12,277,000) (18,235,000) -------------- --------------- --------------- $ -- $ -- $ -- -------------- --------------- --------------- -------------- --------------- ---------------
The effective income tax rate differs from the statutory rate as follows:
PERIOD FROM MARCH 5, 1996 (DATE OF YEAR ENDED DECEMBER 31 INCEPTION) TO SIX MONTHS DECEMBER 31, ------------------------ ENDED JUNE 30, 1996 1997 1998 1999 ----------------- ----- ----- ------------------- Statutory rate................................................ (34%) (34%) (34%) (34%) Non deductible losses from foreign operations................. 2 -- Permanent differences......................................... 8 5 Valuation allowance........................................... 33 33 23 28 Other......................................................... 1 1 1 1 -- -- -- -- Effective tax rate............................................ --% --% --% --% -- -- -- -- -- -- -- --
8. LONG-TERM DEBT The Company has a $12 million credit line for the acquisition of computer equipment and furniture and fixtures. At June 30, 1999, approximately $4.7 million was outstanding under the credit line. Amounts outstanding are payable in monthly installments of principal and interest of approximately $170,000, bear interest at approximately 13.6% per annum and are secured by certain computer equipment and furniture and fixtures. The credit line requires the Company to maintain at least $10,000,000 in cash and cash equivalents. F-63 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 9. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ---------------------------- 1997 1998 JUNE 30, 1999 ------------- ------------- ------------- Product and technology development........................ $ 14,000 $ 490,000 1,169,000 Sales and marketing....................................... 64,000 3,639,000 3,859,000 General and administrative................................ 132,000 1,155,000 853,000 Accrued fixed asset and intangible purchases.............. 17,000 1,059,000 477,000 Costs related to issuance of common stock................. -- -- 959,000 Costs for acquisitions.................................... -- -- 1,174,000 Other..................................................... -- 146,000 276,000 ------------- ------------- ------------- $ 227,000 $ 6,489,000 $ 8,767,000 ------------- ------------- ------------- ------------- ------------- -------------
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. 10. 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 June 30, 1999 are as follows: Year ended June 30: 2000........................................................... $ 898,000 2001........................................................... 740,000 2002........................................................... 385,000 2003........................................................... 297,000 2004........................................................... 51,000 ---------- $2,371,000 ---------- ----------
F-64 STARMEDIA NETWORK, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 10. COMMITMENTS (CONTINUED) Rent expense amounted to approximately $0, $66,000, $392,000, $135,000 and $511,000 for the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the six months ended June 30, 1998 and 1999, respectively. 11. 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. 12. SIGNIFICANT CUSTOMERS AND GEOGRAPHICAL CONCENTRATION For the six months ended June 30, 1999, three customers each accounted for approximately 7% of the Company's total revenue. For the six months ended June 30, 1998, two customers accounted for approximately 27% and 25% of the Company's total revenue, respectively. For the year ended December 31, 1997, three customers accounted for approximately 36%, 23%, and 16% of the Company's total revenue, respectively. For the year ended December 31, 1998, two customers accounted for approximately 21% and 14% of the Company's total revenue, respectively. 13. SUBSEQUENT EVENT (UNAUDITED) On September 18, 1999, the Company entered into an agreement to purchase substantially all of the assets of PageCell International Holdings, Inc. ("PageCell"), a provider of advanced mobile technologies and services, in exchange for common stock and junior non-voting convertible preferred stock of the Company (the "Equity Consideration") valued at $10,000,000 at the closing date and additional Equity Consideration valued at up to $15,000,000 upon the achievement of certain quarterly performance related targets through December 2000. The consummation of the acquisition is subject to certain closing conditions. F-65 UNDERWRITING StarMedia, the selling stockholder 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., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc. and Thomas Weisel Partners L.L.C. are the representatives of the underwriters.
Number of Underwriters Shares - ----------------------------------------------------------------------------------------------------- ----------- Goldman, Sachs & Co.................................................................................. BancBoston Robertson Stephens Inc. .................................................................. J.P. Morgan Securities Inc. ......................................................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................................................................. Salomon Smith Barney Inc. ........................................................................... Thomas Weisel Partners L.L.C. ....................................................................... ----------- 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 975,000 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 and the selling stockholder. 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................... $ $
Paid by the Selling Stockholder ---------------------------- No Exercise Full Exercise ------------- ------------- Per Share............... $ $ Total................... $ $
Shares sold by the underwriters to the public will initially be offered at the initial price to public 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 price to public. 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 price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. StarMedia, its directors and officers, 5% stockholders and the selling stockholder 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 90 days (180 days in the case of the selling stockholder) 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 relating to StarMedia's outstanding shares of common stock. U-1 Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager of 68 filed public offerings of equity securities, of which 37 have been completed, and has acted as a syndicate member in an additional 33 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with StarMedia or any of our officers, directors or other controlling persons, except for its proposed contractual relationship with StarMedia under the terms of the underwriting agreement to be entered into in connection with this offering. In connection with the 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 the 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. As permitted by Rule 103 under the Exchange Act, underwriters and selling group members that are market makers ("passive market makers") in the common stock may make bids for or purchases of common stock in the Nasdaq National Market until a stabilizing bid has been made. Rule 103 generally provides that: - a passive market maker's net daily purchases of the common stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months, or any 60 consecutive days ending within the 10 days, immediately preceding the filing date of the registration statement of which this prospectus forms a part, - a passive market maker may not effect transactions or display bids for common stock at a price that exceeds the highest independent bid for the common stock by persons who are not passive market makers, and - bids made by passive market makers must be identified as such. StarMedia and the selling stockholder estimate that their shares of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . J.P. Morgan Securities Inc., an affiliate of J.P. Morgan & Co., acted as a placement agent for StarMedia in connection with the private placement of StarMedia's series C redeemable convertible preferred stock in August 1998. StarMedia incurred customary placement fees to J.P. Morgan Securities Inc. for such services. 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 to Goldman, Sachs & Co. for such services. StarMedia paid the fee in shares of common stock priced at the private placement price of $11.00 per share. Goldman, Sachs & Co. received 149,091 shares and agreed with StarMedia not to sell, transfer, assign, pledge U-2 or hypothecate any such shares for one year after the date of the initial public 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 and the selling stockholder have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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......................... 8 Forward-Looking Statements; Market Data............................... 20 Use of Proceeds...................... 21 Price Range of Common Stock.......... 21 Dividend Policy...................... 21 Capitalization....................... 22 Dilution............................. 23 Selected Supplemental Consolidated Financial Data..................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 26 Business............................. 36 Management........................... 52 Certain Transactions................. 60 Principal Stockholders............... 62 Description of Capital Stock......... 64 Shares Eligible for Future Sale...... 69 Validity of Common Stock............. 70 Experts.............................. 70 Where You Can Find More Information.. 70 Index to Financial Statements........ F-1 Underwriting......................... U-1
6,500,000 Shares STARMEDIA NETWORK, INC. Common Stock --------------- ------------ GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS J.P. MORGAN & CO. MERRILL LYNCH & CO. SALOMON SMITH BARNEY THOMAS WEISEL PARTNERS L.L.C. Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the issuance and distribution of the common stock being registered. SEC registration fee............................................. $ 86,109 NASD filing fee.................................................. 30,500 NASDAQ listing fee............................................... 17,500 Legal fees and expenses.......................................... 200,000 Accountants' fees and expenses................................... 200,000 Printing expenses................................................ 200,000 Blue sky fees and expenses....................................... 10,000 Transfer Agent and Registrar fees and expenses................... 20,000 Miscellaneous.................................................... 35,891 --------- Total...................................................... $ 800,000 --------- ---------
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. II-1 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. 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. 9. In May 1999, the registrant issued 1,133,334 shares of its common stock in connection with a merger valued at $17,000,000. 10. In June 1999, the registrant issued 20,000 shares of its common stock in connection with an acquisition valued at $1,000,000. 11. In September 1999, the registrant issued 842,887 shares of its common stock in connection with an acquisition valued at $36,655,000. 12. Since May 25, 1999, the registrant has issued and sold 33,333 shares of common stock to 1 employee upon the exercise of options for an aggregate price of $16,667. The sales of the above securities were deemed to be exempt from registration in reliance on Section 4(2) of the Securities Act of 1933, as amended, or Rule 701 promulgated under 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.
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EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 3.1 Amended and restated certificate of incorporation (Incorporated by reference to exhibit 3.2 of StarMedia's Registration Statement on Form S-1, No. 333-74659 ("Registration Statement No. 333-74659"). 3.2 Amended and restated bylaws (Incorporated by reference to exhibit 3.4 of Registration Statement No., 333-74659). 4.1* Specimen common stock certificate. 4.2 Please see Exhibits 3.1 and 3.2 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 (Incorporated by reference to exhibit 10.1 of Registration Statement No. 333-74659). 10.2 1998 stock plan. (Incorporated by reference to exhibit 10.2 of Registration Statement No. 333-74659). 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and StarMedia, as amended (Incorporated by reference to exhibit 10.3 of Registration Statement No. 333-74659). 10.4 Amended and restated registration rights agreement (Incorporated by reference to exhibit 10.4 of Registration Statement No. 333-74659). 10.5 Amendment no. 1 to amended and restated registration rights agreement (Incorporated by reference to exhibit 10.5 of Registration Statement No. 333-74659). 10.6u IBM Business Partner Agreement, dated as of April 1, 1999, by and between StarMedia and International Business Machines Corporation (Incorporated by reference to exhibit 10.9 of Registration Statement No. 333-74659). 10.7 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 (Incorporated by reference to exhibit 10.10 of Registration Statement No. 333-74659). 10.8 Master Loan and Security Agreement No. 4231, dated as of March 31, 1999, by and between StarMedia and Charter Financial, Inc (Incorporated by reference to exhibit 10.11 of Registration Statement No. 333-74659). 10.9 StarMedia 1999 Employee Stock Purchase Plan (Incorporated by reference to exhibit 10.12 of Registration Statement No. 333-74659). 10.10 Stock Purchase Agreement between StarMedia and Hearst Communications, Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.13 of Registration Statement No. 333-74659). 10.11 Stock Purchase Agreement between StarMedia and Reuters Holding Switzerland SA dated as of April 30, 1999 (Incorporated by reference to exhibit 10.14 of Registration Statement No. 333-74659). 10.12 Stock Purchase Agreement between StarMedia and eBay Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.15 of Registration Statement No. 333-74659). 10.13 Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.16 of Registration Statement No. 333-74659). 10.14 Stock Purchase Agreement between StarMedia and Critical Path, Inc. dated as of May 3, 1999 (Incorporated by reference to exhibit 10.17 of Registration Statement No. 333-74659).
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EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.15 Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of May 5, 1999 (Incorporated by reference to exhibit 10.18 of Registration Statement No. 333-74659). 10.16 Share Purchase Agreement dated as of May 4, 1999 between StarMedia and Wass Net S.L., Geradons, S.L., Salvador Porte and Eduardo Kawas (Incorporated by reference to exhibit 10.19 of Registration Statement No. 333-74659). 10.17 Stock Purchase Agreement between StarMedia and National Broadcasting Company, Inc. dated as of May 4, 1999 (Incorporated by reference to exhibit 10.20 of Registration Statement No. 333-74659). 10.18 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Hearst Communications, Inc. (Incorporated by reference to exhibit 10.21 of Registration Statement No. 333-74659). 10.19 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Reuters Holdings Switzerland S.A. (Incorporated by reference to exhibit 10.22 of Registration Statement No. 333-74659). 10.20 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and eBay Inc. (Incorporated by reference to exhibit 10.23 of Registration Statement No. 333-74659). 10.21 Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Europortal Holding S.A. (Incorporated by reference to exhibit 10.24 of Registration Statement No. 333-74659). 10.22 Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Critical Path, Inc. (Incorporated by reference to exhibit 10.25 of Registration Statement No. 333-74659). 10.23 Registration Rights Agreement dated as of May 5, 1999 between StarMedia and Europortal Holding S.A. (Incorporated by reference to exhibit 10.26 of Registration Statement No. 333-74659). 10.24 Registration Rights Agreement dated as of May 4, 1999 between StarMedia and Geradons, S.L. (Incorporated by reference to exhibit 10.27 of Registration Statement No. 333-74659). 10.25 Registration Rights Agreement dated as of May 4, 1999 between StarMedia and National Broadcasting Company, Inc. (Incorporated by reference to exhibit 10.28 of Registration Statement No. 333-74659). 10.26 Employment Agreement dated as of April 29, 1999 by and between StarMedia and Fernando J. Espuelas (Incorporated by reference to exhibit 10.29 of Registration Statement No. 333-74659). 10.27 Employment Agreement dated as of April 29, 1999 by and between StarMedia and Jack C. Chen (Incorporated by reference to exhibit 10.30 of Registration Statement No. 333-74659). 10.28 Form of Rights Agreement (Incorporated by reference to exhibit 10.31 of Registration Statement No. 333-74659). 10.29 Agreement and Plan of Reorganization by and among Webcast Solutions, Inc., StarMedia Network, Inc. and S Media Acquisition Corp., dated as of September 14, 1999. 21.1+ List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Arthur Andersen LLP. 23.3* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 24.1+ Power of attorney (please see Signature Page).
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EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 27.1+ Financial Data Schedule.
- ------------------------ + Previously filed. * To be filed by amendment. u The Commission granted confidential treatment of certain provisions. Omitted material for which confidential treatment has been granted 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-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 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 27th day of September, 1999. STARMEDIA NETWORK, INC. BY: /S/ FERNANDO J. ESPUELAS ----------------------------------------- Fernando J. Espuelas CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the registration statement has been signed by the following persons in the capacities indicated below: Dated: September 27, 1999 /s/ FERNANDO J. ESPUELAS -------------------------------------------- Fernando J. Espuelas Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Dated: September 27, 1999 * -------------------------------------------- Jack C. Chen President and Director Dated: September 27, 1999 * -------------------------------------------- Steven J. Heller Chief Financial Officer(Principal Financial and Accounting Officer) Dated: September 27, 1999 -------------------------------------------- Douglas M. Karp Director Dated: September 27, 1999 * -------------------------------------------- Christopher T. Linen Director Dated: September 27, 1999 * -------------------------------------------- Gerardo M. Rosenkranz Director Dated: September 27, 1999 * -------------------------------------------- Susan L. Segal Director Dated: September 27, 1999 * -------------------------------------------- Frederick R. Wilson Director
*By: /s/ FERNANDO J. ESPUELAS ------------------------- Fernando J. Espuelas ATTORNEY-IN-FACT
II-6 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 June 30, 1999, and the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998, and the six months ended June 30, 1999 and have issued our report thereon dated September 14, 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 September 14, 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 SIX MONTHS ENDED JUNE 30, 1999 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 60,000 $ 179,000 -- -- 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 SIX MONTHS ENDED JUNE 30, 1999 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 239,000 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 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders StarMedia Network, Inc. We have audited the supplemental consolidated financial statements of StarMedia Network, Inc. as of December 31, 1997 and 1998 and June 30, 1999, and the period from March 5, 1996 (date of inception) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999, and have issued our report thereon dated September 14, 1999 (included elsewhere in this Registration Statement). Our audits also included the supplemental 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 supplemental financial statement schedule referred to above, when considered in relation to the basic supplemental 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 September 14, 1999 S-3 SUPPLEMENTAL 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 SIX MONTHS ENDED JUNE 30, 1999 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 65,000 $ 179,000 -- -- YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... -- 65,000 -- -- 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 SIX MONTHS ENDED JUNE 30, 1999 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... $ 244,000 YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts...... 65,000 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-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 1.1 Form of underwriting agreement. 3.1 Amended and restated certificate of incorporation (Incorporated by reference to exhibit 3.2 of StarMedia's Registration Statement on Form S-1, No. 333-74659 ("Registration Statement No. 333-74659"). 3.2 Amended and restated bylaws (Incorporated by reference to exhibit 3.4 of Registration Statement No., 333-74659). 4.1* Specimen common stock certificate. 4.2 Please see Exhibits 3.1 and 3.2 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 (Incorporated by reference to exhibit 10.1 of Registration Statement No. 333-74659). 10.2 1998 stock plan.(Incorporated by reference to exhibit 10.2 of Registration Statement No. 333-74659). 10.3 Lease dated September 15, 1997 between Clemons Management Corp. and StarMedia, as amended (Incorporated by reference to exhibit 10.3 of Registration Statement No. 333-74659). 10.4 Amended and restated registration rights agreement (Incorporated by reference to exhibit 10.4 of Registration Statement No. 333-74659). 10.5 Amendment no. 1 to amended and restated registration rights agreement (Incorporated by reference to exhibit 10.5 of Registration Statement No. 333-74659). 10.6u IBM Business Partner Agreement, dated as of April 1, 1999, by and between StarMedia and International Business Machines Corporation (Incorporated by reference to exhibit 10.9 of Registration Statement No. 333-74659). 10.7 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 (Incorporated by reference to exhibit 10.10 of Registration Statement No. 333-74659). 10.8 Master Loan and Security Agreement No. 4231, dated as of March 31, 1999, by and between StarMedia and Charter Financial, Inc (Incorporated by reference to exhibit 10.11 of Registration Statement No. 333-74659). 10.9 StarMedia 1999 Employee Stock Purchase Plan (Incorporated by reference to exhibit 10.12 of Registration Statement No. 333-74659). 10.10 Stock Purchase Agreement between StarMedia and Hearst Communications, Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.13 of Registration Statement No. 333-74659). 10.11 Stock Purchase Agreement between StarMedia and Reuters Holding Switzerland SA dated as of April 30, 1999 (Incorporated by reference to exhibit 10.14 of Registration Statement No. 333-74659). 10.12 Stock Purchase Agreement between StarMedia and eBay Inc. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.15 of Registration Statement No. 333-74659). 10.13 Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of April 30, 1999 (Incorporated by reference to exhibit 10.16 of Registration Statement No. 333-74659). 10.14 Stock Purchase Agreement between StarMedia and Critical Path, Inc. dated as of May 3, 1999 (Incorporated by reference to exhibit 10.17 of Registration Statement No. 333-74659). 10.15 Stock Purchase Agreement between StarMedia and Europortal Holding S.A. dated as of May 5, 1999 (Incorporated by reference to exhibit 10.18 of Registration Statement No. 333-74659).
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.16 Share Purchase Agreement dated as of May 4, 1999 between StarMedia and Wass Net S.L., Geradons, S.L., Salvador Porte and Eduardo Kawas (Incorporated by reference to exhibit 10.19 of Registration Statement No. 333-74659). 10.17 Stock Purchase Agreement between StarMedia and National Broadcasting Company, Inc. dated as of May 4, 1999 (Incorporated by reference to exhibit 10.20 of Registration Statement No. 333-74659). 10.18 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Hearst Communications, Inc. (Incorporated by reference to exhibit 10.21 of Registration Statement No. 333-74659). 10.19 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and Reuters Holdings Switzerland S.A. (Incorporated by reference to exhibit 10.22 of Registration Statement No. 333-74659). 10.20 Registration Rights Agreement dated as of April 30, 1999 between StarMedia and eBay Inc. (Incorporated by reference to exhibit 10.23 of Registration Statement No. 333-74659). 10.21 Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Europortal Holding S.A. (Incorporated by reference to exhibit 10.24 of Registration Statement No. 333-74659). 10.22 Registration Rights Agreement dated as of May 3, 1999 between StarMedia and Critical Path, Inc. (Incorporated by reference to exhibit 10.25 of Registration Statement No. 333-74659). 10.23 Registration Rights Agreement dated as of May 5, 1999 between StarMedia and Europortal Holding S.A. (Incorporated by reference to exhibit 10.26 of Registration Statement No. 333-74659). 10.24 Registration Rights Agreement dated as of May 4, 1999 between StarMedia and Geradons, S.L. (Incorporated by reference to exhibit 10.27 of Registration Statement No. 333-74659). 10.25 Registration Rights Agreement dated as of May 4, 1999 between StarMedia and National Broadcasting Company, Inc. (Incorporated by reference to exhibit 10.28 of Registration Statement No. 333-74659). 10.26 Employment Agreement dated as of April 29, 1999 by and between StarMedia and Fernando J. Espuelas (Incorporated by reference to exhibit 10.29 of Registration Statement No. 333-74659). 10.27 Employment Agreement dated as of April 29, 1999 by and between StarMedia and Jack C. Chen (Incorporated by reference to exhibit 10.30 of Registration Statement No. 333-74659). 10.28 Form of Rights Agreement (Incorporated by reference to exhibit 10.30 of Registration Statement No. 333-74659). 10.29 Agreement and Plan of Reorganization by and among Webcast Solutions, Inc., StarMedia Network, Inc. and S Media Acquisition Corp., dated as of September 14, 1999. 21.1+ List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Arthur Andersen LLP. 23.3* 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. * To be filed by amendment. u The Commission granted confidential treatment of certain provisions. Omitted material for which confidential treatment has been granted has been filed separately with the Commission. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 DRAFT OF SEPTEMBER 24, 1999 STARMEDIA NETWORK, INC. COMMON STOCK (PAR VALUE $0.001 PER SHARE] UNDERWRITING AGREEMENT ....................., 19.. Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc. JP Morgan Securities Inc. Thomas Weisel Partners L.L.C. As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co. 85 Broad Street, New York, New York 10004 Ladies and Gentlemen: StarMedia Network, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 6,000,000 shares and, at the election of the Underwriters, up to 975,000 additional shares of Common Stock ("Stock") of the Company and the stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of 500,000 shares of Stock. The aggregate of 6,500,000 shares to be sold by the Company and the Selling Stockholders is herein called the "Firm Shares" and the aggregate of 975,000 additional shares to be sold by the Company is herein called the "Optional Shares". The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares". 1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) A registration statement on Form S-1 (File No. 333-87169) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any DRAFT OF SEPTEMBER 24, 1999 post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7 and 11(l) of Form S-1; (iii) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto, and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in -2- DRAFT OF SEPTEMBER 24, 1999 conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (iv) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than pursuant to the grant or exercise of options described in the Prospectus) or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; (v) The Company and its subsidiaries do not own any real property and have good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (vi) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, except where the failure to be so qualified would not be reasonably likely to have a material adverse effect now or in the future on the business, financial condition, stockholder's equity or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"); and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (vii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; -3- DRAFT OF SEPTEMBER 24, 1999 (viii) The unissued Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (ix) The issue and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, other than breaches or defaults that are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any material order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (x) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (xi) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xii) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; -4- DRAFT OF SEPTEMBER 24, 1999 (xiii) Other than as set forth in the Prospectus, the Company and its subsidiaries own or have the right to use pursuant to license, sublicense, agreement, or permission all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, confidential information, proprietary rights and processes ("Intellectual Property") necessary for the operation of the business of the Company and its subsidiaries as described in the Prospectus and have taken all steps reasonably necessary to secure assignments of such Intellectual Property from its employees and contractors; to the Company's knowledge, none of the technology employed by the Company or its subsidiaries has been obtained or is being used by the Company or its subsidiaries in violation of any contractual or fiduciary obligation binding on the Company, its subsidiaries or any of their respective directors or executive officers or any of their respective employees or consultants; and the Company and its subsidiaries have taken and will maintain reasonable measures to prevent the unauthorized dissemination or publication of its confidential information. To the Company's knowledge, neither the Company nor any of its subsidiaries have interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties, and the Company and its subsidiaries have not received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that the Company or any of its subsidiaries must license or refrain from using any intellectual property rights of any third party) which, if the subject of any unfavorable decision, ruling or finding would, individually or in the aggregate, have a Material Adverse Effect; (xiv) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (xv) Ernst & Young LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (xvi) The Company is in the process of reviewing its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a Material Adverse Effect or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the -5- DRAFT OF SEPTEMBER 24, 1999 case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. (b) Each of the Selling Stockholders severally represents and warrants to, and agrees with, each of the Underwriters and the Company that: (i) All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement and the Power of Attorney and the Custody Agreement hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been obtained; and such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power-of-Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder; (ii) The sale of the Shares to be sold by such Selling Stockholder hereunder and the compliance by such Selling Stockholder with all of the provisions of this Agreement, the Power of Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of the Partnership Agreement of such Selling Stockholder or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder; (iii) Such Selling Stockholder has, and immediately prior to each Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder will have, good and valid title to the Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities or claims; and, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters; (iv) Such Selling Stockholder shall not, during the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; -6- DRAFT OF SEPTEMBER 24, 1999 (v) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (vi) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus, when they become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Stockholder will deliver to you prior to or at the First Time of Delivery (as hereinafter defined) a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof); (viii) Certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder hereunder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you (the "Custody Agreement"), duly executed and delivered by such Selling Stockholder to [NAME OF CUSTODIAN], as custodian (the "Custodian"), and such Selling Stockholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you (the "Power of Attorney"), appointing the persons indicated in Schedule II hereto, and each of them, as such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver this Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided in Section 2 hereof, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement; and (ix) The Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder; the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable; the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling -7- DRAFT OF SEPTEMBER 24, 1999 Stockholder or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership or corporation, by the dissolution of such partnership or corporation, or by the occurrence of any other event; if any individual Selling Stockholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be terminated, or if any such partnership or corporation should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of the Selling Stockholders in accordance with the terms and conditions of this Agreement and of the Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event. 2. Subject to the terms and conditions herein set forth, (a) the Company and each of the Selling Stockholders agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each of the Selling Stockholders, at a purchase price per share of $.............., the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company and each of the Selling Stockholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to 975,000 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of shares in excess of the number of Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. -8- DRAFT OF SEPTEMBER 24, 1999 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company and the Selling Stockholders shall be delivered by or on behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and the Custodian to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on ............., 1999 or such other time and date as Goldman, Sachs & Co., the Company and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co., the Company and the Selling Stockholders may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices of Brobeck, Phleger; Harrison LLP, 1633 Broadway, New York, NY 10019 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at .......p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment -9- DRAFT OF SEPTEMBER 24, 1999 or any supplement to the Registration Statement or Prospectus which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its security holders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); -10- DRAFT OF SEPTEMBER 24, 1999 (e) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; except that the Company may issue such securities in exchange for all of the equity or substantially all of the equity or assets of a company in connection with a merger or acquisition, provided that prior to any such issuance the recipients of such securities shall have agreed with Goldman, Sachs & Co. in writing to be found by this provision for the remainder of the 90 day period; (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To use its best efforts to list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); (j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by rule 463 under the Act; and (k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing -11- DRAFT OF SEPTEMBER 24, 1999 either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company and each of the Selling Stockholders covenant and agree with one another and with the several Underwriters that (a) the Company shall pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the reasonable fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (vii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section; and (b) each Selling Stockholder will pay or cause to be paid all costs and expenses incident to the performance of such Selling Stockholder's obligations hereunder which are not otherwise specifically provided for in this Section, including (i) any fees and expenses of counsel for such Selling Stockholder, (ii) such Selling Stockholder's pro rata share of the fees and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and taxes incident to the sale and delivery of the Shares to be sold by such Selling Stockholder to the Underwriters hereunder. In connection with clause (b) (iii) of the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax, and the Selling Stockholder agrees to reimburse Goldman, Sachs & Co. for associated carrying costs if such tax payment is not rebated on the day of payment and for any portion of such tax payment not rebated.. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company and of the Selling Stockholders herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Stockholders shall have performed all of its and their obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act -12- DRAFT OF SEPTEMBER 24, 1999 and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Ropes & Gray, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii), (x) and (xii) of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Brobeck, Phleger & Harrison, LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and, upon payment therefor in accordance with the terms hereof, will be fully paid and non-assessable; and the Shares conform in all material respects to the description of the Stock contained in the Prospectus; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of Florida and New York (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the -13- DRAFT OF SEPTEMBER 24, 1999 opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (v) Any material real property and buildings held under lease by the Company, including the Company's New York headquarters, are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries (in giving the opinion in this clause, such counsel may state that no examination of record titles for the purpose of such opinion has been made, and that they are relying upon a general review of the titles of the Company and its subsidiaries, upon opinions of local counsel and abstracts, reports and policies of title companies rendered or issued at or subsequent to the time of acquisition of such property by the Company or its subsidiaries, upon opinions of counsel to the lessors of such property and, in respect to matters of fact, upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions, abstracts, reports, policies and certificates); (vi) To such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vii) This Agreement has been duly authorized, executed and delivered by the Company; (viii)The issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument which is filed as an exhibit to, or referred to, in the Registration Statement (in giving the opinion in this clause counsel may attach to such opinion a list of the foregoing agreements and instruments), nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (ix) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the -14- DRAFT OF SEPTEMBER 24, 1999 Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (x) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xi) The Company is not an "investment company", as such term is defined in the Investment Company Act; and (xii) Although such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (x) of this Section 7(c), they have participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof with representatives of the Underwriters and their counsel, officers and representatives of the Company, and representatives of the independent certified public accountants of the Company, and nothing has come to their attention that has caused them to believe that the Registration Statement (other than with respect to the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Registration Statement, as to which they need express no opinion), at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (other than with respect to the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Prospectus, as to which they need express no opinion), as of its date or as of such Time of Delivery, contained an untrue statement of material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and that the Registration Statement and the Prospectus (other than the consolidated financial statements, including the notes and schedules thereto, and the other financial data included in the Prospectus, as to which they need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the rules and regulations thereunder, and to their knowledge, no amendment to the Registration Statement is required to be filed and there are no contracts or documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. (d) The respective counsel for each of the Selling Stockholders, as indicated in Schedule II hereto, each shall have furnished to you their written opinion with respect to each of the Selling Stockholders for whom they are acting as counsel (a draft of each such opinion is attached as -15- DRAFT OF SEPTEMBER 24, 1999 Annex II(c) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) A Power-of-Attorney and a Custody Agreement have been duly executed and delivered by such Selling Stockholder and constitute valid and binding agreements of such Selling Stockholder in accordance with their terms; (ii) This Agreement has been duly executed and delivered by or on behalf of such Selling Stockholder; and the sale of the Shares to be sold by such Selling Stockholder hereunder and the compliance by such Selling Stockholder with all of the provisions of this Agreement, the Power-of-Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of the Partnership Agreement of such Selling Stockholder or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder; (iii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement in connection with the Shares to be sold by such Selling Stockholder hereunder, except [NAME ANY SUCH CONSENT, APPROVAL, AUTHORIZATION OR ORDER] which [HAS] [HAVE] been duly obtained and [IS] [ARE] in full force and effect, such as have been obtained under the Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of such Shares by the Underwriters; (iv) Immediately prior to such Time of Delivery, such Selling Stockholder had good and valid title to the Shares to be sold at such Time of Delivery by such Selling Stockholder under this Agreement, free and clear of all liens, encumbrances, equities or claims, and full right, power and authority to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder; and (v) Good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, has been transferred to each of the several Underwriters who have purchased such Shares in good faith and without notice of any such lien, encumbrance, equity or claim or any other adverse claim within the meaning of the Uniform Commercial Code. In rendering the opinion in paragraph (iv), such counsel may rely upon a certificate of such Selling Stockholder in respect of matters of fact as to ownership of, and liens, encumbrances, equities or claims on, the Shares sold by such Selling Stockholder, provided that such counsel shall state that they believe that both you and they are justified in relying upon such certificate; -16- DRAFT OF SEPTEMBER 24, 1999 (e) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Ernst & Young LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto); (f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (g) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (h) The Shares to be sold at such Time of Delivery shall have been duly listed for quotation on NASDAQ; (i) The Company has obtained and delivered to the Underwriters executed copies of an agreement from each of its officers, directors and holders of five percent (5%) or more of its securities, substantially to the effect set forth in Subsection 1(b)(iv) hereof in form and substance satisfactory to you; -17- DRAFT OF SEPTEMBER 24, 1999 (j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (k) The Company and the Selling Stockholders shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company and of the Selling Stockholders, respectively, satisfactory to you as to the accuracy of the representations and warranties of the Company and the Selling Stockholders, respectively, herein at and as of such Time of Delivery, as to the performance by the Company and the Selling Stockholders of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (f) of this Section. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstances in which they were made, or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) The Selling Stockholder will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to -18- DRAFT OF SEPTEMBER 24, 1999 the Company by such Selling Stockholder expressly for use therein; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that such Selling Stockholder shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein; and PROVIDED FURTHER, HOWEVER, that the liability of the Selling Stockholders pursuant to this subsection 8(a) shall not exceed the product of the number of Shares sold by such Selling Stockholder and the initial price to public of the Shares as set forth in the Prospectus.. (c) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstances in which they were made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company and each Selling Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other -19- DRAFT OF SEPTEMBER 24, 1999 expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged -20- DRAFT OF SEPTEMBER 24, 1999 omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Stockholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Stockholders notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Stockholders shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. -21- DRAFT OF SEPTEMBER 24, 1999 (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Stockholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company and the Selling Stockholders to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholders, except for the expenses to be borne by the Company and the Selling Stockholders and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company, the Selling Stockholders and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any of the Selling Stockholders, or any officer or director or controlling person of the Company, or any controlling person of any Selling Stockholder, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither the Company nor the Selling Stockholders shall then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Stockholders as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company and the Selling Stockholders shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives; and in all dealings with any Selling Stockholder hereunder, you and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of such Selling Stockholder made or given by any or all of the Attorneys-in-Fact for such Selling Stockholder. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration Department; if to any Selling Stockholder shall be delivered or sent -22- DRAFT OF SEPTEMBER 24, 1999 by mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company or the Selling Stockholders by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and the Selling Stockholders and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company, any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding, please sign and return to us eight counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Stockholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company and the Selling Stockholders for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Stockholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, StarMedia Network, Inc. -23- DRAFT OF SEPTEMBER 24, 1999 By:___________________________________ Name: Title: Chase Venture Capital Associates, L.P. By:___________________________________ Name: Title: Accepted as of the date hereof at New York New York Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc. JP Morgan Securities Inc. Thomas Weisel Partners L.L.C. By:___________________________________ (Goldman, Sachs & Co.) On behalf of each of the Underwriters -24- DRAFT OF SEPTEMBER 24, 1999 SCHEDULE I
Number of Optional Shares to be Total Number of Purchased if Firm Shares Maximum Option Underwriter to be Purchased Exercised ----------- --------------- ------------------ Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc. JP Morgan Securities Inc. Thomas Weisel Partners L.L.C. [NAMES OF OTHER UNDERWRITERS]
-25- DRAFT OF SEPTEMBER 24, 1999 SCHEDULE II
Number of Optional Shares to be Total Number of Sold if Firm Shares Maximum Option to be Sold Exercised --------------- -------------- The Company................................. The Selling Stockholder: Chase Venture Capital Associates, L.P. (a) --------------- -------------- Total................................. =============== ==============
(a) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling Stockholder. -26- ANNEX I Form of Comfort Letter Pursuant to Section 7(d) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, financial forecasts and/or pro forma financial information) examined by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished to the representatives of the Underwriters (the "Representatives"); (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus as indicated in their reports thereon copies of which have been separately furnished to the Representatives and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus agrees with the corresponding amounts (after restatements where applicable) in the audited consolidated financial statements for such five fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Prospectus; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in clause (B) were not determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Prospectus; (D) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation -2- rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest financial statements included in the Prospectus) or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in clause (E) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the examination referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. -3- EX-10.28 3 EXHIBIT 10.28 BPH DRAFT 04/30/99 Exhibit 10.28 STARMEDIA NETWORK, INC. AND Enter [NAME OF RIGHTS AGENT] (RIGHTS AGENT) RIGHTS AGREEMENT DATED AS OF MAY __, 1999 TABLE OF CONTENTS
PAGE Section 1. Certain Definitions 1 Section 2. Appointment of Rights Agent 5 Section 3. Issue of Rights Certificates. 5 Section 4. Form of Rights Certificates. 7 Section 5. Countersignature and Registration. 8 Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. 8 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. 9 Section 8. Cancellation and Destruction of Rights Certificates 11 Section 9. Reservation and Availability of Preferred Stock. 11 Section 10. Preferred Stock Record Date 12 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights 12 Section 12. Certificate of Adjusted Purchase Price or Number of Shares 20 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. 21 Section 14. Fractional Rights and Fractional Shares. 23 Section 15. Rights of Action 24 Section 16. Agreement of Rights Holders 25 Section 17. Rights Certificate Holder Not Deemed a Stockholder 25 Section 18. Concerning the Rights Agent 26 Section 19. Merger or Consolidation or Change of Name of Rights Agent. 26 Section 20. Duties of Rights Agent 27 Section 21. Change of Rights Agent 29 Section 22. Issuance of New Rights Certificates 30
2.
Section 23. Redemption and Termination. 30 Section 24. Exchange. 31 Section 25. Notice of Certain Events. 32 Section 26. Notices 33 Section 27. Supplements and Amendments 34 Section 28. Successors 34 Section 29. Determinations and Actions by the Board of Directors 34 Section 30. Benefits of This Agreement 35 Section 31. Severability 35 Section 32. Governing Law 35 Section 33. Counterparts 35 Section 34. Descriptive Headings 35
EXHIBITS Exhibit A - Form of Certificate of Designation of Series A Junior Participating Preferred Stock Exhibit B - Form of Rights Certificate Exhibit C - Summary of Rights to Purchase Shares of Series A Preferred Stock
3. RIGHTS AGREEMENT RIGHTS AGREEMENT (the "Agreement"), dated as of May __, 1999, between StarMedia Network, Inc., a Delaware corporation (the "Company"), and [Enter NAME OF TRANSFER AGENT], a ___ banking corporation (the "Rights Agent"). WHEREAS, effective May 4, 1999 (the "Rights Dividend Declaration Date"), the Board of Directors authorized and declared a distribution of one Right (each, a "Right") for each share of Common Stock (as hereinafter defined) of the Company outstanding as of the Close of Business (as hereinafter defined) upon the consumation of the Company's initial public offering (the "Record Date"), each Right initially representing the right to purchase one one-thousandth of a share (a "Unit") of Preferred Stock (as hereinafter defined) upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date (as such terms are hereinafter defined). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS For purposes of this AGREEMENT, the following terms have the meanings indicated: "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock of the Company then outstanding but shall not include (1) the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan, or (2) ___________________ (the "Permitted Investor"), or any of its Affiliates or Associates (collectively with the Permitted Investor, the "Investor Group") to the extent that the members of the Investor Group shall beneficially own in the aggregate up to, but not exceeding, ___% of the shares of Common Stock of the Company then outstanding. Notwithstanding the foregoing: (i) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock of the Company then outstanding; (or, in the case of the Investor Group, more than ___% of the shares of Common Stock of the Company then outstanding); PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding (or, in the case of the Investor Group, more than ___% of the shares of Common Stock of the Company then outstanding) by reason of share purchases by the 4 Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock of the Company (or, in the case of the members of the Investor Group, become the Beneficial Owner of any additional shares of Common Stock of the Company), then such Person shall be deemed to be an "Acquiring Person" hereunder; and (ii) if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" (as defined pursuant to the foregoing provisions of this paragraph (a)), then such Person shall not be deemed to be an "Acquiring Person" for any purpose of this Agreement. "Adjustment Shares" has the meaning set forth in Section 11(a)(ii). "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (as such term is hereinafter defined). A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or successor law or regulation); or (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing, other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; PROVIDED FURTHER, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (x) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act and the Exchange Act Regulations, and (y) is not reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or 5 (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding, (whether or not in writing, other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to (B) of subparagraph (ii) above) or disposing of any securities of the Company; PROVIDED, HOWEVER, that in no case shall an officer or director of the Company be deemed (A) the Beneficial Owner of any securities beneficially owned by another officer or director of the Company solely by reason of actions undertaken by such persons in their capacity as officers or directors of the Company or (B) the Beneficial Owner of securities held of record by the trustee of any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any employee of the Company or any Subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan; Notwithstanding anything in this definition of "Beneficial Owner" and "beneficially own" to the contrary, the phrase "then outstanding," when used with reference to a Person who is the Beneficial Owner of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to beneficially own hereunder. "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New York or the state in which the principal office of the Rights Agent is located are authorized or obligated by law or executive order to close. "Close of Business" on any given date shall mean 5:00 P.M., New York time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 P.M., California time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of common stock, par value $.001, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock (or other equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. "Company" shall have the meaning set forth in the recitals to this Agreement. "current per share market price" shall have the meaning set forth in Section 11(d)(i) hereof. "Current Value" shall have the meaning set forth in Section 11(a) (iii) hereof. "Distribution Date" shall have the meaning set forth in Section 3 (a) hereof. "equivalent preferred shares" shall have the meaning set forth in Section 11(b) 6 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Act Regulations" shall mean the General Rules and Regulations under the Exchange Act. "Exchange Ratio" shall have the meaning set forth in Section 24 hereof. "Expiration Date" shall have the meaning set forth in Section 7(a) hereof. "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. "NASDAQ" shall have the meaning set forth in Section 11(d) hereof. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" shall mean shares of Series A Preferred Stock, par value $.001, of the Company having the rights and preferences set forth in the Form of Certificate of Designation attached to this Agreement as EXHIBIT A. "preferred stock equivalents" shall have the meaning set forth in Section 11(a)(iii) hereof. "Purchase Price" shall have the meaning set forth in Section 7(b) hereof. "Record Date" shall have the meaning set forth in the recitals to this Agreement. "Redemption Date" shall have the meaning set forth in Section 7(a) hereof. "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. "Right" shall have the meaning set forth in the recitals to this Agreement. "Rights Agent" shall have the meaning set forth in the recitals to this Agreement. "Rights Certificate" shall have the meaning set forth in Section 3(a) hereof. "Rights Dividend Declaration Date" shall have the meaning set forth in the recitals to this Agreement. "Section 11(a)(ii) Event" shall mean any event described in Section 11(a)(ii)(A), (B) or (C) hereof. "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in Section 11(a)(iii) hereof. 7 "Section 13 Event" shall mean any event described in clause (x), (y) or (z) of Section 13(a) hereof. "Section 24(a) Exchange Ratio" has the meaning set forth in Section 24(a) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. "Spread" shall have the meaning set forth in Section 11(a)(iii) hereof. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof. "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. Section 2. APPOINTMENT OF RIGHTS AGENT The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. Section 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i) the Close of Business on the Shares Acquisition Date and (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of the Company's Board of Directors prior to such time as any Person becomes an Acquiring Person and of which the Company will give the Rights Agent prompt written notice) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) to commence, a tender or exchange offer, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the 8 shares of Company Common Stock then outstanding (the earlier of (i) and (ii) above being the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for shares of Common Stock registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates, and (y) the right to receive Rights Certificates will be transferable only in connection with the transfer of shares of Common Stock. As soon as practicable after the Distribution Date, the Company will notify the Rights Agent thereof and the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate, in substantially the form of EXHIBIT B hereto (a "Rights Certificate"), evidencing one Right for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in substantially the form of EXHIBIT C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the Expiration Date), the surrender for transfer of any certificate for shares of Common Stock outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. (c) Certificates for shares of Common Stock which become outstanding (including, without limitation, reacquired shares of Common Stock referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earlier of the Distribution Date and the Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between StarMedia Network, Inc. and [Enter NAME OF RIGHTS AGENT], dated as of ________ __, ____ (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of StarMedia Network, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. StarMedia Network, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, 9 as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement), whether currently held by or on behalf of such person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of the Distribution Date and the Expiration Date, the Rights associated with the shares of Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. In the event that the Company purchases or acquires any shares of Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such shares of Common Stock shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the shares of Common Stock which are no longer outstanding. Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the forms of election to purchase Units of Preferred Stock and of assignment to be printed on the reverse thereof) shall be substantially the same as EXHIBIT B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or transaction reporting system on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates shall entitle the holders thereof to purchase the number of Units of Preferred Stock as shall be set forth therein at the price per Unit of Preferred Stock set forth therein, but the number of such Units of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant hereto that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring 10 Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement between StarMedia Network, Inc. and [NAME OF TRANSFER AGENT], as Rights Agent, dated as of _____, 1999 (the "Rights Agreement"). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President, any of its Vice Presidents, or its Treasurer or Chief Financial Officer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purpose, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of Units of Preferred Stock (or, following a Triggering Event, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the office of the Rights 11 Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign and deliver to the person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) Except as provided in Sections 23(c) and 7(e), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Unit of Preferred Stock as to which the Rights are exercised, at or prior to the earliest of (i) the Close of Business on the tenth anniversary hereof (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and (iii) being the "Expiration Date"). (b) The Purchase Price for each Unit of Preferred Stock pursuant to the exercise of a Right shall initially be $100.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the number of Units of Preferred Stock (or other securities or property, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9 hereof in cash, or by certified check or cashier's check payable to the order of the Company, the Rights Agent shall, subject to Section 12 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Stock (or make available, if the Rights Agent is the transfer agent for the Preferred Stock) a certificate or certificates for the number of Units of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests or (B) if the Company shall have elected to deposit the total number of Units of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent of a depositary receipt or depositary receipts representing such number of Units of Preferred Stock as are to be purchased (in which case certificates for the Units of Preferred Stock represented by such receipt or receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced (including to zero) pursuant to Section 11(a)(iii) hereof) may be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing a number of Rights equivalent to the number of Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights Certificate or to such registered holder's duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Triggering Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which a majority of the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e) or (iv) any subsequent transferee shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no 13 liability to any holder of Rights Certificates or to any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK. (a) The Company covenants and agrees that it will use its best efforts to cause to be reserved and kept available out of and to the extent of its authorized and unissued Units of Preferred Stock not reserved for another purpose that will be sufficient to permit the exercise in full of all outstanding Rights. Upon the occurrence of any events resulting in an increase in the aggregate number of shares of Preferred Stock (or other equity securities of the Company) issuable upon exercise of all outstanding Rights above the number then reserved, the Company shall make appropriate increases in the number of shares so reserved. (b) If the Units of Preferred Stock to be issued and delivered upon the exercise of the Rights are at any time listed on a national securities exchange or included for quotation on any transaction reporting system, the Company shall during the period from the Distribution Date to the Expiration Date use its best efforts to cause all shares reserved for such issuance to be listed on such exchange or included for quotation on any such transaction reporting system upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event in which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as 14 the case may be, a registration statement under the Securities Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained, or an exemption therefrom shall be available and until a registration statement has been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Units of Preferred Stock (and, following the occurrence of a Triggering Event, any other securities that may be delivered upon exercise of Rights) shall, at the time of delivery of the certificates for such Units of Preferred Stock (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and non-assessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates or of any Units of Preferred Stock upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for Units of Preferred Stock in a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Units of Preferred Stock upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. PREFERRED STOCK RECORD DATE. Each person in whose name any certificate for Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Preferred Stock (or, following the occurrence of a Triggering Event, other securities) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open; PROVIDED FURTHER, HOWEVER, that if delivery of Units of Preferred Stock is delayed pursuant to 15 Section 9(c), such Persons shall be deemed to have become the record holders of such Units of Preferred Stock only when such Units first become deliverable. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to securities for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a holder of a Unit of Preferred Stock for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS The Purchase Price, the number and kinds of securities covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding shares of Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares Preferred Stock or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Rights exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Rights had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior, to any adjustment required pursuant to Section 11(a)(ii). (ii) Subject to Section 24 of this Agreement, in the event that (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of 16 this Agreement, directly or indirectly, shall (1) merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and shares of Company Common Stock shall remain outstanding and unchanged, (2) in one transaction or a series of transactions, transfer any assets to the Company or any of its Subsidiaries in exchange (in whole or in part) for shares of Company Common Stock, for other equity securities of the Company or any such Subsidiary, or for securities exercisable for or convertible into shares of equity securities of the Company or any of its Subsidiaries (whether shares of Company Common Stock or otherwise) or otherwise obtain from the Company or any of its Subsidiaries, with or without consideration, any additional shares of such equity securities or securities exercisable for or convertible into such equity securities other than pursuant to a pro rata distribution to all holders of shares of Company Common Stock, (3) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity, assets (including securities) on terms and conditions less favorable to the Company or such Subsidiary or plan than those that could have been obtained in arm's-length negotiations with an unaffiliated third party, other than pursuant to a transaction set forth in Section 13(a) hereof, (4) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity (other than transactions, if any, consistent with those engaged in, as of the date hereof, by the Company and such Acquiring Person or such Associate or Affiliate), assets (including securities or intangible assets) having an aggregate fair market value of more than $[5,000,000], other than pursuant to a transaction set forth in Section 13(a) hereof, (5) receive, or any designee, agent or representative of such Acquiring Person or any Affiliate or Associate of such Acquiring Person shall receive, any compensation from the Company or any of its Subsidiaries other than compensation for full-time employment as a regular employee at rates in accordance with the Company's (or its Subsidiaries') past practices, or (6) receive the benefit, directly or indirectly (except proportionately as a holder of shares of Company Common Stock or as required by law or governmental regulation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity; or (B) any Person shall become an Acquiring Person, unless the event causing the Person to become an Acquiring Person is a transaction set forth in Section 13(a); or (C) during such time as there is an Acquiring Person, there shall be any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction or series of transactions involving the Company or any of its Subsidiaries, other than a transaction or transactions to which the provisions of Section 13(a) apply (whether or not with or into or otherwise involving an 17 Acquiring Person), which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its Subsidiaries that is directly or indirectly beneficially owned by any Acquiring Person or any Person or any Associate or Affiliate of any Acquiring Person; then promptly following the occurrence of an event described in Section 11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive for each Right, upon exercise thereof in accordance with the terms of this Agreement and payment of the then-current Purchase Price, in lieu of the number of Units of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, such number of Units of Preferred Stock as shall equal the result obtained by multiplying the then-current Purchase Price by the then number of Units of Preferred Stock for which a Right was exercisable (or would have been exercisable if the Distribution Date had occurred) immediately prior to the first occurrence of a Triggering Event, and dividing that product by 50% of the current per share market price (determined pursuant to Section 11(d) hereof) for shares of Common Stock on the date of occurrence of the Triggering Event (such number of Units of Preferred Stock being hereinafter referred to as the "Adjustment Shares"). (iii) In the event that the number of Units of Preferred Stock which are authorized by the Company's Amended and Restated Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights, or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall, in lieu of issuing Units of Preferred Stock in accordance with Section 11(a)(ii) hereof: (A) determine the excess of (1) the value of the Units of Preferred Stock issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess being referred to as the "Spread") and (B) with respect to each Right, make adequate provision to substitute for such Units of Preferred Stock, upon exercise of the Rights, (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, Common Stock or shares or units of shares of any series of preferred stock which the Board of Directors of the Company has deemed to have the same value as the Units of Preferred Stock (such shares or units of preferred stock are herein called "preferred stock equivalents")), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; PROVIDED, HOWEVER, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) occurrence of a Section 11(a)(ii) Event, and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being 18 referred to herein as the "Section 11(a)(iii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Units of Preferred Stock (to the extent available), [except to the extent that the Company has not obtained any necessary regulatory approval for such issuance,] and then, if necessary, cash, which Units and/or cash have an aggregate value equal to the Spread. (b) In the event that the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Units of Preferred Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Units of Preferred Stock (or shares having the same rights, privileges and preferences as the Preferred Stock ("equivalent preferred stock")) or securities convertible into Units of Preferred Stock or equivalent preferred stock at a price per Unit of Preferred Stock or equivalent preferred share (or having a conversion price per share, if a security convertible into Units of Preferred Stock or equivalent preferred stock) less than the then current per share market price of a Unit of Preferred Stock (as determined pursuant to Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of Units of Preferred Stock which the aggregate offering price of the total number of Units of Preferred Stock and/or equivalent preferred stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of additional Units of Preferred Stock and/or equivalent preferred stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Units of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Units of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend), assets (other than a dividend payable in Units of Preferred Stock but including any dividend payable in equity securities other than Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(d) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price (as determined pursuant to Section 11(d)) of the Preferred Stock on such record date, less the fair market value (as 19 determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holder of rights) of the cash, assets or evidences of indebtedness to be distributed or of such subscription rights or warrants distributable in respect of a share of Preferred Stock and the denominator of which shall be such current per share market price (as determined pursuant to Section 11(d)) of a share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the "current per share market price" of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of thirty (30) Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current per share market price" shall be appropriately adjusted to reflect the "current market price" per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the Nasdaq National Market System ("NASDAQ") or, if the Security is not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Security, the "current per share market price" of such Security on such date as determined in good faith by the Board of Directors of the Company as provided for above shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market 20 price" of the Preferred Stock shall be determined in accordance with the method set forth in Section 11(d)(i). If the "current per share market price" of the Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "current per share market price" of the Preferred Stock shall be conclusively deemed to be an amount equal to $1,000 (as such amount may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to shares of Company Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of Company Common Stock. If shares of neither the Company Common Stock nor Preferred Stock is publicly held or so listed or traded, "current per share market price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. For all purposes of this Agreement, the "current market price" of a Unit of Preferred Stock shall be equal to the "current market price" of one share of Preferred Stock divided by [100]. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-thousandth of a share of Preferred Stock or one one-hundredth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) hereof, the holder of any Rights thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Units of Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Rights and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Section 11(a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Units of Preferred 21 Stock (calculated to the nearest one-millionth of a share of Preferred Stock) obtained by dividing (i) the product obtained by multiplying (x) the number of Units of Preferred Stock covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by, (ii) the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Units of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of Units of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one one-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates to be so distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Units of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per Unit and the number of Units of Preferred Stock which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value of the number of Units of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable number of Units of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Rights exercised after such record 22 date of that number of Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any Unit of Preferred Stock at less than the current market price, (iii) issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, (iv) dividends on Preferred Stock payable in Preferred Stock or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of Units of its Preferred Stock shall not be taxable to such stockholders. (n) The Company shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o)), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the Person which constitutes, or would constitute the "Principal Party" for purposes of Section 13(a) shall have distributed or otherwise transferred to its stockholders or other persons holding an equity interest in such Person Rights previously owned by such Person or any of its Affiliates and Associates; PROVIDED, HOWEVER, this Section 11(n) shall not affect the ability of any Subsidiary of the Company to consolidate with, merge with or into, or sell or transfer assets or earning power to, any other Subsidiary of the Company. (o) After the Distribution Date, the Company shall not, except as permitted by Section 23 or Section 26, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) In the event that, at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on outstanding shares of Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of 23 the Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in any such case the number of Units of Preferred Stock purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of Units of Preferred Stock so purchasable immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. The adjustments provided for in this Section 11(p) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the shares of Common Stock or Units of Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by the Company to make such certification or give such notice shall not affect the validity of or the force or effect of the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) Except as provided in Section 13(b) hereof, in the event that, following a Shares Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)) shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer) to any Person or Persons (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), in one or more transactions, directly or indirectly, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole), (any such event being a "Section 13 Event"), then, and in each such case, proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e), shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price, such number of validly authorized and issued, fully paid and non-assessable shares of Common Stock of the Principal Party (as such term is hereinafter defined), 24 which shares shall not be subject to any liens, encumbrances, rights of first refusal, transfer restrictions or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Units of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such Units of Preferred Stock for which a Right would be exercisable hereunder but for the occurrence of such Section 11(a)(ii) Event by the Purchase Price which would be in effect hereunder but for such first occurrence) and (2) dividing that product (which, following the direct occurrence of a Section 13 Event, shall be the "Purchase Price" for all purposes of this Agreement) by 50% of the current per share market price (determined pursuant to Section 11(d)) of the shares of Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall, for all purposes of this Agreement, thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to ensure that the provisions of this Agreement shall thereafter be applicable to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) shall be of no further effect following the first occurrence of any Section 13 Event. (b) "Principal Party" shall mean: (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), (A) the Person that is the issuer of any securities into which shares of Company Common Stock are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer of shares of Common Stock that has the highest aggregate current market price (determined pursuant to Section 11(d)) and (B) if no securities are so issued, the Person that is the other party to such merger or consolidation, or, if there is more than one such Person, the Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the largest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power transferred pursuant to such transaction or transactions or if the Person receiving the largest portion of the assets or earning power cannot be determined, whichever Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve-month period registered under Section 12 of the Exchange Act ("Registered Common Stock"), or such Person is not a corporation, and 25 such Person is a direct or indirect Subsidiary of another Person that has Registered Common Stock outstanding, "Principal Party" shall refer to such other Person; (2) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person but is not a direct or indirect Subsidiary of another Person which has Registered Common Stock outstanding, "Principal Party" shall refer to the ultimate parent entity of such first-mentioned Person; (3) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and one or more of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever of such other Persons is the issuer of the Registered Common Stock having the highest aggregate current per share market price (determined pursuant to Section 11(d)); and (4) i the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and none of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever ultimate parent entity is the corporation having the greatest stockholders' equity or, if no such ultimate parent entity is a corporation, shall refer to whichever ultimate parent entity is the entity having the greatest net assets. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13, and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that the Principal Party will: (i) (A) file on an appropriate form, as soon as practicable following the execution of such agreement, a registration statement under the Securities Act with respect to the shares of Common Stock that may be acquired upon exercise of the Rights, (B) cause such registration statement to remain effective (and to include a prospectus complying with the requirements of the Securities Act) until the Expiration Date, and (C) as soon as practicable following the execution of such agreement take such action as may be required to ensure that any acquisition of such shares of Common Stock upon the exercise of the Rights complies with any applicable state securities or "blue sky" laws; and (ii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) In case the Principal Party which is to be a party to a transaction referred to in this Section 13 has a provision in any of its authorized securities or in its Certificate of Incorporation or Bylaws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue, in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such 26 Principal Party at less than the then current market price per share (determined pursuant to Section 11(d)) or securities exercisable for, or convertible into, shares of Common Stock of such Principal Party at less than such then current marker price (other than to holders of Rights pursuant to this Section 13) or (ii) providing for any special payment, tax or similar provisions in connection with the issuance of the shares of Common Stock of such Principal Party pursuant to the provisions of this Section 13, then, in such event, the Company shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been cancelled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction. (e) The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NASDAQ or, if the Rights are not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Directors. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred 27 Stock). Fractions of Preferred Stock in integral multiples of one one-thousandth of a share of Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; PROVIDED, HOWEVER, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Stock represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one a share of Preferred Stock as determined pursuant to Section 11(d). (c) The holder of a Right by the acceptance of the Right expressly waives such holder's right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. RIGHTS OF ACTION All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of certificates representing shares of Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, a certificate representing shares of Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of a certificate representing shares of Common Stock), may, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any Person subject to this Agreement. Section 16. AGREEMENT OF RIGHTS HOLDERS Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of shares of the Company's Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; 28 (c) subject to Sections 6(a) and 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; PROVIDED, HOWEVER, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Units of Preferred Stock or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, or willful misconduct on the part of the Rights Agent, for any action taken, suffered or omitted by the Rights Agent in connection with the execution, acceptance and administration of this Agreement and the exercise and performance hereunder of its duties, including the costs and expenses of defending against and appealing any claim of liability in the premises. The indemnity provided herein shall survive the termination of this Agreement and the expiration of the Rights. The costs and expenses incurred 29 in enforcing this right of indemnification shall be paid by the Company. The Rights Agent may conclusively rely upon and shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or certificate for Units of Preferred Stock or shares of Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions and no implied duties or obligations shall be read into this Agreement against the Rights Agent, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: 30 (a) Before the Rights Agent acts or refrains from acting, it may consult with legal counsel of its choice (who may be legal counsel for the Company), and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such advice or opinion. (b) Whenever in the administration, exercise and performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the legality, validity or enforceability or the execution of any Rights Certificate (except its countersignature thereof and has actual knowledge of such change or adjustment); nor shall it be liable or responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in Section 12 hereof or has actual knowledge of such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Units of Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Stock will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or 31 performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the administration, exercise and performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be responsible or liable for any action taken, suffered or omitted by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually received such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if the Rights Agent in good faith believes that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise, transfer, split up, combination or exchange, the certification on the form of assignment or form of election to purchase, as the case may be, that the Rights evidenced by the Rights Certificate are not owned by an Acquiring Person, or an Affiliate or Associate thereof, has either not been completed or in any manner indicates any other response thereto, the Rights Agent shall not take any further action with respect to such requested exercise, transfer, split up, combination or 32 exchange, without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and the Company shall mail notice thereof to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit such holder's Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, authorized under such laws to exercise corporate trust or stock transfer powers, and subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock 33 following the Distribution Date and prior to the Expiration Date, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee benefit plan or arrangement or upon the exercise, conversion or exchange of securities of the Company currently outstanding or issued at any time in the future by the Company and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued and this sentence shall be null and void AB INITIO if, and to the extent that, such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. REDEMPTION AND TERMINATION. (a) The Company may, at its option, upon approval by the Board of Directors, at any time on or prior to the close of business (or such later date as may be determined by the Board of Directors) on the earlier of (i) the Shares Acquisition Date, or (ii) the Final Expiration Date redeem all but not less than all the then outstanding Rights at a redemption price of $0.001 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price either in cash, shares of Common Stock (based on the current per share market price thereof (as determined pursuant to Section 11(d) hereof) at the time of redemption), or any other form of consideration deemed appropriate by the Board of Directors. The redemption of the Rights by the Board of Directors may be made effective at such time on such basis and with such conditions as the Board of Directors in its sole discretion may establish. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; PROVIDED, HOWEVER, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 34 23 or in Section 24 hereof, and other than in connection with the purchase of shares of Common Stock prior to the Distribution Date. (c) Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any time when the Rights are redeemable hereunder. Section 24. EXCHANGE. (a) The Company, at its option, upon approval by the Board of Directors, at any time after any Person becomes an Acquiring Person, may exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for Units of Preferred Stock at an exchange ratio equal to, subject to adjustment to reflect stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then current per share market price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding (such exchange ratio being hereinafter referred to as the "Section 24(a) Exchange Ratio"). Notwithstanding the foregoing, the Company may not effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries, or any trustee or fiduciary with respect to such plan acting in such capacity), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the shares of Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Units of Preferred Stock equal to the number of such Rights held by such holder multiplied by the Section 24(a) Exchange Ratio. The Company shall promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of Units of Preferred Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected PRO RATA based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. 35 (c) In the event that the number of shares of Preferred Stock which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional shares of Preferred Stock for issuance upon exchange of the Rights or make adequate provision to substitute (1) cash, (2) Company Common Stock or other equity securities of the Company, (3) debt securities of the Company, (4) other assets, or (5) any combination of the foregoing, having an aggregate value equal to the Adjustment Spread, where such aggregate value has been determined by the Board of Directors. To the extent that the Company determines that some action need be taken pursuant to subsection (a) of this Section 24, the Board of Directors may temporarily suspend the exercisability of the Rights for a period of up to sixty (60) days following the date on which the event described in Section 24(a) shall have occurred, in order to seek any authorization of additional shares of Preferred Stock and/or to decide the appropriate form of distribution to be made pursuant to the above provision and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended. (d) The Company shall not be required to issue fractions smaller than or to distribute certificates which evidence fractions smaller than one one-thousandth of a share of Preferred Stock. In lieu thereof, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Units would otherwise be issuable an amount in cash equal to the same fraction of the current market value (as determined pursuant to Section 11(d)(i) hereof) of one Unit of Preferred Stock. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Stock or to make any other distribution to the holders of its Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional Units of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding Preferred Stock), (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Stock payable in shares of Common Stock or to effect a subdivision, combination or consolidation of the shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock), then, in each such case, the Company shall give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such 36 reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Common Stock and/or shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten (10) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least ten (10) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Common Stock and/or shares of Preferred Stock, whichever shall be the earlier. (b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the Company will promptly notify the Rights Agent thereof. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Attention: Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sent by registered or certified mail and shall be deemed given upon receipt and addressed (until another address is filed in writing with the Company) as follows: StarMedia Network, Inc. 29 West 36th Street Fifth Floor New York, New York 10018 Attention: JACK C. CHEN, PRESIDENT ---------------------- Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. 37 Prior to the Distribution Date, the Company may supplement or amend this Agreement in any respect, without the approval of any holders of Rights, by action of its Board of Directors, and the Rights Agent shall, if the Company so directs, execute such supplement or amendment. From and after the Distribution Date, the Company may from time to time supplement or amend this Agreement without the approval of any holders of Rights, by action of its Board of Directors in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), including, without limitation, to change the Purchase Price, the Redemption Price, any time periods herein specified, and any other term hereof, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; PROVIDED, HOWEVER, that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Upon receipt of a certificate from an appropriate officer of the Company that the proposed supplement or amendment is consistent with this Section 27 and, after such time as any Person has become an Acquiring Person, that the proposed supplement or amendment does not adversely affect the interests of the holders of Rights, the Rights Agent shall execute such supplement or amendment. Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS . For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors, or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing), which are done or made by the Board of Directors in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties and (y) not subject the Board of Directors to any liability to the holders of the Rights. 38 Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock). Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the tenth Business Day following the date of such determination by the Board of Directors of the Company. Section 32. GOVERNING LAW. This Agreement and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several sections of this Agreement are inserted or convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 39 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. ATTEST: STARMEDIA NETWORK, INC. By: By: Name: Name: Title: Title: ATTEST: [Enter NAME OF RIGHTS AGENT] By: By: Name: Name: Title: Title: 40 EX-10.29 4 EXHIBIT 10-29 EXECUTION COPY AGREEMENT AND PLAN OF REORGANIZATION by and among Webcast Solutions, Inc., StarMedia Network, Inc., and S Media Acquisition Corp., dated as of September 14, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I Generally........................................................................... 2 Section 1.1. Certain Definitions............................................................ 2 Section 1.2. Terms Generally................................................................ 2 ARTICLE II Merger of Newco into the Company.................................................... 2 Section 2.1. The Merger..................................................................... 2 Section 2.2. Effective Time of Merger....................................................... 2 Section 2.3. Articles of Incorporation; By-Laws............................................. 2 Section 2.4. Directors and Officers......................................................... 3 Section 2.5. Taking of Necessary Action; Further Action..................................... 3 Section 2.6. Time and Place of Closing...................................................... 3 Section 2.7. Tax Consequences............................................................... 4 ARTICLE III Conversion and Exchange of Shares................................................... 4 Section 3.1. Conversion of Shares........................................................... 4 Section 3.2. Exchange of Certificates....................................................... 5 Section 3.3. Lost, Stolen or Destroyed Certificates......................................... 6 Section 3.4. Dissenting Shares.............................................................. 6 Section 3.5. Stock Legend................................................................... 7 ARTICLE IV Representations and Warranties of the Company....................................... 7 Section 4.1. Incorporation; Authorization; Capitalization................................... 7
-2- TABLE OF CONTENTS (Continued)
Page ---- Section 4.2. Financial Statements........................................................... 9 Section 4.3. Undisclosed Liabilities........................................................ 9 Section 4.4. Properties..................................................................... 9 Section 4.5. Absence of Certain Changes..................................................... 10 Section 4.6. Taxes.......................................................................... 11 Section 4.7. Litigation; Orders............................................................. 11 Section 4.8. Intellectual Property.......................................................... 12 Section 4.9. Licenses, Approvals, Other Authorizations, Consents, Reports, etc......................................................... 13 Section 4.10. Labor Matters.................................................................. 14 Section 4.11. Compliance with Laws........................................................... 14 Section 4.12. Insurance...................................................................... 14 Section 4.13. Contracts...................................................................... 14 Section 4.14. Transactions with Affiliates................................................... 15 Section 4.15. OSHA Matters................................................................... 15 Section 4.16. Totality of Assets............................................................. 15 Section 4.17. Environmental Matters.......................................................... 15 Section 4.18. Employee Benefits.............................................................. 17 Section 4.19. Year 2000...................................................................... 19 Section 4.20. Pooling........................................................................ 19 Section 4.21. Vote Required.................................................................. 20
-3- TABLE OF CONTENTS (Continued)
Page ---- Section 4.23. Brokers, Finders, etc.......................................................... 20 Section 4.24. Minute Books................................................................... 20 Section 4.25. Disclosure..................................................................... 20 ARTICLE V Representations and Warranties of Parent and Newco.................................. 20 Section 5.1. Incorporation; Authorization; Capitalization................................... 20 Section 5.2. Consents, etc.................................................................. 22 Section 5.3. SEC Documents.................................................................. 22 Section 5.4. No Material Adverse Change..................................................... 23 Section 5.5. Brokers, Finders, etc.......................................................... 23 Section 5.6. Pooling........................................................................ 23 Section 5.7. Litigation, etc................................................................ 23 ARTICLE VI Covenants........................................................................... 24 Section 6.1. Covenants of the Company....................................................... 24 Section 6.2. Additional Agreements.......................................................... 27 Section 6.3. Employee Matters............................................................... 28 Section 6.4. Exclusivity.................................................................... 28 Section 6.7. Nasdaq Listing................................................................. 28 Section 6.8. Company's Auditors............................................................. 28 Section 6.10. Form S-8....................................................................... 28 Section 6.11. Indemnity Agreement............................................................ 28
-4- TABLE OF CONTENTS (Continued)
Page ---- ARTICLE VII Conditions to Parent's and Newco's Obligations to Close............................. 29 Section 7.1. Representations, Warranties and Covenants of the Company........................................................................ 29 Section 7.2. Shareholders................................................................... 30 Section 7.3. Representations, Warranties and Covenants of the Shareholders................................................................... 30 Section 7.4. Filings; Consents.............................................................. 30 Section 7.5. No Injunction.................................................................. 30 Section 7.6. Documents...................................................................... 31 Section 7.7. Convertible Securities......................................................... 31 Section 7.8. Rule 145 Letters............................................................... 31 Section 7.9. Appraisal Rights............................................................... 31 ARTICLE VIII Conditions to the Company's Obligation to Close..................................... 31 Section 8.1. Representations, Warranties and Covenants of Parent............................ 31 Section 8.2. Shareholder Approvals.......................................................... 32 Section 8.3. No Injunction.................................................................. 32 Section 8.4. Nasdaq Listing................................................................. 32 ARTICLE IX Survival............................................................................ 32 Section 9.1. Survival....................................................................... 32 ARTICLE X Termination......................................................................... 33
-5- TABLE OF CONTENTS (Continued)
Page ---- Section 10.1. Termination.................................................................... 33 Section 10.2. Procedure and Effect of Termination............................................ 33 ARTICLE XI Miscellaneous....................................................................... 33 Section 11.1. Entire Agreement............................................................... 33 Section 11.2. Benefit; Assignment............................................................ 33 Section 11.3. No Presumption................................................................. 34 Section 11.4. Notices........................................................................ 34 Section 11.5. Counterparts; Headings......................................................... 35 Section 11.6. Severability................................................................... 35 Section 11.7. No Reliance.................................................................... 35 Section 11.8. Governing Law.................................................................. 35 Section 11.9. Submission to Jurisdiction; Waivers............................................ 35 Section 11.10. Waiver......................................................................... 36 Section 11.11. Amendment...................................................................... 36 Section 11.12. Specific Performance........................................................... 36 Section 11.13. Expenses....................................................................... 36
-6- AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION, dated as of September 14, 1999 (together with the Schedules and Exhibits hereto, the "PLAN OF MERGER"), among Webcast Solutions, Inc., a California corporation (the "COMPANY"), StarMedia Network, Inc., a Delaware corporation ("PARENT"), and S Media Acquisition Corp., a California corporation and a wholly-owned subsidiary of Parent ("NEWCO"). A. The respective Board of Directors of Parent and the Company have determined that it is in the best interests of each such corporation that Parent, through a wholly-owned subsidiary, acquire all outstanding shares of common stock, no par value per share, of the Company (the "WEBCAST COMMON STOCK") for the Aggregate Share Merger Consideration (as hereinafter defined), pursuant to the terms and conditions of this Plan of Merger which provides, among other things, for the merger of Newco into the Company (the "MERGER"), and the respective Board of Directors of the Company and Newco have directed that this Plan of Merger and the Agreement of Merger annexed hereto as Exhibit A (the "MERGER AGREEMENT") be submitted to the Company's and Newco's shareholders for their adoption. B. Pursuant to the Merger, among other things, all of the issued and outstanding capital stock of the Company shall be converted into the right to receive StarMedia Common Stock (as defined herein), as set forth herein, and all outstanding options to purchase Webcast Common Stock shall be converted into options to purchase StarMedia Common Stock, as set forth herein. C. The Company, on the one hand, and Parent and Newco, on the other hand, desire to make certain representations, warranties, covenants and other agreements in connection with the Merger. D. The parties intend, by executing this Plan of Merger, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, and any successor thereto (the "Code"). E. Concurrent with the execution of this Plan of Merger, as a material inducement to Parent and Newco, certain shareholders of the Company will enter into an agreement to indemnify and not to compete with Parent (the "INDEMNITY AND NON-COMPETE AGREEMENT") in the form of Exhibit B hereto. F. Concurrent with the execution of the Merger Agreement, as a material inducement to Parent and Newco, the directors and certain shareholders of the Company will enter a general release of the Company (the "GENERAL RELEASE") in the form of Exhibit C hereto. NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I GENERALLY Section 1.1. CERTAIN DEFINITIONS. Certain capitalized terms used in this Plan of Merger have the meanings specified in Exhibit D hereof. Section 1.2. TERMS GENERALLY. (a) Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (b) the terms "hereof," "herein," "hereto" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Plan of Merger as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Plan of Merger, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Plan of Merger unless otherwise specified, (c) the word "including" and words of similar import when used in this Plan of Merger shall mean "including, without limitation," unless otherwise specified, (d) the word "or" shall not be exclusive, (e) provisions shall apply, when appropriate, to successive events and transactions and (f) terms not found in Exhibit D are defined elsewhere in this Plan of Merger. ARTICLE II MERGER OF NEWCO INTO THE COMPANY Section 2.1. THE MERGER. At the Effective Time, subject to the terms and conditions of this Plan of Merger and in accordance with the Corporations Code, (i) Newco shall be merged with and into the Company, (ii) the separate existence of Newco shall cease, (iii) the Company shall continue as the surviving corporation (the "SURVIVING CORPORATION") as a wholly-owned subsidiary of Parent and under its present corporate name, and (iv) the Merger shall have the effects set forth herein and in the Corporations Code. Section 2.2. EFFECTIVE TIME OF MERGER. The Merger shall become effective at the time a copy of the Merger Agreement, together with the certificates required by Section 1103 of the Corporations Code (collectively, the "CERTIFICATE OF MERGER") is accepted for filing by the Secretary of State of California in accordance with the Corporations Code. Such time is referred to herein as the "EFFECTIVE TIME." This Plan of Merger can be terminated by the applicable party prior to the filing of the Certificate of Merger in accordance with Article X hereof. Section 2.3. ARTICLES OF INCORPORATION; BY-LAWS. (a) At the Effective Time, the Articles of Incorporation of the Surviving Corporation shall, pursuant to the Merger, be amended and restated in its entirety to be in the form of the Articles of Incorporation of Newco, except Article One of such amended and restated Articles of Incorporation shall be amended to read in its entirety as follows: "The name of the corporation is Webcast Solutions, Inc." (b) At the Effective Time, the By-Laws of Newco in effect immediately prior to the Effective Time shall become the By-Laws of the Surviving Corporation, except that the name "S Media Acquisition Corp." shall be changed to "Webcast Solutions, Inc." Section 2.4. DIRECTORS AND OFFICERS. The Board of Directors and principal officers of the Surviving Corporation shall be those persons who constitute the Board of Directors and principal officers of Newco at the Effective Time. Each such director or officer shall hold office until such person's respective successor has been duly elected or appointed or qualified pursuant to the By-Laws of the Surviving Corporation or as otherwise provided under applicable law. Section 2.5. TAKING OF NECESSARY ACTION; FURTHER ACTION. Parent, Newco and the Company, respectively, shall take all such lawful action as may be necessary or appropriate in order to effectuate the transactions contemplated by this Plan of Merger. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Plan of Merger and to vest the Surviving Corporation with full right, title and possession to all assets, properties, rights, privileges, powers and franchises of Newco or the Company, the officers and directors of the Surviving Corporation are fully authorized in the name and on behalf of Newco and the Company or otherwise to take, and shall take, all such lawful and necessary action. Section 2.6. TIME AND PLACE OF CLOSING. (a) The Closing shall take place on (i) September 14, 1999, or (ii) such later date no later than October 31, 1999 mutually satisfactory to the Company and Parent which is no later than the fifth business day after satisfaction (or waiver) of the conditions to the Closing set forth in Articles VII and VIII hereof (other than those conditions which require the delivery of any documents or the taking of other action at the Closing) at 10:00 a.m., New York time, at the offices of Hughes Hubbard & Reed, LLP, One Battery Park Plaza, New York, New York 10004. In the event that at the Closing no party exercises any right it may have to terminate this Plan of Merger and no condition to the obligations of the parties exists that has not been satisfied or waived, the parties shall (i) deliver to each other at the Closing the certificates and other documents required to be delivered under this Section 2.6 and Articles VII and VIII hereof and (ii) at the Closing, or as soon thereafter as practicable, cause the Merger to be consummated by filing the Certificate of Merger with the Secretary of State of California. (b) In addition to the other things required to be done hereby, at the Closing, the Company shall deliver or cause to be delivered to Parent the following: (i) a copy of the resolutions of (A) the board of directors of the Company authorizing the execution, delivery and performance of this Plan of Merger, the Merger Agreement and the consummation of the transactions contemplated hereby and thereby and (B) the shareholders of the Company approving and adopting this Plan of Merger and the Merger Agreement as required by Section 8.2, and a certificate of the Company's secretary dated as of the Closing Date, that the resolutions referred to in the foregoing clauses (A) and (B) were duly adopted and are in full force and effect; (ii) the corporate seal and all of the minute books and stock transfer books of the Company; (iii) the written resignations of all of the officers of the Company and all of the members of the board of directors of the Company; (iv) good standing certificates requested by Parent; (v) a duly executed officer's certificate as required by Section 1103 of the Corporations Code; and (vi) if not previously delivered to Parent, all other certificates and such other instruments, releases and documents required pursuant hereto to be delivered by or on behalf of the Company at or prior to the Closing pursuant to Article VII or otherwise required, or reasonably requested by Parent, in connection herewith. (c) In addition to the other things required to be done hereby, at the Closing, Parent and Newco shall deliver to the Company the following: (i) a copy of the resolutions of (A) the board of directors of Newco authorizing the execution, delivery and performance of this Plan of Merger, the Merger Agreement and the consummation of the transactions contemplated hereby and thereby and (B) the sole shareholder of Newco approving and adopting this Plan of Merger and the Merger Agreement, and a certificate of Newco's secretary, dated as of the Closing Date, that the resolutions referred to in the foregoing clauses (A) and (B) were duly adopted and are in full force and effect; and (ii) if not previously delivered to the Company, all other certificates and such other instruments and documents required pursuant hereto to be delivered by or on behalf of Parent or Newco at or prior to the Closing pursuant to Article VIII or otherwise required, or reasonably requested by the Company, in connection herewith. Section 2.7. TAX CONSEQUENCES. It is intended that the Merger shall constitute a reorganization within the meaning of Section 368(a)(1)(A) and (a)(2)(E) of the Code. Notwithstanding the foregoing, no representation or warranty is made by any party hereto regarding the treatment or consequences of the Merger for purposes of U.S. federal income tax, or foreign, state or local tax law. ARTICLE III CONVERSION AND EXCHANGE OF SHARES Section 3.1. CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Newco, the Company or the holders of any of the following securities: (a) Each share of common stock, par value $.01 per share, of Newco issued and outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock, no par value per share, of the Surviving Corporation. (b) Any shares of Webcast Common Stock which are held in the Company's treasury immediately prior to the Effective Time shall be canceled, and no securities of Parent or cash shall be issuable or exchangeable with respect thereto. (c) Each share of Webcast Common Stock which is issued and outstanding immediately prior to the Effective Time shall be converted into and become the right to receive the Per Share Merger Consideration (as defined herein). Each holder of Webcast Common Stock shall surrender all such holder's certificates formerly representing ownership of Webcast Common Stock in the manner provided in Section 3.2. All such shares of Webcast Common Stock, when so converted, shall no longer be outstanding and shall be canceled and automatically converted into the right to receive the Per Share Merger Consideration (and cash in lieu of fractional shares) therefor upon the surrender of such certificate in accordance with Section 3.2. Any payment made pursuant to this Section 3.1(c) shall be made net of applicable withholding taxes to the extent such withholding is required by law. (d) No fractional share of StarMedia Common Stock shall be issued in connection with the Merger. Each holder of shares of Webcast Common Stock shall be entitled to receive in lieu of any fractional share of StarMedia Common Stock to which such holder otherwise would have been entitled pursuant to this Section 3.1 (after taking into account all shares of Webcast Common Stock then held of record by such holder) a cash payment in an amount equal to the product of (i) the fractional interest of a share of StarMedia Common Stock to which such holder otherwise would have been entitled and (ii) the Conversion Price. Payment of such amounts shall be made by Parent. Section 3.2. EXCHANGE OF CERTIFICATES. (a) The Surviving Corporation shall act as Exchange Agent in the Merger. After the Effective Time, each holder of a certificate or certificates theretofore evidencing outstanding shares of Webcast Common Stock, upon surrender of the same, together with a fully completed and executed Letter of Transmittal (as hereinafter defined), to the Surviving Corporation or such other agent or agents as shall be appointed by the Surviving Corporation, shall be entitled to receive in exchange therefor the Per Share Merger Consideration multiplied by the number of shares of Webcast Common Stock represented thereby, rounded to the nearest ten-thousandth of a share. Each holder shall provide the Surviving Corporation with the certification described in Section 4.6(c) and a properly completed IRS Form W-9, if required. No interest will be paid or accrue on the Per Share Merger Consideration payable upon surrender of such certificate. As soon as practicable after the Effective Time, but in any event, within 20 days, the Surviving Corporation will send a notice and transmittal form (the "LETTER OF TRANSMITTAL") to each holder of an outstanding certificate or certificates which immediately prior to the Effective Time evidenced shares of Webcast Common Stock advising such shareholder of the terms of the exchange effected by the Merger and the procedure for surrendering to the Exchange Agent such certificate or certificates for exchange into the shares of StarMedia Common Stock and cash in lieu of fractional shares, constituting the Per Share Merger Consideration. Until so surrendered, each outstanding certificate which, prior to the Effective Time, represented shares of Webcast Common Stock will be deemed for all corporate purposes of Parent to evidence ownership of a right to receive without interest thereon, the number of full shares of StarMedia Common Stock rounded to the lowest whole share multiplied by the number of shares of Webcast Common Stock represented thereby, plus the applicable cash amount, if any, in lieu of fractional shares, constituting the Per Share Merger Consideration. After the Effective Time there shall be no further registration of transfers on the records of the Company of shares of Webcast Common Stock and, if a certificate representing any such shares is presented to the Surviving Corporation, it shall be canceled and exchanged for the Per Share Merger Consideration as herein provided. (b) If payment of the Per Share Merger Consideration is to be made to a person other than the registered holder of the certificate or certificates surrendered in exchange therefor, it shall be a condition of such payment that the certificate or certificates so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the Person requesting such exchange pay to the Surviving Corporation any transfer or other taxes required by reason of the payment to a Person other than the registered holder of the certificate or certificates surrendered or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not payable. (c) Notwithstanding anything to the contrary in this Section 3.2, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Webcast Common Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. Section 3.3. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any certificates evidencing shares of Webcast Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of StarMedia Common Stock and other amounts, if any, as may be required pursuant to this Article 3; PROVIDED, HOWEVER, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. Section 3.4. DISSENTING SHARES. (a) Notwithstanding any provision of this Plan of Merger to the contrary, any shares of Webcast Common Stock held by a holder who has exercised and perfected appraisal rights for such shares in accordance with the Corporations Code and who, as of the Effective Time, has not effectively withdrawn or lost such appraisal rights ("DISSENTING SHARES"), shall not be converted into or represent a right to receive the Per Share Merger Consideration pursuant to Section 3.1, but the holder thereof shall only be entitled to such rights as are granted by the Corporations Code. (b) Notwithstanding the provisions of subsection (a) above, if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) his or her appraisal rights, then, as of the later of the Effective Time or the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the Per Share Merger Consideration as provided in Section 3.1, without interest thereon, upon surrender of the certificate representing such shares. (c) The Company shall give Parent (i) prompt notice of any written demand for appraisal received by the Company pursuant to the applicable provisions of the Corporations Code and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, or as required under the Corporations Code, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. Section 3.5. STOCK LEGEND. Stock certificates for StarMedia Common Stock issued in the Merger as Per Share Merger Consideration shall contain the legend specified on Schedule 3.5. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to and for the benefit of Parent and Newco as follows: Section 4.1. INCORPORATION; AUTHORIZATION; CAPITALIZATION. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company (i) has all requisite corporate power to own its properties and assets and to carry on its business as it is now being conducted and (ii) is in good standing and is duly qualified to transact business in each jurisdiction in which the nature of property owned or leased by it or the conduct of its business requires it to be so qualified, except where the failure to be in good standing or to be duly qualified to transact business would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company has previously delivered to Parent true and correct copies of the articles of incorporation and by-laws of the Company. The Company has no Subsidiaries. Except as set forth on Schedule 4.1(a), the Company has no investments in, or joint venture arrangements with, any other Person. (b) The Company has full power and authority (corporate or otherwise) to execute, deliver and perform this Plan of Merger, the Merger Agreement and all other agreements and instruments to be executed in connection herewith and therewith (collectively, the "TRANSACTION DOCUMENTS"). Subject only to the receipt of the requisite approval of the Company's shareholders referred to in Section 8.2 hereof, (i) the execution, delivery and performance by the Company of this Plan of Merger has been duly authorized by all necessary action (corporate or otherwise) on the part of the Company, and (ii) as of the Closing Date, the Merger Agreement and the other Transaction Documents to which the Company is a party will be duly authorized by all necessary action (corporate or otherwise) on the part of the Company. This Plan of Merger has been duly executed and delivered by the Company, and, as of the Closing Date, the Merger Agreement and the other Transaction Documents to which the Company is a party will be duly executed and delivered by the Company. Assuming due authorization, execution and delivery by Parent and Newco of this Plan of Merger, this Plan of Merger is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, assuming due authorization, execution and delivery by Parent of this Plan of Merger and the receipt of the requisite approval of the Company's shareholders referred to in Section 8.2 hereof, the Merger Agreement and the other Transaction Documents to which the Company is a party will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. (c) The execution, delivery, and performance by the Company of this Plan of Merger, the Merger Agreement and the other Transaction Documents to which it is a party does not, and the consummation by the Company of the transactions contemplated hereby and thereby, will not, (a) upon receipt of the requisite approval of the Company's shareholders referred to in Section 8.2, violate, conflict with or result in the breach of any provision of the Articles of Incorporation or by-laws of the Company or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, require any consent under, or result in or permit the termination, amendment, modification, acceleration, suspensions, revocation or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the assets of the Company or give to others any interests or rights therein under (i) any Contract, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or other Governmental Entity or any applicable constitution or Law, to which the Company is subject or which is applicable to the Company's assets. (d) The authorized capital stock of the Company consists of (i) 10,000,000 shares of Webcast Common Stock, of which 7,237,500 shares are issued and outstanding, and (ii) 560,000 shares of Series A preferred stock, no par value, of the Company (the "PREFERRED STOCK"), of which 541,650 shares are issued and outstanding. All of the outstanding shares of capital stock of the Company have been duly authorized, validly issued, are fully paid and non-assessable, and have not been issued in violation of any preemptive rights created by statute, regulation, the articles of incorporation or bylaws of the Company or any agreement to which the Company is a party or by which it is bound, or in violation of any federal or state securities laws. The Company has reserved 541,650 shares of Webcast Common Stock for issuance upon conversion of the Preferred Stock and 1,100,000 shares of Webcast Common Stock under the Company's 1999 Stock Option Plan (the "OPTION PLAN") for employees, officers, directors and consultants of the Company as may be determined and approved by the Company's Board of Directors from time to time. Except as disclosed in this Section 4.1(d) and in Schedule 4.1(d) and for the transactions contemplated by this Plan of Merger, there is no security, option, warrant, right (including preemptive rights), put, call, subscription, agreement, commitment, understanding or claim of any nature whatsoever, fixed or contingent, to which the Company is a party or by which it is bound that directly or indirectly (i) calls for the issuance, sale, pledge, delivery or other disposition of any securities of the Company or any securities convertible into, or other rights to acquire, any securities of the Company, (ii) relates to the voting or control of any securities of the Company or (iii) obligates the Company or any of its Affiliates to grant, offer or enter into any of the foregoing. (e) Schedule 4.1(e) contains a complete and correct list of the record and beneficial ownership of Webcast Common Stock and Preferred Stock by each shareholder of the Company designating each officer and director of the Company and the current mailing address of each such shareholder. Section 4.2. FINANCIAL STATEMENTS. (a) Attached hereto as Schedule 4.2(a) are true, correct and complete copies of the (i) unaudited balance sheet of the Company as of June 30, 1999 and the related unaudited income and cash flow statements for the Company for the six-month period then ended, and (ii) unaudited balance sheet of the Company as of December 31, 1998 and the related unaudited income and cash flow statements for the Company for the twelve [sic]-month period then ended. The foregoing financial statements are collectively referred to as the "FINANCIAL STATEMENTS." (b) The Financial Statements were prepared in accordance with the books and records of the Company and fairly present the financial condition, results of operations and cash flows of the Company, as of the dates and for the periods indicated, in each case in conformity with GAAP throughout the periods specified. Section 4.3. UNDISCLOSED LIABILITIES. The Company does not have any liabilities or obligations of any nature (whether known or unknown, due or to become due, absolute, accrued, contingent or otherwise), and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability or obligation, including any liabilities or obligations under Environmental Laws or any unfunded obligation under any Benefit Plan, except as (i) set forth in Schedule 4.3, (ii) disclosed in the Financial Statements, or (iii) incurred in the ordinary course of business since June 30, 1999 which do not individually or in the aggregate have a Material Adverse Effect. Section 4.4. PROPERTIES. (a) The Company does not own, and has never owned, any interest in real property. (b) Schedule 4.4(b) hereto contains descriptions of all items of tangible personal property of every kind or description owned by the Company having a current net book value in excess of $2,500. The Company has good and marketable title to, or holds by valid and existing lease or license, all assets and properties (including without limitation all assets reflected on the Financial Statements (other than Intellectual Property, which is the subject of the corresponding representation set forth in Section 4.8 below)), free and clear of all Liens, except (1) as set forth on Schedule 4.4(b)(i) and (2) for liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not detract from the value or interfere with the present use, of the property subject thereto or affected thereby. (c) All material tangible assets of every kind or description owned or leased by the Company are in good operating condition and repair, ordinary wear and tear excepted. Section 4.5. ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule 4.5, since December 31, 1998, there has been no: (a) event that, individually or together with any other events has, or is reasonably likely to have, a Material Adverse Effect on the Company; (b) physical damage, destruction or loss of any assets of the Company in an amount exceeding $10,000 in the aggregate affecting the Company not remedied within 30 days; (c) increase in compensation payable or to become payable to any of the employees, consultants or directors of the Company, or any bonus payment made or promised to any employee, consultant or director of the Company, or any material change in personnel policies, insurance benefits, Benefit Plans or other compensation arrangements affecting the employees, consultants or directors of the Company (other than increases in wages and salaries or bonus payments or other compensation made in the ordinary course of business and consistent with past practice or except as otherwise contemplated by this Plan of Merger or the Transaction Documents, but in no event increases greater than 3% per annum); (d) waiver of any rights by the Company under any Contract which waivers, individually or in the aggregate, could have a Material Adverse Effect on the Company; (e) mortgage, pledge or subjection to any Lien of any of the properties or assets of the Company; (f) sale or transfer of the properties or assets of the Company including Intellectual Property, other than insignificant transfers in the ordinary course of business which individually or in the aggregate are not material; (g) change in any method of accounting or accounting practice except as required by GAAP as in effect from time to time; (h) dividend or other distribution paid or declared by the Company in respect of any of its capital stock and the Company has not, directly or indirectly, purchased, acquired or redeemed or split, combined or reclassified any shares of the capital stock of the Company; (i) entrance into any material transaction or Contract involving a total commitment by or to any party thereto of more than $20,000 on an annual basis or more than $100,000 on its remaining term which cannot be terminated on no more than 60 days' notice without penalty or additional cost to the Company as the terminating party (except as otherwise contemplated by this Plan of Merger, the Merger Agreement or the Transaction Documents); or (j) material tax election or change in tax accounting by the Company. Section 4.6. TAXES. (a) The Company (which, for purposes of this Section 4.6, shall include any predecessor of the Company) has timely filed all Returns which are required to be filed (giving effect to any timely extensions), and all Taxes shown to be due on such Returns have been timely paid. All such Returns are true, accurate and complete. The Company has provided Parent with complete and accurate copies of all Returns filed by the Company for periods for which the statute of limitations is still open. The Company has paid all Taxes required to be paid. The Company has not been included in any consolidated, combined or unitary Returns. Except as disclosed in Schedule 4.6(a), the Company does not have in effect, nor has been requested to make, any waiver or extension of any statute of limitations with respect to Taxes. (b) No property of the Company is subject to a tax benefit transfer lease subject to the provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954. (c) None of the shareholders of the Company is a foreign person subject to withholding under Section 1445 of the Code and the regulations promulgated thereunder, and certification to that effect will be delivered to Parent. (d) The Company has complied with all applicable laws, rules and regulations relating to information reporting with respect to payments made to third parties and the withholding of and payment of withheld Taxes and has timely withheld from employee wages and other payments and paid over to the proper taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws. (e) There are no pending, proposed, or, to the knowledge of the Company, threatened, audits, Actions, assessments or deficiencies, asserted with respect to Taxes of the Company. There is no pending, proposed, or, to the knowledge of the Company, threatened, claim by any Taxing Authority in any jurisdiction in which the Company does not pay Taxes or file Returns that the Company is required to pay Taxes or file Returns. (f) The Company has not made an election under Section 341(f) of the Code. (g) The Company has not agreed nor is required to make any adjustment under Section 481(a) of the Code. (h) The Company will not have any liability under any tax sharing agreement or tax indemnity agreement on or after the Closing Date. (i) All deficiencies asserted or assessments made as a result of any examination of Returns referred to in Section 4.6(a) have been paid in full. Section 4.7. LITIGATION; ORDERS. There is no Action pending, or to the knowledge of the Company, threatened, against the Company by or before any court, arbitrator, panel or other Government Entity that would prevent the consummation of any of the transactions contemplated hereby. Except as disclosed in Schedule 4.7, there is no Action pending, or to the knowledge of the Company, threatened, against the Company or any of its business, properties or rights by or before any court, arbitrator, panel or other Government Entity. There are no judgments, orders, injunctions, decrees, stipulations or awards rendered by any Government Entity or arbitrator against the Company or any of its properties that would individually or in the aggregate have Material Adverse Effect on the Company. Section 4.8. INTELLECTUAL PROPERTY. (a) Schedule 4.8(a) contains a true, accurate and complete list as of the date hereof of all patents, patent applications, trademark and service marks and corresponding registrations and applications for registration thereof, and copyrights and corresponding registrations and applications for registration thereof, worldwide, as are now owned, used or held for use by the Company. Schedule 4.8(a) further sets forth a true, accurate and complete list as of the date hereof of all Outstanding IP Licenses (other than non-negotiated IP Licenses to the Company for off-the-shelf Software having a license fee, in the aggregate for all copies licensed, of less than $5,000), identifying the other parties thereto and the subject matter and date thereof, any royalty or other payment obligations, the term thereof, and any exclusivity obligations. Except as set forth in Schedule 4.8(a)(i), the Company owns, or is licensed or otherwise possesses legally enforceable rights to use all subject matter set forth in Schedule 4.8(a), free and clear of Liens (including any rights or claims of present or former employees, consultants, officers and directors of the Company or any other Persons) and of any obligations to pay royalties or other remuneration to any Person. There are no Outstanding IP Licenses other than as identified in Schedule 4.8(a), oral or written, and except as may be specifically stated in Schedule 4.8(a), no Outstanding IP License requires any payment of any nature, cash or noncash, or approval from, any past or present officer, director, shareholder or Affiliate of the Company. (b) The Company has sufficient title, ownership or IP Licenses of Intellectual Property Rights (whether or not listed in Schedule 4.8(a)) necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others and such Intellectual Property Rights will not be materially adversely affected by the execution and delivery of this Plan of Merger or the consummation of the transactions contemplated hereby. (c) The Company has not been and is not now interfering with, infringing upon, misappropriating, or otherwise in conflict with or violating any Intellectual Property Rights of other Persons, nor has the Company received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the Intellectual Property Rights of any other Person, nor to the Company's knowledge, is there any basis for the making of any such allegation. (d) Schedule 4.8(d) sets forth a list of all patents relating to any field of business or proposed business of the Company as to which the Company has either sought an opinion of counsel or been advised that it should seek an opinion of counsel. (e) There is not pending, nor to the Company's knowledge, has there been threatened, any action or proceeding to contest, oppose, cancel or otherwise challenge the validity, ownership or enforceability of any of the Company's Intellectual Property. (f) The Company has no knowledge that any Person is infringing any of its Intellectual Property. (g) The Company is not aware after due inquiry of its employees that any of its employees are obligated under any contract (including IP Licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any Governmental Entity, that would interfere with the use of the best efforts of such employee to promote the interests of the Company or that would conflict with the Company's business as currently proposed to be conducted. The Company is not aware after due inquiry of its consultants that any of its consultants is obligated under any contract (including IP Licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any Governmental Entity, that would interfere with such consultant's performance of its contractual obligations or other currently contemplated duties to the Company. Neither the execution nor delivery of this Plan of Merger or the consummation of the transactions contemplated hereby, nor the carrying on of the Company's business by the employees of and the consultants to the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any law, contract, covenant or instrument to or under which any of such employees or consultants is now subject to or obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees or consultants (or Persons it currently intends to hire or retain as consultants) made prior to their employment or engagement by the Company. (h) Schedule 4.8(h) sets forth a complete list of all Internet domain names now used or contemplated to be used by the Company. All such domain names are currently registered and in good standing, and the Company is shown on the records of the registrar thereof as the sole owner thereof. The Company has received no notice or communication stating that any Person is challenging the right of the Company to use any such domain name. (i) All Software which has been used and which is now being used by the Company has and is being used in compliance with all applicable License requirements. Section 4.9. LICENSES, APPROVALS, OTHER AUTHORIZATIONS, CONSENTS, REPORTS, ETC. (a) The Company has all licenses, permits, franchises, registrations, certificates, consents, and other authorizations of any Government Entity necessary to the conduct of the business of the Company (the "LICENSES"). All Licenses are in full force and effect. No Action is pending or, to the knowledge of the Company, threatened, by or before any court, arbitrator, panel or other Government Entity seeking the revocation, modification or limitation of any License. (b) No filing, consent, waiver, approval or authorization of any Government Entity or of any third party on the part of the Company is required in connection with the execution, delivery and performance by the Company of this Plan of Merger, the Merger Agreement, or the other Transaction Documents to which it is a party or the consummation of any of the transactions contemplated hereby or thereby, except in connection with or in compliance with the provisions of the Corporations Code. Section 4.10. LABOR MATTERS. (a) Schedule 4.10(a) sets forth a complete and correct list of all employees of the Company, including for each such employee his or her (i) name; (ii) job title; (iii) status as a full-time or part-time employee; (iv) base salary or wage rate; and (v) 1998 bonus. Schedule 4.10(a) also lists each employee of the Company who is not actively at work for any reason other than vacation, and the reason for such absence. (b) Schedule 4.10(b) sets forth a complete and correct list of all individuals who perform services for the Company as an independent contractor or a leased employee, the services they perform, and their rate of compensation. (c) The Company is not presently, nor has in the past been a party to, or bound by any collective bargaining agreement with respect to its employees. No employees of the Company are, or within the last three years have been, represented by a union or other bargaining agent with respect to their employment with the Company, and, to the knowledge of the Company, no employee organizing efforts are pending with respect to employees of the Company. Within the last three years, there has been no strike, work slowdown or other material labor dispute with respect to employees of the Company, nor to the knowledge of the Company, is any strike, work slowdown or other material labor dispute pending. The Company is not involved in nor, to the knowledge of the Company, threatened with any arbitration, lawsuit or administrative proceeding relating to labor matters involving the employees of the Company (excluding any routine workers' or unemployment compensation claims). (d) Each individual who performs, or has performed, services for the Company and has been classified by the Company as an independent contractor (rather than as an employee) for purposes of income tax withholding and employment taxes is and has been properly classified as an independent contractor for such purposes. Section 4.11. COMPLIANCE WITH LAWS. The conduct of the business of the Company has complied with, and the Company and its properties are in compliance with all Laws applicable thereto other than Laws, the violations of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Section 4.12. INSURANCE. Schedule 4.12 lists all insurance policies owned or held by the Company. The Company's insurance policies afford coverage to the Company and its assets or business in amounts and against all risks normally insured against by Persons possessing similar assets or operating similar businesses in similar locations. All such policies are in full force and effect, all premiums with respect thereto have been paid to the extent due, and no notice of cancellation or termination has been received with respect to any such policy. Section 4.13. CONTRACTS. Schedule 4.13 sets forth a list of all written, and a description of all oral, employment Contracts, regardless of amount, and all other Contracts, except for individual unrelated Contracts which could not involve the payment or receipt by the Company of more than $10,000 per calendar year; PROVIDED, HOWEVER, that such schedule also sets forth those Contracts which do not satisfy the $10,000 threshold but are otherwise material to the Company. Except for all failures to be valid, binding and enforceable and breaches, defaults, events, waivers and disputes which would not, individually or in the aggregate, have a Material Adverse Effect on the Company, (a) all of the Contracts are valid and binding on and enforceable against the Company, in accordance with their terms and, to the knowledge of the Company, on and against the other parties thereto, (b) neither the Company nor, to the knowledge of the Company, any other party to any Contract, is in breach or default under any Contract, (c) the Company has not waived any material right under any Contract, (d) no event has occurred that, with the giving of notice or the lapse of time or both, would constitute a breach or default under any Contract, and (e) there are no unresolved disputes under any of the Contracts. True and complete copies of all written, and accurate summaries of all oral, Contracts set forth on Schedule 4.13 have been provided to Parent. Section 4.14. TRANSACTIONS WITH AFFILIATES. Schedule 4.14 sets forth a complete and accurate (a) list of all Contracts to which any shareholder, director or officer of the Company, or any of its Affiliates, Associates or Relatives (the "INSIDERS"), on the one hand, and the Company, on the other hand, is a party and (b) description of all material transactions which are not the subject of the agreements described in clause (a) above (the "INSIDER TRANSACTIONS") between the Company, on one hand, and any Insider, on the other hand, that have occurred since July 1, 1998. Section 4.15. OSHA MATTERS. The Company is in compliance with the requirements of the Occupational Safety and Health Act and the regulations promulgated thereunder and any similar laws or regulations of any state or local jurisdiction ("OSHA") other than violations of OSHA which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company has not received any citation from the Occupational Safety and Health Administration or any comparable administration of any state or local jurisdiction (an "ADMINISTRATION") or any Administration inspector setting forth any respect in which the facilities or operations of the Company are not in compliance with OSHA, or the regulations thereunder, which non-compliance has not been corrected or remedied to the satisfaction of such Administration or inspector. The Company has heretofore furnished to Parent copies of any citations heretofore issued to the Company under OSHA during the three years prior to the date of this Plan of Merger and copies of all correspondence from and to such Administration and any Administration inspectors during the past three years. Section 4.16. TOTALITY OF ASSETS. The assets of the Company which Parent, through the Surviving Corporation, will acquire at the Closing by virtue of the Merger include all of the assets or rights necessary for the continued operation of the business of the Company substantially in the same manner as currently operated. Section 4.17. ENVIRONMENTAL MATTERS. (a) The Company has made available to Parent all material information which it possesses or controls pertaining to the use, generation, storage, handling, treatment or disposal of Hazardous Materials on any real property, used or leased by the Company and any sampling and test results obtained, samples, tests and monitoring programs taken or conducted by the Company (or otherwise in its possession or control) at and around any real property used or leased by the Company with respect to Hazardous Materials. (b) The Company has complied with, and the Company and any real property used or leased by the Company, is in compliance in all material respects with, the provisions of all applicable Environmental Laws. (c) The Company has not received any written notice or is otherwise aware of any existing claim or the basis for any claim by any Government Entity or any third party that the Company or the condition of any real properties used or leased by the Company has violated or is subject to liability pursuant to any Environmental Law. (d) There are no facts, events or conditions with respect to the past or present operation of business of the Company or any environmental conditions at any of the real properties used or leased by the Company which could reasonably be expected to interfere with or prevent continued compliance with, or could reasonably be expected to give rise to any action, suit, claim or proceeding under, Environmental Laws. (e) The Company is not subject to any liability, past or present, fixed or contingent under any Environmental Law. (f) To the knowledge of the Company, there are no underground storage tanks on or under the real property used or leased by the Company. (g) To the knowledge of the Company, no underground storage tanks were located on or under the real property used or leased by the Company which were removed or filled. (h) The Company has not caused Hazardous Materials to be discharged, disbursed, released, stored, treated, generated, disposed of, or allowed to escape on, in, over or under the real property used or leased by the Company, and, to the knowledge of the Company, no other Person has caused Hazardous Materials to be discharged, disbursed, stored, treated, generated or allowed to escape on, in, over or under the real property used or leased by the Company. (i) No asbestos or asbestos containing materials have been installed, used, incorporated into, or disposed of on the real property used or leased by the Company, by the Company or, to the knowledge of the Company, by any other Person. (j) To the knowledge of the Company, no PCBs have been located on or in the real property used or leased by the Company, whether in electrical transformers, fluorescent light fixtures with ballasts, cooling oils, or otherwise. Section 4.18. EMPLOYEE BENEFITS. (a) Schedule 4.18(a) sets forth a complete and correct list of (i) any "employee benefit plan" within the meaning of Section 3(3) of ERISA, (ii) any other employee benefit plan, arrangement or policy, including without limitation, any stock option, stock purchase, stock award, stock appreciation, phantom stock, deferred compensation, pension, retirement, savings, profit sharing, incentive, bonus, health, life insurance, cafeteria, flexible spending, dependent care, fringe benefit, vacation pay, holiday pay, disability, sick pay, workers compensation, unemployment, severance, employee loan or educational assistance plan, arrangement or policy, and (iii) any employment, indemnification, consulting, severance or change-in-control agreement, in each case, which is sponsored or maintained by the Company or any of its Affiliates, or to which the Company or any of its Affiliates contributes or is required to contribute, on behalf of current or former employees, consultants or directors of the Company or their beneficiaries or dependents, whether or not written ("BENEFIT PLANS"). Neither the Company nor any of its Affiliates has communicated to present or former employees of the Company or formally adopted or authorized any additional Benefit Plan or any change in or termination of any existing Benefit Plan. No Benefit Plan covers employees other than employees of the Company. (b) The Company has delivered to Parent complete and correct copies of each Benefit Plan, or written summaries of any unwritten Benefit Plan, any employee handbook applicable to employees of the Company, and, with respect to each Benefit Plan, the current summary plan description, related trust agreements or insurance contracts, the latest IRS determination letter, the last three annual financial statements, and the last three annual reports on IRS Form 5500 (including all required schedules and accountant's opinions). (c) Each Benefit Plan is and has been operated and administered in accordance with its terms and all applicable laws. Each Benefit Plan intended to be tax-qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS as to its tax-qualified status under the Code and nothing has occurred since the date of such favorable determination letter which would adversely affect the qualified status of such plan. (d) All contributions and premium payments required to have been paid under or with respect to any Benefit Plan have been timely paid. (e) No Benefit Plan provides health, life insurance or other welfare benefits to retirees or other terminated employees of the Company, other than continuation coverage required by Section 4980B of the Code or Sections 601-608 of ERISA ("COBRA"), and the Company does not have any current or projected liability for any such benefits. (f) The Company has never maintained or contributed to a trust which is or was intended to be a voluntary employees' beneficiary association under Section 501(c)(9) of the Code. (g) Except as set forth in Schedule 4.18(g) hereto, no Benefit Plan is funded with, or provides for benefits in the form of, stock or other securities of the Company. (h) Except as set forth in Schedule 4.18(h), there has been no change, since January 1, 1999, in any Benefit Plan, or its related funding vehicle, which would significantly increase the Company's cost, or the benefits payable, with respect to such plan. (i) Schedule 4.18(i) hereto lists each individual who is receiving, or who is entitled to elect, COBRA continuation coverage under any Benefit Plan which is a group health plan. (j) The Company has never maintained or contributed to, or had an obligation to contribute to, (i) a "single-employer plan" within the meaning of Section 4001(a)(15) of ERISA, (ii) a plan subject to Section 412 of the Code, (iii) a plan subject to Section 4063 or 4064 of ERISA, or (iv) a multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA. (k) No event has occurred and no condition exists with respect to any Benefit Plan which could subject any Benefit Plan, the Company, Parent or any of their employees, agents, directors or Affiliates, directly or indirectly (through an indemnification agreement or otherwise), to liability for a breach of fiduciary duty, a "prohibited transaction," within the meaning of Section 406 of ERISA or Section 4975 of the Code, or a tax, penalty or fine under Section 502 or 4071 of ERISA or Subtitle D, Chapter 43 of the Code. (l) There are no actions, suits, or claims (other than routine claims for benefits in the ordinary course) with respect to any Benefit Plan pending which could give rise to a material liability, or to the knowledge of the Company, threatened, and the Company has no knowledge of any facts which could give rise to any such actions, suits or claims (other than routine claims for benefits in the ordinary course). No Benefit Plan is currently under governmental investigation or audit and, to the best knowledge of the Company, no such investigation or audit is contemplated or under consideration. (m) No event has occurred and no condition exists with respect to (i) any terminated employee benefit plan or arrangement previously maintained or contributed to by the Company, or (ii) any employee benefit plan or arrangement currently or previously maintained or contributed to by any Affiliate of the Company which, in either case, could subject the Company, Parent or any of their employees, agents, directors or Affiliates, directly or indirectly (through an indemnification agreement or otherwise), to any liability, including, without limitation, liability under Section 412, 4971 or 4980B of the Code or Title IV of ERISA. (n) Except as set forth on Schedule 4.18(n) hereto and as otherwise contemplated by this Plan of Merger, the Transaction Documents or the transactions contemplated hereby and thereby, neither the execution of this Plan of Merger nor the consummation of the transactions contemplated by this Plan of Merger, will (i) increase the amount of benefits otherwise payable under any Benefit Plan, (ii) result in the acceleration of the time of payment, exercisability, funding or vesting of any such benefits, or (iii) result in any payment (whether severance pay or otherwise) becoming due to, or with respect to, any current or former employee, consultant, or director of the Company. No payment or series of payments that would constitute a "parachute payment" (within the meaning of Section 280G of the Code) has been made or will be made by the Company, directly or indirectly, to any employee, consultant or director in connection with the execution of this Plan of Merger or as a result of the consummation of the transactions contemplated hereby. (o) Substantially adequate and complete records have been and are maintained with respect to each Benefit Plan and are in the custody of the Company or a third party service provider retained by the Company. Section 4.19. YEAR 2000. The "YEAR 2000" problem, consisting of the inability of certain computer applications to recognize and properly perform date-sensitive functions involving dates on or about or subsequent to December 31, 1999, will not have a Material Adverse Effect on the Company. The Company reasonably anticipates that all computer applications which are material to its business will, in a timely basis, be able to properly perform date-sensitive functions for all dates on and after January 1, 2000. The Software and related services used by the Company (except for off-the-shelf, shrink-wrap Software that is commercially available for retail purchase) and/or sold or licensed by the Company will not require any additional expenditures in order to be "YEAR 2000 COMPLIANT," which term shall include the following capabilities: (a) accurately processing date information before, during and after January 1, 2000, including, but not limited to, accepting date input, providing date output and performing calculations on dates or portions of dates; (b) functioning accurately and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the new century; (c) responding to two-digit year date input in a way that resolves the ambiguity as to century in a disclosed, defined and predetermined manner; and (d) storing and providing output of date information in ways that are unambiguous as to century. The Company has contacted its principal vendors of hardware, Software and services, and other Persons with whom the Company has material business relationships, and all such vendors and other Persons have notified the Company that their hardware, Software and services are Year 2000 Compliant to the extent affecting the Company. Upon Parent's request from time to time, the Company shall provide to Parent assurance that the Company's systems and Software are or will be in all material respects Year 2000 Compliant on a timely basis, all in form and substance reasonably satisfactory to Parent. Section 4.20. POOLING. The Company was incorporated in 1998 and has never been a subsidiary or division of another corporation. At the date of this Plan of Merger, the Company had no investment in Parent and has not acquired any investment in Parent to date. The Company has not had any transactions changing the total equity interest of its common stock in contemplation of the Merger from the date of its incorporation to the date of this Plan of Merger, nor are there any equity transactions of this type planned prior to the Closing. The Company has purchased no treasury shares since the date of its incorporation nor are any purchases planned prior to the Closing. To the knowledge of the Company, Parent does not intend and has not agreed to effect any of the following transactions: (a) retire or reacquire, directly or indirectly, all or part of the Webcast Common Stock issued to effect the Merger, (b) enter into financial arrangements for the benefit of the former shareholders of the Company (except as previously disclosed to Parent), or (c) dispose of a significant part of the assets of the Company within two years after the Effective Time, other than disposals in the ordinary course of business and to eliminate duplicate facilities or excess capacity or to comply with an order of a Governmental Entity. The Company has not disposed of any significant assets in the two years prior to the date of this Plan of Merger and between the date of this Plan of Merger and the Closing, except for disposals in the ordinary course of business. Notwithstanding the foregoing, no representation or warranty is made by the Company regarding the treatment or consequences of the Merger being accounted for as a pooling or a purchase transaction. Section 4.21. VOTE REQUIRED. Other than the approval of the Merger by the affirmative vote of a majority of the holders of the outstanding shares of Webcast Common Stock and the Preferred Stock entitled to vote on the question, no vote of the holders of any class or series of the capital stock of the Company is required to approve this Plan of Merger, the Merger Agreement and the Merger. Section 4.22. INTENTIONALLY OMITTED. Section 4.23. BROKERS, FINDERS, ETC. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Plan of Merger or the transactions contemplated hereby based upon any agreements, written or oral, made by or on behalf of the Company or by or on behalf of any director, officer, employee, agent or Affiliate of the Company. Section 4.24. MINUTE BOOKS. The minute books of the Company contain an accurate summary of all meetings of directors and shareholders of the Company since the time of the Company's incorporation. True and complete copies of the minute books of the Company have been made available to Parent. Section 4.25. DISCLOSURE. No representation, warranty or statement made by the Company in this Plan of Merger, the Merger Agreement or the other Transaction Documents contains (or will contain) any untrue statement of a material fact or omits (or will omit) to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO Parent and Newco hereby jointly and severally represent and warrant to the Company as follows: Section 5.1. INCORPORATION; AUTHORIZATION; CAPITALIZATION. (a) Each of Parent and Newco is a corporation duly incorporated, validly existing and in good standing under the laws of its state of incorporation. Each of Parent and Newco has all requisite corporate power to own its respective properties and assets and to carry on its respective business as it is now being conducted. (b) Each of Parent and Newco have full power and authority (corporate or otherwise) to execute, deliver and perform this Plan of Merger, the Merger Agreement and the other Transaction Documents to which Parent or Newco is a party. The execution, delivery and performance by Parent and Newco of this Plan of Merger, the Merger Agreement and the other Transaction Documents to which Parent or Newco is a party have been duly authorized by all necessary action (corporate or otherwise) on the part of each of Parent and Newco. This Plan of Merger has been duly executed and delivered by each of Parent and Newco, and, as of the Closing Date, the Merger Agreement and the other Transaction Documents to which Parent or Newco is a party will be duly executed and delivered by Parent or Newco, as the case may be. This Plan of Merger is a legal, valid and binding obligation of each of Parent and Newco, enforceable against each of them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, the Merger Agreement and the other Transaction Documents to which Parent or Newco is a party will constitute legal, valid and binding obligations of Parent or Newco, as the case may be, enforceable against Parent or Newco in accordance with their terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. (c) The execution, delivery, and performance by each of Parent and Newco of this Plan of Merger, the Merger Agreement, and the other Transaction Documents to which Parent or Newco is a party and the consummation by Parent and Newco of the transactions contemplated hereby and thereby, do not, (a) violate, conflict with or result in the breach of any provision of the Articles of Incorporation or by-laws (or similar organizational documents) of Parent or Newco or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, require any consent under, or result in or permit the termination, amendment, modification, acceleration, suspensions, revocation or cancellation of, or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which Parent or Newco is a party, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or other Governmental Entity or any applicable constitution or Law, to which Parent or Newco is subject, except for such violations, conflicts, breaches, defaults, failures to obtain consents, terminations, modifications, accelerations, revocations and cancellations as would not individually or in the aggregate have a Material Adverse Effect on Parent's or Newco's ability to perform their obligations hereunder. (d) The authorized stock of Parent consists of 200,000,000 shares of Common Stock, $.001 par value, of which 57,222,000 shares were issued and outstanding as of the quarter ended June 30, 1999, and 10,000,000 shares of undesignated preferred stock, $.001 par value. No shares of Parent's preferred stock were issued or outstanding as of the quarter ended June 30, 1999. The authorized capital stock of Newco consists of 1,000 shares of Common Stock, $.01 par value, 1,000 shares of which, as of the date hereof, are issued and outstanding and are held by Parent. All such shares of Parent and Newco have been duly authorized, and all such issued and outstanding shares have been validly issued, are fully paid and nonassessable. As of the date hereof, Parent has also reserved 18,500,000 shares of its Common Stock for issuance pursuant to its employee and director stock and option plans, 9,374,776 shares of which were subject to outstanding options at July 31, 1999. (e) The shares of StarMedia Common Stock to be issued as the Per Share Merger Consideration in accordance with this Plan of Merger and the Merger Agreement when issued and delivered in accordance with the terms of this Plan of Merger and the Merger Agreement, will have been duly authorized, validly issued, fully paid and non-assessable, and will not be issued in violation of any preemptive rights or any U.S. federal or state securities laws. Section 5.2. CONSENTS, ETC. No filing, consent, approval or authorization of any Government Entity or of any third party on the part of the Parent or Newco is required in connection with the execution, delivery and performance of this Plan of Merger, the Merger Agreement and the other Transaction Documents to which Parent or Newco is a party by Parent or Newco or the consummation by Parent or Newco of any of the transactions contemplated hereby or thereby, except in connection with or in compliance with the provisions of the Corporations Code, the laws of certain foreign jurisdictions under which a filing may be required in connection with the Merger, and compliance with applicable state blue sky laws. Section 5.3. SEC DOCUMENTS. Parent has made available to the Company a true and complete copy of Amendment No. 7 to Parent's S-1 Registration Statement (including all exhibits thereto) relating to Parent's initial public offering, Form 10-Q for the quarter ended June 30, 1999 filed by Parent with the Securities and Exchange Commission (the "SEC"), and the Form 8-K's filed on June 10, 1999, June 25, 1999 and August 10, 1999 by Parent with the SEC (collectively, the "PARENT SEC DOCUMENTS"). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Documents, and as of their respective filing dates, none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of Parent included in the Parent SEC Documents (collectively, the "PARENT FINANCIAL STATEMENTS") were prepared in accordance with GAAP (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Form 10-Q) and fairly present in all material respects the financial position of Parent as of the respective dates thereof or the results of operations and cash flows for the respective periods then ended, as the case may be, subject, in the case of unaudited interim financial statements, to normal, recurring adjustments which are not material in the aggregate. Since June 30, 1999 and until the date of this Plan of Merger, there has been no material change in Parent's accounting policies which would require disclosure in the Parent's Financial Statements under GAAP. Section 5.4. NO MATERIAL ADVERSE CHANGE. Since the date of the balance sheet included in the Parent's report on Form 10-Q for the quarter ended June 30, 1999 and until the date of this Plan of Merger, there has not occurred any material adverse change in the business, assets, liabilities, operations, results of operation, prospects or financial condition of Parent and its subsidiaries, taken as a whole. Section 5.5. BROKERS, FINDERS, ETC. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Plan of Merger, the Merger Agreement or the transactions contemplated hereby and thereby based upon any agreements, written or oral, made by or on behalf of Parent or Newco or by or on behalf of any director, officer, employee, agent or Affiliate of Parent or Newco. Section 5.6. POOLING. To Parent's knowledge, Parent does not intend and has not agreed to effect any of the following transactions: (a) retire or reacquire, directly or indirectly, all or part of the Webcast Common Stock issued to effect the Merger, (b) enter into financial arrangements for the benefit of the former shareholders of the Company (except as previously disclosed to the Company), or (c) dispose of a significant part of the assets of the Company within two years after the Effective Time, other than disposals in the ordinary course of business and to eliminate duplicate facilities or excess capacity or to comply with an order of a Governmental Entity. Notwithstanding the foregoing, no representation or warranty is made by Parent regarding the treatment or consequences of the Merger being accounted for as a pooling or a purchase transaction. Section 5.7. LITIGATION, ETC. As of the date of this Plan of Merger, to Parent's knowledge, there is no action, suit, proceeding, claim, arbitration or investigation pending or as to which Parent has received any notice of assertion against Parent, which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Plan of Merger. Section 5.8. TAXES. Parent has no present plan or intention after the Merger to (i) reacquire any of its stock issued in the Merger, (ii) liquidate the Surviving Corporation; (iii) merge the Surviving Corporation with or into another corporation; (iv) sell or otherwise dispose of the stock of Surviving Corporation, except for transfers of stock to corporations controlled by Parent; or, (v) cause the Surviving Corporation to sell or otherwise dispose of any of its assets or of any of the assets acquired from Newco, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by the Surviving Corporation. ARTICLE VI COVENANTS Section 6.1. COVENANTS OF THE COMPANY. The Company agrees to observe and perform the following covenants and agreements: (a) CONDUCT OF THE BUSINESS PRIOR TO THE CLOSING DATE. Except as contemplated in this Plan of Merger, prior to the Closing, the Company will: (1) not make or permit any material change in the general nature of its business; (2) maintain its business in accordance with prudent business judgment and consistent with past practice and policy, and maintain its assets in good repair, order and condition, reasonable wear and tear excepted; (3) preserve the Company as an ongoing business and use reasonable efforts to maintain the goodwill associated with the Company; (4) preserve all of the Company's Licenses; (5) not enter into any material transaction or Contract involving a total commitment by or to any party thereto of more than $10,000 on an annual basis or more than $30,000 on its remaining term which cannot be terminated on no more than 60 days' notice without penalty or additional cost to the Company as the terminating party, except in the ordinary course of business and consistent with past practice; (6) not purchase, sell, lease, dispose of or otherwise transfer or make any contract for the purchase, sale, lease, disposition or transfer of, or subject to Lien, any of the assets of the Company; (7) not hire any new employee unless such new employee is hired at-will and such new employee's total compensation is the same or less than present employees of the Company as of the date hereof; (8) not voluntarily change in any material respect or terminate any insurance policies disclosed on Schedule 4.12 that presently are in effect unless equivalent coverage is obtained; (9) not make any changes in financial policies or practices, or strategic or operating policies or practices; (10) comply in all material respects with all applicable Laws and permits, including without limitation those relating to the filing of reports and the payment of Taxes due to be paid prior to the Closing, other than those contested in good faith; (11) not adopt, amend (other than amendments that reduce the amounts payable by Parent or any of its subsidiaries or amendments required by law) or assume an obligation to contribute to any Benefit Plan or collective bargaining agreement or enter into any employment, consulting, severance or similar Contract with any Person (including without limitation, contracts with management of the Company or any of its Affiliates that might require payments be made upon consummation of the transactions contemplated hereby) or amend any such existing contracts to increase any amounts payable thereunder or benefits provided thereunder; (12) except in the ordinary course of business or as required by the terms of any existing Contract or Benefit Plan, not grant any increase or change in total compensation, benefits or pay any bonus to any employee, director or consultant; (13) not grant or enter into or extend the term of any Contract with respect to continued employment or service for any employee, officer, director or consultant; (14) not make any loan or advance to any Person other than to any officer, director, shareholder or employee in the ordinary course of business and consistent with past practice; (15) not amend any of its organizational documents; and (16) not incur any indebtedness. (b) ACCESS TO THE COMPANY'S OFFICES, PROPERTIES AND RECORDS; UPDATING INFORMATION. (1) From and after the date hereof and until the Closing Date, the Company shall permit Parent and its representatives to have, on reasonable notice and at reasonable times, reasonable access to such of the offices, properties and employees of the Company, and shall disclose, and make available to Parent and its representatives all books, papers and records to the extent that they relate to the ownership, operation, obligations and liabilities of or pertaining to the Company, its business, assets and liabilities. Without limiting the application of the Confidentiality Agreement dated August 1999 between the Company and Parent (the "CONFIDENTIALITY AGREEMENT"), all documents or information furnished by the Company hereunder shall be subject to the Confidentiality Agreement. (2) The Company will notify Parent as promptly as practicable of any significant change in the operation of the Company and of any material complaints, investigations or hearings (or communications indicating that the same may be contemplated) by any Governmental Entity, or the institution or overt threat or settlement of any material Action involving or affecting the Company or the transactions contemplated by this Plan of Merger, and shall use reasonable efforts to keep Parent fully informed of such events and permit Parent's representatives access to all materials prepared in connection therewith. (3) As promptly as practicable after Parent's request, the Company will furnish such financial and operating data and other information pertaining to the Company and its business and assets as Parent may reasonably request. (c) GOVERNMENTAL APPROVALS; THIRD PARTY CONSENTS. The Company will use its reasonable best efforts to obtain all necessary consents, approvals and waivers from any Person required in connection with the transactions contemplated hereby. (d) DIVIDENDS. The Company shall not: (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock; or (ii) redeem, repurchase or otherwise acquire any shares of its capital stock. (e) ISSUANCE OF SECURITIES. Except for Webcast Common Stock (i) issued pursuant to the exercise of options to purchase Webcast Common Stock outstanding on the date hereof; (ii) issued upon the conversion of the Preferred Stock; or (iii) released from the Company's repurchase option pursuant to restricted stock purchase agreements between the Company and the Shareholders, the Company shall not issue, agree to issue, deliver, sell, award, pledge, dispose of or otherwise encumber or authorize or propose the issuance, delivery, sale, award, pledge, disposal or other encumbrance of, any shares of its capital stock of any class or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares or convertible or exchangeable securities. (f) ACCOUNTING. The Company shall not make any changes in its accounting methods, principles or practices except as required by law, rule, regulation or GAAP. (g) CONVERSION OF STOCK. Prior to the Closing, the Company shall cause the holders of all of the issued and outstanding shares of Preferred Stock to convert such shares of Preferred Stock to Webcast Common Stock in accordance with the terms of such Preferred Stock, effective immediately prior to the Effective Time and conditioned upon the effectiveness of the Merger. (h) WEBCAST SHAREHOLDERS' APPROVAL. The Company shall, as soon as reasonably practicable after the date hereof, but in no event later than seven days after the date hereof, (i) take all steps necessary to duly call, give notice of, convene and hold a meeting of its shareholders (including all adjournments thereof, the "COMPANY MEETING," which term shall also include any action by written consent of shareholders) for the purpose of securing the affirmative vote of 98% of the outstanding shares of Webcast Common Stock and Preferred Stock, and (ii) subject to the fiduciary duties of its Board of Directors, recommend to its shareholders the approval and adoption of this Plan of Merger and the Merger Agreement and the transactions contemplated hereby and thereby. The Company will (i) promptly prepare and, after consultation with and approval by Parent as to the form and substance thereof, promptly mail to each holder of shares of Webcast Common Stock and of Preferred Stock, a proxy statement describing the Merger, soliciting the approval and adoption of this Plan of Merger by such holders and containing such other information as the Company shall determine or as Parent may reasonably request and (ii) use its best efforts to obtain the necessary approvals by its shareholders of this Plan of Merger. (i) RULE 145 LETTERS. The Company shall promptly identify to Parent all officers and directors of the Company and any other persons who are "affiliates" within the meaning of such term as used in Rule 145 under the Securities Act ("RULE 145 AFFILIATES"), and the Company shall use its reasonable efforts to provide to Parent undertakings from such persons ("RULE 145 LETTERS") to the effect that no disposition of shares of StarMedia Common Stock received in the Merger will be made by such persons except within the limits and in accordance with the applicable provisions of said Rule 145, as amended from time to time, or except in a transaction which, in the opinion of legal counsel satisfactory to Parent, is exempt from registration under the Securities Act. (j) CONVERTIBLE SECURITIES. As of the Closing, there shall be no security, option, warrant, right (including preemptive rights), put, call, subscription, agreement, commitment, understanding or claim of any nature whatsoever, fixed or contingent, to which the Company is a party or to which it is bound, that directly or indirectly (a) calls for the issuance, sale, pledge, delivery or other disposition of any securities of the Company or any securities convertible into, or other rights to acquire, any securities of any of the Company, (b) relates to the voting or control of any securities of the Company or (c) obligates the Company or any of its Affiliates to grant, offer or enter into any of the foregoing. Section 6.2. ADDITIONAL AGREEMENTS. (a) FURTHER ASSURANCES. Each of Parent and the Company agrees to take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Plan of Merger as promptly as possible. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purpose of this Plan of Merger and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company, the Company's shareholders and the officers and directors of the Company immediately prior to the Effective Time are fully authorized in the name of the Company or otherwise to take, and will take, all such lawful and necessary action. (b) PUBLIC ANNOUNCEMENTS. From the date of this Plan of Merger until the earlier of the date of termination of this Plan of Merger or the Effective Time, neither the Company, Newco nor Parent will disclose or permit their respective agents or Affiliates to disclose to any third parties (other than the Company's shareholders) the fact of the proposed Merger, issue, or permit any of their respective agents or Affiliates to issue, any press releases or otherwise make, or permit any of their respective agents or Affiliates to make, any public or other statements, or to release any information intended for or reasonably likely to result in public or other dissemination thereof, with respect to this Plan of Merger, the Merger Agreement and the transactions contemplated hereby and thereby without the prior written consent of all the other parties hereto, except in the case of Parent, as may be required, in the opinion of Parent's counsel, by law or by the rules of the Nasdaq Stock Market. Section 6.3. EMPLOYEE MATTERS. Nothing in this Plan of Merger shall be construed to require the Surviving Corporation, any of its Affiliates or Parent to continue the employment of any employee of the Company or any of its Affiliates or, to continue in effect any employee benefit plan or arrangement; PROVIDED, HOWEVER, that each employee of the Company who becomes an employee of Parent after the Effective Time shall be eligible to receive salary and benefits (such as health insurance, bonuses, stock options) consistent with Parent's standard human resource policies. Section 6.4. EXCLUSIVITY. Neither the Company nor its officers, directors or Affiliates will take any action, directly or indirectly, to encourage, solicit, initiate, engage in, or continue discussions or negotiations with, or provide any information to, any Person, group or other entity, other than Parent, concerning any purchase of any capital stock or assets of the Company or any merger or similar transaction involving the Company. Section 6.5. INTENTIONALLY OMITTED. Section 6.6. NASDAQ LISTING. Parent agrees to use reasonable efforts to cause the listing on the Nasdaq National Market the shares of StarMedia Common Stock issuable in the Merger, upon official notice of issuance. Section 6.7. COMPANY'S AUDITORS. The Company will use its commercially reasonable efforts to cause its management and its independent auditors to facilitate on a timely basis (i) the preparation of financial statements (including pro forma financial statements if required) as required by Parent to comply with applicable SEC regulations, and (ii) the review of any Company audit or review work papers since inception, including the examination of selected interim financial statements and data. Section 6.8. INTENTIONALLY OMITTED. Section 6.9. FORM S-8. As of the date of this Plan of Merger, Parent represents and warrants that it is eligible to register shares on Form S-8. The Assumed Options will be covered under a registration statement on Form S-8 and Parent shall use its reasonable efforts to maintain the effectiveness of such registration statement consistent with Parent's practice with similar registration statements related to employee stock plans. Section 6.10. INDEMNITY AGREEMENT. Parent agrees that it will cause the Surviving Corporation to honor that certain indemnity agreement between the Company and Scott Heldfond dated as of July 1, 1999. Section 6.11. WEBCAST STOCK OPTIONS. (a) At the Effective Time, each option to purchase shares of Webcast Common Stock issued under the Company's Option Plan which is outstanding and unexercised immediately prior to the Effective Time (a "WEBCAST OPTION") shall cease to represent a right to acquire shares of Webcast Common Stock and shall be converted automatically into an option to purchase shares of StarMedia Common Stock (an "ASSUMED OPTION") in an amount and at an exercise price determined as follows: (i) the number of shares of StarMedia Common Stock subject to an Assumed Option shall be equal to the product of (A) the number of shares of Webcast Common Stock subject to the original Webcast Option, and (B) an amount equal to the Per Share Merger Consideration, provided that any fractional shares of StarMedia Common Stock resulting from such multiplication shall be rounded down to the nearest number of whole shares; and (ii) the exercise price per share of StarMedia Common Stock under an Assumed Option shall be equal to (A) the exercise price per share of Webcast Common Stock under the original Webcast Option, divided by (B) an amount equal to the Per Share Merger Consideration, provided that the resulting exercise price shall be rounded up to the nearest cent. (b) Except as provided in subsection (a) above, each Assumed Option shall continue to be subject to the same terms and conditions as applied immediately prior to the Effective Time (except that all references to the Company shall be deemed to be references to Parent). ARTICLE VII CONDITIONS TO PARENT'S AND NEWCO'S OBLIGATIONS TO CLOSE Parent's and Newco's obligations to consummate the Closing and effect the Merger shall be subject to the satisfaction at or prior to the Closing, or waiver by Parent and Newco, of each of the following conditions (any of which may be waived by Parent and Newco in their sole discretion): Section 7.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. Each of the representations and warranties of the Company contained in this Plan of Merger or in any Schedule, certificate, document or instrument delivered in connection herewith shall be true and correct in all material respects on and as of the date of this Plan of Merger and on and as of the Effective Time, except for representations and warranties that speak as of a specific date or time other than the Effective Time (which need only be true and correct in all material respects as of such date or time); PROVIDED, HOWEVER, that if any portion of any such representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied with respect to such portion of such representation or warranty, such portion of such representation or warranty as so qualified shall be true and correct in all respects. The Company shall have performed and complied in all material respects with all covenants and agreements required by this Plan of Merger to be performed or complied with by the Company at or prior to the Effective Time. The Company shall deliver to Parent and Newco a certificate, dated the Closing Date and signed by a senior executive officer of the Company, to the effect that the conditions set forth in this Section 7.1 have been satisfied. Section 7.2. SHAREHOLDERS. (a) This Plan of Merger and the Merger shall have been approved and adopted by 98% of the holders of Webcast Common Stock and Preferred Stock. (b) The Indemnity and Non-Compete Agreement shall have been entered into by the Shareholders and be in full force and effect. (c) Each of the Shareholders and all of the other officers and directors of the Company shall have executed and delivered to the Company and Parent a General Release, in the form attached hereto as Exhibit C, providing for, among other things, the release of the Company of all obligations owed to the Shareholders. Section 7.3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SHAREHOLDERS. Each of the representations and warranties of the Shareholders contained in the Indemnity and Non-Compete Agreement shall be true and correct in all material respects on and as of the date of this Plan of Merger and on and as of the Effective Time; PROVIDED, HOWEVER, that if any such representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified must be true and correct in all respects. The Shareholders shall have performed or complied with all covenants and agreements required by the Indemnity and Non-Compete Agreement to be performed or complied with by them at or prior to the Effective Time. Each of the Shareholders shall have delivered to Parent and Newco a certificate, dated the Closing Date and signed by each of the Shareholders, to the effect that the conditions set forth in this Section 7.3 have been satisfied. Section 7.4. FILINGS; CONSENTS. All registrations, filings, applications, notices, consents, releases, approvals, orders, qualifications and waivers required in connection with the consummation of the transactions contemplated hereby, including the approval of the Company's shareholders contemplated by Section 7.2, shall have been filed, made, obtained or received. Section 7.5. NO INJUNCTION. (a) There shall be no injunction, restraining order or decree of any nature of any court or other Government Entity of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby, (b) no Action shall have been instituted by or before any court, panel, arbitrator or other Government Entity or any other Person to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of the transactions contemplated hereby, and (c) none of the parties hereto shall have received notice from any Government Entity or any other Person of (i) its intention to institute any Action to restrain or enjoin or nullify this Plan of Merger or the consummation of the transactions contemplated hereby or to commence any investigation into the consummation of the transactions contemplated hereby or (ii) the actual commencement of such an investigation. Section 7.6. DOCUMENTS. The Company shall have delivered to Parent at the Closing such other documents and instruments as shall be reasonably necessary to effectuate the transactions contemplated by this Plan of Merger. The Company and the Shareholders shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by each such person hereunder. Section 7.7. CONVERTIBLE SECURITIES. As of the Closing, there shall be no security, option, warrant, right (including preemptive rights), put, call, subscription, agreement, commitment, understanding or claim of any nature whatsoever, fixed or contingent, to which the Company is a party or to which it is bound that directly or indirectly (a) calls for the issuance, sale, pledge, delivery or other disposition of any securities of the Company or any securities convertible into, or other rights to acquire, any securities of any of the Company, (b) relates to the voting or control of any securities of the Company or (c) obligates the Company or any of its Affiliates to grant, offer or enter into any of the foregoing. Section 7.8. RULE 145 LETTERS. Each Rule 145 Affiliate shall have executed and delivered to Parent a Rule 145 Letter, in form and substance reasonably satisfactory to Parent and its counsel. Section 7.9. APPRAISAL RIGHTS. There shall not be any demand for payment for shares or any appraisal thereof by more than 2% of the outstanding shares of Webcast Common Stock and Preferred Stock pursuant to the Corporations Code with respect to the Merger. ARTICLE VIII CONDITIONS TO THE COMPANY'S OBLIGATION TO CLOSE The Company's obligation to consummate the Closing and effect the Merger is subject to the satisfaction at or prior to the Closing, or waiver by the Company, of all of the following conditions (any of which may be waived by the Company in its sole discretion): Section 8.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PARENT. Each of the representations and warranties of Parent and Newco contained in this Plan of Merger or in any Schedule, certificate, document or instrument delivered in connection herewith, shall be true and correct in all material respects on and as of the date of this Plan of Merger and on and as of the Effective Time, except for representations and warranties that speak as of a specific date or time other than the Effective Time (which need only be true and correct in all material respects as of such date or time); PROVIDED, HOWEVER, that if any portion of any such representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied with respect to such portion of such representation or warranty, such portion of such representation or warranty as so qualified shall be true and correct in all respects. Parent and Newco shall have performed and complied in all material respects with all covenants and agreements required by this Plan of Merger to be performed or complied with by them at or prior to the Effective Time. Parent shall deliver to the Company a certificate, dated the Closing Date and signed by an officer of Parent, to the effect that the conditions set forth in this Section 8.1 have been satisfied. Section 8.2. SHAREHOLDER APPROVALS. This Plan of Merger and the Merger shall have been approved and adopted by the shareholders of the Company by the requisite vote under applicable law and the Company's Articles of Incorporation. Section 8.3. NO INJUNCTION. There shall be no injunction, restraining order or decree of any nature of any court or other Government Entity of competent jurisdiction that is in effect that restrains or prohibits the consummation of the Merger and the other transactions contemplated hereby. Section 8.4. NASDAQ LISTING. The shares of StarMedia Common Stock issuable to shareholders of the Company pursuant to this Plan of Merger and such other shares required to be reserved for issuance in connection with the Merger shall have been authorized for listing on the Nasdaq Stock Market upon official notice of issuance. ARTICLE IX SURVIVAL Section 9.1. SURVIVAL. All of the representations, warranties, covenants and agreements of the parties contained in this Plan of Merger or in any certificate, document or other instrument delivered in connection herewith shall survive (and not be affected in any respect by) the Effective Time and any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing, the representations and warranties contained in or made pursuant to this Plan of Merger shall terminate on, and no claim or Action with respect thereto may be brought after, the first anniversary of the Effective Time, PROVIDED, HOWEVER, that to the extent a breach of a representation or warranty made by the Company is discovered during the audit by Parent's accountants of Parent's consolidated financial statements for the year ended December 31, 1999, such representation and warranty insofar as it relates to such discovered matter shall terminate on the date of the issuance of such accountants' report with respect such consolidated financial statements. The representations and warranties which terminate on the first anniversary of the Effective Time and the representations and warranties which terminate on the issuance of such accountants' report, and the liability of the Shareholders with respect thereto under the Indemnity and Non-Compete Agreement, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which the appropriate Person has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the first anniversary of the Effective Time, or the date of the issuance of such accountants' report, as the case may be. ARTICLE X TERMINATION Section 10.1. TERMINATION. This Plan of Merger may be terminated at any time prior to the Closing by: (a) the mutual written consent of the Company and Parent; or (b) the Company or Parent, if the Closing has not occurred by the close of business on October 31, 1999; PROVIDED, that neither the Company, in the case of termination by the Company, or Parent or Newco, in the case of termination by Parent, is in material default hereunder. Section 10.2. PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Plan of Merger pursuant to Section 10.1, written notice thereof shall forthwith be given by the terminating party to the other party or parties hereto, and this Plan of Merger shall thereupon terminate and become void and have no effect, and the transactions contemplated hereby shall be abandoned without further action by the parties hereto, except that the provisions of this Section 10.2 and of Sections 11.8, 11.9 and 11.13 shall survive the termination of this Plan of Merger; PROVIDED, HOWEVER, that such termination shall not relieve any party hereto of any liability for any breach of this Plan of Merger. ARTICLE XI MISCELLANEOUS Section 11.1. ENTIRE AGREEMENT. This Plan of Merger and the documents and agreements referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written. Section 11.2. BENEFIT; ASSIGNMENT. This Plan of Merger shall be binding upon and inure to the benefit of and shall be enforceable by the parties hereto and their respective successors and permitted assigns. This Plan of Merger shall not be assigned by any party hereto without the prior written consent of the other parties hereto; PROVIDED, HOWEVER, that Parent may assign any or all of its rights hereunder to one or more Affiliates of Parent without the consent of the Company. Any assignment of this Plan of Merger in violation of the terms hereof shall be null and void AB INITIO. Section 11.3. NO PRESUMPTION. Parent and the Company have participated jointly in the negotiation and drafting of this Plan of Merger. In the event any ambiguity or question of intent or interpretation arises, this Plan of Merger shall be construed as if drafted jointly by Parent, Newco and the Company and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Plan of Merger. Section 11.4. NOTICES. All notices, requests, claims, demands and other communications provided for herein shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier, addressed to the party at its address set forth below: If to Company: Webcast Solutions, Inc. 300 Brannan Street, Suite 601 San Francisco, CA 94107 Attn: Cory A. Smith Telephone No.: (415) 284-9999 Telecopy No.: (415) 284-9219 With a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304 Attn: Steven L. Berson Michael S. Russell Telephone No.: (650) 493-9300 Telecopy No.:(650) 461-5375 If to Parent or Newco: StarMedia Network, Inc. 29 West 36th Street, 5th Floor New York, NY 10018 Telecopy No: (212) 548-9650 Attn: Justin K. Macedonia With a copy to: Hughes Hubbard & Reed LLP One Battery Park Plaza New York, New York 10004 Telecopier: (212) 422-4726 Attn: Jeffrey R. Coleman or to such other address as a party may from time to time designate in writing. All notices, requests, claims, demands and other communications given to any party hereto in accordance with the provisions of this Plan of Merger shall be deemed to have been given on the date of receipt. Section 11.5. COUNTERPARTS; HEADINGS. This Plan of Merger may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed an original, but all of which taken together shall constitute one and the same Plan of Merger. The Article and Section headings in this Plan of Merger are inserted for convenience of reference only and shall not constitute a part hereof or affect in any way the meaning or interpretation of this Plan of Merger. Section 11.6. SEVERABILITY. If any term, provision, clause or part of this Plan of Merger or the application thereof under certain circumstances is held invalid, illegal or incapable of being enforced by any Law or public policy, all other terms, provisions and parts of this Plan of Merger shall nevertheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term, provision or part of this Plan of Merger is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Plan of Merger so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. Section 11.7. NO RELIANCE. Except for any assignees permitted by Section 11.2 of this Plan of Merger: (a) no third party is entitled to rely on any of the representations, warranties or agreements of the parties hereto contained in this Plan of Merger; and (b) the parties hereto assume no liability to any third party because of any reliance on the representations, warranties or agreements of such parties contained in this Plan of Merger. Section 11.8. GOVERNING LAW. This Plan of Merger shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws, except to the extent that the terms and consummation of the Merger are subject to the laws of the State of California, in which case the applicable provisions hereof shall be governed by the laws of the State of California. Section 11.9. SUBMISSION TO JURISDICTION; WAIVERS. The parties hereto hereby irrevocably and unconditionally agree that: (a) All suits, actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any New York state or Federal court sitting in the City of New York and any appellate court from any thereof, and each of the parties hereto hereby irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding and irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding and any objection to any such suit action or proceeding whether on the grounds of venue, residence or domicile. A final judgment in any such suit, action, or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or any other manner provided by law. (b) Service of process in any such suit, action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address as provided in Section 11.4. Section 11.10. WAIVER. Any party to this Plan of Merger may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document delivered by the other parties pursuant hereto or (c) waive compliance with any of the agreements or conditions of the other parties contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Plan of Merger. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any such rights. Section 11.11. AMENDMENT. This Plan of Merger may not be amended, modified or supplemented except by an instrument in writing signed by, or on behalf of, each of the parties hereto. Section 11.12. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Plan of Merger was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 11.13. EXPENSES. Whether or not the Merger is consummated, all legal expenses and all other costs and expenses incurred in connection with this Plan of Merger, the Merger Agreement and the transactions contemplated hereby and thereby shall be paid by the party incurring such costs and expenses. IN WITNESS WHEREOF, this Plan of Merger has been signed by or on behalf of each of the parties as of the day first above written. WEBCAST SOLUTIONS, INC. By: /s/ Cory A. Smith Cory A. Smith President and Chief Executive Officer STARMEDIA NETWORK, INC. By: /s/ Jack Chen Name: Jack Chen Title: President S MEDIA ACQUISITION CORP. By: /s/ Jack Chen Name: Jack Chen Title: President EXHIBIT D 1. For purposes of this Plan of Merger, the following terms shall have the following meanings: "ACTION" shall mean any actual or threatened action (at law or in equity), suit, arbitration, review, inquiry, proceeding or investigation. "AFFILIATE" (and, with a correlative meaning, "AFFILIATED") shall mean, with respect to any Person, any other Person that directly, or through one or more intermediaries, controls or is controlled by or is under common control with such first Person. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "AGGREGATE SHARE MERGER CONSIDERATION" shall mean: (1) that number of shares of StarMedia Common Stock determined as follows: (x) if the Conversion Price is less than or equal to $41.50 and greater than or equal to $31.50, 1,000,000, (y) if the Conversion Price is less than $31.50, then an amount equal to (i) 1,000,000 multiplied by (ii) $31.50, divided by (iii) the Conversion Price, provided, however, that if the amount determined pursuant to this clause (y) without giving effect to this proviso is more than 1,500,000, then such amount shall be deemed to equal 1,500,000, or (z) if the Conversion Price is greater than $41.50, then an amount equal to (i) 1,000,000 multiplied by (ii) $41.50, divided by (iii) the Conversion Price, provided, however, that if the amount determined pursuant to this clause (z) without giving effect to this proviso is less than 500,000, then such amount shall be deemed to equal 500,000, minus (2) 10,278. "AGGREGATE WEBCAST OPTION NUMBER" shall mean the product of: (a) the Aggregate Share Merger Consideration, times (b) a fraction, the numerator of which is the number of shares of Webcast Common Stock subject to options to purchase under the Company's Option Plan which options are outstanding and unexercised immediately prior to the Effective Time ("Outstanding Option Shares"), and the denominator of which is the sum of the Effective Time Shares and the Outstanding Option Shares. "ASSOCIATE" of a specified Person shall mean (a) a corporation or other organization of which such Person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 5% or more of any class of equity securities, (b) any trust or other estate in which such Person has such a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity and (c) any Relative of such Person who has the same home as such Person. "CLOSING" shall mean the consummation of the Merger and the other transactions contemplated hereby as described in Article II. "CLOSING DATE" shall mean the date on which the Closing occurs. "CONTRACTS" shall mean all contracts, agreements, leases, arrangements, commitments or understandings, whether oral or written, whether existing as of the date hereof or arising prior to the Effective Time, to which the Company is a party or is otherwise bound. "CONVERSION PRICE" shall mean the average of the closing price of shares of StarMedia Common Stock on the Nasdaq Stock Market for the five trading day period ending on the day before the Effective Time. "CORPORATIONS CODE" shall mean the California Corporations Code as in effect from time to time. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor thereto. "EFFECTIVE TIME SHARES" shall mean the number of shares of Webcast Common Stock outstanding immediately prior to the Effective Time after giving effect to the conversion of all outstanding shares of Preferred Stock. "ENVIRONMENTAL LAWS" shall mean all federal, state, local and foreign statutes and codes or regulations, rules or ordinances issued, promulgated, or approved thereunder (including those with respect to asbestos or asbestos-containing material or exposure to asbestos or asbestos-containing material) relating to (a) emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial toxic or hazardous constituents, substances or wastes, including any Hazardous Material, petroleum, including crude oil or any fraction thereof, any petroleum product or other waste, chemicals or substances regulated by any Environmental Law into the environment (including ambient air, surface water, ground water, land surface or subsurface strata), (b) the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of any Hazardous Material, petroleum, including crude oil or any fraction thereof, any petroleum product or other waste, chemicals or substances regulated by any Environmental Law, and (c) underground storage tanks and related piping, and emissions, discharges and releases or threatened releases therefrom. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor law, and regulations and rules issued by the SEC pursuant to that act or any successor law. "GAAP" shall mean generally accepted accounting principles in the United States as in effect from time to time consistently applied. "GOVERNMENTAL ENTITY" OR "GOVERNMENT ENTITY" means (i) any multinational, federal, provincial, state, municipal, local or other governmental or public department, court, commission, board, bureau, agency or instrumentality, domestic or foreign; (ii) any subdivision, agent, commission, board, or Governmental Entity of any of the foregoing; or (iii) any quasi-governmental or private body exercising any regulatory, expropriation or taxing Governmental Entity under or for the account of any of the foregoing. "HAZARDOUS MATERIALS" shall mean substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," or "toxic substances," or otherwise regulated under Environmental Laws, including petroleum, its derivatives and petroleum products. "IP LICENSE" means any option, license, or agreement of any kind relating to the exercise, use, non-use, registration, enforcement, non-enforcement of or remuneration for any Intellectual Property Right. "IRS" shall mean the Internal Revenue Service. "INDEMNITY AND NON-COMPETE AGREEMENT" shall mean the agreement in the form of Exhibit B hereto executed as of the date of this Plan of Merger by the Shareholders and Parent. "INTELLECTUAL PROPERTY" means the Intellectual Property Rights identified in Schedules 4.8(a), 4.8(d) and 4.8(h), together with all other Intellectual Property Rights owned, used or held for use in connection with the business of the Company as currently conducted. "INTELLECTUAL PROPERTY RIGHTS" means all (i) patents, copyrights, trademarks, service marks, trade identification, trade dress, trade names, copyrights, trade secrets, know-how, proprietary information (including without limitation proprietary software algorithms and designs), mask work rights, database rights, publicity rights, privacy rights and other rights of a similar nature for which legal protection may be obtained, in the United States and/or any other country or jurisdiction; (ii) pending applications to register or otherwise obtain legal protection for any of the foregoing; (iii) rights to make application in the future to register or otherwise obtain legal protection for any of the foregoing; (iv) rights of priority under national laws and international conventions with respect to any of the foregoing; (v) continuations, continuations-in-part, divisions, renewals, extensions, patents of addition, reexaminations, or reissues of any of the foregoing and all related applications therefor; (vi) goodwill associated with any of said trademarks, service marks, trade identification, trade dress and trade names; and (vii) rights to sue with respect to past and future infringements of any of the foregoing. "LAWS" means all statutes, codes, ordinances, decrees, rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, rulings or awards, policies, voluntary restraints, guidelines, or any provisions or interpretations of the foregoing, including general principles of common and civil law and equity, binding on or affecting the Person referred to in the context in which such word is used. "LIEN" means any lien, (including, without limitation, environmental and tax liens) charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, covenant, right of way, easement or other Lien (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction) preferential arrangement or restriction of any kind (including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes). "MATERIAL ADVERSE EFFECT" when used with reference to a Person or Persons shall mean a material adverse effect on the business, assets, liabilities, operations, results of operation, prospects or financial condition of such Person or Persons. "OUTSTANDING IP LICENSE" means any IP License by or to the Company or to which the Company is otherwise a party, or by which the Company or any of its Intellectual Property or other property is subject or bound. "PER SHARE MERGER CONSIDERATION" shall mean an amount equal to (x) the Aggregate Share Merger Consideration, (y) minus the Aggregate Webcast Option Number, (z) divided by the Effective Time Shares rounded to the nearest ten-thousandth of a share. "PERSON" shall mean any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, other form of business or legal entity or Government Entity. "RELATIVE" of a Person shall mean such Person's spouse, such Person's parents, sisters, brothers, children and the spouses of the foregoing and any member of the immediate household of such Person. "RETURNS" shall mean all returns, declarations, statements, reports, estimates, forms or other documents or information, including any amendments to any of the foregoing, required to be filed with or supplied to any Taxing Authority. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor law, and regulations and rules issued by the SEC pursuant to that act or any successor law. "SHAREHOLDERS" shall mean Cory Smith, Bradley L. Knop, Jon Fox and Erin McCarthy. "SOFTWARE" means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code; (ii) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (iii) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, and (iv) all documentation, including user manuals and training materials, relating to any of the foregoing. "STARMEDIA COMMON STOCK" shall mean the common stock, par value $0.001 per share of StarMedia Network, Inc. "SUBSIDIARY" means, with respect to any specified Person, any other corporation, partnership, joint venture, association or other entity in respect of which such specified Person directly, or indirectly through one or more other subsidiaries, owns not less than 50% of the overall economic equity. "TAXES" shall mean (a) all taxes (whether federal, state, county, local or foreign), fees, levies, customs duties, assessments, or charges of any kind whatsoever, including without limitation gross income, net income, gross receipts, profits, windfall profits, sales, use, occupation, value-added, AD VALOREM, transfer, license, franchise, withholding, payroll, employment, excise, estimated, stamp, premium, capital stock, production, net worth, alternative or add-on minimum, environmental, business and occupation, disability, severance, or real or personal property taxes, together with any interest, penalties, or additions to tax imposed with respect thereto and (b) any obligations under any tax sharing, tax allocation, or tax indemnity agreements or arrangements with respect to any Taxes described in clause (a) above. "TAXING AUTHORITY" shall mean any Government Entity having jurisdiction over the assessment, determination, collection, or other imposition of any Tax. 2. The following terms shall have the meanings ascribed to them in the section of this Plan of Merger indicated below:
DEFINED TERM SECTION "Administration"...................................................................... 4.15 "Benefit Plans"....................................................................... 4.18(a) "Certificate of Merger"............................................................... 2.2 "COBRA"............................................................................... 4.18(e) "Company"............................................................................. Preamble "Company Meeting"..................................................................... 6.1(h) "Confidentiality Agreement"........................................................... 6.1(b)(1) "Effective Time"...................................................................... 2.2 "Financial Statements"................................................................ 4.2(a) "Insider Transactions"................................................................ 4.14 "Insiders"............................................................................ 4.14 "Letter of Transmittal"............................................................... 3.2(a) "Licenses"............................................................................ 4.9(a) "Merger".............................................................................. Preamble "Merger Agreement".................................................................... Preamble "Newco"............................................................................... Preamble "Option Plan"......................................................................... 4.1(d) "OSHA"................................................................................ 4.15 "Parent".............................................................................. Preamble "Parent Financial Statements"......................................................... 5.3 "Parent SEC Documents"................................................................ 5.3 "Plan of Merger"...................................................................... Preamble "Preferred Stock"..................................................................... 4.1(d) "Rule 145 Affiliates"................................................................. 6.1(i) "Rule 145 Letters".................................................................... 6.1(i) "SEC"................................................................................. 5.3 "Surviving Corporation"............................................................... 2.1 "Transaction Documents"............................................................... 4.1(b) "Webcast Common Stock"................................................................ Preamble "Webcast Shareholders' Approval"...................................................... 4.21 "Year 2000"........................................................................... 4.19 "Year 2000 Compliant"................................................................. 4.19
SCHEDULE 3.5 1933 Act Legend THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, OR ANY STATE SECURITIES LAWS. NEITHER THESE SECURITIES NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION IS RECEIVED STATING THAT SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY SECTION 4(2) THEREUNDER. EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-1) and related Prospectus of StarMedia Network, Inc. for the registration of 6,000,000 shares of its common stock and the use of our reports dated September 14, 1999 with respect to the consolidated financial statements and the use of our reports dated September 14, 1999 with respect to the supplemental consolidated financial statements of StarMedia Network, Inc. ERNST & YOUNG LLP New York, New York September 23, 1999 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated June 10, 1999 with respect to the financial statements of KD Sistemas de Informacao Ltda. in the Registration Statement (Form S-1) and related Prospectus of StarMedia Network, Inc. for the registration of its common stock. ARTHUR ANDERSEN S/C /s/ Arthur Andersen s/c Rio de Janeiro, Brazil September 23, 1999 -----END PRIVACY-ENHANCED MESSAGE-----