<PAGE>
As filed with the Securities and Exchange Commission on January 26, 1999
Registration No. 333-64233
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PRODIGY COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7370 04-3323363
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
44 South Broadway
White Plains, New York 10601
(914) 448-8000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
SAMER F. SALAMEH
Chairman of the Board and Chief Executive Officer
PRODIGY COMMUNICATIONS CORPORATION
44 South Broadway
White Plains, New York 10601
(914) 448-8000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
DAVID A. WESTENBERG, ESQ. JAMES M. LURIE, ESQ.
HALE AND DORR LLP O'SULLIVAN GRAEV & KARABELL, LLP
60 State Street 30 Rockefeller Plaza
Boston, Massachusetts 02109 New York, New York 10112
Telephone: (617) 526-6000 Telephone: (212) 408-2400
Telecopy: (617) 526-5000 Telecopy: (212) 408-2420
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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,
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, 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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share........ 11,200,000 shares $15.00 $168,000,000 $46,704
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</TABLE>
(1) Includes 1,200,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any. See "Underwriting".
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
(3) Of this amount, $25,443.75 was paid previously and the additional fee of
$21,260.25 resulting from the increase in the proposed maximum aggregate
offering price is paid herewith.
----------------
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.
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<PAGE>
Explanatory Note
This Registration Statement contains two forms of Prospectus: one to be used
in connection with the sale of 8,000,000 shares of Common Stock in an initial
public offering through the Underwriters named herein (the "Offering") and one
to be used in connection with the sale of 2,000,000 shares of Common Stock
directly by the Company to Telefonos de Mexico, S.A. de C.V. (the "Telmex
Purchase"). The two forms of Prospectus are the same except for the front and
back cover pages. The front and back cover pages of the Prospectus for the
Telmex Purchase are included at the end of this Registration Statement under
"Alternate Front Cover Page" and "Alternate Back Cover Page".
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS PRELIMINARY PROSPECTUS DATED JANUARY 26, 1999
8,000,000 Shares
Common Stock
-----------
All of the 8,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Prodigy
Communications Corporation ("Prodigy" or the "Company"). Prior to the Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$12.00 and $15.00 per share. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price of the Common
Stock. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "PRGY".
Telefonos de Mexico, S.A. de C.V. ("Telmex"), an affiliate of the Company's
principal stockholder, Carso Global Telecom, S.A. de C.V. ("Carso Global
Telecom"), has indicated its intention to purchase directly from the Company
2,000,000 shares of Common Stock at the Price to Public set forth below (the
"Telmex Purchase"). The Offering and the Telmex Purchase (collectively, the
"Offerings") are contingent on each other. Upon consummation of the Offering
and the Telmex Purchase (at an assumed initial public offering price of $13.50
per share), Carso Global Telecom will own 49.8% of the Company's outstanding
Common Stock and Telmex will own 19.3% of the Company's outstanding Common
Stock. See "Principal Stockholders".
-----------
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share
Offering.................................. $ $ $
Telmex Purchase........................... $ $ $
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Total(3)................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting".
(2) Before deducting expenses payable by the Company, estimated at $1,450,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,200,000 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
this option is exercised in full, the Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
-----------
The shares of Common Stock offered hereby are offered, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, subject to
certain conditions including the approval of certain legal matters by counsel
for the Underwriters. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made against payment therefor on
or about , 1999 at the office of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167.
-----------
Bear, Stearns & Co. Inc. BancBoston Robertson Stephens
-----------
ING Baring Furman Selz LLC Volpe Brown Whelan & Company
Wit Capital Corporation
as e-Manager
-----------
The date of this Prospectus is , 1999.
<PAGE>
Description of graphic material on inside front and back cover pages of
Prospectus:
Inside front cover (first page of a three page fold-out):
The page depicts the four principal components of Prodigy's outsourcing
arrangements, with the names and logos of Prodigy's outsourced providers
identified next to the applicable function:
National Network: Splitrock
Customer Acquisition: Microsoft, IBM, Packard Bell and NEC
Home Page: Excite
Customer Service: Ron Weber and Associates, EnvisioNet, Softbank Services
Group, SPS Payment Systems and Stream
The text in the upper right hand corner of the page is:
Prodigy follows a "best of breed" outsourcing philosophy in order to enhance
service quality, control costs and enable Prodigy to focus on core strengths.
The page also includes Prodigy's logo and complete corporate name, Prodigy
Communications Corporation.
Inside two pages of fold-out:
The page depicts a map of the United States (including Alaska and Hawaii),
with major cities identified and each POP used to provide Prodigy's services
represented by a dot.
The caption on the top of the page is Nationwide Network Access, and the text
in the lower left hand corner of the page is:
Prodigy utilizes a nationwide network covering over 600 cities in all 50
states, allowing approximately 83% of the United States population to access
Prodigy's services with a local telephone call. The network used by Prodigy
includes approximately 650 local points of presence ("POPs"), of which over
600 POPS currently provide 56 kbps access to Prodigy Internet subscribers
having modems of that speed. The map above depicts the location of the POPs
used to provide Prodigy's services. The network used to provide these services
is owned and operated by Splitrock Services, Inc. See "Business--Principal
Outsourcing Arrangements".
The page also includes Prodigy's logo and complete corporate name, Prodigy
Communications Corporation.
Inside back cover:
The page depicts a representative Prodigy Internet personalized home page,
with selected modules highlighted by pointers to text in balloons.
The caption on the top of the page is:
Prodigy Internet It's a tool for living.(TM)
The caption on the bottom of the page is:
The image above is representative of a Prodigy Internet Home Page created
through the use of personalization tools.
----------------
Prodigy(R), Prodigy Internet(TM), It's a Tool for Living(TM), Prodigy
Classic(TM) and the Prodigy(R) logo are trademarks of the Company. All other
trademarks or trade names referred to in this Prospectus are the property of
their respective owners.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING".
<PAGE>
[4 Color Work]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus (i) has been
adjusted to reflect the one-for-four reverse split of the Common Stock to be
effected prior to the closing of the Offering and (ii) assumes no exercise of
the Underwriters' over-allotment option. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated or suggested in such
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
The Company
Prodigy Communications Corporation ("Prodigy" or the "Company") is a leading
nationwide Internet service provider ("ISP") that provides fast and reliable
Internet access and related value-added services. Prodigy has nationwide brand
recognition and customer acquisition channels not available to regional and
local ISPs, and utilizes a nationwide network covering over 600 cities in all
50 states allowing approximately 83% of the United States population to access
Prodigy's services with a local telephone call. Combining these strengths with
Prodigy's scalable technology has enabled the Prodigy Internet service to
achieve one of the fastest subscriber growth rates among U.S. ISPs, with the
number of billable subscribers to Prodigy Internet (including migration from
Prodigy's original online service, now called Prodigy Classic) increasing from
221,000 at December 31, 1997 to 505,000 at December 31, 1998. The total number
of billable subscribers to Prodigy Internet and Prodigy Classic increased from
615,000 at December 31, 1997 to 671,000 at December 31, 1998. Prodigy Internet
enables the Internet to be used as a productivity tool by allowing subscribers
to obtain and communicate desired information quickly and efficiently in an
easy and personalized manner. Prodigy Internet users receive fast and reliable
access to the Internet, Prodigy-branded content powered by Excite and other
Prodigy member services. In October 1998, J.D. Power and Associates, an
independent market research firm, announced that Prodigy Internet had been
ranked third in overall customer satisfaction based on a nationwide survey of
users of the five largest national ISPs, representing approximately 52% of the
U.S. Internet/online access market. Prodigy is in the process of expanding its
Web hosting and electronic commerce activities for business customers, and
believes that its extensive experience in operating a large data center with
electronic commerce applications positions it well for growth in these areas.
Prodigy is also in the process of evaluating and introducing other consumer
value-added services, such as the co-branded marketing of paging, long-distance
and cellular telephone services, Internet-based telephony and fax services and
online bill presentment.
Prodigy has been an online pioneer since its inception in 1984. Prodigy's
original online service was launched as the world's first consumer-focused
online service in 1988 and achieved national distribution in 1990. Prodigy
Classic featured custom content, e-mail and chat capabilities and was based on
proprietary technologies. In October 1996, the Company launched Prodigy
Internet, an open standards-based Internet access service. Since the autumn of
1997, the Company has focused on expanding Prodigy Internet's subscriber base
and introducing additional value-added services. The Company has also made
strategic decisions to outsource its network, discontinue its development of
custom content and use multiple vendors for outsourced customer service
functions. As a result of these initiatives, the Company has substantially
reduced its fixed operating costs and headcount and now has a business and
operating model that it believes can accommodate sustained subscriber growth on
a cost-effective basis without significant capital expenditures. However, the
Company has incurred significant losses since inception, and there can be no
assurance that the Company will be able to achieve or sustain profitability.
During the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998, the Company incurred net losses of $90.8 million, $132.8
million and $47.9 million, respectively, on revenues of $98.9 million, $134.2
million and $101.5 million, respectively. See "Risk Factors--History of
Losses".
3
<PAGE>
The Internet has grown rapidly in recent years both in terms of the number of
Web users and the number of Web sites. International Data Corporation ("IDC")
estimates that at the end of 1997 there were over 38 million Web users in the
United States and over 68 million worldwide, and projects that by the end of
2002 the number of Web users will increase to over 135 million in the United
States and over 319 million worldwide. The Internet has become an important
global medium enabling millions of people to obtain and share information and
conduct business electronically, and a critical tool for information and
communications for many users. The rapid development and growth of the Internet
has resulted in a highly fragmented industry, consisting of more than 5,000
ISPs in the United States that provide access and related services to both
consumers and businesses.
The principal market for ISPs currently consists of consumers who are
generally focused on speed and reliability of access, ease of use, customer
service and price as they evaluate an ISP. A growing number of business
customers are beginning to focus on the Internet to extend communications and
to reach large numbers of geographically dispersed organizations and consumers
quickly and cost-effectively. While some ISPs already offer high-speed
connections and hosting for intranets and extranets, an increasing number of
businesses are beginning to rely on ISPs for commercial services that
facilitate electronic commerce, such as Web hosting, bill presentment, co-
location and other value-added services. Forrester Research, Inc. ("Forrester")
projects that revenues from Internet access services in the United States will
grow from $5.8 billion in 1997 to $38.1 billion in 2002, and that Internet
hosting revenues will increase from approximately $400 million in 1997 to $10.5
billion in 2002. In addition to services that enable electronic commerce, a few
larger and more sophisticated ISPs are beginning to market other value-added
services, such as paging, long-distance and cellular telephone services, to
both consumers and business customers nationwide.
Prodigy's objectives are to strengthen its position as a leading nationwide
ISP and to expand the range of services it offers and markets it serves. Key
elements to the Company's business strategy include: leveraging the nationwide
strength of the Prodigy brand name and the nationwide access offered by Prodigy
Internet; introducing new services, including additional value-added services;
entering new markets, including small and medium sized businesses and the
Spanish-speaking and Hispanic market in the United States; and evaluating
opportunities for strategic acquisitions.
The Company has in place a variety of nationwide customer acquisition
channels, including: PC bundling; the Microsoft relationship described below;
Web-based marketing; retail channels; direct mail and telemarketing; and
migration of subscribers from Prodigy Classic to Prodigy Internet. Many of
Prodigy's customer acquisition channels are not available to regional and local
ISPs who lack the required nationwide presence. The Prodigy Internet software
is included in the online services folder of every copy of the Windows 98 and
Windows 95 (OSR 2.5 release) operating systems shipped by Microsoft for sale in
retail channels or for loading on new PCs.
Carso Global Telecom is the Company's principal stockholder. Carso Global
Telecom is a Mexican holding company with ownership interests in
telecommunications companies, including a controlling interest in Telmex.
Telmex is the leading provider of local and long-distance telephone services in
Mexico and is the principal full-service telecommunications provider in Mexico.
Telmex owns the nationwide network of local telephone lines and the principal
public long-distance telephone transmission facilities in Mexico, and has built
a nationwide data transmission network. Based on total assets at December 31,
1997, Telmex was the second-largest company in Mexico and the largest company
listed on the Mexican Stock Exchange. See "--Recent Developments--Telmex
Transactions" and "Principal Stockholders".
----------------
The Company was incorporated in Delaware in June 1996 under the name Prodigy,
Inc. and changed its name to Prodigy Communications Corporation in August 1998.
As used in this Prospectus, unless the context otherwise requires, the terms
"Prodigy" or the "Company" refer to Prodigy Communications Corporation and its
predecessors, in each case together with their subsidiaries. See "Corporate
History and Certain Transactions". The Company's principal executive offices
are located at 44 South Broadway, White Plains, New York 10601 and its
telephone number is (914) 448-8000.
4
<PAGE>
Recent Developments
Telmex Transactions
In August 1998, Telmex purchased 6,125,000 shares of Common Stock from the
Company for $49.0 million and concurrently purchased 3,287,500 shares from
certain stockholders of the Company for $26.3 million. Telmex has indicated its
intention to purchase 2,000,000 shares in the Telmex Purchase. Upon
consummation of the Offering and the Telmex Purchase (at an assumed initial
public offering price of $13.50 per share), Telmex will own 19.3% of the
Company's outstanding Common Stock. See "Corporate History and Certain
Transactions" and "Principal Stockholders".
Telmex is the largest ISP in Mexico and had approximately 110,000 billable
subscribers to its Internet Directo Personal ("IDP") online service at December
31, 1998. Telmex has advised the Company that IDP subscribers currently
generate average monthly revenue of approximately 200 pesos per subscriber
(approximately $20 per subscriber based on the current peso/dollar exchange
rate). On January 25, 1999, Prodigy and Telmex executed an agreement under
which: (i) Prodigy will assist Telmex in the negotiation of agreements with
service providers for Telmex's IDP service in Mexico pertaining to
network/Internet access, Web hosting, customer service, content hosting,
billing, marketing, sales and data collection services; (ii) Prodigy will
advise Telmex on customer service, administrative functions and technical
operations, including marketing, Internet connection and other network
services, content, customer support, pricing and service composition, billing
and collection, inbound telemarketing and other aspects of the ISP business;
(iii) the parties will discuss the potential migration of certain IDP
infrastructure functions, including email, subscriber management and
authentication systems, for Telmex's IDP subscribers to the Prodigy
infrastructure platform, and the advisability of offering a co-branded
IDP/Prodigy service in Mexico; and (iv) the parties will pursue additional
opportunities, such as providing services to one another and the joint
acquisitions of subscribers. In exchange for Prodigy's services, Telmex will
pay Prodigy a management fee, on a monthly basis, equal to 15% of the net
subscriber revenue (defined as the invoiced sales price less discounts, excise
taxes and credits for returns) on the first 200,000 IDP subscribers and 10% of
the net subscriber revenue (as defined above) on additional IDP subscribers.
The agreement has a term of five years and may be terminated by Telmex if
Prodigy undergoes a change of control. See "Business--Products and Services--
Spanish-Speaking and Hispanic Market".
Recent Financial Results
The Company had total revenues of $34.6 million in the fourth quarter of
1998, consisting of Internet revenues of $33.7 million and other revenues of
$.9 million, compared to total revenues of $32.3 million in the fourth quarter
of 1997, consisting of Internet revenues of $30.7 million and other revenues of
$1.6 million. Subscription revenues from Prodigy Internet increased $13.6
million, or 121%, to $24.8 million in the fourth quarter of 1998 from $11.2
million in the fourth quarter of 1997. Subscription revenues from Prodigy
Classic decreased $10.6 million, or 54%, to $8.9 million in the fourth quarter
of 1998 from $19.5 million in the fourth quarter of 1997. The number of Prodigy
Internet billable subscribers increased from 433,000 at September 30, 1998,
representing 68% of total billable subscribers, to 505,000 at December 31,
1998, representing 75% of total billable subscribers, as the total number of
billable subscribers increased by 30,000, or 5%, from 641,000 at September 30,
1998 to 671,000 at December 31, 1998. The foregoing information for the fourth
quarter of 1998 is preliminary, unaudited and subject to adjustment, and the
foregoing information for the fourth quarter of 1997 is unaudited. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
5
<PAGE>
The Offerings
<TABLE>
<S> <C>
Common Stock outstanding
before the Offerings........ 45,034,302 shares(1)
Common Stock offered hereby.. 8,000,000 shares
Telmex Purchase.............. 2,000,000 shares
Common Stock to be
outstanding after the
Offerings................... 59,011,670 shares(1)(2)
Use of proceeds.............. To expand Prodigy's consumer business, introduce
new business services and enter new markets, and
for general corporate purposes and possible
acquisitions
Nasdaq National Market
symbol...................... PRGY
</TABLE>
- ----------
(1) Based on the number of shares outstanding as of December 31, 1998 and
excluding shares of Common Stock (a) reserved for issuance pursuant to the
Company's stock-based compensation plans and (b) issuable pursuant to
outstanding options and warrants granted by the Company. As of December 31,
1998, (a) the Company's 1996 Stock Option Plan covered 3,125,000 shares of
Common Stock, of which an aggregate of 2,343,189 shares of Common Stock
were subject to outstanding options at a weighted-average exercise price of
$5.76 per share, 779,174 shares were reserved for future option grants and
2,637 shares had been issued upon exercises, and (b) there were outstanding
warrants to purchase an aggregate of 122,402 shares of Common Stock at a
weighted-average exercise price of $11.08 per share. In addition, (a) upon
the closing of the Offering (at an assumed initial public offering price of
$13.50 per share), International Business Machines Corporation ("IBM") and
Sears, Roebuck and Co. ("Sears") will each hold a Contingent Stock Purchase
Warrant (collectively, the "Contingent Warrants") to purchase 2,437,191
shares of Common Stock (2,527,191 shares if the Underwriters' over-
allotment option is exercised in full) at an exercise price of $17.55 per
share (subject to customary anti-dilution adjustments) at any time prior to
the third anniversary of the Offering, (b) the Company has reserved an
aggregate of 500,000 shares of Common Stock under its 1999 Employee Stock
Purchase Plan and (c) the Company has reserved an aggregate of 250,000
shares of Common Stock under its 1999 Outside Director Stock Option Plan.
See "Corporate History and Certain Transactions--Acquisition of Prodigy
Services Company", "Management--Stock Plans" and Notes 1, 4 and 9 to the
Company's Consolidated Financial Statements.
(2) Includes an aggregate of 3,977,368 shares to be issued to IBM and Sears
upon the closing of the Offerings (at an assumed initial public offering
price of $13.50 per share) pursuant to the conversion of certain 8%
Contingent Convertible Promissory Notes (the "Contingent Notes") held by
them. See "Corporate History and Certain Transactions--Acquisition of
Prodigy Services Company" and Notes 1, 4 and 9 to the Company's
Consolidated Financial Statements.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
Prior to June 17, 1996, the Company was a start-up company engaged in the
evaluation and development of cellular telephone systems and Internet access
and online services in Africa. On June 17, 1996, the Company consummated its
acquisition (the "Prodigy Acquisition") of Prodigy Services Company ("PSC").
The Prodigy Acquisition was accounted for under the purchase method of
accounting. The aggregate purchase price for the Prodigy Acquisition of $78.1
million consisted of a cash payment of $40.8 million, the issuance of
Contingent Notes valued at $30.5 million and direct acquisition related
expenses of $6.8 million. See "Corporate History and Certain Transactions--
Acquisition of Prodigy Services Company" and "--Prior Corporate History".
Subsequently, the Company determined to sell and wind-down its international
operations in Africa and China. Since the autumn of 1997, the Company has
focused on expanding Prodigy Internet's subscriber base and introducing
additional value-added services. The Company also made strategic decisions to
outsource its network, discontinue its development of custom content and use
multiple vendors for outsourced customer service functions. As a result of the
significant changes that occurred in the Company's business and operations as a
result of the Prodigy Acquisition, the subsequent sale and wind-down of the
Company's former international operations and other changes in the Company's
business since the Prodigy Acquisition, the historical financial statements of
the Company are not directly comparable.
The following tables set forth selected consolidated financial and other data
for the Company and PSC for the periods indicated. When reading the following
selected consolidated financial data of the Company, potential investors are
cautioned that the operating results of PSC's business are not included for any
of 1995, are included for six and one-half months of 1996 and are included for
all of 1997. The results of operations for the nine months ended September 30,
1998 are not necessarily indicative of the results for the entire year or for
any future period. The following information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto of the Company and PSC
appearing elsewhere in this Prospectus, "Selected Consolidated Financial
Information and Other Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
7
<PAGE>
Prodigy Communications Corporation
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------- ------------------
1995 1996 1997 1997 1998
----- -------- -------- -------- --------
(in millions, except per share and
subscriber information)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Prodigy Internet revenue....... -- $ .1 $ 29.6 $ 18.4 $ 55.9
Prodigy Classic revenue........ -- 90.6 98.7 79.2 39.3
Other.......................... -- 8.2 5.9 4.3 6.3
----- -------- -------- -------- --------
Total revenues................. -- 98.9 134.2 101.9 101.5
----- -------- -------- -------- --------
Costs of revenue............... $ .1 70.2 100.2 76.8 75.2
Total operating costs and
expenses(2)(3)................ 3.1 177.9 253.8 177.4 149.7
Net loss(1)(2)(3)(4)........... $(3.1) $ (90.8) $ (132.8) $ (83.4) $ (47.9)
===== ======== ======== ======== ========
Net loss per common share(5):
Basic and diluted.............. $(.37) $ (8.76) $ (7.66) $ (5.56) $ (1.28)
===== ======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding:
Basic and diluted.............. 8.4 10.4 17.3 15.0 37.5
===== ======== ======== ======== ========
Other data:
Prodigy Internet billable
subscribers at period end..... -- 7,000 221,000 193,000 433,000
Prodigy Classic billable
subscribers at period end..... -- 807,000 394,000 459,000 208,000
----- -------- -------- -------- --------
Total billable subscribers at
period end.................... -- 814,000 615,000 652,000 641,000
===== ======== ======== ======== ========
EBITDA(6)...................... $(3.1) $ (76.2) $ (110.0) $ (67.6) $ (35.9)
Other cash flow data:
Net cash used in operating
activities.................... $(2.4) $ (35.3) $ (114.0) $ (72.4) $ (49.2)
Net cash used in investing
activities.................... $(1.4) $ (47.9) $ (15.3) $ (11.6) $ (.4)
Net cash provided by financing
activities.................... $ 4.0 $ 104.1 $ 120.4 $ 77.0 $ 66.3
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------
Actual (7) As Adjusted (7)(8)
---------- ------------------
(in millions)
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital................................. $(18.9) $107.3
Total assets.................................... 96.2 22.5
Long-term debt.................................. -- --
Contingent convertible notes (included in
stockholders' equity).......................... 30.5 --
Stockholders' equity............................ $ 46.5 $172.8
</TABLE>
8
<PAGE>
(1) Operating costs and expenses and net loss for the year ended December 31,
1996 includes the acquisition of incomplete technology of $20.9 million
($2.01 per share). See Note 4 to the Company's Consolidated Financial
Statements.
(2) Operating costs and expenses and net loss for the years ended December 31,
1996 and 1997 include restructuring and other special costs of $3.1 million
($.32 per share) and $9.9 million ($.56 per share), respectively, for the
year ended December 31, 1996. These costs relate to the restructuring of
business operations, the termination of certain operating agreements and
the closure of the Company's former headquarters. See Note 3 to the
Company's Consolidated Financial Statements.
(3) Net loss for the year ended December 31, 1997 includes a loss of $12.1
million ($.68 per share) relating to the write-down of Company's equity
investment in a joint venture. See Note 5 to the Company's Consolidated
Financial Statements.
(4) Net loss for the year ended December 31, 1996 includes a charge for the
write-down of an equity investment in Global Enterprise Services, Inc. of
$9.1 million ($.88 per share). See Note 4 to the Company's Consolidated
Financial Statements.
(5) See Note 2 to the Company's Consolidated Financial Statements for an
explanation of the basis used to calculate net loss per share.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is a commonly used measure for the operating performance of ISPs, and also
provides additional information to assist investors in evaluating the
Company's liquidity. EBITDA is not an accounting measure under generally
accepted accounting principles ("GAAP"), is not necessarily indicative of
operating income or cash flows from operations as determined under GAAP and
may not be comparable to similarly titled measures reported by other
companies.
(7) Reflects the conversion upon the closing of the Offerings (at an assumed
initial public offering price of $13.50 per share) of the Contingent Notes
held by IBM and Sears into an aggregate of 3,977,368 shares of Common
Stock. See "Corporate History and Certain Transactions--Acquisition of
Prodigy Services Company" and Note 9 to the Company's Consolidated
Financial Statements.
(8) Adjusted to give effect to the sale by the Company of 10,000,000 shares of
Common Stock in the Offerings at an assumed public offering price of $13.50
per share and after deducting the estimated underwriting discounts and
commissions relating to the Offering and offering expenses payable by the
Company. See "Use of Proceeds".
Prodigy Services Company
<TABLE>
<CAPTION>
Year ended
December 31, Period from
---------------------- January 1, 1996
1993 1994 1995 to June 16, 1996
------ ------ ------ ----------------
(in millions)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total revenues..................... $195.2 $211.0 $243.4 $107.1
Net loss........................... $(60.0) $(52.0) $(34.6) $(62.9)
</TABLE>
9
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider the following factors
carefully in evaluating an investment in the Common Stock offered hereby. This
Prospectus contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of the Company
for future operations and projections of revenue and other financial items,
that are based on the beliefs of, assumptions made by and information
currently available to the Company. The words "expect", "estimate",
"anticipate", "believe", "intend", "plan" and similar expressions and
variations thereof are intended to identify forward-looking statements. The
cautionary statements set forth in this "Risk Factors" section and elsewhere
in this Prospectus identify important factors with respect to such forward-
looking statements, including certain risks and uncertainties, that could
cause actual results to differ materially from those expressed in or implied
by such forward-looking statements.
History of Losses
Since inception, the Company has incurred significant losses. During the
nine months ended September 30, 1997 and 1998, the Company incurred net losses
of $83.4 million and $47.9 million, respectively, on revenues of $101.9
million and $101.5 million, respectively. At September 30, 1998, the Company
had an accumulated deficit of $275.6 million, a working capital deficit of
$18.9 million, current liabilities of $49.7 million and current assets of
$30.8 million. During the years ended December 31, 1996 and 1997, the Company
incurred net losses of $90.8 million and $132.8 million, respectively, on
revenues of $98.9 million and $134.2 million, respectively. Since formation,
the Company has not generated cash flow from operations and has relied on
private sales of equity securities and borrowings to fund its operations. For
the years ended December 31, 1996 and 1997 and the nine months ended September
30, 1997 and 1998, respectively, the Company incurred negative cash flow from
operations of $35.3 million, $114.0 million, $72.4 million and $49.2 million.
Prior to its acquisition by the Company on June 17, 1996, PSC incurred net
losses of $60.0 million, $52.0 million, $34.6 million and $62.9 million in the
years ended December 31, 1993, 1994 and 1995 and the five and one-half months
ended June 16, 1996, respectively, and sustained negative cash flow from
operations which required continued funding by PSC's former owners, IBM and
Sears, aggregating $1.3 billion as of June 16, 1996. There can be no assurance
that the Company will be able to achieve or sustain profitability. See
"Selected Consolidated Financial Information and Other Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto contained herein.
Intense Competition
The industry in which the Company competes is intensely competitive and
includes a number of significant participants, including ISPs, proprietary
online service providers and major international telecommunications companies,
as well as Internet-search services and various other telecommunications
companies. Moreover, the Company faces competition from companies that provide
broadband connections to households, including local and long-distance
telephone companies, cable television companies and electric utility
companies. Broadband technologies offer significantly faster Internet access
than conventional modems, and such companies could include Internet access in
their basic service packages, could offer access for a nominal additional
charge or could prevent the Company from delivering Internet access through
the cable or wire connections that such companies own. The Telecommunications
Act of 1996 (the "Telecommunications Act") contains certain provisions that
remove, or establish procedures for removing, restrictions on the regional
Bell operating companies and others that may permit them to engage directly in
the Internet access business. The Telecommunications Act also makes it easier
for national long-distance carriers, such as AT&T, to offer local telephone
service, which would permit such carriers to offer direct local Internet
access. Competition from these companies could have a material adverse effect
on the Company. The Company cannot predict the extent to which the
Telecommunications Act, or strategic alliances or consolidation among ISPs,
may result in additional competitive pressures on the Company.
10
<PAGE>
Among the larger providers of ISP services are EarthLink Network, Inc.
(which has a strategic relationship with Sprint Corporation), MindSpring
Enterprises, Inc., Microsoft Network, AT&T WorldNet, MCI Internet, IBM
Internet Connection, PSINet Inc., GTE Internetworking (which includes the
former ISP business of BBN Corporation), Netcom On-Line Communications
Services, Inc. and Concentric Network Corporation. In January 1999, ICG
Communications, Inc., the owner of Netcom On-Line Communications Services,
Inc., announced that it had agreed to sell Netcom's dial-up, dedicated and Web
hosting accounts in the United States to MindSpring Enterprises, Inc. but will
retain Netcom's network backbone. In December 1998, AT&T announced that it had
agreed to acquire IBM's data networking business, including its ISP business.
In addition, AT&T has agreed to acquire Tele-Communications, Inc., the second
largest cable television operator in the United States, which is the majority
stockholder of At Home Corporation, a provider of broadband Internet access.
In January 1999, America Online and Bell Atlantic announced a strategic
alliance to provide high speed DSL (Digital Subscriber Line) access to the
America Online service. Microsoft's ownership of the dominant PC operating
system and the Microsoft Internet Explorer browser may give Microsoft Network
certain competitive advantages, including distribution and marketing
synergies. Prodigy also competes with America Online, which offers the America
Online and CompuServe proprietary online services over closed networks, as
well as Internet access. In November 1998, America Online announced that it
had agreed to acquire Netscape Communications Corporation, owner of the
Netscape Navigator browser and other Internet software applications. In
November 1998, America Online also announced that it had entered into
strategic development and marketing agreements with Sun Microsystems, Inc. to
develop electronic commerce and next-generation Internet devices. In December
1998, America Online announced that it had formed a joint venture with the
Cisneros Group, a leading Latin American media and telecommunications
conglomerate, to provide online services in Latin America, with an initial
focus on Mexico, Argentina and Brazil.
The market for Internet and online services is presently characterized by
low operating margins and minimal profitability, and the Company historically
has experienced low operating margins and incurred operating losses. See "--
History of Losses". The introduction of unlimited usage plans and the
elimination of most hourly access charges throughout the industry has placed
further pressure on the Company's revenues and profit margins. Many of the
Company's current and future competitors have substantially greater financial,
marketing and technical resources than the Company. The Company believes that
competition will increase and that increased competition could lead to lower
pricing to customers and greater spending on marketing. Increased competition
could also adversely affect the Company's ability to develop new service
offerings and interfere with the Company's efforts to maintain or grow its
subscriber base. Any of the foregoing factors could have a material adverse
effect on the Company. There can be no assurance the Company will be able to
compete effectively or that price competition will not have a material adverse
effect on the Company's business, financial condition, results of operations
or prospects. See "Business--Competition".
Subscriber Turnover
The results of operations of ISPs, including the Company, are materially
adversely affected by subscriber cancellations. Customer acquisition expenses
and the administrative expenses of enrolling and assisting new subscribers are
substantial. The failure to attract and retain subscribers to the Company's
services, or an increase in, or a failure to slow, the rate of subscriber
cancellations, would have a material adverse effect on the Company. Since
launch in October 1996, the Prodigy Internet service has grown to 505,000
billable subscribers at December 31, 1998, including migration from Prodigy
Classic. The total number of billable subscribers (including billable
subscribers to Prodigy Internet and Prodigy Classic) declined from 1,133,000
at December 31, 1995 to 814,000 at December 31, 1996 and to 615,000 at
December 31, 1997, but increased to 671,000 at December 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and the Consolidated Financial Statements and Notes
thereto contained herein.
Network Risks
Effective July 1, 1997, Prodigy conveyed its network assets to Splitrock
Services, Inc. ("Splitrock") in exchange for Splitrock's agreement to build
and operate a network to carry Prodigy's traffic between subscribers and
Prodigy's data hosting center. Splitrock is required to meet specified service
level objectives relating to grade of service, site and overall system
availability and average transit delays, and to comply with certain financial
11
<PAGE>
covenants. In certain circumstances, Prodigy has the right to assume
responsibility for operating the network at Splitrock's expense. Although the
Company believes these network arrangements present a number of significant
advantages to Prodigy, there are associated risks. Splitrock was formed in
1997 and has a limited operating history, and Prodigy currently is its only
significant customer. See "Risk Factors--Potential Conflicts of Interest". The
failure by Splitrock for any reason to provide network services as required,
or any significant disruption in such services, whether for technical,
operational or financial reasons, would have a material adverse effect on the
Company. The Splitrock arrangements cover only the United States, and the
Company will need to make other network arrangements in order to offer
services in foreign countries. See "--Rapidly Changing Markets and Technology"
and "Business--Principal Outsourcing Arrangements".
Security problems represent an ongoing threat to public and private data
networks and related telecommunications infrastructures. Splitrock's network
and the Company's data hosting center are potentially vulnerable to computer
viruses, break-ins and similar disruptions caused by others which could lead
to service interruptions to the Company's customers. Inappropriate use of the
Internet by third parties could potentially jeopardize the confidentiality of
information stored or transmitted by the Company's customers. The security
measures employed by Splitrock and the Company cannot assure complete
protection from computer viruses, break-ins and other disruptions. The
occurrence of such problems may result in claims against or liability on the
part of the Company and could adversely affect the Company or its ability to
attract and retain customers.
The Company's operations are also dependent on the protection of Splitrock's
network and the Company's data hosting center against damage from fire, power
loss, telecommunications failures and similar events. The Company's host
configuration for Prodigy Classic and Prodigy Internet is unique and, for cost
reasons, has not been replicated off site. The occurrence of a natural
disaster, other catastrophe or other unanticipated problems in Splitrock's
network or the Company's data hosting center, or the failure of
telecommunications providers to provide required data communications capacity
as a result of a natural disaster, operational disruption or for any other
reason, could cause interruptions in the services provided by the Company, and
such service interruptions could have a material adverse effect on the
Company.
In addition to technical problems and network failures that occur from time
to time in the ordinary course of operating a telecommunications network, in
connection with the migration of the Company's subscribers to the Splitrock
network, Prodigy experienced significant service interruptions and failures,
the most prolonged and serious of which occurred in February, March and April
of 1998. The Company believes Splitrock and Splitrock's modem vendor have
addressed the causes of these service interruptions and failures, but there
can be no assurance these or similar problems will not recur in the future.
See "Business--Network and Related Infrastructure".
Reliance on Third-Party Providers
In addition to its network arrangements with Splitrock, the Company has
outsourced its content to Excite, Inc. ("Excite") and aspects of its customer
service and billing functions to several providers. Although the Company
believes its outsourcing strategy permits it to control costs, enhance service
quality and focus on its core strengths, outsourcing also makes the Company
reliant on third-party providers for certain critical functions. The failure
of these providers to provide services as required, or any significant
disruption of or deterioration in services, would have a material adverse
effect on the Company. In January 1999, At Home Corporation announced that it
had agreed to acquire Excite. The Company's agreement with Excite will not be
terminated as a result of At Home's acquisition of Excite, but At Home's
ownership of Excite could affect the likelihood of the agreement being renewed
upon its scheduled expiration in January 2001 or the terms of any such
renewal. The Company also relies on local telephone companies and other
companies to provide data communications capacity via local telecommunications
lines and leased long-distance lines. The Telecommunications Act generally is
expected to lead to increased competition in the provision of local and other
telephone service, but the Company cannot predict the timing or extent of any
such developments or the effect thereof on pricing or supply. The Company's
suppliers and telecommunications carriers also sell or lease products and
services to the Company's competitors and may be, or in the future may become,
competitors of the Company. There can be no assurance that the Company's
suppliers and telecommunications carriers will not enter into exclusive
12
<PAGE>
arrangements with the Company's competitors or stop selling or leasing their
products or services to the Company at commercially reasonable prices or at
all. See "Business--Products and Services", "Business--Customer Service" and
"Business--Principal Outsourcing Arrangements".
Control of the Company and Potential Conflicts of Interest
As of December 31, 1998, Carso Global Telecom, the Company's principal
stockholder, owned 29,396,911 shares of Common Stock, representing 65.3% of
the outstanding Common Stock, and Telmex owned 9,412,500 shares of Common
Stock, representing 20.9% of the outstanding Common Stock. Mr. Carlos Slim
Helu, a Mexican citizen, and certain members of his immediate family,
beneficially own a majority of the outstanding voting equity securities of
Carso Global Telecom. Carso Global Telecom may be deemed to control Telmex
through the regular-voting shares of Telmex that it owns directly and its
interest in a trust which owns a majority of Telmex's outstanding regular-
voting shares. Thus, Mr. Slim and members of his immediate family may be
deemed to control Carso Global Telecom, Telmex and the Company. Mr. Slim is
Chairman of the Board of Carso Global Telecom and Telmex. After giving effect
to the Offerings (including Telmex's purchase of 2,000,000 shares in the
Telmex Purchase) and the conversion of the Contingent Notes held by IBM and
Sears into an aggregate of 3,977,368 shares of Common Stock upon the closing
of the Offering (at an assumed initial public offering price of $13.50 per
share), Carso Global Telecom will beneficially own (directly and through its
control of Telmex) 69.2% of the Company's outstanding Common Stock. In
addition, IBM and Sears have agreed to vote their shares of Common Stock
received upon conversion of the Contingent Notes or exercise of the Contingent
Warrants held by them in accordance with the voting recommendations of the
Company's Board of Directors. As a result, Carso Global Telecom is now and
upon consummation of the Offering will continue to be able to determine the
outcome of all matters submitted to a vote of the stockholders, including the
election of all members of the Company's Board of Directors, and control the
management and affairs of the Company. Circumstances may arise in which the
interests of Carso Global Telecom and/or Telmex, as stockholders of the
Company, could conflict with the interests of the other stockholders of the
Company. The voting control of Carso Global Telecom could be used as a means
or have the effect of delaying or preventing a change in control or
acquisition of the Company.
Carso Global Telecom and its affiliates have engaged in numerous
transactions with the Company in the past, which transactions were not
necessarily a result of arms'-length negotiations. For example, Carso Global
Telecom currently provides the Company with a $35.6 million revolving line of
credit. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". The Company has
outsourced its network operations to Splitrock, an affiliate that is 30.2%
owned by Carso Global Telecom. See "Business--Network and Related
Infrastructure". Carso Global Telecom and its affiliates may engage in
additional related-party transactions with the Company in the future, and
there can be no assurance such transactions will be on arms'-length terms.
Samer F. Salameh, the Company's Chairman of the Board and Chief Executive
Officer, serves on Splitrock's Board of Directors and holds stock options to
purchase 80,000 shares of Splitrock's common stock (approximately 0.1% of the
outstanding shares) at $1.10 per share vesting over four years. Mr. Salameh
also serves as an Advisor to the Chief Executive Officer of Telmex. In
addition, four of the Company's current six directors are affiliated with
Carso Global Telecom or Telmex. Mr. Salameh is married to Mr. Slim's niece and
Arturo Elias, a director of the Company, is married to Mr. Slim's daughter.
Any decision made by the Company's directors is required by law to be made in
accordance with their fiduciary duties and in the best interests of the
Company and its stockholders. Messrs. Salameh, Elias, Nakfoor and Sanchez,
directors of the Company, owe similar duties to the other companies for which
they serve as directors or officers or with which they are otherwise
affiliated. Due to the nature of the potential conflicts of interest presented
on an ongoing basis by these arrangements, and potential future arrangements,
there can be no assurance that the directors involved have acted or will act
in the best interests of the Company and its stockholders. See "Management",
"Corporate History and Certain Transactions" and "Principal Stockholders".
13
<PAGE>
Need for Additional Financing
At December 31, 1998, the Company had available cash of $11.0 million. Since
formation, the Company has sustained negative cash flow from operations, and
the Company's available cash at December 31, 1998 was attributable to the
proceeds of the sales of equity securities in July and August 1998 to Carso
Global Telecom and Telmex. See"--History of Losses" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources". The Company is currently experiencing
substantial negative cash flow each month and expects to continue to
experience negative cash flow through at least the end of 1999. The Company's
future financing requirements will depend on a number of factors, including
the Company's operating performance and increases in operating expenses
associated with growth in the Company's business. Based on its current
operating plan, the Company believes that the net proceeds from the Offering,
together with its existing cash and available financing under its revolving
credit facility with Carso Global Telecom, will be sufficient to meet its
anticipated cash requirements for at least the next twelve months. The Company
has made no arrangements to obtain additional financing, other than pursuant
to the Carso Global Telecom credit facility, and there can be no assurance
that adequate additional financing on acceptable terms will be available when
needed, if at all. The unavailability of sufficient financing when needed
would have a material adverse effect on the Company. Any additional equity
financing may cause investors to experience dilution and any additional debt
financing may result in restrictions on Prodigy's operations or its ability to
pay dividends in the future. See "Dividend Policy", "Management's Discussion
and Analysis of Financial Condition and Results of Operations", "Business" and
the Consolidated Financial Statements and Notes thereto contained herein.
Dependence on PC Bundling and Microsoft Relationship
A majority of the Company's Prodigy Internet enrollments arise from its
bundling arrangements with PC manufacturers and its relationship with
Microsoft. During the years ended December 31, 1997 and 1998, approximately
48% and 44%, respectively, of total Prodigy Internet enrollments resulted from
PC bundling. Prodigy's bundling relationship with Packard Bell/NEC accounted
for approximately 36% and 32%, respectively, of total Prodigy Internet
enrollments during such periods. During the years ended December 31, 1997 and
1998, approximately 10% and 20%, respectively, of total Prodigy Internet
enrollments resulted from Prodigy's relationship with Microsoft. The loss of
the Company's relationships with Packard Bell/NEC or Microsoft or any
significant reduction in enrollments from these channels would have a material
adverse effect on the Company. The Company's bundling agreement with Packard
Bell/NEC automatically renews from year to year but is terminable by either
party upon 30 days' written notice. The Company's agreements with Microsoft
for inclusion of Prodigy Internet in the online services folder of Microsoft's
Windows 98 and Windows 95 (OSR 2.5 release) operating systems expire in June
1999. In addition, Microsoft offers a service, Microsoft Network, which
competes with the Company's Prodigy Internet and Prodigy Classic services,
which could affect the willingness of Microsoft to extend its agreements with
the Company upon expiration or the terms on which extensions could be
obtained. See "Business--Customer Acquisition and Marketing" and "--
Competition".
Several recent developments are likely to have an adverse effect on future
enrollments to Prodigy Internet from the Packard Bell/NEC bundling
arrangement. The Company now requires new enrollees through Packard Bell/NEC
to supply credit card information for billing rather than relying on
subsequent paper billing. The Company believes this change may result in a
lower level of new subscriber enrollments through the Packard Bell/NEC channel
but that the resultant enrollees will be less likely to terminate service upon
completion of the applicable trial period. The Prodigy Internet software is
pre-loaded on the hard drives of selected PC models shipped by Packard
Bell/NEC but Prodigy Internet is no longer automatically selected as the
customer's Internet service if no other selection is made. The Company is
unable to predict the terms or nature of its future bundling arrangements with
Packard Bell/NEC or the level of future Prodigy Internet enrollments from
Packard Bell/NEC.
Impact of Planned Termination of Prodigy Classic Service
On January 22, 1999, the Company announced that it intends to discontinue
Prodigy Classic in the fourth quarter of 1999, because the Company has shifted
its business focus to Internet-based products and services and
14
<PAGE>
because the Company has determined not to make Prodigy Classic Year 2000
compliant. Prodigy Classic has been a significant source of the Company's
revenues and subscribers to Prodigy Internet. During the years ended December
31, 1996 and 1997 and the nine months ended September 30, 1998, approximately
92%, 73% and 39%, respectively, of the Company's total revenues were
attributable to Prodigy Classic. As of December 31, 1998, 146,000 of the
Prodigy Internet billable subscribers had migrated from Prodigy Classic (most
of whom are enrolled in a Prodigy Internet/Prodigy Classic combination plan),
and there were 166,000 remaining billable subscribers to Prodigy Classic.
Although the Company plans to continue to encourage Prodigy Classic
subscribers to migrate to the Prodigy Internet service, the Company has
experienced difficulty in generating migration from Prodigy Classic to Prodigy
Internet, and a substantial portion of the remaining Prodigy Classic
subscribers lack the minimum hardware requirements for the Prodigy Internet
service. For example, in the three months ended December 31, 1998, there was a
net reduction of 42,000 billable subscribers to Prodigy Classic but a net
increase of only 1,000 in the number of billable subscribers who had migrated
from Prodigy Classic to Prodigy Internet. No assurance can be given as to the
number of remaining Prodigy Classic subscribers who will migrate to Prodigy
Internet. In addition, a substantial number of the billable subscribers
enrolled in a Prodigy Internet/Prodigy Classic combination plan (60,000 of
134,000 at December 31, 1998) use both services and some combination plan
subscribers (12,000 of 134,000 at December 31, 1998) do not use Prodigy
Internet at all. Accordingly, some combination plan subscribers may be
unwilling or unable to migrate to Prodigy Internet upon termination of Prodigy
Classic. The termination of Prodigy Classic could adversely affect the
Company's business, financial condition, results of operations or prospects.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Business" and the Consolidated Financial Statements and Notes
thereto contained herein.
Dependence on the Internet
Substantially all of the Company's revenues are dependent on the continued
use and expansion of the Internet. Only recently has the commercial sector
begun significant use of the Internet and, more recently still, have consumers
begun using the Internet. Use of the Internet has grown dramatically, but no
assurance can be given of the continued use and expansion of the Internet as a
medium of communications and commerce. A decrease in the demand for Internet
services or a reduction in the currently anticipated growth for such services
could have a material adverse effect on the Company's business, financial
condition, results of operations or prospects. This Prospectus contains
various data and projections related to the number of Internet users, revenues
from Internet access services, Internet hosting revenues and the size of
Internet commerce. These data and projections have been included in studies
prepared by IDC and Forrester, independent market research firms, and the
projections are based on a number of significant assumptions. If the
assumptions turn out to be incorrect, the projections may be materially
different than actual results or circumstances, which could have a material
adverse effect on the Company's business, financial condition, results of
operations or prospects. Although the Company believes that such data and
projections are generally indicative of the matters reflected therein, such
data and projections are inherently imprecise and investors are cautioned not
to place undue reliance on them. See "Business--Industry Background".
Uncertain Legal Standards
The law relating to the liability of ISPs and online services companies for
information available through their services is uncertain. As the law and
judicial decisions in this area develop, the potential imposition of liability
upon the Company for information available through its services could require
the Company to implement measures to reduce its exposure to such liability.
The implementation of such measures could require the expenditure of
substantial resources or the discontinuation of certain service offerings. Any
costs that are incurred as a result of such expenditures, contesting any such
asserted claims or the imposition of liability could have a material adverse
effect on the Company's business, financial condition, results of operations
or prospects. In addition, due to the increasing use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to
the Internet covering issues such as content, user privacy, pricing, libel,
intellectual property protection and infringement and technology export and
other controls. Changes in the regulatory environment relating to the Internet
services industry, including regulatory changes that directly or indirectly
affect telecommunication costs or increase the likelihood or scope of
competition, could have a material adverse effect on the Company. "Business--
Government Regulation".
15
<PAGE>
Rapidly Changing Markets and Technology
The industry in which the Company competes is characterized by rapid
technological change resulting in dynamic customer demands and frequent new
product and service introductions. As a result, the Company's markets can
change rapidly and the Company's future results will depend in part on its
ability to make timely and cost-effective enhancements and additions to its
services and introduce new services that meet customer demands. For example,
certain ISPs have introduced, or announced plans to introduce, high-speed
Internet access utilizing broadband applications such as cable modems, ISDN
(Integrated Services Digital Network) telephone service and xDSL (Digital
Subscriber Line) telephone service. The Company does not currently provide any
residential or business broadband access services. The Company is in
discussions with Splitrock and others to support various broadband
applications, but there can be no assurance the Company and Splitrock or any
other party will reach agreement. See "Business--Products and Services--
Business Services". There also can be no assurance that the Company will have
sufficient resources to introduce new services that meet customer demands on a
timely basis or that its new service introductions will achieve acceptance in
the marketplace. The Company believes that its ability to compete successfully
is also dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that the Company will be able to conform to
new standards in a timely fashion and maintain a competitive position in its
markets. In addition, there can be no assurance that services or technologies
developed by others will not render the Company's services or technology
uncompetitive or obsolete. See "Business".
Risks of New Services and Markets; Failure to Implement Business Strategy
The Company's business strategy includes the introduction of numerous new
services and entry into various new markets. For example, the Company is
expanding its Web hosting activities and other value-added services, plans to
expand beyond its existing consumer market to include small and medium sized
businesses, and plans to provide Internet services to Spanish-speaking and
Hispanic customers in the United States. See "Use of Proceeds", "Business--
Business Strategy" and "Business--Products and Services". The Company
historically has focused on the consumer market and has relatively little
experience in developing and marketing services to business customers. In
addition, the Company has not previously focused on Spanish-speaking or
Hispanic customers, and the Company's success in penetrating this market will
depend in large part on the Company's ability to establish a strategic
partnership with a company with experience in selling products or services to
this market. Furthermore, to the extent the Company elects to introduce
services in international markets, foreign operations present certain risks
and uncertainties not generally encountered in the United States, such as
compliance with regulatory requirements, export and trade controls,
difficulties in staffing and managing international operations, longer payment
cycles, problems in collecting accounts receivable, foreign exchange
fluctuations and controls, potentially adverse tax consequences and inadequate
protection of intellectual property rights. See "Business--Products and
Services--Spanish-Speaking and Hispanic Market". In addition, the Splitrock
arrangements cover only the United States, and the Company would need to make
other network arrangements in order to offer services in foreign countries.
See " -- Network Risks". There can be no assurance that the Company will be
successful in offering new services and entering new markets as planned or
that any such services, if introduced, will achieve acceptance in the
marketplace.
The Company may decide to alter or discontinue certain aspects of its
business strategy described herein and may adopt alternative or additional
strategies. The Company's ability to successfully implement its business
strategy, and the expected benefits to be obtained from the Company's
strategy, may be adversely impacted by factors not currently foreseen, such as
unforeseen costs and expenses, or events beyond its control, such as
technological change or an economic downturn. In addition, competitive factors
may require the Company to alter or reduce its business strategies or reduce
the expected benefits to be obtained therefrom.
Quarterly Fluctuations in Operating Results
The Company experiences quarterly fluctuations in its operating results due
to a number of factors, including the seasonality of its business, changes in
the level of consumer spending during business cycles, the
16
<PAGE>
timing of introduction of new and enhanced services by the Company, pricing
changes and competitive factors. The Company historically has experienced
seasonality in its business, with higher expenses during the last and first
fiscal quarters, corresponding to the Christmas and post-Christmas selling
season, and lower timed usage revenues (revenues from hourly usage charges)
typically occurring during its second and third fiscal quarters resulting from
reduced usage of its services during the summer months. The Company believes
that the seasonal reductions in timed usage revenues historically experienced
by the Company will be mitigated by the movement from timed usage plans to
unlimited usage plans as well as growth in the Company's subscriber base,
although the Company expects to continue to have higher expenses during the
first and fourth quarters. Accordingly, the Company believes that quarter-to-
quarter comparisons of the Company's operating results may not be meaningful
or indicative of future results. Although the Company's outsourcing strategy
enables it to tie many variable costs to variable revenue sources, the
Company's fixed expenses are based, in part, on its expectations as to future
revenues. To the extent that revenues are below expectations and the Company
is unable to reduce fixed costs proportionately, the Company's operating
results would be adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Business" and the
Consolidated Financial Statements and Notes thereto contained herein.
Protection of Proprietary Technology
The Company protects its proprietary technology through copyright and trade
secrets laws, employee and third-party confidentiality agreements and other
methods. Customers are granted a license to use Prodigy's services under
agreements that contain terms and conditions prohibiting unauthorized
reproduction. Despite these precautions, unauthorized third parties may be
able to copy certain portions of Prodigy's services or reverse engineer or
obtain and use information Prodigy regards as proprietary. Although the
Company does not believe that its products infringe the proprietary rights of
any third parties, there can be no assurance that third parties will not
assert infringement claims against the Company or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to any claims relating to proprietary
rights, whether or not successful, which could materially adversely affect the
Company's business, financial condition, results of operations or prospects.
See "Business--Technology" and "--Proprietary Rights".
Management of Growth and Dependence on Key Personnel
The Company's ability to exploit the market for its products and services
and increase its subscriber base requires an effective planning and management
process. The Company's ability to plan and manage effectively will require it
to continue to implement and improve its operational, financial and management
information systems and to attract and retain skilled managers and other
personnel, including its current executive officers. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining necessary personnel. The Company does
not maintain insurance on the lives of any of its officers or directors.
Although the Company has entered into non-competition agreements with certain
executive officers, no assurance can be given that such agreements are or will
be enforceable by the Company. Most of the Company's executive officers have
joined the Company since the autumn of 1997, including Samer F. Salameh,
Chairman of the Board and Chief Executive Officer, David C. Trachtenberg,
President and Chief Operating Officer, David R. Henkel, Executive Vice
President, Finance and Chief Financial Officer, James P. Dougherty, Executive
Vice President, Business Services and Andrea S. Hirsch, Executive Vice
President, Business Development and General Counsel. See "Management".
Government Regulation
Internet access and online services are not subject to direct regulation in
the United States, but changes in the regulatory environment relating to the
telecommunications and media industry could have an effect on Prodigy's
business, financial condition, results of operations or prospects. For
example, Federal Communications Commission regulatory review and rulemaking
could result in regulation of the Internet and online services industry which
could result in increased telecommunications costs for participants in the
Internet industry,
17
<PAGE>
including Prodigy. The Company cannot predict whether, or to what extent, any
such new rulemaking will occur, or what effect any such rulemaking would have
on Prodigy. There can be no assurance the Company will not be adversely
affected by any such matters. See "Business--Government Regulation".
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. 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 a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities. The Company maintains various internal
computer systems and equipment and contracts with third-party vendors for the
provision of computerized customer billing, network operation, Prodigy
Internet service content and certain other information technology and other
services.
The Company is currently incurring costs to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
internal computer systems and equipment and the computer systems and equipment
of the third-party vendors on which the Company's business relies. The Company
has established a Year 2000 project office staffed by Company personnel and
assisted by a consulting firm.
The Company has completed an inventory of substantially all of its internal
systems and programs related to both the delivery of the Prodigy Internet
service and the daily operations of the business. Based on its preliminary
analysis, the Company estimates that it will spend approximately $9.5 million
through the end of 1999 to remediate potential Year 2000 problems with its
internal systems and to purchase and implement a new member management system
with enhanced customer care, data mining and marketing program management
capabilities that will replace a system that is not Year 2000 compliant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". Prodigy Classic is not Year 2000
compliant and the Company intends to discontinue Prodigy Classic in the fourth
quarter of 1999. See "--Impact of Planned Termination of Prodigy Classic
Service".
The Company is developing contingency plans in the event that any critical
service component or business process fails due to a Year 2000 problem. The
Company expects to complete contingency planning by mid-1999. With respect to
critical third-party vendor systems, (i) Splitrock has publicly reported that
substantially all of its information and non-information technology systems
are Year 2000 compliant (and that upgrades are available for those systems
that are not Year 2000 compliant that will enable Splitrock to be Year 2000
compliant by mid-1999), (ii) Excite has publicly reported that it believes
there are no significant Year 2000 issues within its proprietary systems or
services (although Excite has not yet fully evaluated the Year 2000 compliance
status of the third-party equipment and software it utilizes, or of its
vendors, joint venture partners and content partners), and (iii) Prodigy's
billing provider has committed to making its billing system Year 2000
compliant. There can be no assurance that the Company will be able to address,
in a timely fashion, all potential Year 2000 problems, or that the systems of
the third-party vendors upon which the Company's business relies (and the
maintenance and operation of which are not within the control of the Company)
will be Year 2000 compliant or will become Year 2000 compliant in a timely
manner. Any Year 2000 problems could impact the provision of products or
services to the Company's customers and could subject the Company to the risk
of litigation, lost revenues and loss of current or future customers.
Possible Acquisitions
The Internet services industry is highly fragmented, consisting of more than
5,000 ISPs in the United States, and is expected to undergo substantial
consolidation over the next few years. See "--Intense Competition". The
Company evaluates acquisition opportunities on an ongoing basis and at any
given time may be, and at the present time is, engaged in discussions with
respect to possible acquisitions or other business combinations. The Company
may seek strategic acquisitions that can complement the Company's current or
planned business activities, particularly the expansion of value-added
services such as Web hosting. The Company may also seek
18
<PAGE>
to acquire other ISPs as an additional means of customer acquisition or entry
into new markets. Such acquisitions may not be available at the times or on
terms acceptable to the Company, or may not be available at all. In addition,
any acquisitions that the Company makes may involve risks, including the
successful integration and management of acquired operations and personnel.
The integration of acquired businesses may also lead to the diversion of
management attention from other business matters. No assurance can be given
that suitable acquisitions can be identified, financed and completed on
acceptable terms or that any acquisitions by the Company will be successful.
See "Business--Business Strategy".
Management Discretion Regarding Use of Proceeds
The Company intends to use a significant portion of the net proceeds from
the Offering for working capital and other general corporate purposes. In
addition, the Company is not required to allocate the net proceeds of the
Offering in the manner described herein and, in light of future developments
and circumstances, may allocate the proceeds to other uses or in a different
manner. Accordingly, the Company's management will have significant discretion
in how the net proceeds of the Offering are utilized in the Company's
business. See "Use of Proceeds".
Legal Proceedings
On November 27, 1996, Malcolm Haynes and Lightwave, Ltd., a Cayman Islands
corporation ("Lightwave"), filed a lawsuit in the District Court of Clark
County, Nevada, against the Company, International Wireless Incorporated (the
Company's predecessor) ("IW"), Comstar Cellular Network, Inc. ("Comstar"),
Greg C. Carr, Terrance P. Dillon, Duncan E. Wine and Blaize Kaduru. Mr. Carr
is the former Chairman of the Board of the Company and a former principal
stockholder of the Company, and was a director and principal stockholder of
IW. Mr. Dillon was a director and principal stockholder of the Company, was a
director, officer and principal stockholder of IW and was a director and
technical advisor to Comstar. Mr. Wine is a former principal stockholder of
the Company and IW. Mr. Kaduru is a former principal stockholder of the
Company and IW, was an officer of IW and was a director and officer of
Comstar. Mr. Haynes was co-founder, President and a director of Comstar and
claims that he and Mr. Wine each hold a 30% interest in Lightwave. The lawsuit
arose from IW's acquisition of the assets and liabilities of Comstar in August
1994. See "Corporate History and Certain Transactions--Prior Corporate
History". In connection with the Comstar acquisition, IW issued to Comstar all
then outstanding common stock of IW, which Comstar then distributed as a
liquidating dividend to the holders of certificates for common stock of
Comstar. Each holder of a certificate for common stock of Comstar was required
to acknowledge and accept the terms of the Comstar acquisition and release
Comstar and IW from all claims which such holder may have had against either
Comstar or IW. Pursuant to the foregoing, Comstar offered 1,200,000 shares of
IW's common stock to Mr. Haynes, but Mr. Haynes refused to participate and
therefore received no shares. The lawsuit filed by Mr. Haynes and Lightwave
alleges, among other things, that Messrs. Dillon, Wine and Kaduru breached
their fiduciary duties to the plaintiffs, that Mr. Wine defrauded or made
misrepresentations to the plaintiffs, that Mr. Wine misappropriated a
corporate opportunity belonging to Lightwave, that all defendants are liable
for conversion of plaintiffs' shares of common stock, and that IW and Mr. Carr
aided and abetted the wrongful conduct of Messrs. Dillon, Wine and Kaduru. The
lawsuit seeks to compel the defendants to provide to the plaintiffs 4,500,000
shares of Common Stock of the Company or the fair market value thereof, to
impose a constructive trust on the shares of Common Stock received by Messrs.
Dillon, Wine and Kaduru in the Comstar acquisition, and other monetary damages
and declaratory and equitable relief. On February 25, 1998, the Court granted
the motion of the Company and Mr. Carr to dismiss the lawsuit against them for
lack of personal jurisdiction in Nevada, and the lawsuit is continuing against
the other defendants. Unless this decision is overturned on appeal, the
plaintiffs cannot pursue this lawsuit against the Company and Mr. Carr in
Nevada, although the plaintiffs could pursue these claims in a new lawsuit
filed in any state or states where personal jurisdiction over the Company and
Mr. Carr could be established and where the applicable statute of limitations
has not expired. If a new lawsuit is filed, the Company intends to defend it
vigorously, but there can be no assurance that its outcome would not have a
material adverse effect on the Company's business, financial condition,
results of operations or prospects or result in substantial dilution to the
Company's stockholders. See "Business--Legal Proceedings".
19
<PAGE>
No Public Market; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters (the "Representatives"). See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price of the Common Stock. Investors
should be aware that market prices for securities of ISPs and other
participants in the Internet industry have been and may continue to be highly
volatile. Such volatility may be caused by factors outside of the Company's
control and may be unrelated or disproportionate to the Company's operating
results.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of shares of Common Stock in the public market
following the Offerings could adversely affect the market price of the Common
Stock. Upon completion of the Offerings (at an assumed initial public offering
price of $13.50 per share), the Company will have outstanding 59,011,670
shares of Common Stock. In addition to the 8,000,000 shares offered hereby,
approximately 2,513,120 shares of Common Stock, which are not subject to lock-
up agreements (the "Lock-up Agreements") with the Representatives, will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act of 1933, as amended (the "Securities Act"). Approximately
569,835 additional shares of Common Stock, which are not subject to the Lock-
up Agreements, will be eligible for sale in the public market in accordance
with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. Upon expiration of the Lock-up Agreements,
approximately 38,343,359 additional shares of Common Stock (including the
shares to be sold to Telmex in the Telmex Purchase) will be available for sale
in the public market in accordance with the provisions of Rule 144 under the
Securities Act. Following the consummation of the Offerings, the Company
intends to register an aggregate of 3,875,000 shares of Common Stock issuable
under its 1996 Stock Option Plan, 1999 Employee Stock Purchase Plan and 1999
Outside Director Stock Option Plan. The Company and certain stockholders of
the Company (including Carso Global Telecom, Telmex, IBM, Sears and all
directors and executive officers of the Company) who will hold, upon
consummation of the Offerings at an assumed initial public offering price of
$13.50 per share, an aggregate of approximately 47,827,734 shares of Common
Stock, have agreed, pursuant to the Lock-up Agreements, not to offer, sell,
contract to sell or otherwise dispose of any Common Stock, or any options,
warrants or other securities convertible into or exercisable for Common Stock,
for 30 days after the date of this Prospectus with respect to 433,076 shares
and 180 days after the closing of the Offerings with respect to 47,394,658
shares. The Company is unable to predict the effect that sales made under Rule
144, Rule 701 or otherwise may have on the then prevailing market price of the
Common Stock. Upon the closing of the Offerings (at an assumed initial public
offering price of $13.50 per share), IBM and Sears will be entitled to certain
piggyback and demand registration rights with respect to an aggregate of (i)
3,977,368 shares of Common Stock issued upon the conversion of the Contingent
Notes held by them and (ii) 4,874,382 shares of Common Stock (5,054,382 shares
if the Underwriters' over-allotment option is exercised in full) issuable upon
the exercise of the Contingent Warrants held by them. Exercise of the
foregoing registration rights could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144, Rule 701
or other exemptions from registration, or pursuant to registration rights, may
have an adverse effect on the market price for the Common Stock and could
impair the Company's ability to raise capital through offerings of its equity
securities. See "Description of Capital Stock", "Shares Eligible for Future
Sale", "Underwriting" and "Corporate History and Certain Transactions".
Immediate and Substantial Dilution
The purchase price of the Common Stock will be significantly greater than
the net tangible book value per share after giving effect to the Offerings.
Investors in the Offering will incur an immediate and substantial dilution of
their investment of approximately $11.25 in net tangible book value per share
of Common Stock
20
<PAGE>
(assuming an initial public offering price of $13.50 per share). See
"Dilution" and the Company's Consolidated Financial Statements and Notes
thereto contained herein.
No Dividends
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
The Company's current policy is to retain earnings, if any, to provide funds
for the operation and expansion of its business. See "Dividend Policy".
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $99.3 million after deducting the estimated
underwriting discounts and commissions relating to the Offering and offering
expenses payable by the Company and assuming an initial public offering price
of $13.50 per share ($114.4 million if the Underwriters' over-allotment option
is exercised in full). The net proceeds to the Company from the sale of
2,000,000 shares of Common Stock to Telmex in the Telmex Purchase will be
$27.0 million assuming an initial public offering price of $13.50 per share.
The shares to be sold to Telmex will be sold at the Price to Public set forth
on the cover page hereof. The Offering and the Telmex Purchase are contingent
on each other.
The Company intends to use the net proceeds of the Offerings to expand its
consumer business, including selling, advertising and headcount expenses,
introduce new business services, such as Internet access, hosting services,
value-added services and broadband services, and enter new markets, including
Spanish-speaking and Hispanic customers in the United States. See "Risk
Factors--Risks of New Services and Markets; Failure to Implement Business
Strategy". Any remaining net proceeds from the Offerings will be used for
general corporate purposes, including working capital. The amount actually
expended by the Company for the foregoing purposes will depend upon a number
of factors, and the Company reserves the right, in light of future
developments and circumstances, to allocate the proceeds to other uses or in a
different manner. See "Risk Factors--Management Discretion Regarding Use of
Proceeds". Pending the application of the net proceeds from the Offerings, the
Company intends to invest such net proceeds in short-term, investment grade,
interest-bearing instruments.
The Company evaluates acquisition opportunities on an ongoing basis and at
any given time may be, and at the present time is, engaged in discussions with
respect to possible acquisitions or other business combinations. The Company
may seek strategic acquisitions that can complement the Company's current or
planned business activities, particularly the expansion of value-added
services such as Web hosting. The Company may also seek to acquire other ISPs
as an additional means of customer acquisition or entry into new markets. A
portion of the net proceeds of the Offering may be used to fund such
acquisitions, although the Company has no commitments or agreements for any
material acquisitions as of the date hereof. See "Risk Factors--Possible
Acquisitions".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company's current policy is to retain earnings, if any, to provide
funds for the operation and expansion of its business. Payment of future
dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
financial condition, operating results, current and anticipated cash needs and
growth plans. See "Risk Factors--No Dividends" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1998 and (ii) as adjusted to give effect to (a) the conversion
of the Contingent Notes held by IBM and Sears into an aggregate of 3,977,368
shares of Common Stock upon the closing of the Offerings (at an assumed
initial offering price of $13.50 per share) and (b) the issuance of the Common
Stock in the Offerings, after deducting the estimated underwriting discounts
and commissions relating to the Offering and offering expenses payable by the
Company.
<TABLE>
<CAPTION>
September 30, 1998
--------------------
Actual As Adjusted
------- -----------
(in millions)
<S> <C> <C>
Long-term debt............................................ $ -- $ --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued or outstanding (actual and
as adjusted)........................................... -- --
Contingent Convertible Notes............................ 30.5 --
Common stock, $.01 par value; 280,000,000 shares
authorized (actual and as adjusted); 45,057,417 shares
issued and outstanding (actual); 59,034,785 shares
issued and outstanding (as adjusted)(1)................ .5 .6
Additional paid-in capital.............................. 294.0 450.7
Accumulated deficit..................................... (275.6) (275.6)
Accumulated foreign currency translation
adjustments(2)......................................... .1 .1
Note receivable from Carso Global Telecom(3)............ (3.0) (3.0)
------- ------
Total stockholders' equity............................ 46.5 172.8
------- ------
Total capitalization................................ $ 46.5 $172.8
======= ======
</TABLE>
- ----------
(1) The number of authorized shares of Common Stock was reduced from
280,000,000 to 150,000,000 in January 1999 in connection with the one-for-
four reverse stock split. Excludes shares of Common Stock (i) reserved for
issuance pursuant to the Company's stock-based compensation plans and (ii)
issuable pursuant to outstanding options and warrants granted by the
Company. As of December 31, 1998, (a) the Company's 1996 Stock Option Plan
covered 3,125,000 shares of Common Stock, of which an aggregate of
2,343,189 shares of Common Stock were subject to outstanding options at a
weighted-average exercise price of $5.76 per share, 779,174 shares were
reserved for future option grants and 2,637 shares had been issued upon
exercises, and (b) there were outstanding warrants to purchase an
aggregate of 122,402 shares of Common Stock at a weighted-average exercise
price of $11.08 per share. Upon the closing of the Offering (at an assumed
initial public offering price of $13.50 per share), IBM and Sears will
each hold a Contingent Warrant to purchase 2,437,191 shares of Common
Stock (2,527,191 shares if the Underwriters' over-allotment option is
exercised in full) at an exercise price of $17.55 per share (subject to
customary anti-dilution adjustments) at any time prior to the third
anniversary of the Offering. In addition, the Company has reserved an
aggregate of 500,000 shares of Common Stock under its 1999 Employee Stock
Purchase Plan and an aggregate of 250,000 shares of Common Stock under its
1999 Outside Director Stock Option Plan. See "Corporate History and
Certain Transactions--Acquisition of Prodigy Services Company",
"Management--Stock Plans" and Notes 1, 4 and 9 to the Company's
Consolidated Financial Statements.
(2) Represents the cumulative effect of foreign currency translation
adjustments. See Note 2 to the Company's Consolidated Financial
Statements.
(3) Represents the remaining balance of a letter of credit established by
Carso Global Telecom in October 1997 to secure payment obligations of the
Company under contracts for which IBM and Sears, PSC's former owners,
remain liable. See "Corporate History and Certain Transactions--Prior
Equity Financings" and Note 9 to the Company's Consolidated Financial
Statements.
23
<PAGE>
DILUTION
After giving effect to the conversion of the Contingent Notes into an
aggregate of 3,977,368 shares of Common Stock upon the closing of the
Offerings (at an assumed initial public offering price of $13.50 per share),
the net tangible book value of the Company as of September 30, 1998 would have
been $6,672,000, or $.14 per share of Common Stock. Net tangible book value
per share is determined by dividing the Company's tangible net worth (tangible
assets less liabilities) by the number of shares of Common Stock outstanding.
After giving effect to the sale of the shares of Common Stock in the Offerings
at an assumed initial public offering price of $13.50 per share and after
deducting the estimated underwriting discounts and commissions relating to the
Offering and offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of September 30, 1998 would have been
$2.25 per share. This represents an immediate increase in such net tangible
book value of $2.11 per share to existing stockholders, after giving effect to
the conversion of the Contingent Notes, and an immediate dilution of $11.25
per share to new investors purchasing shares in the Offerings. If the initial
public offering price is higher or lower, the dilution to the new investors
will be greater or less, respectively. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $13.50
Net tangible book value per share as of September 30, 1998
(adjusted as described above)................................... $ .14
Increase per share attributable to the Offerings................. 2.11
-----
Pro forma net tangible book value per share after the
Offerings(1)...................................................... 2.25
------
Dilution per share to new investors(1)............................. $11.25
======
</TABLE>
- ----------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the Offerings would be
$2.46, resulting in an immediate dilution of $11.04 per share to investors
purchasing shares in the Offerings. See "Underwriting".
The following table summarizes, as of December 31, 1998, the total number of
outstanding shares of Common Stock purchased from the Company, the total
consideration paid and the average consideration paid per share by (i) Carso
Global Telecom, (ii) Telmex, (iii) other existing stockholders and (iv) the
new investors based on an assumed initial public offering price of $13.50
share (before deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Carso Global Telecom(1)..... 28,389,161 48.1% $200,822,000 46.8% $7.07
Telmex(2)................... 8,125,000 13.8 76,000,000 17.7 9.35
Other existing
stockholders(3)............ 14,497,509 24.6 44,193,000 10.3 3.05
New investors............... 8,000,000 13.5 108,000,000 25.2 13.50
---------- ----- ------------ -----
Total..................... 59,011,670 100.0% $429,015,000 100.0%
========== ===== ============ =====
</TABLE>
- ----------
(1) Excludes an aggregate of 1,007,750 shares purchased from other
stockholders of the Company between February 1996 and September 1996 at a
weighted-average purchase price of $11.96 per share.
(2) Includes 2,000,000 shares which Telmex has indicated it intends to buy in
the Telmex Purchase at the Price to Public set forth on the cover page
hereof. Excludes an aggregate of 3,287,500 shares purchased from other
stockholders of the Company in August 1998 at a purchase price of $8.00
per share.
(3) Gives effect to the conversion of the Contingent Notes held by IBM and
Sears into an aggregate of 3,977,368 shares of Common Stock upon the
closing of the Offering (at an assumed initial public offering price of
$13.50 per share) and assumes no consideration was paid for such shares.
See "Corporate History and Certain Transactions--Acquisition of Prodigy
Services Company". Also includes the shares of Common Stock sold to Carso
Global Telecom and Telmex by other stockholders of the Company as
described in Notes (1) and (2) above.
24
<PAGE>
The foregoing table excludes shares of Common Stock issuable upon the
exercise of stock options and warrants granted by the Company. As of December
31, 1998, (a) the Company's 1996 Stock Option Plan covered 3,125,000 shares of
Common Stock, of which an aggregate of 2,343,189 shares of Common Stock were
subject to outstanding options at a weighted-average exercise price of $5.76
per share, 779,174 shares were reserved for future option grants and 2,637
shares had been issued upon exercises, and (b) there were outstanding warrants
to purchase an aggregate of 122,402 shares of Common Stock at a weighted-
average exercise price of $11.08 per share. In addition, upon the closing of
the Offering, (i) at an assumed initial public offering price of $13.50 per
share, IBM and Sears will each hold a Contingent Warrant to purchase 2,437,191
shares of Common Stock (2,527,191 shares if the Underwriters' over-allotment
option is exercised in full) at an exercise price of $17.55 per share (subject
to customary anti-dilution adjustments), (ii) 500,000 shares will be available
for issuance under the Company's 1999 Employee Stock Purchase Plan and (iii)
250,000 shares will be available for issuance under the Company's 1999 Outside
Director Stock Option Plan. See "Corporate History and Certain Transactions--
Acquisition of Prodigy Services Company", "Management--Stock Plans" and Notes
1, 4 and 9 to the Company's Consolidated Financial Statements.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth selected consolidated financial information
and other data for the Company and PSC. The selected consolidated financial
data for the Company for the period from May 23, 1994 (date of inception) to
December 31, 1994 and for the year ended December 31, 1995 has been derived
from the Company's unaudited Consolidated Financial Statements for the year
ended December 31, 1995 appearing elsewhere in this Prospectus. Although
required by Regulation S-X under the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's audited financial statements for the year ended
December 31, 1995 have not been presented in this Prospectus. The Company does
not believe such financial statements are meaningful because the Company's
results of operations and assets for the year ended December 31, 1995 were
minimal prior to the Company's acquisition of PSC on June 17, 1996, and the
Company's operations as they existed in the year ended December 31, 1995 have
since been disposed of (see Note 1 to the Consolidated Financial Statements of
International Wireless Incorporated and Note 5 to the Consolidated Financial
Statements of the Company). The selected consolidated financial data for the
Company for the years ended December 31, 1996 and 1997 and for PSC for the
year ended December 31, 1995, and for the period from January 1, 1996 to June
16, 1996 has been derived from the Company's Consolidated Financial Statements
that appear elsewhere in this Prospectus, which have been audited by
PricewaterhouseCoopers LLP, independent public accountants. The selected
consolidated financial and other data for the nine month periods ended
September 30, 1997 and 1998 is unaudited; however, in the opinion of the
Company's management such unaudited data includes all adjustments (consisting
of normal recurring adjustments) necessary for a fair representation of the
information included therein. The results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the results for the
entire year or any other future period.
The selected consolidated financial data should be read in conjunction with
the Consolidated Financial Statements, and the notes thereto, of the Company
and PSC appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Prodigy Communications Corporation
<TABLE>
<CAPTION>
Period From
May 23, 1994 Nine months
(date of Year ended ended
inception) to December 31, September 30,
December 31, ----------------------- --------------
1994(1) 1995(1) 1996 1997 1997 1998
------------- ------- ------ ------- ------ ------
(in millions, except number of billable
subscribers and per share information)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Internet and online
service revenues...... -- -- $ 90.7 $ 128.3 $ 97.6 $ 95.2
Other.................. -- -- 8.2 5.9 4.3 6.3
----- ----- ------ ------- ------ ------
Total revenues......... -- -- 98.9 134.2 101.9 101.5
----- ----- ------ ------- ------ ------
Operating costs and
expenses:
Costs of revenue....... -- $ .1 70.2 100.2 76.8 75.2
Marketing.............. -- -- 21.3 60.5 29.7 25.9
Product development.... -- -- 9.0 16.8 15.7 9.3
General and
administrative........ $ 1.0 3.0 53.4 63.2 47.9 39.3
Acquired incomplete
technology............ -- -- 20.9 -- -- --
Restructuring and other
special costs......... -- -- 3.1 9.9 7.3 --
Write-down of assets
held for sale......... -- -- -- 2.4 -- --
Loss on sale of
cellular assets....... -- -- -- .8 -- --
----- ----- ------ ------- ------ ------
Total operating costs
and expenses.......... 1.0 3.1 177.9 253.8 177.4 149.7
----- ----- ------ ------- ------ ------
Operating loss........ (1.0) (3.1) (79.0) (119.6) (75.5) (48.2)
Loss on equity
investment in joint
venture................ -- -- .5 12.1 7.0 --
(Gain) on sale of
asset.................. -- -- -- -- -- (.8)
Write-down (recovery) of
equity investments..... -- -- 9.1 (.3) -- --
Interest expense, net... -- -- 2.2 1.4 .9 .5
----- ----- ------ ------- ------ ------
Net loss.............. $(1.0) $(3.1) $(90.8) $(132.8) $(83.4) $(47.9)
===== ===== ====== ======= ====== ======
Net loss per common
share:
Basic and diluted...... $(.16) $(.37) $(8.76) $ (7.66) $(5.56) $(1.28)
===== ===== ====== ======= ====== ======
Weighted average number
of common and common
equivalent shares
outstanding:
Basic and diluted...... 6.2 8.4 10.4 17.3 15.0 37.5
===== ===== ====== ======= ====== ======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Period From
May 23, 1994 Nine months
(date of Year ended ended
inception) to December 31, September 30,
December 31, -------------------------- ------------------
1994(1) 1995(1) 1996 1997 1997 1998
------------- ------- -------- -------- -------- --------
(in millions, except number of billable
subscribers and per share information)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Prodigy Internet
billable subscribers at
period end............. -- -- 7,000 221,000 193,000 433,000
Prodigy Classic billable
subscribers at period
end.................... -- -- 807,000 394,000 459,000 208,000
----- ----- -------- -------- -------- --------
Total billable
subscribers at period
end.................... -- -- 814,000 615,000 652,000 641,000
===== ===== ======== ======== ======== ========
Prodigy Internet
revenue................ -- -- $ .1 $ 29.6 $ 18.4 $ 55.9
Prodigy Classic
revenue................ -- -- $ 90.6 $ 98.7 $ 79.2 $ 39.3
EBITDA (2).............. $(1.0) $(3.1) $ (76.2) $ (110.0) $ (67.6) $ (35.9)
Other Cash Flow Data:
Net cash used in
operating activities... $(1.0) $(2.4) $ (35.3) $ (114.0) $ (72.4) $ (49.2)
Net cash used in
investing activities... $ (.1) $(1.4) $ (47.9) $ (15.3) $ (11.6) $ (.4)
Net cash provided by
financing activities... $ 1.4 $ 4.0 $ 104.1 $ 120.4 $ 77.0 $ 66.3
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
------------------------------ --------------------------
1994(1) 1995(1) 1996 1997 Actual As adjusted (3)(4)
------- ------- ------ ------ ------ ------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital
(deficit).............. $.1 $(.3) $(54.8) $(48.5) $(18.9) $107.3
Total assets............ .4 2.5 126.6 93.5 96.2 25.5
Long-term debt.......... .4 1.6 56.0 10.0 -- --
Contingent convertible
notes (included in
stockholders' equity
(deficit))............. -- -- 30.5 30.5 30.5 --
Stockholders' equity
(deficit).............. (.2) -- (11.5) 17.7 46.5 172.8
=== ==== ====== ====== ====== ======
</TABLE>
- ----------
(1) International Wireless Incorporated ("IW") was incorporated in May 1994 to
evaluate and develop cellular telephone systems and Internet access and
online services in Africa. See "Corporate History and Certain
Transactions--Prior Corporate History". In June 1996, the Company was
formed under the name Prodigy, Inc. as a new holding company to acquire
PSC and to hold IW and the other communications interests of IW. On June
17, 1996, the Company consummated the acquisition of PSC. The acquisition
was accounted for under the purchase method of accounting. Accordingly,
the results of operations of PSC are included in the Company's
consolidated results of operations from the date of acquisition. See Notes
1 and 4 to the Company's Consolidated Financial Statements. In January
1997, the Company sold its cellular telephone assets and operations.
Subsequently, the Company decided to sell and wind-down its remaining
international operations in Africa and China. See "Corporate History and
Certain Transactions" and Note 5 to the Company's Consolidated Financial
Statements.
(2) EBITDA is a commonly used measure for operating performance of ISPs, and
also provides additional information to assist investors in determining
the Company's liquidity. EBITDA is not an accounting measure under GAAP,
is not necessarily indicative of operating income or cash flows from
operations as determined under GAAP and may not be comparable to similarly
titled measures reported by other companies.
(3) Reflects the conversion upon the closing of the Offerings (at an assumed
initial public offering price of $13.50 per share) of the Contingent Notes
held by IBM and Sears into an aggregate of 3,977,368 shares of Common
Stock. See "Corporate History and Certain Transactions--Acquisition of
Prodigy Services Company" and "--Prior Equity Financing" and Note 9 to the
Company's Consolidated Financial Statements.
(4) Adjusted to give effect to the sale by the Company of 10,000,000 shares of
Common Stock in the Offerings at an assumed public offering price of
$13.50 per share and after deducting the estimated underwriting discounts
relating to the Offering and offering expenses payable by the Company. See
"Use of Proceeds".
27
<PAGE>
Prodigy Services Company
<TABLE>
<CAPTION>
Period from
Year ended December 31, January 1, 1996
------------------------- to June 16,
1993 1994 1995 1996
------- ------- ------- ---------------
(in millions)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Online service revenues........... $ 154.9 $ 179.6 $ 230.6 $ 98.2
Other............................. 40.3 31.4 12.8 8.9
------- ------- ------- ------
Total revenues.................... 195.2 211.0 243.4 107.1
------- ------- ------- ------
Net loss.......................... $ (60.0) $ (52.0) $ (34.6) $(62.9)
======= ======= ======= ======
<CAPTION>
December 31,
-------------------------
1993 1994 1995
------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)......... $ (42.4) $ (38.9) $ (36.4)
Total assets...................... 83.4 80.1 84.7
Long-term debt.................... 12.9 18.4 16.4
Partners' capital (deficit)....... .5 (4.3) 9.8
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Risk Factors",
"Selected Consolidated Financial Information and Other Data" and the
Consolidated Financial Statements and Notes thereto contained herein.
Overview
The Company is a leading national ISP. In October 1996, the Company launched
Prodigy Internet, an open standards-based Internet access service. Since the
autumn of 1997, the Company has focused on expanding the Prodigy Internet
subscriber base and introducing additional value-added services. The Company
has also made strategic decisions to outsource its network, discontinue its
development of custom content and use multiple vendors for outsourced customer
service functions. As a result of these initiatives, the Company has
substantially reduced its fixed operating costs and headcount.
In conjunction with the launch of Prodigy Internet in October 1996, the
Company began offering a plan allowing subscribers unlimited usage of Prodigy
Internet for a flat monthly fee without hourly usage charges. In December
1996, the Company introduced a similar plan for Prodigy Classic. Since the
introduction of the Company's unlimited usage plans, the portion of revenues
generated from hourly usage charges has decreased substantially.
The results of operations of ISPs, including those of the Company, are
significantly affected by subscriber cancellations. Subscriber acquisition
expenses and the administrative expenses of enrolling and assisting new
subscribers are substantial, and in the past the Company typically offered
free service for one or two months to new subscribers. In many distribution
channels, the Company is replacing free trial programs with money-back
guarantees in order to attract enrollees who are less likely to terminate
service. The failure to attract and retain subscribers to the Company's
services, or an increase in the rate of subscriber cancellations, would have a
material adverse effect on the Company. See "Risk Factors--Subscriber
Turnover". The Company historically has experienced better retention for
subscribers under prepaid term plans than subscribers under month-to-month
plans. Under prepaid term plans, subscribers choose to prepay for longer terms
at reduced monthly rates. The Company ceased offering prepaid term plans in
1995 but reinstated such term plans in January 1997.
The Company historically has experienced seasonality in its business, with
higher expenses during the last and first fiscal quarters, corresponding to
the Christmas and post-Christmas selling season, and lower timed usage
revenues (revenues from hourly usage charges) during its second and third
fiscal quarters resulting from reduced usage of its services during the summer
months. The Company believes that the seasonal reductions in timed usage
revenues historically experienced by the Company will be mitigated by the
movement from timed usage plans to unlimited usage plans as well as growth in
the Company's subscriber base, although the Company expects to continue to
have higher expenses during its first and fourth quarters. As a result of the
seasonality of its business, as well as other factors, the Company experiences
quarterly fluctuations in its operating results. See "Risk Factors--Quarterly
Fluctuations in Operating Results".
On June 17, 1996, the Company acquired PSC from IBM and Sears for an
aggregate purchase price of $78.1 million, consisting of a cash payment of
$40.8 million, the issuance of the Contingent Notes valued by an independent
appraiser at $30.5 million and direct acquisition related expenses of $6.8
million. See "Corporate History and Certain Transactions--Acquisition of
Prodigy Services Company". The Prodigy Acquisition was accounted for as a
purchase. Accordingly, the assets purchased and liabilities assumed and
related results of operations of PSC are included in the consolidated
financial statements of the Company from the date of acquisition. The purchase
price was allocated among tangible and intangible assets acquired based on
their respective fair market values. As a result of this allocation, the
Company recorded as intangible assets, with ten-year lives, tradename of $35.7
million and goodwill of $15.5 million. In addition, $27.2 million was
allocated to property and equipment and assigned a three-year life. As part of
this process, the acquired technology was
29
<PAGE>
extensively evaluated, including the state of the technology and needed
developments, the inherent difficulties and uncertainties in completing the
development and thereby achieving technological feasibility, and the risks
related to the viability and potential changes to target markets. Because the
Internet technology acquired in the Prodigy Acquisition was incomplete and
substantial additional development effort by the Company was required before a
viable consumer product could be launched, the Company recognized a charge for
the purchase of incomplete technology in June 1996 in the amount of $20.9
million. See "--Incomplete Technology" and Note 4 to the Company's
Consolidated Financial Statements.
Results of Operations
The Company's total revenues have two components: Internet revenues,
consisting of subscription revenues from subscribers to Prodigy Internet and
Prodigy Classic, and other revenues, consisting primarily of advertising and
transaction fees and revenues from the Company's former international
operations. Subscription revenues include revenues from hourly usage charges
("timed usage revenues"). The Company defines "billable" subscribers as
subscribers who remain enrolled beyond completion of the applicable trial
period or who enroll in a money-back guarantee program.
Recent Results
The Company had total revenues of $34.3 million in the fourth quarter of
1998, consisting of Internet revenues of $33.7 million and other revenues of
$.6 million, compared to total revenues of $32.3 million in the fourth quarter
of 1997, consisting of Internet revenues of $30.7 million and other revenues
of $1.6 million. Subscription revenues from Prodigy Internet increased $13.6
million, or 121%, to $24.8 million in the fourth quarter of 1998 from $11.2
million in the fourth quarter of 1997. Subscription revenues from Prodigy
Classic decreased $10.6 million, or 54%, to $8.9 million in the fourth quarter
of 1998 from $19.5 million in the fourth quarter of 1997. The number of
Prodigy Internet billable subscribers increased from 433,000 at September 30,
1998, representing 68% of total billable subscribers, to 505,000 at December
31, 1998, representing 75% of total billable subscribers, as the total number
of billable subscribers increased by 30,000, or 5%, from 641,000 at December
31, 1997 to 671,000 at December 31, 1998. The foregoing information for the
fourth quarter of 1998 is preliminary, unaudited and subject to adjustment,
and the foregoing information for the fourth quarter of 1997 is unaudited.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Subscription revenues from Prodigy Internet increased $37.5 million, or
204%, from $18.4 million in the nine months ended September 30, 1997 to $55.9
million in the nine months ended September 30, 1998. The number of Prodigy
Internet billable subscribers increased from 193,000 at September 30, 1997 to
433,000 at September 30, 1998, representing 30% and 68% of total billable
subscribers at September 30, 1997 and September 30, 1998, respectively.
Prodigy Internet subscribers accounted for 38% and 77%, respectively, of total
network usage during the nine months ended September 30, 1997 and 1998.
Subscription revenues from Prodigy Classic decreased $39.9 million, or 50%,
from $79.2 million in the nine months ended September 30, 1997 to $39.3
million in the nine months ended September 30, 1998 as the number of Prodigy
Classic billable subscribers decreased from 459,000 at September 30, 1997 to
208,000 at September 30, 1998. The Company intends to discontinue Prodigy
Classic in the fourth quarter of 1999. See "Risk Factors--Impact of Planned
Termination of Prodigy Classic Service". Total billable subscribers decreased
by 11,000, or 2%, from 652,000 at September 30, 1997 to 641,000 at September
30, 1998. Timed usage revenues decreased $6.5 million, or 66%, from $9.9
million in the nine months ended September 30, 1997 to $3.4 million in the
nine months ended September 30, 1998. The decrease in revenues attributable to
decreases in the total number of billable subscribers and in timed usage
revenues associated with Prodigy Classic was offset, in part, by an increase
in average revenue per billable subscriber primarily due to the higher-priced
plans for unlimited usage associated with Prodigy Internet. Other revenues
increased by $2.0 million, or 47%, from $4.3 million in the nine months ended
September 30, 1997 to $6.3 million in the nine months ended September 30,
1998. For the nine months ended September 30, 1997 and 1998, the other
revenues derived from the Company's former international operations consisted
primarily of fees for Internet access and online services provided primarily
to businesses in Africa and China. As a result of the foregoing factors, total
revenues decreased by $.4 million, from $101.9 million in the nine months
ended September 30, 1997 to $101.5 million in the nine months ended September
30, 1998.
30
<PAGE>
Cost of revenues includes network and content expenses. Content expenses
consist of the costs of developing, or obtaining from third parties, content
for inclusion in the Company's service offerings. Cost of revenues decreased
from $76.8 million in the nine months ended September 30, 1997 to $75.2
million in the nine months ended September 30, 1998, a decrease of $1.6
million, or 2%. This decrease was primarily attributable to content expense,
which declined as a result of the renegotiation and/or termination of content
contracts associated with Prodigy Classic and the Company's content
outsourcing agreement with Excite which substantially eliminated content
expense associated with Prodigy Internet beginning in April 1998. See
"Business--Principal Outsourcing Arrangements". The reduced content expense
was offset, in part, by increased network charges incurred by the Company in
the nine months ended September 30, 1998. Network usage increased 73% from the
nine months ended September 30, 1997 to the nine months ended September 30,
1998, primarily due to the shift of the subscriber base from timed usage to
unlimited usage plans, but network charges increased only 30% because of a
monthly "cap" (based on average hourly usage by subscribers) contained in the
network agreement between the Company and Splitrock.
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. Marketing expense
decreased from $29.7 million in the nine months ended September 30, 1997 to
$25.9 million in the nine months ended September 30, 1998, a decrease of $3.8
million, or 13%. The 1997 period reflected spending related to the launch of
Prodigy Internet in October 1996, which continued through the post-Christmas
selling season. In addition, in early 1998, the Company temporarily deferred
certain of its sales and marketing programs in response to network performance
issues encountered during the transition period accompanying the initial roll-
out of the new Splitrock network. The Company expects that its marketing
expenses will increase during the balance of 1998 and 1999. See "Use of
Proceeds".
Product development expense includes research and development costs and
other product development costs. Product development expense decreased from
$15.7 million in the nine months ended September 30, 1997 to $9.3 million in
the nine months ended September 30, 1998, a decrease of $6.4 million, or 41%.
In the nine months ended September 30, 1997, product development activities
were primarily focused on the stabilization and maintenance of the Prodigy
Internet platform and on migration of Prodigy Classic content to the Prodigy
Internet platform. As a result of the completion of these activities in 1997,
product development activities and spending were subsequently reduced. In the
nine months ended September 30, 1998, product development activities centered
on integration and stabilization of the Splitrock network, transition to the
co-branded Prodigy/Excite content platform for Prodigy Internet and
development of certain commercial applications and value-added services.
General and administrative expense decreased from $47.9 million in the nine
months ended September 30, 1997 to $39.3 million in the nine months ended
September 30, 1998, a decrease of $8.6 million, or 18%. The decrease in
general and administrative expense was attributable to significantly lower
personnel costs resulting from a decrease in average headcount and lower
incentive compensation expense, combined with lower occupancy expense due to
the relocation to a new headquarters facility in White Plains, New York as of
January 1, 1998. See "Business--Facilities" As the result of the grant of
employee stock options with exercise prices below fair market value, the
Company recorded a compensation expense of $.4 million in the nine months
ended September 30, 1998 and expects to record compensation expense of
approximately $.6 million, $.8 million, $.8 million and $.2 million in the
years ending December 31, 1998, 1999, 2000 and 2001, respectively.
Interest expense, net decreased from $.9 million in the nine months ended
September 30, 1997 to $.5 million in the nine months ended September 30, 1998,
due to higher cash balances and reduced levels of borrowing.
In the nine months ended September 30, 1997, the Company recorded a loss of
$7.0 million on an equity investment in a joint venture and a restructuring
charge of $7.3 million in connection with the sale of its network and a
workforce reduction. The Company did not record a restructuring charge in the
nine months ended September 30, 1998. See "--Restructuring Charges" and "--
Former International Operations" for a discussion of the components of the
restructuring charge in the nine months ended September 30, 1997.
31
<PAGE>
As a result of the foregoing factors, the Company's operating loss decreased
by $27.3 million, or 36%, from $75.5 million in the nine months ended
September 30, 1997 to $48.2 million in the nine months ended September 30,
1998, and its net loss decreased by $35.5 million, or 43%, from $83.4 million
in the nine months ended September 30, 1997 to $47.9 million in the nine
months ended September 30, 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Prior to the Prodigy Acquisition on June 17, 1996, the Company was a start-
up company engaged in the evaluation and development of cellular telephone
systems and Internet access and online services in Africa. Due to the
significant changes that occurred in the Company's business and operations as
a result of the Prodigy Acquisition, the subsequent sale and wind-down of the
Company's former international operations and other changes in the Company's
business since the Prodigy Acquisition, the Company believes that its
historical financial statements for the years ended December 31, 1996 and 1997
are not directly comparable. When reading the following comparison of the
years ended December 31, 1996 and 1997, potential investors are cautioned that
the operating results of PSC's business are included only for six and one-half
months of 1996 but are included for all of 1997.
Total revenues increased from $98.9 million in 1996 to $134.2 million in
1997, primarily due to the Prodigy Acquisition on June 17, 1996 and the
inclusion of the operating results of PSC's business for only six and one-half
months in 1996 but all of 1997. The Prodigy Internet service was launched in
October 1996 but did not generate any significant revenues during 1996. During
1997, Prodigy Internet grew from 7,000 billable subscribers at December 31,
1996 to 221,000 billable subscribers at December 31, 1997, and generated
revenues of $29.6 million. Prodigy Classic revenues increased from $90.6
million in 1996 to $98.7 million in 1997. The number of Prodigy Classic
billable subscribers decreased from 807,000 at December 31, 1996 to 394,000 at
December 31, 1997, but Prodigy Classic revenues increased by $8.1 million from
1996 to 1997 because the operating results of PSC's business were included for
only six and one-half months in 1996 but all of 1997. In conjunction with the
launch of Prodigy Internet in October 1996, there commenced a shift in
subscriber composition from timed usage plans to higher-priced unlimited usage
plans. Timed usage revenues decreased from $19.9 million in 1996 to $12.0
million in 1997, and other revenues decreased from $8.2 million in 1996 to
$5.9 million in 1997. The decrease in other revenues also reflected decreases
in subscribers which, in turn, resulted in fewer advertisers and reduced
advertising display fees for Prodigy Classic.
Cost of revenue increased from $70.2 million in 1996 to $100.2 million in
1997, primarily due to the Prodigy Acquisition on June 17, 1996 and the
inclusion of the operating results of PSC's business for only six and one-half
months in 1996 but all of 1997. The effects of the Prodigy Acquisition on the
Company's cost of revenue in 1997 were offset, in part, by network rate
reductions resulting from the Company's network arrangements with Splitrock
which commenced in July 1997, lower subscriber levels, headcount reductions
throughout the Company, reductions in royalty-based content in 1997 and the
renegotiation and/or termination of certain Prodigy Classic content contracts
in 1997.
Marketing expense increased from $21.3 million in 1996 to $60.5 million in
1997, primarily due to the Prodigy Acquisition on June 17, 1996 and the
inclusion of the operating results of PSC's business for only six and one-half
months in 1996 but all of 1997. In 1996, marketing expense reflected
advertising campaigns instituted in late 1996 to support the launch of Prodigy
Internet. Prodigy Internet launch advertising continued into 1997.
Product development expense increased from $9.0 million in 1996 to $16.8
million in 1997, primarily due to the Prodigy Acquisition on June 17, 1996 and
the inclusion of the operating results of PSC's business for only six and one-
half months in 1996 but all of 1997. The Company's product development efforts
during 1996 were focused on the design and development of Prodigy Internet,
which was essentially completed by the end of 1996. During 1997, product
development efforts primarily related to the stabilization and maintenance of
Prodigy Internet, and integration and stabilization of the Splitrock network.
General and administrative expense increased from $53.4 million in 1996 to
$63.2 million in 1997, primarily due to the Prodigy Acquisition on June 17,
1996 and the inclusion of the operating results of PSC's
32
<PAGE>
business for only six and one-half months in 1996 but all of 1997. The effects
of the Prodigy Acquisition on the Company's general and administrative expense
in 1997 were offset, in part, by lower personnel costs resulting from
decreased headcount and incentive compensation expense, a reduction in
occupancy expense and a cost containment program initiated in the customer
service area.
Interest expense, net decreased from $2.2 million in 1996 to $1.4 million in
1997. This decrease resulted from reduced levels of borrowing.
In 1996, the Company recorded a charge of $20.9 million relating to the
purchase of incomplete technology acquired in the Prodigy Acquisition, a $9.1
million write-down of its investment in Global Enterprise Services, Inc.
("GES") to an estimated net realizable value of zero, restructuring and other
special costs of $3.1 million and a loss of $.5 million on an equity
investment in a joint venture. In 1997, the Company recorded a loss of $12.1
million on an equity investment in a joint venture, restructuring and other
special costs of $9.9 million, a $2.4 million write-down of its investment in
its African Internet operations to the estimated net realizable value and a
$.8 million loss on the sale of its African cellular telephone operations. See
"--Restructuring Charges", "--Incomplete Technology" and "--Dispositions of
Former International Operations".
As a result of the foregoing factors, the Company's operating loss increased
from $79.0 million in 1996 to $119.6 million in 1997, and its net loss
increased from $90.8 million in 1996 to $132.8 million in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Prior to the Prodigy Acquisition on June 17, 1996, the Company was a start-
up company engaged in the evaluation and development of cellular telephone
systems and Internet access and online services in Africa. Due to the
significant changes that occurred in the Company's business and operations as
a result of the Prodigy Acquisition, the subsequent sale and wind-down of the
Company's former international operations and other changes in the Company's
business model since the Prodigy Acquisition, the Company believes that its
historical financial statements for the years ended December 31, 1995 and 1996
are not directly comparable. When reading the following comparison of the
years ended December 31, 1995 and 1996, potential investors are cautioned that
the operating results of PSC's business are included for six and one-half
months of 1996 but are not included for any of 1995.
Total revenues increased from $12.2 thousand in 1995 to $98.9 million in
1996, due to the Prodigy Acquisition on June 17, 1996 and the inclusion of the
operating results of PSC's business for six and one-half months in 1996. In
1996, revenues from Prodigy Classic were $90.6 million (of which $19.9 million
was from timed usage), and the Company had other revenue of $8.2 million.
There were 807,000 Prodigy Classic billable subscribers at December 31, 1996.
At December 31, 1995, PSC had 1,133,000 billable subscribers to Prodigy
Classic.
Cost of revenue increased from $82.0 thousand in 1995 to $70.2 million in
1996, due to the Prodigy Acquisition on June 17, 1996 and the inclusion of the
operating results of PSC's business for six and one-half months in 1996. Cost
of revenue in 1996 also reflected growth in content expense as well as
increased costs for the Company's former international operations.
Marketing expense increased from zero in 1995 to $21.3 million in 1996, due
to the Prodigy Acquisition on June 17, 1996 and the inclusion of the operating
results of PSC's business for six and one-half months in 1996. In 1996,
marketing expense reflected advertising campaigns instituted in late 1996 to
support the launch of Prodigy Internet.
Product development expense increased from zero in 1995 to $9.0 million in
1996, due to the Prodigy Acquisition on June 17, 1996 and the inclusion of the
operating results of PSC's business for six and one-half months in 1996. The
Company's product development efforts during 1996 were focused on the design
and development of Prodigy Internet, which was essentially completed by the
end of 1996. There was a substantial reduction in product development costs
for Prodigy Classic in 1996.
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General and administrative expense increased from $3.0 million in 1995 to
$53.4 million in 1996, primarily due to the Prodigy Acquisition on June 17,
1996 and the inclusion of the operating results of PSC's business for six and
one-half months in 1996. General and administrative expense in 1996 reflected
expenditures for a new subscriber management system, growth in occupancy
expense and increased costs for the Company's former international operations.
Interest expense, net increased from $10.7 thousand in 1995 to $2.2 million
in 1996. This increase resulted from increased levels of borrowing to support
the substantial increase in the scope of the Company's operations attributable
to the Prodigy Acquisition.
In 1996, the Company recorded a charge of $20.9 million relating to the
purchase of incomplete technology acquired in the Prodigy Acquisition, a $9.1
million write-down of its investment in GES to an estimated net realizable
value of zero, restructuring and other special costs of $3.1 million and a
loss of $.5 million on an equity investment in a joint venture. See "--
Restructuring Charges", "--Incomplete Technology" and "--Dispositions of
Former International Operations". The Company did not incur any similar
charges or write-downs in 1995.
As a result of the foregoing factors, the Company's operating loss increased
from $3.1 million in 1995 to $79.0 million in 1996, and its net loss increased
from $3.1 million in 1995 to $90.8 million in 1996.
Restructuring Charges
In response to changes in its business environment and to decrease cash
outflows and more efficiently manage its business, the Company has incurred
restructuring and other special costs. The table below presents restructuring
and other special costs incurred and/or expended by the Company from June 17,
1996 through September 30, 1998:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
---------------- ---------------
1996 1997 1997 1998
------ ------ ------- ------
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period:........... $ 10.7(1) $ 11.5 $ 11.5 $ 7.9
Network termination costs(2).............. -- 4.7 4.7 --
Reductions-in-force(3).................... .7 2.9 2.6 --
Content production(4)..................... -- .6 -- --
Facility closing(5)....................... -- 1.6 -- --
Headquarters lease termination(1)......... -- -- -- --
Idle leased space at former headquarters'
location(6).............................. 2.5 -- -- --
------ ------ ------- ------
Subtotal, period accruals................. 3.2 9.8 7.3 --
------ ------ ------- ------
Restructuring expenditures:
Network termination costs................. -- -- -- (.2)
Reductions-in-force....................... (1.6) (3.1) (3.0) (1.6)
Content production........................ -- -- -- (.5)
Facility closing.......................... -- -- -- (.6)
Headquarters lease termination............ (.8) (7.8) (3.4) --
Idle leased space at former headquarters'
location................................. -- (2.5) (1.9) --
------ ------ ------- ------
Subtotal, period expenditures............. (2.4) (13.4) (8.3) (2.9)
------ ------ ------- ------
Accrued restructuring costs at period
end...................................... $ 11.5 $ 7.9 $ 10.5 $ 5.0
====== ====== ======= ======
</TABLE>
- ----------
(1) Opening balance represents the remaining balance of prior restructuring
charges recorded by PSC and assumed by the Company at the time of the
Prodigy Acquisition. Restructuring charges of $14.6 million were recorded
by PSC in 1996 prior to the time of the Prodigy Acquisition. These
restructuring charges included lease termination penalties and write-down
of leasehold improvements at PSC's former headquarters' location as well
as severance pay, early retirements and outplacement services in a
reduction- in-force which affected 120 employees.
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<PAGE>
(2) In connection with the sale of its network, the Company incurred
liabilities related primarily to early termination payments and other
contractual obligations for certain non-cancelable network related
agreements.
(3) The Company implemented restructuring plans in 1996 and 1997 intended to
reduce costs through a reduction-in-force. Approximately 120 employees and
80 employees throughout the Company were terminated, respectively, in 1996
and 1997.
(4) The Company decided to discontinue the production of its own content and
as a result recorded a charge of $.6 million to account for the employee
termination costs and the costs to settle content related contractual
obligations. Approximately 25 employees were terminated.
(5) The Company's offices in Massachusetts were closed and a charge of $1.6
million was recorded to account for the costs of employee terminations and
lease cancellation. The terminated employees were involved with the
Company's international operations and/or former headquarters management.
Approximately 20 employees were terminated.
(6) Beginning in late 1996, the Company vacated 29% of its leased space at its
former headquarters location. The cost of the lease attributed to the idle
leased facility amounted to $2.5 million. The Company terminated its lease
at this location and moved to a new facility effective January 1, 1998.
Incomplete Technology
The Prodigy Acquisition was accounted for as a purchase. Accordingly, the
purchase price was allocated among tangible and intangible assets based on
their respective fair market values. The fair value of intangible assets was
determined using a risk adjusted discounted cash flow approach. Acquired
incomplete technology was valued using a stage-of-completion approach.
Specifically, the Internet technology acquired was evaluated through extensive
interviews and analysis of data concerning the state of the technology and
required development work. The evaluation assumed an average growth in the
Company's Internet revenues of 49% per year, based on industry expectations at
that time, a gross margin on Internet services ranging from 8% to 49% and
sales and general and administrative expenses ranging from 10% to 27% of
revenues. The assumptions used for purposes of the evaluation should not be
construed as forecasts of the Company's future operating results. A discount
rate of 35% was used in the evaluation, reflecting the difficulties and
uncertainties in completing the development effort, the risks related to the
viability and potential changes to target markets and the inherent uncertainty
of predicting cash flows in the Internet industry. The Company estimated its
stage-of-completion at the date of the Prodigy Acquisition to be 30%, based on
costs incurred of $7.9 million and estimated costs to complete of $18.3
million. Actual operating expenses incurred subsequent to the Prodigy
Acquisition, excluding costs of development, were lower than expected,
although these cost savings were more than offset by lower than anticipated
revenue from the Prodigy Internet service. Actual costs through September 30,
1998 were $252.7 million compared to projected costs of $633.3 million. Actual
revenues through September 30, 1998 were $85.6 million compared to projected
revenues of $516.2 million. Accordingly, actual costs through September 30,
1998 were $380.6 million less than projected costs for such period, and actual
revenues through September 30, 1998 were $430.6 million less than projected
revenues for such period. The net result of these variances has had an adverse
impact on the expected return on investment. The technology had no alternative
future use to the Company, inasmuch as the Company could not commercialize the
technology in its existing form. The Company also had no other product, line
of business or research and development in which the technology could be
utilized. Therefore, the Company recognized a $20.9 million charge in June
1996 for the purchase of incomplete technology. See Note 1 to the Company's
Consolidated Financial Statements.
The purchased technology was incomplete because the majority of the coding,
integration and testing of the product was incomplete. At the date of the
Prodigy Acquisition (June 17, 1996), there were over 50 components that needed
further development and integration before the Prodigy Internet service could
reach technological feasibility. These components included applications for
parental access control, browsing, searching, e-mail, the message board,
menus, the navigational bar, the tool bar, code update mechanisms,
authentication, registration, service access control and subscriber billing.
The ability of the Company's Prodigy Internet development team to integrate
these components into the Prodigy Internet platform was a crucial factor in
reaching technological feasibility, and the ability to complete this
integration had not been established as of the acquisition date. The Company
has now successfully completed the further development necessary to complete
and integrate the acquired technology. The cost of completing the development
effort was approximately $6.8 million and
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<PAGE>
involved approximately 470 person-months of work. The Internet technology is
now being used within the Prodigy Internet service, which was launched in
October 1996.
Former International Operations
The historical results discussed above include the operating results of the
Company's Africa and China operations, which began in late-1995 and mid-1996,
respectively. The revenue and net loss from the Company's Africa and China
operations were $7.0 thousand and $89.0 thousand, respectively, for the year
ended December 31, 1995, $1.0 million and $2.7 million, respectively, for the
year ended December 31, 1996, $3.2 million and $8.5 million, respectively, for
the year ended December 31, 1997, $2.5 million and $8.1 million, respectively,
for the nine months ended September 30, 1997 and $4.3 million and $2.4
million, respectively, for the nine months ended September 30, 1998. The
Company sold its African cellular telephone operations in January 1997,
determined to terminate its Chinese operations in December 1997, terminated
its Chinese operations in March 1998 and sold its African Internet operations
in October 1998. In 1997, the Company recorded a $.8 million loss on the sale
of its African cellular telephone operations and a $2.4 million write-down of
its investment in its African Internet operations to the estimated net
realizable value. See "Corporate History and Certain Transactions--Prior
Corporate History--Dispositions of Former International Operations".
Liquidity and Capital Resources
Since formation, the Company has relied on private sales of equity
securities (totaling $294.1 million through December 31, 1998) and borrowings
to fund its operations. See "Corporate History and Certain Transactions--Prior
Equity Financings". The Company has incurred significant losses since
inception and, at September 30, 1998, had an accumulated deficit of $275.6
million, a working capital deficit of $18.9 million, current liabilities of
$49.7 million and current assets of $30.8 million. For the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997
and 1998, respectively, the Company incurred negative cash flow from
operations of $2.4 million, $35.3 million, $114.0 million, $72.4 million and
$49.2 million. Prior to its acquisition by the Company, PSC sustained losses
and negative cash flow from operations which required continued funding by
PSC's former owners, IBM and Sears, aggregating $1.3 billion as of June 16,
1996 (the day before the Prodigy Acquisition). See "Risk Factors--History of
Losses".
To fund operations, the Company borrowed $16.4 million from Banco Inbursa,
S.A. ("Banco Inbursa"), an affiliate of Carso Global Telecom, in February 1998
and $5.7 million from Banco Inbursa in July 1998. The Banco Inbursa loans bore
9% interest and were due December 31, 1999. In July 1998, the Company borrowed
$30.0 million from Bank of America National Trust and Savings Association
("Bank of America") and used the proceeds to repay $30.0 million of the $32.1
million then owed to Banco Inbursa. The Bank of America loan bore 6.5%
interest, was guaranteed by Carso Global Telecom and was due August 14, 1998.
The Bank of America loan was repaid with interest with a portion of the
proceeds from the sales of Common Stock described in the following paragraph.
In August 1998, Telmex purchased 6,125,000 shares of Common Stock from the
Company for gross proceeds of $49.0 million, and in July 1998 Carso Global
Telecom purchased 1,375,000 shares of Common Stock from the Company for gross
proceeds of $11.0 million. The Company used a portion of the proceeds to repay
amounts owed to Banco Inbursa and Bank of America in the aggregate amount of
$32.1 million. See "Corporate History and Certain Transactions" and "Principal
Stockholders".
In August 1998, Carso Global Telecom agreed to provide the Company with a
$35.6 million committed revolving line of credit entitling the Company to
borrow, repay and reborrow amounts in minimum increments of $1.0 million prior
to maturity on December 31, 1999. Advances are due 90 days after borrowing,
but the Company is permitted to roll over advances into new advances at its
election. Advances are unsecured and bear interest at the LIBOR rate plus
between one and five percentage points (as negotiated on a case-by-case
basis). As of December 31, 1998, no amounts were outstanding under the
revolving line of credit. Carso Global Telecom is the Company's principal
stockholder. See "Principal Stockholders".
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<PAGE>
As a result of the Company's outsourcing arrangements, the Company has
significantly reduced the level of capital expenditures needed in its
operations. The Company's July 1997 network agreement with Splitrock
eliminated the need for the Company to maintain and upgrade its own network.
The Company's portal content agreement with Excite eliminated the need,
beginning in April 1998, for internal development of content and Prodigy
Internet customization and other programming projects. See "Business--
Principal Outsourcing Arrangements". The Company's capital expenditures for
the nine months ended September 30, 1998 were $.4 million, primarily for the
purchase of data processing equipment, compared to $1.4 million, $8.8 million
and $8.6 million, respectively, for the years ended December 31, 1995, 1996
and 1997. The Company currently anticipates that its capital expenditures for
the year ending December 31, 1999 will be approximately $11.0 million,
principally for the purchase and implementation of a new member management
system with enhanced customer care, data mining and marketing program
management capabilities, the purchase and implementation of a new accounting
and financial reporting system and the purchase of new equipment for Prodigy
Internet.
At December 31, 1998, the Company had available cash of $11.0 million. The
Company is currently experiencing substantial negative cash flow each month
and expects to continue to experience negative cash flow through at least the
end of 1999. The Company's future financing requirements will depend on a
number of factors, including the Company's operating performance and increases
in operating expenses associated with growth in the Company's business. Based
on its current operating plan, the Company believes that the net proceeds from
the Offering, together with its existing cash and available financing under
its revolving credit facility with Carso Global Telecom, will be sufficient to
meet its anticipated cash requirements for at least the next twelve months.
The Company has made no arrangements to obtain additional financing, other
than pursuant to the Carso Global Telecom credit facility, and there can be no
assurance that adequate additional financing on acceptable terms will be
available when needed, if at all. The unavailability of sufficient financing
when needed would have a material adverse effect on the Company. See "Risk
Factors--Need for Additional Financing".
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. 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 a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities. The Company maintains various internal
computer systems and equipment and contracts with third-party vendors for the
provision of computerized customer billing, network operation, Prodigy
Internet service content and certain other information technology and other
services.
The Company is currently incurring costs to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
internal computer systems and equipment and the computer systems and equipment
of the third-party vendors on which the Company's business relies. The Company
has established a Year 2000 project office staffed by Company personnel and
assisted by a consulting firm.
The Company has completed an inventory of substantially all of its internal
systems and programs related to both the delivery of the Prodigy Internet
service and the daily operations of the business. Based on its preliminary
analysis, the Company estimates that it will spend approximately $9.5 million
through the end of 1999 to remediate potential Year 2000 problems with its
internal systems and to purchase and implement a new member management system
with enhanced customer care, data mining and marketing program management
capabilities that will replace a system that is not Year 2000 compliant.
Prodigy Classic is not Year 2000 compliant and the Company intends to
discontinue Prodigy Classic in the fourth quarter of 1999. See "Risk Factors--
Impact of Planned Termination of Prodigy Classic Service".
The Company is developing contingency plans in the event that any critical
service component or business process fails due to a Year 2000 problem. The
Company expects to complete contingency planning by mid-1999. With respect to
critical third-party vendor systems, (i) Splitrock has publicly reported that
substantially all of its
37
<PAGE>
information and non-information technology systems are Year 2000 compliant
(and that upgrades are available for those systems that are not Year 2000
compliant that will enable Splitrock to be Year 2000 compliant by mid-1999),
(ii) Excite has publicly reported that it believes there are no significant
Year 2000 issues within its proprietary systems or services (although Excite
has not yet fully evaluated the Year 2000 compliance status of the third-party
equipment and software it utilizes, or of its vendors, joint venture partners
and content partners), and (iii) Prodigy's billing provider has committed to
making its billing system Year 2000 compliant. There can be no assurance that
the Company will be able to address, in a timely fashion, all potential Year
2000 problems, or that the systems of the third-party vendors upon which the
Company's business relies (and the maintenance and operation of which are not
within the control of the Company) will be Year 2000 compliant or will become
Year 2000 compliant in a timely manner. Any Year 2000 problems could impact
the provision of products or services to the Company's customers and could
subject the Company to the risk of litigation, lost revenues and loss of
current or future customers.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), effective for years beginning after December 15, 1997. SFAS 131
requires that a company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The financial information to
be reported includes segment profit or loss, certain revenue and expense items
and segment assets and reconciliations to corresponding amounts in the general
purpose financial statements. SFAS 131 also requires revenues from products or
services, countries where the company has operations or assets and major
customers to be reported. The Company does not believe implementation of SFAS
131 will have a material impact on its consolidated financial statements.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position No. 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
on applying generally accepted accounting principles in addressing whether and
under what condition the costs of internal-use software should be capitalized.
SOP 98-1 is effective for transactions entered into in fiscal years beginning
after December 15, 1998, but earlier adoption is encouraged. The Company
adopted the guidelines of SOP 98-1 as of January 1, 1998. Adoption of SOP 98-1
did not have a material impact on the Company's consolidated financial
statements.
In April 1998, the AcSEC issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), effective for fiscal years
beginning after December 15, 1998. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. SOP 98-5 requires that
costs of start-up activities and organization costs be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of
a change in accounting principles, as described in Accounting Principles Board
(APB) Opinion No. 20, "Accounting Changes". When adopting SOP 98-5, entities
are not required to report the pro forma effects of retroactive application.
The Company does not believe implementation of SOP 98-5 will have a material
impact on its consolidated financial statements.
38
<PAGE>
BUSINESS
Prodigy is a leading nationwide ISP that provides fast and reliable Internet
access and related value-added services. Prodigy has nationwide brand
recognition and customer acquisition channels not available to regional and
local ISPs, and utilizes a nationwide network covering over 600 cities in all
50 states allowing approximately 83% of the United States population to access
Prodigy's services with a local telephone call. Combining these strengths with
Prodigy's scalable technology has enabled the Prodigy Internet service to
achieve one of the fastest subscriber growth rates among U.S. ISPs, with the
number of billable subscribers to Prodigy Internet (including migration from
Prodigy Classic) increasing from 221,000 at December 31, 1997 to 505,000 at
December 31, 1998. The total number of billable subscribers to Prodigy
Internet and Prodigy Classic increased from 615,000 at December 31, 1997 to
671,000 at December 31, 1998. Prodigy Internet enables the Internet to be used
as a productivity tool by allowing subscribers to obtain and communicate
desired information quickly and efficiently in an easy and personalized
manner. Prodigy Internet users receive fast and reliable access to the
Internet, Prodigy-branded content powered by Excite and other Prodigy member
services. Prodigy is in the process of expanding its Web hosting and
electronic commerce activities for business customers, and believes that its
extensive experience in operating a large data center with electronic commerce
applications positions it well for growth in these areas. Prodigy is also in
the process of evaluating and introducing other consumer value-added services,
such as the co-branded marketing of paging, long-distance and cellular
telephone services, Internet-based telephony and fax services and online bill
presentment.
Prodigy has been an online pioneer since its inception in 1984. Prodigy's
original online service, now called Prodigy Classic, was launched as the
world's first consumer-focused online service in 1988 and achieved national
distribution in 1990. Prodigy Classic featured custom content, e-mail and chat
capabilities and was based on proprietary technologies. In October 1996, the
Company launched Prodigy Internet, an open standards-based Internet access
service. Since the autumn of 1997, the Company has focused on expanding
Prodigy Internet's subscriber base and introducing additional value-added
services. The Company has also made strategic decisions to outsource its
network, discontinue its development of custom content and use multiple
vendors for outsourced customer service functions. As a result of these
initiatives, the Company has substantially reduced its fixed operating costs
and headcount and now has a business and operating model that it believes can
accommodate sustained subscriber growth on a cost-effective basis without
significant capital expenditures.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet is a collection of computer networks that links millions of
public and private computers to form the largest computer network in the
world. It has become an important global medium enabling millions of people to
obtain and share information and conduct business electronically, and a
critical tool for information and communications for many users. The Internet
has grown rapidly in recent years both in terms of the number of Web users and
the number of Web sites. IDC estimates that at the end of 1997 there were over
38 million Web users in the United States and over 68 million worldwide, and
projects that by the end of 2002 the number of Web users will increase to over
135 million in the United States and over 319 million worldwide. The growth in
the number of Web users and the number of Web sites is being driven by a
number of factors, including the large and growing installed base of personal
computers, advances in the performance and speed of personal computers and
modems, improvements in network infrastructure, easier access to the Internet
and the increasing importance of the Internet as a communications medium, an
information resource and a sales and distribution channel.
For many businesses, the Internet has created a new communications and sales
channel enabling large numbers of geographically dispersed organizations and
consumers to be reached quickly and cost-effectively. IDC estimates that the
number of consumers buying goods and services on the Internet will grow from
17.6 million in 1997 to 128.4 million in 2002, and that the total value of
goods and services purchased over the Internet will increase from
approximately $12 billion in 1997 to approximately $426 billion by 2002.
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<PAGE>
Evolution of the Internet Services Market
Today, the Internet services market consists primarily of Internet access.
Access services include dial-up access for individuals and small businesses
and high-speed dedicated access primarily for larger organizations. Forrester
projects that revenues from Internet access services in the United States will
grow from $5.8 billion in 1997 to $38.1 billion in 2002. The rapid development
and growth of the Internet has resulted in a highly fragmented industry,
consisting of more than 5,000 ISPs in the United States, most of which operate
as small, local businesses. The Internet services industry is expected to
undergo substantial consolidation, especially among mid-sized ISPs, over the
next few years. ISPs vary widely in geographic coverage, customer focus and
the nature and quality of services provided to subscribers. Relatively few
ISPs offer nationwide coverage, have a brand name with nationwide recognition
or have the ability to grow significantly without additional investment in
infrastructure. ISPs may concentrate on specific types of customers that
differ from the target markets of other ISPs. Services offered by ISPs can
range from simple dial-up access to highly organized, personalized access
coupled with value-added services. The Company believes that consumers are
generally focused on speed and reliability of access, ease of use, customer
service and price as they evaluate an ISP. In addition to speed and
reliability of access, the Company believes many business customers want all
their Internet-based requirements, such as access, Web hosting and electronic
commerce applications, met by a single provider.
Internet operations, including Web hosting and electronic commerce, are
increasingly becoming mission-critical to an enterprise's commercial and
communications operations. However, many businesses lack the resources and
expertise to develop, maintain and enhance, on a cost-effective basis, the
facilities and network systems necessary for successful Internet operations.
As a result, businesses increasingly seek outsourcing arrangements to enhance
Web site reliability and performance, provide continuous operation of their
Internet solutions and reduce related operating expenses. By outsourcing these
services, companies can focus on their core competencies rather than utilizing
their resources to support Internet operations. Forrester projects that
Internet hosting revenues will increase from approximately $400 million in
1997 to $10.5 billion in 2002.
As a result, there is increasing demand for ISPs to offer "turnkey"
electronic commerce services. An increasing number of ISPs are beginning to
supplement their basic Internet access services with a variety of commercial
services that facilitate electronic commerce, such as Web hosting, bill
presentment, co-location and other value-added services. Such services expand
an ISP's potential revenue streams from basic monthly access fees to other
fees such as set-up and maintenance charges. In addition to services that
enable electronic commerce, some larger and more sophisticated ISPs are
beginning to market other value-added services, such as paging, long-distance
and cellular telephone services, to both consumers and business customers
nationwide.
The Prodigy Solution
The Company currently provides fast and reliable Internet access and certain
value-added services. The Company intends to meet the rapidly changing needs
of its customers by offering new products and additional value-added services
as demand arises. The Company believes the following competitive strengths
will position Prodigy to meet this goal:
Nationwide Brand Name Recognition. Since the introduction of its original
service in 1988, Prodigy has established substantial nationwide brand
recognition that the Company believes offers a significant competitive
advantage in attracting new subscribers to its services. The Company uses a
variety of advertising, promotional and distribution channels to leverage the
equity of its brand name, one of the oldest and best-known in the Internet
industry. The Company launched the Prodigy Internet service in October 1996 as
a productivity tool dedicated to the Internet and designed to make a user's
experience simpler and more rewarding. The Company believes the strength of
the Prodigy brand has enhanced the market positioning of Prodigy Internet and
facilitated the rapid growth in the number of Prodigy Internet subscribers.
Nationwide Customer Acquisition Channels. The Company has in place a variety
of nationwide customer acquisition channels, including: bundling with PCs
shipped by leading PC manufacturers; the Microsoft relationship described
below; Web-based marketing; retail channels; direct mail and telemarketing;
and migration
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of subscribers from Prodigy Classic to Prodigy Internet. Many of Prodigy's
customer acquisition channels are not available to regional and local ISPs who
lack the required nationwide presence. The Prodigy Internet software is pre-
loaded on the hard drives of selected PC models shipped by many leading PC
manufacturers and is included in the online services folder of every copy of
the Windows 98 and Windows 95 (OSR 2.5 release) operating systems shipped by
Microsoft for sale in retail channels or for loading on new PCs. See "--
Customer Acquisition and Marketing".
Scalable Business Model. Since the autumn of 1997, Prodigy has created a
business and operating model that it believes can accommodate sustained
subscriber growth on a cost-effective basis without significant capital
expenditures. Prodigy has outsourced the major capital and labor intensive
functions to organizations that can provide scalable and dependable network
coverage, customer service and organized content. Prodigy's outsourcing
arrangements enable it to rely on the resources of other organizations while
drawing on its own past experience to manage these services. As a result, the
principal costs of servicing new subscribers, network usage and telephone
customer service, are variable and generally increase only as the subscriber
base increases. In addition, Prodigy's e-mail and customer authentication
systems have been developed in-house to support a large number of customers,
and Prodigy's existing data hosting facilities have the capacity to support
millions of additional subscribers. See "Business".
Fast and Reliable Service. The Prodigy Internet service offers fast and
reliable Internet connections. Prodigy Internet subscribers have direct
Internet access at speeds of up to 56 kbps (kilobits per second). Inverse
Network Technology Inc. ("Inverse") is an independent Internet testing group
that measures and reports eight parameters of ISP network performance. Since
completion of the network used by the Company in May 1998, Inverse has given
Prodigy Internet ratings of A+ or A for 24-hour call failure rate for each of
the months of May through December 1998, which ratings exceeded or equalled
the comparable overall industry rating given by Inverse based on 13 major
providers of Internet access services, except that Prodigy Internet received a
B rating compared to an overall industry rating of A for October 1998. The
Company believes call failure rate is the most important network measure in
terms of customer satisfaction. Overall, Prodigy Internet exceeded or equalled
the comparable industry rating given by Inverse in at least six of the eight
parameters for each of the months of May through December 1998. For a fuller
discussion of network performance and the Inverse reports, see "--Network and
Related Infrastructure--Reliability and Availability". In October 1998, J.D.
Power and Associates, an independent market research firm, announced that
Prodigy Internet had been ranked third in overall customer satisfaction based
on a nationwide survey of users of the five largest national ISPs,
representing approximately 52% of the U.S. Internet/online access market.
Nationwide Network Coverage. The network used to offer the Prodigy Internet
service covers over 600 cities in all 50 states. The network is able to
provide dial-up access, with a local telephone call, to approximately 83% of
the households in the United States. Prodigy also offers network access via an
800 telephone number for $.10 per minute without an additional enrollment
charge. See "--Network and Related Infrastructure".
Superior Customer Experience. In addition to offering an easy-to-use
interface and extensive personalization, the Company believes Prodigy Internet
offers a productive and rewarding customer experience. The Company's customer
services include toll-free telephone support, various online support options
and an online "members helping members" program. The Company distributes its
customer service calls over multiple outsourcing partners to reduce call
waiting times. The Company has developed proprietary filters to limit
unsolicited commercial e-mail, or "spam", sent by or addressed to subscribers.
The Company accepts banner advertisements and sponsorships but limits pop-up
advertisements and intercept screens so that the revenue opportunity from
advertising is balanced against an enhanced customer experience. The Company
also offers the Prodigy Value Center, which rewards subscribers for their
loyalty. See "--Products and Services".
Business Strategy
Prodigy's objectives are to strengthen its position as a leading nationwide
ISP and to expand the range of services it offers and markets it serves. See
"Risk Factors--Risks of New Services and Markets; Failure to Implement
Business Strategy". Key elements to the Company's business strategy include:
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Leverage Strong Brand Name. The Company intends to increase its brand equity
by promoting the recognition and positive perceptions of the Prodigy brand,
partly through increased marketing and advertising activities. See "Use of
Proceeds". The Company is leveraging the Prodigy brand name to encourage
Prodigy Classic subscribers to migrate to Prodigy Internet, expand its other
customer acquisition activities, offer new services and enter new markets.
Introduce New Services. The Company is seeking to expand its Web hosting
business and introduce additional value-added services. The Company's strategy
is to introduce value-added services for business customers that will also be
attractive to consumers. For example, in September 1998 the Company launched
co-branded paging services in partnership with SkyTel Communications, Inc.
("SkyTel"). The Company is also pursuing a variety of other value-added
services, such as the co-branded marketing of long-distance and cellular
telephone services, Internet-based telephony and fax services and online bill
presentment. In January 1999, Prodigy entered into a non-binding letter of
intent with Frontier Communications Services Inc. ("Frontier") to market and
promote Frontier's long-distance and other mutually agreed telecommunications
services to Prodigy's members. The Company is enhancing its data mining
capabilities to enable targeted sales and marketing of value-added services to
existing subscribers. In addition, the Company plans to expand its electronic
commerce activities and introduce broadband services. Prodigy already provides
the fundamental elements of electronic commerce, and Prodigy's strategy is to
provide turnkey solutions for electronic commerce. Prodigy's broadband
strategy is designed to provide business customers with a suite of Internet
access and value-added services. See "--Products and Services".
Enter New Markets. The Company intends to leverage its brand recognition to
expand beyond its existing consumer market to include small and medium sized
businesses. The first services offered in this area will be targeted to small-
office/home-office ("SOHO") customers and will include dial-up Internet
access, Web hosting, communications provisioning and related services. See
"Business--Business Services". On January 25, 1999, Prodigy and Telmex
executed an agreement pursuant to which Prodigy will provide Telmex with
advice and assistance with respect to Telmex's IDP subscribers in exchange for
a management fee. See "Business--Products and Services--Spanish-Speaking and
Hispanic Market". Telmex, which made a significant equity investment in the
Company in August 1998, is the leading provider of local and long-distance
telephone services in Mexico and the largest ISP in Mexico. See "Principal
Stockholders". The Company is also seeking a partner with whom to offer a
Spanish language portal to the Internet, which the Company believes will be
attractive to Spanish-speaking and Hispanic Internet users. See "--Products
and Services--Spanish-Speaking and Hispanic Market".
Evaluate Acquisition Opportunities. The Company evaluates acquisition
opportunities on an ongoing basis and at any given time may be, and at the
present time is, engaged in discussions with respect to possible acquisitions
or other business combinations. The Company may seek strategic acquisitions
that can complement the Company's current or planned business activities,
particularly the expansion of value-added services such as Web hosting. The
Internet services industry is expected to undergo substantial consolidation
over the next few years, and the Company may also seek to acquire other ISPs
as an additional means of customer acquisition or entry into new markets.
Products and Services
Prodigy Internet
Prodigy Internet is an open standards-based Internet access service. The
Prodigy Internet service combines the depth and breadth of the Internet with
the ease of use and organization of a traditional online service. Prodigy
Internet users receive fast and reliable access to the Internet, Prodigy-
branded content powered by Excite and other Prodigy member services. See "--
Principal Outsourcing Arrangements--Excite".
As of December 31, 1998, there were 505,000 billable subscribers to the
Prodigy Internet service. The Company includes as Prodigy Internet subscribers
all subscribers who are enrolled in a Prodigy Internet/Prodigy Classic
combination plan (134,000 at December 31, 1998). See "Risk Factors--Impact of
Planned Termination of Prodigy Classic Service".
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The Prodigy Internet service provides subscribers with direct, high-speed
Internet access, an electronic mailbox enabling subscribers to send and
receive an unlimited number of text, graphics and multimedia messages, and
disk space on Prodigy's servers to host a personal Web page. Prodigy Internet
also offers: (i) Prodigy-branded Web content, as selected, organized and
edited by Excite into a series of 13 "channels" covering topics such as Autos,
Business & Investing, Travel and Shopping; (ii) a personalized home page for
each subscriber which includes personalized news services, stock portfolios,
weather, local TV listings and sports scores; (iii) customer service and
online member support, including help files, tutorials and other online
educational tools; (iv) content generated by community members using
communication tools such as chat, message newsgroups and Web pages; and (v)
access to online transactions on the Web.
The Prodigy Internet service is compatible with Internet standards and
protocols. Standardization of both Prodigy Internet's content and network
permits use of industry-standard client/server software. Unlike some online
services that use proprietary protocols, Prodigy Internet merges seamlessly
with Web content and can be regularly updated to incorporate advances in
Internet technologies, such as new browsers, RealAudio and security devices
for electronic commerce. Prodigy Internet is compatible with Microsoft
Internet Explorer and Netscape Navigator on the Windows 98, Windows 95 and
Windows 3.1 operating systems and on Macintosh computers. Microsoft Internet
Explorer is the primary browser shipped on disks that contain the Prodigy
Internet software.
The price plans for the Prodigy Internet service vary among acquisition
channels and target market segments and are subject to change. Prodigy
Internet's principal price plans currently are (i) $19.95 per month for
unlimited usage with a 30-day money back guarantee, (ii) a discounted prepaid
annual plan of $189 for one year of unlimited usage (equivalent to $15.75 per
month), (iii) $9.95 per month for three months of unlimited usage, then $19.95
per month thereafter, and (iv) a free trial (for 30 to 60 days) with unlimited
usage and $19.95 per month thereafter. In many distribution channels, Prodigy
is replacing free trial programs with money-back guarantees in order to
attract enrollees who are less likely to terminate service.
Prodigy Classic
The Prodigy Classic service, launched in 1988 as the world's first consumer-
focused online service, is based on a proprietary architecture and
technologies. Prodigy Classic offers most basic Internet capabilities,
including e-mail exchange, newsgroup support and Web browsing, as well as
proprietary content developed by or with third-party content providers such as
Dow Jones and Associated Press. Prodigy Classic's implementations of these
Internet functions predate current Internet standards and are not readily
upgradable, and the Company has determined not to make Prodigy Classic Year
2000 compliant. The Company intends to discontinue Prodigy Classic in the
fourth quarter of 1999. See "Risk Factors--Impact of Planned Termination of
Prodigy Classic Service". Prodigy Classic is no longer marketed actively,
although new enrollments continue to occur as a result of residual marketing
efforts. The Company encourages migration with targeted pricing offers,
special hardware upgrade promotions and the introduction of features and
functions that have contributed to the retention of Prodigy Classic
subscribers. See "--Customer Acquisition and Marketing--Migration from Prodigy
Classic". As of December 31, 1998, there were 166,000 billable subscribers to
the Prodigy Classic service.
Prodigy Classic's principal price plans currently are $19.95 per month for
unlimited usage or $9.95 per month for five hours of usage with additional
time billed at $2.95 per hour. In order to encourage existing Prodigy Classic
subscribers to trial and convert to the Prodigy Internet service, Prodigy also
offers a plan that provides unlimited usage of both Prodigy Classic and
Prodigy Internet for a monthly fee of $19.95 or under a discounted prepaid
annual plan of $189 for one year of unlimited usage.
Consumer Value-Added Services
The Prodigy Shopping Mall currently provides links to over 150 Web-based
stores and retailers, including Amazon.com, JCPenney, PC Flowers and Gifts,
Godiva Chocolate, CD Now, FAO Schwarz and Omaha Steaks. In September 1998, the
Company launched co-branded paging services in partnership with SkyTel. Over
the next
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six to nine months, the Company plans to roll out additional consumer value-
added services, such as the co-branded marketing of long-distance and cellular
telephone services, Internet-based faxing, online billing services, the online
procurement of additional goods and services and premium services such as
multiple mailboxes. In January 1999, Prodigy entered into a non-binding letter
of intent with Frontier to market and promote Frontier's long-distance and
other mutually agreed telecommunications services to Prodigy's members. In
November 1998, the Company entered into an agreement with JFAX Communications,
Inc. to provide Prodigy subscribers with integrated fax, voice mail and e-mail
messaging solutions. To enable targeted sales and marketing of value-added
services to existing subscribers, the Company is enhancing its data mining
capabilities. There can be no assurance Prodigy will be successful in offering
additional consumer value-added services. See "Risk Factors--Risks of New
Services and Markets; Failure to Implement Business Strategy".
Business Services
Prodigy has formed a business services division, called the Prodigy Business
Services Group, to develop and market Internet-based services to commercial
and business entities. These services are planned to include Internet access,
basic and enhanced hosting services and broadband services. The Company also
plans to extend its Web hosting activities to include hosting of intranets and
extranets for businesses and electronic commerce sites. Prodigy initially
plans to target its business services to the SOHO market in specific regions
of the United States. Although Prodigy does not currently provide any business
services, other than Web hosting to a limited number of customers, the Company
has recently entered into several agreements to enable Prodigy to begin to
offer additional business services. In November 1998, the Company entered into
an agreement permitting the Company to resell co-branded intranet services
provided by Hotoffice. In December 1998, Prodigy became a channel partner in
Hewlett-Packard's Covision program, which integrates Internet-based business
applications, Hewlett-Packard computer technology and services from systems
integrators and ISPs, and began to market these services to its business
customers. In addition, the Company has appointed various Web site design and
development companies as authorized resellers of Prodigy's Web hosting
services. There can be no assurance Prodigy will be successful in offering
business services. See "Risk Factors--Risks of New Services and Markets;
Failure to Implement Business Strategy".
Prodigy was a pioneer in electronic commerce through its establishment of
standards and creation of applications that facilitated online shopping and
transacting, such as online banking and securities trading. Prodigy currently
has the capability to provide the fundamental elements of electronic
commerce--Web hosting, hosting of intranets/extranets and high-speed dial
access. Prodigy's strategy is to provide turnkey solutions for electronic
commerce. Electronic commerce applications that Prodigy plans to roll out
during 1999 include electronic "shopping carts", order processing and
tracking, online bill presentation and payment processing, co-location hosting
and, in conjunction with partners, consulting and integration services for
complex and large electronic commerce sites.
Prodigy's broadband strategy is designed to provide business customers with
a suite of Internet access and value-added services in conjunction with
selected technology and marketing partners. Commencing in 1999, the Company
plans to introduce fractional T1, T1, DS-3 frame relay and ATM (Asynchronous
Transfer Mode) services. Commencing in 1999, Prodigy also plans to market VPN
(Virtual Private Networks) capability and Internet-based voice and fax
services for businesses. Splitrock does not currently support the broadband
applications the Company plans to offer. The Company is in discussions with
Splitrock and others to support various broadband applications, but there can
be no assurance the Company will reach agreement with Splitrock or any other
party regarding additional broadband services. See "--Network and Related
Infrastructure".
Spanish-Speaking and Hispanic Market
Prodigy plans to market Internet services to Spanish-speaking and Hispanic
customers in the United States. According to United States census data, there
are approximately 17 million persons in the United States age 5 or older who
speak Spanish at home, and a total of approximately 28 million U.S. residents
are identified as Hispanic. Prodigy believes this market is not currently
being targeted by any other nationwide ISP. In addition,
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the Company is seeking a partner with whom to offer a Spanish language portal
to the Internet. Although the Company has not yet identified or reached
agreement with a partner, the Company believes that a Spanish language portal,
once offered, will be attractive to Spanish-speaking and Hispanic Internet
users.
Telmex is the largest ISP in Mexico and had approximately 110,000 billable
subscribers to its Internet Directo Personal ("IDP") online service at
December 31, 1998. Telmex has advised the Company that IDP subscribers
currently generate average monthly revenue of approximately 200 pesos per
subscriber (approximately $20 per subscriber based on the current peso/dollar
exchange rate). On January 25, 1999, Prodigy and Telmex executed an agreement
under which: (i) Prodigy will assist Telmex in the negotiation of agreements
with service providers for Telmex's IDP service in Mexico pertaining to
network/Internet access, Web hosting, customer service, content hosting,
billing, marketing, sales and data collection services; (ii) Prodigy will
advise Telmex on customer service, administrative functions and technical
operations, including marketing, Internet connection and other network
services, content, customer support, pricing and service composition, billing
and collection, inbound telemarketing and other aspects of the ISP business;
(iii) the parties will discuss the potential migration of certain IDP
infrastructure functions, including email, subscriber management and
authentication systems, for Telmex's IDP subscribers to the Prodigy
infrastructure platform, and the advisability of offering a co-branded
IDP/Prodigy service in Mexico; and (iv) the parties will pursue additional
opportunities, such as providing services to one another and the joint
acquisitions of subscribers. In exchange for Prodigy's services, Telmex will
pay Prodigy a management fee, on a monthly basis, equal to 15% of the net
subscriber revenue (defined as the invoiced sales price less discounts, excise
taxes and credits for returns) on the first 200,000 IDP subscribers and 10% of
the net subscriber revenue (as defined above) on additional IDP subscribers.
The agreement has a term of five years and may be terminated by Telmex if
Prodigy undergoes a change of control.
Telmex is the leading provider of local and long-distance telephone services
in Mexico and is the principal full-service telecommunications provider in
Mexico. Telmex owns the nationwide network of local telephone lines and the
principal public long-distance telephone transmission facilities in Mexico,
and has built a nationwide data transmission network. Based on total assets at
December 31, 1997, Telmex was the second-largest company in Mexico and the
largest company listed on the Mexican Stock Exchange. Telmex was the state-
owned monopoly telephone company in Mexico until 1990, when it was privatized
and sold to an investor group led by Grupo Carso, S.A. de C.V. (which
subsequently spun-off its interest to Carso Global Telecom), Southwestern Bell
Corporation (currently known as SBC Communications Inc.) and France Telecom,
the French state-owned telecommunications company. Telmex is currently
controlled by Carso Global Telecom, the Company's principal stockholder. Upon
completion of the Offerings (at an assumed initial public offering price of
$13.50 per share), Carso Global Telecom and Telmex will collectively own 69.2%
of the Company's outstanding Common Stock. See "Principal Stockholders".
Customer Acquisition and Marketing
Prodigy utilizes a variety of customer acquisition channels and focuses on
the lowest-cost and most efficient channels, such as PC bundling. The Company
believes that the strong brand recognition of the Prodigy name among consumers
and the nationwide reach of the network utilized by the Company provide the
Company with access to customer acquisition channels not available to local
and regional ISPs.
The Prodigy Internet service is marketed through a variety of media
vehicles, including television and radio advertising. See "Use of Proceeds".
Prodigy Internet's target audiences are: (i) purchasers of new desktop
consumer PCs, (ii) existing subscribers to online services who may be
interested in moving to an ISP and (iii) existing ISP subscribers who are
dissatisfied with their current service or attracted to the performance and
features of Prodigy Internet. The Company believes that the first target
segment listed gives Prodigy effective access to both first-time Internet
users, who may be attracted by Prodigy Internet's ease-of-use, customer
service and online assistance, and existing Internet access subscribers who,
in conjunction with the purchase of a new PC, may be willing to switch to
Prodigy Internet. The Company believes that consumers in the second and third
target segments listed above are less likely to switch back from Prodigy
Internet to another ISP, are less price sensitive and are more receptive to
value-added services.
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Prodigy's marketing efforts position the Prodigy Internet service as a
productivity tool to help users obtain and communicate desired information
quickly and efficiently. Marketing themes emphasize that the Prodigy Internet
service is superior in terms of connectivity (availability and reliability),
speed (up to 56 kbps), technology (digital switched ATM in most major markets)
and navigation and personalization (via the co-branded Prodigy/Excite content
services). See "--Products and Services" and "--Network and Related
Infrastructure".
PC Bundling. The Prodigy Internet service is bundled with PCs under
arrangements where the Company pays a negotiated fee to the PC manufacturer
only if a subscriber enrolls from the PC distributed by the manufacturer. PC
bundling is an attractive acquisition channel because the supplier bears the
distribution cost and it reaches many more potential subscribers than could be
reached through most other acquisition channels. The Prodigy Internet software
is pre-loaded on the hard drives of selected PC models shipped by Packard
Bell/NEC, Hewlett-Packard, IBM, Gateway 2000, Sony and Acer. See "Risk
Factors--Dependence on PC Bundling and Microsoft Relationship".
Microsoft Relationship. Microsoft includes the Prodigy Internet service in
the online services folder of every copy of the Windows 98 and Windows 95 (OSR
2.5 release) operating systems shipped by Microsoft for sale in retail
channels or for loading on new PCs. Prodigy Internet, Microsoft Network,
America Online, CompuServe and AT&T WorldNet are the only services in the
online services folders of Windows 98 and Windows 95 (OSR 2.5 release). The
Prodigy Internet service is also included in Microsoft's ISP Internet Referral
Service Program. The Company believes that these arrangements enhance
Prodigy's nationwide brand presence. See "Risk Factors--Dependence on PC
Bundling and Microsoft Relationship".
Web-Based. Prodigy maintains a Web site (www.prodigy.com) that provides
Internet users with the opportunity to learn about and enroll in the Prodigy
Internet service. Prodigy also has performance-based arrangements with several
leading Internet advertising companies, including Cyber Gold, DoubleClick
Direct, Net Creations and News America Digital Corporation. In addition, as
part of its Excite arrangements, approximately nine million Prodigy banner ad
impressions appear each month throughout Excite's Web site to promote Prodigy
Internet to non-subscribers. The Company believes these banner advertising and
other programs help target the "switcher" audience.
Retail. Prodigy has relationships with major retailers in the computer,
software and consumer electronics areas, including Best Buy, Blockbuster
Video, Circuit City, Electronics Boutique, Micro Center and Staples. The
Prodigy Internet software is currently available at approximately 6,000 retail
outlets nationwide, and will be the first Internet service marketed to Staples
customers in all 900 Staples retail stores nationwide. These relationships
typically entitle Prodigy to establish displays containing software, along
with incentive applications such as free games and shareware, in prime
locations next to cash registers. Prodigy supports these relationships through
the use of bounty programs, cooperative advertising, joint promotional events
and manufacturer development funds. Prodigy also maintains a Prodigy Pro
Program that provides information, incentives and access to the Prodigy
Internet service to over 4,000 retail sales people in partner stores. Prodigy
is currently exploring expanded distribution through additional retailers,
including music stores, video rental chains, book stores and online retailers.
Lycos provides the search engine and portal for subscribers to Prodigy
Internet who enroll through Blockbuster Video as the result of a separate
agreement between Blockbuster Video and Lycos.
Direct. Prodigy pursues highly targeted and prequalified audiences in its
direct mailing and telemarketing efforts. Prodigy's direct mail is targeted to
highly-qualified prospects, such as known Internet users and new PC
purchasers. Prodigy's inbound telemarketing program fulfills customer orders,
24 hours a day, 7 days a week, 365 days a year, via a toll-free telephone
number (1-800-PRODIGY) which is widely promoted. Prodigy's outbound
telemarketing programs focus on the reacquisition of recently disconnected
members. Prodigy's telemarketing services, inbound and outbound, are
outsourced. Prodigy maintains an online, member-assisted referral program in
which existing subscribers receive account credits for signing up new members.
Migration from Prodigy Classic. Prodigy acquires additional subscribers to
the Prodigy Internet service who migrate from Prodigy Classic. Prodigy
encourages migration with targeted pricing offers, special hardware
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upgrade promotions and the introduction of features and functions that have
contributed to the retention of Prodigy Classic subscribers, while emphasizing
that the Prodigy Internet service provides direct and reliable Internet
access. Because a substantial portion of the remaining Prodigy Classic
subscribers lack the minimum hardware requirements for the Prodigy Internet
service, in the fourth quarter of 1997 Prodigy initiated special hardware
discounts in conjunction with PC and modem suppliers to encourage migration to
the Prodigy Internet service. As of December 31, 1998, 146,000 of the Prodigy
Internet billable subscribers had migrated from Prodigy Classic (most of whom
are enrolled in a Prodigy Internet/Prodigy Classic combination plan), and
there were 166,000 remaining billable subscribers to Prodigy Classic. The
Company intends to discontinue Prodigy Classic in the fourth quarter of 1999.
See "Risk Factors--Impact of Planned Termination of Prodigy Classic Service".
Retention Programs. Prodigy also develops programs to encourage conversion
from trial to paying status and improve customer retention. Typical conversion
promotions are designed to induce usage because usage is a primary determinant
of conversion. For example, in February 1998, Prodigy launched an e-mail
promotion that featured prizes such as Palm Pilots and software titles. The
promotion was entered by approximately 10,000 trialers whose average usage
doubled during their trial period. In June 1998, Prodigy introduced the
Personal Value Center, a member loyalty program designed to increase knowledge
and usage of the Web for transactions and other services. Through the Personal
Value Center, Prodigy members can earn "points" based on usage and redeem such
points for gift certificates at selected retail stores. Prodigy plans to
extend the Personal Value Center to travel services and other merchandise. The
Company also uses incentives to retain subscribers who might otherwise
terminate service.
Customer Service
Prodigy's customer service programs are designed to contribute to member
satisfaction and retention, while controlling costs, by combining selective
outsourcing with in-house services. Prodigy believes that its customer service
programs, coupled with new release management which is both member-sensitive
and market responsive, have positioned Prodigy to provide customer support
services that are efficient and scalable for future growth.
Telephone Support. Prodigy outsources its first contact, toll-free telephone
support to various vendors that provide support 365 days per year, 20 hours
per day (support is not available from 3:00 a.m. to 7:00 a.m., Eastern time).
Customers are assisted with Prodigy software installation, enrollment
questions, account management concerns, service access problems and disconnect
requests. By using multiple vendors, Prodigy is able to direct customer
traffic flow volumes on short notice, which Prodigy believes creates a
competitive environment and results in enhanced quality, performance and
pricing. Geographic distribution of call centers allows for uninterrupted
service to Prodigy's member base in the event of regional disasters. The
Company currently outsources its telephone support services to Ron Weber and
Associates, EnvisioNet, Softbank Services Group, SPS Payment Systems and
Stream.
In-House Customer Support and Systems. Prodigy maintains an online member
services content area that provides a variety of support options to all
members, including real-time chat, instant messaging, newsgroups, message
boards, e-mail, and fax back. Prodigy has integrated comprehensive help,
tutorials, advisories, frequently asked questions and tips online. Prodigy
also has an online "members helping members" program, in which selected
subscribers receive nominal monthly compensation in exchange for providing
personalized responses to members posting inquiries on newsgroups and message
boards. Prodigy's customer service organization monitors customer service
vendor performance with quantitative metrics (including average wait time,
first call resolution rate and abandon rate) and qualitative controls
(including call monitoring). Prodigy also has technically-trained customer
service representatives to call subscribers with unresolved problems.
Prodigy maintains detailed customer records and documents each customer
request in a problem tracking system. This system allows recurring problems to
be identified and communicated to the appropriate internal Prodigy function
for resolution. Prodigy maintains a Web-based database that is accessible by
all vendor and employee customer service representatives on a real-time basis
to help ensure delivery of customer service in a consistent manner regardless
of where the contact is handled.
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Billing. Prodigy's customer billing system and services are outsourced to
CSG Systems, Inc. ("CSG"). CSG's billing system is highly customized and
flexible and supports prompt pricing changes. CSG provides credit card and
paper billing, transaction processing and check handling. A substantial
majority of Prodigy's current subscribers are billed through pre-authorized
credit card charges, while the remainder are issued invoices. See "--Principal
Outsourcing Arrangements--CSG".
Technology
Prodigy has been a technology pioneer in the online industry since its
formation in 1984 and introduced many concepts that would later be adopted for
the Web. Continuing this pioneering heritage in the Internet industry, the
Prodigy Internet service utilizes a standards-based, proprietary service
provider platform and mail server developed by the Company.
Service Provider Platform. The service provider platform is a suite of
functions which creates the infrastructure of a large-scale ISP. Capabilities
include customer profile management, access control, authentication, billing
and customer care interfaces and other functions necessary to offer large-
scale Internet services. The service provider platform is highly scalable (up
to millions of subscribers) and is compatible with industry standard products,
such as Netscape Web servers, Oracle databases, Net.Commerce (IBM's electronic
commerce solution) and Lotus Domino (an interface between Lotus Notes and the
Web). The service provider platform also interfaces effectively with Prodigy's
mail server, and is built to open standards to enable the utilization of
applications from other suppliers.
Mail Server. The Prodigy Internet service uses a scalable, reliable Internet
mail server. The mail server draws on the fault-tolerance and scalability
provided by the underlying Oracle database to offer flexibility, ease of
operation and scalability. Prodigy's mail server supports standard Internet
protocols, such as SMTP (Simple Mail Transfer Protocol), POP3 (Post Office
Protocol) and MIME (Multi-Purpose Internet Mail Extensions). The mail system
also provides:
Tools for Administrators. Welcome messages, bulk mailers, quota controls
(by realm, domain, household, small business or individual account), tools
to manage spam and operational scripts and tools.
Tools for Users. User configured filters for prioritization and spam
removal, and tools to enable the head of household or small business to
administer a group of accounts. Messages can contain any number of MIME
attachments (up to a size limitation of 10 megabytes per mailbox) and are
delivered without any promotional tag lines.
Features for Business Customers. Support for multiple domains which
enable Prodigy Internet to operate multiple Internet services under
different brands on the same system base, and which enable an off-site
administrator to control enterprise mailboxes.
Configuration and Provisioning Interfaces. The system supports a standard
administrative interface that provides configuration and control of the
mail system from external systems or via an HTML (Hypertext Markup
Language) screen. Standard APIs (Application Programming Interfaces)
interface the system to external databases for user authentication and
mailbox provisioning.
Scaling Ability. The system is designed to scale to millions of mailboxes
with an architecture that supports hardware and data redundancy.
Network and Related Infrastructure
Subscribers access Prodigy's services by connecting to a network with their
PCs using local, toll-free or long distance telephone service. The network
connects subscribers' PCs to the Internet as well as to Prodigy's hosting
servers, which store some of the data accessed during subscriber sessions.
Network connections are made through communications hardware, such as
telephone lines, routers, switches and modems, which serve to direct data and
enable communication among a variety of computer operating systems. The
network used for the Prodigy Internet service is built to Internet standards,
including TCP/IP (Transmission Control Protocol/Internet
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Protocol) transmission and PPP (Point-to-Point Protocol) access. The Prodigy
Classic service operates on certain proprietary standards which are used only
for Prodigy Classic. The Company outsources its network functions to
Splitrock. See "--Principal Outsourcing Arrangements--Splitrock".
Network Architecture
The network infrastructure utilized by Prodigy Internet consists of three
primary tiers: local points of presence ("POPs"); a middle tier, which
connects the POPs to regional hubs; and a backbone tier, which connects the
regional hubs to the Internet or Prodigy's data hosting center. The network
currently includes approximately 650 POPs nationwide and has the capability to
provide dial-up access, with a local telephone call, to approximately 83% of
the households in the United States. Prodigy also offers access to the
Splitrock network via an 800 telephone number for $.10 per minute without an
additional enrollment charge.
Over 600 POPs currently provide 56 kbps access to Prodigy Internet
subscribers having modems of that speed. Approximately 32% of all Prodigy
Internet usage is currently at 56 kbps. The backbone implemented by Splitrock
utilizes the WorldCom network. Twenty-one fully-meshed core nodes in major
cities are connected via high-speed links using digital ATM technology in all
major metropolitan markets. To optimize data transmission and facilitate the
addition of POPs as necessary, Splitrock employs an "ATM-to-the-edge"
architecture, placing ATM switches in all physical sites rather than only at
major transmission nodes on the backbone. Eight connections from the backbone
to the Internet provide data transmission to and from servers on the Internet,
and Splitrock is building additional connections to other major networks with
which it has peering arrangements.
Data Hosting Center
Prodigy's data hosting center, located in Yorktown Heights, New York, houses
approximately 400 high-capacity servers to store content and other data. The
data center contains a mainframe complex which supports business support
systems such as subscriber session accounting and reporting, customer service
support systems and business accounting. Prodigy's data center hosts a variety
of applications that are scalable to millions of users. The use of standard
interfaces allows integration of products offered by a broad spectrum of
vendors, including IBM, Microsoft and Netscape. Supported operating system
platforms include UNIX/AIX, NT, OS/390 and TPF, and installed database
products include Oracle and DB2.
Prodigy's data hosting center is equipped with triple redundant power
systems and is housed in a climate and humidity controlled environment. Both
battery and diesel power backup systems are installed to preclude outages that
might otherwise result from interruption of utility power to the building. All
production host systems have backup processors and peripherals, and all
critical data is backed up to tape daily. Facilities and data are physically
secured by incrementally restrictive card key locks, and logical data security
is provided by built-in operating system security features. Firewall
technology is implemented to protect critical systems, and servers that are
open directly to the Internet are installed on a network separate from those
that are not. In addition, anti-hacking measures are in place.
Reliability and Availability
Reliability and availability are key objectives of Prodigy's network and
hosting configurations. Splitrock has designed and is rolling out its network
to meet specified service level objectives, including the P.01 grade of
service (no more than one busy signal in 100 dial-up attempts during the
busiest hour of the day on the busiest day of the week), and specified
objectives for site and overall system availability and backbone transit
delay. Splitrock accumulates and analyzes statistics on each access line, and
lines exhibiting quality problems are removed from service and referred for
repair. In addition, Prodigy has integrated Inverse's Access Ramp product into
the Prodigy Internet software to gather data on the actual connection
experiences of subscribers who have agreed to have their connection
experiences measured. Prodigy reports problem sites to Splitrock for action.
At Prodigy's data hosting center, Prodigy operates a 24x7 operations control
center and Splitrock operates a 24x7 network operations center. Circular
hunting is employed on local access telephone lines to ensure that a
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problem with a single line does not disable the entire access site. Where
feasible, the access lines are distributed among multiple modem subsystems and
access servers to provide diversity. The hosting center is connected to the
backbone via redundant DS3 lines. Splitrock's fully-meshed core node
architecture provides multiple transmission routes across the backbone for
optimal speed and reliability.
Inverse measures and reports eight parameters of ISP network performance
(24-hour call failure rate, evening-hour call failure rate, business-hour call
failure rate, initial modem connect speed, average time to login, average DNS
(Domain Name System) lookup time, average Web throughput and average total Web
failures/timeouts). Since completion of Splitrock's network in May 1998,
Inverse has given Prodigy Internet ratings of A+ or A for 24-hour call failure
rate for each of the months of May through December 1998, which ratings
exceeded or equalled the comparable overall industry rating given by Inverse
based on 13 major providers of Internet access services, except that Prodigy
Internet received a B rating compared to an overall industry rating of A for
October 1998. The Company believes call failure rate is the most important
network measure in terms of customer satisfaction. Overall, Prodigy Internet
exceeded or equalled the comparable industry rating given by Inverse in at
least six of the eight parameters for each of the months of May through
December 1998. Investors should not place undue reliance on Inverse's reports
as a measure of network performance because such reports do not measure and
report on all factors that may affect the quality of the Company's services.
For example, Inverse's reports are based on tests conducted on selected days
at a random sampling of only 42 of Splitrock's POPs, and Inverse's reports
cited above cover only a four month period. There can be no assurance
Splitrock's network will be able to sustain the level of performance indicated
by Inverse's reports. See "Risk Factors--Network Risks".
Principal Outsourcing Arrangements
The Company follows a "best of breed" outsourcing philosophy in which it
selects from among competing suppliers in order to enhance service quality,
control costs and enable the Company to focus on its core strengths.
Splitrock
Prodigy owned and operated its own network in the United States until July
1, 1997. Effective July 1, 1997, Prodigy conveyed its network assets to
Splitrock in exchange for Splitrock's agreement to build and operate the
Splitrock network described above, hire all Prodigy employees engaged in
Prodigy's network operations and assume certain POPs leases and other
liabilities. The Company believes its Splitrock network arrangements present a
number of significant advantages to Prodigy. In addition to shifting to
Splitrock the capital costs of network expansion and enhancement as well as
network operating and personnel expenses, the Company believes these
arrangements have reduced Prodigy's network costs and made such costs more
predictable. Prodigy also believes the variety and sophistication of data
services available to it will increase due to anticipated network enhancements
and upgrades. See "Risk Factors--Network Risks". The Splitrock network
arrangements cover only the United States, and Prodigy would need to make
other network arrangements in order to offer services in foreign countries.
Splitrock is required to provide dial-up network access in all locations in
which Prodigy provided dial-up service as of June 30, 1997. Prodigy may
require additional sites to be added if certain coverage and usage parameters
are met. Splitrock may also provide access to the network to other customers.
Splitrock is required to provide a backbone network based on ATM technology
and is required to support transmission via SLIP (Serial Line Internet
Protocol), PPP and TCP/IP. Splitrock is also required to support the
proprietary standard utilized by Prodigy Classic through December 31, 1999,
and the Company intends to discontinue Prodigy Classic in the fourth quarter
of 1999. See "Risk Factors--Impact of Planned Termination of Prodigy Classic
Service".
Splitrock is required to meet specified service level objectives, including
the P.01 grade of service and specified objectives for site and overall system
availability and backbone transit delay. Splitrock's failure to meet the
specified service level objectives will result in financial penalties. If
Splitrock fails to meet specified service level objectives for an extended
period of time, Prodigy may terminate the agreement. In addition, if there is
a system-wide failure, or Splitrock breaches specified financial covenants,
Prodigy will have the right to terminate the agreement or assume
responsibility for operating the network at Splitrock's expense.
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Splitrock charges Prodigy a monthly fee per subscriber for usage by
Prodigy's subscribers. If the average hourly usage by Prodigy's subscribers in
any month exceeds a specified threshold, Prodigy must pay Splitrock an
additional amount per hour in excess of such threshold for such month. The
agreement includes minimum monthly charges and is terminable by Prodigy upon
payment of a specified early termination charge. During the year ended
December 31, 1997 and the nine months ended September 30, 1998, the Company
incurred network charges to Splitrock of $22.7 million and $48.1 million,
respectively. See "Risk Factors--Control of the Company and Potential
Conflicts of Interest".
The agreement has an initial term of four years through June 30, 2001 and is
subject to automatic renewal for successive one-year terms unless terminated
by either party upon 12 months' notice. Until termination of the agreement,
Prodigy has agreed that Splitrock will be Prodigy's primary provider of
network services. During this period, Prodigy must give Splitrock advance
notice of, and the opportunity to discuss with Prodigy, any forms of service
access (other than network access) that Prodigy wishes to pursue in the United
States.
Excite
In January 1998, Prodigy entered into an agreement with Excite, Inc.
("Excite") under which Excite, commencing in April 1998, provides subscribers
to the Prodigy Internet service with Prodigy-branded Excite content using
Excite's "My Channel" technology. This arrangement enables Prodigy to offer
Excite's extensive editorialized content and content personalization and
communication features under the Prodigy brand without incurring the time or
expense to develop similar capabilities internally.
Prodigy's agreement with Excite (i) has an initial term of three years and
automatically renews for successive one-year terms unless Excite elects not to
renew it, (ii) is terminable by Prodigy upon 60 days' notice, (iii) makes
Excite Search the exclusive search engine, Excite NewsTracker the exclusive
personalized Internet news clipping service and Excite Shopping Search the
exclusive Internet shopping search tool on Web pages provided to subscribers
to the Prodigy Internet service, (iv) does not prohibit Prodigy from entering
into similar agreements with other content providers (except as provided in
the preceding clause (iii)) or prohibit Excite from entering into similar
agreements with other ISPs, (v) provides for a sharing of all revenue derived
from the advertising banners on the co-branded Prodigy/Excite Internet
service, and (vi) gives Prodigy free advertising banner impressions throughout
Excite's Web site to promote the Prodigy Internet service.
In January 1999, At Home Corporation, a provider of broadband Internet
access, announced that it had agreed to acquire Excite. The Company's
agreement with Excite will not be terminated as a result of At Home's
acquisition of Excite, but At Home's ownership of Excite could affect the
likelihood of the agreement being renewed upon its scheduled expiration in
January 2001 or the terms of any such renewal. See "Risk Factors--Reliance on
Third-Party Providers".
CSG
Prodigy outsources its customer billing to CSG. CSG is a leading provider of
customer care and billing solutions for various telecommunications providers,
including many of the largest cable television and direct broadcast satellite
providers. Prodigy and CSG have agreed that CSG is Prodigy's exclusive
provider of billing services for the Prodigy Internet and Prodigy Classic
services but not for premium services or other billing services. CSG charges
Prodigy a monthly fee based on the number of subscribers, subject to a
specified minimum charge, as well as a monthly minimum fee for ongoing
development and support. The agreement between Prodigy and CSG expires June
30, 2001.
Competition
The industry in which the Company competes is intensely competitive and
includes a number of significant participants, including ISPs, proprietary
online service providers and major international telecommunications companies,
as well as Internet-search services and various other telecommunications
companies. There are more than 5,000 ISPs in the United States, most of which
operate small, local businesses. Additional regional
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telephone operating companies, long-distance carriers and cable companies may
also elect to compete with Prodigy. Various partnering arrangements have been
established between Internet-search service companies and major
telecommunications companies, which could result in increased competition for
Prodigy. Moreover, the Company faces competition from companies that provide
broadband connections to households, including local and long-distance
telephone companies, cable television companies and electric utility
companies. Broadband technologies offer significantly faster Internet access
than conventional modems, and such companies could include Internet access in
their basic service packages, could offer access for a nominal additional
charge or could prevent the Company from delivering Internet access through
the cable or wire connections that such companies own. See "Risk Factors--
Intense Competition".
Among the larger providers of ISP services are EarthLink Network, Inc.
(which has a strategic relationship with Sprint Corporation), MindSpring
Enterprises, Inc., Microsoft Network, AT&T WorldNet, MCI Internet, IBM
Internet Connection, PSINet Inc., GTE Internetworking (which includes the
former ISP business of BBN Corporation), Netcom On-Line Communications
Services, Inc. and Concentric Network Corporation. In January 1999, ICG
Communications, Inc., the owner of Netcom On-Line Communications Services,
Inc., announced that it had agreed to sell Netcom's dial-up, dedicated and Web
hosting accounts in the United States to MindSpring Enterprises, Inc. but will
retain Netcom's network backbone. In December 1998, AT&T announced that it had
agreed to acquire IBM's data networking business, including its ISP business.
In addition, AT&T has agreed to acquire Tele-Communications, Inc., the second
largest cable television operator in the United States, which is the majority
stockholder of At Home Corporation. In January 1999, America Online and Bell
Atlantic announced a strategic alliance to provide high speed DSL access to
the America Online service. Microsoft's ownership of the dominant PC operating
system and the Microsoft Internet Explorer browser may give Microsoft Network
certain competitive advantages, including distribution and marketing
synergies. Prodigy also competes with America Online, which offers the America
Online and CompuServe proprietary online services over closed networks, as
well as Internet access. In November 1998, America Online announced that it
had agreed to acquire Netscape Communications Corporation, owner of the
Netscape Navigator browser and other Internet software applications. In
November 1998, America Online also announced that it had entered into
strategic development and marketing agreements with Sun Microsystems, Inc. to
develop electronic commerce and next-generation Internet devices. In December
1998, America Online announced that it had formed a joint venture with the
Cisneros Group, a leading Latin American media and telecommunications
conglomerate, to provide online services in Latin America, with an initial
focus on Mexico, Argentina and Brazil.
Prodigy believes that the principal competitive factors in the ISP industry
are speed and reliability of access, ease of use, brand name recognition,
network coverage, customer service and price. Prodigy believes that its
services compete effectively on the basis of all of these factors.
Government Regulation
Internet access and online services are not subject to direct regulation in
the United States, but changes in the regulatory environment relating to the
telecommunications and media industry could have an effect on Prodigy's
business. For example, Federal Communications Commission regulatory review and
rulemaking could result in regulation of the Internet and online services
industry which could result in increased telecommunications costs for
participants in the Internet industry, including Prodigy. The Company cannot
predict whether, or to what extent, any such new rulemaking will occur, or
what effect any such rulemaking would have on Prodigy.
The Communications Decency Act of 1996, which was held unconstitutional by
the United States Supreme Court in June 1997, had generally made it illegal,
subject to certain defenses, for persons to knowingly use an interactive
computer service to send or display "indecent" communications to minors. The
federal Children's Online Protection Act ("COPA"), enacted in October 1998,
creates criminal penalties for content on the Internet which may be deemed
"harmful to minors" (as defined in various court decisions). The Company has
not changed any of its plans or policies as a result of the enactment of COPA,
and does not believe its current plans or policies violate this statute.
Enforcement of COPA has been stayed pending a lawsuit filed by the American
Civil Liberties Union seeking a preliminary injunction against COPA. The
Company cannot predict whether additional federal or
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similar state legislation will be enacted in the future, whether any such
future legislation would be upheld, how courts would interpret any such future
legislation or what effect, if any, such legislation would have on the
Company. There also are laws that make it illegal to traffic in obscene or
child pornographic materials, including by a computer, and accordingly
Prodigy's servers do not host certain newsgroups which it believes traffic in
child pornography. While the Company does not believe that its activities will
violate any of these laws, it cannot predict how a court would interpret these
laws in the Internet context or whether a court would hold that Prodigy
Internet has a duty to monitor material being transmitted or, if notified that
illegal material is being transmitted, to attempt to stop or restrict such
transmissions. See "Risk Factors--Government Regulation".
In addition, the applicability to Prodigy of existing laws governing issues
such as intellectual property ownership, defamation and personal privacy is
uncertain. Courts have indicated that, under certain circumstances, online
service providers and ISPs could be held responsible for the publication of
defamatory material or for failure to prevent the distribution of material
that infringes copyrights owned by others. The Company does not edit or
otherwise monitor the content accessed by subscribers to Prodigy Internet,
although the Company does filter certain words on Prodigy Classic. Future
interpretations by the courts of online defamation, privacy, copyright
infringement and other legal issues is also uncertain.
In March 1997, Prodigy entered into a Consent Order with the Federal Trade
Commission (which became effective in March 1998) regarding use of the word
"free" and similar words in advertising, disclosure of the financial terms and
conditions of services, practices with respect to electronic funds transfers
and certain related matters. The Consent Order has a duration of twenty years
and imposes various recordkeeping requirements. The Company believes that it
is in compliance with the Consent Order and that its continuing compliance
with the Consent Order will not have a material adverse affect on Prodigy's
business. America Online is subject to a similar Consent Order which governs
its marketing of services under both the American Online and CompuServe
brands.
In September 1998, the Company received a letter from the Office of the
Attorney General of New York notifying the Company that the "advertising and
certain other practices" of Prodigy and other unnamed ISPs were being
investigated by the Attorneys General of New York and 19 other states. The
letter stated that the inquiry was a follow-up to the settlement between
America Online and many states in May 1998 concerning the following issues:
disclosures for free offers, representations concerning pricing, disclosures
concerning premium areas, disclosures for communications charges, advertising
to minors, cancellation procedures, unauthorized charges to credit cards or
bank accounts and changes to the service agreement. The letter requested that
the Company voluntarily supply various documents and other information
relating to the marketing and provision of its services. The Company is
cooperating with the inquiry and believes that its outcome will not have a
material adverse effect on the Company.
Proprietary Rights
The Company owns a variety of trademarks, including "Prodigy(R)", "Prodigy
Internet", "It's a Tool for Living", "Prodigy Classic", the Prodigy logo and
others, many of which are the subject of existing or pending registrations in
the United States and various foreign countries. The Company also owns other
intellectual property rights, including proprietary software used in its
business. See "Technology". The Company protects its proprietary technology
through copyright and trade secrets laws, employee and third-party
confidentiality agreements and other methods. See "Risk Factors--Protection of
Proprietary Technology".
Prodigy and IBM have entered into patent cross-license agreements for their
entire patent portfolios existing as of June 17, 1996 and all additional
patents issued with respect to patent applications filed prior to June 1,
1999. Until June 17, 2001, the Company is required to grant IBM "most favored
nation" status with respect to Prodigy's software that it makes generally
available to the public. See "Corporate History and Certain Transactions--
Acquisition of Prodigy Services Company".
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Employees
At December 31, 1998, the Company had 313 full-time employees, of whom 52
were in sales and marketing, 86 were in technology and product development, 28
were in customer service, 93 were in technical services and 54 were in
management, finance and administration. As necessary, the Company supplements
its regular employees with temporary and contract personnel, which totalled 81
persons at December 31, 1998.
None of the Company's employees is represented by a labor union. The Company
believes that its employee relations are good.
Facilities
Prodigy leases 97,000 square feet of office space in White Plains, New York.
The lease expires December 31, 2004 and Prodigy has a right of first offer
upon expiration. The current annual base rent is $2,275,000 and Prodigy is
required to pay an allocated portion of taxes and operating expenses. Prodigy
has established a letter of credit in the initial amount of $3,930,000
(declining ratably over the lease term) to secure the rent payments.
Prodigy also leases 80,000 square feet in Yorktown Heights. The lease
expires February 28, 2001 with two five-year renewal options in Prodigy's
favor. The current annual base rent is $687,000 and Prodigy is required to pay
associated taxes and operating expenses. Prodigy uses approximately 57,500
square feet of its Yorktown Heights facility for its data hosting center and
subleases the balance to Splitrock. See "--Network and Related
Infrastructure--Data Hosting Center".
The Company leases approximately 16,000 square feet of office space in
Medford, Massachusetts under a lease expiring on August 1, 2001. Prodigy
vacated this facility, which formerly housed the headquarters for Prodigy's
international operations, in June 1998 and is seeking to sublease it.
For additional information regarding the Company's leased facilities and its
aggregate rental expenses, see Note 12 to the Company's Consolidated Financial
Statements.
The Company believes that its existing facilities are adequate for its
current needs and that suitable additional space will be available as needed.
Legal Proceedings
On November 27, 1996, Malcolm Haynes and Lightwave, Ltd., a Cayman Islands
corporation, filed a lawsuit in the District Court of Clark County, Nevada,
against the Company, IW, Comstar Cellular Network, Inc., Greg C. Carr,
Terrance P. Dillon, Duncan E. Wine and Blaize Kaduru. Mr. Carr is the former
Chairman of the Board of the Company and a former principal stockholder of the
Company, and was a director and principal stockholder of IW. Mr. Dillon was a
director and principal stockholder of the Company, was a director, officer and
principal stockholder of IW and was a director and technical advisor to
Comstar. Mr. Wine is a former principal stockholder of the Company and IW. Mr.
Kaduru is a former principal stockholder of the Company and IW, was an officer
of IW and was a director and officer of Comstar. Mr. Haynes was co-founder,
President and a director of Comstar and claims that he and Mr. Wine each hold
a 30% interest in Lightwave. In connection with IW's acquisition of the assets
and liabilities of Comstar in August 1994, IW issued to Comstar all then
outstanding common stock of IW, which Comstar then distributed as a
liquidating dividend to the holders of certificates for common stock of
Comstar. Each holder of a certificate for common stock of Comstar was required
to acknowledge and accept the terms of the Comstar acquisition and release
Comstar and IW from all claims which such holder may have had against either
Comstar or IW. See "Corporate History and Certain Transactions--Prior
Corporate History". Pursuant to the foregoing, Comstar offered 1,200,000
shares of IW's common stock to Mr. Haynes, but Mr. Haynes refused to
participate and therefore received no shares. The lawsuit filed by Mr. Haynes
and Lightwave alleges, among other things, that Messrs. Dillon, Wine and
Kaduru breached their fiduciary duties to the plaintiffs, that Mr. Wine
defrauded or made misrepresentations to the plaintiffs, that Mr. Wine
misappropriated a corporate
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opportunity belonging to Lightwave, that all defendants are liable for
conversion of plaintiffs' shares of common stock, and that IW and Mr. Carr
aided and abetted the wrongful conduct of Messrs. Dillon, Wine and Kaduru. The
lawsuit seeks to compel the defendants to provide to the plaintiffs 4,500,000
shares of Common Stock of the Company or the fair market value thereof, to
impose a constructive trust on the shares of Common Stock received by Messrs.
Dillon, Wine and Kaduru in the Comstar acquisition, and other monetary damages
and declaratory and equitable relief. The Company is defending and
indemnifying Mr. Carr in this lawsuit. On February 25, 1998, the Court granted
the motion of the Company and Mr. Carr to dismiss the lawsuit against them for
lack of personal jurisdiction in Nevada, and the lawsuit is continuing against
the other defendants. Unless this decision is overturned on appeal, the
plaintiffs cannot pursue this lawsuit against the Company and Mr. Carr in
Nevada, although the plaintiffs could pursue these claims in a new lawsuit
filed in any state or states where personal jurisdiction over the Company and
Mr. Carr could be established and where the applicable statute of limitations
has not expired. If a new lawsuit is filed, the Company intends to defend it
vigorously, but there can be no assurance that its outcome would not have a
material adverse effect on the Company's business, financial condition,
results of operations or prospects or result in substantial dilution to the
Company's stockholders.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, their respective ages
and their positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Samer F. Salameh........ 34 Chairman of the Board and Chief Executive Officer
Alfredo Sanchez......... 43 Vice Chairman of the Board
David C. Trachtenberg... 36 President and Chief Operating Officer
David R. Henkel......... 47 Executive Vice President, Finance, Chief Financial Officer and Director
Andrea S. Hirsch........ 41 Executive Vice President, Business Development and General Counsel
Carena M. Pooth......... 45 Executive Vice President, Technology
James P. Dougherty...... 42 General Manager, Business Services
Arturo Elias(1)......... 32 Director
James M. Nakfoor(1)..... 35 Director
Russell I. Pillar....... 33 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee
Mr. Salameh has served as Chief Executive Officer and a director of the
Company since September 1997, as Chairman of the Board since August 1998, and
served as President from September 1997 to December 1998. From July 1994 until
joining the Company, Mr. Salameh served as Director, Long Distance Division of
SBC Communications (formerly Southwestern Bell), responsible for marketing,
strategy, positioning, product management and product development with respect
to Telmex. Mr. Salameh was employed by MCI Telecommunications as a Product
Manager in 1994 and as a Strategic Marketing Manager from 1991 to 1993. During
1993, Mr. Salameh was employed as Vice President of Finance by Merl
Industries, a start-up management consulting firm. Mr. Salameh holds a
Master's degree from the Fletcher School of Law and Diplomacy, a B.S. degree
in Management and Technology Transfer from Polytechnic University of New York
and a Baccalaureate degree with a concentration in Math and Physics from Lycee
Fenelon in Paris. He is also a director of Splitrock and serves as an Advisor
to the Chief Executive Officer of Telmex. See "Risk Factors--Control of the
Company and Potential Conflicts of Interest" and "Business--Principal
Outsourcing Arrangements".
Mr. Sanchez joined the Company's Board of Directors in June 1996 and became
Vice Chairman in August 1998. Mr. Sanchez has served as President of Uninet,
S.A. de C.V., a wholly-owned subsidiary of Telmex through which Telmex
provides data transmission services and Internet access to customers, since
January 1996. He has also served as President of Consorcio Red Uno, S.A. de
C.V., a network company founded by Mr. Sanchez and now owned by Telmex, since
March 1991. See "Risk Factors--Control of the Company and Potential Conflicts
of Interest". From 1985 to March 1991, he was President of Onyx Systems, a
Unix microcomputer manufacturer with operations in the United States, Europe
and Mexico. Mr. Sanchez previously held various communications and
transportation positions in the Mexican government. Mr. Sanchez holds a degree
in Electronics Engineering from the Metropolitan Autonomous University of
Mexico.
Mr. Trachtenberg joined the Company as President and Chief Operating Officer
in December 1998. Prior to joining the Company, Mr. Trachtenberg was employed
for more than eight years by MCI Communications Corporation and then MCI
WorldCom, Inc. From September 1997 to December 1998, Mr. Trachtenberg was
Executive Director of Online Marketing, responsible for residential and small
business Internet operations, and from January 1997 to September 1997, he
served as Executive Director of Brand Marketing, responsible for the MCI One
brand portfolio, including domestic and international long distance products,
calling card services and
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advanced services for the consumer and small business segments. Between March
1990 and January 1997, he held various other marketing and business
development positions, including director of Customer Marketing and director
of International Marketing. Prior to joining MCI, Mr. Trachtenberg was
employed for four years by Bain & Company, an international consulting firm.
Mr. Trachtenberg received a B.A. degree, summa cum laude, from Tufts
University, and received an MBA degree from the Wharton School of Business at
the University of Pennsylvania, where he also received a Masters in
International Affairs and was a Fellow at the Lauder Institute.
Mr. Henkel joined Prodigy in August 1998 as Executive Vice President,
Finance, Chief Financial Officer and a director. In 1997, Mr. Henkel founded
AFX TraTech, Inc., a wireless data company, and served as its Chief Financial
Officer until joining Prodigy. From 1993 to 1997, Mr. Henkel served in a
number of positions with 7th Level, Inc., a developer of interactive games and
educational products, including Chief Operating Officer from 1995 to 1997 and
Chief Financial Officer from 1994 to 1995. In 1993, Mr. Henkel served as Chief
Financial Officer of Value Added Communications Corporation, a
telecommunications reseller, from 1991 to 1993 he served as Chief Financial
Officer and a director of Micrografx, Inc., a software company, and from 1987
to 1991 he was a partner with Arthur Andersen LLP. Mr. Henkel holds a B.A.
degree from Rice University and an M.B.A. degree from Harvard Business School.
Ms. Hirsch joined Prodigy in September 1998 as Executive Vice President,
Business Development and General Counsel. Prior to joining the Company, Ms.
Hirsch served as Vice President, Corporate Development Counsel for Simon &
Schuster, Inc., a publishing company, from March 1994 to September 1998, and
as Assistant General Counsel for Macmillan, Inc., a publishing company, from
June 1991 to January 1994. Ms. Hirsch holds a B.A. degree from Queens College
and a J.D. degree from Washington College of Law at American University.
Ms. Pooth has been employed by Prodigy for 13 years in a variety of
positions, including Executive Vice President, Technology since August 1998,
Senior Vice President of Technical Services from July 1997 to July 1998, Vice
President of Systems Development from November 1996 to June 1997, Senior
Director of Systems Development from February 1996 to October 1996 and
Director of Systems Programming/Development from November 1990 to February
1996, and various other technical management positions. Prior to joining
Prodigy, Ms. Pooth worked as a Systems Programmer for IBM for three years. She
holds a B.A. degree from Vassar College and an M.S. degree from State
University of New York. Ms. Pooth has indicated that she intends to resign
from the Company effective February 28, 1999.
Mr. Dougherty joined Prodigy's former software development division as
Senior Vice President of Marketing and Sales in November 1997, became its
Chief Operating Officer in April 1998 and became its Chief Executive Officer
in May 1998. He became the Company's General Manager, Business Services in
August 1998. From May 1996 through September 1997, Mr. Dougherty worked for
and consulted with a number of Internet startup companies. From November 1987
through May 1996, Mr. Dougherty held various executive positions at Lotus
Development Corporation, including general manager of the Electronic
Applications division, which built and marketed Internet applications to
global businesses, and director in the technology consulting practice. Mr.
Dougherty holds a B.A. degree from Framingham State College, a graduate degree
(Certificate of Special Studies) from Harvard University in finance and
administration and a Master's degree from Columbia University in international
economics.
Mr. Elias joined the Company's Board of Directors in September 1997. He
served as Consulting Advisor to the President of Telmex from September 1996 to
May 1998 and has since served as Head of Commercial New Technologies and
Regulation for Telmex. Mr. Elias is also a director of Carso Global Telecom,
Telmex, Sears Roebuck de Mexico and several privately-held companies. See
"Risk Factors-- Control of the Company and Potential Conflicts of Interest".
Mr. Elias studied Business Administration at Anahuac University and received a
Master in Business Management degree from the Instituto Panamericano de Alta
Direccion de Empresa (IPADE).
Mr. Nakfoor joined the Company's Board of Directors in September 1997. Since
1991, Mr. Nakfoor has served as Vice President of Securities Trading for
Inversora Bursatil, S.A. de C.V., a wholly-owned subsidiary
57
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of Grupo Financiero Inbursa, S.A. de C.V. ("Grupo Financiero"), which is
engaged in the securities brokerage, investment banking and money management
businesses in Mexico. Grupo Financiero, which is affiliated with Carso Global
Telecom, is a Mexican financial group whose businesses include banking,
brokerage, insurance, leasing, factoring and other financial services. See
"Risk Factors--Control of the Company and Potential Conflicts of Interest".
Mr. Nakfoor holds a B.A. degree in Economics and an M.B.A. degree from the
University of Texas at Austin.
Mr. Pillar joined the Company's Board of Directors in October 1996 and
served as President and Chief Executive Officer of the Company's Prodigy
Internet division from September 1997 until August 1998. In November 1998, Mr.
Pillar was appointed President and Chief Executive Officer of Virgin
Entertainment Group, Inc., a subsidiary of Britain's Virgin Group that
operates the Virgin Megastores chain of retail music stores throughout North
America. Since October 1991, he also has served as Managing Partner of
Critical Mass, a company that creates new software solution-based businesses
seeking to capitalize on the migration of communications traffic from circuit-
switched to packet-switched networks. From December 1993 through October 1996,
he served as President, Chief Executive Officer and a director of Precision
Systems, Inc., a publicly traded international telecommunications software
provider. Mr. Pillar is also a director of Telescan, Inc., which develops,
markets and operates online networks and Internet sites. He graduated Phi Beta
Kappa, cum laude, with an A.B. degree in East Asian Studies from Brown
University.
Mr. Pillar qualifies as an "independent" director under Nasdaq rules. The
Company intends to appoint one additional independent director prior to or
within 90 days after the closing of the Offering.
Mr. Carlos Slim Helu, a Mexican citizen, and certain members of his
immediate family, beneficially own a majority of the outstanding voting equity
securities of Carso Global Telecom. Carso Global Telecom may be deemed to
control Telmex through the regular-voting shares of Telmex that it owns
directly and its interest in a trust which owns a majority of Telmex's
outstanding regular-voting shares. Thus, Mr. Slim and members of his immediate
family may be deemed to control Carso Global Telecom, Telmex and the Company.
Mr. Salameh is married to Mr. Slim's niece and Mr. Elias is married to Mr.
Slim's daughter. There are no other family relationships among the Company's
directors, executive officers and principal stockholders and their affiliates.
See "Risk Factors--Control of the Company and Potential Conflicts of Interest"
and "Principal Stockholders".
In connection with the Company's acquisition of PSC, IBM and Sears agreed to
vote their shares of Common Stock received upon conversion of the Contingent
Notes or exercise of the Contingent Warrants held by them in accordance with
the voting recommendations of Prodigy's Board of Directors. See "Corporate
History and Certain Transactions--Acquisition of Prodigy Services Company".
Officers of the Company serve at the discretion of the Board of Directors
and hold office until their successors are duly elected and qualified or until
their earlier resignation or removal.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation Committee.
There is no standing nominating committee of the Board of Directors. The Audit
Committee (which is expected to be composed of Mr. Pillar and the additional
independent director to be elected prior to or within 90 days after the
Offering) (i) will review the annual financial statements of the Company prior
to their submission to the Board, (ii) will consult with the Company's
independent accountants to review financial results, internal financial
controls and procedures, audit plans and recommendations and (iii) will
recommend to the Board the selection, retention or termination of independent
accountants and approve services provided by independent accountants. The
Compensation Committee (composed of Messrs. Elias and Nakfoor) makes
recommendations to the Board regarding the compensation of executive officers,
key managers and directors and administers the Company's stock plans.
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Director Compensation
All directors are reimbursed for their expenses in attending Board and
Committee meetings in accordance with the Company's expense reimbursement
policies. Directors who are also employees of the Company do not receive
additional compensation for serving as directors. Non-employee directors are
eligible to receive stock options under the Company's 1999 Outside Director
Stock Option Plan. See "--Stock Plans--1999 Outside Director Stock Option
Plan".
The Company entered into a one-year Consulting Agreement with Mr. Pillar on
July 31, 1998. Under his Consulting Agreement, Mr. Pillar received an annual
base fee of $250,000 and was eligible to receive either (i) a performance
bonus of $125,000 in the event that the Company closed an initial public
offering or (ii) a discretionary performance bonus payable in February 1999.
Mr. Pillar's consulting services were provided on a part-time basis and Mr.
Pillar was permitted to accept other employment (including full-time
employment) during the term of the Consulting Agreement. In January 1999, the
Company and Mr. Pillar terminated his Consulting Agreement and the Company
paid Mr. Pillar a lump sum of $252,000 in lieu of consulting fees and bonuses
otherwise payable under the Consulting Agreement. The Company is required to
pay all reasonable relocation expenses incurred by Mr. Pillar upon Mr.
Pillar's relocation out of the New York City area, and Mr. Pillar is entitled
to certain accelerated vesting of stock options in the event the Company
closes an initial public offering on or prior to August 1, 1999 or upon a
change in control of the Company. From November 1, 1996 through June 30, 1997,
the Company also had retained Mr. Pillar as a consultant and paid him a
consulting fee of $50,700.
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Executive Compensation
Summary Compensation
The following table sets forth the total compensation earned in the year
ended December 31, 1998 for the Company's Chief Executive Officer, its four
other most highly compensated executive officers in 1998 who were serving as
executive officers on December 31, 1998, one former executive officer who was
not serving as an executive officer on December 31, 1998 and the Company's
other current executive officers. Such current and former executive officers
are hereinafter referred to as the "Named Executive Officers". For additional
information concerning the terms of employment of the Named Executive
Officers, see "--Employment Agreements".
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ------------
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Salary Bonus Compensation Options(1) (2)
- ------------------ --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Executive
Officers:
Samer F. Salameh........ $ 200,000 $ 15,000 $ 50,084(3) -- $6,000
Chairman and Chief
Executive Officer
David C. $ 11,056 -- -- $125,000 --
Trachtenberg(4)........
President and Chief
Operating Officer
David R. Henkel(5)...... $ 79,167 -- -- $187,500 $ 2,375
Executive Vice
President, Finance and
Chief Financial Officer
Andrea S. Hirsch(6)..... $ 56,878 $180,000 -- $ 93,750 --
Executive Vice
President, Business
Development and General
Counsel
Carena M. Pooth......... $ 181,250 $ 26,250 -- $ 68,750 $ 4,313
Executive Vice
President, Technology
James P. Dougherty...... $ 171,138 $ 44,904 -- -- $ 4,404
General Manager,
Business Services
Former Executive
Officers:
Inder S. Gopal(7)....... $ 84,675 $ 33,870 $230,891(8) $ 70,000 $ 2,540
Former President and
General Manager of
Prodigy software and
development division
James L'Heureux(9)...... $ 190,000 $ 11,756 -- $ 43,750 --
Former Executive Vice
President, Consumer
Services
</TABLE>
- ----------
(1) Represents the number of shares covered by options to purchase shares of
the Company's Common Stock granted during the year ended December 31,
1998. The Company has never granted any stock appreciation rights.
(2) Represents Company matching contributions under its 401(k) plan.
(3) Represents housing and car allowances.
(4) Commenced employment with the Company in December 1998.
(5) Commenced employment with the Company in August 1998.
(6) Commenced employment with the Company in September 1998.
(7) Ceased employment with the Company during 1998.
(8) Represents severance payments.
(9) Ceased employment with the Company in January 1999.
60
<PAGE>
Option Grants During 1998
The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1998.
Option Grants in Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(2)
---------------------------------------------- -----------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price per Expiration
Name Granted in Fiscal Year Share(1) Date 5% 10%
---- ---------- -------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive Officers:
Samer F. Salameh........ -- -- -- -- -- --
David C. Trachtenberg... 93,750 6.51% $4.00 12/14/08 $ 938,296 $ 1,716,205
David C. Trachtenberg... 31,250 2.17% $8.60 12/14/08 $ 169,015 $ 428,318
David R. Henkel......... 187,500 13.01% $8.00 8/3/08 $ 943,342 $ 2,390,614
Andrea S. Hirsch........ 93,750 6.51% $8.00 11/16/08 $ 471,671 $ 1,195,307
Carena M. Pooth......... 68,750 4.77% $4.00 1/26/08 $ 172,946 $ 438,279
James P. Dougherty...... -- -- -- -- -- --
Former Executive
Officers:
Inder S. Gopal(3)....... -- -- -- -- -- --
James L'Heureux......... 43,750 3.04% $4.00 1/26/08 $ 110,057 $ 278,905
</TABLE>
- ----------
(1) Reflects a repricing in May 1998 of the options held by Ms. Pooth and Mr.
L'Heureux from $12.00 per share to $4.00 per share. In addition, options
granted to Messrs. Salameh, Dougherty and Gopal prior to 1998 were
repriced to $4.00 per share in May 1998. See "--Stock Plans--1996 Stock
Option Plan".
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the individuals.
(3) Upon termination of Mr. Gopal's employment with the Company, all of his
options were cancelled.
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<PAGE>
Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers on
December 31, 1998. No Named Executive Officer exercised a stock option during
1998.
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End at Fiscal Year End(1)
--------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Current Executive
Officers:
Samer F. Salameh........ 68,750(2) 87,500 $316,250 $402,500
David C. Trachtenberg... -- 125,000 -- $431,250
David R. Henkel......... -- 187,500 -- $112,500
Andrea S. Hirsch........ -- 93,750 -- $ 56,250
Carena M. Pooth......... 11,100 82,650 $ 51,060 $380,190
James P. Dougherty...... 43,750 50,000 $201,250 $230,000
Former Executive
Officers:
Inder S. Gopal.......... -- -- -- --
James L'Heureux......... 12,500 81,250 $ 57,500 $373,750
</TABLE>
- ----------
(1) Represents the difference between the fair market value of the Common
Stock at fiscal year end as determined by the Board of Directors of the
Company ($8.60 per share) and the option exercise price. See "--Stock
Plans--1996 Stock Option Plan".
(2) Includes 18,750 of Mr. Salameh's options which will become exercisable
upon the closing of the Offering.
Employment Agreements
Current Executive Officers
Mr. Salameh is employed under an Employment Agreement that expires on
December 31, 2000 under which he currently receives an annual base salary of
$200,000. Mr. Salameh received a sign-on bonus of $90,000 and is eligible to
receive an annual performance bonus of up to 50% of his base salary,
contingent upon the successful completion of personal and corporate goals as
mutually established. Mr. Salameh is also eligible to participate in all of
the Company's fringe benefit programs. The Company has agreed to provide Mr.
Salameh with a monthly housing allowance of $4,000, a monthly car allowance of
$1,050 and monthly roundtrip airfare between New York and Mexico City. Mr.
Salameh is also entitled to certain accelerated vesting of stock options in
the event the Company closes an initial public offering prior to August 1,
1999 or upon a change in control of the Company. In the event the Company
terminates Mr. Salameh's employment other than for cause, or does not offer by
November 1, 2000 to renew his Employment Agreement for at least one year, Mr.
Salameh will (with certain exceptions) continue to receive his base salary and
fringe benefits for a period of 12 months and will receive a severance payment
equal to one week's base salary for each six months of completed service with
the Company. If Mr. Salameh is terminated for any reason, the Company is
required to pay up to $40,000 of Mr. Salameh's expenses to relocate out of the
New York City area.
Mr. Trachtenberg is employed under an Employment Agreement that expires on
December 31, 2001 under which he currently receives an annual base salary of
$224,000. Mr. Trachtenberg received a sign-on bonus of $74,000 and is eligible
to receive an annual performance bonus of up to 50% of his base salary,
contingent upon the successful completion of personal and corporate goals as
mutually established. Mr. Trachtenberg is also eligible to participate in all
of the Company's fringe benefit programs. The Company has agreed to provide
62
<PAGE>
Mr. Trachtenberg with a monthly car allowance of $2,166 and up to $5,000 to
terminate his current car lease. For the first six months of employment, the
Company has agreed to reimburse his reasonable temporary housing expenses and
weekly commuting expenses between New York and Washington, D.C., and
thereafter the Company will reimburse his relocation expenses and provide a
monthly housing allowance of $3,500. The Company has also agreed to reimburse
Mr. Trachtenberg's reasonable legal fees for review of his Employment
Agreement. In the event the Company terminates Mr. Trachtenberg's employment
other than for cause, he will continue to receive his base salary for a length
of time based on his length of service and will receive certain accelerated
vesting of options.
Mr. Henkel is employed pursuant to an Employment Agreement under which he
currently receives an annual base salary of $190,000. Mr. Henkel is eligible
to receive an annual performance bonus of up to 50% of his base salary,
contingent upon the successful completion of personal and corporate goals as
mutually established. The Company has agreed to provide Mr. Henkel with a
monthly housing allowance of $3,000, certain allowances for airfare between
New York City and Dallas for Mr. Henkel and members of his family for up to
one year, and relocation expenses of up to $3,000. Mr. Henkel is also eligible
to participate in all of the Company's fringe benefit programs. In the event
the Company terminates Mr. Henkel's employment other than for cause after his
third month of service with the Company, he will continue to receive his base
salary for a length of time based on his length of service. Mr. Henkel is also
entitled to certain accelerated vesting of stock options upon a change in
control of the Company.
Ms. Hirsch is employed under an Employment Agreement that expires on
September 13, 2001 and under which she currently receives an annual base
salary of $190,000. Prodigy paid Ms. Hirsch a sign-on bonus of $180,000. Ms.
Hirsch is eligible to receive an annual performance bonus of up to 50% of her
base salary, contingent upon the successful completion of personal and
corporate goals as mutually established. Ms. Hirsch is also eligible to
participate in all of the Company's fringe benefit programs. In the event the
Company terminates Ms. Hirsch's employment other than for cause after Ms.
Hirsch's third month of service with the Company, Ms. Hirsch will continue to
receive her base salary and fringe benefits for six months and will be
entitled to certain accelerated vesting of stock options. In the event that
Prodigy has not offered to renew her Employment Agreement prior to its
expiration, Ms. Hirsch will continue to receive her base salary and fringe
benefits for six months and will be entitled to receive a performance bonus
for such six-month period.
Ms. Pooth is employed under an Employment Agreement that expires on May 31,
2000 and under which she currently receives an annual base salary of $190,000.
Ms. Pooth is eligible to receive an annual performance bonus of up to 50% of
her base salary, contingent upon the successful completion of personal and
corporate goals as mutually established. Ms. Pooth is eligible to participate
in all of the Company's fringe benefit programs, and is entitled to certain
accelerated vesting of stock options upon a change in control of the Company.
In the event the Company terminates Ms. Pooth's employment other than for
cause, Ms. Pooth will continue to receive her base salary and fringe benefits
for nine months, a performance bonus for such nine-month period and a
severance payment based on her length of service. In the event the Company has
not offered to renew her Employment Agreement prior to its expiration, Ms.
Pooth will continue to receive her base salary and fringe benefits for nine
months plus a severance payment based on her length of service. In addition,
if Ms. Pooth resigns from the Company, she will be entitled to salary
continuation for nine months and all of her options will accelerate and remain
exercisable through December 31, 1999, provided she agrees to continue her
full-time employment through February 28, 1999.
Mr. Dougherty is employed under an Employment Agreement that expires on
November 24, 2001 and under which he currently receives an annual base salary
of $190,000. Mr. Dougherty received a sign-on bonus of $20,000 and is eligible
to receive an annual performance bonus of up to 50% of his base salary,
contingent upon the successful completion of personal and corporate goals as
mutually established. Mr. Dougherty is also eligible to participate in all of
the Company's fringe benefit programs. In the event the Company terminates Mr.
Dougherty's employment other than for cause, Mr. Dougherty will continue to
receive his base salary and fringe benefits for nine months if termination
occurs prior to November 24, 1999 (six months if termination occurs on or
after November 24, 1999).
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<PAGE>
Former Executive Officers
Mr. Gopal was employed under an Employment Agreement scheduled to expire on
September 1, 2000 providing for an initial annual base salary of $210,000
subject to annual review and increase, a sign-on bonus of $90,000, an annual
performance bonus of up to 30% of his base salary (with a guaranteed bonus of
$46,000 for 1996), customary fringe benefits and other customary provisions.
Effective May 15, 1998, Mr. Gopal resigned, and the Company agreed to pay him
severance consisting of continued salary and fringe benefits through May 15,
1999, which Mr. Gopal agreed to take in a lump sum payment on May 30, 1998.
The Company also agreed that 70,000 of Mr. Gopal's options would vest upon
termination of employment.
Mr. L'Heureux was employed under an Employment Agreement scheduled to expire
on May 31, 2000 providing for an annual base salary of $190,000 subject to
annual review and increase, a sign-on bonus of $40,000, an annual performance
bonus of up to 50% of his base salary, customary fringe benefits and other
customary provisions. Effective January 13, 1999, Mr. L'Heureux resigned, and
the Company agreed to pay him a performance bonus of $60,000 for 1998 and
severance consisting of a lump sum payment of $11,000 and continued salary and
fringe benefits for nine months. The Company also agreed that 27,083 of Mr.
L'Heureux's options would remain vested and exercisable through September 30,
1999.
Other Matters
During 1993, Mr. Salameh was employed as Vice President of Finance by Merl
Industries, a start-up management consulting firm. Due to the failure of Merl
Industries to pay Mr. Salameh his salary for an extended period of time, Mr.
Salameh filed for personal bankruptcy in Virginia on February 24, 1994 and was
discharged from bankruptcy in June 1994.
Stock Plans
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Option Plan") permits the
issuance of up to 3,125,000 shares of Common Stock upon the exercise of
options granted under the Option Plan. The Option Plan is currently
administered by the Compensation Committee of the Board of Directors. Under
the Option Plan, the Board or Compensation Committee may grant incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986
("incentive stock options") and stock options not intended to qualify as
incentive stock options ("non-statutory stock options"). Stock options may be
granted under the Option Plan to employees, directors, consultants and
advisors of the Company. Only employees of the Company and its subsidiaries
are eligible to receive incentive stock options. The Option Plan expires in
June 2006.
Subject to the provisions of the Option Plan, the Board and Compensation
Committee have the authority to determine: (i) to whom options will be
granted; (ii) the time when options may be granted; (iii) the number of shares
to be covered by each option; (iv) when the option becomes exercisable; and
(v) the exercise price of the option (which price, in the case of incentive
stock options, may not be less than the fair market value of the Common Stock
on the date of grant, or in the case of incentive stock options granted to
employees who own, directly or indirectly, more than 10% of the total combined
voting power of all classes of stock of the Company, 110% of the fair market
value of the Common Stock on the date of grant). The Company's Chief Executive
Officer has authority, without prior Board or Compensation Committee approval,
to grant options under the Option Plan and to determine the terms of such
options, provided that no grants may be made to executive officers and options
may not exceed 25,000 shares per employee per year.
The Company's philosophy is to utilize equity incentives to motivate and
retain management and employees. In June 1997, the exercise price of all
outstanding options held by active employees with exercise prices in excess of
$12.00 per share was reduced to $12.00 per share, representing the then-
current fair market value as determined by the Board of Directors. In this
repricing, options to purchase an aggregate of 383,387 shares with exercise
prices ranging from $20.00 to $28.00 per share were repriced to $12.00 per
share, including
64
<PAGE>
an option to purchase 7,250 shares held by Ms. Pooth. In May 1998, the
exercise price of all outstanding options held by active employees with
exercise prices in excess of $4.00 per share was reduced to $4.00 per share,
representing the then current fair market value as determined by the Board of
Directors. In this repricing, options to purchase an aggregate of 1,294,321
shares with exercise prices ranging from $8.00 to $12.00 per share were
repriced to $4.00 per share, including options to purchase 156,250, 93,750,
93,750, 17,500 and 93,750 shares held by Messrs. Salameh, Dougherty, L'Heureux
and Gopal and Ms. Pooth, respectively. The purpose of these repricings was to
restore the performance incentives intended to be provided by options.
As of December 31, 1998, (i) there were outstanding options under the Option
Plan to purchase an aggregate of 2,343,189 shares of Common Stock at a
weighted-average exercise price of $5.76 per share, (ii) an aggregate of 2,637
shares of Common Stock had been issued upon exercises and (iii) 779,174
additional shares of Common Stock were reserved for future option grants.
Subsequent to December 31, 1998, the Company's Board of Directors granted
options to purchase an aggregate of 314,893 shares at an exercise price of
$12.00 per share, none of which was granted to the Company's executive
officers. After the Company filed the Registration Statement for the
Offerings, two former executives of the Company contacted the Company and
asserted that their options to acquire an aggregate of 275,000 shares of
Common Stock at $12.00 per share had not expired and would remain exercisable
until 270 days after the Offering. The Company has denied this assertion and
believes that such options have expired. If these former executives file a
lawsuit against the Company, the Company will defend it vigorously. The
Company believes that this matter will not have a material adverse effect on
the Company.
1999 Outside Director Stock Option Plan
The Company's 1999 Outside Director Stock Option Plan (the "Director Plan")
permits the issuance of up to 250,000 shares of Common Stock upon the exercise
of options granted under the Director Plan. All options granted under the
Director Plan will be non-statutory stock options.
Pursuant to the Director Plan, each director of the Company who is not
employed by the Company (each, an "outside director") will receive upon the
closing of the Offering an option to purchase 30,000 shares of Common Stock at
an exercise price equal to the price per share at which shares are sold in the
Offering. Messrs. Sanchez, Elias, Nakfoor and Pillar will receive such options
upon the closing of the Offering. Thereafter, each additional outside director
will receive, upon his or her initial election to the Board of Directors, an
option to purchase 30,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. All options
granted under the Director Option Plan will vest in four equal annual
installments, based on continued service as a director, and will expire three
months after termination of service as a director. In the event of an
acquisition of the Company, 50% of all then unvested options will accelerate
and become exercisable.
1999 Employee Stock Purchase Plan
In January 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") which becomes effective upon the closing of the
Offering. The Purchase Plan authorizes the issuance of up to 500,000 shares of
Common Stock ("Shares") to eligible employees of the Company and its
subsidiaries. Employees are eligible to join the Purchase Plan if their
customary employment is more than 20 hours per week and for more than five
months in any calendar year. Employees who own (directly or indirectly, taking
into account the Shares subject to purchase under the Purchase Plan) 5% or
more of the total combined voting power or value of all classes of stock of
the Company are not eligible to participate.
The Purchase Plan permits shares to be purchased at the end of "Purchase
Periods" occurring during each "Offering Periods". Unless otherwise provided
by the Board prior to commencement, an Offering Period will begin on each May
16 and November 16, and continue for a period of 24 months. A Purchase Period
will begin on each May 16 and November 16, and will continue for a period of
six months, ending on the following November 15 or May 15, respectively. The
first Offering Period and the first Purchase Period will commence upon the
closing of the Offering. The last day of each Purchase Period (i.e., May 15 or
November 15) is the date on which Shares are actually purchased (a "Purchase
Date").
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Each eligible employee may enroll in an Offering Period by filing an
election by the first payroll date occurring during the Offering Period (or up
to 45 days after the start of the Offering Period if approved in advance by
the Board), provided such eligible employee is not already participating in an
Offering Period which began earlier. When enrolling in an Offering Period, the
employee must specify the amount to be withheld from pay on each payroll date
occurring during the Offering Period, which cannot exceed 10% of the
employee's basic rate of pay (determined at the beginning of the Offering
Period).
The amount withheld from a participating employee's pay is credited to his
or her account under the Purchase Plan. Unless the electing employee withdraws
from participation (in which case the employee will be refunded the amount in
his account, without interest), the funds in his or her account will be used
on each Purchase Date to purchase that number of Shares which can be purchased
at a price equal to the lower of 85% of the fair market value of the Shares on
the first day of the Offering Period and 85% of the fair market value of the
Shares on the Purchase Date. "Fair market value" is defined as the last sale
price of the Common Stock on the Nasdaq National Market on the applicable day.
The number of Shares otherwise subject to purchase by an employee on a
Purchase Date will be reduced proportionately (as described in the Purchase
Plan) if the number of Shares available under the Purchase Plan, or available
with respect to the Offering Period, is not sufficient to satisfy the purchase
rights of all employees on such Purchase Date. In addition, the number of
Shares otherwise subject to purchase on a Purchase Date will be reduced to the
extent necessary to insure that the employee's right to acquire Shares under
the Purchase Plan does not accrue at a rate which exceeds $25,000 in fair
market value (as determined on the first day of the Offering Period of
reference) for each calendar year during which the employee was an active
participant in the Purchase Plan.
If an employee terminates employment for any reason (including death or
disability), or withdraws from an Offering Period, such employee will not be
entitled to acquire Shares on any succeeding Purchase Date occurring with
respect to such Offering Period, and the amount in his or her account will be
refunded without interest. An employee withdrawing from an Offering Period
will not be entitled to rejoin the Purchase Plan with respect to such Offering
Period but may, if such employee otherwise qualifies, rejoin the Purchase Plan
with respect to any subsequent Offering Period.
The Purchase Plan will be administered by the Compensation Committee of the
Board. The amounts paid to the Company with respect to the purchase of Shares
may be used for any corporate purpose. The employees participating in the
Purchase Plan will have no interest, voting rights or other privileges with
respect to the Shares until they receive a certificate representing such
Shares.
Because participation in the Purchase Plan is voluntary, the Company cannot
now determine the number of Shares to be purchased by any particular current
executive officer, by all Named Executive Officers as a group or by non-
executive employees as a group.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee of the Board of Directors
are Messrs. Elias and Nakfoor. No executive officer of the Company has served
as a director or member of the compensation committee (or other committee
serving an equivalent function) of any other entity, whose executive officers
served as a director of or member of the Compensation Committee of the Board
of Directors.
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CORPORATE HISTORY AND CERTAIN TRANSACTIONS
Acquisition of Prodigy Services Company
Acquisition Terms
On June 17, 1996, the Company acquired PSC from its owners, IBM and Sears,
for $46,950,000 in cash (including $6,150,000 paid to financial advisors) plus
the issuance of 8% Contingent Convertible Promissory Notes (the "Contingent
Notes") valued at $30,500,000 by an independent appraiser. The Contingent
Notes entitled IBM and Sears to receive in the aggregate (i) in the event of a
qualifying initial public offering, 15% of the Company's Common Stock on a
fully-diluted basis, or (ii) in the event the Company is acquired, 15% of the
consideration received, provided that the value of the consideration payable
to IBM and Sears in either case was limited to $200,000,000 plus accrued
interest. IBM and Sears assumed PSC's four existing retirement plans and all
obligations thereunder. Effective as of the closing, IBM received sole
ownership of six patents jointly-owned with PSC, the Company received sole
ownership of two other jointly-owned patents, and IBM and the Company entered
into the patent cross-license agreements described under "Business--
Proprietary Rights". The Company is obligated to indemnify IBM and Sears for
claims and liabilities arising out of PSC's business, whether arising before
or after the closing of the Prodigy Acquisition, except with respect to the
retirement plans assumed by IBM and Sears.
In November 1997, IBM and Sears (i) agreed that the consideration receivable
upon conversion of the Contingent Notes would be based on the valuation of the
Company in excess of $250,000,000 (with the aggregate consideration payable to
IBM and Sears still limited to $200,000,000 plus interest from June 17, 1996)
and (ii) were granted Contingent Stock Purchase Warrants (the "Contingent
Warrants") to purchase shares of Common Stock of the Company at 130% of the
fair market value thereof at the time of conversion of the Contingent Notes.
The aggregate number of shares of Common Stock issuable to IBM and Sears upon
conversion of the Contingent Notes and exercise of the Contingent Warrants
cannot exceed 15% of the number of shares outstanding upon completion of the
Offering. As a condition to these arrangements, Carso Global Telecom prepaid
(on behalf of and as an advance to the Company) the balance due on the
Company's former White Plains lease ($5,831,000) and established a $4,000,000
letter of credit, declining quarterly over three years, to secure certain
payment obligations of the Company under PSC contracts for which IBM and Sears
remain liable. See Notes 1, 4 and 9 to the Company's Consolidated Financial
Statements.
Upon the closing of the Offering (at an assumed initial public offering
price of $13.50 per share), IBM and Sears will each (i) receive 1,988,684
shares of Common Stock pursuant to the conversion of its Contingent Note and
(ii) hold a Contingent Warrant to purchase 2,437,191 shares of Common Stock
(2,527,191 shares if the Underwriters' over-allotment option is exercised in
full) at an exercise price of $17.55 per share (subject to customary anti-
dilution adjustments) at any time prior to the third anniversary of the
Offering. IBM and Sears have customary piggyback and demand registration
rights, at the Company's expense, with respect to the Common Stock issuable
upon conversion of the Contingent Notes or exercise of the Contingent
Warrants, including customary indemnification and other provisions. After
conversion of the Contingent Notes or exercise of the Contingent Warrants, IBM
and Sears have agreed to vote their shares of Common Stock in accordance with
the voting recommendations of the Company's Board of Directors.
Reorganization
In connection with the Prodigy Acquisition, the Company was formed to
acquire PSC and to hold all of the outstanding stock of IW, and IW retained
its existing cellular telephone assets and conveyed its other assets to other
subsidiaries of the Company. The new holding-company structure was created to
effect the Prodigy Acquisition and to consolidate the Company's cellular
telephone assets within IW in order to position IW for separate sale or
financing. As a result of this reorganization, all outstanding Common Stock of
IW was automatically converted into Common Stock of the Company on a one-for-
one basis. See "--Prior Corporate History".
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Other Arrangements with IBM and Sears
In October 1998, the Company sold to IBM a version of Prodigy's service
provider platform software enabling an ISP to manage subscriber data. IBM paid
the Company $2,000,000, and the Company retained a perpetual, royalty-free
license to use and upgrade the software for its own use. The Company does not
use such software to manage its own subscriber data. See "Business--
Technology".
Between the closing of the Prodigy Acquisition and October 1997, IBM and
Sears paid the State of New York $3.4 million for sales and use taxes assessed
against PSC for certain periods ended prior to the Prodigy Acquisition. In
October 1997, the Company, IBM and Sears agreed that each of them would be
liable for one-third of all sales and use taxes assessed against PSC for
periods ended prior to the Prodigy Acquisition, and Carso Global Telecom paid
(as an advance to the Company) $567,000 to each of IBM and Sears in light of
prior payments of such taxes by IBM and Sears.
Prior to outsourcing its network to Splitrock, Prodigy utilized a network
backbone and certain POPs provided by Advantis (a joint venture of IBM and
Sears) and subsequently by IBM Global Services after IBM acquired Sears'
interest in Advantis during 1997. Splitrock continues to use certain POPs
provided by IBM Global Services. The Company also purchases computer equipment
from IBM on normal commercial terms. During the period June 17, 1996 through
December 31, 1996, the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, the Company paid IBM/Advantis an aggregate
of $17,116,000, $33,244,000 and $7,875,000 for network services and equipment
purchases.
At the time of outsourcing its network to Splitrock, Prodigy had certain
non-cancellable commitments to purchase network services from Advantis/IBM
Global Services. In December 1998, in settlement of such commitments, the
Company agreed to purchase from IBM, on normal commercial terms, certain
maintenance and voice-related network services in the aggregate amount of
$7,500,000 prior to December 31, 2000. If the aggregate amount of such
purchases does not equal $7,500,000 by December 31, 2000, the Company must pay
the balance in cash on or before December 31, 2000.
Prior to the Prodigy Acquisition, PSC utilized a network backbone and
certain POPs provided by Advantis and purchased computer equipment from IBM.
During the year ended December 31, 1995 and the period January 1, 1996 through
June 16, 1996, PSC paid Advantis $3,347,000 and $4,355,000, respectively, for
network services and paid IBM $13,686,000 and $4,893,000, respectively, for
computer equipment. See Note 4 to the Consolidated Financial Statements of
Prodigy Services Company for a description of certain other transactions among
PSC, IBM and Sears.
Certain Transactions involving Carso Global Telecom, Telmex and Greg C. Carr
Funding Agreement
Set forth below is a summary of the Funding Agreement entered into by the
Company, Carso Global Telecom and Greg C. Carr on May 12, 1996 in connection
with the Prodigy Acquisition (the "Funding Agreement"). All obligations under
the Funding Agreement have been performed and the Funding Agreement has no
further effect.
Pursuant to the Funding Agreement, Carso Global Telecom and Mr. Carr granted
the Company stock puts giving the Company the right to require Carso Global
Telecom and Mr. Carr to purchase shares of Common Stock with an aggregate
purchase price of up to $125,000,000 and $12,500,000, respectively, subject to
reduction in certain circumstances. The stock puts originally were exercisable
at a price of $24.00 per share until the earlier of November 12, 1997 or the
closing of the Company's initial public offering with gross proceeds of at
least $25,000,000. The Funding Agreement also contained a commitment from
Carso Global Telecom and Mr. Carr to invest $5,000,000 and $2,000,000,
respectively, in the Company's next private placement. The Company also
granted Carso Global Telecom an option, which was not exercised, to purchase
the Company's cellular telephone
licenses and assets in the Ivory Coast and Guinea for $69,000,000 prior to
July 26, 1996. On October 31, 1996,
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the Funding Agreement was amended to reduce the exercise price of the stock
puts to $12.00 per share and the investment commitments of Carso Global
Telecom and Mr. Carr in the Company's next private placement were changed to
$3,500,000 each. On March 18, 1997, the Funding Agreement was further amended
as follows: (i) the amount of Carso Global Telecom's stock put was reduced by
$8,444,762, (ii) the amount of Mr. Carr's stock put was increased by
$8,500,000, (iii) Carso Global Telecom and Mr. Carr agreed to the exercise of
$65,000,000 and $15,000,000 of the stock puts, respectively, and (iv) the
expiration of the remaining stock puts was extended to May 12, 1998. The
proceeds of the foregoing $65,000,000 and $15,000,000 of stock puts, together
with the proceeds of their additional financing commitments of $3,500,000
each, were paid to the Company in connection with the October 1996 Placement
described below under "--Prior Equity Financings". The final amount of the
stock puts, after giving effect to certain reductions contained in the Funding
Agreement and the changes made by the March 18, 1997 amendment to the Funding
Agreement, was $103,938,467 for Carso Global Telecom and $20,990,533 for Mr.
Carr. By October 1, 1997, the stock puts had been fully exercised for
8,661,539 shares and 1,749,211 shares, respectively.
Pending expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), applicable to
certain of the stock put exercises, (i) Carso Global Telecom loaned
$71,500,000 to the Company on an interest-free basis (subsequently converted
into 7,208,333 shares), (ii) Carso Global Telecom caused Banco Inbursa, an
affiliate of Carso Global Telecom, to loan $13,650,000 to the Company at 9%
interest (subsequently repaid in full), (iii) Mr. Carr loaned $16,000,000 to
the Company on an interest-free basis (subsequently converted into 1,333,333
shares) and (iv) Mr. Carr loaned $1,500,000 to the Company at 9% interest
(subsequently converted into 125,000 shares). All such loans were unsecured,
and the proceeds were used to finance the Company's operations, except that
$40,000,000 of the proceeds was used to repay indebtedness owed to Banco
Inbursa under its prior revolving line of credit. See "--Loans from Banco
Inbursa".
Warrants
Set forth below is a summary of certain stock purchase warrants previously
granted by the Company to Carso Global Telecom and Mr. Carr. All such warrants
have been exercised or cancelled.
In consideration of their commitments under the Funding Agreement, the
Company granted Carso Global Telecom and Mr. Carr (i) warrants to purchase
675,000 shares and 67,500 shares, respectively, of Common Stock for $12.00 per
share (the "Initial Warrants"), exercisable until December 31, 1996, and (ii)
warrants to purchase 500,000 shares and 250,000 shares, respectively, of
Common Stock for $36.00 per share (the "Additional Warrants"), exercisable
until the earlier of (a) the closing of the Company's initial public offering
or (b) November 12, 1997. On October 2, 1996, Mr. Carr exercised his Initial
Warrant at the Company's request for $11.72 per share, reflecting a discount
(based on the interest rate paid under the Company's bank debt) from the
original exercise price in order to induce early exercise. On December 27,
1996, Carso Global Telecom exercised its Initial Warrant for $12.00 per share.
In connection with the October 31, 1996 amendment of the Funding Agreement,
Mr. Carr's Additional Warrant was cancelled and the number of shares subject
to Carso Global Telecom's Additional Warrant was reduced from 500,000 to
250,000 and its exercise price was reduced to $28.00 per share. In
consideration of the increased financing commitments under the March 18, 1997
amendment to the Funding Agreement, the Company granted Carso Global Telecom
and Mr. Carr warrants (the "March 1997 Warrants") to purchase 3,250,000 shares
and 500,000 shares, respectively, of Common Stock for $12.00 per share,
exercisable prior to the expiration of the stock puts, and Carso Global
Telecom's Additional Warrant was cancelled. In consideration of certain
interim financing commitments made by Carso Global Telecom and Mr. Carr in
October 1997, the exercise price of the March 1997 Warrants was reduced from
$12.00 per share to $4.00 per share. Carso Global Telecom exercised its March
1997 Warrant in April 1998. Mr. Carr subsequently transferred his March 1997
Warrant to a third party, who exercised such March 1997 Warrant in May 1998.
Board Arrangements
Mr. Carr was Chairman of the Board and a director of the Company from its
formation in June 1996 until his resignation in July 1998 and was also a
director of IW from March 1995 until January 1997. The Company
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paid Mr. Carr an annual fee of $135,000 from May 1996 until his resignation in
recognition of the fact that Mr. Carr's duties as Chairman of the Board were
significantly greater than the duties ordinarily assumed by a Chairman of the
Board.
In connection with the March 18, 1997 amendment of the Funding Agreement,
Carso Global Telecom and Mr. Carr agreed that, until the earlier of March 18,
2007 or one year after the Company's initial public offering with gross
proceeds of at least $25,000,000, (i) Carso Global Telecom would have the
right to designate 60% of the Company's directors, (ii) Mr. Carr would have
the right to designate 40% of the Company's directors, (iii) Mr. Carr would
vote all shares over which he (or any affiliate of Mr. Carr) exercised voting
control in favor of the election of the directors designated by Carso Global
Telecom and (iv) Carso Global Telecom would vote all shares over which it (or
any affiliate of Carso Global Telecom) exercised voting control in favor of
the election of the directors designated by Mr. Carr. In connection with
Telmex's purchase of 3,250,000 shares from Mr. Carr in August 1998, Carso
Global Telecom and Mr. Carr agreed to terminate the foregoing voting
agreement, and Carso Global Telecom agreed to continue, until the earlier of
July 24, 1999 or Mr. Carr's resignation as a director, to vote all shares over
which it (or any of its affiliates) exercised voting control in favor of the
election of Mr. Carr as a director. On July 24, 1998, Mr. Carr resigned as
Chairman of the Board and, on July 31, 1998, Mr. Carr resigned as a director
of the Company. See "--Certain Stock Purchases by Telmex".
Certain Stock Purchases by Telmex
In August 1998, Telmex purchased 3,250,000 shares of Common Stock from Mr.
Carr for $8.00 per share for an aggregate purchase price of $26,000,000. Mr.
Carr concurrently purchased 288,656 shares at the same price from family
members and certain other stockholders. Pending the termination of the waiting
period under the HSR Act applicable to Telmex's purchase from Mr. Carr, Telmex
loaned $26,000,000 to Mr. Carr. Such loan did not bear interest and was
secured by Mr. Carr's pledge to Telmex of 3,250,000 shares. Telmex and Carso
Global Telecom also granted Mr. Carr certain co-sale rights to participate in
subsequent sales by Telmex or Carso Global Telecom, which rights will expire
upon the closing of the Offering.
In August 1998, Telmex purchased 37,500 shares of Common Stock from Paul W.
DeLacey for $8.00 per share for an aggregate purchase price of $300,000. Mr.
DeLacey served as President and Chief Executive Officer of the Company from
June 1996 until September 1997 and as a director of the Company from June 1996
until July 1998. Mr. DeLacey concurrently purchased 6,250 shares at the same
price from family members. Pending the termination of the waiting period under
the HSR Act applicable to Telmex's purchase from Mr. DeLacey, Telmex loaned
$300,000 to Mr. DeLacey. Such loan did not bear interest and was secured by
Mr. DeLacey's pledge to Telmex of 37,500 shares. In connection with this
transaction, Mr. DeLacey resigned as a director of the Company on July 24,
1998.
As a result of Telmex's purchases of an aggregate of 3,287,500 shares from
Messrs. Carr and DeLacey as described above, and its purchase of 6,125,000
shares from the Company as described below under "--Prior Equity Financings",
Telmex currently owns 20.9% of the Company's outstanding Common Stock. Upon
consummation of the Offerings (at an assumed initial public offering price of
$13.50 per share), Telmex will own 19.3% of the Company's outstanding Common
Stock upon the closing of the Offerings. See "Principal Stockholders".
Loans from Banco Inbursa
Set forth below is a summary of certain loans previously made to the Company
by Banco Inbursa. All such loans have been repaid (with interest as
applicable) in cash.
In June 1996, Banco Inbursa agreed to provide the Company with a $50,000,000
revolving line of credit with an original maturity of June 13, 1997. In June
1996, the Company borrowed $48,000,000 in order to pay
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the cash portion of the purchase price for the Prodigy Acquisition and related
expenses and subsequently borrowed the remaining $2,000,000. In March 1997,
the Company repaid $40,000,000 to Banco Inbursa. See "--Funding Agreement". In
June 1997, Banco Inbursa agreed to extend the line of credit for $10,000,000
until January 31, 1998. Advances under the line of credit bore interest at the
prime rate plus one-half percentage point. Between February 1998 and July
1998, Banco Inbursa made additional advances to the Company in the aggregate
amount of $22,100,000 to fund operations; such loans bore 9% interest and were
due December 31, 1999. In late July 1998, the Company repaid all $32,100,000
then owed to Banco Inbursa. Banco Inbursa also made interim loans to the
Company pending the closing of certain equity financings, all of which loans
have been repaid. See "--Prior Equity Financings".
In June 1996, Carso Global Telecom and Mr. Carr pledged 1,750,000 shares and
2,500,000 shares of Common Stock, respectively, owned by them to secure
amounts outstanding under the Banco Inbursa line of credit. In connection with
the October 31, 1996 amendment of the Funding Agreement, Mr. Carr agreed to
continue his stock pledge until June 13, 1998 to secure a new line of credit
from a United States bank or other debt financing to replace the Banco Inbursa
line of credit. In October 1997, Mr. Carr agreed to pledge 1,875,000 shares of
Common Stock to secure advances of $3,750,000 from Banco Inbursa to the
Company until the closing of the Company's rights offering in December 1997.
All stock pledges of Carso Global Telecom and Mr. Carr were released in July
1998.
Loans from Greg C. Carr
Set forth below is a summary of certain loans previously made to the Company
by Mr. Carr. All such loans have been repaid (with interest as applicable) in
cash or through conversion into Common Stock of the Company.
In November and December 1996, Mr. Carr loaned $6,000,000 to the Company.
Such loans bore interest at the prime rate plus 1 1/4 percentage points and
were repaid with interest on January 2, 1997.
From March 31, 1995 to May 15, 1995, Mr. Carr provided a revolving line of
credit of $1,250,000 to the Company. See "--Prior Corporate History--ACI
Merger". As of May 15, 1995, Mr. Carr converted the advances and accrued
interest then outstanding ($730,000 in total) into Common Stock at $10.00 per
share. From November 15, 1995 to June 12, 1996, Mr. Carr provided a revolving
line of credit of $4,500,000 to the Company. Effective as of March 31, 1996,
Mr. Carr converted $3,000,000 in advances into 250,000 shares of Common Stock
at $12.00 per share in connection with the November 1995 Placement described
below under "--Prior Equity Financings". Effective as of June 12, 1996, Mr.
Carr converted the remaining $1,500,000 in advances into 125,000 shares of
Common Stock at $12.00 per share. Advances under both facilities were secured
by all of the Company's assets, bore interest at a floating interest rate
based on the prime rate and were used to finance the Company's operations.
Upon establishment of the $4,500,000 facility, the Company paid Mr. Carr a
commitment fee equal to 1% of the total facility ($45,000) through the
issuance of 3,750 shares of Common Stock valued at $12.00 per share.
Prior Equity Financings
In August 1998, Telmex purchased 6,125,000 shares of Common Stock from the
Company for $8.00 per share for aggregate gross proceeds of $49,000,000, and
in July 1998 Carso Global Telecom purchased 1,375,000 shares of Common Stock
from the Company for $8.00 per share for aggregate gross proceeds of
$11,000,000. Pending the termination of the applicable waiting period under
the HSR Act, Telmex's investment in the Company was represented by an
unsecured, interest-free loan to the Company.
In November 1997, the Company made a rights offering in which each
stockholder of the Company was entitled to purchase one share of Common Stock
at a price of $4.00 per share for each one share held as of October 10, 1997.
The offering price was determined by the Company's Board of Directors to equal
the fair market value of the Common Stock at that time upon consideration of
certain analyses undertaken by a financial advisor as to the range within
which the purchase price would be fair to the Company from a financial point
of
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view and after consideration of other factors. On December 19, 1997, the
Company closed the rights offering by issuing an aggregate of 12,640,478
shares to 36 stockholders of the Company, including 12,385,955 shares to Carso
Global Telecom and 125,000 shares to Mr. Carr. Mr. Carr paid the purchase
price for his shares through the conversion of $500,000 of prior advances to
the Company without interest. In payment for its 12,385,955 shares, Carso
Global Telecom (i) was credited with $4,000,000 by reason of the issuance of
the IBM/Sears LC, (ii) paid $13,750,000 directly to Banco Inbursa on the
Company's behalf in repayment of $13,750,000 of indebtedness owed by the
Company to Banco Inbursa (see "--Loans from Banco Inbursa") and (iii) paid the
remaining $31,793,822 to the Company. Each calendar quarter, Carso Global
Telecom is required to pay the Company an amount equal to $333,333 less any
draws on the IBM/Sears LC during such quarter until the entire $4,000,000 has
been paid to the Company or drawn under the IBM/Sears LC. As of December 31,
1998, Carso Global Telecom had paid $1,333,333 pursuant to such commitment and
the IBM/Sears LC had been reduced to $2,666,667.
Between October 1996 and May 1997, the Company received aggregate gross
proceeds of $88,843,235 from the private placement (the "October 1996
Placement") of 7,403,603 shares of Common Stock for $12.00 per share. In the
October 1996 Placement, Carso Global Telecom and Mr. Carr invested $68,500,000
and $18,500,000, respectively, through exercises of the stock puts and the
financing commitments contained in the Funding Agreement, and Mr. Pillar
invested $30,000. See "--Funding Agreement". The Company granted a warrant to
purchase 17,014 shares of Common Stock for $12.00 per share, exercisable at
any time prior to December 13, 2001, to a placement agent in the October 1996
Placement, and paid a financial advisor cash fees totalling $150,000.
Pursuant to an agreement dated April 11, 1996, Carso Global Telecom
purchased 1,750,000 shares of Common Stock from the Company for $12.00 per
share (for aggregate gross proceeds of $21,000,000) on various dates between
March 1996 and September 1996.
Between November 1995 and March 1996, the Company received aggregate gross
proceeds of $7,376,508 from the private placement (the "November 1995
Placement") of 614,709 shares of Common Stock for $12.00 per share. Mr. Carr
purchased 250,000 shares in the November 1995 Placement for $3,000,000 upon
the conversion of advances made by him to the Company under a line of credit.
See "--Loans from Greg C. Carr". The Company paid a placement agent in the
November 1995 Placement a cash fee of $50,000 and granted other placement
agents (i) a warrant to purchase 33,333 shares of Common Stock for $12.00 per
share, exercisable at any time prior to August 15, 2005, and (ii) a warrant to
purchase 11,095 shares of Common Stock for $12.00 per share, exercisable at
any time prior to March 1, 2001. The foregoing warrants are currently
outstanding.
Between May 1995 and November 1995, the Company received aggregate gross
proceeds of $3,081,250 from the private placement (the "May 1995 Placement")
of 308,125 shares of Common Stock for $10.00 per share. Mr. Carr purchased
100,000 shares in the May 1995 Placement for $1,000,000. The Company paid a
placement agent in the May 1995 Placement a cash fee of $77,438 and granted
other placement agents (i) a warrant to purchase 4,000 shares of Common Stock
for $10.00 per share, exercisable at any time prior to August 15, 2005, and
(ii) a warrant to purchase 1,960 shares of Common Stock for $10.00 per share,
exercisable at any time prior to March 1, 2001. The foregoing warrants are
currently outstanding.
Between October 1994 and February 1995, the Company received aggregate gross
proceeds of $907,456 from the private placement (the "October 1994 Placement")
of 113,432 shares of Series A Convertible Preferred Stock ("Series A Stock")
for $8.00 per share. On March 31, 1995, each share of Series A Stock was
reclassified and changed into 1.25 shares of Common Stock (for an aggregate of
141,790 shares of Common Stock), resulting in an effective purchase price for
the investors in the October 1994 Placement of $6.40 per share of Common
Stock. The rate at which Series A Stock was exchanged for Common Stock was
intended to compensate the holders of Series A Stock for the value of the
liquidation preference they relinquished upon the reclassification of their
shares into Common Stock.
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As a result of their purchases from the Company as described above, and
certain purchases from other stockholders of the Company, Carso Global Telecom
and Telmex currently own 65.3% and 20.9%, respectively, of the Company's
outstanding Common Stock. Upon the closing of the Offerings (at an assumed
initial public offering price of $13.50 per share), Carso Global Telecom will
own 49.8% of the Company's outstanding Common Stock and Telmex will own 19.3%
of the Company's outstanding Common Stock. As a result of certain sales to
other stockholders of the Company, including his sale of 3,250,000 shares to
Telmex in August 1998, Mr. Carr currently owns less than 5% of the Company's
outstanding Common Stock. See "--Certain Stock Purchases by Telmex".
Prior Corporate History
Comstar Transaction
The Company's predecessor, IW, was formed in Delaware in May 1994 to develop
and operate cellular telephone systems in Africa. On August 10, 1994, IW
acquired all of the assets of Comstar Cellular Network, Inc. and assumed
Comstar's outstanding accounts payable. At the time of the acquisition,
Comstar's corporate records were incomplete and there had been an overissuance
of Comstar's common stock. Comstar also required an immediate cash infusion in
order to complete the activities required to convert the two provisional
communications licenses it held in Africa into definitive licenses. In
exchange for Comstar's assets, IW issued to Comstar all then outstanding
common stock of IW, which Comstar then distributed as a liquidating dividend
to the holders of certificates for common stock of Comstar. Each holder of a
certificate for common stock of Comstar was required to acknowledge and accept
the terms of the Comstar acquisition and release Comstar and IW from all
claims which such holder may have had against either Comstar or IW. The terms
of the Comstar acquisition were accepted by the holders of 98% of the
certificates for common stock of Comstar (representing 78% of the number of
shares covered by outstanding certificates for common stock of Comstar), and
an aggregate of 5,409,213 shares of IW common stock were issued to the former
holders of Comstar certificates. Three persons chose not to participate in the
Comstar acquisition and received no IW shares. See "Business--Legal
Proceedings". In March 1995, Comstar was dissolved under Nevada law. The
Company believes that the Comstar acquisition provided the holders of
certificates for common stock of Comstar with the opportunity to acquire
equity participation, without further investment, in a properly constituted
corporation without the corporate irregularities or claims of creditors faced
by Comstar and in substantially the same proportions as they would have had in
Comstar had their certificates been validly issued.
ACI Merger
On March 31, 1995, African Communications Incorporated ("ACI") was merged
with and into IW (the "ACI Merger"). Prior to the ACI Merger, IW and ACI had
jointly evaluated certain African markets and established IW's initial foreign
subsidiaries. ACI had no material assets or liabilities other than its equity
interests in the initial foreign subsidiaries and loans of approximately
$450,000 to IW and certain of its foreign subsidiaries. Immediately prior to
the ACI Merger, ACI assigned these loans to Mr. Carr (who was then ACI's sole
stockholder), and Mr. Carr agreed to make approximately $800,000 in additional
loans available to IW. See "--Loans from Greg C. Carr". In the ACI Merger, Mr.
Carr received 2,790,564 shares of common stock of IW, representing 33.8% of
the outstanding common stock immediately after the ACI Merger and 32.3% of the
then outstanding common stock on a fully-diluted basis. The terms of the ACI
Merger were negotiated to reflect the fact that the initial foreign
subsidiaries were owned by IW and ACI in a two-to-one ratio.
Dispositions of Former International Operations
On January 27, 1997, the Company sold IW to an acquisition corporation (the
"Cellular Buyer") formed by Terrance P. Dillon, a former director and
principal stockholder of the Company and IW. At the time of the sale, IW's
assets consisted of cellular communications licenses and license applications
in certain African
73
<PAGE>
countries and the associated rights and assets used in the Company's cellular
telephone operations. The original purchase price consisted of (i) the
surrender of 1,392,857 shares of Common Stock of the Company (valued by the
parties at $27.00 per share), (ii) a Promissory Note (the "Cellular Note") in
the original principal amount of $21,500,000 (including $1,500,000 in
reimbursement of capital expenditures made by the Company for the benefit of
IW) and (iii) the cancellation of options to purchase 125,000 shares of Common
Stock of the Company. In October 1997, the Cellular Buyer surrendered an
additional 573,580 shares of Common Stock of the Company held by the Cellular
Buyer (valued by the parties at $12.00 per share) to reduce its unpaid
obligations under the Cellular Note and to satisfy unpaid indemnification
obligations owed to the Company. As of December 31, 1998, $17,655,000 in
principal amount and accrued interest was outstanding under the Cellular Note.
Due to uncertainties associated with the efforts of the Cellular Buyer to
obtain financing, the Cellular Note has been recorded in the Company's
accounts at a book value of zero.
On October 1, 1998, the Company sold Africa Online, Inc. ("AFOL"), an ISP
operating in various African countries, for $2,815,000 in cash, of which
$750,000 was placed in escrow for six months to secure the Company's
indemnification obligations to the buyer. In connection with the sale of AFOL,
24,230 shares of Common Stock of the Company were surrendered to the Company
(of which 17,180 shares were surrendered by a former employee and 7,050 were
returned to the Company out of the escrow established when the Company
acquired AFOL in November 1995).
The Company formerly participated in several joint ventures which offered
Internet, online, voice messaging and fax messaging services in China. In
March 1998, the Company terminated its Chinese joint ventures and operations.
See Note 5 to the Company's Consolidated Financial Statements.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of December 31, 1998 and as
adjusted to give effect to the Offerings by (i) each person or entity known to
the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) each of the directors of the Company, (iii) each of the Named Executive
Officers and (iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares to be
Shares Beneficially Beneficially Owned
Owned Prior to the after the
Offerings(1) Offerings(1)(2)
--------------------- ---------------------
Name of Beneficial Owner Number Percentage Number Percentage
------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Directors, Executive
Officers and 5% Stockholders:
Carso Global Telecom(3).......... 29,396,911 65.3% 29,396,911 49.8%
Telmex(4)........................ 9,412,500 20.9 11,412,500 19.3
Samer F. Salameh(5)(6)........... 68,750 * 87,500 *
Alfredo Sanchez(6)............... -- -- -- --
Arturo Elias(6).................. -- -- -- --
James M. Nakfoor(6).............. 9,375 * 9,375 *
Russell I. Pillar(7)............. 121,250 * 140,000 *
David C. Trachtenberg............ -- -- -- --
David R. Henkel.................. -- -- -- --
Andrea S. Hirsch................. -- -- -- --
Carena M. Pooth(8)............... 34,016 * 34,016 *
James P. Dougherty(9)............ 43,750 * 43,750 *
All current executive officers
and directors as a group (10
persons)(6)(10)................. 277,141 * 314,641 *
Other 5% Stockholders:
IBM(11).......................... -- -- 4,425,875 7.2
Sears(12)........................ -- -- 4,425,875 7.2
Former Executive Officers:
Inder S. Gopal................... -- -- -- --
James L'Heureux(13).............. 27,083 * 27,083 *
</TABLE>
- ----------
* Denotes ownership of less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual or entity has
sole or shared voting power or investment power and any shares as to
which the individual or entity has the right to acquire within 60 days
after December 31, 1998 through the exercise of any stock option, warrant
or other right (but such shares are not deemed outstanding for purposes
of calculating the percentage ownership of any other person). The
inclusion herein of any such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial
owner of such shares. Unless otherwise indicated, each person or entity
named in the table has sole voting power and investment power (or, in the
case of individuals, shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
(2) Shares to be beneficially owned after the Offerings give pro forma effect
to the Offering and the Telmex Purchase and the issuance to IBM and Sears
of an aggregate of 3,977,368 shares upon the closing of the Offering (at
an assumed initial public offering price of $13.50 per share) pursuant to
the conversion of the Contingent Notes held by them. See "Corporate
History and Certain Transactions--Acquisition of Prodigy Services
Company" and Notes 1, 4 and 9 to the Company's Consolidated Financial
Statements.
(3) Excludes the listed shares held by Telmex. Carso Global Telecom may be
deemed to control Telmex though the regular-voting shares of Telmex that
it owns directly and its interest in a trust which owns a majority of
Telmex's outstanding regular-voting shares. In June 1996, Carso Global
Telecom was spun-off from Grupo
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<PAGE>
Carso, S.A. de C.V. ("Grupo Carso"), a Mexican holding company with
interests in the tobacco, mining, metallurgical and paper industries, in
the operation of restaurants and department stores and in the production
of copper, copper alloys, copper cable, aluminum wire and tires. Mr.
Carlos Slim Helu, a Mexican citizen, and certain members of his immediate
family, beneficially own a majority of the outstanding voting equity
securities of Carso Global Telecom. Thus, Mr. Slim and members of his
immediate family may be deemed to control Carso Global Telecom, Telmex and
the Company. See "Risk Factors--Control of the Company and Potential
Conflicts of Interest". As used herein with respect to the Company, all
references to Carso Global Telecom mean and include Grupo Carso prior to
the date Carso Global Telecom was spun-off from Grupo Carso. The business
address of Carso Global Telecom and Mr. Slim is Paseo de las Palmas, #736,
Col. Lomas de Chapultepec, Mexico City, Mexico 11000.
(4) The listed shares are held by Sercotel, S.A. de C.V., a wholly-owned
subsidiary of Telmex. Telmex's business address is Parque Via 190,
Oficina 1016, Colonia Cuauhtemoc, Mexico City, Mexico 06599. See footnote
(3).
(5) Consists of 68,750 shares of Common Stock subject to outstanding stock
options that are exercisable within 60 days after December 31, 1998 and,
upon closing of the Offering, 18,750 additional shares of Common Stock
subject to stock options that will become exercisable upon the closing of
the Offering.
(6) Excludes the listed shares held by Carso Global Telecom and Telmex. See
"Management".
(7) Pre-Offering figures include 68,750 shares of Common Stock subject to
outstanding stock options that are exercisable within 60 days after
December 31, 1998. Post-Offering figures include 18,750 additional shares
of Common Stock subject to stock options that will become exercisable
upon the closing of the Offering.
(8) Consists of 34,016 shares of Common Stock subject to outstanding stock
options that are exercisable within 60 days after December 31, 1998.
(9) Consists of 43,750 shares of Common Stock subject to outstanding stock
options that are exercisable within 60 days after December 31, 1998.
(10) Pre-Offering figures include an aggregate of 215,266 shares of Common
Stock subject to outstanding stock options that are exercisable within 60
days after December 31, 1998. Post-Offering figures include 37,500
additional shares of Common Stock subject to stock options that will
become exercisable upon the closing of the Offering.
(11) Upon the closing of the Offering (at an assumed initial public offering
price of $13.50 per share), consists of (i) 1,988,684 shares issued to
IBM pursuant to the conversion of the Contingent Note held by IBM and
(ii) 2,437,191 shares of Common Stock (2,527,191 shares if the
Underwriters' over-allotment option is exercised in full) issuable to IBM
upon exercise of the Contingent Warrant held by it with an exercise price
of $17.55 per share. See "Corporate History and Certain Transaction--
Acquisition of Prodigy Services Company". IBM's business address is New
Orchard Road, Armonk, New York 10504.
(12) Upon the closing of the Offering (at an assumed initial public offering
price of $13.50 per share), consists of (i) 1,988,684 shares issued to
Sears pursuant to the conversion of the Contingent Note held by Sears and
(ii) 2,437,191 shares of Common Stock (2,527,191 shares if the
Underwriters' over-allotment option is exercised in full) issuable to
Sears upon exercise of the Contingent Warrant held by it with an exercise
price of $17.55 per share. See "Corporate History and Certain
Transaction--Acquisition of Prodigy Services Company". Sears' business
address is 3333 Beverly Road, Hoffman Estates, Illinois 60179.
(13) Consists of 27,083 shares of Common Stock subject to outstanding stock
options that are exercisable within 60 days after December 31, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offerings, the authorized capital stock of the
Company will consist of 150,000,000 shares of Common Stock, $.01 par value per
share, and 10,000,000 shares of Preferred Stock, $.01 par value per share. As
of December 31, 1998, there were outstanding (i) 45,034,302 shares of Common
Stock held by 431 stockholders of record, (ii) options to purchase an
aggregate of 2,343,189 shares of Common Stock at a weighted-average exercise
price of $5.76 per share, (iii) warrants to purchase an aggregate of 122,402
shares of Common Stock at a weighted-average exercise price of $11.08 per
share and (iv) the Contingent Notes and Contingent Warrants held by IBM and
Sears. Upon the closing of the Offerings (at an assumed initial public
offering price of $13.50 per share), (i) there will be outstanding 59,011,670
shares of Common Stock, after giving effect to the conversion of the
Contingent Notes held by IBM and Sears into an aggregate of 3,977,368 shares
of Common Stock, and (ii) the Contingent Warrants will be exercisable for an
aggregate of 4,874,382 shares of Common Stock (5,054,382 shares if the
Underwriters' over-allotment option is exercised in full) at an exercise price
of $17.55 per share (subject to customary anti-dilution adjustments) at any
time prior to the third anniversary of the Closing. See "Management--Stock
Plans" and "Corporate History and Certain Transactions--Acquisition of Prodigy
Services Company".
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Certificate of Incorporation and By-laws, as in effect upon
the closing of the Offering, is not intended to be complete and is qualified
by reference to the provisions of applicable law and to the Company's
Certificate of Incorporation and By-laws included as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information".
Common Stock
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Upon the closing of the Offering, certain
holders of Common Stock have the right to require the Company to effect the
registration of their shares of Common Stock in certain circumstances. See
"Shares Eligible for Future Sale--Registration Rights".
Preferred Stock
The Board of Directors is authorized, without any further action by the
Company's stockholders, to designate and issue shares of Preferred Stock in
one or more series and to fix the rights and preferences thereof, including
the voting, dividend, conversion, redemption and liquidation rights and
preferences. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible financings, acquisitions and other
corporate purposes, could adversely affect the rights of the holders of Common
Stock and, under certain circumstances, be used as a means of discouraging,
delaying or preventing a change of control or acquisition of the Company. The
Company has no present plans to issue any Preferred Stock.
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<PAGE>
Delaware Anti-Takeover Statute
Section 203 of the Delaware General Corporation Law ("DGCL") is applicable
to publicly-held corporations organized under the laws of Delaware, including
the Company. Subject to certain exceptions set forth therein, Section 203 of
the DGCL provides that a corporation shall not engage in any business
combination with any "interested stockholder" for a three-year period
following the date that such stockholder becomes an interested stockholder
unless (a) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (b) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding certain shares) or (c) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and by
the affirmative vote of at least two-thirds of the outstanding voting stock
which is not owned by the interested stockholder. Except as specified therein,
an interested stockholder is defined to mean any person that (i) is the owner
of 15% or more of the outstanding voting stock of the corporation, or (ii) is
an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at anytime within three
years immediately prior to the relevant date and the affiliates and associates
of such person referred to in (i) or (ii) of this sentence. Under certain
circumstances, Section 203 of the DGCL makes it more difficult for an
interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by
adopting an amendment to the corporation's certificate of incorporation or by-
laws, elect not to be governed by this section, effective twelve months after
adoption. The Company's Certificate of Incorporation and By-laws do not
exclude the Company from the restrictions imposed under Section 203 of the
DGCL.
Limitation on Liability and Indemnification of Directors
The Certificate of Incorporation contains certain provisions permitted under
the DGCL relating to the liability of directors. The provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty,
except in certain circumstances involving wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the Certificate of
Incorporation contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the DGCL. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the securities of
the Company. Upon completion of the Offerings, based upon the number of shares
outstanding on the date of this Prospectus and after giving pro forma effect
to the conversion upon the closing of the Offerings (at an assumed initial
public offering price of $13.50 per share) of the Contingent Notes held by IBM
and Sears into an aggregate of 3,977,368 shares of Common Stock, there will be
59,011,670 shares of Common Stock of the Company outstanding (assuming no
exercise of the Underwriters' over-allotment option or outstanding warrants or
options of the Company). Of these shares, the 8,000,000 shares sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining 51,011,670 shares of Common Stock (including the shares to be
sold to Telmex in the Telmex Purchase) are deemed "restricted securities"
under Rule 144. Of the restricted securities, approximately 2,513,120 shares
of Common Stock, which are not subject to lock-up agreements (the "Lock-up
Agreements") with the Representatives of the Underwriters, will be eligible
for immediate sale in the public market pursuant to Rule 144(k) under the
Securities Act. Approximately 569,835 additional shares of Common Stock, which
are not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements, approximately 38,343,359 additional shares of Common Stock
will be available for sale in the public market in accordance with the
provisions of Rule 144 under the Securities Act.
The Company and certain stockholders of the Company (including Carso Global
Telecom, Telmex, IBM, Sears and all directors and executive officers of the
Company) who will hold, upon consummation of the Offerings at an assumed
initial public offering price of $13.50 per share, an aggregate of
approximately 47,827,734 shares of Common Stock (including the shares to be
sold to Telmex in the Telmex Purchase), have agreed, without the prior written
consent of Bear, Stearns & Co. Inc., not to sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale, establish an
open "put equivalent position" or otherwise dispose of or enter into any
transaction or arrangement that transfers the economic consequences of
ownership of Common Stock, for (i) in the case of the Company, 180 days after
the Offering and (ii) in the case of such stockholders, officers and
directors, 30 days after the date of this Prospectus with respect to 433,076
shares and 180 days after the closing of the Offering with respect to
47,394,658 shares. In the case of the Company, the foregoing agreement does
not apply to the shares of Common Stock to be issued in connection with the
Offering or pursuant to employee benefit plans existing on the date of this
Prospectus and, in the case of the executive officers, directors and existing
stockholders, the Lock-up Agreements do not apply to certain permitted
transfers to related parties that agree to be bound by the foregoing
restrictions and certain permitted sales of shares acquired in the open market
following the completion of the Offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of 1% of the then outstanding shares of Common
Stock (approximately 590,000 shares immediately after the Offering) or the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule
144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted
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<PAGE>
securities were acquired from the Company or (if applicable) the date they
were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell
the shares immediately without compliance with the foregoing requirements
under Rule 144.
Securities issued in reliance on Rule 701 prior to the Offerings (such as
shares of Common Stock acquired pursuant to the exercise of certain options
granted under the Company's stock plans) are also restricted securities and,
beginning 90 days after the effective date of the Registration Statement of
which this Prospectus is a part, may be sold by stockholders other than
Affiliates of the Company subject only to the manner of sale provisions of
Rule 144 and by Affiliates under Rule 144 without compliance with its one-year
holding period requirement.
Options
Following the Offerings, the Company intends to file registration statements
on Form S-8 under the Securities Act to register all shares of Common Stock
issuable under the Option Plan, the Director Plan and the Purchase Plan.
Shares issued upon the exercise of stock options after the effective date of
the Form S-8 registration statements will be eligible for resale in the public
market without restriction, subject to Rule 144 limitations applicable to
Affiliates and the Lock-Up Agreements noted above, if applicable.
Registration Rights
In connection with the Company's acquisition of PSC from IBM and Sears in
June 1996, the Company issued to IBM and Sears the Contingent Notes and
Contingent Warrants. IBM and Sears hold customary piggyback and demand
registration rights, at Prodigy's expense, with respect to the Common Stock
issuable upon conversion of the Contingent Notes and exercise of the
Contingent Warrants. See "Corporate History and Certain Transactions--
Acquisition of Prodigy Services Company". Upon the closing of the Offerings
(at an assumed initial public offering price of $13.50 per share), IBM and
Sears will each (i) receive 1,988,684 shares of Common Stock pursuant to the
conversion of its Contingent Note and (ii) hold a Contingent Warrant to
purchase 2,437,191 shares (2,527,191 shares if the Underwriters' over-
allotment option is exercised in full) of Common Stock for $17.55 per share
(subject to customary anti-dilution adjustments) at any time prior to the
third anniversary of the Offering.
Effect of Sales of Shares
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of the Common Stock in the public
market could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of
its equity securities.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Bear, Stearns & Co.
Inc., BancBoston Robertson Stephens Inc., ING Baring Furman Selz LLC and Volpe
Brown Whelan & Company, LLC are acting as representatives (the
"Representatives") and Wit Capital Corporation is facilitating online
distribution ("e-Manager"), have severally agreed to purchase from the Company
the following respective number of shares of Common Stock at the initial
public offering price less underwriting discounts and commissions set forth on
the cover page of this Prospectus:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ............................................
BancBoston Robertson Stephens Inc. ..................................
ING Baring Furman Selz LLC...........................................
Volpe Brown Whelan & Company, LLC....................................
---------
Total............................................................ 8,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such
shares are purchased. The Offering and the Telmex Purchase are contingent on
each other.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, a concession
to certain other dealers not in excess of $ per share. After commencement of
the initial public offering, the offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 1,200,000
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it in the above table bears to the
8,000,000 shares of Common Stock initially offered hereby and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the Common Stock offered hereby. If purchased,
the Underwriters will offer such additional shares on the same terms as those
on which the 8,000,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
To facilitate the Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot or otherwise
create a short position in the Common Stock for their own account by selling
more shares of Common Stock than have been sold to them by the Company.
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<PAGE>
The Underwriters may elect to cover any such short position by purchasing
shares of Common Stock in the open market or by exercising the over-allotment
option granted to the Underwriters. In addition, the Underwriters may
stabilize or maintain the price of the Common Stock by bidding for or
purchasing shares of Common Stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in the Offering are reclaimed if shares of Common
Stock previously distributed in the Offering are repurchased in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the Common Stock at a
level that which might otherwise prevail in the open market. The imposition of
a penalty bid may also affect the price of the Common Stock to the extent that
it discourages resales thereof. No representation is made as to the magnitude
or effect of any such stabilization or other transactions. Such transactions
may be effected on the Nasdaq National Market or otherwise and, if commenced,
may be discontinued at any time.
The Underwriters have reserved for sale at the initial public offering price
up to 400,000 shares of Common Stock for sale to certain directors, officers
and employees, friends and family of the Company who have expressed an
interest in purchasing such shares of Common Stock in the Offering. Such
persons are expected to purchase, in the aggregate, not more than 5% of the
Common Stock offered in the Offering. The number of shares available for sale
to the general public in the Offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered to the general public on the same basis as other shares
offered hereby.
A Prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital Corporation. Other than the Prospectus in
electronic format, the information on such Web site and any information
contained on any other Web site maintained by Wit Capital Corporation is not
part of this Prospectus or the Registration Statement of which this Prospectus
forms a part, has not been approved and/or endorsed by the Company or any
Underwriter in such capacity and should not be relied on by prospective
investors.
The Underwriters have informed the Company that they do not expect to
confirm sales to any accounts over which they exercise discretionary
authority.
The Company and certain stockholders of the Company (including Carso Global
Telecom, Telmex, IBM, Sears and all directors and executive officers of the
Company) who will hold, upon consummation of the Offerings at an assumed
initial public offering price of $13.50 per share, an aggregate of
approximately 47,827,734 shares of Common Stock, have agreed, without the
prior written consent of Bear, Stearns & Co. Inc., not to sell, offer or agree
to sell, grant any option for the sale of, pledge, make any short sale,
establish an open "put equivalent position" or otherwise dispose of or enter
into any transaction or arrangement that transfers the economic consequences
of ownership of Common Stock, for (i) in the case of the Company, 180 days
after the Offering, and (ii) in the case of such stockholders, officers and
directors, 30 days after the date of this Prospectus with respect to 433,076
shares and 180 days after the closing of the Offering with respect to
47,394,658 shares. In the case of the Company, the foregoing agreement does
not apply to the shares of Common Stock to be issued in connection with the
Offering or pursuant to employee benefit plans existing on the date of this
Prospectus and, in the case of the executive officers, directors and existing
stockholders, the Lock-up Agreements do not apply to certain permitted
transfers to related parties that agree to be bound by the foregoing
restrictions and certain permitted sales of shares acquired in the open market
following the completion of the Offering.
ING Baring Furman Selz LLC acted as the Company's financial advisor in the
Prodigy Acquisition and was paid a fee of $750,000. The Company also agreed
that if it undertook an initial public offering prior to June 17, 1998, ING
Baring Furman Selz LLC would be permitted to act as a co-manager of such
offering and receive per-share compensation no less favorable than the per-
share compensation paid to other underwriters of the offering. The selection
of ING Baring Furman Selz LLC as one of the Representatives in the Offering
was not made pursuant to these arrangements. See "Corporate History and
Certain Transactions--Acquisition of Prodigy Services Company".
Wit Capital Corporation acted as financial advisor in connection with the
Company's issuance of 1,375,000 shares of Common Stock to Carso Global Telecom
in July 1998 and 6,125,000 shares of Common Stock to
82
<PAGE>
Telmex in August 1998 and was paid a fee of $50,000. See "Corporate History
and Certain Transactions--Prior Equity Financings".
Prior to this Offering, there was no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and the
prospects for, the Company's business and the industry in which it competes,
an assessment of the Company's management, the Company's past and present
operations and financial results, the prospects for earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the Offering and the price-earnings ratios
and market prices of securities of comparable companies at the time of the
Offering. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
TELMEX PURCHASE
Concurrently with the Offering, the Company is offering to sell directly to
Telmex 2,000,000 shares of Common Stock at the Price to Public set forth on
the cover page of this Prospectus. The Underwriters will not receive any
compensation in connection with the sale of such shares. The Offering and the
Telmex Purchase are contingent on each other.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts. A partner of
Hale and Dorr LLP owns 7,500 shares of the Company's Common Stock. Certain
legal matters relating to the Offering will be passed upon for the
Underwriters by O'Sullivan Graev & Karabell, LLP, New York, New York.
EXPERTS
The consolidated financial statements of Prodigy Services Company for the
year ended December 31, 1995 and the five and one-half month period ended June
16, 1996 and the consolidated financial statements of Prodigy Communications
Corporation as of December 31, 1996 and 1997 and for each of the two years in
the period ended December 31, 1997, included in this Prospectus, have been so
included in reliance of the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
On August 29, 1996, the Company appointed Coopers & Lybrand L.L.P. (a
predecessor to PricewaterhouseCoopers LLP) as independent auditors commencing
with the fiscal year ending December 31, 1996. The decision to appoint Coopers
& Lybrand L.L.P. as independent auditors for the Company was approved by the
Company's Board of Directors. Coopers & Lybrand L.L.P. had been the
independent auditors of Prodigy Services Company prior to the Prodigy
Acquisition. As a result of the Prodigy Acquisition, the former assets and
operations of Prodigy Services Company constituted the overwhelming majority
of the Company's assets and operations, and Coopers & Lybrand L.L.P. was
selected as the Company's independent auditors because of the familiarity of
Coopers & Lybrand L.L.P. with the financial statements and history of Prodigy
Services Company.
Coopers & Lybrand L.L.P. replaced the firm of Deloitte & Touche LLP, whose
engagement was terminated effective August 29, 1996. The report of Deloitte &
Touche LLP dated June 17, 1996 on the consolidated financial statements of
International Wireless Incorporated as of and for the periods ended December
31, 1994 and December 31, 1995 (the "Deloitte Report") did not contain an
adverse opinion or a disclaimer of opinion, nor was the Deloitte Report
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period from inception of the Company's predecessor, International
Wireless Incorporated, in May 1994 through August 29, 1996, (i) there were no
disagreements with Deloitte & Touche LLP on any matter of accounting
83
<PAGE>
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not
resolved to the satisfaction of Deloitte & Touche LLP, would have caused it to
make a reference to the subject matter of the disagreement in connection with
the Deloitte Report, and (ii) the Company did not consult Coopers
& Lybrand L.L.P. regarding (a) the application of accounting principles to a
specified transaction, either completed or proposed, (b) the type of audit
opinion that might be rendered on the Company's financial statements or (c)
items which concerned the subject matter of any disagreement with Deloitte &
Touche LLP or reportable events as described in subparagraph (a)(1)(v) of Item
304 of Regulation S-K under the Exchange Act.
As a result of the audit work in relation to the Deloitte Report, Deloitte &
Touche LLP communicated certain matters and recommendations to the management
of International Wireless Incorporated concerning implementation of internal
financial controls, including the need to further develop and document formal
policies and procedures and develop integrated financial reporting systems.
These matters were discussed with the Board of Directors of International
Wireless Incorporated. The Company believes that the plans of its management
satisfactorily address the recommendations of Deloitte & Touche LLP.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits, schedules and supplements thereto) on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission, to which Registration Statement reference is
hereby made. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at the Public Reference Room, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at 1-800-SEC-
0330. In addition, the Company is required to file electronic versions to
these documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
84
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRODIGY COMMUNICATIONS CORPORATION
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and September 30, 1998 (unaudited)....................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1996
and 1997 and for the nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1996 and 1997 and for the nine months ended
September 30, 1998 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996
and 1997 and for the nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
PRODIGY SERVICES COMPANY
Report of Independent Accountants......................................... F-26
Consolidated Statements of Operations for the year ended December 31, 1995
and the five and one-half month period ended June 16, 1996............... F-27
Consolidated Statements of Cash Flows for the year ended December 31, 1995
and the five and one-half month period ended June 16, 1996............... F-28
Notes to Consolidated Financial Statements................................ F-29
Although required by Regulation S-X under the Exchange Act, audited
financial statements for International Wireless Incorporated have not been
presented in this Prospectus. The Company does not believe that the
consolidated financial statements of International Wireless Incorporated are
meaningful, as the results of operations and assets of the entities were
minimal for all periods prior to the acquisition of Prodigy Services Company
(see Note 1 of Notes to Consolidated Financial Statements of International
Wireless Incorporated), and the related operations have been disposed of.
However, unaudited financial statements have been included as additional
disclosure.
Audited financial statements for Prodigy Services Company have been
presented in this Prospectus, as Prodigy Services Company is considered to be
the predecessor business to Prodigy Communications Corporation.
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets as of December 31, 1994 and 1995.... F-34
Unaudited Consolidated Statements of Operations for the period from May
23, 1994
(Date of Inception) to December 31, 1994 and the year ended December 31,
1995..................................................................... F-35
Unaudited Consolidated Statements of Stockholders' Equity (Deficiency) for
the period from
May 23, 1994 (Date of Inception) to December 31, 1994 and the year ended
December 31, 1995........................................................ F-36
Unaudited Consolidated Statements of Cash Flows for the period from May
23, 1994
(Date of Inception) to December 31, 1994 and the year ended December 31,
1995..................................................................... F-37
Unaudited Notes to Consolidated Financial Statements...................... F-38
</TABLE>
F-1
<PAGE>
The accompanying consolidated financial statements of Prodigy Communications
Corporation have been prepared to give effect to the planned reverse stock
split described in Note 16. When this reverse stock split becomes effective we
will issue the following report.
/s/ PricewaterhouseCoopers LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prodigy Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Prodigy Communications Corporation (formerly Prodigy, Inc.) and its
subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles. 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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the accompanying consolidated financial
statements, the Company has restated its financial statements for the years
ended December 31, 1996 and December 31, 1997.
Boston, Massachusetts
April 30, 1998, except as to
the information presented under
Additional Financing in Notes 8 and 11
for which the date is September 21, 1998
and to the information presented under
Restatement of Financial Statements in
Note 1 for which the date is January 22, 1999
F-2
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
------------------- -------------
1996 1997 1998
-------- --------- -------------
(Unaudited)
(in thousands, except share
information)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 21,275 $ 12,363 $ 29,014
Trade accounts receivable, net of
allowances for doubtful accounts of $930,
$685 and $652 at December 31, 1996, 1997
and September 30, 1998, respectively..... 2,795 1,740 357
Other receivable.......................... -- 674 --
Prepaid expenses.......................... 2,744 1,379 869
Other current assets...................... 403 1,108 522
-------- --------- ---------
Total current assets...................... 27,217 17,264 30,762
Restricted cash............................ -- 4,148 4,148
Property and equipment, net................ 31,257 18,327 12,541
Deferred software development costs, net... 3,105 -- --
Tradename, net............................. 33,701 30,246 27,848
Goodwill, net.............................. 14,689 13,138 11,975
Deferred network costs, net................ -- 8,167 6,417
Investment in joint venture................ 5,160 -- --
Assets held for sale....................... 11,263 1,650 2,020
Note receivable, net of deferred gain of
$16,148 at December 31, 1997 and September
30, 1998 ................................. -- -- --
Other assets............................... 176 510 495
-------- --------- ---------
Total assets............................. $126,568 $ 93,450 $ 96,206
======== ========= =========
Liabilities and Stockholders' (Deficit) Eq-
uity
Current liabilities:
Note payable.............................. $ 2,000 $ 2,000 $ 2,000
Accounts payable.......................... 26,615 15,650 6,038
Accrued compensation...................... 3,438 2,348 3,554
Accrued restructuring and other special
costs.................................... 11,468 7,875 4,960
Other accrued expenses.................... 35,141 33,344 22,632
Unearned revenue.......................... 3,359 4,552 10,527
-------- --------- ---------
Total current liabilities................. 82,021 65,769 49,711
Notes payable--related parties............. 56,000 10,000 --
-------- --------- ---------
Total liabilities........................ 138,021 75,769 49,711
-------- --------- ---------
Commitments and contingencies (Note 12)
Stockholders' (deficit) equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized; none issued
or outstanding...........................
Contingent convertible notes.............. 30,500 30,500 30,500
Common stock, $.01 par value; 140,000,000,
280,000,000 and 280,000,000 shares
authorized; 12,310,425, 33,803,894 and
45,057,417 shares issued and outstanding
at December 31, 1996, 1997 and September
30, 1998, respectively................... 123 338 451
Additional paid-in capital................. 52,883 218,736 294,068
Accumulated deficit........................ (94,929) (227,704) (275,581)
Accumulated other comprehensive (loss)
profit.................................... (30) (189) 57
Note receivable from stockholder........... -- (4,000) (3,000)
-------- --------- ---------
Total stockholders' (deficit) equity....... (11,453) 17,681 46,495
-------- --------- ---------
Total liabilities and stockholders'
(deficit) equity........................ $126,568 $ 93,450 $ 96,206
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine-Months Ended
Years Ended December 31, September 30,
------------------------- ------------------
1996 1997 1997 1998
------------ ------------ -------- --------
(Unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Internet and on-line service
revenues.................... $ 90,713 $ 128,252 $ 97,638 $ 95,231
Other........................ 8,201 5,940 4,248 6,237
----------- ------------ -------- --------
Total revenues............. 98,914 134,192 101,886 101,468
----------- ------------ -------- --------
Operating costs and expenses:
Costs of revenue............. 70,204 100,174 76,790 75,154
Marketing.................... 21,253 60,461 29,712 25,924
Product development.......... 8,921 16,822 15,644 9,277
General and administrative... 53,474 63,270 47,873 39,312
Acquired incomplete technolo-
gy.......................... 20,874 -- -- --
Restructuring and other spe-
cial costs.................. 3,147 9,854 7,330 --
Write-down of assets held for
sale........................ -- 2,400 -- --
Loss on sale of cellular as-
sets........................ -- 848 -- --
----------- ------------ -------- --------
Total operating costs and ex-
penses...................... 177,873 253,829 177,349 149,667
----------- ------------ -------- --------
Operating loss............. (78,959) (119,637) (75,463) (48,199)
(Gain) on sale of asset...... -- -- -- (785)
Loss on equity investment in
joint venture............... 539 12,101 7,042 --
Write-down (recovery) of eq-
uity investments............ 9,053 (250) -- --
Interest income.............. (392) (272) (236) (821)
Interest expense............. 2,643 1,559 1,178 1,284
----------- ------------ -------- --------
Net loss................... $ (90,802) $ (132,775) $(83,447) $(47,877)
----------- ------------ -------- --------
Net loss per common share--ba-
sic........................... $ (8.76) $ (7.66) $ (5.56) $ (1.28)
=========== ============ ======== ========
Net loss per common share--di-
luted......................... $ (8.76) $ (7.66) $ (5.56) $ (1.28)
=========== ============ ======== ========
Weighted average number of
common shares outstanding--
basic......................... 10,361 17,337 15,018 37,489
=========== ============ ======== ========
Weighted average number of
common shares outstanding--
diluted....................... 10,361 17,337 15,018 37,489
=========== ============ ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)
<TABLE>
<CAPTION>
Contingent Common Stock Additional Accumulated Other Note Receivable
Convertible -------------- Paid-in Accumulated Comprehensive from Comprehensive
Notes Shares Amount Capital Deficit (Loss) Profit Stockholder Loss Total
----------- ------ ------ ---------- ----------- ----------------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995............. 8,632 $ 86 $ 4,084 (4,127) $ (4) $ 39
Issuance of
common stock for
cash............. 3,208 32 43,164 43,196
Issuance of
common stock for
services......... 8 90 90
Issuance of
common stock to
purchase minority
interest in
subsidiary....... 87 1 1,049 1,050
Conversion of
credit facility.. 375 4 4,496 4,500
Issuance of
contingent
convertible
notes............ $30,500 30,500
Comprehensive
loss:
Net loss........ (90,802) $ (90,802) (90,802)
Other
comprehensive
losses:
Translation
adjustment...... (26) (26) (26)
---------
Comprehensive
loss............ $ (90,828)
------- ------ ---- -------- --------- ----- ------- ========= ---------
Balance at
December 31,
1996............. 30,500 12,310 123 52,883 (94,929) (30) (11,453)
------- ------ ---- -------- --------- ----- ------- ---------
Issuance of
common stock for
cash............. 14,913 149 71,890 $(4,000) 68,039
Issuance of
common stock on
conversion of
advances from
stockholders..... 8,547 86 102,565 102,651
Acquisition and
retirement of
treasury shares.. (1,966) (20) (8,602) (8,622)
Comprehensive
loss:
Net loss........ (132,775) (132,775) (132,775)
Other
comprehensive
losses:
Translation
adjustment...... (159) (159) (159)
---------
Comprehensive
loss............ $(132,934)
------- ------ ---- -------- --------- ----- ------- ========= ---------
Balance at
December 31,
1997............. 30,500 33,804 338 218,736 (227,704) (189) (4,000) 17,681
------- ------ ---- -------- --------- ----- ------- ---------
Issuance of
common stock for
cash............. 11,253 113 74,912 1,000 76,025
Options granted
at below fair
value............ 420 420
Comprehensive
loss:
Net loss........ (47,877) (47,877) (47,877)
Other
comprehensive
income:
Translation
adjustment...... 246 246 246
---------
Comprehensive
loss............ $ (47,631)
------- ------ ---- -------- --------- ----- ------- ========= ---------
Balance at
September 30,
1998
(unaudited)...... $30,500 45,057 $451 $294,068 $(275,581) $ 57 $(3,000) $ 46,495
======= ====== ==== ======== ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
------------------- ------------------
1996 1997 1997 1998
-------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(90,802) $(132,775) $(83,447) $(47,877)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Loss on equity investment in joint
venture............................. 539 12,101 7,042 --
Write-down (recovery) of equity
investments......................... 9,053 (250) -- --
Acquired incomplete technology....... 20,874 -- -- --
Services settled by issuance of
common stock........................ 90 -- -- --
Option grants at below fair value.... -- -- -- 420
Loss on sale of cellular assets...... -- 848 -- --
Depreciation and amortization of
property and equipment.............. 7,108 11,997 8,972 6,200
Amortization of tradename............ 1,915 3,455 2,850 2,399
Amortization of goodwill............. 840 1,551 1,163 1,163
Amortization of deferred network
costs............................... -- 1,335 594 1,750
Write-down of assets held for sale... -- 2,400 -- --
Amortization of deferred software
development costs................... 1,047 1,159 1,340 --
Write-down of deferred software
development costs to net realizable
value............................... 1,399 1,946 -- --
Provision for doubtful accounts...... 930 (245) -- --
Change in operating assets and
liabilities, net of effects of
acquisitions and disposals
Trade accounts receivable............ 690 1,838 511 1,383
Other receivable..................... -- (674) (2,115) 674
Prepaid expenses..................... 436 1,340 868 510
Other current assets................. (257) (1,016) (680) 601
Assets held for sale................. (10,334) (5,325) -- (370)
Accounts payable..................... 21,279 (9,314) (5,288) (9,812)
Accrued compensation................. 3,438 (1,089) 199 1,205
Accrued restructuring and other
special costs....................... 730 (2,178) 897 (2,915)
Other accrued expenses............... -- (2,336) (6,426) (10,512)
Unearned revenue..................... (4,269) 1,193 1,079 5,975
-------- --------- -------- --------
Net cash used in operating
activities......................... (35,294) (114,039) (72,441) (49,206)
-------- --------- -------- --------
Cash flows from investing activities:
Cash paid for Prodigy Services
Company, net of cash acquired....... (21,088) -- -- --
Equity investments................... (9,053) -- -- --
Acquisition of property and
equipment........................... (8,820) (8,556) (6,949) (415)
Deferred software development costs.. (3,575) -- -- --
Investment in joint venture.......... (5,700) (7,006) (4,632) --
Increase in other assets............. 323 308 -- --
-------- --------- -------- --------
Net cash used in investing
activities......................... (47,913) (15,254) (11,581) (415)
-------- --------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock............................... 43,196 68,039 20,347 75,025
Repayment of notes payable to related
parties............................. -- (46,000) (46,000) (10,000)
Proceeds from notes payable to
related parties..................... 58,900 -- -- --
Proceeds from borrowings............. 2,000 102,651 102,651 --
Repayment of note receivable from
stockholder......................... -- -- -- 1,000
Increase in restricted cash.......... -- (4,148) -- --
Other................................ (26) (161) 10 247
-------- --------- -------- --------
Net cash provided by financing
activities......................... 104,070 120,381 77,008 66,272
-------- --------- -------- --------
Net increase in cash and cash
equivalents.......................... 20,863 (8,912) (7,014) 16,651
-------- --------- -------- --------
Cash and cash equivalents, beginning
of period............................ 412 21,275 21,275 12,363
-------- --------- -------- --------
Cash and cash equivalents, end of
period............................... $ 21,275 $ 12,363 $ 14,261 $ 29,014
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
1. Basis of Presentation
Prodigy Communications Corporation (the "Company") is a leading nationwide
Internet Service Provider ("ISP"). The Company is controlled by Carso Global
Telecom, S.A. de C.V. ("Carso Global Telecom") through a majority voting
equity interest in the Company's common stock. The Company was formed in June
1996, under the name Prodigy, Inc., to acquire Prodigy Services Company
("PSC") and to hold International Wireless Incorporated ("IW") and other
communications interests. All outstanding common stock of IW was converted
into common stock of the Company on a one-for-one basis in June 1996. The
assets and liabilities of IW were carried over to the Company at historical
cost as the respective shareholders maintained their relative ownership
percentages existing immediately prior to the conversion. Accordingly, the
financial statements prior to the acquisition of Prodigy Services on June 17,
1996, consist solely of IW. IW was incorporated on May 23, 1994, to develop
and operate cellular telephone systems in Africa. IW's other communications
interests consisted of Africa Online, Inc. (see Note 5--Dispositions), a
wholly-owned subsidiary engaged in Internet access and online services in
Africa, an equity investment in Global Enterprise Services, Inc. (see Note 4--
Acquisitions) and an equity investment in a start-up joint venture in China
(see Note 5--Dispositions).
Since the acquisition of PSC, the Company has been in the midst of a major
transformation, both domestically and internationally. In the United States,
the Company launched its open standards based Internet access service
("Prodigy Internet") in October 1996. The Company's cellular telephone assets
and operations were sold in January 1997. In 1997, the Company determined that
its primary focus will be as an ISP and decided to discontinue the production
of its own content for Prodigy Internet. The Company plans to sell its African
operations and has negotiated a settlement of its liabilities in connection
with the closing of its Asian operations (see Note 5--Dispositions).
The acquisition of PSC was accounted for as a purchase. Accordingly, the
results of operations of PSC since the date of acquisition, June 17, 1996, are
included in the accompanying consolidated statements of operations for the
year ended December 31, 1996. The consolidated statements of operations and
cash flows of PSC for the year ended December 31, 1995 and for the five and
one-half month period ended June 16, 1996 are included elsewhere in the
Prospectus. The Company's accounts as of the date of the acquisition reflect
the fair value of the assets acquired and liabilities assumed (see Note 4--
Acquisitions).
Restatement of Financial Statements
On January 22, 1998, the Company restated its 1996 and 1997 financial
statements in connection with new guidance from the Staff of the SEC related
to the valuation of purchased in-process research and development ("acquired
incomplete technology"). The Company revalued the acquired Prodigy Internet
incomplete technology (See Note 4 --Acquisitions, Acquisition of Prodigy
Services) which was originally recorded in 1996 as a charge to operations of
$46,090. The acquired incomplete technology has been reduced in these restated
financial statements from $46,090 to $20,874. The Company used the same
estimates of future cash flows directly related to the acquired incomplete
technology, as in the original valuation, which were consistent with its
operating plans; however, the Company used a stage-of-completion approach, on
a cost incurred basis to total estimated costs as of the acquisition date, to
estimate the value of the acquired incomplete technology. The Company used the
same discount rate of 35% applied against the estimated future cash flows as
used in the original valuation, reflecting the risks related to the viability
and potential changes to target markets and the inherent uncertainty of
predicting cash flows in the Internet industry.
The Company believes the restatement brings the original purchase price
accounting recorded in 1996 into compliance with current accounting guidance.
However, as this guidance continues to evolve there is the
F-7
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
possibility of further adjustment to the Company's revised accounting recorded
in these restated financial statements. The impact of the restatement is
summarized below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1996 1997
-------------------------- -------------------------
Previously As Previously As
Reported Restated Reported Restated
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Costs of revenue........ $ 69,437 $ 70,204 $ 98,758 $ 100,174
Acquired incomplete
technology ............ 46,090 20,874 -- --
Total operating costs
and expenses........... 201,180 177,873 250,304 253,829
Net loss................ (114,109) (90,802) (129,250) (132,775)
Net loss per common
share--basic and
diluted................ (11.00) (8.76) (7.44) (7.66)
<CAPTION>
December 31, 1996 December 31, 1997
-------------------------- -------------------------
Previously As Previously As
Reported Restated Reported Restated
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Tradename............... $ 28,422 $ 33,701 $ 25,525 $ 30,246
Goodwill................ -- 14,689 -- 13,138
Other long lived
assets................. 47,479 50,961 30,736 32,802
Total assets............ 103,261 126,568 73,668 93,450
Total stockholders'
(deficit) equity....... (34,760) (11,453) (2,101) 17,681
</TABLE>
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
Interim Financial Information
The consolidated financial statements of the Company for the nine months
ended September 30, 1998 are unaudited. All adjustments (consisting only of
normal recurring adjustments) have been made, which, in the opinion of
management, are necessary for a fair presentation. Results of operations for
the nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998, or for any
other future period.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are the
local currencies. Accordingly, assets and liabilities of foreign subsidiaries
are translated to U.S. dollars at period-end exchange rates and revenues and
expenses are translated using the average rates during the period. The effects
of foreign currency translation adjustments have been accumulated and are
included as a separate component of stockholders' equity (deficit). Foreign
currency transaction gains and losses, arising from exchange rate fluctuations
on transactions denominated in currencies other than the functional
currencies, were immaterial for all periods presented.
F-8
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Revenue Recognition
Internet and on-line service revenues encompass subscription and usage fees
and are earned over the period services are provided. Other revenues,
consisting principally of marketing services and transaction fees from the
sale of merchandise, are recognized as services are provided or fees are
earned. Unearned revenue consists primarily of monthly subscription fees
billed in advance.
Subscriber Acquisition Costs
Direct response advertising costs which result in subscriber registrations
without further effort required by the Company are capitalized and amortized
over their estimated useful life subject to recoverability limitations. No
such subscriber acquisition costs have been capitalized due to the uncertainty
of recovery. General marketing costs, as well as all other costs related to
the acquisition of subscribers, are expensed as incurred.
Advertising Costs
Advertising costs are included in marketing expenses and are expensed as
incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
at date of purchase of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value because of
the short maturity of these instruments.
Restricted Cash
Restricted cash represents collateral for outstanding letters of credit.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. When assets are sold or otherwise
disposed of, the cost and related accumulated depreciation are relieved and
any resulting gain or loss is recognized.
Product Development Costs
Software development costs are expensed as incurred until technological
feasibility has been established. The Company determines technological
feasibility upon the completion of a working model. Once technological
feasibility has been established, such costs are capitalized until the
software is available for general release to customers. Amortization is
calculated on a product-by-product basis, using the greater of the straight-
line basis over the estimated economic lives of the related products, two
years, or the ratio of current gross revenue to total current and expected
future gross revenue of the related products, also over two years. The
straight-line basis has produced a greater charge and, accordingly, has been
used exclusively to date. The amortization and write-down of deferred software
development costs is included in "Costs of Revenue."
Amortization of deferred software development costs totaled $1,047 and
$1,159 in 1996 and 1997, respectively.
Research and Development
Research and development costs are expensed as incurred.
F-9
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Investment in Joint Venture
The Company had an investment in a foreign joint venture operating in China
which was accounted for under the equity method of accounting, as the Company
did not have a controlling interest. As of December 31, 1997, the Company's
investment was written down to its net realizable value of zero (see Note 5--
Dispositions).
The assets and revenues of the joint venture were immaterial for all periods
presented.
Tradename
The "Prodigy" tradename was recorded at fair value as of June 17, 1996, upon
the acquisition of PSC. The tradename is amortized on a straight-line basis
over 10 years.
Goodwill
Goodwill relates to the excess of cost over the fair value of the net assets
purchased as of June 17, 1996, upon the acquisition of PSC. Goodwill is
amortized on a straight-line basis over 10 years.
Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including the Prodigy tradename, goodwill and property and equipment,
relying on a number of factors including operating results, business plans,
economic projections and anticipated future cash flows. An impairment in the
carrying value of an asset is recognized when the expected future operating
cash flows derived from the asset are less than its carrying value. In
addition, the Company's evaluation considers nonfinancial data such as market
trends, product and development cycles, and changes in management's market
emphasis.
Income Taxes
Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory rates. A valuation allowance is applied
against net deferred tax assets if, based on the weighted available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized.
Contingent Convertible Notes
The contingent convertible notes issued in connection with the acquisition
of PSC are classified in Stockholders' Equity (Deficit). In 1997, the Company
exchanged the contingent convertible notes for contingent convertible notes
and contingent warrants (see Note 9--Contingent Convertible Notes and
Warrants).
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation," in 1996. As
permitted by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value methodology provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," for the grants or awards
of equity instruments to employees. As required by SFAS No. 123, the Company
has disclosed the pro forma effect on net loss of using a fair value approach
to measure compensation for grants or awards of equity instruments in 1996 and
1997 (see Note 11--Stockholders' Equity (Deficit)).
Net Loss Per Share
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share." SFAS 128 requires the Company to report
F-10
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
both basic earnings per share, which is based on the weighted average number
of common shares outstanding, and diluted earnings per share, which is based
on the weighted average number of common shares outstanding and all dilutive
potential common shares outstanding. As the Company incurred losses for all
periods presented, there is no difference between basic and diluted earnings
per share.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
receivables. Concentration of credit risk with respect to cash is limited as
the Company invests its cash in deposits with several financial institutions.
Concentration of credit risk with respect to trade receivables is limited as
the outstanding total represents a large number of customers with individually
small balances. The Company does not require collateral or other security
against trade receivable balances; however, it does maintain reserves for
potential credit losses and such losses have been within management's
expectations.
Reclassifications
Certain amounts from the prior year have been reclassified to conform with
the current year presentation.
3. Restructuring and Other Special Costs
Fiscal Year 1996 Restructurings and Other Special Costs
The components of the Company's restructuring provision at December 31, 1996
are detailed below:
<TABLE>
<S> <C>
(A) Prodigy Services............................................ $ 8,321
(B) Cost reduction plan......................................... 3,147
-------
$11,468
=======
</TABLE>
(A) In connection with the acquisition of PSC as of June 17, 1996, the
Company assumed non-recurring liabilities classified as "Accrued
Restructuring and Other Special Costs" of $10,738, of which $8,321 remained
outstanding as of December 31, 1996, and payable in 1997. These non-
recurring liabilities related to restructuring plans which occurred prior
to the acquisition date in connection with (i) a lease cancellation penalty
for PSC's lease of its White Plains, NY facilities, of which $7,826 was
outstanding as of December 31, 1996, and (ii) salary continuance and
related liabilities resulting from job eliminations and early retirements
of certain executives, of which $495 was outstanding as of December 31,
1996.
(B) In 1996, subsequent to the PSC acquisition, the Company approved
another restructuring plan to reduce costs through additional job
eliminations and a reduction in the use of leased office space, and as a
result, recorded a restructuring charge of $3,147. Approximately 20
employees were terminated in January 1997 and the related severance cost of
$659 was included in "Accrued Restructuring and Other Special Costs" at
December 31, 1996. Beginning in November 1996, the Company vacated 29% of
its leased space in White Plains, NY. The cost of the lease attributed to
the idle leased facility amounted to $2,488 and was included in "Accrued
Restructuring and Other Special Costs" as of December 31, 1996.
During 1997, the Company paid the balance of the 1996 accrued
restructuring and other special costs.
F-11
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Fiscal Year 1997 Restructurings and Other Special Costs
In an effort to decrease cash outflows and more efficiently manage its
business, the Company decided to restructure its operations and outsource its
network and content production functions. The Company's provisions,
expenditures and remaining balances to be paid are detailed below:
<TABLE>
<CAPTION>
Accrued
Costs at
1997 1997 December 31,
Costs Expenditures 1997
------ ------------ ------------
<S> <C> <C> <C>
(A) Network termination costs................. $4,740 $4,740
(B) Employee severance........................ 2,900 $1,979 921
(C) Discontinuance of content production...... 585 585
(D) Medford, MA Facility Closing.............. 1,629 1,629
------ ------ ------
$9,854 $1,979 $7,875
====== ====== ======
</TABLE>
(A) In connection with the sale of its network (see Note 5--Dispositions,
Sale of Network), the Company incurred liabilities related primarily to
early termination payments and other contractual obligations for certain
non-cancelable network related agreements.
(B) The Company implemented a restructuring plan to reduce costs through
job elimination, and as a result, recorded a charge of $2,900.
Approximately 80 employees throughout the Company were terminated.
(C) The Company decided to discontinue the production of its own content,
and as a result, recorded a charge of $585 to account for the employee
termination costs and the costs to settle content related contractual
obligations. Approximately 25 employees were terminated.
(D) The Company's Medford, Massachusetts location has been closed and a
charge of $1,629 was recorded to account for the costs of employee
terminations and lease cancellation.
The terminated employees were involved with the Company's international
operations and/or former headquarters management. Approximately 20
employees were terminated.
4. Acquisitions
Acquisition of Minority Interest in Subsidiary
In January 1996, the Company purchased 90 shares of common stock of Comstar
Cellular S.A. Cote d'Ivoire ("Comstar Cote d'Ivoire") from a minority
shareholder and employee in exchange for $300 in cash and 87,500 shares of
common stock of the Company with a value of $12.00 per share. As a result of
this transaction, the Company's equity interest in Comstar Cote d'Ivoire
increased from 91% to 100%.
The acquisition was accounted for as a purchase and the excess of the
purchase price over the fair value of the assets acquired and liabilities
assumed, representing goodwill, amounted to $1,350 and was included with
assets held for sale in connection with the sale of International Wireless,
which included the cellular operations of Comstar Cote d'Ivoire.
Investment in Global Enterprise Services, Inc. ("GES")
During the period from January 1996 to March 1996, the Company acquired a
48% voting interest in GES, represented by 4,800,000 shares of convertible
preferred stock, for $9,000. The preferred stock has voting rights and is
convertible into common stock. In 1996, the Company recorded a charge of
$9,053 to reduce the carrying value of its investment in GES to an estimated
net realizable value of zero.
In January 1997, pursuant to a redemption agreement, the Company disposed of
its 48% interest in GES for $250.
F-12
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Acquisition of Prodigy Services
On June 17, 1996, the Company acquired all of the partnership interests of
International Business Machines Corporation ("IBM") and Sears Roebuck and Co.
("Sears") in PSC. The Company acquired the assets and assumed the liabilities
of PSC, with the exception of certain patents and all obligations and
liabilities related to employee retirement and other postretirement benefit
plans. The assets purchased and liabilities assumed, and related results of
operations, are included in the consolidated financial statements of the
Company from the date of acquisition. The aggregate purchase price of $78,116
consisted of a cash payment of $40,800, the issuance of Contingent Convertible
Notes (see Note 9--Contingent Convertible Notes and Warrants) valued at
$30,500, and direct acquisition related expenses of $6,816.
The acquisition was accounted for as a purchase. The purchase price,
including direct costs of $6,816, was allocated based on fair values, as
follows:
<TABLE>
<S> <C>
Purchase price..................................................... $ 78,116
Add: fair value of net liabilities assumed......................... 23,009
--------
Excess to allocate................................................. 101,125
Less: excess allocated to
Tradename........................................................ 35,668
Property and equipment........................................... 27,154
Completed technology--Prodigy Classic............................ 1,900
Incomplete technology--Prodigy Internet.......................... 20,874
Goodwill......................................................... 15,529
========
</TABLE>
The fair value of intangible assets was determined using a risk adjusted
discounted cash flows approach. Specifically, the Prodigy Internet technology
acquired was evaluated through extensive interviews and analysis of data
concerning the state of the technology and needed developments. The evaluation
of the underlying technology acquired considered the inherent difficulties and
uncertainties in completing the development, and thereby achieving
technological feasibility, and the risks related to the viability and
potential changes to target markets. Incomplete technology had no alternative
future use. Therefore, the Company recognized a charge of $20,874 for the
purchase of incomplete technology in 1996.
In connection with the acquisition, the Company entered into a Funding
Agreement (the "Funding Agreement"), as described in Note 8--Notes Payable,
with Carso Global Telecom and another stockholder of the Company (the
"Stockholder"). The Funding Agreement was amended in October 1996 and March
1997.
5. Dispositions
Sale of International Wireless
Effective January 1997, the Company sold all issued outstanding capital
stock of IW to a company (the "Buyer") formed by a former executive and
shareholder of the Company (the "Executive"). The Executive was a former
director of the Company and a former director and officer of IW. Effective as
of October 21, 1996, the Executive resigned as a director of, and from all
other positions with, the Company and IW. Immediately prior to the sale of IW,
the Executive owned 1.0% of the Company's outstanding shares, and the
management team of the Buyer (including the Executive) held an aggregate of
3.3% of the Company's outstanding shares. The management team including
minority investors held greater than 10.0% of the Company's outstanding shares
immediately prior to the sale of IW. The Executive has no continuing
involvement in the Company either as an employee or stockholder. The assets of
IW at the time of the sale consisted of cellular communications licenses and
license applications in certain African countries, and the associated rights
and assets used in the Company's cellular telephone activities. Africa Online,
Inc., formerly a wholly-owned subsidiary of IW, had
F-13
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
been transferred to another subsidiary of the Company (see Exit of
International Operations, below). The Company also retained the joint venture
investment in China previously held by IW (see Exit of International
Operations, below). The selling price consisted of (i) the surrender of
1,392,857 shares of common stock of the Company, (ii) a Promissory Note (the
"Note") in the amount of $21,500 due in full on July 27, 1997, including
$1,500 in reimbursement of capital expenditures made by the Company for the
benefit of IW, secured by a pledge of 67% of the shares of IW purchased from
the Company, and bearing interest at 9% until April 27, 1997 and 12%
thereafter, and (iii) the termination of the Executive's fully vested options
to purchase 125,000 shares of common stock for $1.00 per share and 125,000
shares of common stock for $8.00 per share.
In October 1997, the Company and the Buyer modified the Note as follows: (i)
the due date was extended to January 31, 1999, (ii) the Note is unsecured,
(iii) the interest rate was reduced to 8%, (iv) the Note is subject to
mandatory repayment out of the net proceeds from an acquisition of IW, (v) the
Note is also subject to mandatory repayment to the extent of 10% of the first
$5,000 in net financing proceeds received by IW (with certain exceptions), 20%
of the next $5,000 in proceeds and 40% of all proceeds in excess of $10,000,
and (vi) the Company is allowed to convert the Note upon maturity into equity
securities of IW at a 20% discount from the price at which IW has sold equity
securities to investors. The Buyer also surrendered an additional 573,580
shares of common stock of the Company in exchange for a reduction in IW's
unpaid obligations at October 31, 1997 to $16,148.
As a result of the restructuring of the Note and the revaluation of the
Company's stock from $12.00 to $4.00 per share, a loss on the sale of IW of
$848 was recorded in 1997. The Note has been valued at zero. Any future cash
collected against the Note will be accounted for as a gain in "Other Income."
As of December 31, 1996, the Company reclassified certain assets of $11,263 as
"Assets Held for Sale" in connection with the sale of IW.
Sale of Network
Prodigy owned and operated its own network in the United States until July
1, 1997. Effective July 1, 1997, the Company sold to Splitrock Services, Inc.
("Splitrock") certain of its network assets. Splitrock agreed to: (i) assume
all equipment leases, maintenance and license liabilities related to network
assets, and (ii) enter into a Full Service Agreement whereby Splitrock will
provide certain network services to the Company including commitments to meet
certain capacity and performance requirements. Carso Global Telecom owns a
minority interest in Splitrock.
The Company also entered into a Sublease Agreement pursuant to which
Splitrock subleases a portion of the Company's leased space in Yorktown
Heights, New York, effective July 1, 1997 through February 28, 2001.
Pursuant to the Full Service Agreement, effective July 1, 1997, Splitrock
provides to the Company network services consisting primarily of end-to-end
connection services from subscriber dial-up lines to the Company's data
center. Splitrock charges Prodigy at a fixed rate per subscriber, subject to a
monthly maximum usage limit, after which an incremental hourly rate is
charged, and certain minimum charges (see Note 12--Commitments and
Contingencies).
Under a transition services agreement, Prodigy agreed to pay for certain of
Splitrock's operating expenses and to provide temporary network-related
services to Splitrock, including accounting, human resources and purchasing
functions. Splitrock agreed to reimburse Prodigy for expenses incurred and the
cost of providing these support services (excluding termination penalties
under existing network contracts). The total of the reimbursed expenses and
service costs in 1997 was $27,532. The reimbursed amounts have been offset
against the corresponding expenses and costs in the statements of operations.
The transition services agreement terminated on December 31, 1997, although
the Company continued to provide certain incidental services and make
F-14
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
payments on behalf of Splitrock through June 30, 1998. The net amount due from
Splitrock under the Full Service Agreement and the transition services
agreement as of December 31, 1997 was $674. This amount is recorded under the
heading "Other Receivable" on the balance sheet. Splitrock has notified
Prodigy of the Prodigy Local Site ("PLS") leases, which it wishes to assume,
and Prodigy remains liable for all PLS leases not assumed by Splitrock.
Prodigy also remains liable for all obligations and termination penalties
under its existing agreements with IBM Global Network Services and other
third-party providers of Points of Presence ("POPs"). The costs associated
with the PLS leases retained by the Company and the termination penalties have
been accrued as part of network termination costs as of December 31, 1997 (see
Note 3--Restructuring and Other Special Costs).
Upon termination of the transition services agreement, a Full Services
Agreement became effective, and Splitrock hired all Prodigy employees engaged
in Prodigy's network operations. Splitrock is required to provide dial-up
network access in all locations in which Prodigy provided dial-up services as
of July 1, 1997. Commencing December 31, 1999, Splitrock will not be required
to support the proprietary standards on which the Prodigy Classic service
operates.
Under the Full Service Agreement, Splitrock is required to meet specified
service level objectives. Splitrock's failure to meet the service level
objectives results in financial penalties. If Splitrock fails to meet the
service level objectives for an extended period of time, Prodigy may terminate
the Full Service Agreement. In addition, if there is a system-wide failure, or
Splitrock breaches specified financial covenants, Prodigy has the right to
terminate the Full Service Agreement or assume responsibility for operating
the network at Splitrock's expense.
As a result of the sale of the network effective July 1, 1997, the Company
sold property and equipment with a net book value of approximately $9,400 and
did not record any gain or loss upon the sale of these assets. The net book
value of the equipment was removed from property and equipment on the balance
sheet and classified in "Other Intangible Assets, Net" and is being amortized
over the four year term of the Splitrock contract on a straight-line basis.
Exit of International Operations
In December 1997, management decided to exit its international operations in
order to focus on its domestic internet service business. During 1996 and
1997, the Company's incurred losses of $539 and $12,101, respectively, in
relation to its joint venture operation in China.
The assets of Africa Online, Inc., a wholly-owned subsidiary, are carried as
assets held for sale at their estimated fair value of $1,650, as of December
31, 1997. Africa Online, Inc. was originally part of IW. The Company recorded
a charge of $2,400 in 1997 to reduce the carrying value of Africa Online, Inc.
long lived assets, including goodwill, to their estimated net realizable
value.
On October 1, 1998, Africa Online, Inc. was sold for gross cash proceeds of
$2,815, of which $750 was placed in escrow to secure certain indemnification
obligations of the Company for a six month period. The sale resulted in an
estimated gain to the Company of $2,900, subject to full release of the
escrowed funds.
F-15
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
6. Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
Useful Life 1996 1997
----------- ------- -------
<S> <C> <C> <C>
Computer equipment............................. 3-5 years $33,192 $25,453
Leasehold improvements......................... 3-5 years 3,752 4,177
Furniture and equipment........................ 5-8 years 1,221 1,008
Buildings...................................... 40 years 33 --
------- -------
38,198 30,638
Less accumulated depreciation and amortiza-
tion.......................................... 6,941 12,311
------- -------
$31,257 $18,327
======= =======
</TABLE>
7. Tradename and Deferred Network Costs
The cost and accumulated amortization of the Tradename and Deferred network
costs was as follows at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Tradename:
Cost...................................................... $35,668 $35,668
Less accumulated amortization............................. 1,967 5,422
------- -------
$33,701 $30,246
======= =======
Deferred network costs:
Cost...................................................... -- 9,502
Less accumulated amortization............................. -- 1,335
------- -------
$ -- $ 8,167
======= =======
</TABLE>
8. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Loan from Banco Inbursa..................................... $50,000 $10,000
Loan from stockholder....................................... 6,000 --
------- -------
Notes payable--related parties.............................. $56,000 $10,000
======= =======
Loan from corporate lender.................................. $ 2,000 $ 2,000
======= =======
</TABLE>
In June 1996, the Company entered into a loan agreement with Banco Inbursa
("Inbursa"), an affiliate of Carso Global Telecom, whereby Inbursa agreed to
provide a credit facility to the Company of up to $50,000 with an original
maturity date in June 1997, at an interest rate of prime plus 1/2%. Borrowings
under this credit facility are collateralized by a pledge of 4,250,000 shares
of the Company's common stock of which 1,750,000 shares were pledged by Carso
Global Telecom and 2,500,000 shares are pledged by the stockholder. As a
result of an extension of the credit facility from Inbursa, the maturity date
for outstanding borrowings of $10,000 was extended from June 17, 1997 to
December 31, 1999. The Stockholder had agreed to continue to make available
for pledge, until June 13, 1998, 2,500,000 shares of common stock to secure a
new line of credit from a U.S. bank or other debt financing to replace or
extend the line of credit from Inbursa. Subsequent to December 31, 1997, all
loans were repaid and stock pledges terminated.
F-16
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Pursuant to an amendment to the Company's original Funding Agreement
effective March 18, 1997, the Company exercised a Put option to issue common
stock to the Stockholder for $15,000 and to Carso Global Telecom for $65,000,
of which $40,000 was used to partially repay the $50,000 loan from Inbursa.
The remaining Put of $45,000 was allocated $39,000 to Carso Global Telecom and
$6,000 to the Stockholder. The aggregate proceeds of $80,000 from the exercise
of the Put, as well as proceeds from subsequent Put exercises of $9,000, were
raised through the issuance of 7,416,667 shares of common stock at $12.00 per
share. All amounts available under the Put have been exercised.
In October 1997, Carso Global Telecom and the Stockholder arranged interim
financing for the Company. Carso Global Telecom agreed to (i) establish a
$4,000 letter of credit required as part of the revised Contingent Convertible
Notes and Warrants (see Note 9--Contingent Convertible Notes and Warrants),
(ii) arrange for Inbursa to lend $13,750 to the Company, of which $3,750 is
secured by the Stockholder's pledge of 1,875,000 shares of common stock, and
(iii) indicate its intention to purchase, under a rights offering, its maximum
allocation of 12,385,955 shares of common stock. In payment for its 12,385,955
shares, Carso Global Telecom will (i) be credited with $4,000 for the issuance
of the $4,000 letter of credit, (ii) pay $13,750 directly to Inbursa on the
Company's behalf, and (iii) pay to the Company the remainder of the purchase
price of $31,794 less any other funds advanced to the Company prior to the
closing of the rights offering. Subsequent to the issuance of the $4,000
letter of credit, on a quarterly basis, Carso Global Telecom will contribute
$333, less any draws on the letter of credit, until the $4,000 has been paid
to the Company. The Stockholder agreed to (i) lend the Company up to $2,250
without interest, (ii) pledge 1,875,000 shares of common stock to secure
advances of $3,750 from Inbursa until the earlier of the closing of the rights
offering (see Note 11--Stockholders' Equity (Deficit)) or December 15, 1997,
and (iii) convert its advances to the Company into common stock upon the
closing of the rights offering. As of December 31, 1997, interim financing of
$27,100 had been re-paid in connection with the rights offering.
In March 1996, the Company borrowed $2,000 from a network company (the
"Corporate Lender") pursuant to an 8 1/4% convertible note. Principal and
interest were due on March 31, 1997. The note has not been formally extended.
The Corporate Lender had the right within 30 days after the completion of a
private placement and prior to March 31, 1997 to convert the principal and
interest into common stock at the price per share at which the Company's
common stock is issued in the private placement. See Note 16--Subsequent
Events (Unaudited).
Additional Financing
In February 1998, the Company entered into an additional loan agreement with
Inbursa in the amount of $16,400, payable December 31, 1999 at an interest
rate of 9%. In July 1998, a further $5,700 was borrowed from Inbursa, payable
December 31, 1999 at an interest rate of 9%. Also in July 1998, the Company
borrowed $30,000 from Bank of America National Trust and Savings Association
("Bank of America"), payable on August 14, 1998 at an interest rate of 6.5%.
This loan was guaranteed by Carso Global Telecom. The proceeds from this loan
were used to pay down the Inbursa notes payable. Subsequent to December 31,
1997, the Bank of America loan was repaid in full.
In August 1998, the Company secured a $35,600 line of credit commitment from
Carso Global Telecom. This credit facility expires on December 31, 1999 and
bears interest at the LIBOR rate plus between one and five percentage points
(as negotiated on a case-by-case basis).
9. Contingent Convertible Notes and Warrants
The Contingent Convertible Notes ("Contingent Notes") issued in connection
with the acquisition of PSC (see Note 4--Acquisitions), would have accrued
interest at a rate of 8% annually commencing on December 17, 1997.
F-17
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
The Contingent Notes were automatically convertible into shares constituting
15% of the Company's then outstanding common stock on a fully diluted basis,
limited to the number of shares equal to a value of $200,000 plus contingent
interest, upon the earlier of (i) an initial public offering by the Company
resulting in gross proceeds of at least $25,000, (ii) an acquisition of the
Company, (iii) following an initial public offering with gross proceeds of
less than $25,000, the first date on which the Company's market value exceeds
$200,000, or (iv) June 17, 2006. In lieu of conversion upon an initial public
offering or June 17, 2006, the Company had the option, but under no
circumstances the obligation, to redeem the Contingent Notes. The Contingent
Notes were non-voting and the holders had no redemption rights.
In November 1997, IBM and Sears exchanged the Contingent Notes for (i)
contingent notes in the face amount of $200,000 and (ii) contingent warrants
to acquire up to 15% of the Company. Subject to a maximum aggregate value of
$200,000, plus contingent interest, the contingent notes are automatically
convertible into shares constituting 15% of the value of the Company's common
stock in excess of a market value of $250,000, upon the earlier of (i) an
initial public offering by the Company resulting in gross proceeds of at least
$25,000, (ii) an acquisition of the Company, (iii) following an initial public
offering with gross proceeds of less than $25,000, the first date on which the
Company's market value exceeds $200,000, or (iv) June 17, 2006. In lieu of
conversion upon an initial public offering or June 17, 2006, the Company had
the option, but under no circumstances the obligation, to redeem the
Contingent Notes. The warrants allow IBM and Sears to purchase up to 15% of
the Company at 130% of the fair market value at the date of conversion of the
contingent notes. The warrants are exercisable at any time prior to the third
anniversary of the conversion of the contingent notes. As a condition to these
arrangements, Carso Global Telecom prepaid (as an advance to the Company) the
balance due on the White Plains lease of $5,831. Carso Global Telecom also
established a $4,000 letter of credit, declining quarterly over three years,
to secure other payment obligations of the Company under contracts for which
IBM and Sears retained liability. After conversion of the contingent notes or
exercise of the contingent warrants, IBM and Sears have agreed to vote their
shares of common stock in accordance with the voting recommendations of the
Company's Board of Directors. The contingent notes are non-voting and the
holders have no redemption rights.
10. Income Taxes
The Company had no income tax expense for the years ended December 31, 1996
and 1997 as a result of net losses. As of December 31, 1996 and 1997, the
Company's deferred tax assets (liabilities) were as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Domestic net operating loss carryforwards................ $ 21,602 $ 46,000
Foreign net operating loss carryforwards................. 3,350 8,840
Intangible assets........................................ 5,236 4,698
Equity investments....................................... 3,621 --
Restructuring and other nonrecurring reserves............ 1,259 5,357
Other.................................................... (1,359) 4,045
Valuation allowance...................................... (33,709) (68,940)
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $115,000 which may be used to
offset future taxable income, beginning to expire in 2009. The utilization of
the federal income tax loss carryforwards is subject to limitation as a result
of a change of ownership. The Company also has operating loss carryforwards in
various foreign subsidiaries of approximately $22,100 which began to expire in
1998 and may be used to offset future taxable income in those countries.
F-18
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards. Under the applicable
accounting standards, management has considered the Company's history of
losses and concluded that it is more likely than not that the Company will not
realize these favorable tax attributes. Accordingly, the deferred tax assets
have been fully reserved. Management revaluates the positive and negative
evidence periodically.
11. Stockholders' Equity (Deficit)
Authorized Shares of Common Stock
In 1996, the Board of Directors and the stockholders approved an increase in
the authorized shares of common stock to 140,000,000 shares.
In 1997, the Board of Directors and the stockholders approved a further
increase in the authorized shares of common stock to 280,000,000 shares.
Private Placement
In October 1996, the Company offered up to 2,000,000 shares of its common
stock in a private placement, resulting in net proceeds to the Company from
investors (other than Carso Global Telecom and the Stockholder) of
approximately $1,843. In February 1997, the Company increased the size of the
offering from 2,000,000 shares to 4,000,000 shares of common stock and reduced
the offering price to $12.00 per share from $28.00 per share. As a result of
the reduction in the offering price, the Company offered to each investor the
choice of either (i) receiving additional shares to reduce their average
purchase price to $12.00 or (ii) rescinding their subscriptions and receiving
refunds without interest upon the closing. The Company received aggregate
gross proceeds of $88,843 and issued 7,403,603 shares of common stock.
In November 1997, the Company made a Rights Offering whereby each eligible
stockholder was entitled to purchase at a price of $4.00 per share, one share
of the Company's common stock for each share held. The Company issued
12,640,478 additional shares and received $46,554 in cash and a $4,000 note
receivable from Carso Global Telecom for the issuance of the IBM/Sears letter
of credit (see Note 9--Contingent Convertible Notes and Warrants). On a
quarterly basis, Carso Global Telecom will contribute $333 less any draws on
the letter of credit until the $4,000 has been paid to the Company.
Additional Financing
In August 1998, the Company sold 6,125,000 shares of common stock at a price
of $8.00 per share to Telefonos de Mexico, S.A. de C.V. ("Telmex"), an
affiliate of Carso Global Telecom, resulting in proceeds of $49,000 to the
Company. At the same time Carso Global Telecom purchased an additional
1,375,000 shares of common stock at a price of $8.00 per share, resulting in
proceeds of $11,000 to the Company. These proceeds were used to repay the
$30,000 note payable to Bank of America and a remaining $2,100 in notes
payable to Inbursa, with the balance to be used for general corporate
purposes.
Stock Option Plan
In 1996, the Board of Directors and the stockholders approved a Stock Option
Plan (the "Plan"). Under the Plan, options to purchase up to 2,375,000 shares
of common stock may be granted to employees, directors, consultants and
advisors of the Company. Options granted may be either "incentive stock
options" or "nonqualified options." All options issued under the Plan are
exercisable over periods determined by the Board
F-19
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
of Directors, not to exceed 10 years from the date of grant. Options generally
vest over periods ranging from 3-5 years. In September 1997, the Board of
Directors and the stockholders approved an increase of 750,000 to the number
of shares of common stock available for future grants. These options have the
same terms and conditions as the shares initially authorized under the 1996
Plan.
Stock option plan activity for the years ended December 31, 1996 and 1997
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Outstanding at January 1..................................... 1,197 2,286
Options granted............................................ 1,703 828
Options canceled........................................... (614) (815)
------ ------
Outstanding at December 31................................... 2,286 2,299
====== ======
Exercisable at December 31................................... 469 867
====== ======
Available for grant at December 31........................... 89 825
====== ======
Weighted average option exercise price information for the years ended
December 31, 1996 and 1997 follows:
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Outstanding at January 1..................................... $ 8.60 $12.48
Options granted............................................ $12.00 $10.04
Options canceled........................................... $10.92 $ 9.32
Outstanding at December 31................................... $12.48 $10.72
====== ======
Exercisable at December 31................................... $ 7.88 $10.96
====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (in thousands) Life Price (in thousands) Price
----------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.00 6 7.2 years $ 1.00 6 $ 1.00
$4.00 12 7.3 years $ 4.00 12 $ 4.00
$8.00 to
$12.00 2,281 5.8 years $10.80 849 $11.12
----- ---
$1.00 to
$12.00 2,299 5.8 years $10.72 867 $10.96
===== ========= ====== === ======
</TABLE>
Had compensation cost for the Company been determined based upon the fair
value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS No. 123, the Company's net losses for the
years ended December 31, 1996 and 1997 would have been approximately $116,512
and $133,395, respectively, and basic and diluted net loss per share would
have been approximately $11.24 and $7.68, respectively. The effects of this
pro forma disclosure are not indicative of future amounts. Additional awards
are anticipated in future years. The weighted average fair value of the
options granted during the years ended December 31, 1996 and 1997 was
estimated at $6.76 and $1.12 per share, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
no dividend yield, volatility of 55% for 1996 and 1997, risk-free rate of
6.16% for 1996 and 5.99% for 1997, and an expected option life of 4.6 years
from date of vesting for 1996 and 1997.
F-20
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
In determining the fair value of the common stock at the date of grant under
the Plan, the Board considered a broad range of factors including the illiquid
nature of an investment in the Company's common stock, transactions in the
Company's common stock, the Company's historical financial performance
relative to that of comparable companies and its future prospects.
Repricing of Stock Options
In June 1997, the Board approved a repricing plan to reprice employee stock
options under the Plan to restore the long-term employee retention and
performance incentives of the stock options outstanding. In accordance with
the repricing plan, all stock options held by current, active full-time
employees, with exercise prices above $12.00 per share, were canceled and
replaced by the same number of options exercisable at $12.00 per share, the
fair value of the Company's common stock as determined by the Board on the
date of the repricing.
In May 1998, the Board approved a repricing plan to reprice employee stock
options under the Plan to restore the long-term employee retention and
performance incentives of the stock options outstanding. In accordance with
the repricing plan, all stock options held by current, active full-time
employees, with exercise prices above $4.00 per share, were canceled and
replaced by the same number of options exercisable at $4.00 per share. The
Company records compensation expense for these repriced options over the
vesting periods based upon a fair value of $7.00 per share. The deferred
compensation expense amounted to $1,929 at September 30, 1998.
The exercise and vesting periods of the outstanding options were not altered
by the repricings.
In making the determinations of the fair value of the Company's common
stock, the Board considered a broad range of factors including the illiquid
nature of an investment in the Company's common stock, transactions of the
Company's common stock, the Company's historical financial performance
relative to that of comparable companies and its future prospects.
Stock Warrants
In October 1996, the Stockholder exercised his warrant to purchase 67,500
shares of common stock at a price of $12.00 per share, less a discount
resulting in proceeds of $792 to the Company. The discount was approved by the
Company's Board of Directors and was agreed upon to reflect the fact that the
Stockholder exercised the warrant prior to its expiration date of December 31,
1996. In December 1996, Carso Global Telecom exercised its warrant to purchase
675,000 shares of common stock at a price of $12.00 per share, resulting in
proceeds of $8,100 to the Company. These warrants were granted in
consideration of the commitments described in the Funding Agreement (see Note
4--Acquisition of Prodigy Services).
The warrant to purchase 250,000 shares issued to Carso Global Telecom in
1996 was canceled in March 1997, at which time the Company granted Carso
Global Telecom and the Stockholder warrants to purchase 3,250,000 shares and
500,000 shares, respectively, of common stock for $12.00 per share,
exercisable prior to or on November 12, 1997. In October 1997, in
consideration of the interim financing (see Note 8--Notes Payable), the
exercise price was reduced from $12.00 per share to $4.00 per share.
At December 31, 1997, the Company had warrants outstanding with various
shareholders, including Carso Global Telecom, to purchase 3,859,347 shares of
the Company's common stock at an average price of $4.20 per share. Of the
outstanding warrants, 3,750,000 may be exercised at any time until the earlier
of May 12, 1998, or an initial public offering. Of the remainder, 22,014
warrants expire between May and December 2001, and 87,333 expire between May
and August 2005. In April 1998, 3,250,000 warrants were exercised at $4.00 per
share. In May 1998, 500,000 warrants were exercised at $4.00 per share.
F-21
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
12. Commitments and Contingencies
Commitments
At December 31, 1997, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than
one year were as follows:
<TABLE>
<S> <C>
Year ended December 31,
1998................................................................ $ 2,777
1999................................................................ 2,861
2000................................................................ 3,102
2001................................................................ 2,414
2002 and thereafter................................................. 7,317
-------
$18,471
=======
</TABLE>
The Company's rent expense in the years ended December 31, 1996 and 1997 was
approximately $5,800 and $9,192, respectively.
In December 1993, PSC entered into a noncancelable agreement with a
telephone company to provide certain services at the Company's White Plans, NY
and Yorktown, NY facilities. The agreement has a term ("service period") of
ten years. The agreement calls for line charges totaling $510 per year. The
Company has the right to terminate the agreement for certain services at any
time at a cost of 80% of the line charges over the remaining services period.
The Company is party to a contract for a subscription management system
through June 2001. This contract requires minimum annual payment of processing
fees of $900. For the years ended 1996 and 1997, the Company paid $5,055 and
$3,628, respectively.
The Company is party to a number of other agreements with information
providers which require payment of fees based upon the number of subscribers
or subscriber usage of providers' data.
Under the Company's four-year agreement with Splitrock, the Company is
obligated to minimum annual payments of $39,000 in 1998, $45,000 in 1999,
$51,000 in 2000 and $27,000 in 2001 and maximum monthly charges based on the
number of the Company's subscribers for the month. The agreement provides for
early termination charges of $7,000 in the first year, declining thereafter of
an annual basis. The agreement is automatically renewed for successive 12-
month periods unless terminated by either party upon 12-months notice.
In September 1997, the Company entered into a 22-month agreement with a
vendor to provide network licensing and technical support. This agreement
requires annual payments of $714 and $429, in 1998 and 1999, respectively.
Upon 30-day prior written notice, the Company can terminate the agreement
without penalty. The agreement can be extended for an additional 12 months.
As of December 31, 1997, the Company was contractually obligated to pay IBM
a network termination penalty of $7,500 as part of the sale of the Company's
network. The Company is currently negotiating with IBM to settle this
liability through a defined purchasing plan, whereby the Company will be
obliged to purchase services from IBM through December 31, 2000, up to $7,500
in value, with any shortfall being paid as a penalty. The Company has accrued
$2,000 as of December 31, 1997, representing management's best estimate of the
anticipated penalty to IBM. This amount is included in the Company's accrued
network termination cost (see Note 3--Restructuring and Other Special Costs).
See Note 16--Subsequent Events (Unaudited).
F-22
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
Contingencies
In June 1998, Lycos, Inc. ("Lycos") filed a complaint and motion for
preliminary injunction in the Superior Court of Middlesex County,
Massachusetts against the Company. The lawsuit alleges, among other things,
that the Company breached a license agreement with Lycos by entering into a
portal outsourcing agreement with Excite in January 1998 and by terminating
the license agreement between Lycos and the Company. The lawsuit seeks
specific performance of the license agreement between Lycos and the Company, a
preliminary and permanent injunction enjoining the Company from terminating
the license agreement between Lycos and the Company and from performing under
its agreement with Excite, money damages and attorneys' fees. A hearing on
Lycos' motion for preliminary injunction has been adjourned because the
parties are in negotiations to settle the lawsuit. However, there can be no
assurance the lawsuit will be settled. If the lawsuit is not settled, the
Company intends to defend it vigorously. It is not currently possible to
estimate the effect of an unfavorable outcome to this lawsuit; however, it is
possible that such an outcome could have a material adverse impact on the
Company's operations. See the penultimate paragraph of Note 16 for subsequent
event.
13. Defined Contribution Plan
On June 17, 1996, as part of the Company's acquisition of PSC (see Note 4--
Acquisitions), the Company took on responsibility for the administration and
sponsorship of the Prodigy Services Corporation Capital Accumulation Plan (the
"Plan").
The Plan is a defined contribution plan covering all employees of the
Company. Employees can participate in the Plan from their first day of
employment.
Each year, active participants may contribute up to 12 percent of their pre-
tax base salaries, up to the maximum amount allowed by the Plan. The Company
contributes a matching contribution equal to 100 percent of an employee's pre-
tax contributions, limited to a maximum of 3 percent of a participant's
compensation. The Plan also has an after-tax savings feature that permits
employees to contribute from 1 percent to 10 percent of their base salaries
subject to Internal Revenue Code limitations.
The Company's contributions were $600 and $596 in 1996 and 1997,
respectively.
14. Valuation and Qualifying Accounts
The following table sets forth activity in the Company's reserve accounts:
Accounts Receivable
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charges to End of
of Period Operations Deductions Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
December 31, 1996................ $-- $4,002 $3,072 $930
December 31, 1997................ 930 4,749 4,994 685
Nine months ended September 30,
1998 (unaudited)................ 685 2,313 2,346 652
</TABLE>
F-23
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
15. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Cash paid for interest...................................... $ 2,428 $ 1,177
======== ========
Noncash investing and financing activities:
Conversion of advances from stockholder to common stock... $ 4,500 $102,651
Contingent convertible notes and contingent warrants
issued in exchange for contingent convertible note....... -- 30,500
Sale of network assets in exchange for service agreement.. -- $ 9,502
Acquisition of minority interest in "Comstar Cote d'
Ivoire," in exchange for 350,000 shares of common stock.. $ 1,050 --
======== ========
Acquisition of business, net of cash acquired:
Fair value of assets acquired............................. $136,095 --
Cash paid for assets, including direct costs.............. (47,616) --
Issuance of contingent convertible notes.................. (30,500) --
-------- --------
Liabilities assumed......................................... $ 57,979 --
======== ========
</TABLE>
16. Subsequent Events (Unaudited)
Telmex is the largest ISP in Mexico and had approximately 110,000 billable
subscribers to its Internet Directo Personal ("IDP") online service at
December 31, 1998. Telmex has advised the Company that IDP subscribers
currently generate average monthly revenue of approximately 200 pesos per
subscriber (approximately $20 per subscriber based on the current peso/dollar
exchange rate). On January 25, 1999, Prodigy and Telmex executed an agreement
under which: (i) Prodigy will assist Telmex in the negotiation of agreements
with service providers for Telmex's IDP service in Mexico pertaining to
network/Internet access, Web hosting, customer service, content hosting,
billing, marketing, sales and data collection services; (ii) Prodigy will
advise Telmex on customer service, administrative functions and technical
operations, including marketing, Internet connection and other network
services, content, customer support, pricing and service composition, billing
and collection, inbound telemarketing and other aspects of the ISP business;
(iii) the parties will discuss the potential migration of certain IDP
infrastructure functions, including email, subscriber management and
authentication systems, for Telmex's IDP subscribers to the Prodigy
infrastructure platform, and the advisability of offering a co-branded
IDP/Prodigy service in Mexico; and (iv) the parties will pursue additional
opportunities, such as providing services to one another and the joint
acquisitions of subscribers. In exchange for Prodigy's services, Telmex will
pay Prodigy a management fee, on a monthly basis, equal to 15% of the net
subscriber revenue (defined as the invoiced sales price less discounts, excise
taxes and credits for returns) on the first 200,000 IDP subscribers and 10% of
the net subscriber revenue (as defined above) on additional IDP subscribers.
The agreement has a term of five years and may be terminated by Telmex if
Prodigy undergoes a change of control.
F-24
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share and per share amounts)
In connection with the Company's contractual obligation to pay IBM a network
termination penalty of $7,500 as part of the sale of the Company's network
(see Note 12--Commitments and Contingencies), the Company concluded an
agreement with IBM in December 1998, pursuant to which the Company is obliged
to purchase services from IBM through December 31, 2000, up to $7,500 in
value. If the Company does not purchase from IBM services with such value by
such date, then the Company is obligated to pay the balance in a lump sum, on
or before January 30, 2001.
In January 1999, the Company paid the Corporate Lender (see Note 8--Notes
Payable) $750 in full settlement of its 8 1/4% convertible note in the
principal amount of $2,000.
In January 1999, the Company settled its dispute with Lycos (see Note 12--
Commitments and Contingencies) at no net cost to the Company.
In January 1999, the Company's Board of Directors declared a 1 for 4 reverse
stock split. All references in the financial statements to shares of Common
Stock have been retroactively adjusted to reflect this reverse stock split.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Prodigy Communications Corporation:
In our opinion, the accompanying consolidated statements of operations and
of cash flows present fairly, in all material respects, the consolidated
results of operations and cash flows of Prodigy Services Company and its
subsidiary for the year ended December 31, 1995 and for the five and one-half
month period ended June 16, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
September 10, 1998
F-26
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1995 and the five and one-half month period
ended June 16, 1996:
<TABLE>
<CAPTION>
Year Ended January 1, 1996
December 31, Through June 1,
1995 1996
------------ ---------------
(in thousands)
<S> <C> <C>
Revenues:
On-line service revenues......................... $230,562 $ 98,242
Other............................................ 12,837 8,900
-------- --------
Total revenues................................. 243,399 107,142
-------- --------
Operating costs and expenses:
Costs of revenue................................. 120,457 67,833
Marketing........................................ 67,411 43,527
Product development.............................. 22,509 11,277
General and administrative....................... 68,738 32,948
Restructuring and other special costs............ -- 14,561
-------- --------
Total operating costs and expenses............. 279,115 170,146
-------- --------
Operating loss................................. (35,716) (63,004)
Interest income.................................... 1,133 61
-------- --------
Net loss....................................... $(34,583) $(62,943)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1995 and the five and one-half month period
ended June 16, 1996
<TABLE>
<CAPTION>
January 1, 1996
Year Ended Through
December 31, June 16,
1995 1996
------------ ---------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(34,583) $(62,943)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts............... (2,434) 883
Depreciation and amortization of property and
equipment.................................... 19,032 8,824
Amortization of deferred software development
costs........................................ 2,719 1,215
Write-down of deferred software development
costs to net realizable value................ -- 3,359
Amortization of deferred subscriber
acquisition costs............................ 12,700 7,800
Write-down of deferred subscriber acquisition
costs to net realizable value................ -- 9,221
Gain on sale of property and equipment........ (1,273) --
Write-off of leasehold improvements........... -- 5,593
Changes in operating assets and liabilities:
Trade accounts receivable................... 6,788 3,096
Prepaid expenses and other current assets... (2,424) 3,827
Deferred subscriber acquisition costs....... (16,848) (5,076)
Accounts payable............................ 4,833 (7,715)
Accrued pension expense..................... (1,146) 984
Accrued restructuring and other special
costs...................................... -- 8,101
Other accrued expenses...................... (7,571) 3,957
Unearned revenue............................ (5,565) (10,094)
-------- --------
Net cash used in operating activities..... (25,772) (28,968)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment.............. (25,746) (14,057)
Proceeds from disposals of property and
equipment...................................... 2,783 85
Deferred software development costs............. (2,880) (3,498)
-------- --------
Net cash used in investing activities..... (25,843) (17,470)
-------- --------
Cash flows from financing activities:
Partners' capital contributions................. 48,613 67,300
-------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (3,002) 20,862
Cash and cash equivalents at beginning of period.. 8,668 5,666
-------- --------
Cash and cash equivalents at end of period........ $ 5,666 $ 26,528
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. Organization and Basis of Presentation
Prodigy Services Company (the "Partnership") is a joint venture of
International Business Machines Corporation ("IBM") and Sears, Roebuck & Co.
("Sears"). The Partnership was formed to develop and market PRODIGY(SM) (the
"PRODIGY Service" or the "Service"), the national network that provides on-
line services to households with personal computers.
The Partnership was organized on February 13, 1984 as a New York State
general partnership.
On June 16, 1996, the Partners sold the PRODIGY Service, and the related
assets and liabilities, of the Partnership to Prodigy, Inc., with the
exception of certain patents and all obligations and liabilities related to
employee retirement and postretirement benefit plans, for an aggregate
purchase price of $78,116. These consolidated financial statements present the
results of operations for the year ended December 31, 1995 and for the five
and one-half month period from January 1, 1996 through June 16, 1996, and have
been prepared using the Partnership's historical basis in the results of
operations.
These consolidated financial statements have been included in the Prospectus
as the Partnership is considered to be the predecessor business to Prodigy
Communications Corporation.
2. Significant Accounting Policies
Principles of Consolidation and Estimates
The consolidated financial statements include the accounts of the
Partnership and its majority-owned subsidiary, SonicNet, Inc. All significant
intercompany transactions have been eliminated on consolidation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with a maturity of
three months or less when purchased and consist of deposits with banks and
financial institutions which are unrestricted as to withdrawal or use.
Revenue Recognition
On-line service revenues encompass subscription and usage fees. Term
subscription fees are recognized on a pro-rata basis over the life of the
related subscriptions. Other revenues consist principally of marketing
services and transaction fees generated from goods and services purchased
through the service. Revenues are recorded when services are rendered or
products are delivered.
Income Taxes
The Partnership is not a taxable entity; accordingly, no provision for
income taxes has been made in the financial statements. The Partners'
respective shares of partnership losses are reportable on the individual
Partner's corporate income tax returns.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful life of the
asset or the lesser of the remaining lease term or the life of the
improvement. Estimated service lives of these assets range principally from
three to seven years.
F-29
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(in thousands)
Repair and maintenance charges are expensed as incurred. When assets are
sold, retired or otherwise disposed of, the applicable costs and accumulated
depreciation and amortization are removed from the accounts and the resulting
gain or loss is included in the consolidated statement of operations.
Deferred Subscriber Acquisition Costs
Certain subscriber acquisition costs are deferred and charged to operations
using the straight-line method beginning the month after such costs are
incurred. These costs are amortized over a fifteen to eighteen month period.
These costs relate directly to subscriber solicitations and principally
include printing, production and shipping of start-up kits. Costs incurred
other than those targeted at specific identifiable prospects for the
Partnership's services are expensed as incurred.
Product Development
The Partnership capitalizes the cost of developing computer software used in
the sale of its services. The capitalization of these costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Costs incurred prior to
technological feasibility are expensed as incurred. Amortization expense is
computed on a product-by-product basis using the straight-line method,
primarily over a twenty-four month period beginning the month after the date
of product release.
Concentrations of Credit Risk
Financial instruments which potentially subject the Partnership to
concentrations of credit risk consist principally of cash and trade
receivables. Concentration of credit risk with respect to cash is limited as
the Partnership invests its cash in deposits with several financial
institutions. Concentration of credit risk with respect to trade receivables
is limited as the outstanding total represents a large number of customers
with individually small balances. The Partnership does not require collateral
or other security against trade receivable balances; however, it does maintain
reserves for potential credit losses and such losses have been within
management's expectations.
3. Investments
In December 1995, the Partnership purchased a 53 percent ownership interest
in SonicNet, Inc., a company formed to provide an interactive service of
alternative rock music made available through a Prodigy web site on the
Internet and through other interactive media. The investment consists of
voting securities issued in exchange for the Partnership's commitment to
provide funding of approximately $2,100 for SonicNet, Inc. in scheduled
monthly payments through February 1997. The results of operations from the
date of acquisition are included in the Partnership's net losses and are not
material.
4. Related Party Transactions
a. The Partnership recognized revenues from contracts with its Partners as
follows:
<TABLE>
<CAPTION>
January 1,
Year Ended 1996 Through
December 31, June 16,
1995 1996
------------ ------------
<S> <C> <C>
IBM................................................ $ 41 $ 5
Sears.............................................. 163 23
---- ---
$204 $28
==== ===
</TABLE>
F-30
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(in thousands)
b. The Partnership purchased data processing and office equipment from IBM
and Sears as follows:
<TABLE>
<CAPTION>
January 1,
Year Ended 1996 Through
December 31, June 16,
1995 1996
------------ ------------
<S> <C> <C>
IBM................................................ $7,193 $356
Sears.............................................. 6 --
------ ----
$7,199 $356
====== ====
</TABLE>
c. Payments to IBM for technical services, software license fees, equipment
maintenance and installation charges, and training services totaled
approximately $6,200 and $2,300 for the year ended December 31, 1995 and the
five and one-half month period ended June 16, 1996, respectively.
d. In March 1995, the Partnership contracted with Advantis, a joint venture
of IBM and Sears, to provide an inbound 800 number calling service. During the
year ended December 31, 1995 and the five and one-half month period ended June
16, 1996, the Partnership made net payments of approximately $1,200 and
$1,400, respectively, relating to this agreement.
e. In September 1995, the Partnership entered into an agreement with IBM to
participate in the IBM licensing agreement with Netscape, Inc. for the
latter's "Navigator" Internet browser. Under the agreement the Partnership is
obligated to reimburse IBM for certain contractual fees in proportion to the
benefits derived from underlying services. These reimbursements were $239 and
$0 for the year ended December 31, 1995 and the five and one-half month period
ended June 16, 1996, respectively.
f. In October 1993, the Partnership entered into an agreement with IBM to
provide PRODIGY Service start-up kits and an on-line service application for
inclusion in IBM personal computers. Payments to IBM totaled $416 and $331 for
the year ended December 31, 1995 and the five and one-half month period ended
June 16, 1996, respectively.
g. In December 1991, the Partnership entered into an agreement with IBM for
business recovery services in the event a disaster interrupted operations at
the Partnership's data center. Partnership payments to IBM under this
agreement totaled $398 and $183 for the year ended December 31, 1995 and the
five and one-half month period ended June 16, 1996, respectively.
5. Lease Agreements
During 1992, the Partnership executed a lease agreement with Metropolitan
Life Insurance Company for a ten-year lease on the Partnership's headquarters
premises in White Plains, New York, commencing January 1, 1993.
The Partnership also leases space for numerous computer installation sites
throughout the United States. Leases for the computer installation sites
generally have three-year terms with options to renew for at least one
additional term.
Rent expense approximated $9,900 and $4,800 for the year ended December 31,
1995 and the five and one-half month period ended June 16, 1996, respectively.
F-31
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(in thousands)
6. Employee Benefit Plans
Pension Plan
The Partnership has a noncontributory defined benefit pension plan (the
"Pension Plan") for all full-time employees. The benefits are based upon years
of service and the employee's average compensation during the highest-paid
consecutive five years of the last ten years of employment. The Pension Plan
is funded in accordance with the requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA").
Net Pension Plan expense included the following components for the year
ended December 31, 1995:
<TABLE>
<S> <C>
Service cost........................................................ $ 1,714
Interest cost....................................................... 2,214
Actual return on assets............................................. (8,350)
Net amortization and deferral....................................... 5,148
-------
Net pension plan expense.......................................... $ 726
=======
</TABLE>
The Partnership recorded a net Pension Plan expense of $360 in the five and
one-half month period ended June 16, 1996.
Supplemental Retirement Plans
The Partnership also maintains two unfunded supplemental retirement plans
(the "Plans") for certain employees. The benefits are based upon years of
service and the employee's average compensation during the highest-paid
consecutive five years of the last ten years of employment.
Net expense for the Plans included the following components for the year
ended December 31, 1995:
<TABLE>
<S> <C>
Service cost........................................................... $ 63
Interest cost.......................................................... 495
Net amortization and deferral.......................................... (70)
----
Net plan expense..................................................... $488
====
</TABLE>
The Partnership recorded a net expense for the Plans of $224 in the five and
one-half month period ended June 16, 1996.
Capital Accumulation Plan
The Partnership has a voluntary capital accumulation plan for all full-time
employees. The plan is a defined contribution plan and is subject to the
provisions of ERISA. Under the provisions of the plan, the Partnership matches
the first 3% of base salary employee-deferred pre-tax contributions. The
Partnership contributed approximately $1,100 and $600 to the plan in the year
ended December 31, 1995 and the five and one-half month period ended June 16,
1996, respectively.
7. Other Postretirement Benefits
The Partnership sponsors a defined benefit postretirement medical and life
insurance plan for all full-time employees. The plan is unfunded.
In 1995, the Partnership adopted Statement of Financial Accounting Standards
No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other
than Pensions." The standard requires recognition of the estimated future cost
of providing health and other postretirement benefits on the accruals basis.
F-32
<PAGE>
PRODIGY SERVICES COMPANY AND ITS SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(in thousands)
Net periodic postretirement benefit cost included the following components
for the year ended December 31, 1995:
<TABLE>
<S> <C>
Service cost........................................................... $212
Interest cost.......................................................... 377
Amortization of net obligation at transition........................... 205
----
$794
====
</TABLE>
The Partnership recorded a net periodic postretirement benefit cost of $400
in the five and one-half month period ended June 16, 1996.
8. Restructuring and Other Special Costs
In April 1996, the Company approved a restructuring plan to reduce costs
through job eliminations and a reduction in the use of leased office space,
and as a result recorded a restructuring charge of $14,561. This charge
consisted of severance costs of $5,300 in connection with the planned
termination of 20 employees, a lease termination penalty of $7,826, a write-
down of $5,593 related to leasehold improvements, less the write-off of
deferred rent concessions of $4,158.
F-33
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1995
-------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents..................................... $242,362 $ 413,513
Accounts receivable...................................... -- 5,466
Note receivable--stockholder............................. -- 100,000
Interest receivable...................................... -- 7,700
Prepaid expenses......................................... -- 76,699
-------- ----------
Total current assets................................... 242,362 603,378
-------- ----------
Property, Plant and Equipment, Net......................... 52,618 1,491,092
-------- ----------
Other Assets:
Licenses................................................. 75,235 72,215
Deposits................................................. -- 17,426
Goodwill................................................. -- 316,807
-------- ----------
Total other assets..................................... 75,235 406,448
-------- ----------
Total................................................ $370,215 $2,500,918
======== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995
1994 1995 (Pro Forma)
----------- ----------- -----------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
(Deficiency)
Current Liabilities:
Accounts payable and accrued
expenses............................. $ 110,628 $ 617,373
Accrued interest--stockholders........ -- 11,118
Advances from stockholders............ 11,476 32,529
Customer deposits..................... -- 201,402
----------- -----------
Total current liabilities........... 122,104 862,422
----------- -----------
Due to Stockholder...................... 422,786 1,600,000
----------- -----------
Total liabilities................... 544,890 2,462,422
----------- -----------
Commitments and Contingencies
Stockholders' Equity (deficiency):
Series A convertible preferred stock,
$.01 par value; 1,000,000 shares
authorized; 433,728 and 0 shares
issued and outstanding in 1994 and
1995, respectively................... 4,337 --
Common stock, $.01 par value;
70,000,000
shares authorized; 8,124,776, and
8,631,941
shares issued and outstanding in 1994
and 1995, respectively; 10,364,616
shares pro forma..................... 81,248 86,319 $ 103,646
Additional paid-in capital............ 779,379 4,083,521 24,805,901
Deficit............................... (1,039,639) (4,127,365) (4,127,365)
Cumulative translation adjustment..... -- (3,979) (3,979)
----------- ----------- -----------
Total stockholders' equity
(deficiency)....................... (174,675) 38,496 $20,778,203
----------- ----------- -----------
Total............................. $ 370,215 $ 2,500,918
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From May 23, 1994
(Date of Inception) to Year Ended
December 31, 1994 December 31, 1995
------------------------ -----------------
<S> <C> <C>
Revenues............................ $ -- $ 12,195
----------- -----------
Costs and Expenses:
Cost of revenues.................. -- 82,000
Selling, general and administra-
tive............................. 1,039,639 3,007,209
----------- -----------
Total........................... 1,039,639 3,089,209
----------- -----------
Loss From Operations................ (1,039,639) (3,077,014)
----------- -----------
Other Income (expense):
Interest income................... -- 7,832
Interest expense.................. -- (18,544)
----------- -----------
Total........................... -- (10,712)
----------- -----------
Net Loss............................ $(1,039,639) $(3,087,726)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------ --------------------
Additional
Paid-in
Shares Amount Shares Amount Capital
----------- ----------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Acquisition of
Comstar.............. 5,334,212 $53,342 -- $ -- $ (125,547)
Sale of preferred
stock, net of costs
of $19,200........... -- -- 433,728 4,337 843,919
Issuance of common
stock................ 2,790,564 27,906 -- -- 61,007
Net loss.............. -- -- -- -- --
----------- ------- ----------- ------- ----------
Balance, December 31,
1994................... 8,124,776 81,248 433,728 4,337 779,379
Sale of preferred
stock................ -- -- 20,000 200 39,800
Conversion of
preferred stock...... 141,790 1,417 (453,728) (4,537) 3,120
Common stock issued
for services......... 13,750 138 -- -- 144,862
Sale of common stock,
net of costs of
$146,374............. 201,625 2,016 -- -- 1,867,860
Conversion of amount
due to stockholder... 100,000 1,000 -- -- 999,000
Acquisition of Karisi
Communications,
Inc.................. 50,000 500 -- -- 249,500
Net loss.............. -- -- -- -- --
Translation
adjustment........... -- -- -- -- --
----------- ------- ----------- ------- ----------
Balance, December 31,
1995................... 8,631,941 $86,319 -- $ -- $4,083,521
=========== ======= =========== ======= ==========
<CAPTION>
Cumulative
Translation
Deficit Adjustment Total
----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Acquisition of
Comstar.............. $ -- $ -- $ (72,205)
Sale of preferred
stock, net of costs
of $19,200........... -- -- 848,256
Issuance of common
stock................ -- -- 88,913
Net loss.............. (1,039,639) -- (1,039,639)
----------- ------- -----------
Balance, December 31,
1994................... (1,039,639) -- (174,675)
Sale of preferred
stock................ -- -- 40,000
Conversion of
preferred stock...... -- -- --
Common stock issued
for services......... -- -- 145,000
Sale of common stock,
net of costs of
$146,374............. -- -- 1,869,876
Conversion of amount
due to stockholder... -- -- 1,000,000
Acquisition of Karisi
Communications,
Inc.................. -- -- 250,000
Net loss.............. (3,087,726) -- (3,087,726)
Translation
adjustment........... -- (3,979) (3,979)
----------- ------- -----------
Balance, December 31,
1995................... $(4,127,365) $(3,979) $ 38,496
=========== ======= ===========
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from May 23, 1994 Year Ended
(Date of Inception) to December 31,
December 31, 1994 1995
------------------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................... $(1,039,639) $(3,087,726)
Adjustments to reconcile net loss to
cash used in operating activities:
Common stock issued for services..... -- 145,000
Depreciation and amortization........ 4,291 28,478
Changes in assets and liabilities:
Accounts receivable................ -- (1,561)
Interest receivable................ -- (7,700)
Prepaid expenses................... -- (75,301)
Deposits........................... -- (17,426)
Accounts payable and accrued
expenses.......................... 38,070 377,327
Accrued interest--stockholders..... -- 11,118
Customer deposits.................. -- 199,355
Advances from stockholders......... 11,476 43,989
----------- -----------
Cash used in operating
activities...................... (985,802) (2,384,447)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment..... (52,596) (1,425,419)
Acquisition of licenses................ (79,195) (2,094)
----------- -----------
Cash used in investing
activities...................... (131,791) (1,427,513)
----------- -----------
Cash Flows from Financing Activities:
Net proceeds from sale of common
stock................................. 88,913 1,869,876
Borrowings from stockholder............ 422,786 2,177,214
Note receivable from stockholder....... -- (100,000)
Net proceeds from issuance of Convert-
ible Preferred Stock.................. 848,256 40,000
Other.................................. -- (3,979)
----------- -----------
Cash provided by financing
activities...................... 1,359,955 3,983,111
----------- -----------
Increase in Cash and Equivalents......... 242,362 171,151
Cash and Equivalents, Beginning of Peri-
od...................................... -- 242,362
----------- -----------
Cash and Equivalents, End of Period...... $ 242,362 $ 413,513
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business--International Wireless Incorporated (the "Company") was
incorporated on May 23, 1994, as a Delaware corporation to develop and operate
cellular telephone systems together with voice mail, paging and other enhanced
services, including Internet access and on-line services, in developing
countries throughout the world. In January 1996, through its investment in
Global Enterprise Services, Inc., the Company expanded its Internet-related
activities to the United States. In May 1996, the Company entered into an
agreement to acquire Prodigy Services Company ("Prodigy") through a holding
company, Prodigy, Inc., formed to hold the Company and Prodigy, resulting in a
substantial change in the nature of the Company's activities. As a result of
the Prodigy acquisition, the Company has become a major provider of on-line
and Internet services while continuing to pursue the development of its
cellular and other on-line activities in developing countries.
Effective, January 1997, Prodigy Inc. sold all issued and outstanding
capital stock of International Wireless Incorporated ("IW"). The assets of IW
at the time of the sale consisted of cellular communications licenses and
license applications in certain African countries, and the associated rights
and assets used in the Company's cellular telephone activities. Africa Online,
Inc. formerly a wholly-owned subsidiary of IW, had been transferred to another
subsidiary of Prodigy, Inc. and was sold on October 1, 1998. Prodigy, Inc.
also retained the joint venture investment in China previously held by IW.
This investment was subsequently discontinued.
Although required by Regulation S-X, audited financial statements for
International Wireless Incorporated have not been presented in the Prospectus,
as the operating results and assets of the Company and its Subsidiaries were
minimal for all periods prior to the acquisition of Prodigy. Audited financial
statements for Prodigy Services Company have been presented in the Prospectus
for the year ended December 31, 1995 and for the five and one-half month
period ended June 16, 1998, as Prodigy is considered to be the predecessor
business to Prodigy Communications Corporation.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Pro Forma Stockholders' Equity--Pro forma stockholders' equity reflects the
following transactions in 1996 as if they had occurred on December 31, 1995:
the sale of the first 1,000,000 of 1,750,000 shares of common stock to a
subsidiary of Grupo Carso, S.A. de C.V. ("Carso"), at $12 per share pursuant
to a stock subscription agreement (see Note 8--Stock Subscription); the
receipt of additional advances of $2,900,000 from a stockholder (the
"Stockholder") and conversion of the additional advances and the outstanding
advances at December 31, 1995 of $1,600,000 into 375,000 shares of common
stock at $12 per share (see Note 8--Stockholder Advances); and, the sale in a
private placement of 357,675 shares of common stock resulting in net proceeds
to the Company of $4,239,707 (see Note 8--Private Placement).
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenues--Cellular service revenue is recognized as services are provided.
Customer deposits represent receipts for cellular service subscriptions
received by the Company's subsidiary in Cote d'lvoire.
Cash Flow Information--Cash equivalents include highly liquid securities
purchased with remaining maturities of less than three months. No cash was
paid for income taxes or interest in 1994 and 1995.
F-38
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
Property, Plant and Equipment--Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, ranging from 3 to 8 years for automobiles
and equipment and 40 years for buildings.
Licenses--Licenses consist of cellular telephone licenses in certain African
countries. The costs of obtaining the licenses have been deferred and are
being amortized over the lesser of the period of the license or its estimated
useful life. Amortization expense for the period ended December 31, 1994 and
for the year ended December 31, 1995 amounted to $3,960 and $9,074,
respectively.
Goodwill--Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and is being amortized over 10 years. Goodwill is
periodically reviewed for impairment by comparison to future expected cash
flows to be generated by the underlying operations.
Foreign Currency Translation--The functional currencies of the Company's
foreign subsidiaries are the local currency. Accordingly, assets and
liabilities of foreign subsidiaries are translated to U.S. dollars at period-
end exchange rates and revenues and expenses are translated using the average
rates during the period. The effects of foreign currency translation
adjustments have been accumulated and are included as a separate component of
stockholders' equity.
Income Taxes--Deferred tax assets and liabilities are provided to recognize
differences in the book and tax bases of assets and liabilities.
Financial Instruments--The carrying values of cash and equivalents,
receivables and accounts and other payables approximate fair value due to the
short-term nature of these instruments. Management believes that the amount
due to stockholder approximates fair value because the terms were negotiated
in the latter part of 1995.
Impairment of Long-Lived Assets--The Company will be required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," in 1996. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
Accounting for Stock-Based Compensation--The Company will be required to
adopt SFAS No. 123, "Accounting for Stock-Based Compensation," in 1996. As
permitted by SFAS No. 123, the Company will elect to continue to apply the
intrinsic value methodology provisions of Accounting Principles Board Opinion
No. 25 for grants or awards of equity instruments to employees. Also, as
required by SFAS No. 123, the Company will use a fair value methodology to
measure the compensation element of grants or awards of equity instruments to
nonemployees and will disclose in its annual consolidated financial
statements, beginning in 1996, the pro forma effect on net income of using a
fair value approach to measure compensation for all grants or awards of equity
instruments.
2. Acquisitions
Comstar Cellular Network, Inc. ("Comstar")--In August 1994, the Company
issued 5,334,213 shares of common stock in exchange for certificates of common
stock of Comstar representing 79% of the number of shares covered by
outstanding certificates of common stock of Comstar. The assets of Comstar
consisted primarily of provisional licenses to develop cellular communications
systems in Cote d'lvoire and Nigeria. The Company has recorded the assets
acquired and liabilities assumed at their historical carrying amounts due to
the common control of both companies. The excess of liabilities assumed over
assets acquired was $72,205. The accompanying consolidated financial
statements include the results of operations of Comstar from the date of
acquisition.
F-39
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
African Communications Incorporated ("ACI")--On March 31, 1995, the Company
merged with ACI. This transaction was accounted for in a manner similar to a
pooling of interests because of the common ownership of both companies. Prior
to March 31, 1995, the Company and ACI were jointly developing the Company's
cellular systems through subsidiaries of the Company that were approximately
67% owned by the Company and 33% owned by ACI. The Company and ACI had no
operations that were independent of these joint development efforts. The
Company issued 2,790,563 shares of common stock representing a 33% interest in
the Company in exchange for all of the outstanding shares of ACI. The
consolidated financial statements for 1994 have been restated to include the
operations of ACI.
Karisi Communications, Inc. ("Karisi")--In November 1995, the Company
acquired Karisi including a 79% equity interest in Karisi Communications
(Kenya) Ltd. Karisi, which changed its name to Africa Online, Inc., is
primarily engaged in providing online services to Kenyan subscribers. The
initial purchase price consisted of 25,000 shares of the Company's common
stock valued at $10.00 per share and assumption of net liabilities of $30,085.
Additional consideration of 25,000 shares is currently held in escrow and may
be released over a two-year period based on the attainment of future
subscriber levels.
The acquisition has been accounted for as a purchase. Accordingly, the
results of operations of Karisi have been included in the accompanying
consolidated statements of operations from the date of acquisition. The excess
of purchase over the fair value of net assets acquired has been allocated to
goodwill.
The following unaudited pro forma information for the year ended December
31, 1995 reflects the combined results of operations of the Company and Karisi
as if the acquisition occurred on January 1, 1995:
<TABLE>
<S> <C>
Revenue....................................................... $ 141,395
Net loss...................................................... 3,231,637
</TABLE>
Karisi did not have any significant operations prior to January 1, 1995.
3. Property, Plant and Equipment
Property, plant and equipment at December 31, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
------- ----------
<S> <C> <C>
Land.................................................... $49,000 $ 78,064
Buildings............................................... -- 195,834
Computer equipment...................................... -- 190,078
Cellular system equipment............................... -- 721,612
Furniture and equipment................................. 3,896 241,404
Automobiles............................................. -- 87,870
------- ----------
Total................................................. 52,896 1,514,862
Less accumulated depreciation........................... (278) (23,770)
------- ----------
Property, plant and equipment........................... $52,618 $1,491,092
======= ==========
</TABLE>
4. Due to Stockholder--Credit Facility
Under a credit facility provided by the Stockholder in 1994, the Company was
able to borrow up to a maximum of $1,250,000 without interest through March
31, 1995 and with interest at prime plus 2% thereafter. On May 31, 1995, the
credit facility was terminated and the outstanding borrowings at that date of
$1,000,000 were converted into 100,000 shares of common stock.
F-40
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
Pursuant to a loan and security agreement dated November 15, 1995, the
Stockholder agreed to make additional loans to the Company in the aggregate
amount up to $4,500,000. Borrowings bear interest payable monthly at prime
plus 1.25% on the first $1 million; prime plus 1.5% on the second $1 million;
and prime plus 2% on amounts in excess of $2 million. Borrowings are
collateralized by all assets of the Company, including a pledge of the common
stock of the subsidiaries. All borrowings are due on December 31, 1998. Prior
to December 31, 1996, borrowings are convertible into shares of the Company's
common stock at a conversion price of $12.00 per share.
The Company paid the Stockholder a commitment fee equal to 1% of the maximum
borrowings through the issuance of 3,750 shares of the Company's common stock.
5. Income Taxes
The tax effects of significant items comprising the Company's net deferred
tax assets as of December 31, 1994 and 1995 are approximately as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
U.S. net loss carryforwards.......................... $ 51,000 $ 608,000
Net loss carryforwards of foreign subsidiaries....... 200,000 592,000
Deferred liabilities................................. -- (4,000)
Valuation allowances................................. (251,000) (1,196,000)
--------- -----------
Net tax asset........................................ $ -- $ --
========= ===========
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of $1,673,000 which may be used to offset future
taxable income, expiring in 2010. The Company also has operating loss
carryforwards in Cote d'lvoire and Kenya, which begin to expire in 1998, of
$1,696,000, which may be used to offset future taxable income in those
countries. Due to the uncertainty of realization, the Company has provided a
100% valuation allowance of all deferred tax assets.
6. Stockholders' Equity
Stock Recapitalization--On March 31, 1995, the stockholders approved the
following recapitalization: conversion of the existing outstanding preferred
stock into common stock at a rate of .3125 shares of common stock for each
share of preferred stock; an increase in the number of authorized shares of
common stock from 35,000,000 to 70,000,000; an increase in the number of
authorized shares of preferred stock from 1,000,000 shares of "Series A"
preferred stock to 10,000,000 shares of "blank check" preferred stock. In
1996, the Board of Directors and the stockholders approved an increase in the
authorized shares of common stock to 140,000,000 shares.
Stock Option Plan--Under the Company's 1994 Stock Option Plan (the "Plan"),
options to purchase up to 1,500,000 shares of common stock may be granted to
employees, directors, consultants, and advisors of the Company. Options
granted may be either "incentive stock options" or nonqualified options. Stock
options are exercisable over a period determined by the Board of Directors.
In 1996, the Board of Directors and the stockholders adopted an amendment to
the Plan increasing the number of shares available for grant to 2,375,000.
F-41
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Shares Price
--------- ------------
<S> <C> <C>
Granted................................................. 271,000 $ 1.00-$8.00
Exercised............................................... -- --
Canceled................................................ -- --
--------- ------------
Balance, December 31, 1994.............................. 271,000 $1.00-$10.00
Granted................................................. 926,750 $1.00-$10.00
Exercised............................................... -- --
Canceled................................................ -- --
--------- ------------
Balance, December 31, 1995.............................. 1,197,750 $1.00-$10.00
========= ============
Exercisable at December 31, 1995........................ 228,750 $1.00-$10.00
========= ============
</TABLE>
Stock Warrants--At December 31, 1995, the Company had outstanding warrants
to purchase 54,000 shares of the Company's common stock at $10.00 per share.
The warrants may be exercised at any time and expire in 2005.
7. Commitments and Contingencies
As of December 31, 1995, the Company and its subsidiaries leased facilities
in Ivory Coast and in Cambridge, MA. The leases expire from 1996 to 2000 and
contain renewal options. Future minimum rental payments are as follows:
<TABLE>
<S> <C>
Year ended December 31
1996............................................................... $171,000
1997............................................................... 122,000
1998............................................................... 45,000
1999............................................................... 50,000
2000............................................................... 55,000
Thereafter......................................................... 71,000
--------
Total future minimum rentals....................................... $514,000
========
</TABLE>
Total rent expense for the period ended December 31, 1994 and the year ended
December 31, 1995 was $3,000 and $86,000, respectively.
At December 31, 1995, the Company has outstanding purchase commitments of
approximately $4.7 million for equipment relating to its cellular telephone
development activities in Africa.
Litigation--Pursuant to the acquisition described in Note 2, holders of
Comstar stock certificates were required to release Comstar and the Company
from any claims which such holders may have had and to surrender their Comstar
stock certificates. Certain holders of the Comstar certificates did not
participate in the reorganization, and there can be no assurance that they
will not bring claims against the Company. The consolidated financial
statements contain no provision or liability for such potential claims;
however, the Company believes that the reorganization provided the holders
with the opportunity to acquire equity participation in the Company, without
further investment, in the same relative proportion as they would have had in
Comstar. The Company does not expect that this matter will have a material
impact on its financial position or the results of operations.
F-42
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
8. Subsequent Events
Acquisition of Minority Interest in Subsidiary--In January 1996, the Company
purchased 90 shares of common stock of Comstar Cellular S.A. Cote d'lvoire
("Comstar Cote d'lvoire") from a minority shareholder and employee in exchange
for 87,500 shares of common stock of the Company and $300,000 in cash. As a
result of this transaction, the Company's equity interest in Comstar Cote
d'Ivoire increased from 91% to 100%.
The acquisition will be accounted for as a purchase and the purchase price
of $1,350,000 is expected to be allocated to goodwill associated with the
cellular operations of Comstar Cote d'Ivoire.
Investment in Global Enterprise Services, Inc. ("GES")--In 1996, the Company
acquired a 48% voting interest in GES, represented by 4,800,000 shares of
convertible preferred stock, for $9 million. The preferred stock has voting
rights and is convertible into common stock of GES stock.
The Company also received a warrant to purchase up to 1,380,000 additional
shares of GES' convertible preferred stock at an exercise price of $2.8125 per
share. The warrant is exercisable from January 1, 1997 through June 30, 1997
only in the event that GES reports both revenues of less than $15 million and
a loss before interest, taxes, depreciation and amortization for the year
ending December 31, 1996.
The Company will account for its investment using the equity method since
essentially all of the capital at risk in GES belongs to the Company.
Note Payable--In March 1996, the Company borrowed $2 million from Bay
Networks, Inc. ("Bay Networks") pursuant to an 8 1/4% convertible note.
Principal and interest are due on the earlier of six months after the
completion of a private placement with aggregate gross proceeds of at least
$1,000,000 or March 31, 1997. Bay Networks has the right within 30 days after
the completion of such a private placement and prior to March 31, 1997 to
convert the principal and interest into common stock at the price per share at
which the Company's common stock is sold in the private placement.
Private Placement--Subsequent to December 31, 1995, the Company has sold in
a private placement 1,430,702 shares of common stock resulting in net proceeds
to the Company of $4,239,707.
Stock Subscription--Pursuant to a subscription agreement dated February 20,
1996, as amended, Carso agreed to acquire for cash 1,750,000 shares of common
stock of the Company at a price of $12 per share as follows:
<TABLE>
<CAPTION>
Date Shares Amount
---- --------- -----------
<S> <C> <C>
February 20, 1996...................................... 1,000,000 $ 3,000,000
March 11, 1996......................................... 2,000,000 6,000,000
May 1, 1996............................................ 1,000,000 3,000,000
September 3, 1996...................................... 3,000,000 9,000,000
--------- -----------
Total................................................ 7,000,000 $21,000,000
========= ===========
</TABLE>
In addition, Carso may purchase an additional 750,000 shares of the
Company's common stock from existing stockholders.
Stockholder Advances--Subsequent to December 31, 1995, the Stockholder
advanced the Company an additional $2,900,000 under the terms of the existing
credit facility (Note 4) and all advances have been converted into 375,000
shares of common stock at $12 per share. The credit facility has been
terminated.
F-43
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
Acquisition of Prodigy Services Company--On June 17, 1996, the Company
acquired the partnership interests of International Business Machines
Corporation ("IBM") and Sears Roebuck and Co. ("Sears") in Prodigy. The
Company acquired the assets and assumed liabilities of Prodigy, with the
exception of certain patents and all obligations and liabilities related to
employee retirement and other postretirement benefit plans. The purchase price
was $46.2 million in cash subject to adjustments plus contingent convertible
notes (the "Contingent Convertible Notes"), payable to IBM and Sears.
Commencing December 1998, the Contingent Convertible Notes accrue interest
at $4 million on a quarterly basis. Upon the earlier of (i) an initial public
offering by the Company resulting in gross proceeds of at least $25 million,
(ii) an acquisition of the Company, (iii) following an initial public
offering, the Company's market value exceeds $200 million, or (iv) the tenth
anniversary of the closing date, the Contingent Convertible Notes are
convertible into shares constituting 15% of the Company's outstanding common
stock on a fully diluted basis (or 15% of the consideration received in the
event the Company is acquired), limited to a value equal to $200 million plus
accrued interest. Principal and interest are not required to be paid in cash,
except in the event that the Company is acquired for cash.
As part of the above agreement, the Company is required to have available
funds in the amount of $155 million to provide a portion of the necessary
funds for the purchase and operations of Prodigy. In order to meet this
requirement, the Company entered into a funding agreement with Carso and the
Stockholder described below.
Commencing with the Prodigy closing and terminating on the earlier of (i)
November 12, 1997 or (ii) the closing of an underwritten public offering in
which the gross proceeds to the Company exceed $25 million, the Company has
the right from time to time to require Carso and the Stockholder to purchase
shares of common stock from the Company at $24 per share up to a maximum
amount of $144.5 million (the "Maximum Amount"). The Maximum Amount is reduced
by (i) the net amount realized from the sale by the Company of certain
cellular assets (see below), (ii) the net amount realized, after expenses,
from the sale of common stock in a private placement, (iii) the net amount
realized by the Company in an initial public offering, (iv) the amount
realized by the Company from the exercise of the warrants described below. The
Maximum Amount is allocated 90% to Carso and 10% to the Stockholder.
The Company has granted Carso and the Stockholder warrants to purchase
675,000 shares and 67,500 shares, respectively, of common stock at $12 per
share after the initial closing of a private placement and on or before
December 31, 1996. Warrants to purchase 500,000 shares and 250,000 shares of
the Company's common stock were also granted to Carso and the Stockholder,
respectively, at $36 per share at any time after the initial closing of a
private placement and on or before the earlier of the closing of an initial
public offering or November 12, 1997.
In connection with these arrangements, the Company granted Carso an option
to purchase, on or before July 26, 1996, its cellular telephone assets located
in Cote d'lvoire and Guinee for a purchase price of $69 million. If the option
is exercised, Carso will be granted a right of first refusal, from January 1,
1997 to March 31, 1997, to purchase additional cellular assets the Company may
have at that time.
As a result of the Prodigy acquisition, the Company has entered into
employment and stock option agreements with certain Prodigy management.
F-44
<PAGE>
INTERNATIONAL WIRELESS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited)
Summarized financial information with respect to Prodigy is as follows (in
thousands):
<TABLE>
<CAPTION>
As of
December 31,
------------------
1994 1995
-------- --------
<S> <C> <C> <C>
Total assets................................... $ 80,121 $ 84,702
Partners' capital (deficit).................... (4,279) 9,751
<CAPTION>
For the Years Ended
December 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... $195,194 $210,900 $243,399
Net loss....................................... (59,973) (51,980) (34,583)
</TABLE>
Credit Facility--In June 1996, the Company entered into a loan agreement
with Banco Inbursa, S.A. ("Inbursa"), an affiliate of Carso, whereby Inbursa
agreed to provide a credit facility to the Company of up to $50 million for a
period of one year at an interest rate of prime plus 1/2%. Borrowings under
this credit facility are collateralized by a pledge of 4,250,000 shares of the
Company's common stock held by two of the Company's stockholders. Any
outstanding borrowings mature within 30 days of the date of borrowing at which
time the Company may re-borrow any unpaid balances. Through June 17, 1996, the
Company had borrowed $48 million under the agreement primarily to fund the
Prodigy acquisition.
Reorganization--On June 13, 1996, a reorganization was effected through
which the Company became a wholly owned subsidiary of a new holding company,
Prodigy, Inc.
Reverse Stock Split--In January 1999, the Board of Directors of Prodigy
Communications Corporation (formerly Prodigy, Inc.) declared a 1 for 4 reverse
stock split. As the predecessor business to Prodigy Communications
Corporation, all references in these financial statements to shares of Common
Stock have been retroactively adjusted to reflect this reverse stock split.
* * * * * *
F-45
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction where, or to any person to whom, it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has not been any change in the facts set forth in this Prospectus
or in the affairs of the Company since the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Dilution................................................................... 24
Selected Consolidated Financial Information and Other Data................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 29
Business................................................................... 39
Management................................................................. 56
Corporate History and Certain Transactions................................. 67
Principal Stockholders..................................................... 75
Description of Capital Stock............................................... 77
Shares Eligible for Future Sale............................................ 79
Underwriting............................................................... 81
Telmex Purchase............................................................ 83
Legal Matters ............................................................. 83
Experts.................................................................... 83
Additional Information..................................................... 84
Index to Consolidated Financial Statements................................. F-1
</TABLE>
---------------
Until , 1999 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 Shares
(PRODIGY LOGO)
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
BancBoston Robertson Stephens
ING Baring Furman Selz LLC
Volpe Brown Whelan & Company
Wit Capital Corporation
as e-Manager
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE FRONT COVER PAGE]
SUBJECT TO COMPLETION
PROSPECTUS PRELIMINARY PROSPECTUS DATED JANUARY 26, 1999
2,000,000 Shares
Common Stock
-----------
All of the 2,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby are being offered by Prodigy Communications
Corporation ("Prodigy" or the "Company") to Telefonos de Mexico, S.A. de C.V.
("Telmex"), an affiliate of the Company's principal stockholder, Carso Global
Telecom, S.A. de C.V. ("Carso Global Telecom"), at the Price to Public set
forth below (the "Telmex Purchase"). Pursuant to a separate prospectus, the
Company is offering to sell in an initial public offering 8,000,000 shares of
Common Stock through a syndicate of Underwriters (the "Offering"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $12.00 and $15.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price of the
Common Stock. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "PRGY".
The Offering and the Telmex Purchase (collectively, the "Offerings") are
contingent on each other. Upon consummation of the Offering and the Telmex
Purchase (at an assumed initial public offering price of $13.50 per share),
Carso Global Telecom will own 49.8% of the Company's outstanding Common Stock
and Telmex will own 19.3% of the Company's outstanding Common Stock. See
"Principal Stockholders".
-----------
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share
Offering.................................. $ $ $
Telmex Purchase........................... $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters of the Offering
against certain liabilities, including certain liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting".
(2) Before deducting expenses payable by the Company, estimated at $1,450,000.
(3) The Company has granted the Underwriters of the Offering a 30-day option to
purchase up to 1,200,000 additional shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If this option is exercised in full, the Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
-----------
It is expected that delivery of the shares of Common Stock will be made
against payment therefor on or about , 1999.
The date of this Prospectus is , 1999.
<PAGE>
[ALTERNATE BACK COVER PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or make any
representations not contained in this Prospectus in connection with the
offering covered by this Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, the Common Stock in any jurisdiction where, or
to any person to whom, it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has not been any
change in the facts set forth in this Prospectus or in the affairs of the
Company since the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Dilution................................................................... 24
Selected Consolidated Financial Information and Other Data................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 29
Business................................................................... 39
Management................................................................. 56
Corporate History and Certain Transactions................................. 67
Principal Stockholders..................................................... 75
Description of Capital Stock............................................... 77
Shares Eligible for Future Sale............................................ 79
Underwriting............................................................... 81
Telmex Purchase............................................................ 83
Legal Matters ............................................................. 83
Experts.................................................................... 83
Additional Information..................................................... 84
Index to Consolidated Financial Statements................................. F-1
</TABLE>
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 Shares
(PRODIGY LOGO)
Common Stock
---------------
PROSPECTUS
---------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 46,704
NASD filing fee.................................................. 17,300
Nasdaq National Market listing fee............................... 95,000
Blue Sky fees and expenses....................................... 10,000
Transfer Agent and Registrar fees................................ 10,000
Accounting fees and expenses..................................... 625,000
Legal fees and expenses.......................................... 325,000
Printing and mailing expenses.................................... 250,000
Miscellaneous.................................................... 70,996
----------
Total.......................................................... $1,450,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Article EIGHTH of the Registrant's Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach
of fiduciary duty as a director, except to the extent that the Delaware
General Corporation Law prohibits the elimination or limitation of liability
of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Certificate of Incorporation provides that
a director or officer of the Registrant (a) shall be indemnified by the
Registrant against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement incurred in connection with any litigation or
other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such
II-1
<PAGE>
person, such person is permitted to petition the court to make an independent
determination as to whether such person is entitled to indemnification. As a
condition precedent to the right of indemnification, the director or officer
must give the Registrant notice of the action for which indemnity is sought
and the Registrant has the right to participate in such action or assume the
defense thereof.
Article NINTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred
in connection with an action or proceeding to which he is or is threatened to
be made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if
such person had no reasonable cause to believe his conduct was unlawful;
provided that, in the case of actions brought by or in the right of the
corporation, no indemnification shall be made with respect to any matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
Under Section 7(b) of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Purchase Agreement filed as Exhibit 1.1 hereto.
The Registrant has an insurance policy with coverage of $8,000,000 that
insures the directors and officers of the Registrant against certain
liabilities which might be incurred by such directors and officers in
connection with the performance of their duties.
Item 15. Recent Sales of Unregistered Securities
Set forth below in chronological order is certain information regarding
securities issued by the Registrant and its predecessor, International
Wireless Incorporated ("IW"), without registration under the Securities Act of
1933, as amended (the "Securities Act"), since May 1, 1995. The information
presented in this Item 15 has not been adjusted to reflect the one-for-four
reverse stock split of the Registrant's Common Stock that the Company will
effect prior to the closing of the Offering.
1. In May 1995, IW granted to two persons, for business development
services, warrants to purchase an aggregate of 200,000 shares of Common Stock
for $2.50 per share, exercisable at any time prior to May 15, 2005.
2. Between May 1995 and November 1995, IW issued, in connection with a
private placement transaction, an aggregate of 1,232,500 shares of Common
Stock to selected private investors for a purchase price of $2.50 per share
for aggregate proceeds of $3,081,250 (including the conversion of $730,000 in
cash advances from Greg C. Carr). D.E. Wine Investments, Inc. acted as
placement agent in this private placement and was paid a cash fee of $77,438.
ANZ, Inc. also acted as placement agent in this private placement and was
granted a warrant to purchase 16,000 shares of Common Stock for $2.50 per
share, exercisable at any time prior to August 15, 2005.
3. In November 1995, IW issued an aggregate of 200,000 shares of Common
Stock in connection with the acquisition of Africa Online, Inc.
4. Between November 1995 and March 1996, IW issued, in connection with a
private placement transaction, an aggregate of 2,458,836 shares of Common
Stock to selected private investors for a purchase price
II-2
<PAGE>
of $3.00 per share for aggregate cash proceeds of $7,376,508 (including the
conversion of $3,000,000 in cash advances from Greg C. Carr). D.E. Wine
Investments, Inc. acted as placement agent in this private placement and was
paid a cash fee of $50,000. ANZ, Inc. also acted as placement agent in this
private placement and was granted a warrant to purchase 133,333 shares of
Common Stock for $3.00 per share, exercisable at any time prior to August 15,
2005.
5. In November 1995, IW issued 15,000 shares of Common Stock to Greg C. Carr
as a commitment fee valued at $3.00 per share ($45,000 total) in consideration
of the establishment of a $4,500,000 credit facility by Mr. Carr in favor of
IW.
6. In December 1995, IW issued an aggregate of 9,500 shares of Common Stock
to two former holders of certificates for common stock of Comstar Cellular
Network, Inc. ("Comstar") in exchange for their release of any claims against
IW and related parties arising out of IW's acquisition of Comstar's assets and
accounts payable in August 1994.
7. In January 1996, IW issued 350,000 shares of Common Stock in exchange for
a 9% equity interest in Comstar Cellular S.A. Cote d'Ivoire, IW's Ivory Coast
subsidiary, held by IW's Ivory Coast consultant.
8. In February 1996, IW issued 16,734 shares of Common Stock to an executive
search firm in exchange for such firm's placement of an executive employee
with IW.
9. In March 1996 and May 1996, IW issued an aggregate of 4,000,000 shares of
Common Stock to Grupo Carso, S.A. de C.V. ("Grupo Carso") for a purchase price
of $3.00 per share for aggregate cash proceeds of $12,000,000 pursuant to an
agreement dated April 11, 1996 (the "Initial Grupo Carso Agreement").
10. In May 1996, IW issued 13,333 shares of Common Stock to an executive
search consultant in exchange for such consultant's placement of an executive
employee with IW.
11. In May 1996, IW granted Grupo Carso and Greg C. Carr, in connection with
financing commitments made by Grupo Carso and Mr. Carr under a Funding
Agreement dated May 12, 1996 (the "Funding Agreement"), (i) warrants to
purchase 2,700,000 shares and 270,000 shares, respectively, of Common Stock
for $3.00 per share, exercisable prior to December 31, 1996, and (ii) warrants
to purchase 2,000,000 shares and 1,000,000 shares, respectively, of Common
Stock for $9.00 per share, exercisable prior to the earlier of (a) the closing
of an initial public offering or (b) November 12, 1997.
12. In May 1996, IW granted a person a warrant to purchase 20,000 shares of
Common Stock for $3.00 per share, exercisable at any time prior to May 16,
2001, for his assistance in introducing IW to Grupo Carso.
13. In June 1996, IW issued 500,000 share of Common Stock to Greg C. Carr
for $3.00 per share upon the conversion of $1,500,000 in cash advances from
Mr. Carr.
14. In June 1996, the Registrant issued, in connection with its
incorporation, 100 shares of Common Stock to IW for an aggregate cash purchase
price of $10.
15. In June 1996, the Registrant issued, in connection with a holding-
company reorganization in which a wholly-owned subsidiary of the Registrant
was merged with and into IW, an aggregate of 21,636,850 shares of Common Stock
in exchange for all outstanding Common Stock of IW and simultaneously assumed
the outstanding options and warrants of IW.
16. In June 1996, the Registrant issued, in connection with its acquisition
of Prodigy Services Company ("PSC"), 8% Contingent Convertible Promissory
Notes to International Business Machines Corporation ("IBM") and Sears,
Roebuck and Co. ("Sears") in the aggregate face amount of $200,000,000. In
connection with the Registrant's acquisition of PSC, Wasserstein, Perella &
Co., Inc. acted as the financial advisor to PSC's management and received a
fee of $5,400,000 and ING Baring Furman Selz LLC acted as the Registrant's
financial advisor and received a fee of $750,000.
II-3
<PAGE>
17. In September 1996, the Registrant issued 3,000,000 shares of Common
Stock to Carso Global Telecom, S.A. de C.V. ("Carso Global Telecom") for a
purchase price of $3.00 per share for aggregate cash proceeds of $9,000,000.
In June 1996, Carso Global Telecom was spun-off from Grupo Carso and assumed
Grupo Carso's obligations under the Initial Grupo Carso Agreement and the
Funding Agreement.
18. In September 1996, the Registrant issued 100,000 shares of Common Stock
to a former holder of a certificate for common stock of Comstar in exchange
for his release of any claims against IW, the Registrant and related parties
arising out of IW's acquisition of Comstar's assets and accounts payable in
August 1994.
19. In October 1996, in connection with an amendment to the Funding
Agreement, (i) Mr. Carr's warrant to purchase 1,000,000 shares for $9.00 per
share was cancelled and (ii) Grupo Carso's warrant to purchase 2,000,000
shares for $9.00 per share was exchanged for a warrant to purchase 1,000,000
shares for $7.00 per share and assigned to Carso Global Telecom.
20. In October 1996, the Registrant issued 270,000 shares of Common Stock to
Greg C. Carr upon the exercise of an outstanding warrant for a purchase price
of $2.93 per share for aggregate cash proceeds of $792,000, reflecting a
discount (based on the interest rate charged on the Registrant's bank debt)
from the original exercise price in order to induce early exercise.
21. Between October 1996 and February 1997, the Registrant issued, in
connection with a private placement transaction, an aggregate of 1,309,034
shares of Common Stock to selected private investors for a purchase price of
$7.00 per share for aggregate cash proceeds of $9,163,238. In February 1997,
the Registrant reduced the offering price from $7.00 per share to $3.00 per
share. The purchasers of an aggregate of 50,000 shares at $7.00 per share
elected to receive cash refunds totalling $350,000 and the other purchasers at
$7.00 per share elected to receive an aggregate of 1,678,711 additional shares
to reduce their average purchase price to $3.00 per share. In March 1997, the
Registrant issued Convertible Promissory Notes to Carso Global Telecom and
Greg C. Carr in the principal amounts of $65,000,000 and $15,000,000,
respectively, which automatically converted into an aggregate of 26,666,667
shares at $3.00 per share upon receipt of regulatory approvals in June 1997.
In May 1997, the Registrant issued 10,000 additional shares to an investor at
$3.00 per share. In total, the Registrant issued an aggregate of 29,614,412
shares for $3.00 per share for aggregate cash proceeds of $88,843,235 in this
private placement. Tucker Anthony Incorporated acted as placement agent and
financial advisor in this private placement and was paid cash fees totalling
$150,000. ANZ, Inc. also acted as placement agent in this private placement
and was granted a warrant to purchase 68,056 shares of Common Stock for $3.00
per share, exercisable at any time prior to December 13, 2001.
22. In December 1996, the Registrant issued 2,700,000 shares of Common Stock
to Carso Global Telecom upon the exercise of an outstanding warrant for a
purchase price of $3.00 per share for aggregate cash proceeds of $8,100,000.
23. In March 1997, in connection with an amendment to the Funding Agreement,
the Registrant (i) granted warrants to purchase 13,000,000 and 2,000,000
shares of Common Stock to Carso Global Telecom and Mr. Carr, respectively,
with an exercise price of $3.00 per share and (ii) cancelled Carso Global
Telecom's warrant to purchase 1,000,000 shares for $7.00 per share.
24. In June 1997, the Registrant issued 2,166,667 shares and 833,333 shares
of Common Stock to Carso Global Telecom and Greg C. Carr, respectively, upon
the exercise of stock puts under the Funding Agreement for a purchase price of
$3.00 per share for aggregate cash proceeds of $9,000,000.
25. In July 1997, the Registrant issued 8,450,000 shares and 200,000 shares
of Common Stock to Carso Global Telecom and Greg C. Carr, respectively, upon
the exercise of stock puts under the Funding Agreement for a purchase price of
$3.00 per share for aggregate cash proceeds of $25,950,000.
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<PAGE>
26. In August 1997, the Registrant issued 363,511 shares of Common Stock to
Greg C. Carr upon the exercise of stock puts under the Funding Agreement for a
purchase price of $3.00 per share for aggregate cash proceeds of $1,090,533.
27. In September 1997, the Registrant issued 2,362,822 shares and 166,667
shares of Common Stock to Carso Global Telecom and Greg C. Carr, respectively,
upon the exercise of stock puts under the Funding Agreement for a purchase
price of $3.00 per share for aggregate cash proceeds of $7,588,467.
28. In October 1997, the Registrant issued 433,333 shares of Common Stock to
Greg C. Carr upon the exercise of stock puts under the Funding Agreement for a
purchase price of $3.00 per share for aggregate cash proceeds of $1,300,000.
29. In October 1997, in connection with interim financing commitments made
by Carso Global Telecom and Greg C. Carr, the Registrant reduced the exercise
price of the warrants held by Carso Global Telecom and Mr. Carr to purchase
13,000,000 and 2,000,000 shares of Common Stock, respectively, from $3.00 per
share to $1.00 per share.
30. In November 1997, Prodigy Services Corporation issued to IBM and Sears,
in exchange for the 8% Contingent Convertible Promissory Notes described in
paragraph 16 above, (i) 8% Contingent Convertible Promissory Notes in the
aggregate face amount of $200,000,000 and (ii) Contingent Common Stock
Purchase Warrants.
31. In December 1997, the Registrant issued, in connection with a private
placement transaction involving a rights offering to all stockholders of the
Registrant, an aggregate of 50,561,915 shares of Common Stock for a purchase
price of $1.00 per share for aggregate proceeds of $50,561,915, of which (i)
$32,811,915 was paid in cash (including the conversion of $500,000 in cash
advances from Greg C. Carr), (ii) Carso Global Telecom was credited with
$4,000,000 by reason of the issuance of a letter of credit on behalf of the
Registrant (and with respect to which Carso Global Telecom will pay the
Registrant each calendar quarter an amount equal to $333,333 less any draws on
such letter of credit during such quarter until the entire $4,000,000 has been
paid to the Registrant or drawn under such letter of credit), and (iii)
$13,750,000 was paid by Carso Global Telecom directly to Banco Inbursa, S.A.
("Banco Inbursa") on the Registrant's behalf in repayment of $13,750,000 of
indebtedness owed by the Registrant to Banco Inbursa. Tucker Anthony
Incorporated acted as financial advisor in this private placement and was paid
a cash fee of $150,000.
32. In April 1998, the Registrant issued 13,000,000 shares of Common Stock
to Carso Global Telecom upon the exercise of a warrant at a purchase price of
$1.00 per share for aggregate cash proceeds of $13,000,000.
33. In May 1998, the Registrant issued 2,000,000 shares of Common Stock to
an investor upon exercise of a warrant at a purchase price of $1.00 per share
for aggregate cash proceeds of $2,000,000.
34. In July 1998, the Registrant issued 5,500,000 shares of Common Stock to
Carso Global Telecom for a purchase price of $2.00 per share for aggregate
cash proceeds of $11,000,000, and in August 1998 the Registrant issued
24,500,000 shares of Common Stock to Telefonos de Mexico, S.A. de C.V. for a
purchase price of $2.00 per share for aggregate cash proceeds of $49,000,000.
Wit Capital Corporation acted as financial advisor in this private placement
and was paid a cash fee of $50,000.
35. In November 1998, the Company granted a person (i) a warrant to purchase
7,840 shares of Common Stock for $2.50 per share, exercisable at any time
prior to March 1, 2001, for his assistance in identifying investors in the
private placement described in paragraph 2 above, and (ii) a warrant to
purchase 44,380 shares of Common Stock for $3.00 per share, exercisable at any
time prior to March 1, 2001, for his assistance in identifying investors in
the private placement described in paragraph 4 above.
Since May 1, 1995, the Registrant (including IW) has granted stock options
to employees and consultants to purchase an aggregate of 18,294,645 shares of
Common Stock with exercise prices ranging from $1.00 to
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<PAGE>
$7.00 per share. During this same period, the Registrant (including its
predecessor) has issued an aggregate of 10,549 shares of Common Stock for
aggregate cash proceeds of $30,227 pursuant to the exercise of stock options.
The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from registration set forth in Sections
3(b) and 4(2) of the Securities Act, or regulations promulgated thereunder,
relating to sales by an issuer not involving any public offering, (ii) in the
case of certain sales to non-United States persons, pursuant to Regulation S
promulgated under the Securities Act, or (iii) in the case of certain options
to purchase shares of Common Stock and shares of Common Stock issued upon the
exercise of such options, such offers and sales were made in reliance upon an
exemption from registration under Rule 701 of the Securities Act. Except as
noted above, no underwriters or placement agents were involved in the
foregoing sales of securities.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Registrant, as amended.
3.2** By-laws of the Registrant, as amended.
3.3* Form of Certificate of Incorporation of the Registrant, as in effect
upon the closing of the Offering.
3.4* Form of By-laws of the Registrant, as in effect upon the closing of
the Offering.
4.1*** Specimen certificate for shares of Common Stock.
5.1* Opinion of Hale and Dorr LLP.
10.1** Agreement and Plan of Corporate Reorganization, dated July 8, 1994,
among International Wireless Incorporated, Comstar Cellular Network,
Inc., Terrance Dillon, Duncan Wine, Blaize Kaduru and Herbert Orji.
10.2** Partnership Purchase Agreement, dated May 12, 1996, among
International Wireless Incorporated, Prodigy Services Company,
International Business Machines Corporation and Sears, Roebuck and
Co., as amended by Amendment dated June 3, 1996.
10.3** Note Exchange Agreement, dated October 20, 1997, among the Registrant,
Prodigy Services Corporation, International Business Machines
Corporation and Sears, Roebuck and Co., as amended by Amendment to
Note Exchange Agreement dated October 31, 1997.
10.4** Letter agreement, dated October 20, 1997, between the Registrant and
Carso Global Telecom, S.A. de C.V., relating to the Note Exchange
Agreement.
10.5** Form of 8% Contingent Convertible Promissory Note issued by Prodigy
Services Corporation to IBM and Sears.
10.6** Form of Contingent Common Stock Purchase Warrant issued by Prodigy
Services Corporation to IBM and Sears.
10.7** Letter agreement, dated April 11, 1996, between International Wireless
Incorporated and Grupo Carso, S.A. de C.V.
10.8** Funding Agreement, dated May 12, 1996, among International Wireless
Incorporated, Grupo Carso, S.A. de C.V. and Greg C. Carr.
10.9** Amendment to Funding Agreement, dated October 31, 1996, among the
Registrant, Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.10** Amendment No. 2 to Funding Agreement, dated March 18, 1997, among the
Registrant, Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
10.11** Put Exercise Agreement, dated May 6, 1997, among the Registrant,
Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
10.12** Interim Financing Agreement, dated October 30, 1997, among the
Registrant, Greg C. Carr and Carso Global Telecom, S.A. de C.V.
10.13** Stock Purchase Agreement, dated July 24, 1998, between the Registrant
and Telefonos de Mexico, S.A. de C.V.
10.14** Stock Purchase Agreement, dated July 24, 1998, between the Registrant
and Carso Global Telecom, S.A. de C.V.
10.15** Stock Purchase Agreement, dated July 24, 1998, among the Registrant,
Telefonos de Mexico, S.A. de C.V., Greg C. Carr and Carso Global
Telecom, S.A. de C.V.
10.16*** 1999 Outside Director Stock Option Plan of the Registrant.
10.17+** Software License and Services Agreement, dated April 16, 1997,
between Prodigy Services Corporation and ORACLE Worldwide Tech
Support.
10.18** Understanding Agreement, dated August 5, 1998, for line of credit
granted by Carso Global Telecom, S.A. de C.V. to the Registrant.
10.19+** Splitrock Full Service Agreement, dated June 24, 1997, between
Splitrock Services, Inc. and Prodigy Services Corporation.
10.20** Agreement of Sublease, dated June 24, 1997, between Splitrock
Services, Inc. and Prodigy Services Corporation.
10.21*** Employment Agreement, dated September 1, 1998, between the Registrant
and Samer F. Salameh.
10.22*** Consulting Agreement, dated July 31, 1998, between the Registrant and
Russell I. Pillar, as amended January 5, 1999.
10.23*** Employment Agreement, dated July 21, 1998, between the Registrant and
David R. Henkel.
10.24*** Employment Agreement, dated November 24, 1997, between the Registrant
and James P. Dougherty.
10.25*** Employment Agreement, dated September 14, 1998, between the
Registrant and Andrea S. Hirsch.
10.26*** Employment Agreement, dated December 14, 1998, between the Registrant
and David C. Trachtenberg.
10.27*** Employment Agreement, dated June 1, 1998, between the Registrant and
Carena M. Pooth.
10.28*** 1996 Stock Option Plan of the Registrant, as amended.
10.29*** 1999 Employee Stock Purchase Plan of the Registrant.
10.30** Lease, dated August 14, 1997, between Prodigy Services Corporation
and Westchester One LLC, as amended.
10.31+** Promotion & Distribution Agreement, effective October 7, 1996,
between Microsoft Corporation and Prodigy Services Corporation, as
amended.
10.32+** Distribution and Licensing Agreement, effective October 1, 1996,
between Packard Bell NEC, Inc. and Prodigy Services Corporation.
10.33+** Excite Services Distribution and Co-Branded Area Agreement, dated
January 20, 1998, between Excite, Inc. and Prodigy Services
Corporation.
10.34** Lease Agreement, dated June 6, 1988, between Prodigy Services Company
and Crow-Kelly#1, as amended.
10.35+** Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated January 8, 1997, between
Prodigy Services Corporation and Microsoft Corporation.
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.36+** Software Development and Processing Services Agreement, dated January
1, 1992, between Prodigy Services Company and CSG Systems, Inc., as
amended.
10.37** Form of Prodigy Service Member Agreement.
10.38*** Agreement, dated January 25, 1999, between the Registrant and
Telefonos de Mexico, S.A. de C.V.
10.39* Stock Purchase Agreement dated February , 1999, between the
Registrant and Telefonos de Mexico, S.A. de C.V.
11.1* Computation of earnings per common share.
16.1** Letter from Deloitte & Touche LLP regarding change in accountants.
23.1*** Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1** Power of Attorney (included on page II-10 of Registration Statement
filed on September 25, 1998).
27.1*** Financial Data Schedule.
</TABLE>
- ----------
*To be filed by amendment.
**Previously filed.
***Filed herewith.
+ Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(b) Financial Statement Schedules
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
Item 17. Undertakings
(a) 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation, as amended, of the Registrant and the laws of the State of
Delaware, 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 Securities 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 and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
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.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in White Plains, New
York, on this 25th day of January, 1999.
Prodigy Communications Corporation
/s/ Samer F. Salameh
By: _________________________________
Samer F. Salameh, Chairman of the
Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Samer F. Salameh Chairman of the Board and January 25, 1999
______________________________________ Chief Executive Officer
Samer F. Salameh (principal executive
officer)
Alfredo Sanchez * Vice Chairman of the Board January 25, 1999
______________________________________
Alfredo Sanchez
David R. Henkel * Executive Vice President, January 25, 1999
______________________________________ Finance, Chief Financial
David R. Henkel Officer and Director
(principal financial and
accounting officer)
Arturo Elias * Director January 25, 1999
______________________________________
Arturo Elias
James M. Nakfoor * Director January 25, 1999
______________________________________
James M. Nakfoor
Russell I. Pillar * Director January 25, 1999
______________________________________
Russell I. Pillar
</TABLE>
/s/ Samer F. Salameh
* By: _______________________________
Samer F. Salameh
Attorney-in-Fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Registrant, as amended.
3.2** By-laws of the Registrant, as amended.
3.3* Form of Certificate of Incorporation of the Registrant, as in effect
upon the closing of the Offering.
3.4* Form of By-laws of the Registrant, as in effect upon the closing of
the Offering.
4.1*** Specimen certificate for shares of Common Stock.
5.1* Opinion of Hale and Dorr LLP.
10.1** Agreement and Plan of Corporate Reorganization, dated July 8, 1994,
among International Wireless Incorporated, Comstar Cellular Network,
Inc., Terrance Dillon, Duncan Wine, Blaize Kaduru and Herbert Orji.
10.2** Partnership Purchase Agreement, dated May 12, 1996, among
International Wireless Incorporated, Prodigy Services Company,
International Business Machines Corporation and Sears, Roebuck and
Co., as amended by Amendment dated June 3, 1996.
10.3** Note Exchange Agreement, dated October 20, 1997, among the
Registrant, Prodigy Services Corporation, International Business
Machines Corporation and Sears, Roebuck and Co., as amended by
Amendment to Note Exchange Agreement dated October 31, 1997.
10.4** Letter agreement, dated October 20, 1997, between the Registrant and
Carso Global Telecom, S.A. de C.V., relating to the Note Exchange
Agreement.
10.5** Form of 8% Contingent Convertible Promissory Note issued by Prodigy
Services Corporation to IBM and Sears.
10.6** Form of Contingent Common Stock Purchase Warrant issued by Prodigy
Services Corporation to IBM and Sears.
10.7** Letter agreement, dated April 11, 1996, between International
Wireless Incorporated and Grupo Carso, S.A. de C.V.
10.8** Funding Agreement, dated May 12, 1996, among International Wireless
Incorporated, Grupo Carso, S.A. de C.V. and Greg C. Carr.
10.9** Amendment to Funding Agreement, dated October 31, 1996, among the
Registrant, Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
10.10** Amendment No. 2 to Funding Agreement, dated March 18, 1997, among the
Registrant, Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
10.11** Put Exercise Agreement, dated May 6, 1997, among the Registrant,
Carso Global Telecom, S.A. de C.V. and Greg C. Carr.
10.12** Interim Financing Agreement, dated October 30, 1997, among the
Registrant, Greg C. Carr and Carso Global Telecom, S.A. de C.V.
10.13** Stock Purchase Agreement, dated July 24, 1998, between the Registrant
and Telefonos de Mexico, S.A. de C.V.
10.14** Stock Purchase Agreement, dated July 24, 1998, between the Registrant
and Carso Global Telecom, S.A. de C.V.
10.15** Stock Purchase Agreement, dated July 24, 1998, among the Registrant,
Telefonos de Mexico, S.A. de C.V., Greg C. Carr and Carso Global
Telecom, S.A. de C.V.
10.16*** 1999 Outside Director Stock Option Plan of the Registrant.
10.17+** Software License and Services Agreement, dated April 16, 1997,
between Prodigy Services Corporation and ORACLE Worldwide Tech
Support.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.18** Understanding Agreement, dated August 5, 1998, for line of credit
granted by Carso Global Telecom, S.A. de C.V. to the Registrant.
10.19+** Splitrock Full Service Agreement, dated June 24, 1997, between
Splitrock Services, Inc. and Prodigy Services Corporation.
10.20** Agreement of Sublease, dated June 24, 1997, between Splitrock
Services, Inc. and Prodigy Services Corporation.
10.21*** Employment Agreement, dated September 1, 1998, between the Registrant
and Samer F. Salameh.
10.22*** Consulting Agreement, dated July 31, 1998, between the Registrant and
Russell I. Pillar, as amended January 5, 1999.
10.23*** Employment Agreement, dated July 21, 1998, between the Registrant and
David R. Henkel.
10.24*** Employment Agreement, dated November 24, 1997, between the Registrant
and James P. Dougherty.
10.25*** Employment Agreement, dated September 14, 1998, between the
Registrant and Andrea S. Hirsch.
10.26*** Employment Agreement, dated December 14, 1998 between the Registrant
and David C. Trachtenberg.
10.27*** Employment Agreement, dated June 1, 1998, between the Registrant and
Carena M. Pooth.
10.28*** 1996 Stock Option Plan of the Registrant, as amended.
10.29*** 1999 Employee Stock Purchase Plan of the Registrant.
10.30** Lease, dated August 14, 1997, between Prodigy Services Corporation
and Westchester One LLC, as amended.
10.31+** Promotion & Distribution Agreement, effective October 7, 1996,
between Microsoft Corporation and Prodigy Services Corporation, as
amended.
10.32+** Distribution and Licensing Agreement, effective October 1, 1996,
between Packard Bell NEC, Inc. and Prodigy Services Corporation.
10.33+** Excite Services Distribution and Co-Branded Area Agreement, dated
January 20, 1998, between Excite, Inc. and Prodigy Services
Corporation.
10.34** Lease Agreement, dated June 6, 1988, between Prodigy Services Company
and Crow-Kelly#1, as amended.
10.35+** Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated January 8, 1997, between
Prodigy Services Corporation and Microsoft Corporation.
10.36+** Software Development and Processing Services Agreement, dated January
1, 1992, between Prodigy Services Company and CSG Systems, Inc., as
amended.
10.37** Form of Prodigy Service Member Agreement.
10.38*** Agreement, dated January 25, 1999, among the Registrant, Telefonos de
Mexico, S.A. de C.V. and others.
11.1* Computation of earnings per common share.
16.1** Letter from Deloitte & Touche LLP regarding change in accountants.
23.1*** Consent of PriceWaterhouseCoopers LLP.
23.2* Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1** Power of Attorney (included on page II-10 of Registration Statement
filed on September 25, 1998).
27.1*** Financial Data Schedule.
</TABLE>
- ----------
*To be filed by amendment.
**Previously filed.
***Filed herewith.
+ Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
8,000,000 Shares of Common Stock
PRODIGY COMMUNICATIONS CORPORATION
UNDERWRITING AGREEMENT
=========== ==== , 1999
BEAR, STEARNS & CO. INC.
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz LLC
Volpe Brown Whelan & Company, LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto, including
- ----------
Wit Capital Corporation, as e-Manager
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
Prodigy Communications Corporation, a corporation organized and existing
under the laws of the State of Delaware (the "Company"), proposes, subject to
the terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
----------
8,000,000 shares (the "Firm Shares") of its common stock, par value $.01 per
share (the "Common Stock") and, for the sole purpose of covering over-allotments
in connection with the sale of the Firm Shares, at the option of the
Underwriters, up to an additional 1,200,000 shares (the "Additional Shares") of
Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Offered Shares." The Company also
proposes to issue and sell 2,000,000 shares of Common Stock (the "Telmex
Shares") to TelJfonos de MJxico, S.A. de C.V. ("Telmex") pursuant to a purchase
agreement dated the date hereof (the "Telmex Purchase Agreement") between the
Company and Telmex. The Offered Shares and the Telmex Shares are referred to
herein as the "Shares." The Shares are more fully described in the Registration
Statement referred to below.
1. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-64233),
and may have filed an amendment or amendments thereto, for the registration
of the Shares under the Securities Act of 1933, as amended (the "Act").
Such registration statement, including the prospectuses, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration
statement, including any information deemed to be a part thereof as of the
time of
<PAGE>
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the
Rules and Regulations of the Commission under the Act (the "Regulations"),
is herein called the "Registration Statement", and the prospectus relating
to the Offered Shares, in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing
is required, is herein called the "Prospectus." The term "preliminary
prospectus" as used herein means a preliminary prospectus relating to the
Offered Shares as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration
Statement, when the Prospectus is first filed with the Commission pursuant
to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission and at the Closing
Date and the Additional Closing Date, if any, (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
does not or will not contain an untrue statement of a material fact and
does not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading. When the preliminary prospectus dated January 26, 1999 relating
to the Offered Shares was first filed with the Commission (whether filed as
part of the registration statement for the registration of the Shares or
any amendment thereto or pursuant to Rule 424(a) of the Regulations) and
when any amendment thereof or supplement thereto was first filed with the
Commission, such preliminary prospectus and any amendments thereof and
supplements thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and did not contain an untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not
misleading. No representation and warranty is made in this subsection (b),
however, with respect to any information contained in or omitted from the
Registration Statement or the Prospectus or any related preliminary
prospectus or any amendment thereof or supplement thereto in reliance upon
and in conformity with information furnished in writing to the Company by
or on behalf of any Underwriter through the Representatives as herein
stated expressly for use in connection with the preparation thereof. If
Rule 434 is used, the Company will comply with the requirements of Rule 434
other than Rule 434(a)(2) and (b)(1).
(c) PricewaterhouseCoopers LLP, who have certified certain financial
statements and supporting schedules included in the Registration Statement,
are independent public accountants as required by the Act and the
Regulations.
(d) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects,
2
<PAGE>
properties, operations, condition (financial or other) or results of
operations of the Company and its subsidiaries taken as a whole, whether or
not arising from transactions in the ordinary course of business ("Material
Adverse Effect"), and since the date of the latest balance sheet presented
in the Registration Statement and the Prospectus, neither the Company nor
any of its subsidiaries has incurred or undertaken any liabilities or
obligations, direct or contingent, whether or not arising from transactions
in the ordinary course of business, which are material to the Company and
its subsidiaries taken as a whole, except for liabilities or obligations
which are reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the Telmex Purchase Agreement and the
transactions contemplated herein and therein have been duly and validly
authorized by the Company and this Agreement and the Telmex Purchase
Agreement have been duly and validly executed and delivered by the Company.
(f) Neither the Company nor any of its subsidiaries is (i) in violation
of its respective certificate of incorporation or by-laws (or other
organizational documents) or (ii) in default in the performance of any
obligation, agreement or condition contained in any agreement, instrument,
franchise, license, permit, judgment, order or decree to which the Company
or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property or assets is bound that would
result in a Material Adverse Effect.
(g) The execution, delivery and performance of this Agreement and the
Telmex Purchase Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any agreement, instrument, franchise,
license or permit to which the Company or any of its subsidiaries is a
party or by which any of such corporations or their respective properties
or assets is bound or (ii) violate or conflict with any provision of
applicable law or the certificate of incorporation or by-laws (or other
organizational documents) of the Company or any of its subsidiaries or any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court
or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement and the Telmex Purchase Agreement or the
consummation of the transactions contemplated hereby and thereby, including
the issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Company hereunder and thereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may
be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Offered Shares by the Underwriters.
3
<PAGE>
(h) All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable and were not issued and
are not now in violation of or subject to any preemptive or similar rights.
The Shares, when issued, delivered and sold in accordance with this
Agreement or the Telmex Purchase Agreement, will be duly and validly issued
and outstanding, fully paid and nonassessable, and will not have been
issued in violation of or be subject to any preemptive or similar rights.
The Company had, at September 30, 1998, an authorized and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. The Common Stock, the Firm Shares, the Additional Shares and
the Telmex Shares conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus.
(i) The outstanding 8% Contingent Convertible Notes (the "Contingent
Notes") of the Company have been duly and validly authorized, executed and
delivered by the Company and constitute valid and binding obligations of
the Company and the shares of Common Stock issuable upon conversion thereof
have been, or prior to the Closing Date will be, duly and validly
authorized and reserved for issuance upon such conversion and, upon
conversion of the Contingent Notes on the Closing Date, such shares of
Common Stock will be validly issued and outstanding, fully paid and
nonassessable and will not have been issued in violation of or be subject
to any preemptive or similar rights. All outstanding warrants (the
"Warrants") to purchase Common Stock of the Company, including without
limitation, the Contingent Warrants (as defined in the Registration
Statement) have been duly and validly authorized, executed and delivered by
the Company and constitute valid and binding obligations of the Company and
the shares of Common Stock issuable upon exercise of such Warrants have
been, or prior to the Closing Date will be, duly and validly authorized and
reserved for issuance upon such exercise and, upon payment of the exercise
price thereof upon exercise of such Warrants, such shares of Common Stock
will be validly issued and outstanding, fully paid and nonassessable and
will not have been issued in violation of or be subject to any preemptive
or similar rights. Except as described in or expressly contemplated by the
Registration Statement and the Prospectus, there are no outstanding rights
(including without limitation preemptive rights), warrants or options to
acquire, or instruments convertible into or exchangeable for, any shares of
capital stock or other equity interests in the Company or any of its
subsidiaries, or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock of
the Company or any such subsidiary, or any such convertible or exchangeable
securities or any such rights, warrants or options.
(j) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not, individually or in
the aggregate, have a Material Adverse Effect. The Company has all
requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
of and from all public, regulatory or governmental agencies and
4
<PAGE>
bodies, to own, lease and operate its properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus, except as would not result in a Material Adverse Effect,
and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome
restriction not adequately disclosed in the Registration Statement and the
Prospectus. The Company has no subsidiaries which individually or in the
aggregate have any material assets or liabilities.
(k) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company is a party or to which any
property of the Company is subject or which is pending or, to the knowledge
of the Company, contemplated against the Company which might result in a
Material Adverse Effect or which is required to be disclosed in the
Registration Statement and the Prospectus, and there are no statutes,
regulations, contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement that are not described or filed as required.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(m) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the
Company, Prodigy Services Company ("PSC") and International Wireless
Incorporated ("IW") as of the dates indicated and the results of their
operations and changes in cash flows for the periods specified; except as
otherwise stated in the Registration Statement, said financial statements
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and the supporting schedules
included in the Registration Statement present fairly the information
required to be stated therein; and except as disclosed therein, the pro
forma financial information included in the Registration Statement and the
Prospectus has been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and the
assumptions used in the preparation thereof are, in the Company's opinion,
reasonable; and the other financial and statistical information and data
included in the Registration Statement and the Prospectus is, in all
material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(n) Except as described in the Prospectus, no holder of securities of
the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
(o) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
5
<PAGE>
(p) The Shares have been approved for quotation subject to notice of
issuance on the National Association of Securities Dealers Automated
Quotation National Market System.
(q) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
dispute or disturbance by the employees of any of its principal customers,
suppliers, contractors or providers of outsourced services that might have
a Material Adverse Effect.
(r) The Company and its subsidiaries own, possess or can acquire on
commercially reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), patents, copyrights, confidential information and
other intellectual property necessary to conduct the business now operated
by them, or presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect.
(s) The Company and its subsidiaries (i) are in compliance in all
material respects with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received all
material permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental
Laws, failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits, licenses
or approvals would not, singly or in the aggregate, have a Material Adverse
Effect.
(t) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a Material Adverse
Effect.
(u) The Company and its subsidiaries own no real property and have good
and marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, 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 materially 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 materially
interfere with the use made and proposed to be
6
<PAGE>
made of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
(v) The Company and each of its subsidiaries are insured by insurers
[of recognized financial responsibility] against such losses and risks and
in such amounts as the Company believes are prudent and customary in the
businesses in which they are engaged; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not result in a Material Adverse Effect.
(w) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(x) Except as described in the Prospectus or the Registration Statement
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement), the Company has not sold, issued or distributed any
shares of Common Stock during the six-month period preceding the date
hereof, including any sales pursuant to Rule 144A under, or Regulation D or
S of, the Act, other than shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans or
pursuant to outstanding options, rights or warrants.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers, suppliers or providers of outsourced
services of the Company or any of its subsidiaries on the other hand, which
is required by the Act to be described in the Registration Statement and
the Prospectus which is not so described.
2.Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the
Company, at a purchase price per share of $__________, the number of Firm
Shares set forth opposite the respective names of the Underwriters in
Schedule I hereto plus any additional number of Shares which such
----------
Underwriter may become obligated to purchase pursuant to the provisions of
Section 9 hereof.
7
<PAGE>
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of O'Sullivan Graev &
Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112, or at such
other place as shall be agreed upon by the Representatives and the Company,
at 9:00 A.M. on the third or fourth business day (as permitted under Rule
15c6-1 under the Exchange Act) (unless postponed in accordance with the
provisions of Section 9 hereof), following the date of the effectiveness of
the Registration Statement (or, if the Company has elected to rely upon
Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination
of the initial public offering price of the Shares), such time and date of
payment and delivery being herein called the "Closing Date". Payment shall
be made to the Company by wire transfer in same day funds to an account
designated by the Company, against delivery to the Representatives for the
respective accounts of the Underwriters of certificates for the Shares to
be purchased by them. Certificates for the Shares shall be registered in
such name or names and in such authorized denominations as the
Representatives may request in writing at least two full business days
prior to the Closing Date. The Company will permit you to examine and
package such certificates for delivery at least one full business day prior
to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters options
to purchase up to an aggregate of 1,200,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters to the Company for
the Firm Shares as set forth in this Section 2, for the sole purpose of
covering over-allotments in the sale of Firm Shares by the Underwriters.
Such options may be exercised at any time and from time to time, in whole
or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by the Representatives to the Company. Each
such notice shall set forth the aggregate number of Additional Shares as to
which an option is being exercised and the date and time, as reasonably
determined by the Representatives, when the Additional Shares are to be
delivered (each such date and time being herein sometimes referred to as
the "Additional Closing Date"); provided, however, that no Additional
-------- -------
Closing Date shall be earlier than the Closing Date or earlier than the
second full business day after the date on which the option shall have been
exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof).
Certificates for Additional Shares shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the applicable Additional Closing
Date. The Company will permit you to examine and package such certificates
for delivery at least one full business day prior to the applicable
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter on an
Additional Closing Date shall be the number which bears the same ratio to the
aggregate number of Additional Shares being purchased on such Additional Closing
Date as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
----------
Section 9 hereof) bears to 8,000,000, subject, however, to such adjustments to
eliminate any fractional shares as the Representatives in their sole discretion
shall make.
8
<PAGE>
Payment for the Additional Shares shall be made by wire transfer in same
day funds to an account designated by the Company, and the closing shall take
place at the offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza,
New York, New York 10112, or such other location as may be mutually acceptable,
upon delivery of the certificates for the Additional Shares to the
Representatives for the respective accounts of the Underwriters.
3. Offering. Upon the Representatives authorization of the release of the
--------
Firm Shares, the Underwriters propose to offer the Shares for sale to the public
upon the terms set forth in the Prospectus. The obligation of the Company to
sell and deliver the Firm Shares and the Additional Shares is subject to the
condition that at the Closing Date or the Additional Closing Date, as the case
may be, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and in effect or proceedings therefor initiated or
threatened.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement
and any amendments thereto to become effective as promptly as possible, and
if Rule 430A is used or the filing of the Prospectus is otherwise required
under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or
Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely
on Rule 434, the Company will prepare and file a term sheet that complies
with the requirements of Rule 434.
The Company will notify you promptly (and, if requested by you will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission
for any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to
the Registration Statement or the Prospectus, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of the
receipt of any comments from the Commission, and (vi) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for that purpose. If the Commission shall
propose or enter a stop order at any time, the Company will make every
reasonable effort to prevent the issuance of any such stop order and, if
issued, to obtain the lifting of such order as soon as possible. The
Company will not file any amendment to the Registration Statement or any
amendment of or supplement to the Prospectus (including the prospectus
required to be filed to Rule 424(b)or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement
to which the Representatives shall reasonably object in writing after being
timely furnished in advance a copy thereof.
9
<PAGE>
(b) If at any time when a prospectus relating to the Offered Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in
the judgment of the Representatives or the Company, include an untrue
statement of a material fact or omit to state any material fact required to
be stated therein, in the light of the circumstances under which they were
made, not misleading, or if it shall be necessary, in the judgment of the
Underwriters or the Company, at any time to amend or supplement the
Prospectus or the Registration Statement to comply with the Act or the
Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and
substance satisfactory to the Representatives) which will correct statement
or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you one signed copy of the
Registration Statement, including exhibits and all amendments thereto, and
the Company will promptly deliver to each of the Underwriters such number
of copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any,
as the Representatives may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Offered Shares for offering and sale under the securities laws
relating to the offering or sale of the Offered Shares of such
jurisdictions as the Representatives may designate and to maintain such
qualification in effect for so long as required for the distribution
thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a
general consent to service of process.
(e) The Company will make generally available (within the meaning of
11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the
Registration Statement occurs, an earning statement (in form complying with
the provisions of Rule 158 of the Regulations), which need not be audited,
covering a period of at least twelve consecutive months beginning after the
effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus, the
Company will not, without the prior written consent of Bear, Stearns & Co.
Inc. (i) issue, sell, offer or agree to sell, grant any option for the sale
of, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange
Act of 1934, as amended), or otherwise dispose of, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common
Stock) of the Company or of any of its subsidiaries or (ii) enter into any
swap, derivative transaction or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, provided that the foregoing shall not
--------
apply to (A)
10
<PAGE>
the Offered Shares to be sold hereunder, (B) the issuance of the Common
Stock upon conversion of the Contingent Notes on the Closing Date, (C) the
issuance by the Company of shares of Common Stock upon the exercise of any
option or warrant outstanding on the date hereof and disclosed in the
Prospectus or (D) the issuance of any Common Stock or options to purchase
Common Stock subsequent to the date hereof pursuant to the 1996 Employee
Stock Option Plan, the 1999 Employee Stock Purchase Plan and the 1999
Outside Director Stock Option Plan described in the Prospectus; and the
Company has obtained the undertaking of each of its officers and directors
and such of its shareholders as have been heretofore designated by the
Representatives and listed on Schedule II attached hereto, not to engage in
-----------
any of the aforementioned transactions on their own behalf, except as
otherwise permitted by the terms of the "lock-up" agreements agreed to by
you or your counsel.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares as
set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to
qualify for inclusion in the National Association of Securities Dealers
Automated Quotation National Market System.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement and the Agreement Among Underwriters and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated)), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable by the Company thereon, (iii) the qualification of the Shares
under state or foreign securities or Blue Sky laws, including the costs of
duplicating and mailing a preliminary and final "Blue Sky Survey", (iv) the fees
of counsel for the Underwriters in connection with the qualification of the
Shares under state or foreign securities or Blue Sky laws and in connection with
the review and qualification of the offering of the Shares by the National
Association of Securities Dealers Inc., and such counsel's disbursements in
relation thereto, (v) quotation of the Shares on the National Association of
Securities Dealers Automated Quotation National Market System, (vi) filing fees
of the Commission and the National Association of Securities Dealers, Inc.;
(vii) the cost of printing certificates representing the Shares and (viii) the
cost and charges of any transfer agent or registrar.
11
<PAGE>
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to O'Sullivan Graev &
Karabell, LLP ("Underwriters' Counsel") pursuant to this Section 6 of any
misstatement or omission, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than, if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the
date of this Agreement or, if pricing pursuant to a pricing amendment ,
12:00 P.M., New York time on the date an amendment to the Registration
Statement containing the public offering price has been filed with the
Commission, or at such later time and date as shall have been consented to
in writing by the Representatives; if the Company shall have elected to
rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall
have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and, at or prior to the Closing Date no stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereof shall have been issued and no proceedings
therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Hale and
Dorr LLP, counsel for the Company, dated the Closing Date addressed to the
Underwriters and in form and substance satisfactory to Underwriters'
Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction listed in a schedule to
such opinion, which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so
qualified or in good standing which will not, individually or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries taken as a whole. The Company has all requisite
corporate power and authority to own, lease and operate its respective
properties and conduct its business as described in the Registration
Statement and the Prospectus.
(ii) The Company has authorized capital stock as set forth in the
Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock (including the shares of Common Stock issued on
the Closing Date upon conversion of the Contingent Notes) are duly and
validly authorized and issued, are fully paid and nonassessable and
were not issued in violation of or subject to any preemptive or
similar rights under Delaware law, the certificate of incorporation of
the Company or any agreement filed as an exhibit to the Registration
Statement. The Shares to be delivered on the Closing Date have
12
<PAGE>
been duly and validly authorized and, when delivered by the Company in
accordance with this Agreement or the Telmex Purchase Agreement, as
applicable, will be duly and validly issued, fully paid and
nonassessable and the issuance of the Shares is not subject to any
preemptive or similar rights under Delaware law, the certificate of
incorporation of the Company or any agreement filed as an exhibit to
the Registration Statement. The Common Stock, the Firm Shares and the
Additional Shares conform to the descriptions thereof contained in the
Registration Statement and the Prospectus.
(iii) All outstanding Warrants to purchase Common Stock of the
Company, including without limitation, the Contingent Warrants, have
been duly and validly authorized, executed and delivered by the
Company and constitute valid and binding obligations of the Company,
and the shares of Common Stock issuable upon exercise of such Warrants
have been duly and validly authorized and reserved for issuance upon
such exercise and, upon payment of the exercise price thereof upon
exercise of such Warrants, such shares of Common Stock will be validly
issued and outstanding, fully paid and nonassessable and the issuance
of such shares is not subject to any currently existing preemptive or
similar rights under Delaware law, the certificate of incorporation of
the Company or any agreement filed as an exhibit to the Registration
Statement.
(iv) This Agreement and the Telmex Purchase Agreement have been
duly and validly authorized, executed and delivered by the Company.
(v) To our knowledge: (A) there is no litigation or governmental
or other action, suit, proceeding or investigation before any court or
before or by any public, regulatory or governmental agency or body
pending, threatened against, or involving the properties or business
of, the Company or any of its subsidiaries, which is of a character
required to be disclosed in the Registration Statement and the
Prospectus which has not been properly disclosed therein and (B) there
are no statutes, regulations contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(vi) The execution, delivery and performance of this Agreement
and the Telmex Purchase Agreement and the consummation of the
transactions contemplated hereby and thereby by the Company do not and
will not (A) conflict with or result in a breach of any of the terms
and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any agreement, instrument, franchise,
license or permit filed as an exhibit to the Registration Statement or
(B) violate or conflict with any provision of applicable law or the
certificate of incorporation or by-laws of the Company, or, to the
knowledge of such counsel, any judgment, decree or order of any court
or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets. No
consent,
13
<PAGE>
approval, authorization, order, registration, filing, qualification,
license or permit of or with any court or any public, governmental, or
regulatory agency or body having jurisdiction over the Company or any
of its properties or assets is required for the execution, delivery
and performance of this Agreement or the Telmex Purchase Agreement or
the consummation of the transactions contemplated hereby or thereby,
except for (1) such as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Offered Shares by the Underwriters (as to which such counsel need
express no opinion) and (2) such as have been made or obtained under
the Act.
(vii) The statements (A) in the Prospectus under the captions
"Description of Capital Stock" and "Shares Eligible for Future Sale"
and (B) in the Registration Statement in Item 14, in each case insofar
as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents
and proceedings and fairly summarize the matters referred to therein.
(viii) The Company is not, and upon consummation of the
transactions contemplated hereby, will not be, an "investment company"
as such term is defined in the Investment Company Act of 1940, as
amended.
(ix) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included therein, as
to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the
Regulations.
(x) The Registration Statement is effective under the Act, and,
to the knowledge of such counsel (A) no stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereof has been issued and (B) no proceedings therefor have
been initiated or threatened by the Commission; and all filings
required by Rule 424(b) of the Regulations have been made.
(xi) To such counsel's knowledge, no holder of any security of
the Company has any right, not effectively satisfied or waived, to
require inclusion of shares of Common Stock or any other security of
the Company in the Registration Statement.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any
amendment thereof made prior to the Closing Date as of the date
14
<PAGE>
of such amendment, contained an untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus as of its date (or
any amendment thereof or supplement thereto made prior to the Closing Date as of
the date of such amendment or supplement) and as of the Closing Date contained
or contains an untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no belief or
opinion with respect to the financial statements and schedules and other
financial or statistical data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States, the
General Corporation Law of the State of Delaware and the laws of the
Commonwealth of Massachusetts, to the extent such counsel deems proper and to
the extent specified in such opinion, if at all, upon an opinion or opinions (in
form and substance reasonably satisfactory to Underwriters' Counsel) of other
counsel reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem proper, on
certificates of officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company and
its subsidiaries, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel. The opinion of such counsel for
the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are justified
in relying thereon.
The opinion of Hale and Dorr LLP described in this Section 6(b) shall
be rendered to the Underwriters at the request of the Company and shall so state
therein.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
the Underwriters shall have received from said Underwriters' Counsel a
favorable opinion, dated as of the Closing Date with respect to the
issuance and sale of the Shares, the Registration Statement and the
Prospectus and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(d) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) the condition set forth in
subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) the sale of the
Telmex Shares pursuant to the Telmex Purchase Agreement and the Company
shall have received $_____ as a result of such sale and (iv) as of the
Closing Date the obligations of the Company to be performed hereunder on or
prior thereto have been duly performed and subsequent to the respective
dates as of which information is given with the Registration Statement and
the Prospectus the Company and its subsidiaries have not sustained any
material loss or interference with their respective businesses or
properties
15
<PAGE>
from fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse
change, or any development involving a material adverse change, in the
business prospects, properties, operations, condition (financial or
otherwise), or results of operations of the Company and its subsidiaries
taken as a whole, except in each case as described in or contemplated by
the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter, from PricewaterhouseCoopers LLP, independent
public accountants for the Company and PSC, dated, respectively, as of the
date of this Agreement and as of the Closing Date addressed to the
Underwriters and in form and substance satisfactory to the Representatives,
to the effect that: (i) they are independent certified public accountants
with respect to the Company and PSC within the meaning of the Act and the
Regulations and stating that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) stating that, in
their opinion, the financial statements and schedules of the Company and
PSC included in the Registration Statement and the Prospectus and covered
by their opinion therein comply as to form in all material respects with
the applicable accounting requirements of the Act and the applicable
published rules and regulations of the Commission thereunder; (iii) on the
basis of procedures consisting of a reading of the latest available
unaudited interim consolidated financial statements of the Company, and its
subsidiaries, a reading of the minutes of meetings and consents of the
shareholders and boards of directors of the Company and its subsidiaries
and the committees of such boards subsequent to December 31, 1997,
inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting matters
of the Company and its subsidiaries with respect to transactions and events
subsequent to December 31, 1997 and other specified procedures and
inquiries to a date not more than five days (three days in the case of the
letter delivered on the Closing Date) prior to the date of such letter,
nothing has come to their attention that would cause them to believe that:
(A) the unaudited consolidated financial statements and schedules of the
Company presented in the Registration Statement and the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited consolidated financial statements of the Company included in
the Registration Statement and the Prospectus; (B) with respect to the
period subsequent to September 30, 1998 there were, as of the date of the
most recent available monthly consolidated financial statements of the
Company and its subsidiaries, if any, and as of a specified date not more
than five days (three days in the case of the letter delivered on the
Closing Date) prior to the date of such letter, any changes in the capital
stock or long-term indebtedness of the Company or any decrease in the net
current assets or stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet presented
in the Registration Statement and the Prospectus, except for changes or
decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur or which are set forth in such letter; or (C) that
during the period from October 1, 1998 to the date of the most recent
available monthly consolidated financial statements
16
<PAGE>
of the Company and its subsidiaries, if any, and to a specified date not
more than five days (three days in the case of the letter delivered on the
Closing Date) prior to the date of such letter, there was (1) any decrease,
as compared with the corresponding period in the prior fiscal year, in
total revenues, or any increase, as compared with the corresponding period
in the prior fiscal year, in operating loss or the total or per share net
loss or (2) any decrease, as compared with the corresponding period in the
prior fiscal quarter, in Prodigy Internet service revenues, except in any
such case for decreases or increases which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set forth
in such letter; (iv) nothing has come to their attention that would cause
them to believe that the pro forma financial information included in the
Registration Statement do not comply in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such financial information; and (v) stating
that they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, and other financial information
pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts,
numbers, percentages, and information may be derived from the general
accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.
(f) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(g) You have shall received from each person who is a director or
officer of the Company or such shareholder as have been heretofore
designated by the Representatives and listed on Schedule II hereto an
-----------
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of Bear Stearns & Co. Inc., offer, sell,
offer or agree to sell, grant any option to purchase, pledge, make any
short sale, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended), or
otherwise dispose of, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock) of the Company or of any
of its subsidiaries or (ii) enter into any swap, derivative transaction or
other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise,
for a period of 180 days after the date of the Prospectus and containing
such exceptions and other terms as have been agreed to by you or your
counsel.
(h) The closing of the sale of the Telmex Shares shall be consummated
concurrently with or prior to the closing of the sale of the Offered Shares
and the Company shall have received $____ per share or $_____ in the
aggregate with respect thereto.
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(i) At the Closing Date, the Shares shall have been approved for
quotation on the National Association of Securities Dealers Automated
Quotation National Market System.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Representatives
and to their counsel, all obligations of the Underwriters hereunder may be
cancelled by the Representatives at, or at any time prior to, the Closing Date
and the obligations of the Underwriters to purchase the Additional Shares may be
cancelled by the Representatives at, or at any time prior to, the Additional
Closing Date. Notice of such cancellation shall be given to the Company in
writing, or by telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
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(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including
but not limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation), joint or several, to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Shares, as originally
filed or any amendment thereof, or any related preliminary prospectus or
the Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will
-------- -------
not be liable in any such case to the extent but only to the extent that
any such loss, liability, claim, damage or expense arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives expressly for use
therein. This indemnity agreement will be in addition to any liability
which the Company may otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each
of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending
against any
18
<PAGE>
litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), jointly or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the
Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof 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 any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives expressly for use therein; provided, however, that in no
-------- -------
case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by
such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the
last paragraph of the cover page, the last paragraph on the inside cover of
the Prospectus relating to stabilization and in the sixth, seventh and
tenth paragraphs and the first sentence of the ninth paragraph under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for use
in the registration statement relating to the Shares as originally filed or
in any amendment thereof, any related preliminary prospectus or the
Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from
any liability which it may have under this Section 7). In case any such
action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and to the extent it may elect by
written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees
and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel and the payment
of the fees and expenses of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense
of such action, (ii) the indemnifying parties shall not have retained
counsel to have charge of the defense of such action within a reasonable
time after notice of commencement of the action, or (iii) such indemnified
party or parties shall have reasonably concluded that there may be defenses
available to it or them which are
19
<PAGE>
different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be
borne by the indemnifying parties; provided, however, that the indemnifying
party shall not, in respect of the legal expenses of any indemnified party
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all such indemnified parties
and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Bear, Stearns & Co.
Inc., in the case of parties indemnified pursuant to Section 7 (a), and by
the Company, in the case of parties indemnified pursuant to Section 7 (b).
Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
-------- -------
consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances in
------------
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or,
if such allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters 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
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 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
20
<PAGE>
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) 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. Notwithstanding the provisions of this Section 8 and the
preceding sentence, 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 that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
-------- -------
withheld.
9. Default by an Underwriter.
--------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number
of Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the
respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of
----------
Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, the Representatives
may in their discretion arrange for yourself or for another party or
parties (including any non-defaulting Underwriter or Underwriters who so
agree) to purchase such Firm Shares or Additional Shares, as the case may
be, to which such default relates on the terms contained herein. In the
event that within 5 calendar days after such a default you do not arrange
for the purchase of the Firm Shares or Additional Shares, as the case may
be, to which such default relates as provided in this Section 9, this
Agreement or, in the case of a default with respect to the Additional
Shares, the obligations of the Underwriters to purchase and of the Company
to
21
<PAGE>
sell the Additional Shares shall thereupon terminate, without liability on
the part of the Company with respect thereto (except in each case as
provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing
in this Agreement shall relieve a defaulting Underwriter or Underwriters of
its or their liability, if any, to the other Underwriters and the Company
for damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, the
Representatives or the Company shall have the right to postpone the Closing
Date or the applicable Additional Closing Date, as the case may be, for a
period, not exceeding five business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus or in any other documents and arrangements, and the Company
agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel,
may thereby be made necessary or advisable. The term "Underwriter" as used
in this Agreement shall include any party substituted under this Section 9
with like effect as if it had originally been a party to this Agreement
with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
the Representatives and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase
price per Share has not been agreed upon prior to 5:00 P.M., New York time,
on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without
liability to the Company or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you or by the Representatives
notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 11 and of Section 1, 5, 7 and 8 hereof shall at all times be
in full force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to
purchase Additional Shares at any
22
<PAGE>
time prior to the applicable Additional Closing Date, as the case may be,
if (A) any domestic or international event or act or occurrence has
materially disrupted, or in the opinion of the Representatives will in the
immediate future materially disrupt, the market for the Company's
securities or securities in general; or (B) if trading on the New York or
American Stock Exchanges or the NASDAQ shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required, on the New York
or American Stock Exchanges or the NASDAQ by the New York or American Stock
Exchanges, the National Association of Securities Dealers, Inc. or by order
of the Commission or any other governmental authority having jurisdiction;
or (C) if a banking moratorium has been declared by a state or federal
authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may
be, shall have become effective; or (D) (i) if the United States becomes
engaged in hostilities or there is an escalation of hostilities involving
the United States or there is a declaration of a national emergency or war
by the United States or (ii) if there shall have been such change in
political, financial or economic conditions if the effect of any such event
in (i) or (ii) as in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the offering, sale and
delivery of the Firm Shares or the Additional Shares, as the case may be,
on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by the
Representatives as provided in Section 11(a) hereof or (ii) Section 9(b) or
11(b) hereof), or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters
set forth herein is not satisfied or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or
comply with any provision hereof, the Company will, subject to demand by
the Representatives, reimburse the Underwriters for all out-of-pocket
expenses (including the fees and expenses of their counsel), incurred by
the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: ___________; if sent to the Company, shall be
mailed, delivered, or telegraphed and confirmed in writing to the Company, 44
South Broadway, White Plains, New York 10601, Attention: Chief Financial
Officer, with a copy to Hale and Dorr LLP, 60 State Street, Boston, MA 02109,
Attention: David A. Westenberg, Esq.
13. Parties. This Agreement shall insure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
23
<PAGE>
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
24
<PAGE>
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
Prodigy Communications Corporation
By ________________________________________
Name:
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz LLC
Volpe Brown Whelan & Company, LLC
on behalf of themselves and the other
Underwriters named in Schedule I hereto, including
----------
Wit Capital Corporation, as e-Manager
BY: BEAR STEARNS & CO. INC.
By __________________________
Name:
Title:
25
<PAGE>
SCHEDULE I
----------
Number of Firm
Name of Underwriter Shares to be Purchased
------------------- ------------------------
Bear, Stearns & Co. Inc
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz LLC
Volpe Brown Whelan & Company, LLC
-----------
Total......................... 8,000,000
-----------
26
<PAGE>
SCHEDULE II
-----------
Carso Global Telecom, S.A. de C.V.
Telefonos de Mexico, S.A. de C.V.
International Business Machines Corporation
Sears, Roebuck and Co.
Samer F. Salameh
David Trachtenberg
Russell I. Pillar
Alfredo Sanchez
David R. Henkel
James P. Dougherty
Andrea S. Hirsch
James L'Heureux
Carena M. Pooth
Arturo Elias
James N. Nakfoor
Greg Carr
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 4.1
<S> <C> <C>
NUMBER SHARES
PRO PRODIGY
PRODIGY COMMUNICATIONS CORPORATION
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 74283P 10 7
SEE REVERSE FOR
CERTAIN DEFINITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
is the owner of
- ------------------------------------------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
PRODIGY COMMUNICATIONS CORPORATION (herein called the "Corporation") transferable upon the books of the Corporation in person or by
attorney upon surrender of this certificate duly endorsed or assigned. This certificate and the shares represented hereby are
subject to the laws of the State of Delaware, and to the Certificate of Incorporation and the By-Laws of the Corporation, each as
amended from time to time (copies of which are on file with the Transfer Agent).
This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, PRODIGY COMMUNICATIONS CORPORATION has caused its facsimile corporate seal and the facsimile signatures
of its duly authorized officers to be hereunto affixed.
Dated:
[SEAL APPEARS HERE]
/s/ Andrea S. Hirsch /s/ Samer F. Salameh
Secretary Chairman and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE
CORPORATION WILL FURNISH TO THE HOLDER UPON REQUEST AND WITHOUT CHARGE THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT- _____Custodian_____
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act__________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received,______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________
___________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
_______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.16
PRODIGY COMMUNICATIONS CORPORATION
1999 DIRECTOR STOCK OPTION PLAN
1. Purpose
-------
The purpose of this 1999 Director Stock Option Plan (the "Plan") of Prodigy
Communications Corporation (the "Company") is to encourage ownership in the
Company by outside directors of the Company whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.
2. Administration
--------------
The Board of Directors (the "Board") shall supervise and administer the
Plan. Grants of stock options under the Plan and the amount and nature of the
awards to be granted shall be automatic in accordance with Section 5. However,
all questions of interpretation of the Plan or of any options issued under it
shall be determined by the Board and such determination shall be final and
binding upon all persons having an interest in the Plan.
3. Participation in the Plan
-------------------------
Directors of the Company who are not employees of the Company shall be
eligible to participate in the Plan.
4. Stock Subject to the Plan
-------------------------
(a) The maximum number of shares which may be issued under the Plan shall
be 1,000,000 shares (before giving effect to the anticipated reverse stock split
of one-for-four) of the Company's Common Stock, $.01 par value per share
("Common Stock"), subject to adjustment as provided in Section 9 of the Plan.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares allocable to the
unexercised portion of such option shall again become available for grant
pursuant to the Plan.
(c) All options granted under the Plan shall be nonqualified options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended to date and as it may be amended from time to time (the
"Code").
<PAGE>
5. Terms, Conditions and Form of Options
--------------------------------------
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:
(a) Option Grants.
-------------
(1) Upon the closing of the Company's initial public offering of
Common Stock, the Company shall grant to each eligible director an option for
120,000 shares (before giving effect to the anticipated reverse stock split of
one-for-four) of Common Stock.
(2) Upon the initial election of any eligible director as a director
of the Company, the Company shall grant to such director an option for 120,000
shares (before giving effect to the anticipated reverse stock split of one-for-
four) of Common Stock. Notwithstanding the foregoing, no director shall receive
an option under this Section 5(a)(2) if he or she received an option under
Section 5(a)(1) above.
(b) Option Exercise Price. The option exercise price per share for each
---------------------
option granted under Section 5(a)(1) of the Plan shall equal the initial public
offering price to the public in the Company's initial public offering of Common
Stock. The option exercise price per share for each option granted under Section
5(a)(2) of the Plan shall equal (i) the last reported sales price per share of
the Company's Common Stock on the Nasdaq National Market (or, if the Company is
traded on a nationally recognized securities exchange on the date of grant, the
reported closing sales price per share of the Company's Common Stock by such
exchange) on the date of grant (or if no such price is reported on such date
such price as reported on the nearest preceding day) or (ii) if the Common Stock
is not traded on the Nasdaq National Market or such an exchange, the fair market
value per share on the date of grant as most recently determined by the Board.
(c) Options Non-Transferable. Except as otherwise provided in the
------------------------
agreement evidencing the option grant, each option granted under the Plan by its
terms shall not be transferable by the optionee other than by will, or by the
laws of descent and distribution, and shall be exercised during the lifetime of
the optionee only by the optionee. Except as otherwise provided in the
agreement evidencing the option grant, no option or interest therein may be
transferred, assigned, pledged or hypothecated by the optionee during the
optionee's lifetime, whether by operation of law or otherwise, or be made
subject to execution, attachment or similar process.
(d) Exercise Period. Each option shall become exercisable on a cumulative
---------------
basis as to 25% of the shares subject to the option on each of the first,
second, third and fourth anniversaries of the date of grant of such option.
Except as otherwise
2
<PAGE>
provided in the option agreements, in the event an optionee ceases to serve as a
director, each such option shall terminate in full 90 days after the date on
which such optionee ceases to serve as a director. No option shall be
exercisable after the expiration of 10 years from the date of grant.
(e) Exercise Procedure. Options may be exercised only by written notice to
------------------
the Company at its principal office accompanied by (i) payment in cash of the
full consideration for the shares as to which they are exercised or (ii) an
irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the exercise price or delivery of irrevocable
instructions to a broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price.
6. Assignments
-----------
The rights and benefits of participants under the Plan may not be assigned,
whether voluntarily or by operation of law, except as provided in Section 5(c).
7. Effective Date
--------------
The Plan shall become effective immediately upon the closing of the
Company's initial public offering of Common Stock, subject to the prior approval
of the Plan by the stockholders of the Company.
8. Limitation of Rights
--------------------
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
----------------------------------
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
-----------------------------------
as a stockholder with respect to the shares covered by such optionee's options
until the date of the issuance to such optionee of a stock certificate therefor,
and no adjustment will be made for dividends or other rights (except as provided
in Section 9) for which the record date is prior to the date such certificate is
issued.
9. Adjustments for Changes in Common Stock and Certain Other Events
----------------------------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the number and class of securities and exercise price per share subject to
each outstanding option and (iii) the number and
3
<PAGE>
class of securities subject to options issuable under Section 5(a) of this Plan
shall be appropriately adjusted by the Company (or substituted options may be
made, if applicable) to the extent the Board shall determine in good faith, that
such an adjustment (or substitution) is necessary and appropriate. If this
Section 9(a) applies and Section 9(c) also applies to any event, Section 9(c)
shall be applicable to such event, and this Section 9(a) shall not be
applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
--------------------------
dissolution of the Company, the Board shall upon written notice to the optionees
provide that all then unexercised options will (i) become exercisable in full as
of a specified time at least 10 business days prior to the effective date of
such liquidation or dissolution and (ii) terminate effective upon such
liquidation or dissolution, except to the extent exercised before such effective
date.
(c) Acquisition Events
------------------
(1) Definitions. An "Acquisition Event" shall mean an acquisition of
-----------
the Company, whether by acquisition of assets, acquisition of securities,
merger, consolidation or otherwise, provided that in no event shall an
Acquisition Event be deemed to occur by reason of any acquisition of assets or
securities by, or merger or consolidation with, Carso Global Telecom, S.A. de
C.V., Telefonos de Mexico, S.A. de C.V. or any of their affiliates.
(2) Effect on Options. In the event of an Acquisition Event, 50% of
-----------------
the then unvested options will become exercisable immediately prior to the
consummation of such Acquisition Event and will expire upon consummation of the
Acquisition Eevent, except to the extent exercised by the optionees before the
consummation of such Acquisition Event.
10. Amendment of the Plan
---------------------
The Board may at any time, and from time to time, suspend or
discontinue the Plan or modify or amend it in any respect whatsoever.
11. Governing Law
-------------
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
Adopted by the Board of Directors on
____________,1999
Approved by the stockholders on
____________, 1999
4
<PAGE>
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the first of
September, 1998, between Prodigy Services Corporation, a Delaware corporation
(the "Company") and an indirect wholly-owned subsidiary of Prodigy
Communications Corporation (the "Parent"), with its principal place of business
at 44 So. Broadway, White Plains, New York 10601, and Samer Salameh, residing at
101 W. 79th Street, Apt. 4F, New York, NY 10024, (the "Executive").
WHEREAS, the Company desires to employ the Executive as Chairman and Chief
Executive Officer of the Company, and the Executive desires to be employed in
that capacity;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Term of Employment.
------------------
The Company hereby agrees to employ the Executive, and the Executive hereby
accepts employment with the Company, upon the terms set forth in this Agreement,
for the period commencing on September 1, 1998 (the "Commencement Date"), and
ending on December 31, 2000 (the "Employment Period"), unless sooner terminated
in accordance with the provisions of Section 4.
2. Title; Capacity.
---------------
The Executive shall serve as Chairman and Chief Executive Officer of the
Company. The Executive shall be based in White Plains, New York or such other
place within the greater New York metropolitan area as the Board of Directors of
the Company (the "Board") shall determine. The Executive shall report to and be
subject to the supervision of, and shall have such authority as is delegated to
Executive by the Board of Directors.
The Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position, and such other duties and
responsibilities as the Board shall from time to time reasonably assign to the
Executive. The Executive shall devote Executive's entire business time,
attention and energies to the business and interests of the Company during the
Employment Period. The Executive shall abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive, in accordance with its
------
normal payroll practices, an annual base salary of $200,000. Such salary
shall be subject to increase (but not decrease) thereafter as determined by
the Board.
<PAGE>
3.2 Performance Bonuses. The Executive shall participate in an annual
-------------------
bonus plan consistent with the plan in place for other senior executives.
For calendar year 1998, bonuses shall be paid based upon Executive's
duration of employment during the calendar year, without regard to the
commencement date of this Agreement. During each such year, 50% of such
bonus shall be contingent upon successful completion of personal goals as
mutually agreed between the Executive and the Board, and 50% of such bonus
shall be contingent upon the successful completion of corporate goals as
determined by the Company. Such performance bonus shall be determined and
paid within 45 days after the end of each such calendar year during the
Employment Period. Further, the Executive does not have to be employed by
the Company beyond the last day of the applicable year in order to be
eligible to receive a bonus payment.
3.3 Option Grant.
------------
(a) On September 29, 1997, the Parent granted the Executive a stock
option to purchase 625,000 shares of common stock of the Parent at an
exercise price of $2.00 per share. Such option shall vest and become
exercisable as follows: 100,000 options shall vest on the Commencement
Date, with the remaining 525,000 options vesting in 3 equal annual
installments, with the first vesting to occur on the first anniversary
of the grant date, provided, however, that 75,000 of the shares which
would otherwise vest on September 29, 2000 (the "Performance Options"),
shall vest upon the closing of an initial public offering by the Company
prior to August 1, 1999. The parties acknowledge that the exercise price
of all stock options referred to in this Section 3.3 has been reduced to
$1.00 per share.
(b) The Executive, if requested by the Parent and the managing
underwriter of the initial public offering of the Parent's securities
(the "IPO"), shall not sell publicly or otherwise transfer or dispose of
any securities of the Parent held by the Executive for a specified
period of time (not to exceed 270 days), following the effective date of
the registration statement for the IPO; provided that all then executive
-------------
officers, directors and holders of 5% or more of the outstanding stock
of the Parent enter into similar agreements. The Executive acknowledges
that no representations have been made to him concerning the size,
occurrence, valuation or timing of any IPO.
3.4 Acceleration of Vesting Schedule. If there is a change of control of
--------------------------------
the Parent, pursuant to which one single person or entity has control of the
Parent (as control is understood under the Internal Revenue Code or
securities laws of the US), in 1998, the vesting schedule on all options
previously granted to the Executive will be accelerated so that a total of
50% of the Executive's options will be vested on the effective date of such
merger or acquisition. The vesting schedule shall thereafter remain the same
so that the remaining shares vest without giving effect to the shares which
vested on an accelerated basis.
<PAGE>
3.5 Vacation. The Executive shall be entitled to four (4) weeks annual
--------
vacation, to be taken at times selected by the Executive and reasonably
acceptable to the Board. Unused vacation shall accrue from year to year only
to the extent permitted under the Company's vacation policies in effect from
time to time.
3.6 Fringe Benefits. The Executive shall be entitled to participate in
---------------
all fringe benefit programs that the Company establishes and makes available
to its employees from time to time to the extent that Executive's position,
tenure, salary, age, health and other qualifications make him eligible to
participate.
3.7 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred or paid
by the Executive in connection with the performance of his duties hereunder,
upon presentation by the Executive of documentation, expense statements,
vouchers and/or such other supporting information as the Company may
request; provided, however, that the nature and amount of such expenses
-------- -------
shall be subject to the Company's expense policies as in effect from time to
time.
3.8 Housing Allowance. During the term of the Employment Period, the
-----------------
Company shall reimburse the Executive for expenses, not to exceed $4,000 per
month on an after tax basis, incurred or paid by the Executive for housing
for him and his immediate family in the greater New York metropolitan area,
upon presentation by the Executive of documentation, receipts, and/or such
other supporting information as the Company may request.
3.9 Car Allowance. During the term of the Employment Period, the Company
-------------
shall reimburse the Executive for expenses, not to exceed $1,050 per month
on an after tax basis, incurred or paid by the Executive for the costs
associated with business and personal use of a car.
3.10 Airfare. One time each month during the term of the Employment
-------
Period, the Company shall reimburse the Executive for the expense of a round
trip, business class airline ticket for the Executive's spouse between New
York and Mexico City.
4. Employment Termination. The employment of the Executive pursuant to this
----------------------
shall terminate upon the occurrence of any of the following:
4.1 At the election of the Company, for Cause (as hereinafter defined)
immediately upon written notice by the Company to the Executive. For
purposes of this Agreement, "Cause" shall mean (a) a good faith finding by
the Board, after notice to the Executive and an opportunity to be heard, of
the failure of the Executive to perform his reasonably assigned duties, or
the Executive's gross dishonesty, gross negligence or gross misconduct, or
(b) the conviction of the Executive of, or the entry of a plea of guilty or
nolo contendere by the Executive to, any felony;
<PAGE>
4.2 Thirty days after the death or Disability (as hereinafter defined)
of the Executive. For purposes of this Agreement, "Disability" shall mean
the inability of the Executive, due to a physical or mental disability, for
a period of 90 days, whether or not consecutive, during any 360-day period
to perform, with or without reasonable accommodation, the services
contemplated under this Agreement. A determination of Disability shall be
made by a physician satisfactory to both the Executive and the Company;
provided that if the Executive and the Company do not agree on a physician,
-------------
the Executive and the Company shall each select a physician and these two
together shall select a third physician, whose determination as to
Disability shall be binding on all parties; or
4.3 At the election of the Executive, upon written notice of
termination, for Good Reason (as hereinafter defined). For purposes of this
Agreement, "Good Reason" shall mean (i) any significant diminution in the
duties of the Executive under this Agreement or (ii) the Company's
requirement that the Executive relocate beyond the greater New York
metropolitan area, or (iii) if there is a change in control of the Parent so
that a single person or entity has control of the Parent (as control is
understood under the Internal Revenue Code or securities laws of the US).
4.4 At the election of the Executive, upon not less than two weeks'
prior written notice of termination, or at the election of the Company, upon
written notice of termination.
4.5 Upon the expiration of the Employment Contract.
5. Effect of Termination.
---------------------
5.1 Termination for Cause or at Election of the Executive. In the event
-----------------------------------------------------
the Executive's employment is terminated for Cause pursuant to Section 4.1,
or the Executive's employment is terminated at the election of the Executive
pursuant to Section 4.4, the Company shall, through the last day of his
actual employment by the Company, continue to pay to the Executive his base
salary as in effect on the date of notice of termination and continue to
provide to the Executive the fringe benefits available to him under Section
3.6 hereof, as of the last day of actual employment.
5.2 Termination for Death or Disability. If the Executive's employment
-----------------------------------
is terminated due to death or Disability pursuant to Section 4.2, the
Company shall continue to pay to the estate of the Executive or to the
Executive, as the case may be, for a period of 90 days after termination of
employment due to death or Disability, the Executive's base salary as in
effect on the date of termination.
5.3 Termination by the Executive for Good Reason or at Election of the
------------------------------------------------------------------
Company. If the Executive's employment is terminated by the Executive for
-------
Good Reason pursuant to Section 4.3 or at the election of the Company
pursuant to Section 4.4, the Company shall, during the Severance Period (as
hereinafter defined), continue to pay to the Executive his base salary as in
effect on the date of notice of termination and continue to provide to the
Executive the fringe benefits, including accrual of vacation pay, available
to him as of the date of notice of termination under Sections 3.5 and 3.6,
except during the Severance Period no options shall vest and no service
credit shall be granted which would have the
<PAGE>
effect of extending the Severance Period in accordance with Company's
standard severance policy. Further, a pro rata share of the performance
bonus referenced in Section 3.2 shall be paid to the Executive covering the
period from the beginning of the calendar year up to the date of
termination. For purposes of this Agreement, the "Severance Period" shall
mean a period of 12 months after such termination, plus a severance payment
of one (1) week's base salary for each completed six (6) months of Company
service as of the date of notice of termination. If this paragraph conflicts
with any applicable Stock Option Agreement, this paragraph shall control.
However, if Mr. Salameh is offered employment in any capacity by any of the
companies controlled by, or affiliated with Grupo Carso, S.A. de C.V., Carso
Global Telecom, S.A. de C.V., Grupo Financiero Inbursa, S.A. de C.V.,
Telefonos de Mexico (TELMEX), or SBC Communications, or any of their
affiliates, Mr. Salameh agrees to forgo any compensation from the Company at
the time he begins employment with any of the above mentioned entities.
In addition, if Mr. Salameh is terminated for any reason, the Company
shall reimburse reasonable expenses incurred (including lease cancellation
penalties) for the relocation from his home in the New York City area to any
other city in the U.S. or Mexico up to a total of the lesser of his actual
expenses directly incurred or $40,000.00.
5.4 Termination at Expiration of Contract. If, prior to November 1,
-------------------------------------
2000, the Company has not offered to renew the Employment Contract on terms
at least equal to those contained herein and for a term of not less than one
(1) year, the Company shall continue to pay the Executive his base salary in
effect on the date of termination for a period of 12 months after such
termination, plus a severance payment of one (1) week's base salary for each
completed six (6) months of Company service through the expiration of this
Agreement except as modified by Section 5.3. The Company shall also provide
to the Executive during the Severance Period, the fringe benefits, including
accrual of vacation pay, available to him under Sections 3.5 and 3.6, except
as modified by Section 5.3
.
5.5 Survival. The provisions of Sections 5.2, 5.3 and 5.4 shall survive
--------
the expiration or termination of this Agreement under the circumstances
specified in those Sections for the periods specified in such Sections.
Sections 6 and 7 shall survive the termination of this Agreement.
6. Non-Compete.
-----------
(a) During the Executive's active employment and for the Severance Period,
the Executive will not:
(i) be a partner, stockholder (other than as the holder of not more than
one percent (1%) of the total outstanding stock of), officer, employee,
consultant, director, joint venturer, investor or lender of or to America
Online, Inc., CompuServe Corporation, Microsoft Network, AT&T WorldNet,
Netcom On-Line Communications Services, Inc., EarthLink Network, Inc.,
MindSpring Enterprises, Inc., or any corporation or other entity acquiring
any of the foregoing; or involved in providing services that compete
directly with Prodigy; or
<PAGE>
(ii) directly or indirectly recruit, solicit or induce, or attempt to
induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with the Company; or
(iii) directly or indirectly solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the clients,
customers or accounts, or prospective clients, customers or accounts, of the
Company, including but not limited to those clients, customers or accounts
which were contacted, solicited or served by the Executive while employed by
the Company.
(b) If any restriction set forth in this Section 6 is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(c) The restrictions contained in this Section 6 are necessary for the
protection of the business and goodwill of the Company and are considered by the
Executive to be reasonable for such purposes. The Executive agrees that any
breach of this Section 6 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific performance and injunctive relief.
(d) Unless the context otherwise requires, all references in this Section 6
and in Section 7 below to the "Company" shall include all current or future
subsidiaries or affiliates of the Company.
7. Proprietary Information and Developments.
----------------------------------------
7.1 Proprietary Information.
(a) The Executive agrees that all information and know-how related to
the activities of the Company, whether or not in writing, of a private,
secret or confidential nature concerning the Company's business or financial
affairs collectively, ("Proprietary Information") is and shall be the
exclusive property of the Company. By way of illustration, but not
limitation, Proprietary Information may include inventions, products,
processes, methods, techniques, formulas, compositions, compounds, projects,
developments, plans, research data, clinical data, financial data, personnel
data, computer programs, and customer and supplier lists. The Executive will
not disclose any Proprietary Information to others outside the Company or
use the same for any unauthorized purposes without written approval by an
officer of the Company, either during or after his employment, unless and
until such Proprietary information has become public knowledge without fault
by the Executive.
<PAGE>
(b) The Executive agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings,
or other written, photographic, or other tangible material containing
Proprietary Information, whether created by the Executive or others, which
shall come into his custody or possession, shall be and are the exclusive
property of the Company to be used by the Executive only in the performance
of his duties for the Company.
(c) The Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs (a)
and (b) above, also extends to such types of information, know-how, records
and tangible property of customers of the Company or suppliers to the
Company or other third parties who may have disclosed or entrusted the same
to the Company or to the Executive in the course of the Company's business.
7.2 Developments.
------------
(a) The Executive will make full and prompt disclosure to the Company of
all inventions, improvements, discoveries, methods, developments, software,
and works of authorship, related to the activities of the Company, whether
patentable or not, which are created, made, conceived or reduced to practice
by the Executive or under his direction or jointly with others during his
employment by the Company, whether or not during normal working hours or on
the premises of the Company (all of which are collectively referred to in
this Agreement as "Developments").
(b) The Executive agrees to assign and does hereby assign to the Company
(or any person or entity designated by the Company) all his right, title and
interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. The Executive also
acknowledges that all work fixed in a tangible medium of expression shall be
deemed a work made for hire under the US Copyright Act such that the work is
owned by the Company at the moment of creation.
(c) The Executive agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in
the United States and foreign countries) relating to Developments. The
Executive shall sign all papers, including, without limitation, copyright
applications, patent applications, declarations, oaths, formal assignments,
assignment of priority rights, and powers of attorney, which the Company may
deem necessary or desirable in order to protect its rights and interests in
any Development.
7.3 Other Agreements. The Executive hereby represents that his performance
----------------
of all the terms of this Agreement and as an employee of the Company does not
and will not breach the terms of any agreement with any previous employer or
other party to refrain from using or disclosing any trade secret, confidential
or proprietary information, knowledge or data acquired by him in confidence or
in trust prior to his employment with the Company or to refrain from competing,
directly or indirectly, with the business of such previous employer or any other
party.
<PAGE>
8. Notices.
-------
All notices required or permitted under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon sending, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown above, or at such other address or addresses as either party
shall designate to the other in accordance with this Section 8.
9. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns and pronouns shall include the plural, and vice versa.
10. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter of this Agreement, except that the Agreement
Regarding Confidential Information, the Prodigy Business Conduct Guidelines, and
other documents executed on the commencement of employment, shall remain in full
force and effect.
11. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Executive.
12. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of New York in the United States, without reference
to conflict of laws principles.
13. Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of both
parties and their respective successors and assigns, including any corporation
with which or into which the Company may be merged or which may succeed to its
assets or business; provided, however, that the obligations of the Executive are
-------- -------
personal and shall not be assigned by him.
14. Miscellaneous.
-------------
14.1 No delay or omission by either the Company or the Executive in
exercising any right under this Agreement shall operate as a waiver of that
or any other right. A waiver or consent given by either the Company or the
Executive on any one occasion shall be effective only in that instance and
shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for convenience
of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
<PAGE>
14.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Andrea S. Hisch
------------------------------------
Andrea S. Hisch
EXECUTIVE
/s/ Samer Salameh
---------------------------------------
Samer Salameh
<PAGE>
EXHIBIT 10.22
AGREEMENT
AGREEMENT (the "Agreement"), entered into on this 31st day of July 1998,
between Prodigy Services Corporation, a Delaware Corporation (the "Company"),
and an indirect wholly owned subsidiary of Prodigy, Inc. (the "Parent"), with
its principal place of business at 44 So. Broadway, and Russell I. Pillar,
residing at 174 West 76th Street, #12-H, New York, N.Y. (the "Executive").
WHEREAS, the Company and the Executive are parties to an Employment
Agreement dated as of September 29, 1997 (the "Employment Agreement");
WHEREAS, on September 29, 1997, the Executive was granted an option
pursuant to the Prodigy, Inc., Stock Option Plan to purchase 625,000 shares of
Common Stock of the Company at an exercise price of $3.00 per share;
WHEREAS, the Executive is currently serving as President and Chief
Executive Officer and a director of the Company;
NOW, THEREFORE, in consideration of the undertakings and commitments
contained herein and other good and valuable consideration, the sufficiency of
which is acknowledged, the parties agree as follows:
1. Resignation. Effective as of July 31, 1998 (the "Commencement Date")
-----------
and except as provided in Sections 2 and 3 below, the Executive hereby
resigns as President and Chief Executive Officer of the Company and from
all other positions held with the Company and the Company's current
subsidiaries (individually and collectively, the "Prodigy Entities"),
including without limitation as a Trustee of The Prodigy Trust. The Company
hereby accepts such resignations.
2. Service as a Director. The Executive shall continue to serve as a
---------------------
director of the Company and agrees to serve as a director until his death,
resignation or removal in accordance with applicable law and the respective
Certificates of Incorporation and by-laws of the Company. The Executive
shall not be eligible to participate in any compensation arrangements put
in place for outside directors so long as Consulting Period is in effect
other than to be covered under the Company's standard directors liability
insurance policy and to have reasonable expenses reallocated.
3. Consulting Agreement. The Company desires to enter into a Consulting
--------------------
Agreement (the "Agreement"), effective as of the 1st day of August 1998,
with Russell I. Pillar, presently residing at 174 West 76th Street, #12-H,
New York, N.Y. (the "Consultant").
3.1 Agreement. The Company desires to retain the Consultant, and the
---------
Consultant desires to be retained by the Company, as a consultant with
respect to the matters described herein. In consideration of the
mutual covenants and promises contained herein, and other good and
valuable consideration, the receipt
<PAGE>
and sufficiency of which are hereby acknowledged by the parties
hereto, the parties agree as follows:
3.2. Term of Engagement. The Company hereby agrees to retain the
------------------
Consultant, and the Consultant hereby agrees to be retained by the
Company, upon the terms set forth in this Agreement, for the period
commencing on August 1, 1998, and ending on July 31, 1999 (the
"Consulting Period"). The Agreement will be non-cancelable by the
Company and will renew year-to-year unless either party terminates
with 30 days advance notice prior the end of the then current year.
3.3. Title; Capacity. The parties agree that the Consultant shall
---------------
serve as Vice Chairman (a non-executive Board of Directors position),
and will have responsibility for continuing to support the Chairman in
setting corporate strategy, building and maintaining senior level
relationships throughout the industry; speaking on behalf of the
Corporation in public venues when appropriate; and continuing to help
guide the Company to and through an initial public offering.
3.4. Time Commitment. During the term, Consultant will be available
---------------
from time-to-time on reasonable notice to consult with the Chairman,
but in no case will Consultant be required to dedicate such time as
would interfere with Consultant's ability to enter into full-time
employment elsewhere or more than ten hours per month on a non-
cumulative basis.
4. Fees and Expenses.
-----------------
4.1 Fees. In full compensation for services rendered under this
----
Agreement, the Company shall pay the Consultant a fee of $250,000,
payable in twelve (12) equal monthly installments, in advance on the
first day of each month during the Consulting Period, with an initial
payment of $20,833.33 payable upon execution of this Agreement.
4.2 Performance Bonus. A performance bonus of $125,000 based on a
-----------------
successful initial public offering, payable in full 30 days after the
IPO; otherwise discretionary based on performance and payable in
February, 1999.
4.3 Expenses. The Company shall reimburse the Consultant for all
--------
reasonable travel and other business expenses incurred or paid by the
Consultant in connection with the performance of his duties hereunder,
upon presentation by the Consultant of documentation, expense
statements, vouchers and/or such other supporting information as the
Company may reasonably request, provided, however, that the nature and
-------- -------
amount of such expenses shall be subject to the Company's expense
policies as in effect from time to time.
<PAGE>
4.4 Independent Contractor Status. The Consultant shall perform all
-----------------------------
services under this Agreement as an "independent contractor" and not
as an employee or agent of the Company. The Consultant is not
authorized to assume or create any obligation or responsibility
express or implied, on behalf of, or in the name of, the Company or to
bind the Company in any manner. The Consultant shall not be entitled
to any benefits, coverages or privileges, including without limitation
social security, unemployment, pension payments, made available to
employees of the Company with respect to his services as a consultant.
The Company shall not make any tax withholding with respect to the
fees paid hereunder, and the Consultant shall be solely responsible
for all income or other taxes attributable thereto. The parties agree,
however, that the Executive's termination of employment on July 31,
1998, shall constitute a qualifying event pursuant to the Consolidated
Budget Reconciliation Act of 1985 (COBRA), and the Company shall
afford the Consultant benefit continuation to the extent required by
law at the Company's expense.
4.5 Relocation. If the Consultant chooses to relocate out of the New
----------
York City area any time during the term of this Agreement, the Company
will pay all reasonable actual expenses incurred to relocate the
Consultant, his family, automobile, and household goods to another
city in the United States. In addition, the Company will pay any
continuation of rent on the Consultant's apartment in New York City if
the Consultant is unable to break the current lease without any
payment, as well as applicable lease cancellation penalties.
4.6 Administrative Support. The Consultant will continue to be
----------------------
provided with his current office and full time assistant, Stacey
Lettis, during the term of the consulting period. The Consultant will
also be provided with a complimentary Prodigy Internet account for as
long as he is a member of the Board of Directors.
4.7 Company match of 401(k). The Company hereby waives existing
-----------------------
vesting restrictions on the Consultant's vesting schedule of the
Company match of the Consultant's 401(k), and vests those amounts
immediately upon signing of this Agreement.
5. Options.
a.) On September 29, 1997, the Parent granted the Executive a stock
option to purchase 625,000 shares of common stock of the Parent at an
exercise price of $3.00 per share. Such options vest as follows:
- 100,000 vested as of September 29, 1997;
- 175,000 options shall vest on September 29, 1998;
- 175,000 options shall vest on September 29, 1999;
- 175,000 options shall vest on September 29, 2000 provided, however,
that 75,000 of the shares which would otherwise vest on September 29,
2000 (the "Performance Options"), shall vest upon the closing of an
initial public offering by the Company by August 1, 1999. The parties
agree that the vesting schedule specified in this Section 5 shall
remain in effect and the options will continue to vest in the event
that the Consulting Agreement is not renewed beyond July 31, 1999.
Further, the Consultant may exercise a portion of or all his vested
options for up to a period of 12 months after ceasing to be
<PAGE>
a member of the Board of Directors or a Consultant or 12 months from the
final vesting date, if later, except that the Consultant shall have up
until December 31, 2000 to exercise any or all shares under option
except for those which vest on September 29, 2000, for which the
Consultant shall have until September 28, 2001 to exercise. The parties
acknowledge that the exercise price of all stock options referred to in
this Section 5 has been reduced to $1.00 per share.
b.) The Consultant, if requested by the Parent and the managing
underwriter of the initial public offering of the Parent's securities
(the "IPO"), agrees not to sell publicly or otherwise transfer or
dispose of any securities of the Parent held by the Consultant for a
specified period of time (not to exceed 180 days) following the
effective date of the registration statement for the IPO; provided that
all then executive officers, directors and holders of 5% or more of the
outstanding stock of the Parent enter into similar agreements. The
Consultant acknowledges that no representations have been made to him
concerning the size, valuation or timing of any IPO.
c.) All options and any additional shares owned by the Consultant will
be registered by the Company (under an S-8 or other appropriate filing),
at the time of the IPO filing.
d.) Acceleration of Vesting Schedule. If there is a change of control of
--------------------------------
the Parent, pursuant to which one single person or entity has control of
the Parent (as control is understood under the Internal Revenue Code or
securities laws of the US), the vesting schedule on all options
previously granted to the Consultant will be accelerated so that a total
of 50% of the Consultant's unvested options selected from those options
last scheduled to vest will be vested on the effective date of such
merger or acquisition. The vesting schedule shall thereafter remain the
same so that the remaining shares vest without giving effect to the
shares, which vested on an accelerated basis.
6. No Other Payments or Benefits. The parties acknowledge and agree that
-----------------------------
the payments, benefits and options described in Sections 4 and 5 above
represent the sole and entire amounts or compensation due or to become due
to the Consultant in connection with his services, his status and/or any
and all other associations with the Prodigy Entities (including, without
limitation, any termination of any of the forgoing or for any other reason
whatsoever), and no further or other compensation including, without
limitation, stock or other equity compensation, payments, bonuses,
benefits, unused accrued vacation time, any and all other accrued but
unpaid compensation, severance pay or other amounts whatsoever are or shall
become due or payable at any time by the Prodigy Entities (or by any
officer, director, employee or stockholder of the Prodigy Entities) to the
Consultant other than customary expense reimbursements.
7. Proprietary Information and Developments.
----------------------------------------
7.1 Proprietary Information.
-----------------------
(a) The Consultant agrees that all information and know-how,
whether or not in writing, of a private, secret or confidential
nature concerning the Company's business or financial affairs,
<PAGE>
other than that which the Consultant learns and uses under the
auspices of Critical Mass or a Critical Mass portfolio company
(collectively "Proprietary Information") is and shall be the
exclusive property of the Company. By way of illustration, but not
limitation, Proprietary Information may include inventions,
products, processes, methods, techniques, formulas, compositions,
compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, and
customer and supplier lists. The Consultant will not disclose any
Proprietary Information to others outside the Company or use the
same for any unauthorized purposes without written approval by the
Chairman of the Parent, unless and until such Proprietary
Information has become public knowledge without fault by the
Consultant.
(b) The Consultant agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, laboratory notebooks,
program listings, or other written, photographic, or other tangible
material containing Proprietary Information, whether created by the
Consultant or others, which shall come into his custody or
possession, shall be and are the exclusive property of the Company
to be used by the Consultant only in the performance of his
services for the Company.
(c) The Consultant agrees that his obligation not to disclose or
use information, know-how and records of the types set forth in
paragraphs (a) and (b) above, also extends to such types of
information, know-how, records and tangible property of customers
of the Company or suppliers to the Company or other third parties
who may have disclosed or entrusted the same to the Company or to
the Consultant in the course of the Company's business.
7.2 Developments.
------------
(a) The Consultant will make full and prompt disclosure to the
Company of all inventions, improvements, discoveries, methods,
developments, software, and works of authorship, whether patentable
or not, which are created, made, conceived or reduced to practice
by the Consultant or under his direction or jointly with others
during his employment by the Company, whether or not during normal
working hours or on the premises of the Company other than that
which the Consultant created under the auspices of Critical Mass or
a Critical Mass portfolio company (all of which are collectively
referred to in this Agreement as "Developments").
(b) The Consultant agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company), all
his right, title and interest in and to all Developments and all
related patents, patent applications, copyrights and copyright
applications.
(c) The Consultant agrees to cooperate fully with the Company, with
respect to the procurement, maintenance and enforcement of
copyrights and patents (both in the United States and foreign
countries), relating to
<PAGE>
Developments at no cost to the Company. Consultant shall sign all
papers, including, without limitation, copyright applications,
patent applications, declarations, oaths, formal assignments,
assignment of priority rights, and powers of attorney, which the
Company may deem necessary or desirable in order to protect its
rights and interests in any Development.
7.3 Other Agreements. The Consultant hereby represents that his
----------------
performance of all the terms of this Agreement and as a consultant to
the Company does not and will not breach the terms of any agreement
with any previous employer or other party to refrain from using or
disclosing any trade secret, confidential or proprietary information,
knowledge or data acquired by him in confidence or in trust prior to
the consulting period or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other
party.
7.4 Entities Covered. All references in this Section 7 to the
----------------
"Company" shall include all Prodigy Entities.
7.5 Effective Date. The parties intend and agree that the provisions
--------------
of this Section 7 are intended to be, and shall be, effective as of
September 29, 1997 (the date on which the Executive commenced
employment with the Company).
8. Releases.
--------
8.1 By the Consultant.
-----------------
(a) In exchange for the payments and undertakings described within
this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
Consultant, on behalf of himself and his representatives, agents,
estate, heirs, successors and assigns, hereby absolutely and
unconditionally releases and forever discharges the Prodigy
Entities and/or their respective successors, assigns, stockholders,
officers, directors, investors, employees, attorneys,
representatives and agents, both individually and in their official
capacities, from any and all actions or causes of action, suits,
claims, complaints, contracts, liabilities, agreements, promises,
debts, judgments, damages and demands of every kind or nature
whether existing or contingent, known or unknown, both in law and
equity, including without imitation: claims arising from or as a
consequence of any actions or inactions of the directors or
officers of the Prodigy Entities; any other contract, express or
implied; and common law.
(b) This release is intended by the Consultant to be all
encompassing and to act as a full and total release of any claims
that the Consultant has, may have or has had against the Prodigy
Entities and their respective successors, assigns, directors,
stockholders, officers, investors, employees, attorneys,
representatives and/or agents, both individually and in their
6
<PAGE>
official capacity with the Prodigy Entities, since the beginning of
the world through the date of this Agreement, specifically
including, but without limitation to: any federal or state law or
regulation dealing with either employment or employment
discrimination; the Age Discrimination in Employment Act; the fair
employment practices statute of any applicable jurisdiction; all
claims arising from or in conjunction with the Consultant's
employment and/or status as an officer of the Prodigy Entities; and
all claims for compensation (such as: severance payments; benefits;
accrued vacation pay; sick pay; reimbursable expenses; expense
vouchers; obligations or commitments to grant stock options or to
issue stock and all other rights to acquire stock, if any such
obligations, commitments and/or rights are claimed to exist;
performance or other bonuses; business-related expenses; and all
other payments, commissions, compensations or reimbursements of
every kind and description) other than the compensation expressly
provided for in this Agreement.
(c) The Consultant specifically waives any right he has or may have
under applicable law to revoke this Agreement after its execution.
The Consultant acknowledges that he was advised by the Company of
his right to obtain independent legal advice regarding this
agreement; that he has had the opportunity to review and reflect on
all the terms of this Agreement; and that he has not been subject
to any undue or improper influence interfering with the exercise of
his free will to execute this Agreement.
8.2 By the Prodigy Entities. In exchange for the releases set forth
above and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledge, the Company, on behalf of
itself, the Prodigy Entities and their respective successors, assigns,
directors, officers, employees, representatives and agents, hereby
absolutely and unconditionally releases and forever discharges the
Consultant, his representatives, agents, estate, heirs, successors and
assigns, from any and all actions or causes of action, suits, claims,
complaints, contracts, liabilities, agreements, promises, debts,
judgments, damages and demands of every kind or nature whether
existing or contingent, known or unknown, both in law and equity,
including without limitation: claims arising from or as a consequence
of the Consultant's acts or omissions as an officer or as a director
of the Company; any other contract, express or implied; and common
law. This release is intended by the Prodigy Entities to be all
encompassing and to act as a full and total release of any claims that
any Prodigy Entities has, may have or has had against the Consultant
or his representatives, agents, estate, heirs, successors and assigns,
since the beginning of the world through the date of this Agreement.
8.3 Exceptions. The foregoing release shall not apply to any act or
----------
omissions of either party occurring after the date hereof relating to
any breach of this Agreement and the Employment Agreement of September
29, 1997 is terminated effective July 31, 1998.
7
<PAGE>
8.4 No Admissions. Nothing in this Agreement is to be construed as
-------------
an admission or acknowledgment by the Prodigy Entities and/or their
respective stockholders, officers, directors, investors, employees,
representatives or agents, of any unlawful, wrongful or negligent
conduct or as an admission or acknowledgment of any liability
whatsoever. Nothing in this Agreement is to be construed as an
admission or acknowledgment by the Consultant of any unlawful,
wrongful or negligent conduct or as an admission or acknowledgment of
any liability whatsoever.
8.5 Continuing Rights to Indemnification. It is expressly agreed and
------------------------------------
understood that nothing in this Agreement shall affect the parties'
rights and obligations relating to indemnification pursuant to the
Certificate of Incorporation of the Company, bylaws, Employment
Agreement, or law.
9. Confidentiality. The parties agree that the terms and contents of
---------------
this Agreement, the contents of the negotiations and discussions resulting
in this Agreement, shall be maintained as confidential by the parties,
their agents and representatives, and none of the above shall be disclosed
except by either party for the purpose of enforcing this Agreement, to the
extent required by federal or state law, to the extent otherwise provided
for in this Agreement, or as agreed to in writing by the authorized agents
of each party.
10. Notices and Payments. All notices, payments and communications shall
--------------------
be given or made to the parties by hand delivery or first class prepaid
mail at the following addresses, or such other addresses as the parties
shall inform each other of in writing as aforesaid:
If to the Consultant: Russell I. Pillar
174 West 76th Street, #12-H
New York, NY 10023
If to the Company: Prodigy, Inc.
44 So. Broadway
White Plains, NY 10601
Attention: General Counsel
11. No Other Inducement. In entering into this Agreement, neither party
-------------------
has relied on any representation, promise or inducement made by the other
party, except as expressly provided herein.
12. Entire Agreement. This Agreement constitutes the sole and entire
----------------
agreement between the parties as to its subject matter and supersedes and
terminates any and all other agreements, understandings and representations
as to its subject matter, and the parties acknowledge and agree that there
are no other agreements, understandings and/or representations of any kind
whatsoever remaining between them except as set forth herein.
8
<PAGE>
13. Miscellaneous.
-------------
13.1 The descriptive section headings herein have been inserted for
convenience only and shall not be deemed to limit or otherwise affect
the construction of any provision hereof. There shall be no
presumption that ambiguities, if any, in this Agreement shall be
construed for or against either party.
13.2 This Agreement shall be construed, interpreted and enforced in
accordance with the laws of the State of New York, without reference
to conflict of laws principles.
13.3 This Agreement shall not be assignable by the Consultant or by
the Company but, except to the foregoing extent, shall be binding on
the parties hereto and their respective heirs, legal representatives,
successors and assigns and shall inure to the benefit of the Company's
successors and assigns. This Agreement may be modified or amended and
any provision hereunder waiver only by written agreement signed by the
parties.
13.4 The parties agree that each provision herein shall be treated as
a separate and independent clause, and the unenforceability of any one
clause shall in no way impair the enforceability of any of the other
clauses herein. Moreover, if one or more of the provisions contained
in this Agreement shall for any reason be held to be excessively broad
as to scope, activity or subject matter so as to be unenforceable at
law, such provision or provisions shall be construed by limited and
reducing it or them, so as to be enforceable to the extent compatible
with the applicable law as it shall then appear.
13.5 This Agreement may be executed in any number of counterparts,
each of which shall constitute an original, but which taken together
shall constitute one instrument.
IN WITNESS WHEREOF, this Agreement is entered into under seal by the
Company and the Consultant as of the date set forth above.
/s/ Russell Pillar
---------------------------------
Russell I. Pillar
PRODIGY SERVICES CORPORATION
By: /s/ Samer Salameh
---------------------------------
Samer Salameh
Chairman
9
<PAGE>
AMENDMENT NO. 1
TO
AGREEMENT
THIS AMENDMENT NO. 1, (the "Amendment") dated this 5th day of January,
1999, to the Agreement dated as of August 1, 1998 (the "Agreement") between
Prodigy Communications Corporation (the "Company") with its principal place of
business at 44 South Broadway, White Plains, New York and Russell I. Pillar,
residing at 174 West 76th Street, #12, New York, New York (the "Consultant").
Whereas, the Company and the Executive are parties to the Agreement,
pursuant to which Executive agreed to perform certain consulting services for
the Company and to serve as Vice Chairman of its Board of Directors; and
Whereas, the parties desire to amend the Agreement as provided herein;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree, and the
Agreement is hereby amended, as follows:
1. Termination of Consulting Services. The parties agree that effective
----------------------------------
as of the date hereof, the Consultant shall no longer provide
consulting services for the Company, and the provisions specified in
Article 3 of the Agreement shall be of no further force or effect.
2. Service As Director. Notwithstanding termination of the consulting
-------------------
services, Consultant hereby resigns his position as Vice Chairman of
the Company, but agrees to continue to serve as a director of the
Company until resignation or removal in accordance with applicable
law and the Certificate of Incorporation and bylaws of the Company.
In consideration of the compensation arrangements described herein,
Consultant agrees that he shall not be eligible for additional
compensation as a director until such time as the Company adopts
compensation arrangements for outside directors (at which time he
will participate in such compensation arrangements), except that
Consultant shall be entitled to reimbursement for reasonable out of
pocket travel expenses relating to attendance at Board meetings, in
accordance with Company policy.
3. Compensation. In lieu of the compensation and all other arrangements
-------------
specified in Article 4 of the Agreement, and as full consideration
for the early termination of the Consulting Services and ongoing
service as a member of the Board of Directors of the Company, the
Company shall pay to Consultant a fee of $145,833.31, such fee to be
paid to Consultant upon
<PAGE>
execution of this Amendment. Additionally, in lieu of any bonus
stated in the Agreement on completion of the initial public offering
of the Company's stock, Company shall pay to Consultant a
discretionary bonus based upon performance of $106,250, such amount
to be payable on execution of this Agreement.
4. Options. The options to purchase 625,000 shares of common stock of
-------
the Company specified in Article 5 of the Agreement, and the vesting
schedule, lock up provisions, registration rights and acceleration
events specified therein shall continue in effect as specified
therein.
Except as expressly provided herein, the Agreement shall remain in full
force and effect, and the parties agree to be bound by the terms thereof, as
amended herein.
Prodigy Communications Corporation
By: /s/ Samer Salameh
---------------------------
Samer Salameh
Chief Executive Officer
By: /s/ Russell I. Pillar
---------------------------
Russell I. Pillar
<PAGE>
EXHIBIT 10.23
PRODIGY
44 South Broadway, White Plains, NY 10601 (914) 448-8000
July 21, 1998
Mr. David Henkel
6111 Bluff Point Drive
Dallas, TX 75248
Dear David,
I am pleased to extend our revised offer of employment for you to join Prodigy
as Senior Vice President and Chief Financial Officer. In this capacity you will
report directly to Russ Pillar, President and Chief Executive Officer.
Specific elements of your offer are as follows:
Base Salary:
- -----------
$190,000 annually; $7,916.67 semi-monthly.
Bonus:
- -----
You will participate in a bonus plan, which will have an annual on-target bonus
of 30% of your base salary. One half of the targeted payout will be tied to
company results, with one half tied to individual performance. For 1998, the
payout will be pro rated to reflect actual months worked.
Stock Options:
- -------------
As a participant in the plan, you will have the option to purchase 750,000
shares at a price of $2.00 per share. These shares will vest evenly over three
(3) years, with the first vesting to occur on the first anniversary of your hire
date.
Housing Allowance:
- -----------------
You will receive a payment of $3,000 per month.
Commutation:
- -----------
Between your hire date and December 31, 1998, the Company will reimburse you for
air travel between New York City and Dallas and related ground transportation
costs. This will apply to one (1) trip per week. In addition, you will be
reimbursed for the cost of airfare related to your children's travel to New York
City (round trip coach). This will apply to a maximum of two (2) trips during
the period ending December 31, 1998. You agree to extend your best efforts in
minimizing air travel expenses through careful advance planning.
<PAGE>
The Company will also reimburse you for the use of a rental car until such time
as you purchase a car. In addition, hotel, meals and related expenses, will be
reimbursed until such time as you move into an apartment.
Relocation:
- ----------
You will be reimbursed for actual expenses up to a maximum of $3,000 for
shipment of household goods from Dallas to New York City. After your relocation
to the New York area, the Company will reimburse you for the cost of up to two
(2) round trip coach class tickets each month for you and your spouse. This
benefit will be available for a period of one (1) year and subject to
renegotiation at that time.
Benefits:
- --------
You will participate in the full range of Prodigy benefits programs which
include medical, dental, accident and life insurance and 401K savings plans,
effective your first day of employment. Your vacation entitlement will be four
(4) weeks.
Severance:
- ---------
. In the event of an involuntary termination during the first three (3)
months of your employment, there will be no severance benefit.
. If an involuntary termination for reasons other than cause occurs after
the Company goes public, but before the first anniversary of your hire
date, option vesting will be accelerated so that as of the termination
date, one-third (1/3) or 250,000 of the options granted shall be vested.
You will have three (3) months after the termination date to exercise the
vested options. For purposes of this employment offer, cause shall mean
(a) a good faith finding by the Board, after notice and an opportunity to
be heard, of your failure to perform your reasonably assigned duties, or
your gross dishonesty, gross negligence or gross misconduct, or (b) your
conviction of, or the entry of a plea of guilty or nolo contendre, to any
felony.
. If termination occurs as a result of a change in control, vesting shall be
accelerated so that as of the termination date, 50% of all non-vested
options shall vest. You will have three (3) months after the termination
date to exercise the vested options.
. In addition to the benefits outlined in the above second and third
paragraphs, in the event of your termination for reasons other than cause
(defined above), you will be entitled to receive a severance benefit of one
(1) month's salary continuation for each completed six (6) months service
up to a maximum benefit of six (6) months salary continuation.
This employment offer is contingent on the satisfactory completion of reference
checks.
2
<PAGE>
David, we are truly excited at the prospect of your joining the Prodigy
Executive team and believe your background and experience will add immeasurably
to Prodigy's success. At the same time, I am convinced you will find working at
Prodigy to be challenging and rewarding, both personally and professionally.
Please initial your acceptance of this offer in the space indicated and return a
copy to me.
Sincerely,
Samer Salameh
Chairman of the Board
cc: R. Pillar
Accepted: /s/ David R. Henkel
----------------------
David Henkel
Date: 7/22/98
----------------------
3
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the ____ day of
November, 1997, between Prodigy Services Corporation, a Delaware corporation
(the "Company") and an indirect wholly-owned subsidiary of Prodigy, Inc. (The
"Parent"), with its principal place of business at 445 Hamilton Avenue, White
Plains, New York 10601, and James P. Dougherty, residing at 33 Wilton Road,
Pleasantville, New York 01570 (the "Executive").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President, Marketing & Sales of the Prodigy Solutions division of the Company
("Prodigy Solutions") and the Executive desires to be employed as Senior Vice
President, Marketing & Sales of Prodigy Solutions;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Term of Employment.
------------------
The Company hereby agrees to employ the Executive, and the Executive
hereby accepts employment with the Company, upon the terms set forth in
this Agreement, for the period commencing on the date set forth above (the
"Commencement Date") and ending on the fourth anniversary of the
Commencement Date (the "Employment Period"), unless sooner terminated in
accordance with the provisions of Section 4.
2. Title; Capacity.
---------------
The Executive shall serve as Senior Vice President, Marketing & Sales of
Prodigy Solutions. The Executive shall be based in White Plains, New York
or such other place within the greater New York metropolitan area as the
Board of Directors of the Company (the "Board") shall determine. The
Executive shall report to and be subject to the supervision of, and shall
have such authority as is delegated to him by, the President and General
Manager of Prodigy Solutions (the "President") or such other senior
executive officer as the Board shall designate.
The Executive hereby accepts such employment and agreed to undertake the
duties and responsibilities inherent in such position (as specific in
Attachment A), and such other duties and responsibilities as the President
shall from time to time to time reasonably assign to him. The Executive
agrees to devote his entire business time, attention and energies to the
business and interests of the Company during the Employment Period. The
Executive agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Company
<PAGE>
and any changes therein which may be adopted from time to time by the
Company.
By mutual consent, the Executive may be involved in external boards of
director provided that the activities do not adversely impact or conflict
with his duties in the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive, in accordance with its
------
normal payroll practices, an annual base salary of $150,000 for the
one-year period commencing on the Commence Date. Such salary shall be
subject to subject to increase (but not decrease) thereafter as
determined by the Board.
3.2 The Company shall pay the Executive a sign-on bonus of $20,000, less
applicable withholding, within 30 days of the hire date.
3.3 Performance Bonuses.
-------------------
(a) During the Employment Period (starting January 1, 1998), and in
lieu of participating in any other bonus plans or programs
available to senior executive employees of Prodigy Solutions or
the Company, the Executive shall receive bonuses based on a
percentage of Prodigy Solutions revenues from the sale or
licensing of products to third parties ("Revenues"). Revenues
shall be calculated in accordance with generally accepted
accounting practices as followed by the Company. For calendar
year 1998, the bonus shall equal (i) 0.33% of the first
$5,000,000 in Revenues, (ii) 0.67% of the next $5,000,000 in
Revenues, (iii) 1.00% of the next $5,000,000 in Revenues and (iv)
1.50% of all revenues in excess of $15,000,000. For purposes of
establishing bonus programs for the Executive for calendar years
after 1998, the applicable percentages and thresholds for
Revenues (which may be different from those set forth above for
1998) shall be established by mutual agreement of the President
and the Executive.
(b) Within 45 days after the end of each calendar quarter, starting
with the quarter ending March 31, 1998, Prodigy Solutions shall
(i) calculate the cumulative amount of the bonus earned in the
calendar year to date (cased on aggregate Revenues through the
end of such calendar quarter) and (ii) pay to the Executive the
amount of the bonus so calculated less the aggregate amount of
the bonus previously paid to the Executives for such year. In
the event
<PAGE>
of termination of employment for reasons other than cause,
the participant shall be entitled to receive performance
bonus payments earned during the last fall calendar quarter of
active employment exclusive of paid time in lieu of notice,
earned vacation or salary continuance.
3.4 Option Grant. Subject to approval of the Compensation Committee of
------------
the Board of Directors of the Parent (the "Compensation Committee"),
the Executive shall be granted a stock option to purchase 375,000
shares of Common Stock of the Parent at an exercise price determined
by the Compensation Committee but not less than the fair market value
of the Common Stock on the date of such grant. Such option shall vest
and become exercisable as follows: 75,000 options shall vest on the
commencement date, with the remaining 300,000 options vesting in three
(3) equal annual installments with the first vesting to occur on the
first anniversary of the Commencement Date. The Executive, if
requested by the Parent and the managing underwriter of the initial
public offering of the Parent's securities (the "IPO"), agrees not to
sell publicly or otherwise transfer or dispose of any securities of
the Parent held by the Executive for a specified period of time (not
to exceed 270 days) following the effective date of the registration
statement for the IPO; provided that all then executive officers,
-------- ----
directors and holders of 5% or more of the outstanding stock of the
Parent enter into similar agreements. The Executive acknowledges that
no representations have been made to him concerning the size,
valuation or timing of any IPO.
3.5 Vacation. The Executive shall be entitled to two weeks paid vacation
--------
per calendar year, to be taken at times selected by the Executive and
reasonably acceptable to the President. Unused vacation shall accrue
from year to year only to the extent permitted under the Company's
vacation policies as in effect from time to time.
3.6 Fringe Benefits. The Executive shall be entitled to participate in
---------------
all fringe benefit programs that the Company establishes and makes
available to its employees from time to time to the extent that
executive's position, tenure, salary, age, health and other
qualifications make him eligible to participate.
3.7 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred
or paid by the executive in connection with the performance of his
duties hereunder, upon presentation by the
<PAGE>
Executive of Documentation, expense statements, vouchers and/or such
other supporting information as the Company may request; provided,
--------
however, that the nature and amount of such expenses from time to
-------
time.
4. Employment Termination.
----------------------
The employment of the Executive pursuant to this Agreement shall terminate
upon the occurrence of any of the following:
4.1 Expiration of the Employment Period in accordance with Section 1;
4.2 At the election of the Company, for Cause (as hereinafter defined)
immediately upon written notice by the Company to the Executive. For
purposes of this Agreement, "Cause" shall mean (a) a good faith
finding by the Board, after notice to the Executive and an opportunity
to be heard, of the failure of the Executive to perform his reasonably
assigned duties (as per Section 2), or the Executive's gross
dishonesty, gross negligence or gross misconduct, or (b) the
conviction of the Executive of, or the entry of pleading of guilty or
nolo contendere by the Executive to, any felony;
4.3 Thirty days after the death or Disability (as hereinafter defined) of
the Executive. For purposes of this Agreement, "Disability" shall
mean the inability of the Executive, due to a physical or mental
disability, for a period of 90 days, whether or not consecutive,
during any 360-day period to perform, with or without reasonable
accommodation, the services contemplated under this Agreement. A
determination of Disability shall be made by a physician satisfactory
to both the Executive and the Company; provided that if the Executive
and the Company do not agree on a physician, the Executive and the
Company shall each select a physician and these two together shall
select a third physician, whose determination as to Disability shall
be binding on all parties, or
4.4 At the election of the Executive, upon written notice of termination,
for Good Reason (as hereinafter defined). For purposes of this
Agreement, "Good Reason" shall mean (i) any significant diminution in
the duties of Executive under this Agreement or (ii) the Company's
requirement that the Executive relocate beyond the greater New York
metropolitan area; or (iii) a failure by the Board of Directors to
provide the options as per section 3.4 within six (6) months of the
commencement date.
4.5 At the election of the Executive, upon not less than one month's prior
written notice of termination, or at the election of the Company, upon
written notice of termination.
<PAGE>
5. Effect of Termination.
---------------------
5.1 Expiration, Termination for Cause or at the Election of the Executive.
---------------------------------------------------------------------
In the event the Employment Period expires pursuant to Section 4.1, or
the Executive's employment is terminated for Cause pursuant to Section
4.2, or the Executive's employment is terminated at the election of
the executive pursuant to Section 4.5, the Company shall, through the
last day of his actual employment by the Company, continue to pay to
the Executive his base salary as in effect on the date or termination
and continue to provide to the executive the fringe benefits available
to him as of the date of termination under Section 3.5.
5.2 Termination for Death or Disability. If the Executive's employment is
-----------------------------------
terminated due to death or Disability pursuant to Section 4.3, the
Company shall continue to pay to the estate of the Executive or to the
Executive, as the case may be, for a period of 90 days after the
termination of employment due to death or Disability, the Executive's
base salary as in effect on the date of termination. In addition, all
earned performance bonuses as specified in 3.3, or vested options as
specified in 3.4, will go to the Executive's estate.
5.3 Termination by the Executive for Good Reason or at the Election of the
----------------------------------------------------------------------
Company. In the event the Executive's employment is terminated by the
-------
Executive for Good Reason pursuant to Section 4.4 or at the election
of the Company pursuant to Section 4.5, the Company shall, during the
Severance Period (as hereinafter defined), continue to pay to the
Executive his base salary as in effect on the date of termination
under Section 3.5. For purposes of this Agreement, the "Severance
Period" shall mean (i) if such employment termination occurs prior to
the second anniversary of the Commencement Date, a period of nine
months after such termination, and (ii) if such employment termination
occurs on or after the second anniversary of the Commencement Date but
prior to the fourth anniversary of the Commencement Date, a period of
six months after such termination of employment.
5.4 Survival. The provisions of Sections 6 and 7 shall survive the
--------
termination of this Agreement.
6. Non-Compete.
-----------
(a) During the Executive's active employment and for a period of one
year after the termination or expiration thereof, the Executive
will not:
<PAGE>
(i) be a partner, stockholder (other than as the holder of not more
than one percent (1%) of the total outstanding stock of),
officer, employee, consultant, director, joint venturer, investor
or lender of or to America Online, Inc., CompuServe Corporation,
Microsoft Network, AT&T WorldNet, Netcom On-Line Communications
Services, Inc., MCI Internet, PSINet Inc., GTE Internetworking,
EarthLink Network, Inc., MindSpring Enterprises, Inc., Concentric
Network Corporation or any corporation or other entity acquiring
any of the foregoing; or
(ii) directly or indirectly recruit, solicit or induce, or attempt to
induce, any employee or employees of the Company to terminate
their employment with, or otherwise cease their relationship with
the Company; or
(iii) directly or indirectly solicit, divert or take away, or attempt
to divert or to take away, the business or patronage of any of
the clients, customers or accounts, or prospective clients,
customers or accounts, of the Company, including but not limited
to those clients, customers or accounts which were contacted,
solicited or served by the Executive while employed by the
Company.
(b) If any restriction set forth in this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range
of activities or in too broad a geographic area, it shall be
interpreted to extend only over the maximum period of time, range
of activities or geographic area as to which it may be
enforceable.
(c) The restrictions contained in this Section 6 are necessary for
the protection of the business and goodwill of the Company and
are considered by the Executive to be reasonable for such
purposes. The Executive agrees that any breach of this Section 6
will cause the Company substantial and irrevocable damage and
therefore, in the event of any such breach, in addition to such
other remedies which may be available, the Company shall have the
right to seek specific performance and injunctive relief.
(d) Unless the context otherwise requires, all references in this
Section 6 and in Section 7 below to the "Company" shall include
all current or future subsidiaries or affiliates of the Company.
<PAGE>
7. Proprietary Information and Developments.
----------------------------------------
7.1 Proprietary Information.
-----------------------
(a) The Executive agrees that all information and know-how related to
the activities of the Company, whether or not in writing, of a
private, secret or confidential nature concerning the Company's
business or financial affairs collectively, ("Proprietary
Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary
Information may include inventions, products, processes, methods,
techniques, formulas, compositions, compounds, projects,
developments, plans, research data, clinical data, financial
data, personal data, computer programs, and customer and supplier
lists. The Executive will not disclose any Proprietary
Information to others outside the Company or use the same for any
unauthorized purposes without written approval by an officer of
the Company, either during or after his employment, unless and
until such Proprietary Information has become public knowledge
without fault by the Executive.
(b) The Executive agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program
listings, or other written, photographic, or other tangible
material containing Proprietary Information, whether created by
the Executive or others, which shall come into his custody or
possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of
his duties for the Company.
(c) The Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in
paragraphs (a) and (b) above, also extends to such types of
information, know-how, records and tangible property of customers
of the Company or suppliers to the Company or other third parties
who may have disclosed or entrusted the same to the Company or to
the Executive in the course of the Company's business.
7.2 Developments.
------------
(a) The Executive will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods,
developments, software, and works of authorship, related to the
<PAGE>
activities of the Company, whether patentable or not, which are
created, made, conceived or reduced to practice by the Executive
or under his direction or jointly with others during his
employment by the Company, whether or not during normal working
hours or on the premises of the Company (all of which are
collectively referred to in this Agreement as "Developments").
(b) The Executive agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all
his right, title and interest in and to all Developments and all
related patents, patent applications, copyrights and copyright
applications.
(c) The Executive agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to
the procurement, maintenance and enforcement of copyrights and
patents (both in the United States and foreign countries)
relating to Developments. The Executive shall sign all papers,
including, without limitation, copyright applications, patent
applications, declarations, oaths, formal assignments, assignment
of priority rights, and powers of attorney, which the Company may
deem necessary or desirable in order to protect its rights and
interests in any Development.
(d) Notwithstanding the foregoing, this Section 7.2 shall not apply
to Developments which do not relate to the present or planned
business or research and development of the Company and which are
made and conceived by the Executive not during normal working
hours, not on the Company's premises and not using the Company's
tools, devices, equipment or Proprietary Information.
7.3 Other Agreements. The Executive hereby represents that his
----------------
performance of all the terms of this Agreement and as an employee of
the Company does not and will not breach the terms of any agreement
with any previous employer or other party to refrain from using or
disclosing any trade secret, confidential or proprietary information,
knowledge or data acquired by him in confidence or in trust prior to
his employment with the Company or to refrain from competing, directly
or indirectly, with the business of such previous employer or any
other party.
8. Notices.
-------
All notices required or permitted under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon sending, by
registered or certified mail, postage prepaid, addressed to the other party
at the address
<PAGE>
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 8.
9. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the
singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether written or
oral, relating to the subject matter of this Agreement.
11. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Executive.
12. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of New York in the United States, without
reference to conflict of laws principles.
13. Successor and Assigns.
---------------------
This Agreement shall be binding upon and inure to the benefit of both
parties and their respective successors and assigns, including any
corporation with which or into which the Company may be merged or which may
succeed to its assets or business; provided, however, that the obligations
of the Executive are personal and shall not be assigned by him.
14. Miscellaneous.
-------------
14.1 No delay or omission by either the Company or the Executive in
exercising any right under this Agreement shall operate as a waiver of
that or any other right. A wavier or consent given by either the
Company or the Executive on any one occasion shall be effective only
in that instance and shall not be construed as a bar or waiver of any
right on any other occasion.
14.2 The captions of the sections of this Agreement are for convenience of
reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired
thereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
PRODIGY SERVICES CORPORATION
By: /s/ Inder Gopal
-----------------------------------------
Title: ____________________________________
EXECUTIVE
/s/ James P. Dougherty 11/24/97
--------------------------------------------
James P. Dougherty
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the 14th day of
September 1998, between Prodigy Communications Corporation, a Delaware
corporation (the "Company"), with its principal place of business at 44 So.
Broadway, White Plains, New York 10601, and Andrea S. Hirsch, residing at 345
East 86th Street, Apt. 8B, New York, NY 10028, (the "Executive").
WHEREAS, the Company desires to employ the Executive as Executive Vice
President of the Company, and the Executive desires to be employed in that
capacity;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Term of Employment.
------------------
The Company hereby agrees to employ the Executive, and the Executive hereby
accepts employment with the Company, upon the terms set forth in this Agreement,
for the period commencing on September 14, 1998 (the "Commencement Date"), and
ending on September 13, 2001 (the "Employment Period"), unless sooner terminated
in accordance with the provisions of Section 4.
2. Title; Capacity.
---------------
The Executive shall serve as Executive Vice President, Business Development
and General Counsel of the Company. The Executive shall be based in White
Plains, New York or such other place within the greater New York metropolitan
area as the Board of Directors of the Company (the "Board") shall determine.
The Executive shall report to and be subject to the supervision of, and shall
have such authority as is delegated to Executive by the Chairman and Chief
Executive Officer or such other senior executive that may be designated by the
Chairman.
The Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position, and such other duties and
responsibilities as the Chairman shall from time to time reasonably assign to
the Executive. The Executive shall devote Executive's entire business time,
attention and energies to the business and interests of the Company during the
Employment Period. The Executive shall abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive, in accordance with its
------
normal payroll practices, an annual base salary of $190,000 commencing
on the Commencement Date. Based on performance, such salary shall be
subject to increase consistent with existing merit increase guidelines
in effect February 1999.
<PAGE>
3.2 Performance Bonuses. Effective January 1, 1999, the Executive shall be
-------------------
eligible to participate in an annual bonus plan and receive up to 50%
of his annual base salary as a performance bonus during each calendar
year of the Employment Period. During each such year, 50% of such bonus
shall be contingent upon the successful completion of personal goals as
mutually agreed between the Executive and the Chairman, and 50% of such
bonus shall be contingent upon the successful completion of corporate
goals as determined by the Company. Such performance bonus shall be
determined and paid, in cash, within 45 days after the end of each such
calendar year during the Employment Period. Further, the Executive does
not have to be employed by the Company beyond the last day of the
applicable year in order to be eligible to receive a bonus payment.
3.3 Sign-On Bonus. The Company shall pay the Executive a guaranteed sign-on
-------------
bonus of $180,000, less applicable withholdings, in two (2)
installments, with the first payment of $60,000 payable on the
Executive's hire date and the second payment, in the amount of
$120,000, payable on December 31, 1998.
3.4 Option Grant.
------------
(a) The Company shall grant the Executive a stock option to purchase
375,000 shares of common stock of the Company at an exercise price equal to
90% of the IPO price, vesting in three (3) equal annual installments (except
as otherwise provided in Section 5.3), with the first vesting to occur on
the first anniversary of the Commencement Date. If, within six(6) months of
the Executive's Commencement Date, the Company does not complete a public
offering, the stock price on all of the above mentioned shares shall revert
to $2.00 per share.
(b) The Executive, if requested by the Company and the managing
underwriter of the initial public offering of the Company's securities (the
"IPO"), shall not sell publicly or otherwise transfer or dispose of any
securities of the Company held by the Executive for a specified period of
time (not to exceed 270 days), following the effective date of the
registration statement for the IPO; provided that all then executive
-------- ----
officers, directors and holders of 5% or more of the outstanding stock of
the Company enter into similar agreements. The Executive acknowledges that
no representations have been made to him concerning the size, occurrence,
valuation or timing of any IPO.
3.5 Fringe Benefits. The Executive shall be entitled to participate in all
---------------
fringe benefit programs that the Company establishes and makes
available to its employees from time to time to the extent that
Executive's position, tenure, salary, age, health and other
qualifications make him eligible to participate.
3.6 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred or
paid by the Executive in connection with the performance of his duties
hereunder, upon presentation by the Executive of documentation, expense
statements, vouchers and/or such other supporting information as the
Company may request; provided, however, that the nature and amount of
-------- -------
such expenses shall be subject to the Company's expense policies as in
effect from time to time.
<PAGE>
4. Employment Termination.
----------------------
The employment of the Executive pursuant to this Agreement shall terminate
upon the occurrence of any of the following:
4.1 At the election of the Company, for Cause (as hereinafter defined)
immediately upon written notice by the Company to the Executive. For
purposes of this Agreement, "Cause" shall mean (a) a good faith finding
by the Board, after notice to the Executive and an opportunity to be
heard, of the failure of the Executive to perform his reasonably
assigned duties, or the Executive's gross dishonesty, gross negligence
or gross misconduct, or (b) the conviction of the Executive of, or the
entry of a plea of guilty or nolo contendere by the Executive to, any
felony;
4.2 Thirty days after the death or Disability (as hereinafter defined) of
the Executive. For purposes of this Agreement, "Disability" shall mean
the inability of the Executive, due to a physical or mental disability,
for a period of 90 days, whether or not consecutive, during any 360-day
period to perform, with or without reasonable accommodation, the
services contemplated under this Agreement. A determination of
Disability shall be made by a physician satisfactory to both the
Executive and the Company; provided that if the Executive and the
Company do not agree on a physician, the Executive and the Company
shall each select a physician and these two together shall select a
third physician, whose determination as to Disability shall be binding
on all parties; or
4.3 At the election of the Executive, upon written notice of termination,
for Good Reason (as hereinafter defined). For purposes of this
Agreement, "Good Reason" shall mean (i) any significant diminution in
the duties of the Executive under this Agreement or (ii) the Company's
requirement that the Executive relocate beyond the greater New York
metropolitan area, or (iii) if there is a change in control of the
Company so that a single person or entity or an affiliated group of
persons or entities has control of the Company (as control is
understood under the Internal Revenue Code or securities laws of the
US).
4.4 At the election of the Executive, upon not less than two (2) weeks'
prior written notice of termination, or at the election of the Company,
upon written notice of termination.
4.5 Upon the expiration of the Employment Contract.
5. Effect of Termination.
---------------------
5.1 Termination for Cause or at Election of the Executive. In the event the
------------------------------------------------------
Executive's employment is terminated for Cause pursuant to Section 4.1,
or the Executive's employment is terminated at the election of the
Executive pursuant to Section 4.4, the Company shall, through the last
day of his actual employment by the Company, continue to pay to the
Executive his base salary as in effect on the date of notice of
termination and continue to provide to the Executive the fringe
benefits available to him under Section 3.5 hereof, as of the last day
of actual employment.
<PAGE>
5.2 Termination for Death or Disability. If the Executive's employment is
------------------------------------
terminated due to death or Disability pursuant to Section 4.2, the
Company shall continue to pay to the estate of the Executive or to the
Executive, as the case may be, for a period of 90 days after
termination of employment due to death or Disability, the Executive's
base salary as in effect on the date of termination.
5.3 Termination by the Executive for Good Reason or at Election of the
------------------------------------------------------------------
Company. If the Executive's employment is terminated by the Executive
--------
for Good Reason pursuant to Section 4.3 or at the election of the
Company pursuant to Section 4.4, the Company shall, during the
Severance Period (as hereinafter defined), continue to pay to the
Executive his base salary as in effect on the date of notice of
termination and continue to provide to the Executive the fringe
benefits available to him as of the date of notice of termination under
Section 3.5, except during the Severance Period no options shall vest.
Further, a pro rata share of the performance bonus referenced in
Section 3.2 shall be paid to the Executive covering the period from the
beginning of the calendar year up to the date of termination. For the
purposes of this Section 5.3, the performance bonus referenced in
Section 3.2 shall be calculated as 50% the Executive's annual base
salary. For purposes of this Agreement, the "Severance Period" shall
mean a period of six (6) months after such termination. Notwithstanding
the above, if the Executive's employment is terminated for any reason
during the first three (3) months of employment, there will be no
severance benefit payable to the Executive. If a termination for
reasons other than Cause occurs after three (3) months employment but
before the first anniversary of the Commencement Date, option vesting
shall be accelerated so that as of the termination date, one-third or
125,000 of the options granted shall be vested. In the event that
termination for reasons other than Cause occurs at any time following
the first anniversary of the Commencement Date, those options otherwise
scheduled to vest on the next vesting date specified in Section 3.4
shall be accelerated and shall vest, on a pro rata basis, for each full
or partial month that Executive remained employed by the Company
through the termination date. The Executive shall have three (3) months
after the termination date to exercise the vested options. If this
paragraph conflicts with any applicable Stock Option Agreement, this
paragraph shall control.
5.4 Termination at Expiration of Contract. If, prior to September 13, 2001,
--------------------------------------
the Company has not offered to renew the Employment Contract on terms
at least equal to those contained herein as modified during the
Employment Period by mutual agreement of the parties and for a term of
not less than one (1) year, the Company shall continue to pay the
Executive his base salary in effect on the date of termination for a
period of six (6) months after such termination and Executive shall
remain eligible to receive a performance bonus, calculated in
accordance with Section 3.2. The Company shall also provide to the
Executive during the Severance Period, the fringe benefits available to
him under Section 3.5.
5.5 Survival. The provisions of Sections 3.3, 5.2, 5.3 and 5.4 shall
---------
survive the expiration or termination of this Agreement under the
circumstances specified in those Sections for the periods specified in
such Sections. Sections 6 and 7 shall survive the termination of this
Agreement.
<PAGE>
6. Non-Compete.
------------
(a) During the Executive's active employment and for the Severance Period,
the Executive will not:
(i) be a partner, stockholder (other than as the holder of not more than
one percent (1%) of the total outstanding stock of), officer, employee,
consultant, director, joint venturer, investor or lender of or to America
Online, Inc., CompuServe Corporation, Microsoft Network, AT&T WorldNet,
Netcom On-Line Communications Services, Inc., EarthLink Network, Inc.,
MindSpring Enterprises, Inc., or any corporation or other entity acquiring
any of the foregoing; or involved in providing services that compete
directly with Prodigy; or
(ii) directly or indirectly recruit, solicit or induce, or attempt to
induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with the Company; or
(iii) directly or indirectly solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the clients,
customers or accounts, or prospective clients, customers or accounts, of the
Company, including but not limited to those clients, customers or accounts
which were contacted, solicited or served by the Executive while employed by
the Company.
(b) If any restriction set forth in this Section 6 is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(c) The restrictions contained in this Section 6 are necessary for the
protection of the business and goodwill of the Company and are considered by the
Executive to be reasonable for such purposes. The Executive agrees that any
breach of this Section 6 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific performance and injunctive relief.
(d) Unless the context otherwise requires, all references in this Section 6
and in Section 7 below to the "Company" shall include all current or future
subsidiaries or affiliates of the Company.
7. Proprietary Information and Developments.
-----------------------------------------
7.1 Proprietary Information.
------------------------
(a) The Executive agrees that all information and know-how related to the
activities of the Company, whether or not in writing, of a private, secret or
confidential nature concerning the Company's business or financial affairs
collectively, ("Proprietary Information") is and shall be the exclusive property
of the Company. By way of illustration, but not limitation, Proprietary
<PAGE>
Information may include inventions, products, processes, methods, techniques,
formulas, compositions, compounds, projects, developments, plans, research data,
clinical data, financial data, personnel data, computer programs, and customer
and supplier lists. The Executive will not disclose any Proprietary Information
to others outside the Company or use the same for any unauthorized purposes
without written approval by an officer of the Company, either during or after
his employment, unless and until such Proprietary information has become public
knowledge without fault by the Executive.
(b) The Executive agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by the Executive or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Executive only in the performance of his duties for
the Company.
(c) The Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs (a) and
(b) above, also extends to such types of information, know-how, records and
tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to the Executive in the course of the Company's business.
7.2 Developments.
-------------
(a) The Executive will make full and prompt disclosure to the Company of all
inventions, improvements, discoveries, methods, developments, software, and
works of authorship, related to the activities of the Company, whether
patentable or not, which are created, made, conceived or reduced to practice by
the Executive or under his direction or jointly with others during his
employment by the company, whether or not during normal working hours or on the
premises of the Company (all of which are collectively referred to in this
Agreement as "Developments").
(b) The Executive agrees to assign and does hereby assign to the Company (or
any person or entity designated by the Company) all his right, title and
interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. The Executive also
acknowledges that all work fixed in a tangible medium of expression shall be
deemed a work made for hire under the US Copyright Act such that the work is
owned by the Company at the moment of creation.
(c) The Executive agrees to cooperate fully with the Company, both during
and after his employment with the Company, with respect to the procurement,
maintenance and enforcement of copyrights and patents (both in the United States
and foreign countries) relating to Developments. The Executive shall sign all
papers, including, without limitation, copyright applications, patent
applications, declarations, oaths, formal assignments, assignment of priority
rights, and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interests in any Development.
<PAGE>
7.3 Other Agreements. The Executive hereby represents that his performance
-----------------
of all the terms of this Agreement and as an employee of the Company does not
and will not breach the terms of any agreement with any previous employer or
other party to refrain from using or disclosing any trade secret, confidential
or proprietary information, knowledge or data acquired by him in confidence or
in trust prior to his employment with the Company or to refrain from competing,
directly or indirectly, with the business of such previous employer or any other
party.
8. Notices.
--------
All notices required or permitted under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon sending, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown above, or at such other address or addresses as either party
shall designate to the other in accordance with this Section 8.
9. Pronouns.
---------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns and pronouns shall include the plural, and vice versa.
10. Entire Agreement.
-----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter of this Agreement, except that the Agreement
Regarding Confidential Information, the Prodigy Business Conduct Guidelines, and
other documents executed on the commencement of employment, shall remain in full
force and effect.
11. Amendment.
----------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Executive.
12. Governing Law.
--------------
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of New York in the United States, without reference
to conflict of law principles.
13. Successors and Assigns.
-----------------------
This Agreement shall be binding upon and inure to the benefit of both
parties and their respective successors and assigns, including any corporation
with which or into which the Company may be merged or which may succeed to its
assets or business; provided, however, that the obligations of the Executive are
personal and shall not be assigned by him.
14. Miscellaneous.
--------------
14.1 No delay or omission by either the Company or the Executive in
exercising any right under this Agreement shall operate as a waiver of that
or any other right. A waiver or consent given by either the Company or the
Executive on any one occasion shall be effective only in that instance and
shall not be construed as a bar or waiver of any right on any other
occasion.
<PAGE>
14.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Samuel Salameh
-------------------------------
Title: Chairman and, CEO
-------------------------------
EXECUTIVE
/s/ Andrea S. Hirsch
--------------------------------
Andrea S. Hirsch
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the 14th day of
December 1998, between Prodigy Communications Corporation, a Delaware
corporation (the "Company"), with its principal place of business at 44 South
Broadway, White Plains, New York 10601, and David Trachtenberg, residing at 1827
19th St. NW, Washington, DC 20009 (the "Executive").
WHEREAS, the Company desires to employ the Executive as President and Chief
Operating Officer of the Company, and the Executive desires to be employed in
that capacity;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Term of Employment.
------------------
The Company hereby agrees to employ the Executive, and the Executive hereby
accepts employment with the Company, upon the terms set forth in this Agreement,
for the period commencing on December 14, 1998 (the "Commencement Date"), and
ending on December 31, 2001 (the "Employment Period"), unless sooner terminated
in accordance with the provisions of Section 4.
2. Title; Capacity.
---------------
The Executive shall serve as President and Chief Operating Officer of the
Company. The Executive shall be based in White Plains, New York or such other
place within the greater New York metropolitan area as the Board of Directors of
the Company (the "Board") shall determine. The Executive shall report to and be
subject to the supervision of, and shall have such authority as is delegated to
Executive by the Company's Chief Executive Officer.
The Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position, and such other duties and
responsibilities as the Chief Executive Officer shall from time to time assign
to the Executive. The Executive shall devote Executive's entire business time,
attention and energies to the business and interests of the Company during the
Employment Period. The Executive shall abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive, in accordance with its
------
normal payroll practices, an annual base salary of $224,000 commencing on
the Commencement Date. Based on performance, such salary shall be subject
to increase consistent with existing merit increase guidelines.
3.2 Performance Bonuses. Effective January 1, 1999, the Executive shall
-------------------
be eligible to participate in an annual bonus plan and receive up to 50% of
his annual base salary as a
<PAGE>
performance bonus during each calendar year of the Employment Period.
During each such year, 50% of such bonus shall be contingent upon the
successful completion of personal goals as mutually agreed between the
Executive and the Chief Executive Officer, and 50% of such bonus shall be
contingent upon the successful completion of corporate goals as determined
by the Company. Such performance bonus shall be determined and paid within
45 days after the end of each such calendar year during the Employment
Period.
3.3 Sign-On Bonus. The Company shall pay the Executive a guaranteed
-------------
sign-on bonus of $74,000, less applicable withholdings, payable on the
Commencement Date.
3.4 Option Grant.
------------
(a) The Company shall grant the Executive stock options to purchase
375,000 shares of common stock of the Company at an exercise price equal to
$1.00 per share, and 125,000 shares of common stock of the Company at an
exercise price equal to $2.15 per share. These options shall vest in three
(3) equal annual installments (except as otherwise provided in Section
5.3), with the first vesting to occur on the first anniversary of the
Commencement Date, and the second and third vestings to occur on the second
and third anniversary dates, respectively. In the event of a change in
control of the Company (as defined in Section 4.3) the vesting schedule for
then unvested options will be accelerated so that a total of 50% of each
option grant (or such lesser amount as may then be outstanding) will vest
on the effective date of the change of control. Thereafter, the vesting
schedule for the remaining outstanding options shall remain unchanged.
(b) In addition to the option grant set forth in the preceeding section,
the Company agrees to consider in good faith on an annual bases the grant
of additional stock options to Executive.
(c) The Executive, if requested by the Company and the managing
underwriter of the initial public offering of the Company's securities (the
"IPO"), shall not sell publicly or otherwise transfer or dispose of any
securities of the Company held by the Executive for a specified period of
time (not to exceed 270 days), following the effective date of the
registration statement for the IPO; provided that all then executive
-------------
officers, directors and holders of 5% or more of the outstanding stock of
the Company enter into similar agreements. The Executive acknowledges that
no representations have been made to him concerning the size, occurrence,
valuation or timing of any IPO.
3.5 Fringe Benefits. The Executive shall be entitled to participate in
---------------
all fringe benefit programs that the Company establishes and makes
available to its employees from time to time to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him
eligible to participate. The Executive's vacation entitlement shall be four
weeks per year.
3.6 Reimbursement of Expenses. The Company shall reimburse the
-------------------------
Executive for all reasonable travel, entertainment and other expenses
incurred or paid by the Executive in connection with the performance of his
duties hereunder, upon presentation by the Executive of documentation,
expense statements, vouchers and/or such other supporting information as
the Company may request; provided, however, that the nature and amount of
-------- -------
such expenses shall be subject to the Company's expense policies as in
effect from time to time.
<PAGE>
3.7 Commutation Expenses: Executive shall use best reasonable efforts to
---------------------
relocate to the greater New York metropolitan area within six months of the
Commencement Date. For the first six months following the Commencement
Date (the "Commutation Period") the Company shall reimburse the Executive
for air or ground travel between Washington, D.C. and New York and related
ground transportation costs, not to exceed one round trip per week.
Executive agrees to use best efforts to minimize such commutation expenses
through advance bookings. Additionally, the Company will reimburse
Executive for other, reasonable and appropriate business related expenses
incurred during the Commutation Period, upon presentation by the Executive
of documentation, expense statements, vouchers and/or such other supporting
information as the Company may request.
3.8 Relocation Expenses ; Housing Allowance. During the Commutation
---------------------------------------
Period, the Company shall reimburse Executive for his reasonable housing
expenses in the greater New York metropolitan area. The parties contemplate
that during the first few weeks of employment such expenses shall be
comprised of hotel charges. At such time as Executive identifies a suitable
furnished corporate apartment for lease, the Company shall make the lease
payments directly to the landlord for the remainder of the Commutation
Period.
The Company shall reimburse Executive for reasonable expenses incurred
by Executive in relocating to the greater New York metropolitan area.
Following relocation, the Company shall pay to Executive a housing
allowance of $3,500 per month. The housing allowance will be included in
the Executive's biweekly paychecks and will be subject to applicable
withholding.
3.9 Reimbursement for Legal Expenses. The Company will reimburse
--------------------------------
Executive for reasonable attorneys' fees incurred in connection with the
review of this Employment Agreement.
3.10 Car Allowance. The Company shall reimburse Executive for those
-------------
amounts paid by Executive in connection with the cancellation of his
current car leasing arrangement, such amount not to exceed $5,000.
Additionally, the Company shall provide Executive with a car allowance of
$2,166 per month. The car allowance will be included in the Executive's
biweekly paychecks and will be subject to applicable withholding.
4. Employment Termination
----------------------
The employment of the Executive pursuant to this Agreement shall terminate
upon the occurrence of any of the following:
4.1 At the election of the Company, for Cause (as hereinafter defined)
immediately upon written notice by the Company to the Executive. For
purposes of this Agreement, "Cause" shall mean (a) a good faith finding by
the Board, after notice to the Executive and an opportunity to be heard, of
the failure of the Executive to perform his reasonably assigned duties, or
the Executive's gross dishonesty, gross negligence or gross misconduct, or
(b) the conviction of the Executive of, or the entry of a plea of guilty or
nolo contendere by the Executive to, any felony;
4.2 Thirty days after the death or Disability (as hereinafter defined) of
the Executive.
<PAGE>
For purposes of this Agreement, "Disability" shall mean the inability of
the Executive, due to a physical or mental disability, for a period of 90
days, whether or not consecutive, during any 360-day period to perform,
with or without reasonable accommodation, the services contemplated under
this Agreement. A determination of Disability shall be made by a physician
satisfactory to both the Executive and the Company; provided that if the
-------- ----
Executive and the Company do not agree on a physician, the Executive and
the Company shall each select a physician and these two together shall
select a third physician, whose determination as to Disability shall be
binding on all parties; or
4.3 At the election of the Executive, upon written notice of termination,
for Good Reason (as hereinafter defined). For purposes of this Agreement,
"Good Reason" shall mean (i) any significant diminution in the duties of
the Executive under this Agreement or (ii) the Company's requirement that
the Executive relocate beyond the greater New York metropolitan area, or
(iii) if there is a change in control of the Company so that a single
person or entity or an affiliated group of persons or entities has control
of the Company (as control is understood under the Internal Revenue Code or
securities laws of the US) as a result of which Executive's employment with
the Company is involuntarily terminated.
4.4 At the election of the Executive, upon not less than four (4) weeks'
prior written notice of termination, or at the election of the Company,
upon written notice of termination.
4.5 Upon the expiration of the Employment Contract.
5. Effect of Termination.
---------------------
5.1 Termination for Cause or at Election of the Executive. In the event
-----------------------------------------------------
the Executive's employment is terminated for Cause pursuant to Section 4.1,
or the Executive's employment is terminated at the election of the
Executive pursuant to Section 4.4, the Company shall, through the last day
of his actual employment by the Company, continue to pay to the Executive
his base salary as in effect on the date of notice of termination and
continue to provide to the Executive the fringe benefits available to him
under Section 3.5 hereof, as of the last day of actual employment.
5.2 Termination for Death or Disability. If the Executive's employment is
-----------------------------------
terminated due to death or Disability pursuant to Section 4.2, the Company
shall continue to pay to the estate of the Executive or to the Executive,
as the case may be, for a period of 90 days after termination of employment
due to death or Disability, the Executive's base salary as in effect on the
date of termination.
5.3 Termination by the Executive for Good Reason or at Election of the
------------------------------------------------------------------
Company. If the Executive's employment is terminated by the Executive for
-------
Good Reason pursuant to Section 4.3 or at the election of the Company
pursuant to Section 4.4, the Company shall, during the Severance Period (as
hereinafter defined), continue to pay to the Executive his base salary as
in effect on the date of notice of termination and continue to provide to
the Executive the fringe benefits available to him as of the date of notice
of termination under Section 3.5. In addition, the Company shall, for the
first six months of the Severance Period, continue to pay the allowances
specified in Sections 3.8 and 3.10. . Further, a pro rata share of the
performance bonus referenced in Section 3.2 shall be paid to the Executive
<PAGE>
covering the period from the beginning of the calendar year up to the date
of termination. For the purposes of this Section 5.3, the performance bonus
referenced in Section 3.2 shall be calculated as 50% the Executive's annual
base salary. For purposes of this Agreement, the "Severance Period" shall
mean a period of six (6) months after such termination, increasing by one
month for every six months (or part thereof) of Executive's employment with
the Company, but in no event to exceed twelve months in the aggregate.
Additionally, option vesting shall be accelerated so that as of the
termination date, one-half of the then unvested options granted at each
strike price shall be vested. No further options shall vest within the
Severance Period. The Executive shall have one year after the termination
date to exercise the vested options. If this paragraph conflicts with any
applicable Stock Option Agreement, this paragraph shall control.
5.4 Termination at Expiration of Contract. If, prior to December 31,
-------------------------------------
2001, the Company has not offered to renew the Employment Contract on terms
at least equal to those contained herein as modified during the Employment
Period by mutual agreement of the parties and for a term of not less than
one (1) year, the Company shall continue to pay the Executive his base
salary in effect on the date of termination for a period of six (6) months
after such termination and Executive shall remain eligible to receive a
performance bonus, calculated in accordance with Section 3.2. In addition,
during this six-month period, the Company shall also provide to the
Executive the fringe benefits available to him under Section 3.5 as well as
pay to the Executive, during the first three months of the six-month
period, the allowances specified in Sections 3.8 and 3.10. If Executive is
terminated under this Section 5.4, the "Severance Period" for the purposes
of Section 6 will be six (6) months.
5.5 Survival. The provisions of Sections 3.3, 5.2, 5.3 and 5.4 shall
--------
survive the expiration or termination of this Agreement under the
circumstances specified in those Sections for the periods specified in such
Sections. Sections 6 and 7 shall survive the termination of this Agreement.
6. Non-Compete.
-----------
(a) During the Executive's active employment and for the Severance Period,
the Executive will not:
(i) be a partner, stockholder (other than as the holder of not more
than one percent (1%) of the total outstanding stock of), officer,
employee, consultant, director, joint venturer, investor or lender of
or to America Online, Inc., CompuServe Corporation, Microsoft Network,
AT&T WorldNet, Netcom On-Line Communications Services, Inc., EarthLink
Network, Inc., MindSpring Enterprises, Inc., or any corporation or
other entity acquiring any of the foregoing; or involved in providing
Internet Access ervices that compete directly with Prodigy; or
(ii) directly or indirectly recruit, solicit or induce, or attempt
to induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with the
Company; or
(iii) directly or indirectly solicit, divert or take away, or attempt
to divert or to take away, the business or patronage of any of the
clients, customers or accounts,
<PAGE>
or prospective clients, customers or accounts, of the Company,
including but not limited to those clients, customers or accounts
which were contacted, solicited or served by the Executive while
employed by the Company.
(b) If any restriction set forth in this Section 6 is found by any court
of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which
it may be enforceable.
(c) The restrictions contained in this Section 6 are necessary for the
protection of the business and goodwill of the Company and are considered
by the Executive to be reasonable for such purposes. The Executive agrees
that any breach of this Section 6 will cause the Company substantial and
irrevocable damage and therefore, in the event of any such breach, in
addition to such other remedies which may be available, the Company shall
have the right to seek specific performance and injunctive relief.
(d) Unless the context otherwise requires, all references in this Section
6 and in Section 7 below to the "Company" shall include all current or
future subsidiaries or affiliates of the Company.
7. Proprietary Information and Developments.
----------------------------------------
7.1 Proprietary Information.
-----------------------
(a) The Executive agrees that all information and know-how related to
the activities of the Company, whether or not in writing, of a
private, secret or confidential nature concerning the Company's
business or financial affairs (collectively, "Proprietary
Information") is and shall be the exclusive property of the Company.
By way of illustration, but not limitation, Proprietary Information
may include inventions, products, processes, methods, techniques,
formulas, compositions, compounds, projects, developments, plans,
research data, clinical data, financial data, personnel data, computer
programs, and customer and supplier lists. The Executive will not
disclose any Proprietary Information to others outside the Company or
use the same for any unauthorized purposes without written approval by
an officer of the Company, either during or after his employment,
unless and until such Proprietary information has become public
knowledge without fault by the Executive.
(b) The Executive agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program
listings, or other written, photographic, or other tangible material
containing Proprietary Information, whether created by the Executive
or others, which shall come into his custody or possession, shall be
and are the exclusive property of the Company to be used by the
Executive only in the performance of his duties for the Company.
(c) The Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs
(a) and (b) above, also extends to such types of information, know-
how, records and tangible property of customers of the Company or
suppliers to the Company or other third parties who
<PAGE>
may have disclosed or entrusted the same to the Company or to the
Executive in the course of the Company's business.
7.2 Developments.
------------
(a) The Executive will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods, developments,
software, and works of authorship, related to the activities of the
Company, whether patentable or not, which are created, made, conceived
or reduced to practice by the Executive or under his direction or
jointly with others during his employment by the company, whether or
not during normal working hours or on the premises of the Company (all
of which are collectively referred to in this Agreement as
"Developments").
(b) The Executive agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his
right, title and interest in and to all Developments and all related
patents, patent applications, copyrights and copyright applications.
The Executive also acknowledges that all work fixed in a tangible
medium of expression shall be deemed a work made for hire under the US
Copyright Act such that the work is owned by the Company at the moment
of creation.
(c) The Executive agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents
(both in the United States and foreign countries) relating to
Developments. The Executive shall sign all papers, including, without
limitation, copyright applications, patent applications, declarations,
oaths, formal assignments, assignment of priority rights, and powers
of attorney, which the Company may deem necessary or desirable in
order to protect its rights and interests in any Development.
7.3 Other Agreements. The Executive hereby represents that his
----------------
performance of all the terms of this Agreement and as an employee of the
Company does not and will not breach the terms of any agreement with any
previous employer or other party to refrain from using or disclosing any
trade secret, confidential or proprietary information, knowledge or data
acquired by him in confidence or in trust prior to his employment with the
Company or to refrain from competing, directly or indirectly, with the
business of such previous employer or any other party.
8. Notices. All notices required or permitted under this Agreement shall be
-------
in writing and shall be deemed effective upon personal delivery or upon sending,
by registered or certified mail, postage prepaid, addressed to the other party
at the address shown above, or at such other address or addresses as either
party shall designate to the other in accordance with this Section 8.
9. Pronouns. Whenever the context may require, any pronouns used in this
--------
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. Entire Agreement. This Agreement constitutes the entire agreement between
----------------
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the
<PAGE>
subject matter of this Agreement, except that the Agreement Regarding
Confidential Information, the Prodigy Business Conduct Guidelines, and other
documents executed on the commencement of employment, shall remain in full force
and effect.
11. Amendment. This Agreement may be amended or modified only by a written
---------
instrument executed by both the Company and the Executive.
12. Governing Law. This Agreement shall be construed, interpreted and enforced
-------------
in accordance with the laws of the State of New York in the United States,
without reference to conflict of law principles.
13. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business; provided, however, that the
-------- -------
obligations of the Executive are personal and shall not be assigned by him.
14. Miscellaneous.
-------------
14.1 No delay or omission by either the Company or the Executive in
exercising any right under this Agreement shall operate as a waiver of that
or any other right. A waiver or consent given by either the Company or the
Executive on any one occasion shall be effective only in that instance and
shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for convenience of
reference only and in no way define, limit or affect the scope or substance
of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Samer Salameh
------------------------
Title:____________________________
EXECUTIVE
/s/ David Trachtenberg
----------------------------------
David Trachtenberg
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the first of June
1998, between Prodigy Services Corporation, a Delaware corporation (the
"Company") and an indirect wholly-owned subsidiary of Prodigy, Inc. (the
"Parent"), with its principal place of business at 44 So. Broadway, White
Plains, New York 10601, and Carena M. Pooth, residing at RRl Box 45, Poughquag,
NY 12570, (the "Executive").
WHEREAS, the Company desires to employ the Executive as Senior Vice
President of the Company, and the Executive desires to be employed in that
capacity;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Term of Employment.
------------------
The Company hereby agrees to employ the Executive, and the Executive hereby
accepts employment with the Company, upon the terms set forth in this Agreement,
for the period commencing on June 1, 1998 (the "Commencement Date"), and ending
on May 31, 2000 (the "Employment Period"), unless sooner terminated in
accordance with the provisions of Section 4.
2. Title; Capacity.
---------------
The Executive shall serve as Senior Vice President of the Company. The
Executive shall be based in White Plains, New York or such other place within
the greater New York metropolitan area as the Board of Directors of the Company
(the "Board") shall determine. The Executive shall report to and be subject to
the supervision of, and shall have such authority as is delegated to Executive
by the President and Chief Executive Officer of the Company or Parent (the
"President"), or such other senior executive as the President shall designate.
The Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position, and such other duties and
responsibilities as the President shall from time to time reasonably assign to
the Executive. The Executive shall devote Executive's entire business time,
attention and energies to the business and interests of the Company during the
Employment Period. The Executive shall abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
3. Compensation and Benefits.
-------------------------
3.1 Salary. The Company shall pay the Executive, in accordance with its
------
normal payroll practices, an annual base salary of $ 175,000 commencing on
the Commencement Date. Such salary shall be subject to increase (but not
decrease) thereafter as determined by the Board. Such salary was increased
to $150,000 annually on August 1, 1998.
<PAGE>
3.2 Performance Bonuses. The Executive shall be eligible to receive up to
-------------------
30% of his annual base salary as a performance bonus during each calendar
year of the Employment Period with any partial calendar year of employment
subject to pro rata adjustment. For calendar year 1998, bonuses shall be
paid based upon the Executive's duration of employment during the calendar
year, without regard to the commencement date of this Agreement. During
each such year, 50% of such bonus shall be contingent upon the successful
completion of personal goals as mutually agreed between the Executive and
the President, and 50% of such bonus shall be contingent upon the
successful completion of corporate goals as determined by the Company.
Such performance bonus shall be determined and paid within 45 days after
the end of each such calendar year during the Employment Period. Further,
the Executive does not have to be employed by the Company beyond the last
day of the applicable year in order to be eligible to receive a bonus
payment.
3.3 Option Grant.
------------
a. On July 12, 1996, the Parent granted the Executive a stock option
to purchase 20,000 shares of common stock of the Parent at an exercise
price of $3.00 per share, vesting in four (4) equal annual installments,
with the first vesting to occur on the first anniversary of the grant date.
On December 5, 1996, the Parent granted the Executive a stock option to
purchase 9,000 shares of common stock of the Parent at an exercise price of
$3.00 per share, vesting in three (3) equal annual installments, with the
first vesting to occur on July 12, 1997. On August 1, 1997, the Parent
granted the Executive a stock option to purchase 71,000 shares of common
stock of the Parent at an exercise price of $3.00 per share, vesting in
five (5) annual installments, with the first vesting to occur on July 12,
1997. On January 26, 1998, the Parent granted the Executive a stock option
to purchase 275,000 shares of common stock of the Parent at an exercise
price of $2.00 per share, vesting in three (3) equal annual installments,
with the first vesting to occur on the first anniversary of the grant date.
The parties acknowledge that the exercise price of all stock options
referred to in this Section 3.3 has been reduced to $ 1.00 per share.
b. The Executive, if requested by the Parent and the managing
underwriter of the initial public offering of the Parent's securities (the
"IPO"), shall not sell publicly or otherwise transfer or dispose of any
securities of the Parent held by the Executive for a specified period of
time (not to exceed 270 days), following the effective date of the
registration statement for the IPO; provided that all then executive
-------- ----
officers, directors and holders of 5% or more of the outstanding stock of
the Parent enter into similar agreements. The Executive acknowledges that
no representations have been made to him concerning the size, occurrence,
valuation or timing of any IPO.
3.4 Acceleration of Vesting Schedule. If there is a change of control of
--------------------------------
the Parent, pursuant to which one single person or entity has control of
the Parent (as control is understood under the Internal Revenue Code or
securities laws of the US), in 1998, the vesting schedule on all options
previously granted to the Executive will be accelerated so that a total of
50% of the Executive's options will be vested on the effective date of such
merger or acquisition. The vesting schedule shall thereafter remain the
same so that the remaining shares vest without giving effect to the shares
which vested on an accelerated basis.
3.5 Vacation. The Executive shall be entitled to four (4) weeks annual
--------
vacation, to be taken at times selected by the Executive and reasonably
acceptable to the President. Unused vacation shall accrue from year to
year only to the extent permitted under the Company's vacation policies in
effect from time to time.
3.6 Fringe Benefits. The Executive shall be entitled to participate in
---------------
all fringe benefit programs that the Company establishes and makes
available to its employees from time to time to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him
eligible to participate.
2
<PAGE>
3.7 Reimbursement of Expenses. The Company shall reimburse the Executive
-------------------------
for all reasonable travel, entertainment and other expenses incurred or
paid by the Executive in connection with the performance of his duties
hereunder, upon presentation by the Executive of documentation, expense
statements, vouchers and/or such other supporting information as the
Company may request; provided, however, that the nature and amount of such
expenses shall be subject to the Company's expense policies as in effect
from time to time.
4. Employment Termination.
----------------------
The employment of the Executive pursuant to this Agreement shall terminate
upon the occurrence of any of the following:
4.1 At the election of the Company, for Cause (as hereinafter defined)
immediately upon written notice by the Company to the Executive. For
purposes of this Agreement, "Cause" shall mean (a) a good faith finding by
the Board, after notice to the Executive and an opportunity to be heard, of
the failure of the Executive to perform his reasonably assigned duties, or
the Executive's gross dishonesty, gross negligence or gross misconduct, or
(b) the conviction of the Executive of; or the entry of a plea of guilty or
nolo contendere by the Executive to, any felony;
4.2 Thirty days after the death or Disability (as hereinafter defined) of
the Executive. For purposes of this Agreement, "Disability" shall mean the
inability of the Executive, due to a physical or mental disability, for a
period of 90 days, whether or not consecutive, during any 360-day period to
perform, with or without reasonable accommodation, the services
contemplated under this Agreement. A determination of Disability shall be
made by a physician satisfactory to both the Executive and the Company;
provided that if the Executive and the Company do not agree on a physician,
the Executive and the Company shall each select a physician and these two
together shall select a third physician, whose determination as to
Disability shall be binding on all parties; or
4.3 At the election of the Executive, upon written notice of termination,
for Good Reason (as hereinafter defined). For purposes of this Agreement,
"Good Reason" shall mean (i) any significant diminution in the duties of
the Executive under this Agreement or (ii) the Company's requirement that
the Executive relocate beyond the greater New York metropolitan area, or
(iii) if there is a change in control of the Parent so that a single person
or entity has control of the Parent (as control is understood under the
Internal Revenue Code or securities laws of the US).
4.4 At the election of the Executive, upon not less than two (2) weeks'
prior written notice of termination, or at the election of the Company,
upon written notice of termination.
4.5 Upon the expiration of the Employment Contract.
5. Effect of Termination.
---------------------
5.1 Termination for Cause or at Election of the Executive. In the event
-----------------------------------------------------
the Executive's employment is terminated for Cause pursuant to Section 4.1,
or the Executive's employment is terminated at the election of the
Executive pursuant to Section 4.4, the Company shall, through the last day
of his actual employment by the Company, continue to pay to the Executive
his base salary as in effect on the date of notice of termination and
continue to provide to the Executive the fringe benefits
3
<PAGE>
available to him under Section 3.6 hereof; as of the last day of actual
employment.
5.2 Termination for Death or Disability. If the Executive's employment is
-----------------------------------
terminated due to death or Disability pursuant to Section 4.2, the Company
shall continue to pay to the estate of the Executive or to the Executive,
as the case may be, for a period of 90 days after termination of employment
due to death or Disability, the Executive's base salary as in effect on the
date of termination.
5.3 Termination by the Executive for Good Reason or at Election of the
------------------------------------------------------------------
Company. If the Executive's employment is terminated by the Executive for
-------
Good Reason pursuant to Section 4.3 or at the election of the Company
pursuant to Section 4.4, the Company shall, during the Severance Period (as
hereinafter defined), continue to pay to the Executive his base salary as
in effect on the date of notice of termination and continue to provide to
the Executive the fringe benefits, including accrual of vacation pay,
available to him as of the date of notice of termination under Sections 3.5
and 3.6, except during the Severance Period no options shall vest and no
service credit shall be granted which would have the effect of extending
the Severance Period in accordance with Company's standard severance
policy. Further, a pro rata share of the performance bonus referenced in
Section 3.2 shall be paid to the Executive covering the period from the
beginning of the calendar year up to the date of termination. For the
purposes of this Section 5.3, the performance bonus referenced in Section
3.2 shall be calculated as 30% the Executive's annual base salary. For
purposes of this Agreement, the "Severance Period" shall mean a period of
nine (9) months after such termination, plus a severance payment of one (1)
week's base salary for each completed six (6) months of Company service as
of the date of notice of termination. If this paragraph conflicts with any
applicable Stock Option Agreement, this paragraph shall control.
5.4 Termination at Expiration of Contract. If, prior to April 1, 2000, the
-------------------------------------
Company has not offered to renew the Employment Contract on terms at least
equal to those contained herein and for a term of not less than one (1)
year, the Company shall continue to pay the Executive his base salary in
effect on the date of termination for a period of nine (9) months after
such termination, plus a severance payment of one (1) week's base salary
for each completed six (6) months of Company service through the expiration
of this Agreement. The Company shall also provide to the Executive during
the Severance Period, the fringe benefits, including accrual of vacation
pay, available to him under Sections 3.5 and 3.6, except as modified by
Section 5.3.
5.5 Survival. The provisions of Sections 5.2, 5.3 and 5.4 shall survive
--------
the expiration or termination of this Agreement under the circumstances
specified in those Sections for the periods specified in such Sections.
Sections 6 and 7 shall survive the termination of this Agreement.
6. Non-Compete.
-----------
(a). During the Executive's active employment and for the Severance
Period, the Executive will not:
(i) be a partner, stockholder (other than as the holder of
not more than one percent (1%) of the total outstanding
stock of), officer, employee, consultant, director,
joint venturer, investor or lender of or to America
Online, Inc., CompuServe Corporation, Microsoft Network,
AT&T WorldNet, Netcom On-Line Communications Services,
Inc., EarthLink Network, Inc., MindSpring Enterprises,
Inc., or any corporation or other entity acquiring any
of the foregoing; or involved in providing services that
compete directly with Prodigy; or
4
<PAGE>
(ii) directly or indirectly recruit, solicit or induce, or
attempt to induce, any employee or employees of the
Company to terminate their employment with, or otherwise
cease their relationship with the Company; or
(iii) directly or indirectly solicit, divert or take away, or
attempt to divert or to take away, the business or
patronage of any of the clients, customers or accounts,
or prospective clients, customers or accounts, of the
Company, including but not limited to those clients,
customers or accounts which were contacted, solicited or
served by the Executive while employed by the Company.
(b). If any restriction set forth in this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which
it may be enforceable.
(c). The restrictions contained in this Section 6 are necessary for
the protection of the business and goodwill of the Company and are
considered by the Executive to be reasonable for such purposes. The
Executive agrees that any breach of this Section 6 will cause the Company
substantial and irrevocable damage and therefore, in the event of any such
breach, in addition to such other remedies which may be available, the
Company shall have the right to seek specific performance and injunctive
relief.
(d). Unless the context otherwise requires, all references in this
Section 6 and in Section 7 below to the "Company" shall include all current
or future subsidiaries or affiliates of the Company.
7. Proprietary Information and Developments.
----------------------------------------
a. Proprietary Information.
-----------------------
(a). The Executive agrees that all information and know-how related
to the activities of the Company, whether or not in writing, of a private,
secret or confidential nature concerning the Company's business or
financial affairs collectively, ("Proprietary Information") is and shall be
the exclusive property of the Company. By way of illustration, but not
limitation, Proprietary Information may include inventions, products,
processes, methods, techniques, formulas, compositions, compounds,
projects, developments, plans, research data, clinical data, financial
data, personnel data, computer programs, and customer and supplier lists.
The Executive will not disclose any Proprietary Information to others
outside the Company or use the same for any unauthorized purposes without
written approval by an officer of the Company, either during or after his
employment, unless and until such Proprietary information has become public
knowledge without fault by the Executive.
(b). The Executive agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, laboratory notebooks, program
listings, or other written, photographic, or other tangible material
containing Proprietary Information, whether created by the Executive or
others, which shall come into his custody or possession, shall be and are
the exclusive property of the Company to be used by the Executive only in
the performance of his duties for the Company.
(c). The Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs (a)
and (b) above, also
5
<PAGE>
extends to such types of information, know-how, records and tangible
property of customers of the Company or suppliers to the Company or other
third parties who may have disclosed or entrusted the same to the Company
or to the Executive in the course of the Company's business.
7.2 Developments.
------------
(a). The Executive will make full and prompt disclosure to the
Company of all inventions, improvements, discoveries, methods,
developments, software, and works of authorship, related to the activities
of the Company, whether patentable or not, which are created, made,
conceived or reduced to practice by the Executive or under his direction or
jointly with others during his employment by the company, whether or not
during normal working hours or on the premises of the Company (all of which
are collectively referred to in this Agreement as "Developments").
(b). The Executive agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his right,
title and interest in and to all Developments and all related patents,
patent applications, copyrights and copyright applications. The Executive
also acknowledges that all work fixed in a tangible medium of expression
shall be deemed a work made for hire under the US Copyright Act such that
the work is owned by the Company at the moment of creation.
(c). The Executive agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in
the United States and foreign countries) relating to Developments. The
Executive shall sign all papers, including, without limitation, copyright
applications, patent applications, declarations, oaths, formal assignments,
assignment of priority rights, and powers of attorney, which the Company
may deem necessary or desirable in order to protect its rights and
interests in any Development.
7.3 Other Agreements. The Executive hereby represents that his
----------------
performance of all the terms of this Agreement and as an employee of the
Company does not and will not breach the terms of any agreement with any
previous employer or other party to refrain from using or disclosing any
trade secret, confidential or proprietary information, knowledge or data
acquired by him in confidence or in trust prior to his employment with the
Company or to refrain from competing, directly or indirectly, with the
business of such previous employer or any other party.
8. Notices.
-------
All notices required or permitted under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon sending, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown above, or at such other address or addresses as either party
shall designate to the other in accordance with this Section 8.
9. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns and pronouns shall include the plural, and vice versa.
10. Entire Agreement.
----------------
6
<PAGE>
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter of this Agreement, except that the Agreement
Regarding Confidential Information, the Prodigy Business Conduct Guidelines, and
other documents executed on the commencement of employment, shall remain in full
force and effect.
11. Amendment.
---------
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Executive.
12. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of New York in the United States, without reference
to conflict of law principles.
13. Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of both
parties and their respective successors and assigns, including any corporation
with which or into which the Company may be merged or which may succeed to its
assets or business; provided, however, that the obligations of the Executive are
-------- -------
personal and shall not be assigned by him.
14. Miscellaneous.
-------------
14.1 No delay or omission by either the Company or the Executive in
exercising any right under this Agreement shall operate as a waiver of that
or any other right. A waiver or consent given by either the Company or the
Executive on any one occasion shall be effective only in that instance and
shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for convenience of
reference only and in no way define, limit or affect the scope or substance
of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
PRODIGY SERVICES CORPORATION
By: /s/ Samer Salameh
-------------------------------------
Title: Chairman and CEO
----------------------------------
EXECUTIVE
/s/ Carena M, Pooth
----------------------------------------
7
<PAGE>
EXHIBIT 10.28
PRODIGY, INC.
1996 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Prodigy, Inc. (the
"Company") and its shareholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisors
to, the Company and its parent and subsidiary corporations who are expected to
contribute to the Company's future growth and success. Except where the context
otherwise requires, the term "Company" shall include the parent and all present
and future subsidiaries of the Company as defined in Sections 424(e) and 424(f)
of the Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that term is defined
in the Plan).
2. Type of Options and Administration.
----------------------------------
(a) Types of Options. Options granted pursuant to the Plan may be either
----------------
incentive stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code or Non- Statutory Options which are not intended to meet
the requirements of Section 422 of the Code ("Non-Statutory Options").
(b) Administration.
--------------
(i) The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions of
the Plan shall be final and conclusive. The Board of Directors may in its sole
discretion grant options to purchase shares of the Company's Common Stock
("Common Stock") and issue shares upon exercise of such options as provided in
the Plan. The Board shall have authority, subject to the express provisions of
the Plan, to construe the respective option agreements and the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective option agreements, which
need not be identical, and to make all other determinations which are, in the
judgment of the Board of Directors, necessary or desirable for the
administration of the Plan. The Board of Directors may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or in any option
agreement in the manner and to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final judge of such expediency.
No
<PAGE>
director or person acting pursuant to authority delegated by the Board of
Directors shall be liable for any action or determination under the Plan made in
good faith.
(ii) The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations and Section 3(b) of this Plan
delegate any or all of its powers under the Plan to a committee (the
"Committee") appointed by the Board of Directors, and if the Committee is so
appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
---------------------------
express reference to Rule 16b-3 promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3"), or which are
required in order for certain option transactions to qualify for exemption under
Rule 16b-3, shall apply only to such persons as are required to file reports
under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
-----------
(a) General. Options may be granted to persons who are, at the time of
-------
grant, employees, officers or directors of, or consultants or advisors to, the
Company; provided, that the class of employees to whom Incentive Stock Options
--------
may be granted shall be limited to all employees of the Company. A person who
has been granted an option may, if he or she is otherwise eligible, be granted
additional options if the Board of Directors shall so determine.
(b) Grant of Options to Directors and Officers. From and after the
------------------------------------------
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or an officer (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors,
of which all members shall be "disinterested persons" (as hereinafter defined),
or (ii) by two or more directors having full authority to act in the matter,
each of whom shall be a "disinterested person." For the purposes of the Plan, a
director shall be deemed to be a "disinterested person" only if such person
qualifies as a "disinterested person" within the meaning of Rule 16b-3, as such
term is interpreted from time to time.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 15 below, the maximum number
of shares of Common Stock which may be issued and sold under the Plan is
9,500,000 shares. If an option granted under the Plan shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan. If shares issued
2
<PAGE>
upon exercise of an option under the Plan are tendered to the Company in payment
of the exercise price of an option granted under the Plan, such tendered shares
shall again be available for subsequent option grants under the Plan; provided,
that in no event shall such shares be made available for issuance to Reporting
Persons or pursuant to exercise of Incentive Stock Options.
5. Forms of Option Agreements.
--------------------------
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price.
--------------
(a) General. Subject to Section 3(b), the purchase price per share of
-------
stock deliverable upon the exercise of an option shall be determined by the
Board of Directors, provided, however, that in the case of an Incentive Stock
-------- -------
Option, the exercise price shall not be less than 100% of the fair market value
of such stock, as determined by the Board of Directors, at the time of grant of
such option, or less than 110% of such fair market value in the case of options
described in Section 11(b).
(b) Payment of Purchase Price. Options granted under the Plan may provide
-------------------------
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised or (ii) by any other means (including, without
limitation, by delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board of Directors
determines are consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of Regulation T
promulgated by the Federal Reserve Board). The fair market value of any shares
of the Company's Common Stock or other non-cash consideration which may be
delivered upon exercise of an option shall be determined by the Board of
Directors.
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that, in the case of an
Incentive Stock Option, such date shall not be later than ten years after the
date on which the option is granted and, in all cases, options shall be subject
to earlier termination as provided in the Plan.
3
<PAGE>
8. Exercise of Options.
-------------------
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
-----------------------------
Options shall not be assignable or transferable by the person to whom they
are granted, either voluntarily or by operation of law, except by will or the
laws of descent and distribution, and, during the life of the optionee, shall be
exercisable only by the optionee; provided, however, that Non-Statutory Options
may be transferred pursuant to a qualified domestic relations order (as defined
in Rule 16b-3).
10. Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's employment or other relationship
with the Company or (ii) the death or disability of the optionee. Such periods
shall be set forth in the agreement evidencing such option.
11. Incentive Stock Options.
-----------------------
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
-------------------
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive Stock Option is
---------------
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value
of one share of Common Stock at the time of grant; and
4
<PAGE>
(ii) the option exercise period shall not exceed five years from the
date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide, options
-----------------
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
----------------------------------------------
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), provided, that the agreement with respect to such option
--------
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e) (3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
5
<PAGE>
12. Additional Provisions.
---------------------
(a) Additional Option Provisions. The Board of Directors may, in its sole
----------------------------
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
-------- ----
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
(b) Acceleration, Extension, Etc. The Board of Directors may, in its sole
----------------------------
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised.
13. General Restrictions.
--------------------
(a) Investment Representations. The Company may require any person to whom
--------------------------
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the Company in
connection with any public offering of its Common Stock.
(b) Compliance With Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company
to apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
6
<PAGE>
14. Rights as a Shareholder.
-----------------------
The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares.
No adjustment shall be made for dividends or other rights for which the record
date is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
(a) General. If, through or as a result of any merger, consolidation, sale
-------
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment would cause the Plan to
fail to comply with Section 422 of the Code.
(b) Board Authority to Make Adjustments. Any adjustments under this
-----------------------------------
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
(a) General. In the event of a consolidation or merger or sale of all or
-------
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such options
--------
7
<PAGE>
substituted for Incentive Stock Options shall meet the requirements of Section
424(a) of the Code, (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified period following
the date of such notice, (iii) in the event of a merger under the terms of which
holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the merger (the "Merger
Price"), make or provide for a cash payment to the optionees equal to the
difference between (A) the Merger Price times the number of shares of Common
Stock subject to such outstanding options (to the extent then exercisable at
prices not in excess of the Merger Price) and (B) the aggregate exercise price
of all such outstanding options in exchange for the termination of such options,
and (iv) provide that all or any outstanding options shall become exercisable in
full immediately prior to such event.
(b) Substitute Options. The Company may grant options under the Plan in
------------------
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
8
<PAGE>
19. Amendment of the Plan.
---------------------
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, or under Rule
16b-3, the Board of Directors may not effect such modification or amendment
without such approval.
(b) The termination or any modification or amendment of the Plan shall not,
without the consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected,
the Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to
amend or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. Withholding.
-----------
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by the
Company as of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to this Section 20(a)
may only satisfy his or her withholding obligation with shares of Common Stock
which are not subject to any repurchase, forfeiture, unfulfilled vesting or
other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3 (unless
it is intended that the transaction not qualify for exemption under Rule 16b-3).
9
<PAGE>
21. Cancellation and New Grant of Options, Etc.
------------------------------------------
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution there for of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan.
---------------------------------------
(a) Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors, but no option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, options previously granted
under the Plan shall not vest and shall terminate and no options shall be
granted thereafter. Amendments to the Plan not requiring shareholder approval
shall become effective when adopted by the Board of Directors; amendments
requiring shareholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular person) unless and until such amendment shall have been approved by
the Company's shareholders. If such shareholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any options granted on
or after the date of such amendment shall terminate to the extent that such
amendment was required to enable the Company to grant such option to a
particular optionee. Subject to this limitation, options may be granted under
the Plan at any time after the effective date and before the date fixed for
termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section 16,
-----------
the Plan shall terminate upon the close of business on the day next preceding
the tenth anniversary of the date of its adoption by the Board of Directors.
Options outstanding on such date shall continue to have force and effect in
accordance with the provisions of the instruments evidencing such options.
10
<PAGE>
23. Provision for Foreign Participants.
----------------------------------
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
Adopted by the Board of Directors
on June 25, 1996.
11
<PAGE>
EXHIBIT 10.29
1999 EMPLOYEE STOCK PURCHASE PLAN
FOR
PRODIGY COMMUNICATIONS CORPORATION
Section 1. Purpose. This 1999 Employee Stock Purchase Plan of Prodigy
Communications, Corporation is intended to provide employees of the Company and
its Designated Subsidiaries with an opportunity to purchase Stock of the Company
through accumulated payroll deductions under an "Employee Stock Purchase Plan"
as defined in Section 423 of the Code, and all provisions hereof will be
construed in accordance with those objectives.
Section 2. Definitions. As used herein, the following terms shall have
the meaning indicated:
(a) "Account" shall mean the account established for each Participant
to record the amounts withheld from his Compensation during the Offering Period
of reference.
(b) "Administrator" shall mean the Board or a designated committee of
the Board.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Company" shall mean Prodigy Communications Corporation.
(f) "Compensation" shall mean the actual cash remuneration (exclusive
of bonuses) paid to a Participant by the Employer in consideration of services
rendered.
(g) "Considered Compensation" shall be determined with respect to each
Offering Period, and shall mean a reasonable estimate (as determined by the
Administrator in its sole discretion, but treating Participants similarly
situated in a reasonably similar manner) of the Participant's basic Compensation
(including commissions) during the Offering Period (i.e. without taking into
account bonuses, overtime pay, noncash benefits or other special payments), all
as reasonably determined by the Administrator.
(h) "Designated Subsidiaries" shall mean the Subsidiaries that have
been designated by the Board from time to time in its sole discretion as
eligible to adopt, and which have in fact adopted, this Plan for the benefit of
their Employees.
(i) "Directed Withholding" shall mean such percentage of Compensation
(not to exceed 10%) that an Eligible Employee directs his Employer to withhold
on each Payroll Date during the Offering Period of reference.
(j) "Direction To Withhold" shall mean the written notice to the
Administrator, in the form of Exhibit A attached hereto, which directs the
---------
Employer to commence to deduct the Directed Withholding from a Participant's
Compensation on each Payroll Date during the Offering Period of reference;
provided, however, that if the amount of Compensation on such payroll date is
insufficient to fund the amount to be withheld, the Participant shall pay the
Company the remaining amount to be withheld not later than the next Payroll
Date.
<PAGE>
(k) "Election To Rescind" shall mean the written notice to the
Administrator, in the form of Exhibit B attached, rescinding the Direction to
---------
Withhold in its entirety.
(l) "Eligible Employee" shall mean each Employee (i) who is employed
as an Employee on the Enrollment Date of reference, (ii) who is not already a
Participant with respect to an Offering Period which will continue beyond such
Enrollment Date, and (iii) who on such Enrollment Date does not own Stock
(within the meaning of Section 423(b)(3) of the Code) possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of the Company or of any Subsidiary and, without limiting the generality of the
foregoing, in computing the amount of such Stock owned by an Employee, there
shall be included the amount of Stock owned directly, the Stock subject to a
Purchase Right, the Stock which with respect to which the Employee has an option
to acquire, and the Stock owned by any other person whose stock is attributed to
such Employee pursuant to Section 425(d) of the Code.
(m) "Employee" shall mean any person, including an officer and
director who is also an Employee, who is expected to be customarily employed by
the Employer for at least twenty (20) hours per week and for more than five (5)
months in the calendar year.
(n) "Employer" shall mean, collectively, the Company and each
Designated Subsidiary.
(o) "Enrollment Date" shall mean the first business day of each
Offering Period.
(p) "Fair Market Value" of a Share on the Enrollment Date or on a
Purchase Date shall be the closing price of Stock on such date, which shall be
(i) if the Stock is listed or admitted for trading on any United States national
securities exchange (which for purposes hereof shall include the NASDAQ National
Market System), the last reported sale price of Stock on such exchange as
reported in any newspaper of general circulation, (ii) if the Stock is quoted on
NASDAQ (other than on the NASDAQ National Market System) or any similar system
of automated dissemination of quotations of securities prices in common use, the
mean between the closing high bid and low asked quotations for such day of the
Stock on such system or (iii) if neither clause (i) nor (ii) is applicable, a
value determined by any fair and reasonable means by the Administrator.
(q) "Offering Period" shall mean (i) an initial period beginning on
the day of the initial public offering by the Company pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "IPO"),
and ending on the last day of the month preceding the month in which occurs the
27th month anniversary of the date of the IPO, and (ii) the period beginning on
the day after each Purchase Date and ending on the 24 month anniversary of such
Purchase Date; provided further, and without limitation, references herein to an
Offering Period refer separately to each Offering Period, notwithstanding that
several Offering Periods are occurring simultaneously at the time of reference;
and provided, finally, that notwithstanding any provisions hereof to the
contrary, the Board, in its sole discretion, may change the period of any
Offering Period which has not already commenced.
(r) "Option Shares" shall mean, with respect to each Participant with
respect to the Offering Period of reference, that number of whole Shares equal
to the quotient of (i) the Participant's Considered Compensation on the
Enrollment Date of such Offering Period, divided by (ii) the Fair Market Value
of a Share on such Enrollment Date.
2
<PAGE>
(s) "Participant" shall mean, with respect to an Offering Period, each
Eligible Employee who is having an amount withheld from his Compensation under
Section 4 at the time of reference.
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(t) "Payroll Date" shall mean each date on which a Participant is paid
his Compensation.
(u) "Plan" shall mean this 1999 Prodigy Communications Corporation
Employee Stock Purchase Plan.
(v) "Purchase Date" shall mean the 15th day of each May and November,
except that in the case of the IPO, it shall mean the first of such dates which
occurs not less than 120 days after the date of the IPO, and the last business
day of such initial Offering Period.
(w) "Purchase Period" shall mean each of the periods between Purchase
Dates, which, without limitation, shall be 6 month periods except for the first
and last such period during the initial Offering Period.
(x) "Purchase Price" shall mean the lesser of (i) 85% of the Fair
Market Value of the Shares on the Enrollment Date occurring during the Offering
Period of reference, or (ii) 85% of the Fair Market Value of the Shares on the
Purchase Date occurring during such Offering Period, but never less than the par
value of a Share; provided, further, and without limitation, that the Purchase
Price shall always be determined with respect to a single Offering Period of
reference so that there may be more than one Purchase Price in effect with
respect to each Purchase Date.
(y) "Purchase Right" shall mean the Participant's right to acquire all
or any portion of his Option Shares.
(z) "Separation" shall mean a person's termination of employment with
the Employer for any reason, including death or disability.
(aa) "Shares" shall mean the shares of Stock reserved for issuance
under this Plan.
(bb) "Stock" shall mean the common stock, $.01 par value per share, of
the Company.
(cc) "Subsidiary" shall mean any corporation (other than the Company)
in any unbroken chain of corporations beginning with the Company if, at the time
of reference, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
Section 3. Shares Subject To Purchase.
(a) Subject to adjustments provided in Section 15 hereof, a total of
----------
2,000,000 Shares shall be subject to the Plan. The Shares subject to the Plan
shall consist of unissued Shares or previously issued Shares reacquired and held
by the Company, or any Subsidiary, and such number of Shares shall be and hereby
is reserved for sale for such purpose. Any of such Shares that may remain
unsold at the termination of the Plan shall cease to be reserved for the purpose
of the Plan, but until termination of the Plan the Company shall at all times
reserve a sufficient number of Shares to meet the requirements of the Plan.
Should any Shares subject to Purchase Rights on the Enrollment Date of an
Offering Period fail to
3
<PAGE>
be purchased during such Offering Period, such Shares may again be made
available for purchase with respect to a subsequent Offering Period.
(b) All of the Shares in the Plan at the time of reference shall be
available with respect to each Offering Period, except that the Administrator
may provide, in writing, prior to the start of any Offering Period, that a
lesser number of Shares shall be available for purchase for such Offering
Period, in each case subject to the adjustments described in Section 8.
Section 4. Participation and Deduction of Directed Withholding.
(a) During the 45 days ending on the Enrollment Date for the Offering
Period of reference, each Eligible Employee, who is not already a Participant
with respect to an Offering Period commencing prior to such Offering Period of
reference, may become a Participant for such Offering Period by filing with the
Administrator a written Direction to Withhold setting forth the amount of such
Eligible Employee's Directed Withholding; provided, however, that the
Administrator, in its sole discretion, may extend the period during which a
Direction to Withhold may be filed with respect to any Offering Period for up to
45 days after the Enrollment Date for such Offering Period of reference,
provided the Administrator communicates such extension to all persons who are
Eligible Employees with respect to such Offering Period.
(b) Notwithstanding the foregoing, the Administrator, in its sole
discretion may, but shall have no duty to, refund a prorata portion of the funds
in a Participant's Account where the Administrator reasonably determines that
either (i) the aggregate amounts in all of the Accounts which will be used on
the next Purchase Date of the Offering Period of reference to purchase Shares is
likely to substantially exceed the amount which will be required to purchase all
of the Shares subject to purchase on such next Purchase Date; or (ii) the amount
in a Participant's Account substantially exceeds the amount which will be
required to purchase all of his Option Shares remaining to be purchased.
(c) All amounts deducted from a Participant's Compensation (or paid by
a Participant) pursuant to the terms of this Plan shall be credited to a
Participant's Account, but shall remain the unencumbered assets of the Employer.
(d) Without limiting the generality of the foregoing, no amount of
earnings, including without limitation interest or its equivalent, will be paid
by the Company with respect to amounts credited to the Accounts.
Section 5. Changes Relating to Offering Period(s).
(a) A Participant may increase or decrease the amount of his Directed
Withholding during an Offering Period by filing a new written Direction to
Withhold with the Administrator, and such change will be effective on the day
after the Purchase Date next following the filing of such new Direction to
Withhold.
(b) Notwithstanding any provision hereof to the contrary, in the event
that the Fair Market Value of a Share on a Purchase Date is less than the Fair
Market Value of a Share on a preceding Enrollment Date, then each such Offering
Period automatically shall terminate as of the close business on such Purchase
Date, and each Participant in each such terminated Offering Period(s) shall be
deemed to have filed a new Direction to Withhold, identical to the Direction To
Withhold in effect as of the termination of such Offering Period(s), with
respect to the Enrollment Date for the next succeeding Offering Period;
provided, further, that nothing herein shall limit the right of each such
affected Participant
4
<PAGE>
to change his rate of Directed Withholding by filing a new Direction to Withhold
on or before such Enrollment Date.
(c) Prior to his Separation, a Participant may rescind his Direction
to Withhold in its entirety, at any time, by filing a written Election to
Rescind with the Administrator. Notwithstanding any provision hereof to the
contrary, a Participant's Direction to Withhold automatically is rescinded in
its entirety effective on the date of his Separation. Following a rescission of
a Direction to Withhold, no Shares will be purchased on any subsequent Purchase
Date, and the entire amount credited to such Participant's Account automatically
will be paid to such Participant in a lump sum, in cash, as soon as reasonably
possible following the date of the rescission. A rescission (other than by
reason of Separation) shall not limit such person's right to file a Direction to
Withhold with respect to any later Offering Period.
Section 6. Exercise Of Purchase Right. Each Participant in an Offering
Period will have a Purchase Right to purchase all or any portion of his Option
Shares, all subject to the maximum amounts, and the adjustments, if any, in
Section 8. The Participant's Purchase Right will be exercised automatically on
- ---------
each Purchase Date by debiting his Account with the Purchase Price of the Shares
subject to his Purchase Right; provided, further, that if the Purchase Date is
not the final Purchase Date during the Offering Period of reference, any unused
funds will remain in his Account and used to exercise his rights on the next
succeeding Purchase Date, and, finally, that if the Purchase Date is the final
Purchase Date during the Offering Period of reference, then such unused funds
will be refunded. Notwithstanding the foregoing, if the Plan is not approved by
the shareholders as described Section 21, the purchase of the Shares shall be
----------
rescinded and the funds in the Account refunded to the Participants.
Section 7. Delivery. As promptly as practicable after the later of (i)
the approval of the Plan by shareholders as described in Section 21, and (ii)
----------
the Purchase Date of reference, the Administrator shall arrange the delivery to
each Participant of a certificate representing the Shares purchased on such
Purchase Date.
Section 8. Maximum Shares, and Reduction in Shares, Subject to Purchase
Rights.
(a) Notwithstanding any provision hereof to the contrary, the maximum
number of Shares subject to each Participant's Purchase Right on each Purchase
Date occurring during the Offering Period of reference shall be that number of
Shares equal to the lesser of: (i) the excess of (w) his Option Shares, less
(x) the aggregate number of Shares such Participant shall have purchased on
prior Purchase Dates with respect to such Offering Period, (ii) that number of
Shares which will not cause such Participant's Purchase Rights to accrue at a
rate which exceeds $25,000 of Fair Market Value of Shares, determined on the
Enrollment Date of reference, for each calender year in which such Participant
has a Purchase Right outstanding, and (iii) the excess of (y) the maximum number
of Shares that will not cause the Participant to exceed the 5% ownership
limitation of Section 2(l) less (z) the aggregate number of Shares purchased on
------------
prior Purchase Date(s) with respect to such Offering Period.
(b) If, on a Purchase Date, the maximum number of Shares available for
purchase as determined under Section 3(b) for such Offering Period are less than
------------
the number of Shares subject to all then existing Purchase Rights (as limited by
Section 8(a), if applicable) with respect to such Offering Period, the
- ------------
Administrator will reduce the number of Shares subject to each Participant's
Purchase Right to an amount equal to the product of (i) the maximum Shares
available for purchase as determined under Section 3(b), and (ii) a fraction,
------------
the numerator of which is the amount in such Participant's Account and the
denominator of which is the amount, with respect to such Offering Period, in the
Accounts of all Participants with respect to such Offering Period.
5
<PAGE>
(c) If on a Purchase Date the Shares available under the Plan are less
than the number of Shares subject to Purchase Rights under all Offering Periods
(as limited by Section 8(b)), the Administrator will allocate the Shares
------------
available under the Plan until they are exhausted, to each Offering Period, in
the order of their beginning date, in an amount equal to the lesser of (i) the
number of Shares required to satisfy all Purchase Rights with respect to the
Purchase Date of such Offering Period, and (ii) the number of Shares determined
under Section 3(b) with respect to such Offering Period, less any Shares
-----------
previously purchased with respect to such Offering Period.
Section 9. Voting and Registration.
(a) A Participant will have no interest or voting right in or other
privileges relating to Shares subject to a Purchase Right until delivery of the
certificate representing such Shares.
(b) Shares to be delivered to a Participant will be registered in the
name of the Participant.
Section 10. Administration. The Plan shall be administered by the
Administrator, which will be the Board or a committee appointed by the Board.
If a committee of the Board is appointed by the Board to act as Administrator,
such committee shall have all of the powers of the Board with respect to the
Plan except for (i) those expressly reserved by the Board at the time of
reference, and (ii) those set forth in Section 16 hereof. The administration,
----------
interpretation or application of the Plan by the Administrator shall be final,
conclusive and binding upon all Participants. Eligible Employees may not
actively serve as a member of the Administrator. The Administrator may appoint
agents including, without limitation, Eligible Employees, to assist it in the
discharge of its duties.
Section 11. Designation of Beneficiary.
(a) A Participant may file a written designation of a beneficiary who
is to receive any cash as a result of the Participant's death prior to a
Purchase Date, or to receive any Shares (and excess cash, if any) in the event
of Participant's death subsequent to a Purchase Date but before delivery of the
Shares (and excess cash, if any).
(b) Such designation of beneficiary may be changed by the Participant
at any time by written notice.
(c) In the event of the death of a Participant without a designated
surviving beneficiary, the Administrator shall deliver such cash and/or Shares
to the spouse of the Participant or, if there is no surviving spouse, then to
the executor or administrator of the estate of the Participant.
Section 12. Transferability. Neither payroll deductions credited to a
Participant's Account, nor any rights with regard to the making or recision of a
Directed Withholding, nor the right to receive Shares (and excess cash, if any)
may be assigned, transferred, pledged or otherwise disposed of in any way (other
than as provided in Section 11) by a Participant. Any such attempt at
----------
assignment, transfer, pledge or other disposition shall be without effect.
Section 13. Use of Funds. All payroll deductions received or held by the
Employer under the Plan may be used by the Employer for any corporate purpose,
and the Employer shall not be obligated to segregate such payroll deductions.
6
<PAGE>
Section 14. Reports and Withholding.
(a) Statements will be given to all Participants within a reasonable
time following a Purchase Date, which statements will set forth the amounts of
payroll deductions, the per Share Purchase Price, the number of Shares purchased
(and an explanation of any reduction in the Shares otherwise subject to the
Purchase Right), and the remaining cash balance, if any.
(b) Each person who acquires Shares hereunder shall agree as a
condition of such acquisition that he shall notify his Employer in the event he
disposes of the Shares before the second anniversary of the Enrollment Date on
which he acquired the Purchase Right with respect to such Shares, and in the
event of such disposition while an employee of the Employer, the Employer may
withhold from such Participant's current Compensation such amount as it
reasonably determines to be necessary to satisfy the Company's obligation to
withhold for federal and state taxes with respect to such events.
Section 15. Adjustments Upon Changes in Capitalization.
(a) If a stock dividend, stock split, spinoff, recapitalization,
merger, consolidation, exchange of shares or the like occurs, as a result of
which shares of any class shall be issued in respect of the Shares, then the
number of Shares described in Section 3(a), and the Shares subject to purchase
------------
with respect to each affected Offering Period, shall be (i) changed into a
different number of the same or another class or classes, and (ii) the number
of Shares to which each Purchase Right shall be applicable and the calculation
of the Fair Market Value as of the Enrollment Date for such Shares shall be
appropriately adjusted by the Company in a manner that in its sole discretion
will keep this Plan qualified under Section 423 of the Code.
(b) In the event of the proposed dissolution or liquidation of the
Company, notwithstanding any provision hereof to the contrary, each Offering
Period will close, and the final Purchase Date will occur, 15 days immediately
prior to the consummation of such proposed action, all Participants will be
notified in advance of such revised Purchase Date, and each Participant will be
entitled to have withheld from Compensation paid prior to such final Purchase
Date, or shall pay from personal funds, or both, the amount which would have
been withheld (as determined in sole discretion of the Administrator) during the
Purchase Period in which occurs the final Purchase Date.
(c) In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation then, unless this Plan and each Purchase Right shall be assumed or
an equivalent plan and right shall be substituted by such successor corporation
or a parent or subsidiary of such successor corporation, such event will be
deemed to constitute the dissolution or liquidation of the Company and
Participants shall have the rights set forth in Section 15(b).
------------
Section 16. Amendment or Termination. The Board may at any time and for
any reason terminate or amend the Plan, provided, however, that the Plan may not
be amended without compliance with any applicable shareholder approval
requirements promulgated under the Internal Revenue Code, if applicable, or by
any stock exchange or market on which the Common Stock is listed for trading,
all as reasonably determined by the Administrator. Except as specifically
provided in the Plan, no such termination or amendment can reduce such rights as
a Participant would have with respect to his Option Shares on the effective date
of such occurrence unless either the Participant agrees to such action or the
Participant is granted the rights set forth in Section 15(b) determined as if
------------
the effective date of the termination or amendment were deemed to be a
liquidation or dissolution of the Company.
7
<PAGE>
Section 17. Notices. All notices or other communications shall be deemed
to have been duly given (i) if by a Participant to the Administrator, when
received in the required form at the corporate home office of the Company,
addressed to "Administrator, Employee Stock Purchase Plan," and (ii) if by the
Administrator to the Participant, when mailed to the last known address of
Participant shown on the Employer's records. Where a form must be filed by a
certain date in order to be effective, the last such form filed by such date
shall be controlling.
Section 18. Conditions Upon Issuance of Shares. Shares shall not be
issued unless such issuance and delivery shall comply with all applicable
provisions of law, domestic or foreign, and the requirements of any stock
exchange upon which the Shares may then be listed, including, in each case the
rules and regulations promulgated thereunder, and shall be further subject to
the approval of counsel for the Company with respect to such compliance, which
may include a representation and warrants from the Participant that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares.
Section 19. Term of Plan. The Plan shall become effective on the date of
the IPO and shall terminate on November 15 of the year in which occurs the 9th
anniversary of the date of the IPO.
Section 20. Miscellaneous.
(a) Execution of Receipts and Releases. Any payment or any issuance
or transfer of Shares to any person shall be in full satisfaction of all claims
hereunder against the Plan, and the Administrator may require such person, as a
condition precedent to receiving delivery of Shares, to execute a receipt and
release therefor in such form as it shall determine.
(b) Payment of Expenses. All expenses incident to the administration,
termination, or protection of the Plan, including, but not limited to, legal and
accounting fees, shall be paid by the Company.
(c) Records. Records of the Company as to any matters relating to
this Plan will be conclusive on all persons.
(d) Interpretations and Adjustments. To the extent permitted by law,
an interpretation of the Plan and a decision on any matter within the Board's or
Administrator's discretion made in good faith is binding on all persons. A
misstatement or other mistake of fact shall be corrected when it becomes known
and the person responsible shall make such adjustment on account thereof as he
considers equitable and practicable.
(e) No Rights Implied. Nothing contained in this Plan or any
modification or amendment to the Plan or in the creation of any Account, or the
execution of any subscription agreement, or the issuance of any Shares under the
Plan, shall give any Employee any right to continue employment or any legal or
equitable right against the Company or any officer, director, or Employee of the
Company, except as expressly provided by the Plan.
(f) Information. The Company shall, upon request or as may be
specifically required hereunder, furnish or cause to be furnished, all of the
information or documentation which is necessary or required by the Board and/or
Administrator to perform its duties and functions under the Plan. The Company's
records as to the current information the Company furnishes to the Board and/or
Administrator shall be conclusive as to all persons.
8
<PAGE>
(g) Severability. In the event any provision of the Plan shall be
held to be illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan, but shall be fully severable
and the Plan shall be construed and enforced as if the illegal or invalid
provision had never been included herein.
(h) Headings; Gender. The titles and headings are included for
convenience of reference only and are not to be considered in construction of
the provisions hereof. Words used in the masculine shall apply to the feminine,
and whenever the context of the Plan dictates, the plural shall be read as the
singular and the singular as the plural.
(i) No Liability For Good Faith Determinations; Actions. Neither the
members of the Board nor the Administrator (nor their respective delegatees)
shall be liable for any act, omission, or determination taken or made in good
faith with respect to the Plan or any right to purchase Shares granted under it,
and members of the Board and the Administrator (and their delegatees) shall be
entitled to indemnification and reimbursement by the Company in respect of any
claim, loss, damage, liability or expense (including attorneys' fees, the costs
of settling any suit, provided such settlement is approved by independent legal
counsel selected by the Company, and amounts paid in satisfaction of a judgment,
except a judgment based on a finding of bad faith) arising therefrom to the full
extent permitted by law and under any directors' and officers' liability or
similar insurance coverage that may from time to time be in effect. The Company
assumes no liability to any Participant or his legal representatives, heirs,
legatees or distributees for any act of, or failure to act on the part of, the
Company, the Board or the Administrator.
(j) Governing Law. All questions arising with respect to the
provisions of this Plan shall be determined by application of the laws of the
State of New York.
Section 21. Shareholder Approval. This Plan has been executed as of
this _____ day of ______________, 1999 to fully evidence the Company's adoption
thereof, to be effective as provided in Section 19 hereof, provided, however,
----------
that notwithstanding any provision of the Plan to the contrary, unless the Plan
has been approved by the shareholders of the Company in the manner required by
Section 423(b)(2) of the Code, the Plan shall be terminated retroactive to the
Effective Date and, without limitation, all previously granted options (and
purchases of Shares) shall be rescinded and become null and void ab initio, and
amounts in Participants' Accounts will be refunded, in cash, to such
Participants.
PRODIGY COMMUNICATIONS CORPORATION
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
9
<PAGE>
EXHIBIT 10.38
AGREEMENT
AGREEMENT (the "Agreement"), dated as of January 25, 1999, by and
among Telefonos de Mexico, S.A. de C.V., a sociedad anonima organized in Mexico
with its principal place of business at Parque Via 190, Oficina 1016, Colonia
Cuauhtemoc, Mexico City, Mexico ("Telmex") and Prodigy Communications
Corporation, a Delaware corporation located at 33 South Broadway, White Plains,
New York ("Prodigy").
WHEREAS, Telmex, through its Internet Directo Personal division
("IDP") offers dial up internet access throughout Mexico (the "IDP Service"),
and
WHEREAS, Prodigy offers internet access and value added services
through the United States and has proven expertise in network and data center
operation, customer service and other services relating to the offering of
internet access to consumers; and
WHEREAS, Telmex desires to retain Prodigy to provide certain
management and consulting services in connection with the IDP Service;
NOW, THEREFORE, in consideration of the premises and mutual
representations, warranties, covenants and agreements contained herein and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Services. Commencing as of the date of this Agreement, and continuing
--------
throughout the term hereof (as described below), Prodigy shall from time to
time upon the request of Telmex provide the following services (the "Services")
to Telmex in connection with the IDP Service:
(a) At Telmex's request on an as needed basis, assist in the
negotiation of or negotiate on behalf of Telmex service level agreements
and other agreements pertaining to the provisioning of the following
services:
(i) network/Internet Access,
(ii) web hosting,
(iii) customer service, including telemarkeing,
registration, technical support);
(iv) content hosting;
(v) billing;
(vi) marketing and sales agreements and
(vii) data collection services.
<PAGE>
2
It is agreed and understood that the final terms and conditions of the
agreements described above shall remain within the discretion of Telmex.
It is further understood and agreed that in the provision of such services,
Telmex shall not rely on Prodigy for advice relating to legal, accounting,
tax or finance matters.
(b) At Telmex's request on an as needed basis, provide ongoing advice
and consultation in respect of customer service, administrative functions,
and technical operations, including the following services:
(i) marketing the service, including advertising, packaging,
promotion, sales and distribution (the "Marketing");
(ii) Provision of Internet connection and other network
services;
(iii) Content, including Internet home page;
(iv) Customer support, pricing and service plan, product
composition, billing and collection services;
(v) inbound telemarketing; and
(vi) provision of any other service that is generally provided
to subscribers in the Internet service provider business.
(c) The parties will also discuss the potential migration of certain
functions relating to the IDP infrastructure platform, including: email,
subscriber management and authentication systems for the IDP Subscribers to
the Prodigy infrastructure platform and the advisability of offering a
cobranded IDP/Prodigy Service in Mexico. Additionally, the parties will
pursue additional opportunities, such as providing services to one another
and joint acquisitions of subscribers.
(d) Prodigy may provide the Services to Telmex with its own personnel
and resources or may contract with third parties who will be the sole
responsibility of Prodigy, it being understood that Prodigy does not have
the right or authority to contract with any third party in the name and in
representation of Telmex. Prodigy shall at all times be considered as an
independent contractor and therefore Prodigy's personnel shall not in any
manner be considered as Telmex's employees for purposes of applicable labor
law.
2. CONSIDERATION.
(a) Fee. In consideration of the services rendered by Prodigy
hereunder, Telmex shall, during the Term of this Agreement, pay or cause to
be paid to Prodigy on a monthly basis, the following management fee: (i)
with respect to IDP's first 200,000 Subscribers ("first" referring to those
IDP Subscribers who became IDP's Subscribers first in time) ("First
Subscribers"), 15% of the Net Subscriber Revenue attributable to such First
Subscribers for each month, and (ii) with respect to IDP's Subscribers
other
<PAGE>
3
than the First Subscribers ("Other Subscribers"), 10% of the Net Subscriber
Revenue attributable to such Other Subscribers for each month. For purposes
of this Agreement, "Net Subscriber Revenue" shall mean, with respect to any
period, the invoiced sales price of the IDP Service as invoiced to Telmex's
customers after deducting the following amounts: (i) any discounts,
promotional allowances, volume rebates or similar reductions actually
allowed to such customers for such sales, (ii) the cost of insurance and
freight where so invoiced to customers for such sales, (iii) any excise
taxes imposed on such sales, and (iv) any allowances repaid or credited to
customers due to rejected or returned orders for such sales or sales or
included in the calculation of "Net Sales" for a prior period for which a
fee was paid hereunder.
The Fee shall be paid at the domicile of Prodigy or in the account
designated by Prodigy from time to time. All payments by Telmex and all
other amounts payable hereunder shall be made after and with deduction for
any present or future income, excise, stamp, or franchise taxes and any
other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed by any taxing authority, including without limitation
Mexican withholding taxes imposed with respect to Prodigy as provided for
by the Mexican Income Tax Law (Ley del Impuesto sobre Renta) and the
regulations thereunder. In the event that any withholding or deduction
from any payment to be made by Telmex hereunder is required in respect of
any taxes pursuant to any applicable law, rule or regulation, then Telmex
will (i) pay directly to the relevant authority the full amount required to
be so withheld or deducted; and (ii) promptly forward to Prodigy an
official receipt or other available documentation satisfactory to Prodigy
evidencing such payment to such authority.
(b) Telmex shall render payment of the Fee due hereunder within
fifteen (15) business days following the end of each calendar month during
the term. Each payment shall be accompanied by an accounting indicating
the (i) Net Subscriber Revenue attributable to the First Subscribers and
(ii) Net Subscriber Revenue attributable to the Other Subscribers, together
with a calculation of the Fee due in respect thereof.
(c) Information. Prodigy and Telmex shall provide each other with
-----------
the opportunity to audit and review, at the other party's expense, the
books and records and other information relating to the matters covered by
this Agreement, which books and records and other information shall be
maintained confidentially by the other party.
3. Term.
----
(a) This Agreement shall commence as of the date of execution by both
parties and, unless terminated sooner pursuant to section 3(b), shall continue
for an initial term of five (5) years, provided that Telmex may terminate this
-------------
Agreement if it decides to suspend or substantially modify the IDP Service at
its own discretion.
(b) The non-defaulting party may terminate this Agreement if a
Default, as defined below, by the other party has occurred and is continuing by
giving written notice to the defaulting party. The term "Default" shall mean
any of the following: (a) failure by a party to comply with or perform any
material provision or condition of this Agreement and, if such material breach
can
<PAGE>
4
be cured, continuance of such failure for thirty (30) days after written notice
to such party; or (b) a party becomes insolvent, is unable to pay its debts as
they mature or is the subject of a petition in bankruptcy, whether voluntary or
involuntary, or of any other proceeding under bankruptcy, insolvency or similar
laws; or makes an assignment for the benefit of creditors; or is named in, or
its property is subject to a suit for appointment of a receiver; or is dissolved
or liquidated. Additionally, Telmex shall be entitled to terminate this
Agreement on 30 days notice in the event that Prodigy sells or all substantially
all of its assets, or there is a change in control of Prodigy such that Telmex
and its affiliates (including for purposes of this Agreement Carso) fails to own
50.1% of the outstanding capital stock of Prodigy.
4. Representations, Warranties, Indemnities.
----------------------------------------
(a) Each party represents and warrants to the other that: (a) it is a
corporation duly organized, validly existing, and in good standing under
the laws of the State of its incorporation; (b) it has all requisite
corporate power and authority to enter into this Agreement and to carry out
and perform its obligations under the terms of this Agreement; (c) this
Agreement has been duly authorized and when executed and delivered will
constitute a valid and binding obligation of such party enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights; and (d) the execution, delivery, and
performance of and compliance with this Agreement does not and will not
conflict with, or constitute a default under, or result in the creation of,
any mortgage, pledge, lien, encumbrance, or charge upon any of the
properties or assets of such party, nor result in any violation of: (i) any
term of its certificate of incorporation or bylaws; (ii) in any material
respect, any term or provision of any mortgage, indenture, contract,
agreement, instrument, judgment, or decree; or (iii) to the best of its
knowledge, any order, statute, rule, or regulation applicable to such
party, the violation of which would have a material adverse effect on its
business or properties.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY
OTHER PERSON, INCLUDING SUBSCRIBERS, FOR INDIRECT, INCIDENTAL, OR SPECIAL
DAMAGES, LOST PROFITS, LOST SAVINGS, OR ANY OTHER FORM OF CONSEQUENTIAL
DAMAGES, REGARDLESS OF THE FORM OF ACTION, EVEN IF ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, WHETHER RESULTING FROM BREACH OF ITS
OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE. NEITHER MAKES ANY
WARRANTIES, AND EACH PARTY HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED
WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE OR PURPOSE. Under no circumstances shall Prodigy be liable
to Telmex or any other Person for any loss, injury, or damage, of whatever
kind or nature, resulting from or arising out of any mistakes, errors,
omissions, delays, or interruptions in the receipt, transmission, or
storage of any messages, signals or information arising out of or in
connection with its Services or the IDP Services.
<PAGE>
5
(c) Each party shall defend, indemnify, and hold the other harmless
from and against any and all third party claims resulting in liabilities,
losses, damages and costs, including reasonable attorney's fees, resulting
from, arising out of, or in any way connected with: (i) any breach by such
party of any warranty, representation or obligation contained herein or (ii)
the performance of such party's duties and obligations hereunder. The
parties' obligations under this Section shall survive the termination or
expiration of this Agreement.
5. Miscellaneous.
-------------
(a) This Agreement 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
including the Term Sheet between Prodigy and Telmex dated October 30, 1998.
(b) This Agreement 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 Agreement shall not be
assigned by any party hereto without the prior written consent of the other
parties hereto.
(c) All notices, requests, claims, demands and other communications
provided for herein shall be in writing in the English language 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 in the preamble to this Agreement or to
such other address as a party may from time to time designate in writing in
a notice given in accordance with this Section. All notices, requests,
claims, demands and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have
been given on the date of receipt.
(d) This Agreement 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 Agreement.
(e) If any term, provision, clause or part of this Agreement 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 Agreement 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 Agreement is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement
so as to effect the original intent of the parties as closely as possible
in an acceptable manner in order that the transactions
<PAGE>
6
contemplated hereby are consummated as originally contemplated to the
greatest extent possible.
(f) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
(g) Any party to this Agreement 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 Agreement. The failure of any party to assert any of
its rights hereunder shall not constitute a waiver of any such rights.
(h) This Agreement may not be amended, modified or supplemented
except (a) by an instrument in writing signed by, or on behalf of, each of
the parties hereto or (b) by a waiver in accordance with Subsection (g).
<PAGE>
7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
TELEFONOS DE MEXICO, S.A. de C.V.
By: /s/ Adolfo Cerezo
---------------------------
Name: __________________________
Title: _________________________
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Samer Salameh
----------------------------
Name: __________________________
Title: _________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement (No. 333-64233)
on Form S-1, as filed on January 26, 1999, of our report dated April 30, 1998,
except as to the information presented under Additional Financing in Notes 8
and 11 for which the date is September 21, 1998, and to the information
presented under Restatement of Financial Statements in Note 1 for which the
date is January 22, 1999, on our audits of the consolidated financial
statements of Prodigy Communications Corporation as of December 31, 1996 and
1997 and for each of the two years in the period ended December 31, 1997, and
of our report dated September 10, 1998, on our audits of the consolidated
financial statements of Prodigy Services Company for the year ended December
31, 1995 and the five and one-half month period ended June 16, 1996. We also
consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 12,363 29,014
<SECURITIES> 0 0
<RECEIVABLES> 1,740 357
<ALLOWANCES> 685 652
<INVENTORY> 0 0
<CURRENT-ASSETS> 17,264 30,762
<PP&E> 18,327 12,541
<DEPRECIATION> 12,311 19,810
<TOTAL-ASSETS> 93,450 96,206
<CURRENT-LIABILITIES> 65,769 49,711
<BONDS> 0 0
0 0
0 0
<COMMON> 338 451
<OTHER-SE> 17,343 46,044
<TOTAL-LIABILITY-AND-EQUITY> 93,450 96,206
<SALES> 0 0
<TOTAL-REVENUES> 134,192 101,468
<CGS> 100,174 75,154
<TOTAL-COSTS> 253,829 149,667
<OTHER-EXPENSES> 13,138 (322)
<LOSS-PROVISION> (245) (33)
<INTEREST-EXPENSE> 1,559 1,284
<INCOME-PRETAX> (132,775) (47,877)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (132,775) 132,775
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (132,775) (132,775)
<EPS-PRIMARY> (7.66) (1.28)
<EPS-DILUTED> (7.66) (1.28)
</TABLE>
