<PAGE>
As filed with the Securities and Exchange Commission on February 8, 1999
Registration No. 333-64233
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
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 $48,170.25
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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) Previously paid.
----------------
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 FEBRUARY 8, 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 $1,500,000.
(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>
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 effected
on February 4, 1999, (ii) assumes the concurrent consummation of the Offering
and the Telmex Purchase and (iii) 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
613,000 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 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 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,
1998, 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 $34.7 million in the fourth quarter of
1998, consisting of Internet revenues of $33.7 million and other revenues of
$1.0 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 by 72,000, or 17%, 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........ 45,035,111 shares(1)
Common Stock offered hereby.. 8,000,000 shares
Telmex Purchase.............. 2,000,000 shares
Common Stock to be
outstanding after the
Offerings................... 59,012,599 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 February 8, 1999 and
excluding shares of Common Stock reserved for issuance pursuant to the
Company's stock-based compensation plans and 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 2,343,191 shares of Common Stock
were subject to outstanding options at a weighted-average exercise price of
$5.78 per share, 779,173 shares were reserved for future option grants and
2,636 shares had been issued upon exercises, and (b) there were outstanding
warrants to purchase an aggregate of 122,401 shares of Common Stock at a
weighted-average exercise price of $11.09 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 2,437,200
shares of Common Stock (2,527,200 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 3,977,488 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..... -- 780,000 392,000 455,000 208,000
----- -------- -------- -------- --------
Total billable subscribers at
period end.................... -- 787,000 613,000 648,000 641,000
===== ======== ======== ======== ========
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.................................... 96.2 222.5
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 3,977,488 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.
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. America Online has recently announced several transactions
that could result in additional competition for the Company. 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. 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.
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 1,129,000
at December 31, 1995 to 787,000 at December 31, 1996 and to 613,000 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
11
<PAGE>
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
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 3,977,488 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, 144,000 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 and a net
reduction of 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 59,012,599
shares of Common Stock. In addition to the 8,000,000 shares offered hereby,
approximately 2,491,242 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
70,667 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
38,365,351 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 47,849,726 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 436,201 shares and 180 days after the closing of
the Offerings with respect to 47,413,525 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) 3,977,488 shares of
Common Stock issued upon the conversion of the Contingent Notes held by them
and (ii) 4,874,400 shares of Common Stock (5,054,400 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 $99.2 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 ($114.3 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 3,977,488
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); 45,057,393 shares
issued and outstanding (actual); 59,034,881 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
2,343,191 shares of Common Stock were subject to outstanding options at a
weighted-average exercise price of $5.78 per share, 779,173 shares were
reserved for future option grants and 2,636 shares had been issued upon
exercises, and (b) there were outstanding warrants to purchase an
aggregate of 122,401 shares of Common Stock at a weighted-average exercise
price of $11.09 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 2,437,200 shares of Common
Stock (2,527,200 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 3,977,488 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% 210,082,000 49.0% $7.40
Telmex(2)................... 8,125,000 13.8 76,000,000 17.7 9.35
Other existing
stockholders(3)............ 14,497,605 24.6 34,933,000 8.1 2.41
New investors............... 8,000,000 13.5 108,000,000 25.2 13.50
---------- ----- ------------ -----
Total..................... 59,011,766 100.0% $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 3,977,488 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 2,343,191 shares of Common Stock were
subject to outstanding options at a weighted-average exercise price of $5.78
per share, 779,173 shares were reserved for future option grants and 2,636
shares had been issued upon exercises, and (b) there were outstanding warrants
to purchase an aggregate of 122,401 shares of Common Stock at a weighted-
average exercise price of $11.09 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 2,437,200
shares of Common Stock (2,527,200 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.................... -- -- 780,000 392,000 455,000 208,000
----- ----- -------- -------- -------- --------
Total billable
subscribers at period
end.................... -- -- 787,000 613,000 648,000 641,000
===== ===== ======== ======== ======== ========
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 96.2 222.5
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 3,977,488 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>
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 $34.7 million in the fourth quarter of
1998, consisting of Internet revenues of $33.7 million and other revenues of
$1.0 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 by 72,000, or 17%,
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 455,000 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 7,000, or 1%, from 648,000 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 deemed to be 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, $1.1 million, $1.1 million, $.5 million and $.1
million in the years ending December 31, 1998, 1999, 2000, 2001 and 2002,
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 780,000 at December 31, 1996 to 392,000 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 780,000 Prodigy Classic billable subscribers at December 31, 1996.
At December 31, 1995, PSC had 1,129,000 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 613,000 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 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 Marketplace on Prodigy Internet 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 January
1999, the Company agreed to create a co-branded Internet service with Value
America, Inc., that will provide exclusive discounts and online shopping
opportunities to subscribers, and to include the Value America online stores
in Prodigy Internet's Marketplace area. In September 1998, the
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Company launched co-branded paging services in partnership with SkyTel. Over
the next 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, 1998, 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".
The target audiences for Prodigy Internet 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 cash payments 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, 144,000 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. 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. America Online has recently announced several transactions
that could result in additional competition for the Company. 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. In January 1999,
America Online and Bell Atlantic announced a strategic alliance to provide
high speed DSL access to the America Online service.
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
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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. In February 1999, enforcement of COPA was
enjoined by a federal judge. The Company cannot predict whether additional
federal or 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. Since 1994, he has also been a private investor in
Mexican real estate, textile and retail businesses. 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
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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) -- $ 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 $ 508,906 $ 973,239
James P. Dougherty...... -- -- -- -- -- --
Former Executive
Officers:
Inder S. Gopal(3)....... -- -- -- -- -- --
James L'Heureux......... 43,750 3.04% $4.00 1/26/08 $ 323,849 $ 619,334
</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
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<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 2,343,191 shares of Common Stock at a
weighted-average exercise price of $5.78 per share, (ii) an aggregate of 2,636
shares of Common Stock had been issued upon exercises and (iii) 779,173
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.
Stock Option Dispute
After the Company filed the Registration Statement for the Offerings, two
former executives of the Company, Edward A. Bennett and William J. Lansing,
contacted the Company and asserted through legal counsel 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 Messrs. Bennett and Lansing 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
In January 1999, the Company's Board of Directors and stockholders adopted
the Company's 1999 Outside Director Stock Option Plan (the "Director 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's Board of Directors and stockholders adopted
the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). 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
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<PAGE>
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 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").
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 (85% of the Price to Public set forth on
the cover page of this Prospectus in the case of the first 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 1,988,744
shares of Common Stock pursuant to the conversion of its Contingent Note and
(ii) hold a Contingent Warrant to purchase 2,437,200 shares of Common Stock
(2,527,200 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 5,958,333 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 453,728 shares of Series A Convertible Preferred Stock ("Series A Stock")
$2.00 per share. Each share of Series A Stock was convertible into .25 share
of Common Stock for an effective purchase price of $8.00 per share of Common
Stock. On March 31, 1995, each share of Series A Stock was reclassified and
changed into .3125 share 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).......................... -- -- 4,425,944 7.2
Sears(12)........................ -- -- 4,425,944 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 3,977,488 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) Shares to be owned after the Offering include 2,000,000 shares to be
purchased in the Telmex Purchase. 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) 1,988,774 shares issued to
IBM pursuant to the conversion of the Contingent Note held by IBM and
(ii) 2,437,200 shares of Common Stock (2,527,200 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) 1,988,774 shares issued to
Sears pursuant to the conversion of the Contingent Note held by Sears and
(ii) 2,437,200 shares of Common Stock (2,527,200 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
The authorized capital stock of the Company consists 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) 45,034,278 shares of Common Stock held by 431 stockholders of
record, (ii) options to purchase an aggregate of 2,343,191 shares of Common
Stock at a weighted-average exercise price of $5.78 per share, (iii) warrants
to purchase an aggregate of 122,401 shares of Common Stock at a weighted-
average exercise price of $11.09 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 59,012,599 shares of Common Stock, after giving effect to
the conversion of the Contingent Notes held by IBM and Sears into an aggregate
of 3,977,488 shares of Common Stock, and (ii) the Contingent Warrants will be
exercisable for an aggregate of 4,874,400 shares of Common Stock (5,054,400
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.
77
<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 3,977,488 shares of Common Stock, there will be
59,012,599 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 51,012,599 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 2,491,242 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 70,667 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 38,365,351 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 47,849,726 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 436,201
shares and 180 days after the closing of the Offering with respect to
47,413,525 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 1,988,744 shares of Common Stock pursuant to the
conversion of its Contingent Note and (ii) hold a Contingent Warrant to
purchase 2,437,200 shares (2,527,200 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 Underwriters and the Company have agreed to certain covenants of
indemnity and contribution 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 800,000 shares of Common Stock for sale to certain directors, officers,
employees, friends and family of the Company, Carso Global Telecom, Telmex and
their affiliates 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 10% 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 47,849,726 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 436,201
shares and 180 days after the closing of the Offering with respect to
47,413,525 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 the Offerings, 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 Securities Exchange Act of
1934, 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>
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.
/s/ PricewaterhouseCoopers LLP
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 FEBRUARY 8, 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 $1,500,000.
(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............................................. $48,170.25
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.......................................... 350,000
Printing and mailing expenses.................................... 250,000
Miscellaneous.................................................... 94,529.75
----------
Total.......................................................... $1,500,000
==========
</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 (which it
expects to increase to up to $20,000,000 prior to the Offerings) that insures
the directors and officers of the Registrant (with entity coverage) 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 was effected on
February 4, 1999.
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.
II-4
<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 20,569,217 shares of
Common Stock with exercise prices ranging from $1.00 to
II-5
<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.
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.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
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.
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.
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.39** Form of 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>
- ----------
*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. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in White Plains, New
York, on this 8th day of February, 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. 3 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 February 8, 1999
______________________________________ Chief Executive Officer
Samer F. Salameh (principal executive
officer)
Alfredo Sanchez * Vice Chairman of the Board February 8, 1999
______________________________________
Alfredo Sanchez
David R. Henkel * Executive Vice President, February 8, 1999
______________________________________ Finance, Chief Financial
David R. Henkel Officer and Director
(principal financial and
accounting officer)
Arturo Elias * Director February 8, 1999
______________________________________
Arturo Elias
James M. Nakfoor * Director February 8, 1999
______________________________________
James M. Nakfoor
Russell I. Pillar * Director February 8, 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.
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.
10.39** Form of 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>
- ----------
*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 3.1
CERTIFICATE OF INCORPORATION
OF
PRODIGY, INC.
FIRST. The name of the Corporation is: Prodigy, Inc.
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 150,000,000 shares, of which 140,000,000 shares shall
be Common Stock, $.01 par value per share, and 10,000,000 shares shall be Series
Preferred Stock, $.01 par value per share, set aside for designation from time
to time by the Board of Directors of the Corporation in accordance with the
provisions of the General Corporation Law of the State of Delaware.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
<PAGE>
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one of more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
special voting rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or be junior to the Preferred Stock of
any other series to the extent permitted by law. Except as otherwise
specifically provided in this
<PAGE>
Certificate of Incorporation, no vote of the holders of the Preferred Stock or
Common Stock shall be a prerequisite to the issuance of any shares of any series
of the Preferred Stock authorized by and complying with the conditions of this
Certificate of Incorporation, the right to have such vote being expressly waived
by all present and future holders of the capital stock of the Corporation.
FIFTH. The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
Ernest L. Godshalk One Kendall Square
Building 200, 2nd Floor
Cambridge, MA 02139
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 79 of Title of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or
<PAGE>
class of stockholders, of this corporation, as the case may be, and also on this
corporation.
EIGHTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment
NINTH. 1. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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 Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
<PAGE>
2. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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 Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware or such other court shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
---- ----------
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
<PAGE>
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel of the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6 below, in
-------------------
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article or any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter, provided,
--------
however, that the payment of such expenses incurred by an Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking may be accepted without reference to the financial ability of
such person to make such repayment.
<PAGE>
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority
vote of a quorum of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), (b) if no such quorum is obtainable, a majority
vote of a committee of two or more disinterested directors, (c) a majority vote
of a quorum of the outstanding shares of stock of all classes entitled to vote
for directors, voting as a single class, which quorum shall consist of
stockholders who are not at that time parties to the action, suit or proceeding
in question, (d) independent legal counsel (who may be regular legal counsel to
the Corporation), or (e) a court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the
Corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6 that the Indemnitee has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable standard of
conduct. The indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the
<PAGE>
General Corporation Law of Delaware or any other applicable laws shall affect or
diminish in any way the rights of any Indemnitee to indemnification under the
provisions hereof with respect to any action, suit, proceeding or investigation
arising out of or relating to any actions, transactions or facts occurring prior
to the final adoption of such amendment, termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time
to time by its Board of Directors, grant indemnification rights to other
employees or agents of the Corporation or other persons serving the Corporation
and such rights may be equivalent to, or greater or less than, those set forth
in this Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
<PAGE>
12. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the Indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
EXECUTED at Cambridge, MA, on June 13, 1996.
/s/ E. Godshalk
---------------------------------
Incorporator
Ernest L. Godshalk
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PRODIGY, INC.
- -------------------------------------------------------------------------------
PRODIGY, INC. (hereinafter called the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: The Board of Directors of the Corporation, at a meeting thereof
duly called and held on September 23, 1997, acting pursuant to Section 242 of
the General Corporation Law of the State of Delaware, duly adopted the following
resolution:
RESOLVED: That it is hereby proposed and declared advisable to amend the
Corporation's Certificate of Incorporation by deleting the first
paragraph of Article FOURTH and inserting in lieu thereof the
following:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 280,000,000 shares of Common
Stock, $.01 par value per share ("Common Stock"), and (ii) 10,000,000 shares of
Preferred Stock, $.01 par value per share ("Preferred Stock")."
SECOND: The stockholders of the Corporation duly approved this
Certificate of Amendment of Certificate of Incorporation and the amendment
contained herein by written consent in accordance with Sections 228 and 242 of
the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Amendment to be signed by its President
this September 30, 1997.
PRODIGY, INC.
By: /s/ Samer Salameh
--------------------------------
President
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
Prodigy (New York), Inc.
(a Delaware corporation)
INTO
Prodigy, Inc.
(a Delaware corporation)
Prodigy, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: That the Corporation was incorporated on the 13th day of June,
-----
1996, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
------
class of the stock of Prodigy (New York), Inc., a corporation incorporated on
the 17th day of July, 1996 pursuant to the General Corporation Law of the State
of Delaware.
THIRD: That the Board of Directors of the Corporation, at a meeting duly
-----
held on the 6th day of July, 1998, duly adopted the following resolutions:
RESOLVED: That, pursuant to Section 253 of the Delaware General
Corporation Law, the Corporation is hereby authorized to
merge Prodigy (New York), Inc., a Delaware corporation which
is a wholly owned subsidiary of the Corporation, into the
Corporation;
RESOLVED: That the President and Secretary of the Corporation be and
each hereby is, authorized to execute a Certificate of
Ownership and Merger with respect to the merger of Prodigy
(New York), Inc. into the Corporation and to cause the same
to be filed with the Secretary of State of Delaware, and to
take all such other actions and to execute all such other
instruments and agreements as they or any of them may deem
appropriate to effect such merger;
<PAGE>
RESOLVED: That the merger of Prodigy (New York), Inc. into the
Corporation shall be effective upon the filing of a
Certificate of Ownership and Merger with the Secretary of
State of Delaware.
RESOLVED: That the name of the Corporation effective upon the filing
of a Certificate of Ownership and Merger with the Secretary
of State of Delaware shall be Prodigy Communications
Corporation.
IN WITNESS WHEREOF, Prodigy, Inc. has caused this Certificate to be signed
by Samer F. Salameh as President and attested by Marc Jacobson as Secretary,
this 3rd day of August, 1998.
PRODIGY, INC.
By: /s/ Samer F. Salameh
--------------------------------
Samer F. Salameh
President
ATTEST:
/s/ Marc Jacobson
- --------------------------------
Marc Jacobson
Secretary
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
Prodigy International, Inc.
(a Delaware corporation)
INTO
Prodigy Communications Corporation
(a Delaware corporation)
Prodigy Communications Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That the Corporation was incorporated on the 6th day of June,
-----
1996, pursuant to the General Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
------
class of the stock of Prodigy International, Inc., a corporation incorporated on
the 1st day of September, 1995 pursuant to the General Corporation Law of the
State of Delaware under the name International Online, Inc.
THIRD: That the Board of Directors of the Corporation, by a unanimous
-----
written consent of directors in lieu of a meeting dated as of October 29, 1998,
duly adopted the following resolutions:
RESOLVED: That, pursuant to Section 253 of the Delaware General
Corporation Law, the Corporation is hereby authorized to merge Prodigy
International, Inc., a Delaware corporation which is a wholly owned subsidiary
of the Corporation, into the Corporation.
RESOLVED: That the President and Secretary of the Corporation be, and
each hereby is, authorized to execute a Certificate of Ownership and Merger with
respect to the merger of Prodigy International, Inc. into the Corporation and to
cause the same to be filed with the Secretary of State of Delaware, and to take
all such other actions and to execute all such other instruments and agreements
as they or any of them may deem appropriate to effect such merge.;
RESOLVED: That the merger of Prodigy International, Inc. into the
Corporation shall be effective upon the filing of a Certificate of Ownership and
Merger with the Secretary of State of Delaware.
<PAGE>
IN WITNESS WHEREOF, Prodigy Communications Corporation has caused this
Certificate to be signed by David Henkel as CFO this 1st day of December, 1998.
PRODIGY COMMUNICATIONS
CORPORATION
By: /s/ David R. Henkel
--------------------
Name: David Henkel
Title: Chief Financial Officer
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PRODIGY COMMUNICATIONS CORPORATION
______________________________________________________________________________
PRODIGY COMMUNICATIONS CORPORATION (hereinafter called the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:
FIRST: The Board of Directors of the Corporation, at a meeting thereof
duly called and held on January 25, 1999, acting pursuant to Section 242 of the
General Corporation Law of the State of Delaware, duly adopted the following
resolution:
RESOLVED: That it is hereby proposed and declared advisable to amend the
Corporations's Certificate of Incorporation, as amended, as
follows:
The first paragraph of Article FOURTH shall be deleted and the following
shall be inserted in lieu thereof:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 150,000,000 shares of
Common Stock, $.01 par value per share ("Common Stock"), and (ii)
10,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred
Stock").
Upon the filing of this Certificate of Amendment with the Secretary of
State of the State of Delaware, each four issued and outstanding shares of
Common Stock, $.01 par value per share, shall be reclassified into one (1)
share of Common Stock, $.01 par value per share. Pending the surrender of
certificates representing the Common Stock reclassified pursuant to the
<PAGE>
preceding sentence, each certificate therefor shall, from and after the
time of such reclassification, be deemed to represent the number of shares
of Common Stock into which the shares evidenced thereby were so
reclassified. No fractional shares of Common Stock shall be issued upon
the reclassification pursuant to this paragraph. The number of full and
fractional shares of Common Stock to which a holder is entitled upon the
reclassification pursuant to this paragraph shall be determined on the
basis of the total number of full and fractional shares being reclassified
held by such holder. Any remaining fraction of a share of Common Stock
shall be settled by a cash payment made by the Corporation in an amount
equal to such fraction multiplied by the fair market value of the Common
Stock as determined by the Corporation's Board of Directors."
SECOND: The stockholders of the Corporation duly approved this Certificate
of Amendment of Certificate of Incorporation and amendment contained herein by
written consent in accordance with Sections 228 and 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Amendment to be signed by an authorized
officer this 1st day of February, 1999.
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Andrea S. Hirsch
---------------------------
Andrea S. Hirsch
Executive Vice President, Business
Development and General Counsel
-2-
<PAGE>
Exhibit 5.1
Hale and Dorr LLP
60 State Street
Boston, MA 02109
February __, 1999
Prodigy Communications Corporation
44 South Broadway, 9th Floor
White Plains, NY 10601
Re: Registration Statement on Form S-1 (File No. 333-64233)
-------------------------------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-64233) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of 11,200,000 shares of Common Stock, $0.01 par value per share (the "Shares"),
of Prodigy Communications Corporation, a Delaware corporation (the "Company"),
including (i) 1,200,000 Shares issuable upon exercise of an over-allotment
option granted by the Company and (ii) 2,000,000 Shares issuable to Telefonos de
Mexico, S.A. de C.V. ("Telmex").
The Company is to sell (i) 9,200,000 Shares (including the 1,200,000 Shares
subject to the over-allotment option) pursuant to an Underwriting Agreement (the
"Underwriting Agreement") to be entered into by and among the Company and Bear,
Stearn & Co. Inc., BancBoston Robertson Stephens Inc., ING Baring Furman Selz
LLC and Volpe Brown Whelan & Company, LLC, as representatives of the several
underwriters named in the Underwriting Agreement, and Wit Capital Corporation,
as e-Manager, the form of which has been filed as Exhibit 1.1 to the
Registration Statement and (ii) 2,000,000 Shares pursuant to a Stock Purchase
Agreement (the "Stock Purchase Agreement") to be entered into by and between the
Company and Telmex, the form of which is being filed as Exhibit 10.39 to the
Registration Statement.
We are acting as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, the Stock Purchase Agreement, minutes of
meetings of the stockholders and the Board of Directors of the Company as
provided to us by the Company, stock record books of the Company as provided to
us by the Company, the Certificate of Incorporation and By-Laws of the Company,
each as restated and/or amended to date, and such other documents as we have
deemed necessary for purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
<PAGE>
Prodigy Communications Corporation
February __, 1999
Page 2
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we
are opining herein, we have assumed that such laws are identical to the state
laws of the Commonwealth of Massachusetts, and we are expressing no opinion
herein as to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement and the Stock Purchase Agreement, as applicable, the Shares will be
validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters."
In giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<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 RR1 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.
Effective August 1, 1998, the Executive shall serve as Executive Vice President
of the Company, reporting to the Chief Executive Officer. 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.
The Executive shall exercise best efforts to identify and engage a
qualified person to fill each of the newly created roles of Senior Vice
President, Product Development, and Vice President, Project Development. In
selecting these employees, Executive shall seek individuals who, in her best
judgement, will each have the capacity to assume Executive's role, in the event
her employment relationship should terminate. Executive acknowledges that, as of
September 1, 1998, recruiting for these positions has begun. Executive shall
also identify all critical talent and functions not readily replaced from within
her organization, and exercise best efforts to hire individuals, within
headcount restrictions, who may provide such talent and functions, should
existing talent leave the Company's employ.
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 $190,000 annually on August 1, 1998.
<PAGE>
3.2 Performance Bonuses. The Executive shall be eligible to receive up to
-------------------
50% of her 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 her 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 her eligible to
participate.
<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 her 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 her 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),
or (iv) upon completion of fulltime employment by the Company through
February 28, 1999. If the Executive chooses to exercise her rights under
this Section 4.3(iv), then Section 4.4 is not applicable.
4.4 At the election of the Executive, upon not less than two (2) weeks'
prior written notice of termination, or, after February 28, 1999, 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 her actual employment by the Company, continue to pay to the Executive
her base salary as in effect on the date of notice of termination and
continue to provide to the Executive the fringe benefits available to her
under Section 3.6 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 her 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 her 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 50% of 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 the Executive's employment is
terminated by the Executive for Good Reason pursuant to Section 4.3(iv),
the vesting schedule on all options previously granted to the Executive
will be accelerated so that a total of 100% of the Executive's options
shall vest on the termination date, and the Executive shall have the right
to exercise these options until December 31, 1999. 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 her 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 her 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 her 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 her custody or possession,
shall be and are the exclusive property of the Company to be used by
the Executive only in the performance of her duties for the Company.
(c) The Executive agrees that her obligation not to disclose or
use information, know-how and records of the types set forth in
paragraphs (a) and (b) above, also
<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 her direction or jointly with others during her 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 her
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 her 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 her
----------------
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 her in confidence or in trust prior to her 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.
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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. In order to
exercise her rights under section 4.3(iv), Executive must give notice to the
Company between January 15 and January 31, 1999.
9. Pronouns.
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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.
----------------
<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.
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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
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personal and shall not be assigned by her.
14. Miscellaneous.
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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
----------------------------------
<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
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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.
Notwithstanding the foregoing, or any provision hereof to the contrary, the Fair
Market Value of a Share on the Enrollment Date of the initial Offering Period
shall be the initial public offering price at which Shares are offered to the
public
(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.
<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 1998 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
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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
<PAGE>
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 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, an
Offering Period automatically shall terminate as of the close of business on the
first Purchase Date on which the Fair Market Value of a Share on such Purchase
Date is less than the Fair Market Value of a Share on the Enrollment Date of
such Offering Period, and each Participant in each such terminated Offering
Period(s)
<PAGE>
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 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
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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)
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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
<PAGE>
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.
(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,
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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
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assignment, transfer, pledge or other disposition shall be without effect.
<PAGE>
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.
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).
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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
<PAGE>
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.
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.
<PAGE>
(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.
(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 25th day of January, 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
<PAGE>
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:
<PAGE>
EXHIBIT 10.39
STOCK PURCHASE AGREEMENT
AGREEMENT effective as of the ___ day of February, 1999 between Prodigy
Communications Corporation, a Delaware corporation ("Prodigy"), and Telefonos de
Mexico, S.A. de C.V., a Mexican corporation ("Telmex").
In consideration of the mutual promises hereinafter set forth and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereby agree as follows:
1. Definitions. All capitalized terms used herein and not otherwise
-----------
defined herein shall have the respective meanings set forth in the Underwriting
Agreement, dated as of the date hereof, among Prodigy, as issuer, and Bear,
Stearns & Co. Inc., BancBoston Robertson Stephens Inc., ING Baring Furman Selz
LLC and Volpe Brown Whelan & Company, LLC, as Representatives of the
Underwriters (the "Underwriting Agreement").
2. Purchase and Sale of the Telmex Shares. Prodigy hereby agrees to issue
--------------------------------------
and sell to Telmex, and Telmex hereby agrees to purchase from Prodigy, 2,000,000
shares (the "Telmex Shares") of common stock, $.01 par value per share ("Common
Stock"), of Prodigy for a purchase price per share of Common Stock equal to the
Price to Public set forth on the cover page of the Prospectus for Prodigy's
initial public offering ("IPO"). The number of Telmex Shares reflects the one-
for-four reverse stock split implemented on February 4, 1999.
3. Closing. Subject to the satisfaction or waiver of the conditions
-------
specified in Sections 6 and 7 below, the closing (the "Closing") of the purchase
and sale of the Telmex Shares, and the payment of the purchase price with
respect thereto, shall take place concurrently with the purchase and sale of the
Firm Shares pursuant to the Underwriting Agreement. At the Closing, Prodigy
shall deliver to Telmex a stock certificate, registered in the name of Telmex,
representing the Telmex Shares, and Telmex shall pay the purchase price for the
Telmex Shares by wire transfer or other form of payment acceptable to Prodigy.
Such stock certificate shall not bear any restrictive legend under the
Securities Act of 1933.
4. Representations and Warranties of Prodigy. The representations and
-----------------------------------------
warranties set forth in Section 1 of the Underwriting Agreement are hereby
incorporated herein by reference for the benefit of Telmex in conjunction with
the purchase and sale of the Telmex Shares hereunder, except that (i) all
references to "this Agreement" or "this Agreement and the Telmex Purchase
Agreement" in such Section 1
<PAGE>
shall mean this Agreement and (ii) all references to the "Shares" in such
Section 1 shall mean the Telmex Shares rather than the Firm Shares and the
Additional Shares.
5. Representations and Warranties of Telmex. Telmex represents and
----------------------------------------
warrants as follows:
5.1 Authorization and Binding Nature. The execution, delivery and
--------------------------------
performance by Telmex of this Agreement has been duly authorized by all
requisite corporate action, and this Agreement constitutes the valid and legally
binding obligation of Telmex, enforceable against Telmex in accordance with its
terms.
5.2 Non-Contravention. The execution, delivery and performance by
-----------------
Telmex of this Agreement will not, with or without the giving of notice or the
passage of time or both, (a) violate the provisions of any law, rule or
regulation applicable to Telmex, (b) violate the provisions of the charter
documents of Telmex, (c) violate any judgment, decree, order or award of any
court, governmental body or arbitrator applicable to Telmex, or (d) conflict
with or violate any agreement to which Telmex is a party or by which it is
bound.
5.3 Receipt of Preliminary and Final Prospectuses. Telmex has received
---------------------------------------------
the preliminary prospectus dated January 26, 1999 relating to the Telmex Shares.
Telmex hereby consents to delivery of any subsequent preliminary prospectus
relating to the Telmex Shares, if any, and the final prospectus relating to the
Telmex Shares, via email addressed to [email protected].
6. Telmex's Conditions to Closing. The obligation of Telmex to consummate
------------------------------
the transactions contemplated hereby is subject to the following conditions
only, each of which may be waived in the sole discretion of Telmex:
6.1 Performance of Covenants and Agreements. Prodigy shall have
---------------------------------------
performed the covenants and agreements to be performed by it under this
Agreement at or prior to the Closing.
6.2 Closing of IPO. The purchase and sale of, and payment for, the
--------------
Firm Shares pursuant to the Underwriting Agreement shall have been consummated.
7. Prodigy's Conditions to Closing. The obligation of Prodigy to
-------------------------------
consummate the transactions contemplated hereby is subject to the following
conditions only, each of which may be waived in the sole discretion of Prodigy:
7.1 Representations and Covenants. The representations and warranties
-----------------------------
of Telmex contained in this Agreement shall be true as of the Closing and
2
<PAGE>
Telmex shall have performed the covenants and agreements to be performed by it
under this Agreement at or prior to the Closing.
7.2 Closing of IPO. The purchase and sale of, and payment for, the
Firm Shares pursuant to the Underwriting Agreement shall have been consummated.
8. Notices. Any notices or other communications required or permitted
-------
hereunder shall be in the English language and shall be sufficiently given if
delivered personally or sent by telecopy or via a reputable express courier,
with charges prepaid, to the address set forth below or to such other address of
which the parties may have given notice. Unless otherwise specified herein,
such notices or other communications shall be deemed received one business day
after personal delivery or delivery by telecopy, or three business days after
being sent, if sent by reputable express courier.
If to Prodigy:
44 South Broadway
White Plains, NY 10601
Attention: General Counsel
with a copy to:
David A. Westenberg, Esq.
Hale and Dorr LLP
60 State Street
Boston, MA 02109
If to Telmex:
Parque Via 190
Officina 1016
Colonia Cuauhtemoc
Mexico City, Mexico 06599
with copies to:
Nicolas Grabar, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Rafael Robles Miaja, Esq.
Franck, Galicia, Duclaud y Robles, S.C.
Paseo de las Palmas
#405, Col. Lomas de Chapultepec
Mexico City, Mexico 11000
3
<PAGE>
9. Successors and Assigns. No party may assign its obligations hereunder
----------------------
without the prior written consent of the other party, except that Telmex may
assign its rights and obligations hereunder to any subsidiary of Telmex.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns. Any
assignment in contravention of this provision shall be void.
10. Entire Agreement. This Agreement represents the entire understanding
----------------
and agreement between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral and written and all contemporaneous oral
negotiations, commitments and understandings between such parties. The parties
may amend or modify this Agreement, in such manner as may be agreed upon, only
by a written instrument executed by the parties hereto.
11. Expenses. Each party shall pay its own expenses in connection with
--------
this Agreement and the transactions contemplated hereby.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York in the United States, without
reference to conflict of laws principles, and the parties hereby consent to the
jurisdiction of the courts of the State of New York.
13. Section Headings. The section headings are for the convenience of the
----------------
parties and in no way alter, modify, amend, limit or restrict the contractual
obligations of the parties.
14. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
4
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of and on the date first above written.
PRODIGY COMMUNICATIONS CORPORATION
By:
-----------------------------
Title:
--------------------------
TELEFONOS DE MEXICO, S.A. DE C.V.
By:
-----------------------------
Title:
--------------------------
5
<PAGE>
EXHIBIT 11.1
PRODIGY COMMUNICATIONS CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Basic Diluted
Shares Shares
---------- ----------
(In thousands)
<S> <C> <C>
For the year ended December 31, 1996
Common shares outstanding, beginning of the period 8,632 8,632
Weighted average common shares issued during the period 1,729 1,729
------------ ------------
Weighted average number of common
shares outstanding 10,361 10,361
------------ ------------
Net loss $ (90,802) $ (90,802)
------------ ------------
Net loss per common share $ (8.76) $ (8.76)/1/
For the year ended December 31, 1997
Common shares outstanding, beginning of the period 12,310 12,310
Weighted average common shares issued during the period 5,027 5,027
------------ ------------
Weighted average number of common
shares outstanding 17,337 17,337
Net loss
Net loss per common share $ (132,775) $ (132,775)
------------ ------------
$ (7.66) $ (7.66)/1/
For the nine-months ended September 30, 1998 ------------ ------------
Common shares outstanding, beginning of the period 33,804 33,804
Weighted average common shares issued during the period 3,685 3,685
------------ ------------
Weighted average number of common
shares outstanding 37,489 37,489
------------ ------------
Net loss $ (47,877) $ (47,877)
------------ ------------
Net loss per common share $ (1.28) $ (1.28)/1/
------------ ------------
</TABLE>
(1) In 1996, 1997 and 1998, options and warrants to purchase 2,645,347,
6,158,347 and 2,289,683 shares of common stock, respectively, and the
conversion of 8% Contingent Convertible Promissory Notes valued at
$30,500,000, were excluded from the calculation of diluted earnings per
share because the effect of their inclusion would have been anti-
dilutive.
<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 February 8, 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
February 8, 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>
