<PAGE>
As filed with the Securities and Exchange Commission on May 5, 2000
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PRODIGY COMMUNICATIONS CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class B common stock, $.01 par value per share, of Prodigy
Communications Corporation and units in Prodigy Communications Limited
Partnership
(2) Aggregate number of securities to which transaction applies:
One share of Class B common stock and approximately 43% of the units in
the operating partnership
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$20.6875 (average of high and low prices of the common stock, $.01 par
value per share, of Prodigy on the Nasdaq National Market on December
16, 1999) per share for up to 50,136,000 shares of Class A common
stock, $.01 par value per share, of Prodigy into which each of share of
common stock which will be automatically converted upon the
consummation of the transaction and the share of Class B common stock
and approximately 43% of units in the operating partnership may be
converted
(4) Proposed maximum aggregate value of transaction: $1,037,188,500.
(5) Total fee paid: $207,438.
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Prodigy Communications Corporation
May 5, 2000
Dear Prodigy Communications Corporation Stockholders:
You are cordially invited to attend the 2000 annual meeting of stockholders
of Prodigy Communications Corporation at 11:00 a.m., local time, on Wednesday,
May 24, 2000, at the Crowne Plaza Hotel, 66 Hale Avenue, White Plains, New York
10601. At the annual meeting, you will be asked:
. to approve a proposed transaction between Prodigy and SBC Communications
Inc.;
. to elect six directors of Prodigy;
. to adopt the 1999 stock option plan; and
. to ratify the selection of PricewaterhouseCoopers LLP as our independent
accountants for fiscal year 2000.
Our proposed transaction with SBC will establish a strategic relationship in
which:
. SBC will acquire an approximate 43% indirect interest in Prodigy;
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses in the United States;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers--the wholesale price to be paid by SBC to Prodigy for the
Prodigy Internet service that SBC will resell to its existing Internet
subscribers will equal SBC's average retail price as of the closing less
reasonable and necessary expenses actually incurred by SBC in serving
its existing Internet subscribers;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period--all new subscribers obtained for
Prodigy by SBC will be Prodigy subscribers;
. Prodigy has agreed to pay SBC a fee of between $40 and $75 for each
subscriber obtained by SBC;
. SBC has agreed to pay Prodigy a penalty, under a specified formula, if
SBC does not obtain 1,200,000 additional Internet subscribers for
Prodigy over the three-year period, with the size of the penalty based
on the number of subscribers actually obtained by SBC who pay at least
one monthly bill from Prodigy--for example, the penalty will range from
$165,000,000 if SBC acquires no new subscribers for Prodigy, to
$105,000,000 if SBC acquires 600,000 new subscribers for Prodigy, to no
penalty if SBC acquires 1,200,000 new subscribers for Prodigy;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers, so long as SBC's terms are
competitive with those offered by other providers;
. SBC will have the exclusive right to provide telecommunications,
advertising, telecommunications e-commerce and Internet telephony
applications in conjunction with the Prodigy Internet service to
Prodigy's subscribers, so long as SBC's terms are competitive with those
offered by other providers; and
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides to Prodigy's subscribers.
<PAGE>
SBC's exclusive rights described in the four preceding bullet points will be
subject to Prodigy's existing agreements with other providers. Prodigy
currently has agreements with other providers of network, telecommunications
and related services. These agreements will not be affected by the SBC's
transaction. When these agreements terminate, SBC's exclusive rights described
above will apply.
Following the SBC transaction, Prodigy will:
. provide the Prodigy Internet service to SBC's existing Internet
subscribers;
. continue to provide the Prodigy Internet service to Prodigy's current
subscribers;
. obtain additional Prodigy Internet subscribers through SBC's marketing
efforts; and
. continue to obtain new Prodigy Internet subscribers through Prodigy's
existing and new channels on a nationwide basis.
In order to implement our strategic relationship with SBC:
. Prodigy will contribute substantially all of its assets and liabilities
and transfer its employees to the operating partnership;
. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with SBC's consumer and small
business Internet operations and that are selected by Prodigy because
Prodigy determines that they would be useful in connection with the
provision of services to SBC's customers and Prodigy's customers after
the closing;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of royalty-free licenses to use SBC's trademarks in
connection with the marketing and operation of the Prodigy Internet
service and Prodigy's right to manage SBC's existing Internet customers;
. Prodigy will receive an initial interest in the operating partnership of
approximately 57%;
. SBC will receive an initial interest in the operating partnership of
approximately 43%; and
. SBC may convert its interest in the operating partnership into a direct
equity interest in Prodigy at any time, or may require the operating
partnership to be merged into Prodigy at any time.
Prodigy and SBC believe that the value of the assets to be contributed by SBC
is equal to the value of the interest in Prodigy to be received by SBC. As a
result of this structure, Prodigy will become a holding company and its
principal asset will be its interest in the operating partnership. Upon the
liquidation of the operating partnership, the assets contributed by Prodigy and
SBC will be distributed to them after payment of the operating partnership's
liabilities.
Prodigy and SBC will enter into the following agreements in order to
establish their strategic relationship:
. an investment agreement covering SBC's acquisition of its equity interest
in Prodigy and related matters;
. a strategic and marketing agreement governing the marketing of the
Prodigy Internet service and related matters;
. an amended limited partnership agreement governing the operation of the
operating partnership; and
. a registration rights agreement for the future registration of SBC's
shares in Prodigy under the federal securities laws and related matters.
The strategic and marketing agreement will have an initial term of three
years and will automatically renew for additional three-year terms unless
either Prodigy or SBC terminates it. The strategic and marketing agreement may
be terminated earlier by SBC if Prodigy fails to provide a competitive portal
service for three consecutive quarters or by either party if the other party
breaches the agreement.
ii
<PAGE>
As part of its strategic relationship with SBC, Prodigy will also amend its
certificate of incorporation and by-laws to implement the following corporate
governance arrangements:
. SBC will have the right to appoint three Prodigy directors;
. Carso Global Telecom and Telmex, Prodigy's current principal
stockholders, will have the right to appoint three Prodigy directors;
. Prodigy's other three directors will be its chief executive officer and
two independent directors;
. Prodigy's board will establish a new executive steering committee, which
must approve all major corporate actions prior to being submitted to the
board for consideration; and
. SBC will have the right to appoint two members of the executive steering
committee and Carso Global Telecom and Telmex will have the right to
appoint the other two members of the executive steering committee.
The agreements and transactions described above are mutually dependent and
none of them will become effective unless all of them become effective.
Stockholder approval of the SBC transaction will include approval of all of the
agreements and transactions described above.
Your board of directors has determined that the terms of the SBC transaction
are advisable and in the best interest of Prodigy and you and unanimously
recommends that you approve the SBC transaction and the related agreements
described above.
Your board of directors has obtained an opinion from its independent
financial advisor, Bear, Stearns & Co. Inc., to the effect that the
consideration to be issued to SBC in the SBC transaction is fair, from a
financial point of view, to Prodigy.
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement does not constitute a firm
financing commitment from Citibank. The Citibank financing is subject to the
issuance by SBC of a performance guarantee and satisfaction of other
conditions, and Prodigy cannot assure that the financing will be completed.
Prodigy and SBC have agreed in principle that SBC will provide a performance
guarantee that, in the event Prodigy becomes unable to continue to perform its
service obligations under the subscriber contracts, SBC will either perform
Prodigy's service obligations directly or replace Prodigy with a substitute
Internet service provider. In exchange for this guarantee, Prodigy and SBC have
agreed in principle that SBC will receive a contingent warrant to purchase
537,924 shares of Prodigy common stock for $1.00 per share, expiring 3.5 years
after the closing date of the Citibank financing and exercisable only if:
. SBC's performance guarantee is triggered;
. Prodigy's chief executive officer is not then an SBC appointee; and
. SBC, Carso Global Telecom and Telmex then collectively own, on a fully-
diluted basis, securities representing less than 50% of the voting power
of Prodigy's then outstanding securities.
Prodigy has also entered into an agreement to merge with FlashNet
Communications, Inc. In the merger, each share of FlashNet common stock will be
exchanged for 0.35 of a share of Prodigy common stock. Prodigy expects to issue
approximately 5,000,000 shares of its common stock in the merger. Upon
consummation of the merger, but excluding the impact of the SBC transaction,
FlashNet shareholders will own approximately 7% of the outstanding Prodigy
common stock. The FlashNet merger is subject to the approval of the FlashNet
stockholders. The board of directors of FlashNet has recommended that the
FlashNet stockholders approve the merger and has solicited their approval in a
proxy statement which has been sent to the FlashNet stockholders. The approval
of Prodigy's stockholders is not required to complete the FlashNet merger. The
completion of the SBC transaction is not a condition to the completion of
Prodigy's merger with FlashNet, and the completion of the FlashNet merger is
not a condition to the completion of the SBC transaction.
iii
<PAGE>
The accompanying proxy statement provides detailed information about Prodigy,
the SBC transaction and the other matters to be considered at the annual
meeting. Please give all of this information your careful attention. In
particular, you should carefully consider the discussion in the section
entitled "Risk Factors" beginning on page 9 of the proxy statement.
Your board of directors has fixed the close of business on April 7, 2000 as
the record date to determine which Prodigy stockholders are entitled to receive
notice of and vote at the annual meeting. A list of Prodigy stockholders on the
record date will be available during ordinary business hours for ten days prior
to the annual meeting at the place of the annual meeting. Prodigy stockholders
may examine this list for any purpose germane to the annual meeting.
A copy of our annual report to stockholders for the year ended December 31,
1999, which contains other information of interest to stockholders, is also
enclosed. Upon written request of any stockholder, we will furnish without
charge a copy of our annual report on Form 10-K for the year ended December 31,
1999, as filed with the Securities and Exchange Commission. Please address
requests to Prodigy Communications Corporation, 44 South Broadway, White
Plains, New York 10601, Attention: Investor Relations.
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card or attend the annual
meeting. To approve the SBC transaction you must vote "FOR" the first proposal
by following the instructions stated on the enclosed proxy card. If you do not
vote at all, it will, in effect, count as a vote against the SBC transaction.
Prodigy stockholder approval of the SBC transaction is required under the
rules of the Nasdaq National Market, on which Prodigy's common stock is listed,
because Prodigy will issue to SBC securities giving SBC an approximate 43%
voting interest in Prodigy. In order to induce SBC to enter into the SBC
transaction, Carso Global Telecom and Telmex, our principal stockholders who
collectively own approximately 64.1% of Prodigy common stock, have entered into
a voting agreement with SBC and have delivered to SBC an irrevocable proxy to
vote their shares in favor of the SBC transaction. Therefore, Prodigy
stockholder approval of the SBC transaction is assured.
The accompanying proxy statement provides detailed information on
abstentions, broker non-votes and instructions for shareholders whose shares
are held in street name. This information is described below in the section
entitled "The Annual Meeting" beginning on page 30 of the proxy statement.
Sincerely,
Samer F. Salameh
Chairman of the Board and Chief
Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or determined if
this proxy statement is accurate or complete. Any representation to the
contrary is a criminal offense.
This proxy statement is dated May 5, 2000 and was first mailed to Prodigy
stockholders on or about May 5, 2000.
iv
<PAGE>
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
(914) 448-8000
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 24, 2000
We will hold the 2000 annual meeting of stockholders of Prodigy
Communications Corporation at 11:00 a.m., local time, on Wednesday, May 24,
2000, at the Crowne Plaza Hotel, 66 Hale Avenue, White Plains, New York 10601:
1. To approve Prodigy's proposed transaction with SBC Communications Inc.
described in this proxy statement.
2. To elect six directors.
3. To adopt the 1999 stock option plan.
4. To ratify the selection of PricewaterhouseCoopers LLP as our
independent accountants for fiscal year 2000.
5. To transact any other business that properly comes before the annual
meeting.
Your board of directors has determined that the SBC transaction is advisable
and in the best interests of Prodigy and you and unanimously recommends that
you vote to approve the SBC transaction and the 1999 stock option plan.
We describe the SBC transaction more fully in the accompanying proxy
statement, which we urge you to read.
Only Prodigy stockholders of record at the close of business on April 7, 2000
are entitled to notice of and to vote at the annual meeting.
Your vote is important. To assure that your shares are represented at the
annual meeting, you are urged to complete, date and sign the enclosed proxy and
mail it promptly in the postage-paid envelope provided, whether or not you plan
to attend the annual meeting in person. You may revoke your proxy in the manner
described in the accompanying proxy statement at any time before it has been
voted at the annual meeting. You may vote in person at the annual meeting even
if you have returned a proxy.
By Order of the Board of Directors
Samer F. Salameh
Chairman of the Board and Chief
Executive Officer
White Plains, New York
May 5, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE SBC TRANSACTION........................... 1
SUMMARY................................................................... 3
RISK FACTORS.............................................................. 9
Risks Relating to the SBC Transaction................................... 9
Risks Relating to Prodigy's Business.................................... 11
Cautionary Statement Concerning Forward-Looking Statements.............. 17
SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION.......... 19
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION..... 24
MARKET PRICE INFORMATION.................................................. 29
Prodigy Market Price Information........................................ 29
Recent Closing Prices................................................... 29
Dividends............................................................... 29
THE ANNUAL MEETING........................................................ 30
Date, Time and Place of Meeting......................................... 30
What Will Be Voted Upon................................................. 30
Record Date and Outstanding Shares...................................... 30
Votes Required.......................................................... 30
Quorum; Abstentions and Broker Non-Votes................................ 30
Voting and Revocation of Proxies........................................ 31
Solicitation of Proxies and Expenses.................................... 31
Board Recommendation.................................................... 32
THE SBC TRANSACTION....................................................... 33
Overview and Structure of the SBC Transaction........................... 33
Background of the SBC Transaction....................................... 36
Prodigy's Reasons for the SBC Transaction; Recommendation of the Board
of Directors........................................................... 39
Opinion of Prodigy's Financial Advisor.................................. 40
Interests of Executive Officers, Directors and Principal Stockholders of
Prodigy in the SBC Transaction......................................... 49
Goverance of Prodigy and the Operating Partnership Following the SBC
Transaction............................................................ 50
Treatment of Prodigy Common Stock....................................... 51
Accounting Treatment of the SBC Transaction............................. 51
Federal Income Tax Treatment of the SBC Transaction..................... 51
Regulatory Approvals.................................................... 51
Regulatory Impact on Prodigy............................................ 52
No Appraisal Rights..................................................... 53
AGREEMENTS WITH SBC....................................................... 54
Strategic and Marketing Agreement....................................... 54
Investment, Issuance, Contribution and Assumption Agreement............. 55
Limited Partnership Agreement........................................... 61
Registration Rights Agreement........................................... 63
RESTATED CERTIFICATE OF INCORPORATION..................................... 66
AMENDED AND RESTATED BY-LAWS.............................................. 73
1999 STOCK OPTION PLAN.................................................... 74
Summary of the Plan..................................................... 74
Federal Income Tax Consequences......................................... 75
PRODIGY'S BUSINESS........................................................ 77
PRODIGY'S MANAGEMENT...................................................... 95
ELECTION OF DIRECTORS..................................................... 105
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRODIGY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 108
FLASHNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 119
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION........... 128
PRODIGY'S PRINCIPAL STOCKHOLDERS....................................... 140
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS................... 142
STOCKHOLDER PROPOSALS.................................................. 142
EXPERTS................................................................ 142
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
ANNEXES
Annex A: Opinion of Bear, Stearns & Co. Inc.
Annex B: Strategic and Marketing Agreement
Annex C: Investment, Issuance, Contribution and Assumption Agreement
Annex D: Form of Amended and Restated Limited Partnership Agreement
Annex E: Form of Registration Rights Agreements
Annex F: Form of Restated Certificate of Incorporation
Annex G: Form of Amended and Restated By-Laws
Annex H: 1999 Stock Option Plan
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SBC TRANSACTION
Q: Why are the companies proposing to enter into the SBC transaction?
A: Prodigy proposes to enter into the SBC transaction because it believes the
SBC transaction will make Prodigy stronger, more competitive and capable of
achieving greater financial strength, growth, operational efficiencies and
earnings than it could on its own. As part of the SBC transaction, Prodigy
will gain a new and more cost-effective distribution channel for its
service. SBC will market the Prodigy Internet service exclusively to SBC's
approximately 77,000,000 U.S. consumers and has committed to acquire at
least 1,200,000 new subscribers for Prodigy over the next three years.
Prodigy's subscribers acquired through the SBC relationship will have a
lower acquisition cost than subscribers acquired through Prodigy's other
subscriber acquisition channels which will increase Prodigy's operating
margins. In addition, Prodigy will incur no acquisition expenses for SBC's
690,000 existing Internet subscribers who will receive the Prodigy Internet
service. As the number of subscribers managed by Prodigy increases,
Prodigy's ability to generate additional non-subscriber revenue from
advertising and e-commerce will also increase. In addition, the immediate
addition of SBC's 50,000 subscribers with high speed Internet access will
make Prodigy a leading provider of digital subscriber line Internet access
in the United States. On balance, Prodigy believes that these anticipated
benefits from the SBC transaction justify the issuance to SBC of an
approximate 43% interest in Prodigy.
Q: Prodigy has proposed to merge with FlashNet Communications, Inc. Is the
FlashNet merger a condition to the SBC transaction?
A. The completion of the SBC transaction is not a condition to the completion
of Prodigy's merger with FlashNet, and the completion of the FlashNet merger
is not a condition to the completion of the SBC transaction.
Q: What will I receive in the SBC transaction?
A: If the SBC transaction is completed, each share of Prodigy common stock that
you own will be automatically converted into one share of Prodigy Class A
common stock. Prodigy Class A common stock will have rights similar to the
rights of Prodigy common stock you currently own and will generally have
rights identical to holders of Prodigy Class B common stock. However, each
holder of Prodigy Class A common stock will be entitled to one vote per
share and each holder of Prodigy Class B common stock will be entitled to
one vote for each share of Prodigy Class B common stock held by it and one
vote for each unit in the operating partnership not held by Prodigy.
Q: When do you expect to complete the SBC transaction?
A: We expect to complete the SBC transaction in the second calendar quarter of
2000.
Q: Who must approve the SBC transaction?
A: The board of directors of both Prodigy and SBC have approved the SBC
transaction. The Prodigy stockholders must approve the SBC transaction.
Q: Does the Prodigy board of directors recommend approval of the SBC
transaction?
A: Yes, the Prodigy board of directors believes that the SBC transaction is
advisable and in your best interests and unanimously recommends that you
vote to approve the SBC transaction.
Q: What stockholder vote is required to approve the SBC transaction?
A: The affirmative vote of the holders of at least a majority of the
outstanding shares of Prodigy common stock is required to approve the SBC
transaction. Prodigy stockholder approval of the SBC transaction is required
under the rules of the Nasdaq National Market, on which Prodigy's common
stock is listed, because Prodigy will issue to SBC securities giving
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<PAGE>
SBC an approximate 43% voting interest in Prodigy. In order to induce SBC to
enter into the SBC transaction, Carso Global Telecom and Telmex, our
principal stockholders who collectively own approximately 64.1% of Prodigy
common stock, have entered into a voting agreement with SBC and have
delivered to SBC an irrevocable proxy to vote their shares in favor of the
SBC transaction. Therefore, Prodigy stockholder approval of the SBC
transaction is assured.
Q: What do I need to do now?
A: We urge you to read this proxy statement carefully, including its annexes,
and to consider how the SBC transaction will affect you as a stockholder.
Q: How do I vote?
A: You may indicate how you want to vote on your proxy card and then sign and
mail your proxy card in the enclosed return envelope. You may also attend
the annual meeting and vote in person instead of submitting a proxy.
If you fail either to return your proxy card or to vote in person at the
annual meeting, or if you mark your proxy "abstain," the effect will be a
vote against the SBC transaction. If you fail to indicate your vote on your
proxy, your proxy will be counted as a vote for the SBC transaction unless
your shares are held in a brokerage account.
Q: If my shares are held in a brokerage account, will my broker vote my shares
for me?
A: Your broker cannot vote your shares without instructions from you on how to
vote. Therefore, it is important that you follow the directions provided by
your broker regarding how to instruct your broker to vote your shares. If
you fail to provide your broker with instructions, it will have the same
effect as a vote against the SBC transaction.
Q: May I change my vote after I have mailed in my signed proxy card?
A: Yes. You may change your vote at any time before the vote takes place at the
Prodigy annual meeting. To change your vote, you may either complete and
submit a later dated proxy card or send a written notice stating that you
would like to revoke your proxy. In addition, you may attend the annual
meeting and vote in person. However, if you elect to vote in person at the
annual meeting and your shares are held by a broker, bank or other nominee,
you must bring to the annual meeting a legal proxy from the broker, bank or
other nominee authorizing you to vote the shares.
Q: When and where is the Prodigy annual meeting?
A: The annual meeting of Prodigy stockholders will be held at 11:00 a.m., on
Wednesday, May 24, 2000, at the Crowne Plaza Hotel, 66 Hale Avenue, White
Plains, New York 10601.
2
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the SBC
transaction fully and for a more complete description of the legal terms of the
SBC transaction and the other matters to be considered at the annual meeting,
you should read this proxy statement and its annexes carefully. We have
included page references parenthetically to direct you to a more complete
description of the topics in this summary.
The Companies
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
(914) 448-8000
Prodigy is a leading Internet service provider that provides Internet access
and other Internet-based services. Prodigy tailors its services to target
consumers, small businesses and U.S. Hispanic markets. Prodigy's Internet
strategy is to strengthen its position as a leading Internet service provider
and to expand the range of services it offers and markets it serves. Prodigy's
strategy also envisions and promotes acquisitions that can complement its
current or planned business activities.
SBC Communications Inc.
175 East Houston
San Antonio, Texas 78205
(210) 351-3736
SBC is a communications holdings company whose subsidiaries and affiliates
operate predominantly in the communications services industry. SBC's
subsidiaries and affiliates provide telecommunications services and equipment,
yellow pages, publishing and cable television services. SBC's Internet services
include Internet access and Internet-based services and are marketed and
provided primarily in states where an SBC subsidiary is the incumbent local
telephone company: Arkansas, California, Connecticut, Indiana, Illinois,
Kansas, Michigan, Missouri, Nevada, Ohio, Oklahoma, Texas and Wisconsin. SBC's
Internet services are provided through its various subsidiaries. Immediately
prior to the transaction with Prodigy, these companies will create a new SBC
subsidiary, called SBC Internet Communications, Inc., which will contribute the
assets to Prodigy in exchange for an approximate 43% ownership interest in
Prodigy. Thus, all of the assets to be received by Prodigy in the SBC
transaction will be owned by SBC Internet Communications, Inc. immediately
prior to their contribution to Prodigy, and SBC Internet Communications, Inc.
will be primarily used to hold the securities issued by Prodigy in exchange for
the contributed assets.
The SBC Transaction
(Page 33)
In the SBC transaction:
. SBC will acquire an approximate 43% indirect interest in Prodigy;
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses in the United States;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers--the wholesale price to be paid by SBC to Prodigy for the
Prodigy Internet service that SBC will resell to its existing Internet
subscribers will equal SBC's average retail price as of the closing less
reasonable and necessary expenses actually incurred by SBC in serving
its existing Internet subscribers;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period--all new subscribers obtained for
Prodigy by SBC will be Prodigy subscribers;
. SBC will have the exclusive right to provide telecommunications,
advertising,
3
<PAGE>
. Prodigy has agreed to pay SBC a fee of between $40 and $75 for each
subscriber obtained by SBC;
. SBC has agreed to pay Prodigy a penalty, under a specified formula, if
SBC does not obtain 1,200,000 additional Internet subscribers for Prodigy
over the three-year period, with the size of the penalty based on the
number of subscribers actually obtained by SBC who pay at least one
monthly bill from Prodigy--for example, the penalty will range from
$165,000,000 if SBC acquires no new subscribers for Prodigy, to
$105,000,000 if SBC acquires 600,000 new subscribers for Prodigy, to no
penalty if SBC acquires 1,200,000 new subscribers for Prodigy;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers and so long as SBC's terms are
competitive with those offered by other providers;
telecommunications e-commerce and Internet telephony applications in
conjunction with the Prodigy Internet service to Prodigy's subscribers, so
long as SBC's terms are competitive with those offered by other providers;
and
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides to Prodigy's subscribers.
SBC's exclusive rights described in the four preceding bullet points will be
subject to Prodigy's existing agreements with other providers. Prodigy
currently has agreements with other providers of network, telecommunications
and related services. These agreements will not be affected by the SBC
transaction. When these agreements terminate, SBC's exclusive rights described
above will apply.
Following the SBC transaction, Prodigy will:
. provide the Prodigy Internet service to SBC's existing Internet
subscribers;
. continue to provide the Prodigy Internet service to Prodigy's current
subscribers;
. obtain additional Prodigy Internet subscribers through SBC's marketing
efforts; and
. continue to obtain new Prodigy Internet subscribers through Prodigy's
existing and new channels on a nationwide basis.
In order to implement our strategic relationship with SBC:
. Prodigy will contribute substantially all of its assets and liabilities
and transfer its employees to the operating partnership;
. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with SBC's consumer and small
business Internet operations and that are selected by Prodigy because
Prodigy determines that they would be useful in connection with the
provision of services to SBC's customers and Prodigy's customers after
the closing;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of royalty-free licenses to use SBC's trademarks in
connection with the marketing and operation of the Prodigy Internet
service and Prodigy's right to manage SBC's existing Internet customers;
. Prodigy will receive an initial interest in the operating partnership of
approximately 57%;
. SBC will receive an initial interest in the operating partnership of
approximately 43%; and
. SBC may convert its interest in the operating partnership into a direct
equity interest in Prodigy at any time, or may require the operating
partnership to be merged into Prodigy at any time.
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<PAGE>
Prodigy and SBC believe that the value of the assets to be contributed by SBC
is equal to the value of the interest in Prodigy to be received by SBC. As a
result of this structure, Prodigy will become a holding company and its
principal asset will be its interest in the operating partnership. Upon the
liquidation of the operating partnership, the assets contributed by Prodigy and
SBC will be distributed to them after payment of the operating partnership's
liabilities.
Prodigy and SBC will enter into the following agreements in order to
establish their strategic relationship:
. an investment agreement covering SBC's acquisition of its equity interest
in Prodigy and related matters;
. a strategic and marketing agreement governing the marketing of the
Prodigy Internet service and related matters;
. an amended limited partnership agreement governing the operation of the
operating partnership; and
. a registration rights agreement for the future registration of SBC's
shares in Prodigy under the federal securities laws and related matters.
The strategic and marketing agreement will have an initial term of three
years and will automatically renew for additional three-year terms unless
either Prodigy or SBC terminates it. The strategic and marketing agreement may
be terminated earlier by SBC if Prodigy fails to provide a competitive portal
service for three consecutive quarters or by either party if the other party
breaches the agreement. SBC will retain its interest in Prodigy upon expiration
or termination of the strategic and marketing agreement.
As part of its strategic relationship with SBC, Prodigy will also amend its
certificate of incorporation and by-laws to implement the following corporate
governance arrangements:
. SBC will have the right to appoint three Prodigy directors;
. Carso Global Telecom and Telmex, Prodigy's current principal
stockholders, will have the right to appoint three Prodigy directors;
. Prodigy's other three directors will be its chief executive officer and
two independent directors;
. Prodigy's board will establish a new executive steering committee, which
must approve all major corporate actions prior to being submitted to the
board for consideration; and
. SBC will have the right to appoint two members of the executive steering
committee and Carso Global Telecom and Telmex will have the right to
appoint the other two members of the executive steering committee.
The agreements and transactions described above are mutually dependent and
none of them will become effective unless all of them become effective.
Stockholder approval of the SBC transaction will include approval of all of the
agreements and transactions described above.
Conditions to the SBC Transaction
(Page 58)
The completion of the SBC transaction depends upon meeting a number of
conditions, including:
. the approval of Prodigy stockholders;
. no threatened or pending court order that restrains, enjoins or
otherwise prohibits the SBC transaction; and
. other customary contractual conditions specified in the investment
agreement.
Any of the conditions to the SBC transaction may be waived by the party
entitled to assert the condition. However, Prodigy will obtain stockholder
approval before it waives a material closing condition.
No Solicitation by Prodigy
(Page 58)
Subject to applicable fiduciary duties to Prodigy stockholders of the Prodigy
board of directors to recommend a superior proposal to Prodigy stockholders,
Prodigy has agreed that it will not
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<PAGE>
solicit, initiate or encourage any proposal that might lead to an alternative
transaction, enter into discussions or negotiations concerning, or provide any
non-public information to a third party relating to an alternative transaction
or agree to recommend an alternative transaction to the Prodigy stockholders.
Prodigy has further agreed to cause each of its officers, directors, employees,
financial advisors, representatives and agents, not to take any of these
actions.
Termination of the SBC Transaction
(Page 60)
Prodigy and SBC can mutually agree to terminate the SBC transaction, and
either Prodigy or SBC can terminate the SBC transaction upon the occurrence of
a number of events, including:
. the other party breaches any material representation, warranty or
covenant in the investment agreement and fails to cure the breach within
30 days of receiving notice of the breach;
. a court order has been issued permanently restraining, enjoining or
prohibiting the SBC transaction;
. the SBC transaction is not completed by June 1, 2000; or
. Prodigy stockholders do not approve the SBC transaction and related
matters.
In addition, the board of directors of Prodigy can terminate the SBC
transaction if prior to obtaining Prodigy stockholder approval the board of
directors of Prodigy determines in its good faith judgment, after consultation
with its outside counsel, that it is necessary to do so in order to comply with
its fiduciary duties. Simultaneously with or following termination, the board
of directors of Prodigy can:
. withdraw or modify its recommendation to the Prodigy stockholders to
approve the SBC transaction; or
. approve or recommend to the Prodigy stockholders an alternative
transaction with a third party meeting the requirements set forth in the
investment agreement.
Termination Fee
(Page 60)
Prodigy must pay SBC a termination fee of $45,000,000 if the board of
directors of Prodigy terminates the SBC transaction prior to obtaining Prodigy
stockholder approval after having determined in its good faith judgment, after
consultation with its outside counsel, that it is necessary to do so in order
to comply with its fiduciary duties.
Opinion of Prodigy's Financial Advisor
(Page 40)
In deciding to approve the SBC transaction, the Prodigy board of directors
received an opinion, dated November 19, 1999, from its financial advisor, Bear,
Stearns & Co. Inc., that the consideration to be issued to SBC by Prodigy in
the SBC transaction was fair, from a financial point of view, to Prodigy. The
full text of Bear Stearns' opinion is attached as Annex A to this proxy
statement and should be read carefully. Bear Stearns' opinion is addressed to
the Prodigy board of directors and does not constitute a recommendation to any
Prodigy stockholder with respect to matters relating to the SBC transaction.
Pursuant to the terms of the engagement letter between Prodigy and Bear
Stearns dated June 29, 1999, and confirmed on October 15, 1999, Prodigy agreed
to pay to Bear Stearns:
. a cash fee of $400,000, which would be credited against the success fee;
and
. a success fee of $2,000,000 upon consummation of the SBC transaction.
Interests of Executive Officers,
Directors and Principal Stockholders of Prodigy in the SBC Transaction
(Page 49)
In considering the recommendation of the Prodigy board of directors, you
should be aware that options to purchase 154,791 shares representing an
aggregate potential gain of $878,522 based on the closing market price of
Prodigy's common stock on March 31, 2000 held by current executive officers and
directors will accelerate and become fully vested and exercisable;
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In considering the fairness of the SBC transaction to Prodigy stockholders,
the Prodigy board of directors took into account these interests. These
interests are different from and in addition to your and their interests as
stockholders.
Business Relationships Among Prodigy,
Prodigy's Principal Stockholders and SBC
(Page 9)
In considering the recommendation of the Prodigy board of directors, you
should be aware of the following business relationships among Prodigy,
Prodigy's principal stockholders and SBC:
. Carlos Slim Helu controls Prodigy and Carso Global Telecom and is a
director of SBC;
. Carso Global Telecom controls Telmex, and SBC owns an equity interest of
approximately 8.9% in Telmex;
. Carso Global Telecom and SBC have formed other joint ventures in the past
and may do so in the future;
. Samer F. Salameh, Alfredo Sanchez, Arturo Elias and James M. Nakfoor,
directors of Prodigy, have affiliations with Carso Global Telecom or
Telmex; and
. Allen Craft, an executive officer and director of Prodigy, is employed by
SBC.
The Prodigy board of directors was aware of these preexisting business
relationships, and took them into account, when considering approval of the SBC
transaction.
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement does not constitute a firm
financing commitment from Citibank. The Citibank financing is subject to the
issuance by SBC of a performance guarantee and satisfaction of other
conditions, and Prodigy cannot assure that the financing will be completed.
Prodigy and SBC have agreed in principle that SBC will provide a performance
guarantee that, in the event Prodigy becomes unable to continue to perform its
service obligations under the subscriber contracts, SBC will either perform
Prodigy's service obligations directly or replace Prodigy with a substitute
Internet service provider. In exchange for this guarantee, Prodigy and SBC have
agreed in principle that SBC will receive a contingent warrant to purchase
537,924 shares of Prodigy common stock for $1.00 per share, expiring 3.5 years
after the closing date of the Citibank financing and exercisable only if:
. SBC's performance guarantee is triggered;
. Prodigy's chief executive officer is not then an SBC appointee; and
. SBC, Carso Global Telecom and Telmex then collectively own, on a fully-
diluted basis, securities representing less than 50% of the voting power
of Prodigy's then outstanding securities.
Accounting Treatment
(Page 51)
Prodigy will recognize the contribution of the assets by SBC to the operating
partnership at fair value in exchange for the partnership units issued. As a
result of the partnership units issued, Prodigy will consolidate the operating
partnership and will recognize the SBC minority interest in the operating
partnership. The contribution of the intangible assets at fair value will
result in a substantial amount of amortization which will reduce Prodigy's
future earnings or increase its future losses.
Federal Income Tax Treatment of the SBC Transaction
(Page 51)
Prodigy shareholders will not recognize gain or loss as a result of the SBC
transaction. Prodigy believes that it will not recognize a gain or loss upon
the contribution by Prodigy to the operating partnership. Prodigy will be
required to take into account its allocable share of the operating
partnership's income, gains, losses and deductions, including amounts paid by
SBC to the operating partnership for services rendered by the operating
partnership to SBC pursuant to the SBC transaction.
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<PAGE>
Regulatory Impact
(Page 52)
The SBC transaction will alter the manner in which Prodigy conducts its
business in SBC's region but will not prohibit Prodigy from conducting business
in SBC's region. Because SBC is a Bell operating company, it and its affiliates
are subject to restrictions under the Communications Act on the types of
telecommunications and information services they may offer. The SBC transaction
will cause Prodigy to become an SBC affiliate and subject to the restrictions
that apply to affiliates of Bell operating companies. As a result of these
restrictions, with respect to customers in SBC territories, Prodigy will be
unable to provide or resell the long-distance component of its Internet access
service and, thus, will not be able to aggregate the price of the long-distance
component with the price of other components of its service. Instead, Prodigy
will adopt a mechanism by which those customers obtain long-distance services
from an unaffiliated entity. Prodigy will continue to bill and collect all of
the charges for its Internet service, including the unaffiliated entity's
charge for long-distance services, which will appear as a separate line item on
the customer's bill. These arrangements will be transparent to Prodigy's
customers.
Regulatory Approvals
(Page 51)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Prodigy and
SBC may not complete the SBC transaction until notifications have been
furnished to the Federal Trade Commission and the Antitrust Division of the
Department of Justice and the required waiting period has been satisfied.
Prodigy filed a pre-merger notification and report form with the FTC and the
Antitrust Division on December 15, 1999. SBC made a similar filing on December
14, 1999.
On January 14, 2000, the applicable waiting period under the Hart-Scott-
Rodino Act expired without comment from the FTC or the Antitrust Division.
Therefore, the SBC transaction is deemed to have received antitrust approval
and may be consummated, pending compliance with the other closing conditions.
Prodigy Stockholders Have No Appraisal Rights
(Page 53)
The Prodigy stockholders do not have appraisal rights in connection with the
SBC transaction or the other matters to be considered at the annual meeting.
Forward-Looking Statements May Prove Inaccurate
(Page 17)
We have made forward-looking statements in this proxy statement that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of
Prodigy. Also, when we use words such as "believes," "expects," "anticipates"
or similar expressions, we are making forward-looking statements. Stockholders
should note that many factors could affect the future financial results of
Prodigy, and could cause these results to differ materially from those
expressed in our forward-looking statements. These factors include the
following:
. the risk that Prodigy encounters challenges in integrating the Internet
operations of Prodigy and SBC;
. the risk that Prodigy encounters challenges in modifying the manner in
which it provides Internet services in the manner that complies with
applicable regulatory requirements;
. changes in laws or regulations, including increased government regulation
of the Internet, and privacy related issues;
. the risk that Prodigy will be unable to retain its employees;
. the risk that Prodigy will be unable to retain customers resulting from
the SBC transaction; and
. the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful.
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RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to vote to approve and adopt the SBC transaction and the other matters
to be considered at the annual meeting.
Risks Relating to the SBC Transaction
If Prodigy is unable to expand its network and operations to accommodate SBC's
customers, Prodigy may lose subscribers and thus not realize the expected
benefits of the SBC transaction.
As a result of the SBC transaction, Prodigy will rapidly take on management
of a significant number of new customers. This will require Prodigy to expand
its operations, especially its network and customer service operations, in
order to accommodate these new customers. Any failure of Prodigy to
successfully expand its operations and a resulting deterioration of service
could make it difficult for Prodigy to attract and retain customers, including
the customers resulting from the SBC transaction.
If the SBC transaction's benefits do not meet the expectations of financial or
industry analysts or if Prodigy is unable to retain the customers resulting
from the SBC transaction, the market price of Prodigy Class A common stock may
decline.
The market price of Prodigy Class A common stock may decline as a result of
the SBC transaction if:
. Prodigy does not achieve the perceived benefits of the SBC transaction as
rapidly as, or to the extent, anticipated by financial or industry
analysts;
. the effect of the SBC transaction on Prodigy's financial results is not
consistent with the expectations of financial or industry analysts; or
. Prodigy is unable to retain the customers resulting from the SBC
transaction.
Upon the closing of the SBC transaction, each share of Prodigy common stock
will be automatically converted into one share of Prodigy Class A common stock.
Prodigy Class A common stock will continue to be traded on the Nasdaq National
Market under the same trading symbol as Prodigy common stock.
Prodigy's officers and directors hold options that will accelerate as a result
of the SBC transaction. These benefits are in addition to the benefits to be
derived generally by Prodigy's shareholders and may have influenced them to
support or approve the SBC transaction. There can be no assurance Prodigy's
officers and directors would have supported the merger absent this option
acceleration.
Prodigy's officers and directors hold options to purchase 154,791 shares
representing an aggregate potential gain of $878,522 based on the closing
market price of Prodigy's common stock on March 31, 2000 that will accelerate
and become fully vested and exercisable upon completion of the SBC transaction.
There are business relationships among Prodigy, Prodigy's principal
stockholders and SBC that may have influenced the willingness of Prodigy's
board of directors to approve the SBC transaction.
The following business relationships among Prodigy, Prodigy's principal
stockholders and SBC exist:
. Carlos Slim Helu controls Prodigy and Carso Global Telecom and is a
director of SBC;
. Carso Global Telecom controls Telmex, and SBC owns an equity interest of
approximately 8.9% in Telmex;
. Carso Global Telecom and SBC have formed other joint ventures in the past
and may do so in the future;
. Samer F. Salameh, Alfredo Sanchez, Arturo Elias and James M. Nakfoor,
directors of Prodigy, have affiliations with Carso Global Telecom or
Telmex; and
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. Allen Craft, an executive officer and director of Prodigy, is employed by
SBC.
The Prodigy board of directors was aware of and took into account these
business relationships when it approved the SBC transaction. It is possible
that these relationships may have influenced the members of the Prodigy board
to approve the SBC transaction when they may not have otherwise.
It is possible that these interests may have influenced the members of the
Prodigy board to vote to approve the SBC transaction when they may not have
otherwise. Prodigy stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend the SBC
transaction. You should read more about these interests in the section entitled
"The SBC Transaction--Interests of Executive Officers, Directors and Principal
Stockholders of Prodigy in the SBC Transaction."
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement does not constitute a firm
financing commitment from Citibank. The Citibank financing is subject to the
issuance by SBC of a performance guarantee and satisfaction of other
conditions, and Prodigy cannot assure that the financing will be completed.
Prodigy and SBC have agreed in principle that SBC will provide a performance
guarantee that, in the event Prodigy becomes unable to continue to perform its
service obligations under the subscriber contracts, SBC will either perform
Prodigy's service obligations directly or replace Prodigy with a substitute
Internet service provider. In exchange for this guarantee, Prodigy and SBC have
agreed in principle that SBC will receive a contingent warrant to purchase
537,924 shares of Prodigy common stock for $1.00 per share, expiring 3.5 years
after the closing date of the Citibank financing and exercisable only if:
. SBC's performance guarantee is triggered;
. Prodigy's chief executive officer is not then an SBC appointee; and
. SBC, Carso Global Telecom and Telmex then collectively own, on a fully-
diluted basis, securities representing less than 50% of the voting power
of Prodigy's then outstanding securities.
The SBC transaction may cause Prodigy to lose key personnel if they experience
uncertainty about their future roles following the transaction.
SBC will have considerable influence over the management of Prodigy. As a
result of this change in ownership and management structure, current and
prospective Prodigy employees may experience uncertainty about their future
roles with Prodigy following the SBC transaction. This uncertainty may
adversely affect Prodigy's ability to attract and retain key management, sales,
marketing and technical personnel. Any failure to attract and retain key
personnel could affect the condition of Prodigy's business.
After the SBC transaction is implemented, all major corporate actions will
require the unanimous approval of the executive steering committee. The
existence and authority of the executive steering committee may decrease the
willingness of some potential directors to serve on the board of directors.
As part of the SBC transaction, Prodigy will establish an executive steering
committee, consisting of two directors selected by SBC and two directors
selected by Carso Global Telecom and Telmex. All major corporate actions will
require the unanimous approval of the executive steering committee prior to
being submitted for the approval of the board of directors of Prodigy. A
potential director who does not anticipate being appointed to the steering
committee could perceive the authority of the steering committee as diminishing
the authority of the full board. This could make it more difficult for Prodigy
to attract and retain qualified directors.
SBC will retain its interest in Prodigy if the strategic and marketing
agreement expires or is terminated.
As part of the SBC transaction, Prodigy and SBC will enter into a strategic
and marketing agreement governing the marketing of the Prodigy Internet service
and related matters. The agreement has an initial term of three years and
automatically renews for additional three-year terms unless terminated by
Prodigy or SBC. In addition, SBC may terminate the agreement if Prodigy fails
to meet specified performance standards or in
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other specified circumstances. If the agreement expires or is terminated, SBC
will retain its interest in Prodigy. As a result, there is a possibility that
Prodigy will issue an approximate 43% interest to SBC and not realize the
benefits it anticipates receiving in exchange for the interest.
Risks Relating to Prodigy's Business
Prodigy has incurred significant losses and may incur losses in the future. If
Prodigy does not achieve and sustain profitability, Prodigy's financial
condition and stock price could decline.
Prodigy cannot assure that it will achieve or sustain profitability. Since
inception, Prodigy has incurred significant losses. The following table shows
Prodigy's revenues and net losses during the three years ended December 31,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........ $134.2 million $136.1 million $189.0 million
Net Losses...... $132.8 million $ 65.1 million $ 80.5 million
</TABLE>
At December 31, 1999, Prodigy had:
. an accumulated deficit of $373.3 million;
. a working capital deficit of $128.1 million;
. current liabilities of $179.9 million; and
. current assets of $51.8 million.
As a result of these losses, Prodigy has never generated positive cash flow
from operations and has relied on private and public sales of equity securities
and borrowings to fund its operations. The following table shows Prodigy's
negative cash flows from operations during the last three years.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
-------------- ------------- -------------
<S> <C> <C> <C>
$114.0 million $68.0 million $40.1 million
</TABLE>
Prior to its acquisition by Prodigy on June 17, 1996, Prodigy's predecessor
incurred significant net losses and sustained negative cash flow from
operations that required continued funding by the predecessor's former owners,
IBM and Sears. The funding totaled $1.3 billion as of June 16, 1996.
Prodigy operates in a highly competitive market and faces significant
competition from a variety of current and potential sources, including
EarthLink and America Online, as well as companies that provide broadband
services. Prodigy may also face additional competitive pressures from strategic
alliances or consolidations among other Internet service providers. Many of
Prodigy's current and future competitors have greater financial, marketing and
technical resources. Thus, Prodigy may fail to compete effectively in its
market.
Prodigy's industry is intensely competitive and some of Prodigy's current and
future competitors have substantially greater financial, marketing and
technical resources than Prodigy. Increased competition could also adversely
affect Prodigy's ability to develop new service offerings and interfere with
Prodigy's efforts to maintain or grow its subscriber base. There can be no
assurance Prodigy will compete effectively. Increasing competition could
adversely affect Prodigy's future revenues and liquidity.
Prodigy's industry includes many significant participants, including:
. Internet service providers;
. proprietary online service providers;
. major international telecommunications companies;
. Internet-search services; and
. various other telecommunications companies.
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Prodigy also faces competition from companies that provide broadband service
to households, including:
. local and long-distance telephone companies;
. cable television companies; and
. electric utility companies.
Among the larger Internet service providers that Prodigy competes with are
EarthLink, which has merged with MindSpring, Microsoft Network, AT&T WorldNet,
MCI Internet, IBM Internet Connection, PSINet, GTE Internetworking and
Concentric Network. Microsoft's ownership of the dominant PC operating system
and the Microsoft Internet Explorer browser may give Microsoft Network
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 and Internet
access.
Broadband technologies offer significantly faster Internet access than
conventional modems. Broadband companies could include Internet access in their
basic service packages, offer access for a nominal additional charge or prevent
Prodigy from delivering Internet access through the cable or wire connections
that these companies own.
The federal Telecommunications Act of 1996 contains provisions that remove,
or establish procedures for removing, restrictions on regional Bell operating
companies and others that may permit them to engage directly in the Internet
access business. This act also makes it possible for national long-distance
carriers, such as AT&T, to offer local telephone service, which would permit
these carriers to offer direct local Internet access. The federal
Telecommunications Act and strategic alliances or consolidation among Internet
service providers may result in additional competitive pressures.
Prodigy may be subject to increasing pricing pressures due to increasing
competition, the introduction of free service and unlimited usage plans and the
elimination of most hourly access charges in the industry, which could result
in lower revenues.
Because of Prodigy's historically low operating margins, any decrease in
revenues or increase in marketing expenses would diminish the likelihood of
Prodigy becoming profitable. The introduction of free service and unlimited
usage plans and the elimination of most hourly access charges by Internet
service providers, as well as increasing competition in Prodigy's industry,
have placed further pressure on Prodigy's revenues and profit margins.
Subscriber cancellations are common in Prodigy's industry and the cost of
acquiring and retaining new subscribers is high. A high rate of customer
turnover may thus adversely affect Prodigy's future revenues.
The failure to attract and retain subscribers to Prodigy's services, or an
increase in or a failure to slow the rate of subscriber cancellations, would
adversely affect Prodigy's future revenues. Prodigy's industry is characterized
by a high rate of customer turnover. Customer acquisition expenses and the
administrative expenses of enrolling and assisting new subscribers are
substantial.
Prodigy relies on Splitrock's network to carry Prodigy's subscriber traffic.
Splitrock's failure to provide network services as required could damage
Prodigy's business.
Splitrock was formed in 1997 and has a limited operating history, and Prodigy
currently is Splitrock's principal customer. The failure by Splitrock for any
reason to provide network services as required, or any significant disruption
in these services, whether for technical, operational or financial reasons,
could adversely affect Prodigy's service quality, reputation and customer base.
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Telecommunications networks are subject to security problems, such as break-
ins and viruses, and other network failures. The occurrence of a network
problem could result in breach of confidentiality lawsuits, the loss of
subscribers and substantial costs.
Security problems represent an ongoing threat to the telecommunications
networks used in Prodigy's business. Splitrock's network and Prodigy's data
hosting center are potentially vulnerable to computer viruses, break-ins and
similar disruptions that could lead to service interruptions. Break-ins could
jeopardize the confidentiality of information stored or transmitted by
Prodigy's customers. The security measures employed by Splitrock and Prodigy
cannot assure complete protection from security problems. The occurrence of
these problems may result in claims against Prodigy and could adversely affect
it or its ability to attract and retain customers.
Prodigy's operations are also dependent on the protection of Splitrock's
network and its data hosting center against damage from fire, power loss,
telecommunications failures and similar events. Technical problems and network
failures can occur from time to time in the ordinary course of operating a
telecommunications network. Prodigy's host configuration for Prodigy Internet
is unique and, for cost reasons, has not been replicated off site. The
occurrence of a natural disaster or other unanticipated problems in Splitrock's
network or Prodigy's data hosting center, or the failure of telecommunications
providers to provide required data communications capacity due to a natural
disaster or for any other reason, could cause interruptions in Prodigy's
services. These service interruptions could adversely affect Prodigy's
business.
Prodigy relies on third-party providers, including local phone companies, for
essential business services. The inability or unwillingness of these companies
to continue to provide telecommunications, customer service, billing and other
services to Prodigy or to provide these services at reasonable prices could
negatively affect Prodigy's business.
In addition to its network arrangements with Splitrock, Prodigy has
outsourced aspects of its content, customer service and billing functions to
several providers. Outsourcing makes Prodigy reliant on third-party providers
for critical functions. The failure of these providers to provide services as
required, or any significant disruption of or deterioration in services, could
require Prodigy to obtain alternative suppliers at a higher cost and result in
customer cancellations.
Prodigy also relies on local telephone and other companies to provide data
communications capacity via local telecommunications lines and leased long-
distance lines. The federal Telecommunications Act of 1996 is expected to lead
to increased competition in the provision of local and other telephone service.
However, Prodigy cannot predict the timing or extent of any developments or
their effect on pricing or supply. Prodigy's suppliers and telecommunications
carriers also sell or lease products and services to its competitors and
possibly current or future competitors. Prodigy's suppliers and
telecommunications carriers could enter into exclusive arrangements with its
competitors or stop selling or leasing their products or services to Prodigy at
commercially reasonable prices or at all.
Carlos Slim Helu currently controls Prodigy. Mr. Slim can determine the
outcome of all matters submitted to shareholders irrespective of the votes of
other shareholders.
Carlos Slim Helu can control the management and affairs of Prodigy. Mr Slim
and members of his immediate family beneficially own a majority of the voting
equity securities of Carso Global Telecom. Carso Global Telecom may be deemed
to control Telmex through the shares of Telmex that it owns directly and
indirectly. Mr. Slim is also chairman of the board of Carso Global Telecom and
Telmex. Thus, Mr. Slim and members of his immediate family may be deemed to
control Prodigy and can currently determine the outcome of all matters
submitted to a vote of Prodigy shareholders, including the election of all
members of Prodigy's board of directors. The voting control of Mr. Slim could
be used as a means or have the effect of delaying or preventing a change in
control or acquisition of Prodigy.
13
<PAGE>
Carso Global Telecom, Telmex and Prodigy's directors have engaged in
transactions that were not necessarily arms' length. Prodigy cannot assure that
its directors will act solely in the interests of Prodigy and its shareholders.
Circumstances may arise in which the interests of Carso Global Telecom or
Telmex, as shareholders, could conflict with the interests of the other
shareholders of Prodigy. Carso Global Telecom and its affiliates have engaged
in numerous transactions with Prodigy in the past that were not necessarily a
result of arms'-length negotiations. For example, an affiliate of Carso Global
Telecom provides Prodigy with a $130,000,000 revolving line of credit, and
Telmex has committed to provide financing of up to $200,000,000 to fund
Prodigy's operations through February 2001. Prodigy has outsourced its network
operations to Splitrock, a company that is 30% owned by Carso Global Telecom.
Carso Global Telecom and its affiliates may engage in additional related-party
transactions with Prodigy in the future, and there can be no assurance these
transactions will be on arms'-length terms. Samer F. Salameh, Prodigy's
chairman of the board and chief executive officer, who formerly served on
Splitrock's board of directors, holds stock options to purchase shares of
Splitrock common stock. Mr. Salameh also serves as an advisor to the chief
executive officer of Telmex. In addition to Mr. Salameh, Alfredo Sanchez,
Arturo Elias and James M. Nakfoor, directors of Prodigy, are affiliated with
Carso Global Telecom or Telmex, and Allen Craft, an executive officer and
director of Prodigy, is employed by SBC. Mr. Salameh is married to Mr. Slim's
niece, and Mr. Elias is married to Mr. Slim's daughter.
The law requires Prodigy's directors to make all decisions in accordance with
their fiduciary duties and in the best interests of Prodigy and its
shareholders. Messrs. Salameh, Elias, Nakfoor and Sanchez, directors of
Prodigy, 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, Prodigy cannot assure
that the directors involved have acted or will act in a manner that takes into
account solely the interests of Prodigy and its shareholders.
Prodigy cannot fund its operations with the cash generated from its business
and is seeking third-party financing to fund its operations. Additional
financing may result in dilution to existing stockholders and additional
operating restrictions.
Prodigy is currently experiencing substantial negative cash flow each month
and expects to continue to experience negative cash flow through 2000. Prodigy
had $21.1 of cash available at March 31, 2000. Telmex has committed to provide
financing of up to $200,000,000 to fund Prodigy's operations through February
2001. In addition, Prodigy is in the process of seeking third party financing
of $200,000,000 secured by the future service fees payable by contract
subscribers to the Prodigy Internet service. Any additional equity financing
may cause investors to experience dilution. Any additional debt financing may
result in restrictions on Prodigy's operations.
Enrollments from PC bundling are declining. If future enrollments from PC
bundling are not fully replaced by enrollments from other acquisition programs,
Prodigy's financial condition may decline.
Prodigy's financial condition may decline if it does not continue to increase
its subscriber base. Historically a majority of Prodigy Internet enrollments
have arisen from bundling arrangements with PC manufacturers. In 1998, 44% of
total enrollments to Prodigy Internet were obtained through PC bundling,
including 32% from Prodigy's PC bundling relationship with Packard Bell/NEC. In
1999 the percentage of total enrollments to Prodigy Internet obtained through
PC bundling declined to 15% but the percentage obtained through contract
acquisition programs, in which Prodigy makes payments of up to $400 to major PC
retailers who enroll subscribers to term subscriptions of at least one year,
increased from zero in 1998 to 34%. Prodigy's contract acquisition program with
Best Buy accounted for approximately 33% of total enrollments during 1999.
Prodigy's contract acquisition program with Best Buy terminated on November 30,
1999, except in 32 stores where the program is still in effect. Prodigy has
other, less significant, contract acquisition programs with other retailers and
entered into an additional contract acquisition program in February 2000.
However, Prodigy cannot predict whether future contract acquisition programs
will generate as many enrollments as in the past.
14
<PAGE>
The number of Prodigy Internet subscribers decreased from 1,138,000 at
December 31, 1999 to 1,115,000 at March 31, 2000, primarily due to the
termination of Prodigy's contract acquisition program with Best Buy on November
30, 1999.
If Prodigy does not manage the integration of acquired companies successfully,
it may be unable to achieve desired results of the acquisitions and may
experience increased operating losses.
As a part of its business strategy, Prodigy has completed several
acquisitions to date and may enter into additional business combinations,
acquisitions and strategic relationships. These transactions are typically
accompanied by risks similar to those posed by the SBC transaction.
Prodigy may not succeed in addressing these risks or any other problems
encountered in connection with these potential business combinations and
acquisitions potentially disrupting Prodigy's business and causing increased
losses.
Prodigy's expansion strategy and future success depends on its ability to
anticipate and adapt to new services and markets.
Prodigy's business strategy includes the introduction of new services and
entry into new markets. Prodigy may be unsuccessful in offering new services
and entering new markets as planned. Prodigy's new services may not achieve
market acceptance. In particular, Prodigy is:
. expanding its Web hosting activities and other Internet-based services;
. expanding beyond its existing consumer market to include small and
medium-sized businesses; and
. targeting Internet services to Spanish-speaking and Hispanic customers in
the United States.
Prodigy historically has focused on the consumer market and has only limited
experience in developing and marketing services in these markets.
Prodigy's business is subject to seasonality which causes Prodigy's quarterly
results to fluctuate. If Prodigy's quarterly results fail to meet the
expectations of public market analysts and investors, the market price of
Prodigy's stock will decline.
Although Prodigy's strategy of contracting with third parties to provide
services such as network access, billing and customer service enables it to tie
many variable costs to variable revenue sources, Prodigy bases its fixed
expenses, in part, on its expectations of future revenues. If revenues are
below expectations, Prodigy may be unable to reduce fixed costs proportionately
which may adversely effect its operating results.
Prodigy experiences quarterly fluctuations in its operating results due to
many factors, including:
. pricing changes;
. changes in the level of consumer spending during business cycles;
. the timing of introduction of new and enhanced services by Prodigy; and
. competitive factors.
In addition, Prodigy 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, meaning revenues from hourly usage charges,
typically occurring during Prodigy's second and third fiscal quarters
resulting from reduced usage of its services during the summer months.
Accordingly, Prodigy believes that quarter-to-quarter comparisons of
operating results may not be meaningful or indicative of future results.
15
<PAGE>
The failure to protect Prodigy's proprietary technology adequately would
adversely affect Prodigy's competitive position.
Failure to protect Prodigy's proprietary technology could adversely affect
its competitive position. Prodigy attempts to protect its proprietary
technology through copyright and trade secrets laws, employee and third-party
confidentiality agreements and other methods. Prodigy grants customers a
license to use its services under agreements that contain terms and conditions
prohibiting unauthorized reproduction. Despite these precautions, unauthorized
third parties may be able to copy portions of Prodigy's services or reverse
engineer or obtain and use information Prodigy regards as proprietary.
Prodigy's business plan requires it to continue to grow its subscriber base.
If Prodigy is unable to manage growth effectively and maintain consistent
network performance, its business could be harmed.
Prodigy anticipates that the network assets and resources to be acquired upon
the consummation of the SBC transaction and the FlashNet merger will alleviate
the network performance deterioration which has accompanied the increase in
Prodigy's subscriber base. The failure to close either the SBC transaction or
the FlashNet merger in a timely fashion or at all or the failure to integrate
the network assets and resources acquired through the SBC transaction and the
FlashNet merger could adversely affect Prodigy's network performance, service
quality, reputation and customer base.
Prodigy's ability to exploit the market for its products and services and
increase its subscriber base requires an effective planning and management
process. Prodigy's ability to plan and manage effectively will require Prodigy
to continue to implement and improve its operational, financial and management
information systems. Prodigy will also be required to attract and retain
skilled managers and other personnel, including its current executive officers.
These challenges are exacerbated during periods of rapid growth. For example,
as Prodigy increased the number of billable Prodigy Internet subscribers by 87%
from June 30, 1999 to December 31, 1999, network performance deteriorated and
customer service costs increased. The network performance deterioration did not
materially affect Prodigy's results of operations or significantly alter the
services offered by Prodigy.
If Prodigy is unable to attract and retain key personnel in an intensely
competitive environment, its operations could be adversely effected.
Competition for key personnel is intense, and there can be no assurance that
Prodigy will be successful in attracting and retaining necessary personnel to
maintain and support its business. Although Prodigy has entered into non-
competition agreements with some executive officers, the agreements may not be
enforceable. Prodigy does not maintain insurance on the lives of any of its
officers or directors.
Prodigy may not be able to complete proposed acquisitions, which could
adversely affect Prodigy's competitive position.
Prodigy's failure to expand its business through acquisitions may materially
adversely affect its competitive position. Prodigy may be unable to identify,
finance and complete acquisitions on acceptable terms. The Internet services
industry is highly fragmented, consisting of more than 5,000 Internet service
providers in the United States, and is expected to undergo substantial
consolidation over the next few years.
Prodigy depends on the continued use and expansion of the Internet.
Prodigy's business and revenues depend on the continued use and expansion of
the Internet. A decrease in the demand for Internet services or a reduction in
the currently anticipated growth for Internet services could adversely affect
Prodigy's future revenues and liquidity. 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 Prodigy cannot assure the continued use and expansion of the Internet as a
medium of communications and commerce.
16
<PAGE>
Prodigy's attraction and retention of customers depends on its ability to
anticipate and adapt to rapidly changing technology and on the compatibility of
its technology with the technology of others.
Prodigy's industry is characterized by rapid technological change resulting
in dynamic customer demands and frequent new product and service introductions.
As a result of these technical improvements, markets can change rapidly.
Prodigy's future results will depend in part on its ability to make timely and
cost-effective enhancements and additions to its services. For example,
competitors have introduced, or announced plans to introduce, high-speed
Internet access utilizing broadband technology through cable lines, integrated
services digital network, or ISDN, telephone service and digital subscriber
line, or DSL, telephone service. While Prodigy offers high-speed Internet
access through DSL, Prodigy may not have sufficient resources to provide DSL
access when introducing new services that meet customer demands on a timely
basis. Prodigy's new service introductions may not achieve market acceptance.
Prodigy's ability to compete successfully is also dependent upon the
continued compatibility of its services with the technologies of others.
Although Prodigy intends to support emerging standards in the market for
Internet access, its products may not conform to new standards in a timely
fashion. Services or technologies developed by others could render Prodigy's
services or technology noncompetitive or obsolete.
Changes in government regulation, which are likely in the rapidly evolving
Internet-related industries, could adversely affect Prodigy's business.
Internet access and online services are not subject to direct regulation in
the United States. Changes in the regulatory environment relating to the
telecommunications and media industry could adversely affect Prodigy's
business, financial condition, results of operations or prospects. As the law
in this area develops, Prodigy's potential liability for information available
through its services could require Prodigy to implement measures to reduce its
exposure to this liability. Regulation of the Internet and online services
industry could result in increased telecommunications costs or competition for
participants in the Internet industry, including Prodigy. Prodigy cannot
predict whether, or to what extent, any new regulation will occur, or what
effect any new regulation would have on it. Due to the increasing use of the
Internet, additional laws may be adopted covering issues such as content, user
privacy, pricing, libel, intellectual property protection and infringement and
technology export and other controls.
Cautionary Statement Concerning Forward-Looking Statements
Prodigy believes this proxy statement contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of management of Prodigy, based on information
currently available to Prodigy's management. When we use words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates,"
"should," "likely" or similar expressions, we are making forward-looking
statements. Forward-looking statements include the information concerning
possible or assumed future results of operations of Prodigy or FlashNet set
forth under:
"Summary," "Selected Historical Condensed and Unaudited Pro Forma
Financial Information," "Risk Factors," "The SBC Transaction--Overview and
Structure of the SBC Transaction," "The SBC Transaction--Prodigy's Reasons
for the SBC Transaction; Recommendation of the Board of Directors," "The
SBC Transaction--Opinion of Prodigy's Financial Advisor," "Unaudited Pro
Forma Condensed Combined Financial Statements," "Prodigy's Business,"
"Prodigy Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "FlashNet Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of Prodigy may differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these results and values
are beyond
17
<PAGE>
our ability to control or predict. Stockholders are cautioned not to put undue
reliance on any forward-looking statements. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
For a discussion of some of the factors that may cause actual results to
differ materially from those suggested by the forward-looking statements,
please read carefully the information under "Risk Factors" beginning on page 9.
The factors discussed under "Risk Factors" that may affect future performance
and the accuracy of forward-looking statements is illustrative, but by no means
exhaustive. Accordingly, all forward-looking statements should be evaluated
with the understanding of their inherent uncertainty.
18
<PAGE>
SELECTED HISTORICAL CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following data contains selected consolidated financial information and
other data for Prodigy and its predecessor business, Prodigy Services Company.
The selected consolidated financial data for Prodigy for each of the years
1995-1999 has been derived from Prodigy's annual consolidated financial
statements, including the consolidated balance sheets at December 31, 1998 and
1999 and the related consolidated statements of operations and of cash flows
for the three years ended December 31, 1999 and accompanying notes appearing
elsewhere in this document.
Please read this information in conjunction with "Prodigy Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Prodigy's consolidated financial statements and accompanying notes included
elsewhere in this document.
Selected Historical Condensed Consolidated Financial Information of Prodigy
(in millions, except number of billable subscribers and per share information)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------------
1995(1)(4) 1996(4) 1997 1998 1999(2)
---------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues
Internet and online service
revenues........................ $ 90.7 $ 128.3 $128.9 169.8
Other............................ 8.2 5.9 7.2 19.2
------ ------ ------- ------ ------
Total Revenues................... 98.9 134.2 136.1 189.0
Operating costs and expenses
Costs of revenue................. $ 0.1 66.3 92.0 93.3 102.2
Sales and marketing.............. 20.7 59.6 41.7 58.9
Product development.............. 4.8 11.4 10.9 12.3
General and administrative....... 3.0 49.8 56.3 44.6 61.7
Depreciation and amortization.... 12.3 21.4 16.1 21.8
Amortization of subscriber
acquisition costs............... 20.4
Acquired incomplete technology... 20.9
Restructuring and other special
costs........................... 3.1 9.9
Write-down of assets held for
sale............................ 2.4
Loss on sale of cellular assets.. 0.8
------ ------ ------- ------ ------
Total operating costs and
expenses........................ 3.1 177.9 253.8 206.6 277.3
------ ------ ------- ------ ------
Operating loss.................. (3.1) (79.0) (119.6) (70.5) (88.3)
(Loss) on equity investment in
joint venture.................... (0.5) (12.1)
Gain on asset sale................ 5.2
(Write-down) recovery of equity
investments...................... (9.1) 0.3
Interest (expense) income, net.... (2.2) (1.4) 0.2 2.3
Gain on sale of equity
investment....................... 3.3
Gain on settlement of note
receivable....................... 0.5
Gain on settlement of note
payable.......................... 1.7
------ ------ ------- ------ ------
Net Loss........................ $ (3.1) $(90.8) $(132.8) $(65.1) $(80.5)
====== ====== ======= ====== ======
Net loss per common share:
Basic and diluted................ $(0.37) $(8.76) $ (7.66) $(1.60) $(1.34)
====== ====== ======= ====== ======
Weighted average number of common
and common equivalent shares
outstanding:
Basic and diluted................ 8.4 10.4 17.3 40.7 60.0
====== ====== ======= ====== ======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------------------
1995(1)(4) 1996(4) 1997 1998 1999(2)
---------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Other Data:
Prodigy Internet billable
subscribers at period end... 7,000 221,000 505,000 1,138,000
Prodigy Classic billable
subscribers at period end... 780,000 392,000 166,000 --
Internet subscribers
managed..................... 364,000
----- ------- ------- ------- ---------
Total managed subscribers at
period end.................. 0 787,000 613,000 671,000 1,502,000
===== ======= ======= ======= =========
Prodigy Internet revenue..... $ 0.1 $ 29.5 $ 80.7 $ 154.2
Prodigy Classic revenue...... 90.6 98.8 48.2 15.6
EBITDA (3)................... $(3.1) (76.2) (110.0) (49.7) (40.5)
Other Cash Flow Data:
Net cash used in operating
activities.................. (2.4) (35.3) (114.0) (68.0) (40.1)
Net cash used in investing
activities.................. (1.4) (47.9) (15.3) 2.6 (212.6)
Net cash provided by
financing activities........ 4.0 104.1 120.4 65.2 276.0
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995(1)(4) 1996(4) 1997 1998 1999(2)
---------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital ................. $(0.3) $(54.8) $(48.5) $(33.6) $(128.1)
Total assets..................... 2.5 126.6 93.5 78.3 346.0
Long-term debt................... 1.6 56.0 10.0 -- 1.0
Contingent Convertible Notes
(included in stockholders'
equity (deficit))............... -- 30.5 30.5 30.5 --
Stockholders' equity (deficit)... 0.0 (11.5) 17.7 29.8 165.1
</TABLE>
- --------
(1) International Wireless Incorporated was incorporated in May 1994 to
evaluate and develop cellular telephone systems and Internet access and
online services in Africa. In June 1996, Prodigy was formed under the name
Prodigy, Inc. as a new holding company to acquire Prodigy Services Company
and to hold International Wireless and the other communications interests
of International Wireless. On June 17, 1996, Prodigy completed the
acquisition of Prodigy Services Company. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of
operations of Prodigy Services Company are included in Prodigy's
consolidated results of operations from the date of acquisition. In January
1997, Prodigy sold its cellular telephone assets and operations.
Subsequently, Prodigy decided to sell and wind-down its remaining
international operations in Africa and China.
(2) On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business
of U.S. Republic Communications, Inc., an indirect majority owned
subsidiary of VarTec, including the subscribers of the BizOnThe.Net Web
hosting business. At the closing, Prodigy repaid a $9 million loan from
VarTec to U.S. Republic and issued 2,840,993 shares of Prodigy common stock
to U.S. Republic.
The acquisition of BizOnThe.Net has been accounted for under the purchase
method of accounting and, accordingly, the results of operations of
BizOnThe.Net are included in Prodigy's consolidated results of operations
from the date of acquisition. The cost to acquire BizOnThe.Net was
allocated to the assets acquired and liabilities assumed based on their
respective fair values with the excess allocated to goodwill. Based on the
value of the 2,840,993 shares of common stock currently issued in
connection with the BizOnThe.Net acquisition and the $9 million cash used
to repay the loan, the total purchase price was approximately $58 million.
(3) Earnings before interest, taxes, depreciation and amortization is a
commonly used measure for operating performance of Internet service
providers, and also provides additional information to assist investors in
determining Prodigy's liquidity. Earnings before interest, taxes,
depreciation and amortization is not an accounting measure under generally
accepted accounting principles, is not necessarily indicative of operating
income or cash flows from operations as determined under these principles
and may not be comparable to similarly titled measures reported by other
companies.
20
<PAGE>
(4) Selected Historical Condensed Consolidated Financial Information of Prodigy
Services Company
(in millions)
<TABLE>
<CAPTION>
Period from
January 1,
Year Ended 1996 to
December 31, June 16,
1995 1996
------------ -----------
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Online service revenues........................... $230.6 $ 98.2
Other............................................. 12.8 8.9
------ ------
Total revenues.................................... 243.4 107.1
------ ------
Net loss.......................................... $(34.6) $(62.9)
====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)......................................... $(36.4)
Total assets...................................................... 84.7
Long-term debt.................................................... 16.4
Partners' capital (deficit)....................................... 9.8
</TABLE>
21
<PAGE>
Selected Historical Condensed Consolidated Financial Information Of FlashNet
(in thousands, except per share data)
Please read the following selected consolidated financial data of FlashNet in
conjunction with "FlashNet's Management's Discussion and Analysis of Financial
Condition and Results of Operations" and FlashNet's consolidated financial
statements and accompanying notes included elsewhere in this document. The
statement of operations data for the years ended December 31, 1997, 1998 and
1999, and the balance sheet data at December 31, 1998 and 1999 are derived from
FlashNet's audited consolidated financial statements included elsewhere in this
proxy statement/prospectus. The statement of operations data for the period
ended December 31, 1995 and the year ended December 31, 1996 and the balance
sheet data at December 31, 1995, 1996 and 1997 are derived from audited
financial statements not included in this document.
<TABLE>
<CAPTION>
Period from
September 25, 1995
(inception) Year Ended December 31,
through December -------------------------------------------
31, 1995 1996 1997 1998 1999
------------------ --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Consumer access
services............... $ 19 $ 2,286 $ 11,942 $ 21,979 $ 31,104
Business services....... -- 53 571 1,597 2,079
Shipping revenues....... -- -- -- -- 2,374
Set-up fees and other... 15 1,315 5,024 3,316 4,694
--------- --------- --------- --------- ----------
Total revenues.......... 34 3,654 17,537 26,892 40,251
Operating costs and
expenses:
Cost of services........ 28 2,348 8,215 11,797 19,909
Cost of other revenues.. 4 473 799 349 1,973
Cost of shipping........ -- -- -- -- 1,995
Sales and marketing..... 32 4,329 10,300 8,202 20,967
General and
administrative......... 74 1,039 3,453 5,268 10,330
Operations and customer
support................ -- 830 3,683 6,016 10,453
Depreciation and
amortization........... 3 545 2,061 3,069 5,094
--------- --------- --------- --------- ----------
Total expenses.......... 141 9,564 28,511 34,701 70,721
--------- --------- --------- --------- ----------
Loss from operations.... (107) (5,910) (10,974) (7,809) (30,470)
Interest (expense)
income, net............ -- (144) (714) (2,456) 97
--------- --------- --------- --------- ----------
Loss before
extraordinary item..... (107) (6,054) (11,688) (10,265) (30,373)
Extraordinary item --
Loss on early
extinguishment of
debt................... -- -- -- -- (1,656)
--------- --------- --------- --------- ----------
Net loss................ (107) (6,054) (11,688) (10,265) (32,029)
Accretion on redeemable
preferred stock........ -- -- -- (2,741) (48)
--------- --------- --------- --------- ----------
Net loss attributable to
common shareholders.... $ (107) $ (6,054) $ (11,688) $ (13,006) $ (32,077)
========= ========= ========= ========= ==========
Net loss per common
share -- basic and
diluted
Loss before
extraordinary item..... $ (0.03) $ (1.15) $ (2.15) $ (2.36) $ (2.46)
Extraordinary item...... -- -- -- -- (.13)
--------- --------- --------- --------- ----------
Basic and diluted net
loss per share......... $ (0.03) $ (1.15) $ (2.15) $ (2.36) $ (2.59)
========= ========= ========= ========= ==========
Shares used in computing
basic and diluted net
loss per share......... 3,527,000 5,266,000 5,449,000 5,505,000 12,370,000
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $25 $ 137 $ 1,570 $ 1,038 $ 7,045
Total assets............ 175 5,887 11,000 9,733 39,585
Working capital......... (41) (7,113) (16,835) (22,757) (8,816)
Total debt.............. -- 4,672 6,766 6,896 9,539
Redeemable preferred
stock.................. -- -- -- 7,911 --
Total shareholders'
equity (deficit)....... 51 (5,275) (13,436) (23,707) 9,656
</TABLE>
<TABLE>
<CAPTION>
Period from
September 25, 1995 Year Ended December 31,
(inception) through -------------------------------------
December 31, 1995 1996 1997 1998 1999
------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
EBITDA(1)............... $(104) $(5,365) $ (8,913) $ (4,740) $(23,839)
Cash flow provided
(used) by:
Operating activities.... $ (38) $ 412 $ 1,342 $ (5,229) $(34,913)
Investing activities.... $ (82) $(1,038) $ (4,461) $ (1,445) $ (6,244)
Financing activities.... $ 145 $ 739 $ 4,551 $ 6,142 $ 47,164
Subscribers(2).......... 200 47,361 152,022 172,472 234,914
Independent sales
representatives in
FlashNet's network
marketing program(2)... -- -- 1,885 5,424 8,226
</TABLE>
- --------
(1) Earnings before interest, tax, depreciation and amortization (EBITDA)
consists of net loss before extraordinary item, provisions for net interest
expense/(income), income taxes, depreciation, amortization (including
amortization of customer hardware) and the deemed dividend on the preferred
stock. These earnings are not intended to represent cash flows from
operations in accordance with generally accepted accounting principles and
should not be considered as an alternative to net loss as an indicator of
FlashNet's operating performance or to cash flows as a measure of
liquidity. FlashNet believes that earnings before interest, tax,
depreciation and amortization is a standard measure commonly reported and
widely used by analysts, investors and other interested parties in the
Internet service provider industry to compare the operating performance of
companies within this industry. FlashNet has elected to include these
earnings in its financial presentation to provide investors with an
additional measurement of its operating performance, especially in view of
its continuing levels of net losses.
(2) Determined as of the end of the period.
23
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business of
U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business. At
the closing, Prodigy repaid a $9 million loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy common stock to U.S. Republic including
727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.
Under accounting principles generally accepted in the United States, the
acquisition of BizOnThe.Net was accounted for under the purchase method of
accounting and accordingly the cost to acquire BizOnThe.Net was allocated to
the assets acquired and liabilities assumed based on their respective fair
values with the excess allocated to goodwill. Based on the value of the
2,840,993 shares of Prodigy common stock currently issued in connection with
the BizOnThe.Net acquisition and the $9 million cash used to repay the loan,
the total purchase price is approximately $58 million, including transaction
costs of $829 thousand. The excess of the purchase price over the fair value of
net assets acquired is approximately $50 million.
On November 5, 1999, Prodigy agreed to acquire FlashNet Communications, Inc.
In the merger, Prodigy will issue 0.35 share of Prodigy common stock for each
outstanding share of FlashNet common stock. Based on the number of FlashNet
shares outstanding on December 31, 1999, Prodigy will issue approximately
5,000,000 shares to complete the merger, representing approximately 7% of
Prodigy's then outstanding shares. In addition, Prodigy will assume all
FlashNet stock options and warrants outstanding as of the date of the merger.
Under accounting principles generally accepted in the United States, the
acquisition of FlashNet will be accounted for under the purchase method of
accounting. Accordingly, the cost to acquire FlashNet will be allocated to the
assets acquired and liabilities assumed based on their respective fair values,
with the excess to be allocated to goodwill. The valuations and other studies
required to determine the fair value of the FlashNet assets acquired and
liabilities assumed have not been performed and, accordingly, the related
adjustments reflected in the unaudited pro forma combined financial information
are preliminary and subject to further revisions and adjustments. Based on the
value of the 5,000,000 shares of Prodigy common stock to be issued in
connection with the FlashNet acquisition, the total purchase price is
approximately $136 million including transaction costs incurred to date of $2.2
million. The goodwill and other intangibles acquired, based on the excess of
the purchase price over the net book value of net assets to be acquired, is
currently estimated to be $126 million.
On November 19, 1999, SBC and Prodigy agreed to establish a strategic
relationship in which:
. Prodigy will contribute substantially all of its assets and liabilities,
and transfer its employees to a new limited partnership, called the
operating partnership, that will operate Prodigy's business;
. SBC will acquire an approximately 43% indirect interest in Prodigy upon
completion of the SBC transaction and an approximate 39.5% indirect
interest after the FlashNet merger;
. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with its consumer and small
business Internet operations that are selected by Prodigy;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of brand assets and subscriber relationships;
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers;
24
<PAGE>
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period in exchange for fees of $40 to $75
per subscriber;
. SBC has agreed to pay Prodigy a penalty if SBC does not obtain 1,200,000
additional internet subscribers for Prodigy over the three-year period,
with the size of the penalty based on the number of subscribers actually
obtained by SBC;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers and so long as SBC's terms are
competitive with those offered by other providers;
. SBC will have the exclusive right to provide telecommunications,
advertising, telecommunications e-commerce and Internet telephony
applications in conjunction with the Prodigy Internet service to
Prodigy's subscribers, so long as SBC's terms are competitive with those
offered by other providers;
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides to Prodigy's subscribers;
. Prodigy will convert all outstanding Prodigy common stock into Prodigy
Class A common stock; and
. Prodigy will issue to an SBC subsidiary one share of Prodigy Class B
common stock in consideration of $100.
The tangible and intangible assets received in conjunction with the SBC
transaction will be recorded at fair value on the date the assets are
contributed. Based on the following assumptions, the fair value of the assets
received has been estimated at $968.75 million:
. SBC will receive approximately 50,000,000 partnership units, which
assuming that SBC's book capital account equals its imputed capital
account and that the partnership interests will be equivalent in value
to the Prodigy Class A common stock, will be convertible into
approximately 50,000,000 shares of Prodigy Class A common stock based on
pro forma shares outstanding after giving effect to the BizOnThe.Net and
FlashNet acquisitions; and
. the value of one share of Prodigy common stock was approximately $19.38
on December 31, 1999, which when multiplied by 50,000,000 shares,
results in an estimated value of $968.75 million.
For purposes of the pro forma financial information, and pending preparation of
a valuation to allocate the purchase price, the tangible and intangible assets
to be received have been aggregated and presented in total in the SBC Assets
balance sheet caption. These assets, which are principally related to the
royalty-free licenses to use the SBC trademarks, which will be amortized over
the three year term of the agreement, and the routers, servers and associated
hardware, which are also assumed to have a three year life. If the amortization
period of any of these assets is longer than the three year period assumed for
purposes of the pro forma financial information, the corresponding annual
amortization expense will be decreased.
In addition to the equity investment, SBC will purchase from Prodigy the
Prodigy Internet service and resell these services to its existing 690,000
Internet service subscribers. Prodigy will charge SBC a fixed price per
subscriber for its services, to be fixed as of the closing date, and will incur
incremental costs associated with providing these services to SBC, principally
related to Prodigy's acquisition of additional network services and customer
service. Adjustments have not been made to revenue or cost of revenue included
in the pro forma statement of operations to reflect the services to be provided
to the existing SBC subscribers as contractual agreements have not been
finalized with respect to these services.
25
<PAGE>
Additionally, the SBC agreement includes other services that Prodigy and SBC
will provide to each other. Impacts to revenue and expenses associated with
these services, however, cannot be estimated at this time and accordingly have
not been included in the pro forma statement of operations.
The unaudited pro forma condensed combined balance sheets give effect to the
acquisition of FlashNet and the SBC transaction as if these had occurred on
December 31, 1999. The acquisition of BizOnThe.Net is reflected in the
historical balance sheet of Prodigy as of December 31, 1999.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1999 give effect to the acquisition of BizOnThe.Net and
FlashNet, and the SBC transaction as if these occurred on January 1, 1999 and
are based on the historical results of operations of Prodigy, BizOnThe.Net and
FlashNet and the amortization associated with the assets acquired in the SBC
transaction. The results of BizOnThe.Net for the fourth quarter of 1999 are
included in the results of operations of Prodigy for the year ended December
31, 1999.
The unaudited pro forma condensed combined financial statements are based on
the preliminary estimates and assumptions set forth in the notes to these
statements that have been made solely for purposes of developing this pro forma
information. The unaudited pro forma condensed combined financial statements
are not necessarily indicative of the results that would have been achieved had
these transactions been completed as of the dates indicated or that may be
achieved in the future.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
related notes and other financial information pertaining to Prodigy,
BizOnThe.Net and FlashNet, including the Prodigy and FlashNet "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors" included elsewhere in this document.
26
<PAGE>
Selected Unaudited Pro Forma Condensed Combined Financial Information
Prodigy, BizOnThe.Net and FlashNet
Condensed Combined Pro Forma Financial Data
<TABLE>
<CAPTION>
Twelve Months
Ended
December 31,
1999
-------------
(In millions,
except share
and per share
information)
<S> <C>
Combined Statement of Operations Data
Revenues
Internet and online service revenues.......................... $ 200.9
Web Hosting................................................... 19.0
Other......................................................... 28.4
----------
Total Revenues............................................ 248.3
Operating costs and expenses
Costs of revenue.............................................. 126.4
Amortization of subscriber acquisition costs.................. 20.4
Sales and marketing........................................... 92.2
Product development........................................... 12.3
General and administrative.................................... 89.2
Depreciation and amortization................................. 83.3
----------
Total operating costs and expenses........................ 423.8
----------
Operating loss.............................................. (175.5)
Interest (Expense) Income, net.................................. 2.4
Gain on sale of equity investment............................... 3.3
Gain on settlement of note payable.............................. 1.7
Gain on settlement of note receivable........................... 0.5
----------
Net loss before extraordinary item.......................... $ (167.6)
==========
Net loss per common share:
Basic and diluted............................................. $ (2.50)
==========
Weighted average number of common and common equivalent shares
outstanding:
Basic and diluted............................................. 67,114,152
==========
<CAPTION>
December 31,
1999
-------------
<S> <C>
Combined Balance Sheet Data:
Working capital deficit......................................... $ (139.1)
Total assets.................................................... 511.6
Stockholders' equity............................................ 298.5
</TABLE>
27
<PAGE>
Selected Unaudited Pro Forma Condensed Combined Financial Information
Prodigy, BizOnThe.Net, FlashNet
and SBC Transaction Condensed Combined Pro Forma Financial Data
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
1999
-------------------
(In millions,
except share and
per share
information)
<S> <C>
Combined Statement of Operations Data
Revenues
Internet and online service revenues....................... $ 200.9
Web Hosting................................................ 19.0
Other...................................................... 28.4
----------
Total Revenues......................................... 248.3
Operating costs and expenses
Costs of revenue........................................... 126.4
Amortization of subscriber acquisition costs............... 20.4
Sales and marketing........................................ 92.2
Product development........................................ 12.3
General and administrative................................. 89.2
Depreciation and amortization.............................. 406.2
----------
Total operating costs and expenses..................... 746.7
----------
Operating loss........................................... (498.4)
Interest (Expense) Income, net.............................. 2.4
Gain on sale of equity investment........................... 3.3
Gain on settlement of note payable.......................... 1.7
Gain on settlement of note receivable....................... 0.5
Minority interest in net loss............................... 193.2
----------
Net Loss before extraordinary item....................... $ (297.3)
==========
Net loss per common share:
Basic and diluted.......................................... $ (4.43)
==========
Weighted average number of common and
common equivalent shares outstanding:
Basic and diluted.......................................... 67,114,153
==========
<CAPTION>
December 31,
1999
-------------------
<S> <C>
Combined Balance Sheet Data:
Working capital deficit..................................... $ (139.1)
Total assets................................................ 1,480.3
Stockholders' equity........................................ 768.0
</TABLE>
28
<PAGE>
MARKET PRICE INFORMATION
Prodigy Market Price Information
Prodigy common stock has traded on the Nasdaq National Market under the
symbol "PRGY" since February 11, 1999.
The table below sets forth, for the periods indicated, the high and low sale
prices of Prodigy common stock as reported on the Nasdaq National Market since
February 11, 1999, the date of Prodigy's initial public offering.
<TABLE>
<CAPTION>
Prodigy
Common Stock
-----------------
High Low
-------- --------
<S> <C> <C>
Fiscal 1999
Quarter ended March 31, 1999............................... $ 50.625 $ 20.00
Quarter ended June 30, 1999................................ $ 41.25 $21.0625
Quarter ended September 30, 1999........................... $ 28.625 $ 14.00
Quarter ended December 31, 1999............................ $35.4375 $ 16.00
Fiscal 2000
Quarter ended March 31, 2000............................... $ 25.75 $ 12.00
Quarter ending June 30, 2000 (through May 4, 2000)......... $ 13.875 $ 9.8125
</TABLE>
As of April 7, 2000, Prodigy had 505 record holders. Prodigy believes that
there were more than 28,000 beneficial holders of its common stock at April 7,
2000.
Recent Closing Prices
The following table sets forth the closing prices per share of Prodigy common
stock as reported on the Nasdaq National Market on November 19, 1999, the last
full trading day prior to the public announcement that Prodigy and SBC proposed
to enter into the SBC transaction and May 4, 2000, the last full trading day
for which closing prices were available at the time of the printing of this
proxy statement.
<TABLE>
<CAPTION>
Prodigy
Common
Date Stock
- ---- --------
<S> <C>
November 19, 1999...................................................... $ 32.125
May 4, 2000............................................................ $11.6875
</TABLE>
Dividends
Prodigy has never declared or paid cash dividends on Prodigy common stock.
Prodigy currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Prodigy board of directors after taking into account various factors, including
Prodigy's financial condition, operating results, current and anticipated cash
needs and plans for expansion.
29
<PAGE>
THE ANNUAL MEETING
Prodigy is furnishing this proxy statement to holders of Prodigy common stock
in connection with the solicitation of proxies by the Prodigy board of
directors for use at the 2000 annual meeting of Prodigy stockholders to be held
on Wednesday, May 24, 2000, and any adjournment of the meeting.
This proxy statement is first being furnished to Prodigy stockholders on or
about May 5, 2000.
Date, Time and Place of Meeting
The annual meeting will be held on Wednesday, May 24, 2000, at 11:00 a.m.,
local time, at the Crowne Plaza Hotel, 66 Hale Avenue, White Plains, New York
10601.
What Will Be Voted Upon
At the annual meeting, stockholders of Prodigy will be asked to approve the
SBC transaction. A vote in favor of the SBC transaction will constitute a vote
in favor of each element of the SBC transaction described on pages 33 to 36 of
this proxy statement.
Prodigy stockholders will also be asked to elect six directors, approve the
1999 stock option plan, ratify the selection of PricewaterhouseCoopers LLP as
our independent accountants for fiscal year 2000 and transact any other
business that may properly come before the annual meeting or any postponements
or adjournments of that meeting.
Record Date and Outstanding Shares
Only stockholders of record of Prodigy common stock at the close of business
on the April 7, 2000 record date for the annual meeting are entitled to notice
of and to vote at the annual meeting. As of the close of business on the record
date, there were 64,644,561 shares of Prodigy common stock outstanding and
entitled to vote, held of record by 505 stockholders. Each Prodigy stockholder
is entitled to one vote for each share of Prodigy common stock held as of the
record date.
Votes Required
The affirmative vote of the holders of at least a majority of the shares of
Prodigy common stock outstanding on the record date is required to approve the
SBC transaction. Election of directors requires the vote of a plurality of the
shares present or represented by proxy at the meeting. Approval of the 1999
stock option plan and ratification of the selection of PricewaterhouseCoopers
LLP as our independent accountants for fiscal year 2000 requires the vote of a
majority of the shares present or represented by proxy at the meeting.
Prodigy stockholder approval of the SBC transaction is required under the
rules of the Nasdaq National Market, on which Prodigy's common stock is listed,
because Prodigy will issue to SBC securities giving SBC an approximate 43%
voting interest in Prodigy. In order to induce SBC to enter into the SBC
transaction, SBC entered into a voting agreement with Carso Global Telecom and
Telmex, Prodigy's principal stockholders. Pursuant to the voting agreement,
each of these stockholders has agreed, without any additional consideration
being paid to them, to deliver an irrevocable proxy to SBC to vote all of their
shares in favor of the SBC transaction. These stockholders own, as of the
record date, 41,413,111 shares of Prodigy common stock, representing
approximately 64.1% of the shares of common stock outstanding. Approval of the
SBC transaction by the Prodigy stockholders is therefore assured.
Quorum; Abstentions and Broker Non-Votes
A Prodigy stockholder may abstain from voting on any proposal by returning a
proxy marked "ABSTAIN" with respect to that matter.
30
<PAGE>
Under applicable rules, brokers who hold shares in street name for customers
have the authority to vote on some routine proposals when they have not
received instructions from the beneficial owners. Under applicable rules, these
brokers are permitted to exercise their voting discretion for the election of
directors and ratification of independent accountants, but are precluded from
exercising their voting discretion with respect to the approval and adoption of
non-routine matters like the SBC transaction and the 1999 stock option plan.
Thus, absent specific instructions from the beneficial owner of shares held in
street name, brokers are not empowered to vote these shares with respect to the
approval and adoption of the SBC transaction and the 1999 stock option plan.
Abstentions and broker non-votes are not affirmative votes and, therefore,
will have the same effect as votes against approval of the SBC transaction. In
addition, the required vote of the stockholders of Prodigy to approve the SBC
transaction is based upon the number of outstanding shares of Prodigy common
stock rather than upon the shares actually voted in person or by proxy at the
annual meeting. Therefore, if the holders of any Prodigy shares fail to either
submit a proxy or vote in person at the annual meeting, this failure will have
the same effect as a vote against approval of the SBC transaction.
Voting and Revocation of Proxies
The proxy accompanying this document is solicited on behalf of the Prodigy
board of directors. Prodigy stockholders are requested to complete, date and
sign the accompanying proxy and promptly return it in the accompanying envelope
or otherwise mail it to Prodigy. A number of brokerage firms and banks offer
telephone and Internet voting options. If your shares are registered in street
name, check the information forwarded by your bank or broker to see which
options are available to you. Please see the accompanying proxy for more
information.
All properly executed proxies received by Prodigy prior to the annual meeting
that are not revoked will be voted at the annual meeting in accordance with the
instructions indicated on the proxies, or, if no direction is indicated, to
approve the matters presented. Prodigy's board of directors does not presently
intend to bring any other business before the annual meeting and, as of the
date of this document, the board knows of no other matters to be brought before
the annual meeting. As to any other business that may properly come before the
annual meeting, however, it is intended that proxies, in the form enclosed,
will be voted in accordance with the judgment of the persons voting those
proxies. A Prodigy stockholder who has given a proxy may revoke it at any time
before it is exercised at the annual meeting by:
. delivering to the secretary of Prodigy a written notice, bearing a date
later than the date of the proxy, stating that the proxy is revoked;
. signing and delivering a proxy relating to the same shares and bearing a
later date than the date of the previous proxy prior to the vote at the
annual meeting; or
. attending the annual meeting and voting in person.
However, if you elect to vote in person at the annual meeting and your shares
are held by a broker, bank or other nominee, you must bring to the annual
meeting a legal proxy from your broker, bank or other nominee authorizing you
to vote the shares.
Solicitation of Proxies and Expenses
The cost of solicitation of proxies will be paid for by Prodigy. In addition
to solicitation by mail, brokerage houses and other custodians, nominees and
fiduciaries will send beneficial owners the proxy material. Prodigy will, upon
request, reimburse those brokerage houses and custodians for their reasonable
expenses in so doing. Prodigy does not expect to incur any significant expenses
in connection with the solicitation of proxies. We urge stockholders to submit
proxies without delay.
31
<PAGE>
Board Recommendation
Prodigy's board of directors, on the recommendation of a special committee of
directors, has unanimously approved the SBC transaction and believes that the
SBC transaction is fair to, and is in the best interests of, Prodigy and its
stockholders and therefore recommends that Prodigy's stockholders vote for
approval of the SBC transaction.
Prodigy's board of directors has also unanimously approved the election of
the six directors named in this proxy statement, the 1999 stock option plan and
the ratification of the selection of PricewaterhouseCoopers LLP as our
independent accountants for fiscal year 2000, and recommends that Prodigy's
stockholders vote for approval of each of these proposals.
The matters to be considered at the annual meeting are of great importance to
the stockholders of Prodigy. Accordingly, Prodigy's stockholders are urged to
read and carefully consider the information presented in this document, and to
complete, date, sign and promptly return the enclosed proxy card in the
enclosed postage-paid envelope.
32
<PAGE>
THE SBC TRANSACTION
This section describes the material terms of the SBC transaction. Prodigy
stockholders should read the SBC agreements attached as Annexes to this proxy
statement carefully for a more complete understanding of the SBC transaction.
Overview and Structure of the SBC Transaction
Prodigy and SBC have agreed to establish a strategic relationship in which:
. SBC will acquire an approximate 43% indirect interest in Prodigy;
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses in the United States;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers--the wholesale price to be paid by SBC to Prodigy for the
Prodigy Internet service that SBC will resell to its existing Internet
subscribers will equal SBC's average retail price as of the closing less
reasonable and necessary expenses actually incurred by SBC in serving
its existing Internet subscribers;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period--all new subscribers obtained for
Prodigy by SBC will be Prodigy subscribers;
. Prodigy has agreed to pay SBC a fee of between $40 and $75 for each
subscriber obtained by SBC;
. SBC has agreed to pay Prodigy a penalty, under a specified formula, if
SBC does not obtain 1,200,000 additional Internet subscribers for
Prodigy over the three-year period, with the size of the penalty based
on the number of subscribers actually obtained by SBC who pay at least
one monthly bill from Prodigy--for example, the penalty will range from
$165,000,000 if SBC acquires no new subscribers for Prodigy, to
$105,000,000 if SBC acquires 600,000 new subscribers for Prodigy, to no
penalty if SBC acquires 1,200,000 new subscribers for Prodigy;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers, so long as SBC's terms are
competitive with those offered by other providers;
. SBC will have the exclusive right to provide telecommunications,
advertising, telecommunications e-commerce and Internet telephony
applications in conjunction with the Prodigy Internet service to
Prodigy's subscribers, so long as SBC's terms are competitive with those
offered by other providers; and
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides to Prodigy's subscribers.
SBC's exclusive rights described in the four preceding bullet points will be
subject to Prodigy's existing agreements with other providers. Prodigy
currently has agreements with other providers of network, telecommunications
and related services. These agreements will not be affected by the SBC's
transaction. When these agreements terminate, SBC's exclusive rights described
above will apply.
In order to implement our strategic relationship with SBC:
. Prodigy will contribute substantially all of its assets and liabilities
and transfer its employees, including the asset, liabilities and
employees acquired in the pending FlashNet merger, to the operating
partnership;
33
<PAGE>
. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with SBC's consumer and small
business Internet operations and that are selected by Prodigy because
Prodigy determines that they will useful in connection with the provision
of services to SBC's customers and Prodigy's customers after the closing;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of royalty-free licenses to use SBC's trademarks in
connection with the marketing and operation of the Prodigy Internet
service and Prodigy's right to manage SBC's existing Internet customers;
. Prodigy will receive an initial interest in the operating partnership of
approximately 57%;
. SBC will receive an initial interest in the operating partnership of
approximately 43%; and
. SBC may convert its interest in the operating partnership into a direct
equity interest in Prodigy at any time, or may require the operating
partnership to be merged into Prodigy at any time.
Prodigy and SBC believe that the value of the assets to be contributed by
SBC, which as disclosed in "Unaudited Pro Forma Condensed Combined Financial
Information" was estimated at $968.75 million as of December 31, 1999 based on
specified assumptions, is equal to the value of the interest in Prodigy to be
received by SBC. Upon the liquidation of the operating partnership, the assets
contributed by Prodigy and SBC will be distributed to them after payment of the
operating partnership's liabilities.
Following the SBC transaction, Prodigy will:
. provide the Prodigy Internet service to SBC's existing Internet
subscribers;
. continue to provide the Prodigy Internet service to Prodigy's current
subscribers;
. obtain additional Prodigy Internet subscribers through SBC's marketing
efforts; and
. continue to obtain new Prodigy Internet subscribers through Prodigy's
existing and new channels on a nationwide basis.
At the closing, Prodigy will also issue to the SBC subsidiary one share of
Prodigy Class B common stock in consideration of $100. Prodigy Class B common
stock will be convertible at any time, on a one-for-one basis, into the same
number of shares of Prodigy Class A common stock. When transferred to any
person or entity not affiliated with SBC, Prodigy Class B common stock will
automatically convert into Prodigy Class A common stock. Only one share of
Class B common stock will be authorized for issuance, and Prodigy does not
anticipate issuing any additional shares of Class B common stock to SBC or
anyone else.
As part of its strategic relationship with SBC, Prodigy will also amend its
certificate of incorporation and by-laws to implement the following corporate
governance arrangements:
. SBC will have the right to appoint three Prodigy directors;
. Carso Global Telecom and Telmex, Prodigy's current principal
stockholders, will have the right to appoint three Prodigy directors;
. Prodigy's other three directors will be its chief executive officer and
two independent directors;
. Prodigy's board will establish a new executive steering committee, which
must approve all major corporate actions prior to being submitted to the
board for consideration; and
. SBC will have the right to appoint two members of the executive steering
committee and Carso Global Telecom an Telmex will have the right to
appoint the other two members of the executive steering committee.
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The agreements between Prodigy and SBC establishing the strategic
relationship are summarized in the section entitled "Agreements With SBC." The
amendments to Prodigy's certificate of incorporation and by-laws are described
in the sections entitled "Restated Certificate of Incorporation" and "Amended
and Restated By-Laws."
The structure of the SBC transaction is depicted below:
As a result of the SBC transaction:
. Prodigy will be a holding company;
. Prodigy's sole assets will consist of the approximate 57% interest in
the operating partnership and rights under stock-related agreements and
plans;
. Prodigy's sole business will be to act as the general partner of the
operating partnership; and
. Prodigy will become an affiliate of SBC and will become subject to the
restrictions imposed on affiliates of Bell operating companies under the
federal Communications Act.
Prodigy common stock owned by Prodigy's current stockholders will
automatically convert into Prodigy Class A common stock. Prodigy Class A common
stock will be listed on the Nasdaq National Market and will be freely tradeable
to the same extent as the Prodigy common stock was. Holders of Prodigy Class A
common stock will generally have rights identical to holders of Prodigy Class B
common stock, except that:
. each holder of Prodigy Class A common stock will be entitled to one vote
per share; and
. the SBC subsidiary that holds Prodigy Class B common stock will be
entitled to one vote for each share of Prodigy Class B common stock held
by it and one vote for each unit in the operating partnership not held
by Prodigy.
SBC, as the owner of Prodigy Class B common stock, will have the right to
directly elect three of Prodigy's nine directors. Otherwise, holders of Prodigy
Class A common stock and Prodigy Class B common
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stock generally will vote together as a single class on all matters, including
the election of the directors who are not elected directly by SBC. Pursuant to
a voting agreement, SBC has agreed to vote in favor of the election of up to
three nominees to the Prodigy board of directors designated by Carso Global
Telecom and Telmex. In order to give SBC the flexibility to combine its voting
interest in Prodigy and its economic interest in the operating partnership, SBC
will have the right to approve a merger of the operating partnership into
Prodigy by a vote of at least 75% of Prodigy Class B common stock. No vote of
the holders of Prodigy Class A common stock for this merger would be required
because it would have no effect on the economic or voting interests of
Prodigy's stockholders.
Prodigy will establish an executive steering committee of the board of
directors of Prodigy. The executive steering committee will consist of four
members, two of whom will be selected by the Class B directors elected by SBC
and two of whom will be selected by the Class A directors designated by Telmex
and Carso Global Telecom. The purpose of the executive steering committee will
be to evaluate all major corporate actions of Prodigy, the operating
partnership and any other subsidiary of Prodigy, such as mergers, acquisitions
and capital expenditures or borrowings in excess of $20,000,000. Major
corporate actions will require the unanimous approval of the executive steering
committee prior to being submitted of the board of directors of Prodigy for its
approval.
As the sole general partner of the operating partnership, Prodigy will have
unilateral control over all of the affairs and decision making of the operating
partnership, subject to the approval of the SBC subsidiary as to:
. admitting new limited partners;
. requiring additional capital contributions;
. making distributions;
. instituting any bankruptcy proceedings; or
. dissolving the operating partnership.
As the sole general partner, Prodigy, acting through its executive steering
committee, board of directors and officers, will be responsible for nearly all
operational and administrative decisions of the operating partnership and the
day-to-day management of the operating partnership's business. Prodigy cannot
be removed as the sole general partner of the operating partnership, and the
operating partnership cannot be dissolved without Prodigy's approval. The
circumstances under which Prodigy may withdraw as general partner from the
operating partnership or under which the operating partnership can be dissolved
are described under "Agreements With SBC--Limited Partnership Agreement."
Upon issuance of the units and Prodigy Class B common stock to the SBC
subsidiary, the number of units owned by Prodigy will equal the number of
shares of outstanding Prodigy Class A common stock. The partnership agreement
requires that each time Prodigy issues shares of Prodigy Class A common stock
the operating partnership must issue an equal number of units to Prodigy in
exchange for the net proceeds received by Prodigy from the issuance of Prodigy
Class A common stock. This means that Prodigy can increase its percentage
ownership of the operating partnership by issuing additional Class A common
stock, although unanimous approval of Prodigy's executive steering committee,
including the members appointed by SBC, will be required for Prodigy to issue
additional Class A common stock. The number of units owned by Prodigy is
intended to equal the number of shares of outstanding Prodigy Class A common
stock at all times following the closing.
Background of the SBC Transaction
Prodigy's current principal stockholders are Carso Global Telecom and Telmex.
Carlos Slim Helu controls Prodigy and Carso Global Telecom and is a director of
SBC. Carso Global Telecom controls Telmex, and SBC owns an equity interest of
approximately 8.9% in Telemex. As a result of these relationships, Carso Global
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Telecom and SBC have in the past explored and entered into various strategic
relationships and joint ventures. As early as the summer of 1998, SBC and
Prodigy held discussions to determine whether their Internet strategies were
sufficiently aligned to make discussions concerning acquisitions, alliances or
other business combinations worthwhile. Prior to these discussions, there was
no direct relationship between SBC and Prodigy. Those discussions were
unsuccessful and were discontinued.
In February 1999, following completion of its initial public offering,
Prodigy began to focus on the need to increase its subscriber base and to
develop a national high speed service offering. As a result, Prodigy explored
various potential acquisition transactions with several national and regional
Internet service providers, and conducted detailed discussion with two
companies in addition to SBC. These discussions included a wide range of
possible transactions, but none of these discussions resulted in any agreement
on transaction terms or reached the point of negotiation of definitive
documentation.
On February 24, 1999, Samer F. Salameh, chairman of the board and chief
executive officer of Prodigy, and Andrea S. Hirsch, executive vice president of
business development and general counsel of Prodigy, met in Mexico City with
Steve McGaw, managing director--corporate development of SBC, Dave Shanberg,
then director--corporate development of SBC, and John Beans, director, business
development of Pacific Telesis Shared Services, to discuss each company's
strategic plans and to determine whether their interests were sufficiently
aligned to make further discussions worthwhile. Based on these preliminary
discussions, Prodigy believed that a relationship with SBC would provide many
of the attributes that management had identified as key elements to Prodigy's
continued growth. Specifically, Prodigy believed that a combination of the
Internet businesses of Prodigy and SBC would immediately give Prodigy benefits
of scale and would provide Prodigy with a significant new marketing and
distribution channel. In addition, SBC's plans to expand its high speed
Internet access offering convinced Prodigy to continue its discussions with
SBC.
During March and April 1999, SBC and Prodigy conducted due diligence reviews
and exchanged further information about Prodigy and SBC. During a series of
conference calls, representatives of each company discussed network
infrastructure, data centers, customer service operations, product development
capabilities and marketing and sales. During that time frame, the parties
continued to discuss proposed structures for a transaction.
On April 20, 1999, David R. Henkel, then chief financial officer of Prodigy,
Ms. Hirsch, Tom Brennan, then vice president of business development of
Prodigy, a representative of Hale and Dorr LLP, Prodigy's outside counsel, Dave
Shanberg, Tom Giltner, a representative of Sullivan and Cromwell, counsel for
SBC, and representatives of Bear Stearns and Goldman Sachs met at Bear Stearns'
offices to discuss potential structures for the transaction. No agreement was
reached at the meeting as to any of the issues discussed.
On May 11, 1999, Messrs. Salameh, Henkel and Shanberg, Ms. Hirsch and
representatives from Bear Stearns, who was at that time informally advising
Prodigy in connection with a potential transaction, and Goldman Sachs,
financial adviser to SBC, met at SBC's offices in San Antonio. At this meeting,
the parties discussed potential structures for a transaction. It was suggested
that SBC and Prodigy each retain their existing subscriber base but form a new
entity into which future subscribers would be contributed. Prodigy also would
contribute its existing assets to the new entity. The attendees also discussed
the methodology for valuing Prodigy's hosting business and issues relating to
control of the joint venture, marketing commitments from SBC and branding
strategy. No agreement was reached on the issues addressed during the meeting,
and following several subsequent conversations, with no acceptable resolution,
negotiations were suspended.
In late June, Prodigy formally engaged Bear Stearns as its financial advisor.
Throughout the third quarter of 1999, Prodigy engaged in discussions with
several other major Internet service providers regarding potential business
combinations and other strategic alternatives. These discussions did not result
in any agreements and were discontinued.
On September 17, 1999, Mr. Salameh and Ms. Hirsch met with Messrs. McGaw and
Shanberg in San Antonio to review a proposed term sheet for the transaction.
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At a meeting of Prodigy's board of directors held on September 23, 1999,
Prodigy's management reviewed with the board a term sheet for the SBC
transaction and discussed the proposed transaction structure, governance
arrangements, regulatory issues, exclusivity and marketing arrangements,
required approvals and other aspects of the transaction. The board discussed
the strategic and other benefits of the SBC transaction to Prodigy, citing the
increased subscriber base, access to new marketing channels and the ability to
leverage SBC's commitment to high speed Internet access. The board also
discussed the potential risks of the SBC transaction, questioning whether an
alliance with SBC might impede future transactions and voicing concern that the
transaction structure might not be understood by stockholders.
During the course of the discussion, James R. Adams, a director of Prodigy
and a former officer of SBC, indicated that he did not consider himself
independent of SBC because he held stock in and received a pension from SBC. As
a result, Prodigy's board of directors established a special committee,
consisting of Mr. Salameh, Alfredo Sanchez, Arturo Elias, James M. Nakfoor and
Russell I. Pillar, with full authority to consider and make a recommendation to
the full board of directors regarding the proposed SBC transaction. These
directors were selected for the special committee because they did not have a
direct financial interest in SBC. The interests of the executive officers and
directors in the SBC transaction, and the preexisting business relationships
among Prodigy, Prodigy's principal stockholders and SBC, are described below
under "Interests of Executive Officers, Directors and Principal Stockholders of
Prodigy in the SBC Transaction." At the September 23 meeting the board
discussed these preexisting business relationships and believed that because
the members of the special committee did not hold direct financial interests in
SBC they would be sufficiently independent of SBC to be able to make an arms'-
length determination of the merits of any proposed transaction with SBC. Based
upon the instructions of the special committee, Prodigy's management continued
to negotiate the terms of the transaction with SBC over the next three weeks.
On September 24, 1999, representatives of Prodigy and SBC met at a follow up
meeting in Houston. At the meeting the parties continued their discussions
concerning operational control of the operating partnership, minimum subscriber
contributions from SBC and bounties and penalties relating to the subscriber
commitments. The parties continued to negotiate the principal terms of the
transaction as contained in the term sheet over the next few weeks. During this
time period, SBC and Prodigy renewed due diligence and exchanged further
information concerning operations.
At a meeting held on October 20, 1999, the special committee further
considered the proposed SBC transaction. The special committee reviewed various
materials and discussed the underlying valuation principles, the exclusivity
and marketing arrangements, the proposed governance arrangements, the creation
of the executive steering committee and the termination provisions of the
proposed agreements. The special committee instructed management to continue to
negotiate the terms of the transaction with SBC, citing specific concerns
relating to the bounties payable to SBC in connection with new subscriber
acquisitions, the minimum number of subscribers required to be delivered by SBC
to Prodigy in each year and penalties for failing to deliver these minimums and
the degree of control that SBC would be able to exercise over the operating
partnership.
From October 20 through November 19, 1999, in a series of conference calls,
representatives of SBC and Prodigy continued to negotiate the terms of the
definitive agreements.
At a meeting held on November 19, 1999, the special committee further
considered the proposed SBC transaction. The special committee reviewed
additional materials prepared by Prodigy's management and by Bear Stearns.
Representatives of Bear Stearns made a detailed presentation to the special
committee, as summarized below under "Opinion of Prodigy's Financial Advisor."
At the conclusion of their presentation, representatives of Bear Stearns stated
Bear Stearns' opinion that, as of November 19, 1999, the consideration to be
issued by Prodigy to SBC in the SBC transaction was fair, from a financial
point of view, to Prodigy. The special committee then recommended approval of
the SBC transaction to the full board of directors.
The opinion of Bear Stearns will not be updated to the time of closing. In
making its recommendation, the special committee was satisfied that the
fairness opinion of Bear Stearns would not be updated to the time of
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closing because the special committee recognized that negotiation of the terms
of the transaction was based on information then known by the parties and that
the relative values of the securities and assets to be exchanged could
fluctuate over time.
On April 19, 2000, Prodigy and SBC amended the investment agreement to extend
the closing deadline from May 19, 2000 to June 1, 2000.
Prodigy's Reasons for the SBC Transaction; Recommendation of the Board of
Directors
Based on the recommendation of the special committee, the Prodigy board of
directors has unanimously concluded that the SBC transaction is fair to, and in
the best interests of, Prodigy and its stockholders and recommends that the
Prodigy stockholders approve the SBC transaction.
The recommendation of the special committee to the full board of directors,
and the recommendation of the board of directors to stockholders, was based on
several potential benefits of the SBC transaction that the special committee
believed would contribute to the success of Prodigy. These potential benefits
include:
. Prodigy's belief that broadband access will come to dominate the
Internet access market because of its speed, reliability and ease of use
and that digital subscriber line, or DSL, telephone service is emerging
as one of the broadband technologies of choice. As a result of SBC's
announced $6 billion investment in its broadband network and its
approximately 690,000 existing subscribers with dial-up integrated
services digital network, or ISDN, telephone service and basic DSL
Internet access, the SBC transaction would make Prodigy the leading DSL
broadband Internet service provider in the United States.
. The ability to gain exclusive access to SBC's extensive marketing and
distribution channels covering approximately 77,000,000 U.S. consumers.
. Prodigy would have the opportunity to market its bilingual Prodigy en
Espanol service to a greater percentage of the U.S. Hispanic population
as the result of SBC's local presence in nine of the top 10 U.S.
Hispanic population centers, covering more than 60% of the U.S. Hispanic
population.
The special committee reviewed a number of factors in evaluating the SBC
transaction, including the following:
. information concerning the respective businesses, prospects, strategic
business plans, financial performance and condition, results of
operations, technology positions, management and competitive positions
of Prodigy and SBC's consumer and small business Internet operations,
which information confirmed Prodigy's management belief that the size of
SBC's existing subscriber base of dial up and high speed access customer
base and continued commitment to high speed access would bolster
Prodigy's ability to compete effectively in the current industry
environment;
. results of the due diligence investigation conducted by Prodigy's
management, financial advisors and legal advisors;
. Prodigy management's view that integrating SBC's Internet assets into
Prodigy's operations would enable Prodigy to benefit from additional
economies of scale in customer service, network and other areas of
operation;
. current financial market conditions and historical stock market prices,
volatility and trading information, which information was used to
evaluate comparable historical trends in valuations of other Internet
service providers;
. the impact of the SBC transaction on the customers and employees of
Prodigy--the Board concluded that the transaction was likely to have no
impact on employees or the basic service provided to Prodigy
subscribers, but that subscribers would benefit from new
telecommunications and related services that SBC would offer to
Prodigy's subscribers; and
. the opinion of Bear Stearns that, as of November 19, 1999, the
consideration to be issued by Prodigy in the SBC transaction was, from a
financial point of view, fair to Prodigy.
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During the course of its deliberations concerning the SBC transaction, the
special committee also identified and considered a variety of potentially
negative factors that could materialize as a result of the SBC transaction,
including the following:
. the risk that the potential benefits sought in the SBC transaction might
not be fully realized;
. the possibility that the SBC transaction might not be consummated;
. the possibility that the public announcement of the SBC transaction
could cause some of SBC's Internet subscribers to terminate their
service and thus not contribute to the anticipated financial benefits to
Prodigy;
. the risk that the requirement that the executive steering committee
approve all major corporate actions before submitting them for approval
by the board of directors could give the full board of directors less
control over aspects of Prodigy's business, such as its business plan;
. the possibility that the creation and authority of the executive
steering committee could decrease the willingness of some potential
directors to serve on Prodigy's board of directors; and
. the risks associated with obtaining the necessary approvals required to
complete the SBC transaction.
The special committee concluded that the potential benefits to be gained by
the SBC transaction outweighed these factors. In view of the wide variety of
factors, both positive and negative, considered by the special committee, the
directors did not find it practical to, and did not, quantify or otherwise
assign relative weights to the specific factors discussed above.
For the reasons discussed above, Prodigy's board of directors has unanimously
approved the SBC transaction and has determined that the SBC transaction is
advisable and fair to, and in the best interests of, Prodigy and its
stockholders and unanimously recommends that the Prodigy stockholders vote for
approval of the SBC transaction.
Opinion of Prodigy's Financial Advisor
Prodigy retained Bear Stearns to act as its financial advisor in connection
with the SBC transaction. Bear Stearns delivered its written opinion, dated
November 19, 1999, to the Prodigy board of directors to the effect that the
consideration to be issued by Prodigy to SBC in the SBC transaction was fair,
from a financial point of view, to Prodigy.
The full text of the Bear Stearns opinion is attached as Annex A to this
proxy statement. Holders of Prodigy common stock are urged to read the Bear
Stearns opinion carefully, especially with regard to the assumptions made and
matters considered by Bear Stearns, as well as the limitations on the
information considered and analysis presented.
The Bear Stearns opinion, intended for the benefit and use of the Prodigy
board of directors, did not constitute a recommendation to the Prodigy board of
directors in connection with the SBC transaction and does not constitute a
recommendation to any holder of Prodigy common stock as to how to vote in
connection with the SBC transaction. Bear Stearns did not express any opinion
as to Prodigy's underlying business decision to pursue the SBC transaction or
the price or range of prices at which Prodigy common stock may trade subsequent
to the announcement of the SBC transaction or the price or range of prices at
which the shares of Prodigy Class A common stock may trade subsequent to the
consummation of the SBC transaction.
The amount and form of the consideration and the terms of the SBC transaction
were determined by negotiations between Prodigy and SBC and were not based on
any recommendation by Bear Stearns. Prodigy did not impose any limitations on
Bear Stearns with respect to the investigation made or the procedures followed
by Bear Stearns in rendering its opinion.
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In arriving at its opinion, Bear Stearns, among other things:
. reviewed drafts in substantially final form of each of the agreements
with respect to the SBC transaction (other than the registration rights
agreement) summarized below under "Agreements with SBC";
. reviewed Prodigy's recent filings with the Securities and Exchange
Commission;
. reviewed unaudited operating and financial information relating to SBC's
consumer and small business Internet operations for the year ended
December 31, 1998 and monthly periods ended September 30, 1999;
. reviewed operating and financial information relating to Prodigy's
business and prospects on a stand-alone basis, including projections,
prepared and provided to Bear Stearns by Prodigy management;
. reviewed operating and financial information relating to Prodigy's
business and prospects as adjusted to reflect the pro forma effects of
the SBC transaction, including projections, prepared and provided to
Bear Stearns by Prodigy's management;
. reviewed estimates of revenue enhancements, cost savings and other
combination benefits expected to result from the SBC transaction,
prepared and provided to Bear Stearns by Prodigy's management;
. reviewed projected SBC Internet subscriber data supplied by SBC and
incorporated by Prodigy's management in its projections;
. discussed Prodigy's business, operations, historical and projected
financial results and future prospects with members of Prodigy's senior
management;
. discussed the business, operations, historical financial results and
future prospects of SBC's consumer and small business Internet
operations with SBC's senior management;
. reviewed the historical prices, trading multiples and trading volumes of
shares of Prodigy common stock;
. reviewed publicly available financial data, stock market performance
data and trading multiples of companies which Bear Stearns deemed
generally comparable to Prodigy;
. performed discounted cash flow analyses based on the stand-alone Prodigy
projections and the pro forma Prodigy projections, both including and
excluding the estimated combination benefits expected to result from the
SBC transaction;
. reviewed the pro forma financial condition and capitalization of Prodigy
giving effect to the SBC transaction; and
. conducted other studies, analyses, inquiries and investigations which
Bear Stearns deemed appropriate.
Other than as described herein, Bear Stearns was not provided with, nor was
it asked to obtain, any financial forecasts, estimates, projections, pro forma
financial effects and calculations of cost savings or synergies.
Bear Stearns relied upon and assumed, with the consent of Prodigy and without
independent verification, the accuracy and completeness of the financial and
other information provided to Bear Stearns by Prodigy. With respect to the
Prodigy projections and the estimated combination benefits that could be
achieved upon consummation of the SBC transaction, Bear Stearns assumed that
they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the senior management of Prodigy as to the
expected future performance of Prodigy on a stand-alone basis and after giving
pro forma effect to the SBC transaction. Bear Stearns did not assume any
responsibility for the independent verification or assessment of any of this
information, and Bear Stearns further relied upon the assurances of the senior
management of Prodigy that they were unaware of any facts that would make the
information provided to Bear Stearns incomplete or misleading. In addition,
Bear Stearns did not make or receive any independent evaluation or appraisal of
the assets or liabilities of Prodigy or SBC's consumer and small business
Internet operations, nor was Bear Stearns furnished with any evaluation or
appraisal.
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In rendering its opinion, Bear Stearns assumed, at the direction of Prodigy,
renewals of the strategic and marketing agreement on substantially the same
terms as are in effect during the strategic and marketing agreement's initial
three-year term. Bear Stearns further assumed that:
. the SBC transaction will not be taxable to Prodigy or SBC;
. Prodigy and SBC will comply with all the material terms and conditions
of the SBC transaction documents and all applicable laws and
regulations; and
. the SBC transaction will be consummated in accordance with its terms,
Prodigy will consolidate the operating partnership and minority interest
treatment will be accorded to SBC's stake in the operating partnership.
In arriving at its opinion, Bear Stearns did not assign any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments based upon its experience in providing fairness opinions and on then
existing economic, monetary, market and other conditions as to the significance
of each analysis and factor. Bear Stearns believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered, without considering all of the analyses and factors, could
create a misleading or incomplete view of the processes underlying its opinion.
In its analyses, Bear Stearns made numerous assumptions with respect to
industry performance, general business conditions and other matters, many of
which are beyond the control of Prodigy, SBC or Bear Stearns. Any assumed
estimates implicitly contained in Bear Stearns' opinion or relied upon by it in
rendering its opinion, are not necessarily reflective of actual values or
predictive of future results or values. Any estimates relating to the value of
a business or securities do not purport to be appraisals or necessarily reflect
the prices at which companies or securities may actually be sold.
Bear Stearns is an internationally recognized investment banking firm which,
as part of its investment banking business, regularly engages in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Prodigy board of directors selected Bear
Stearns on the basis of its experience and independence. Bear Stearns has
previously rendered investment banking and financial advisory services to
Prodigy in connection with the initial public offering of Prodigy common stock
for which underwriting discounts and commissions of approximately $2.2 million
were received. Bear Stearns also served as Prodigy's financial advisor for the
acquisition of BizOnThe.Net, for which compensation of $660,000 plus expenses
was paid, and Prodigy's pending acquisition of FlashNet, for which Bear Stearns
will receive a success fee of approximately $865,000 plus expenses upon
consummation of the transaction. In addition, Bear Stearns has received
$400,000 to date, which will be credited against a success fee of $2,000,000
plus expenses upon consummation of the SBC transaction. Bear Stearns also
advised Prodigy on a financing arrangement for which it will receive
approximately $250,000, primarily representing reimbursement of Bear Stearns'
legal expenses. In the ordinary course of its business, Bear Stearns may
actively trade the equity and debt securities of Prodigy for its own account or
for accounts of its customers and, accordingly, Bear Stearns may at any time
hold a long or short position in these securities. There have been no other
material relationships between Prodigy and Bear Stearns during the past two
years.
Pursuant to the terms of the engagement letter between Prodigy and Bear
Stearns dated June 29, 1999, as confirmed on October 15, 1999, Prodigy agreed
to pay to Bear Stearns:
. a success fee of $2,000,000 upon consummation of the SBC transaction;
and
. upon the earlier of the execution by Prodigy and SBC of a definitive
agreement and the rendering by Bear Stearns of a fairness opinion, from
a financial point of view, of the consideration to be issued to SBC in
the SBC transaction, a cash fee of $400,000, which would be credited
against the success fee.
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In addition, Prodigy has agreed to reimburse Bear Stearns for all reasonable
out-of-pocket expenses incurred by it in connection with the SBC transaction,
including reasonable fees and disbursements of its legal counsel. Prodigy has
also agreed to indemnify Bear Stearns against specific liabilities in
connection with its engagement, including liabilities under the federal
securities laws.
Summary of Analyses
The following is a summary of the material valuation, financial and
comparative analyses performed by Bear Stearns in arriving at its opinion. Bear
Stearns based its analysis of the SBC transaction on three distinct
methodologies:
. discounted cash flow;
. relative contribution; and
. value creation based on multiples of Prodigy's projected pro forma
revenues, on the one hand, and Prodigy's current stand-alone trading
multiple and the trading multiples of four other Internet service
provider companies, on the other hand.
Bear Stearns applied each of these methodologies to three principal pro forma
projection scenarios based on the additional subscribers resulting from the
strategic and marketing agreement, both before and after giving effect to the
projected combination benefits resulting from the SBC transaction, as
summarized below.
Additional Subscribers. At all stages of its analysis of the SBC transaction,
Bear Stearns took into account the additional subscription revenue that Prodigy
expects to generate as a result of the greater number of subscribers managed by
Prodigy pursuant to the strategic and marketing agreement. In Prodigy
management's view, this revenue is unrelated to the projected combination
benefits resulting from the SBC transaction, as described under "Projected
Combination Benefits" immediately below. Bear Stearns assumed that Prodigy
would realize the additional subscription revenue whether or not it realized
the additional non-subscription revenue and other projected combination
benefits resulting from the SBC transaction.
Projected Combination Benefits. Aside from the additional subscription
revenue resulting from the strategic and marketing agreement, Prodigy's
management projected that additional non-subscription revenue and other revenue
enhancements and cost savings would result from the combination of Prodigy and
SBC's consumer and small business Internet operations. The principal projected
combination benefits resulting from the SBC transaction, as prepared and
provided to Bear Stearns by Prodigy's management, were:
. enhanced growth in Prodigy's subscriber base of 4.3%, 6.6%, 9.1%, 11.8%
and 13.6% in years 2000 to 2004, respectively, based on assumed greater
brand name recognition as a result of Prodigy's affiliation with SBC;
. additional non-subscription revenue of $.50 to $1.00 per subscriber per
month from advertising and e-commerce as a result of the greater number
of subscribers managed by Prodigy and the addition of subscribers with
high speed Internet access; and
. cost savings of $.25 to $.50 per subscriber per month, primarily
consisting of lower network costs and customer service costs due to
assumed purchasing economies.
As a result of the foregoing, Prodigy estimated that its earnings before
interest, taxes, depreciation and amortization would be enhanced by 58.8%,
33.3%, 33.3% and 33.5% in years 2001 to 2004, respectively. Investors are
cautioned that Prodigy cannot assure that these synergies will be achieved.
Pro Forma Projection Scenarios. Bear Stearns focused on the following three
principal pro forma scenarios:
. A base case scenario, which reflected Prodigy management's base forecast
for subscriber growth. Prodigy's management believed the base case
represented the most likely outcome of future operating results from the
transaction.
43
<PAGE>
. An upside case scenario, which assumed a 25% increase in gross
subscriber additions to the base case.
. A minimum subscriber case scenario, which Prodigy's management believed
represented the least likely of the three scenarios, and which assumed
the minimum number of new subscribers required to be delivered to
Prodigy under the strategic and marketing agreement.
Each of the three principal pro forma projection scenarios was analyzed
assuming renewals of the strategic and marketing agreement on substantially the
same terms as are in effect during its initial three-year term.
Bear Stearns also analyzed the base case, upside case, minimum subscriber
case and a fourth scenario, the no new subscriber case, assuming termination of
the strategic and marketing agreement after its initial three-year term. The no
new subscriber case assumed the contribution of no new subscribers to the pro
forma company which would require SBC to pay to Prodigy a maximum penalty after
three years of $165,000,000. However, Prodigy management advised Bear Stearns
that the scenarios based on termination of the strategic and marketing
agreement represented, in management's view, low probability outcomes of the
SBC transaction.
Discounted Cash Flow Analysis. Bear Stearns performed a discounted cash flow
analysis on the after-tax cash flows of Prodigy on a stand-alone basis and on a
pro forma basis giving effect to the SBC transaction. The pro forma analysis
was based on the additional subscribers resulting from the strategic and
marketing agreement, both before and after giving effect to the projected
combination benefits resulting from the SBC transaction. After-tax cash flows
for the five-year period beginning January 1, 2000 and ending on December 31,
2004 were calculated as after-tax earnings before depreciation and amortization
less changes in working capital and capital expenditures.
Bear Stearns calculated a terminal value for Prodigy on a stand-alone basis
by applying a range of multiples of 18.0x to 22.0x to projected earnings before
interest, taxes, depreciation and amortization in 2004. This range of multiples
was selected based on comparisons of multiples for selected Internet-related
companies with growth rates generally similar to Prodigy's at the end of the
projected period and on Bear Stearns' general experience in valuing companies.
In addition, Bear Stearns compared the expected perpetual growth rates in
after-tax cash flow with those implied by the selected multiples.
Terminal values for the three principal projection scenarios, assuming in
each case renewals of the strategic and marketing agreement, were first
calculated by applying a range of multiples of 18.0x to 22.0x to projected
earnings before interest, taxes, depreciation and amortization in 2004. An
expanded multiple range of 23.0x to 27.0x was also applied to Prodigy's
projected earnings before interest, taxes, depreciation and amortization in
2004 under the base case, upside case and minimum subscriber case, to reflect
the greater growth rates and future prospects projected by Prodigy management
for the pro forma company as compared to the projected growth rates and future
prospects for Prodigy on a stand-alone basis. These multiple ranges were
selected based on comparisons of multiples for selected Internet-related
companies with growth rates generally similar to Prodigy's and the growth rate
of SBC's consumer and small business Internet operations at the end of the
projected period and on Bear Stearns' general experience in valuing companies.
In addition, Bear Stearns compared the expected perpetual growth rates in
after-tax cash flow with those implied by the selected multiples.
With respect to each of the three principal scenarios based on a termination
of the strategic and marketing agreement after its initial three-year term,
Bear Stearns divided its terminal valuation analysis into two parts. Bear
Stearns first divided Prodigy's projected earnings before interest, taxes,
depreciation and amortization in 2004 on a pro forma basis into Prodigy and SBC
Internet portions based on their relative contributions of projected
subscribers to the pro forma combined company as of the end of year 2004. Bear
Stearns then valued Prodigy's projected earnings before interest, taxes,
depreciation and amortization using the multiple range of 18.0x to 22.0x. Bear
Stearns did not apply any terminal value to the projected earnings before
interest, taxes, depreciation and amortization of SBC's consumer and small
business Internet operations. Instead, earnings before interest, taxes,
depreciation and amortization were projected beyond 2004 based on monthly rates
of subscriber turnover and assuming constant earnings before interest, taxes,
depreciation and amortization per subscriber. Bear Stearns then calculated the
present value of this declining cash flow stream.
44
<PAGE>
With respect to all projection scenarios, weighted average costs of capital
ranging from 14.0% to 18.0% were chosen based on an analysis of Prodigy's
stand-alone weighted average cost of capital and comparisons of discount rates
for selected Internet-related companies with growth rates similar to Prodigy's
and SBC consumer and small business Internet operations' at the end of year
2004 and on several assumptions regarding factors such as the inflation rate,
interest rates and the inherent business risk of the combined company.
The discounted cash flow analysis of Prodigy on a stand-alone basis generated
per share equity values ranging from a low of $31.01 per share, assuming an
18.0x multiple and an 18.0% weighted average cost of capital, to a midpoint of
$37.06 per share, assuming a 20.0x multiple and a 16.0% weighted average cost
of capital, to a high of $44.01 per share, assuming a 22.0x multiple and a
14.0% weighted average cost of capital.
The discounted cash flow analysis of Prodigy on a pro forma basis generated a
range of per share equity values specific to each of the scenarios analyzed by
Bear Stearns. The following tables show for each scenario the applicable low,
midpoint and high equity values per share as compared to the per share equity
values for Prodigy on a stand-alone basis, both without giving effect to the
projected combination benefits from the SBC transaction (Table A) and after
giving effect to the projected combination benefits from the SBC transaction
(Table B). The pro forma values for cases without an expanded multiple range
assumed the same multiples and weighted average costs of capital as were
applied to the discounted cash flow analysis of Prodigy on a stand-alone basis.
The pro forma values for cases with an expanded multiple range assumed: for
each of the low values, a multiple of 23.0x; for each of the midpoint values, a
multiple of 25.0x; and, for each of the high values, a multiple of 27.0x. The
pro forma multiple expansion values also assumed the same weighted average
costs of capital as were applied to the discounted cash flow analysis of
Prodigy on a stand-alone basis. Both tables also show the percentage premium or
discount of the midpoint per share equity value for Prodigy on a pro forma
basis, under each of the forma projection scenarios analyzed by Bear Sterns, to
the midpoint per share value for Prodigy on a stand-alone basis.
A. Stand-Alone and Pro Forma Discounted Cash Flow Values Assuming Additional
Subscribers Resulting from the Strategic and Marketing Agreement:
<TABLE>
<CAPTION>
Assuming Renewal of the Prodigy--SBC
Strategic and Marketing Agreement
------------------------------------
Before
Strategic and Assuming Strategic and
Marketing Illustrative Multiple Marketing Agreement
Agreement No Multiple Expansion Expansion Termination After 3 Years
--------------- ---------------------- ---------------------- ---------------------------------
Stand-Alone Min.
Discounted Cash Min. Subscri- Min. No New
Flow Value Per Base Upside Subscri- Base Upside ber Base Upside Subscri- Subscri-
Share Case Case ber Case Case Case Case Case Case ber Case ber Case
--------------- ------ ------ -------- ------ ------ -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High.................. $44.01 $60.93 $70.02 $35.72 $73.74 $84.78 $43.07 $36.00 $38.22 $29.27 $27.28
Midpoint.............. $37.06 $51.26 $58.89 $30.13 $63.00 $72.41 $36.87 $30.53 $32.44 $24.76 $23.11
Low................... $31.01 $42.84 $49.19 $25.26 $53.62 $61.61 $31.45 $25.76 $27.41 $20.83 $19.46
Premium/(discount) To
midpoint stand-alone
value ($37.06)....... -- 38.3% 58.9% (18.7)% 70.0% 95.4% (0.5)% (17.6)% (12.5)% (33.2)% (37.6)%
</TABLE>
Taking into account the additional subscribers resulting from the strategic
and marketing agreement, as described on page 43, Bear Stearns noted the
following with respect to its discounted cash flow analysis:
. the midpoint per share values for Prodigy in the base case ($51.26,
assuming a 20.0x multiple, and $63.00, assuming a 25.0x expanded
multiple) and upside case ($58.89, assuming a 20.0x multiple, and
$72.41, assuming a 25.0x expanded multiple) compared favorably to the
midpoint per share value for Prodigy on a stand-alone basis ($37.06);
and
. the comparisons were unfavorable in the minimum subscriber case ($30.13,
assuming a 20.0x multiple, and $36.87, assuming a 25.0x expanded
multiple) and in all cases if renewals of the strategic and marketing
agreement between Prodigy and SBC were not assumed.
45
<PAGE>
B. Stand-Alone and Pro Forma Discounted Cash Flow Values Assuming Additional
Subcribers and Projected Combination Benefits Resulting from the SBC
Transaction:
<TABLE>
<CAPTION>
Assuming Renewal of the Prodigy--SBC
Strategic and Marketing Agreement
------------------------------------
Before
Strategic and Assuming Strategic and
Marketing Illustrative Multiple Marketing Agreement
Agreement No Multiple Expansion Expansion Termination After 3 Years
--------------- ---------------------- ---------------------- ---------------------------
Stand-alone
Discounted Cash Min. Min. Min.
Flow Value Per Base Upside Subscri- Base Upside Subscri- Base Upside Subscri-
Share Case Case ber Case Case Case ber Case Case Case ber Case
--------------- ------ ------ -------- ------ ------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High................... $44.01 $69.81 $79.96 $43.32 $84.47 $96.79 $52.28 $38.29 $40.59 $31.47
Midpoint............... $37.06 $58.74 $67.26 $36.52 $72.18 $82.69 $44.73 $32.49 $34.49 $26.63
Low.................... $31.01 $49.10 $56.21 $30.60 $61.44 $70.37 $38.14 $27.44 $29.17 $22.42
Premium/ (discount) To
midpoint stand-alone
value ($37.06)........ -- 58.5% 81.5% (1.5)% 94.8% 123.1% 20.7% (12.3)% (6.9)% (28.1)%
</TABLE>
After giving effect to the projected combination benefits from the SBC
transaction, as described on page 43, and taking into account the additional
subscribers resulting from the strategic and marketing agreement, as described
on page 43, Bear Stearns noted the following with respect to its discounted
cash flow analysis:
. the midpoint per share value for Prodigy in the base case ($58.74,
assuming a 20.0x multiple, and $72.18, assuming a 25.0x expanded
multiple), upside case ($67.26, assuming a 20.0x multiple, and $82.69,
assuming an expanded 25.0x multiple) and, assuming an expanded 25.0x
multiple, the minimum subscriber case ($44.73), compared favorably to
the midpoint per share value for Prodigy on a stand-alone basis
($37.06); and
. the comparisons were unfavorable in the minimum subscriber case if a
20.0x multiple was assumed ($36.52) and in all cases if renewals of the
strategic and marketing agreement between Prodigy and SBC were not
assumed.
Relative Contribution Analysis
Bear Stearns also performed an analysis of the relative contributions by SBC
and Prodigy to the pro forma combined company with respect to projected
revenues, earnings before interest, taxes, depreciation and amortization and
subscribers over the period 2000 to 2004. Bear Stearns' relative contribution
analysis was based upon the additional subscribers resulting from the strategic
and marketing agreement, both before and after giving effect to the projected
combination benefits resulting from the SBC transaction. Bear Stearns compared
this analysis to the relative contributions to combined enterprise value by SBC
and Prodigy. Based on the closing price of Prodigy common stock on November 12,
1999 and the number of shares of Prodigy Class A common stock that would be
issued to SBC upon conversion of Prodigy Class B common stock and the operating
partnership units to be acquired by SBC in the transaction, SBC would
contribute 40.9% of the combined enterprise value and Prodigy would contribute
59.1% of the combined enterprise value.
46
<PAGE>
The following table sets forth the relative contributions to projected
revenues, earnings before interest, taxes, depreciation and amortization and
subscribers during the periods indicated by SBC and Prodigy, taking into
account the additional subscribers resulting from the strategic and marketing
agreement, as described on page 43.
<TABLE>
<CAPTION>
Earnings before interest,
taxes, depreciation and
Revenues amortization Subscribers
---------------- --------------------------- -----------------
2000 2002 2004 2000 2002 2004 2000 2002 2004
---- ---- ---- -------- -------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A. Assuming Renewal of
the Prodigy--SBC
Strategic and
Marketing Agreement
(i) Base Case Prodigy 57.5% 45.7% 42.7% * 46.3% 43.4% 64.9% 55.7% 52.7%
SBC 42.5% 54.3% 57.3% * 53.7% 56.6% 35.1% 44.3% 47.3%
(ii) Upside Case Prodigy 54.4% 40.4% 37.2% * 41.0% 37.7% 61.7% 50.5% 47.3%
SBC 45.6% 59.6% 62.8% * 59.0% 62.3% 38.3% 49.5% 52.7%
(iii) Minimum
Subscriber Case Prodigy 64.9% 68.8% 71.5% * 65.1% 75.6% 72.7% 77.0% 79.1%
SBC 35.1% 31.2% 28.5% * 34.9% 24.4% 27.3% 23.0% 20.9%
B. Assuming Strategic
and Marketing
Agreement
Termination After 3
Years
(i) Base Case Prodigy 57.5% 45.7% 65.4% * 46.3% 61.7% 64.9% 55.7% 78.9%
SBC 42.5% 54.3% 34.6% * 53.7% 38.3% 35.1% 44.3% 21.1%
(ii) Upside Case Prodigy 54.4% 40.4% 59.9% * 41.0% 55.7% 61.7% 50.5% 74.9%
SBC 45.6% 59.6% 40.1% * 59.0% 44.3% 38.3% 49.5% 25.1%
(iii) Minimum
Subscriber Case Prodigy 64.9% 68.8% 85.9% * 65.1% 87.0% 72.7% 77.0% 92.2%
SBC 35.1% 31.2% 14.1% * 34.9% 13.0% 27.3%% 23.0% 7.8%
(iv) No New
Subscriber Case Prodigy 73.4% 74.6% 100% * 40.1% NA 81.4% 93.5% 100%
SBC 26.6% 25.4% 0% * 59.9% NA 18.6% 6.5% 0%
</TABLE>
- --------
* Not meaningful, since projected numbers for the year 2000 are negative.
The following table sets forth the relative contributions to projected
revenues, earnings before interest, taxes, depreciation and amortization and
subscribers after giving effect to the projected combination benefits from the
SBC transaction, as described on page 43, and taking into account the
additional subscribers resulting from the strategic and marketing agreement, as
described on page 43:
<TABLE>
<CAPTION>
Earnings before interest,
taxes, depreciation and
Revenues amortization Subscribers
---------------- --------------------------- ----------------
2000 2002 2004 2000 2002 2004 2000 2002 2004
---- ---- ---- -------- -------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A. Assuming Renewal of
the Prodigy--SBC
Strategic and
Marketing Agreement
(i)Base Case Prodigy 55.7% 43.6% 40.1% * 40.1% 37.9% 63.1% 53.0% 49.2%
SBC 41.2% 51.8% 53.9% * 46.5% 49.9% 34.2% 42.2% 44.1%
Combination Benefits 3.1% 4.6% 6.0% * 13.4% 12.7% 2.7% 4.8% 6.7%
(ii)Upside Case Prodigy 52.5% 38.6% 35.1% * 35.3% 33.0% 60.2% 48.3% 44.5%
SBC 44.0% 56.9% 59.2% * 50.8% 54.6% 37.3% 47.3% 49.5%
Combination Benefits 3.5% 4.5% 5.6% * 13.9% 12.4% 2.6% 4.4% 6.0%
(iii) Minimum
Subscriber Case Prodigy 63.2% 64.6% 65.1% * 55.7% 62.0% 70.6% 71.9% 71.5%
SBC 34.1 29.3% 25.9% * 29.8% 20.0% 26.4% 21.5% 18.8%
Combination Benefits 2.7% 6.1% 9.0%5 * 14.5% 18.0% 3.0% 6.5% 9.7%
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Earnings
before
interest,
taxes,
depreciation
and
Revenues amortization Subscribers
---------------- --------------- ----------------
2000 2002 2004 2000 2002 2004 2000 2002 2004
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
B. Assuming Strategic
and Marketing
Agreement
Termination After 3
Years
(i) Base Case Prodigy 55.7% 43.6% 63.0% * 40.1% 58.8% 63.1% 53.0% 75.6%
SBC 41.2% 51.8% 33.4% * 46.5% 36.5% 34.2% 42.2% 20.2%
Combination Benefits 3.1% 4.6% 3.6% * 13.4% 4.7% 2.7% 4.8% 4.1%
(ii) Upside Case Prodigy 52.5% 38.6% 58.0% * 35.3% 53.3% 60.2% 48.3% 72.0%
SBC 44.0% 56.9% 38.7% * 50.8% 42.5% 37.3% 47.3% 24.1%
Combination Benefits 3.5% 4.5% 3.3% * 13.9% 4.2% 2.6% 4.4% 3.9%
(iii) Minimum
Subscriber Case Prodigy 63.2% 64.6% 81.9% * 55.7% 81.4% 70.6% 71.9% 87.8%
SBC 34.1% 29.3% 13.5% * 29.8% 12.2% 26.4% 21.5% 7.4%
Combination Benefits 2.7% 6.1% 4.7% * 14.5% 6.4% 3.0% 6.5% 4.8%
</TABLE>
- --------
* Not meaningful, since projected numbers for the year 2000 are negative
Bear Stearns noted that, with respect to the base case and the upside case
assuming renewals of the strategic and marketing agreement, the comparisons
generally were favorable. In other words, Prodigy's relative contribution to
pro forma combined revenues, earnings before interest, taxes, depreciation and
amortization and subscribers based on the additional subscribers resulting from
the strategic and marketing agreement, both before and after giving effect to
the projected combination benefits resulting from the SBC transaction,
generally was less than its contribution to pro forma combined enterprise value
in each year throughout the projected period, particularly in the later years.
However, Bear Stearns also noted that, if termination of the strategic and
marketing agreement after its initial three-year term were assumed, the later
year comparisons would be unfavorable for these cases--in other words,
Prodigy's relative contribution to pro forma combined revenues, earnings before
interest, taxes, depreciation and amortization and subscribers would exceed its
contribution to pro forma combined enterprise value. Bear Stearns further noted
that the comparisons were unfavorable in the minimum subscriber case whether
with or without giving effect to the projected combination benefits from the
SBC transaction, and whether assuming renewals of the strategic and marketing
agreement, or assuming termination of the strategic and marketing agreement
after its initial three-year term.
Illustrative Value Creation Analysis
Bear Stearns noted that, based on the implied enterprise value of Prodigy on
a pro forma base case basis as of November 12, 1999, the implied blended
multiple of estimated pro forma 2000 revenue was 4.0x. The implied enterprise
value was calculated by adding the pro forma debt of the combined company to
the pro forma market capitalization of the combined company on a fully-diluted
basis and subtracting cash and cash equivalents from that amount. This
calculation was based on the closing price of Prodigy common stock on November
12, 1999 and the number of shares of Prodigy Class A common stock outstanding
after the issuance to SBC of approximately 50,136,000 shares of Prodigy Class A
common stock upon conversion of Prodigy Class B common stock and the operating
partnership units initially issued to SBC.
Bear Stearns calculated a range of implied values of Prodigy common stock on
a pro forma basis by applying a range of multiples of estimated year 2000
revenue and potential cost savings from the SBC transaction. The multiples of
estimated 2000 revenue ranged from 3.0x to 5.0x. That range was based on:
. Prodigy's current trading multiple of estimated 2000 revenue (4.1x);
. the implied multiple of estimated 2000 revenue in the pro forma base case
(4.0x); and
. an assumed high multiple of estimated 2000 revenue (5.0x).
Bear Stearns analyzed the implied values against a range of potential annual
cost savings from $0.0 to $60.0 million in increments of $15.0 million, which
cost savings were capitalized at a multiple of 25.0x. These cost savings
compared to projected cost savings in the base case of $21.6 million for 2000,
$48.0 million for
48
<PAGE>
2001 and $73.1 million for 2002. The range of implied pro forma values of
Prodigy common stock based on these multiples and potential annual cost savings
are set forth in the following table:
<TABLE>
<CAPTION>
Potential Annual
Cost Savings 3.0x 4.0x 5.0x
---------------- ------ ------ ------
<S> <C> <C> <C>
$ -- $17.21 $22.75 $27.99
15.0 20.18 25.72 30.96
30.0 23.16 28.70 33.94
45.0 26.13 31.67 36.91
60.0 29.10 34.64 39.88
</TABLE>
The following table sets forth the percentage premium or discount of the
implied values set forth in the above table to the closing price of $22.75 of
Prodigy common stock on November 12, 1999, five business days prior to the date
of the Bear Stearns opinion:
<TABLE>
<CAPTION>
Potential Annual
Cost Savings 3.0x 4.0x 5.0x
---------------- ----- ---- ----
<S> <C> <C> <C>
$ -- (24.3)% 0.0% 23.0%
15.0 (11.3)% 13.1% 36.1%
30.0 1.8 % 26.1% 49.2%
45.0 14.9 % 39.2% 62.2%
60.0 27.9 % 52.3% 75.3%
</TABLE>
Bear Stearns noted that, the implied values of Prodigy common stock based on
a multiple of estimated 2000 revenue of 3.0x and potential cost savings from
the SBC transaction of $.0 and $15.0 million ($17.21 and $20.18, respectively)
compared unfavorably to the closing price of Prodigy common stock on November
12, 1999 ($22.75). In the other cases illustrated in the two tables above, the
comparisons to the closing price of Prodigy common stock on November 12, 1999,
were favorable.
Bear Stearns compared the implied blended multiple of 4.0x estimated 2000
revenues of Prodigy on a pro forma base case basis to:
. Prodigy's current trading multiple of estimated 2000 revenue on a stand-
alone basis; and
. to the trading multiples of estimated 2000 revenues of four Internet
service provider companies which, in Bear Stearns' judgment, were
comparable to the operations of the combined company for purposes of this
analysis.
The following table sets forth the trading multiples of estimated 2000
revenues for each of the above companies, based on publicly available
information, including estimates in published third party research reports and
closing stock prices as of November 12, 1999:
<TABLE>
<CAPTION>
Implied multiple of
2000 revenues
-------------------
<S> <C>
Prodigy.................................................. 4.1x
EarthLink Network........................................ 3.2x
America Online........................................... 27.7x
OneMain.com.............................................. 2.1x
Voyager.net.............................................. 3.1x
</TABLE>
Interests of Executive Officers, Directors and Principal Stockholders of
Prodigy in the SBC Transaction
In considering the recommendation of the board of directors to approve the
SBC transaction, you should be aware that some of Prodigy's executive officers,
directors and principal stockholders have direct and indirect interests in the
SBC transaction that are different from and in addition to your interests as a
stockholder of Prodigy generally. The board of directors was aware of these
potential conflicts and considered them in approving the SBC transaction.
Acceleration of Stock Options
The employment agreements between Prodigy and the executive officers named
below provide that 50% of their unvested stock options will accelerate and
become immediately vested and exercisable upon a change
49
<PAGE>
in control of Prodigy. Prodigy's 1999 outside director stock option plan
contains similar provisions. As a result, the board of directors has concluded
that upon completion of the SBC transaction the following stock options held by
current executive officers and directors that were unvested as of March 31,
2000 will accelerate:
<TABLE>
<CAPTION>
Weighted
average
exercise Value of
price in-the-
Unvested options per money
Name of Executive Officer or Director that will accelerate share Options(1)
- ------------------------------------- -------------------- -------- ----------
<S> <C> <C> <C>
Samer F. Salameh....................... 21,875 $ 4.00 $241,992
David C. Trachtenberg.................. 41,666 $ 5.15 $413,014
Andrea S. Hirsch....................... 31,250 $ 8.00 $220,703
James R. Adams......................... 15,000 $25.625 $ --
Arturo Elias........................... 15,000 $ 15.00 $ 938
James M. Nakfoor....................... 15,000 $ 15.00 $ 938
Alfredo Sanchez........................ 15,000 $ 15.00 $ 938
------- --------
Total................................ 154,791 $878,522
</TABLE>
- --------
(1) Represents the difference between the fair value of Prodigy common stock
on March 31, 2000 ($15.0625) and the option exercise price.
Business Relationships among Carso Global Telecom, Telmex and SBC
Prodigy's current principal stockholders are Carso Global Telecom and Telmex.
Carlos Slim Helu controls Prodigy and Carso Global Telecom and is a director of
SBC. Carso Global Telecom controls Telmex, and SBC owns an equity interest of
approximately 8.9% in Telmex. Carso Global Telecom and SBC have formed other
joint ventures in the past and may do so in the future. Allen Craft, an
executive officer and director of Prodigy is employed by SBC. In addition,
Prodigy and SBC have agreed in principle that SBC will guarantee Prodigy's
ongoing performance obligations under its customer contracts in connection with
a proposed third party financing, and that Prodigy will grant SBC a contingent
warrant to purchase 537,924 shares of Prodigy common stock for $1.00 per share.
See "Prodigy Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Affiliations of Most Members of the Special Committee with Carso Global
Telecom or Telmex
Four of the five members of the special committee that recommended approval
of the SBC transaction are affiliated with Carso Global Telecom or Telmex. The
affiliations of these members, Samer F. Salameh, Alfredo Sanchez, Arturo Elias
and James M. Nakfoor, with Carso Global Telecom or Telmex are described below
under "Prodigy's Management--Executive Officers and Directors."
Goverance of Prodigy and the Operating Partnership Following the SBC
Transaction
As a result of the SBC transaction, Prodigy will be a holding company, and
Prodigy's sole business will be to act as the general partner of the operating
partnership.
As the sole general partner of the operating partnership, Prodigy will have
unilateral control over all of the affairs and decision making of the operating
partnership, subject to the approval of the SBC subsidiary as to:
. admitting new limited partners;
. requiring additional capital contributions;
. making distributions;
. instituting any bankruptcy proceedings; or
. dissolving the operating partnership.
Prodigy, acting through its executive steering committee, board of directors
and officers, will be responsible for nearly all operational and administrative
decisions of the operating partnership and the day-to-day management of the
operating partnership's business. Prodigy cannot be removed as the sole general
partner of the operating partnership.
50
<PAGE>
The circumstances under which Prodigy may withdraw from the operating
partnership, or under which the operating partnership can be dissolved, are
described under the section "Agreements With SBC--Limited Partnership
Agreement."
Following the SBC transaction, Prodigy's board of directors will consist of
nine members:
. three directors elected by SBC;
. three directors jointly designated by Carso Global Telecom and Telmex;
. Prodigy's chief executive officer; and
. two independent directors.
Following the closing, Prodigy will establish an executive steering committee
of the board of directors. The executive steering committee will consist of
four members, two of whom will be selected by the directors elected by SBC and
two of whom will be selected by the directors designated by Carso Global
Telecom and Telmex. The purpose of the executive steering committee will be to
evaluate all major corporate actions of Prodigy, the operating partnership and
any other subsidiary of Prodigy, such as mergers, acquisitions and capital
expenditures or borrowings in excess of $20,000,000. Major corporate actions
will require the unanimous approval of the executive steering committee prior
to being submitted for the approval of the board of directors of Prodigy.
Prodigy and SBC have agreed that Prodigy's headquarters will remain in White
Plains, New York unless otherwise decided by the board of directors.
Treatment of Prodigy Common Stock
In the SBC transaction, each share of Prodigy common stock will be
automatically converted into one share of Prodigy Class A common stock. Upon
completion of the SBC transaction, all certificates formerly representing
Prodigy common stock will automatically represent Prodigy Class A common stock.
Holders of Prodigy common stock should not send any certificates representing
Prodigy common stock to Prodigy.
Accounting Treatment of the SBC Transaction
Prodigy will recognize the contribution of the assets by SBC to the operating
partnership at fair value in exchange for the partnership units issued. As a
result of the partnership units issued, Prodigy will consolidate the operating
partnership and will recognize the SBC minority interest in the operating
partnership. The contribution of the intangible assets at fair value will
result in a substantial amount of amortization which will reduce Prodigy's
future earnings or increase its future losses.
Federal Income Tax Treatment of the SBC Transaction
Prodigy shareholders will not recognize a gain or loss as a result of the SBC
transaction. Prodigy believes that it will not recognize a gain or loss upon
the contribution by Prodigy to the operating partnership. Prodigy will be
required to take into account its allocable share of the operating
partnership's income, gains, losses and deductions, including amounts paid by
SBC to the operating partnership for services rendered by the operating
partnership to SBC pursuant to the SBC transaction. Prodigy has been advised by
counsel that this description reflects the material tax consequences of the SBC
transaction, but Prodigy has determined not to obtain a formal opinion of tax
counsel.
Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the SBC
transaction may not be consummated until notifications have been furnished to
the Federal Trade Commission and the Antitrust
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Division of the Department of Justice and specified waiting period requirements
have been satisfied. Prodigy filed a pre-merger notification and report form
with the FTC and the Antitrust Division on December 15, 1999. SBC made a
similar filing on December 14, 1999. On January 14, 2000, the applicable
waiting period under the Hart-Scott-Rodino Act expired without comment from the
FTC or the Antitrust Division. Therefore, the SBC transaction is deemed to have
received antitrust approval and may be consummated, pending compliance with the
other closing conditions.
At any time before the effective time of the SBC transaction, the Antitrust
Division, the FTC or a private person or entity could seek under antitrust
laws, among other things, to enjoin the SBC transaction and any time after the
effective time of the SBC transaction, to cause SBC to divest itself, in whole
or in part, of its ownership interests in Prodigy and the operating partnership
or of the businesses conducted by the operating partnership. There can be no
assurance that a challenge to the SBC transaction will not be made or that, if
a challenge is made, Prodigy will prevail. See "Agreements with SBC--
Investment, Issuance, Contribution and Assumption Agreement--Closing
Conditions" on page 58.
Regulatory Impact on Prodigy
The Communications Act places certain restrictions on Bell operating
companies and their affiliates that do not apply to other telecommunications
providers. Subsidiaries of SBC are Bell operating companies and, therefore, SBC
and its affiliates are subject to these restrictions. Under the Communications
Act, an affiliate of a Bell operating company includes any entity in which the
Bell operating company has control or an equity interest greater than 10%. As a
result of the SBC transaction, SBC will acquire an approximate 43% indirect
interest in Prodigy. Accordingly, Prodigy will become subject to the
restrictions imposed on Bell operating company affiliates by the Communications
Act.
Restrictions on Long Distance Service
Under the Communications Act, a Bell operating company must obtain approval
from the FCC before it or its affiliates may provide long distance
telecommunications and information services, including Internet access
services, that originate in one of the predefined geographic areas in which the
Bell operating company is the local telephone company and terminate outside of
that area. To obtain FCC approval to provide these types of long distance
services, a Bell operating company must satisfy, for each state for which FCC
approval is requested, conditions specified in the Communications Act designed
to ensure that competitive local telephone companies have access to the Bell
operating company's local telecommunications network. Moreover, for three years
after the FCC grants its approval, the Bell operating company must offer these
types of long distance services through a separate affiliate.
The restrictions imposed on Bell operating companies and their affiliates
will cause Prodigy to alter the manner in which it conducts its business. SBC's
affiliates are the local telephone company in the following states: Arkansas,
California, Connecticut, Illinois, Indiana, Kansas, Michigan, Missouri, Nevada,
Ohio, Oklahoma, Texas and Wisconsin. As an affiliate of SBC, Prodigy will not
be able to offer long distance information services that originate in a
predefined area within these states where an SBC affiliate is the local
telephone company and terminate outside of that area until SBC obtains FCC
approval to enter the long-distance business for the state in which that area
is located. Since Prodigy currently resells these types of long distance
services as part of its bundled Internet access service, it will be affected by
this restriction after the SBC transaction is implemented. Following the SBC
transaction, Prodigy will be required to implement a mechanism by which an
unaffiliated carrier will provide the connection between Prodigy's information
service and the Internet, and the charge for the connection between Prodigy's
information service and the Internet will be separately stated on the
customer's bill. Under this mechanism:
. There is an interconnection point in each local service area of an SBC
affiliate where traffic is exchanged with an entity that is authorized to
provide the connection between Prodigy's information service and the
Internet. There must be an interconnection agreement with each of these
entities to assure a proper exchange of traffic and a division of network
responsibilities.
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. The unaffiliated provider must set the rates, terms and conditions for
the provision of its services to Internet customers. Neither SBC,
Prodigy nor any affiliate may negotiate on behalf of the provider for
modifications of rates, terms and conditions. Neither SBC, Prodigy nor
any affiliate may pay the provider charges on behalf of the end-user.
However, SBC, Prodigy or one of their affiliates may collect the
provider's charges from the Internet customer on behalf of the provider.
Promotions, discounts and special pricing arrangements with respect to
the provider's services require the express authorization of the
provider.
. The unaffiliated provider's charges must separately appear in sales
agreements, sales collateral and advertisements and on the Internet
customer's bill. These charges must appear as a separate line item on
the Internet customers bill.
. The unaffiliated provider is responsible for the performance of its
network. If there are network problems, SBC, Prodigy or their affiliates
may notify the provider of the problem and assist in trouble isolation.
However, the provider is responsible for the repair.
The arrangement described above will be necessary until SBC obtains FCC
approval to enter the long-distance business in each of SBC's 13 in-region
states listed above. Prodigy has no assurances as to when or whether this
approval will be obtained, but SBC has informed Prodigy that it plans to make
the applicable governmental filings in order to obtain approval to provide long
distance services as soon as commercially practicable. Until then, Prodigy will
incur costs in altering the manner in which it conducts its business and may
not realize the efficiencies that could result if Prodigy were permitted to
resell the long distance portion of its service.
No Appraisal Rights
Prodigy stockholders will not have any appraisal rights with respect to the
SBC transaction.
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AGREEMENTS WITH SBC
This section describes the material terms of the agreements between Prodigy
and SBC which are attached as Annexes B, C, D and E to this proxy statement and
are incorporated by reference into this summary. We urge all Prodigy
stockholders to read the agreements with SBC carefully for a more complete
description of the terms and conditions of the SBC transaction and related
matters.
Strategic and Marketing Agreement
Prodigy, SBC, a subsidiary of SBC and the operating partnership have entered
into a strategic and marketing agreement.
Marketing and Exclusivity Commitments
Pursuant to the strategic and marketing agreement:
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses in the United States;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers--the wholesale price to be paid by SBC to Prodigy for the
Prodigy Internet service that SBC will resell to its existing Internet
subscribers will equal SBC's average retail price as of the closing less
reasonable and necessary expenses actually incurred by SBC in serving its
existing Internet subscribers;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period--all new subscribers obtained for
Prodigy by SBC will be Prodigy subscribers;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers, so long as SBC's terms are
competitive with those offered by other providers;
. SBC will have the exclusive right to provide telecommunications,
advertising, telecommunications e-commerce and Internet telephony
applications in conjunction with the Prodigy Internet service to
Prodigy's subscribers, so long as SBC's terms are competitive with those
offered by other providers; and
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides to Prodigy's subscribers.
SBC's exclusive rights described in the three preceding bullet points will be
subject to Prodigy's existing agreements with other providers. Prodigy
currently has agreements with other providers of network, telecommunications
and related services. These agreements will not be affected by the SBC's
transaction. When these agreements terminate, SBC's exclusive rights described
above will apply.
Prodigy's services will be co-branded with Prodigy's name and one or more SBC
trademarks. Prodigy and SBC will grant each other licenses to use each other's
marketing materials and trademarks. Prodigy and SBC will also grant each other
licenses to any work product developed during the term of the agreement.
Following the SBC transaction, Prodigy will:
. provide the Prodigy Internet service to SBC's existing Internet
subscribers;
. continue to provide the Prodigy Internet service to Prodigy's current
subscribers;
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. obtain additional Prodigy Internet subscribers through SBC's marketing
efforts; and
. continue to obtain new Prodigy Internet subscribers through Prodigy's
existing and new channels on a nationwide basis.
Bounty and Penalty Provisions
Prodigy will pay SBC a bounty, or fee, of $40 for each dial-up subscriber and
$75 for each DSL subscriber obtained by SBC for Prodigy who pays at least one
bill. Once 300,000 subscribers are obtained for Prodigy by SBC in any year, the
dial-up bounty will increase to $60 for the remainder of that year. If SBC
exceeds 300,000 subscribers in a year, the excess subscribers will count toward
its future commitments.
If SBC does not obtain for Prodigy at least 1,200,000 subscribers by the end
of the initial three-year term, unless the number of subscribers obtained by
Prodigy is less than the number of subscribers obtained by SBC, SBC must pay
penalties to Prodigy as follows:
. if SBC obtains fewer than 900,000 subscribers, the penalty is $75,000,000
plus $100 multiplied by the difference between 900,000 and the number of
subscribers actually obtained;
. if SBC obtains more than 900,000 subscribers but fewer than 1,050,000
subscribers, the penalty is $15,000,000 plus $400 multiplied by the
difference between 1,050,000 and the number of subscribers actually
obtained; and
. if SBC obtains more than 1,050,000 subscribers but fewer than 1,200,000
subscribers, the penalty is $100 multiplied by the difference between
1,200,000 and the number of subscribers actually obtained.
In order to be counted, a subscriber obtained by SBC must remain a Prodigy
subscriber for at least one monthly billing cycle, excluding any unpaid trial
period, and must pay at least one monthly bill.
Duration of Agreement; Termination Provisions; Impact of Termination
The strategic and marketing agreement has an initial term of three years and
automatically renews for additional three-year terms unless either Prodigy or
SBC terminates the agreement at least 135 days prior to the end of the then
current term. SBC may terminate the agreement if Prodigy fails to meet
specified performance standards for three consecutive quarters. The performance
standards require that Prodigy's subscribers generate as much non-subscription
revenue from advertising and e-commerce as comparable Internet service
subscribers and that the Prodigy Internet service be available to subscribers
at least 98% of the time, excluding planned outages. Either party may terminate
the agreement if the other party breaches any material obligation which is not
cured within 30 days or resolved through arbitration. In addition, SBC may
terminate the agreement if Prodigy issues any Prodigy Class A common stock to
AT&T, Bell Atlantic, BellSouth, GTE, MCI Worldcom, Microsoft, Sprint, Time-
Warner, US West/Qwest or any of their affiliates. If the agreement expires or
is terminated, all rights and obligations of both Prodigy and SBC under the
agreement will terminate, but SBC will retain its interest in Prodigy.
Investment, Issuance, Contribution and Assumption Agreement
Prodigy, a subsidiary of Prodigy, SBC, the SBC subsidiary and the operating
partnership have entered into an investment, issuance, contribution and
assumption agreement.
Contribution of Assets and Liabilities; Ownership of the Operating Partnership
Pursuant to the investment agreement:
. Prodigy will contribute substantially all of its assets and liabilities
and transfer its employees to the operating partnership;
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. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with SBC's consumer and small
business Internet operations and selected by Prodigy because Prodigy
determines that they will useful in connection with the provision of
services to SBC's customers and Prodigy's customers after the closing;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of royalty-free licenses to use SBC's trademarks in
connection with the marketing and operation of the Prodigy Internet
service and Prodigy's right to manage SBC's existing Internet customers;
. Prodigy will receive an initial interest in the operating partnership of
approximately 57%;
. SBC will receive an initial interest in the operating partnership of
approximately 43%; and
. SBC may convert its interest in the operating partnership into a direct
equity interest in Prodigy at any time, or may require the operating
partnership to be merged into Prodigy at any time.
Prodigy Class B common stock will be convertible at any time, on a one-for-
one basis, into the same Prodigy Class A common stock. When transferred to any
person or entity not affiliated with SBC, Prodigy Class B common stock will
automatically convert into Prodigy Class A common stock. SBC will also have the
right to exchange its units in the operating partnership for shares of Prodigy
Class A common stock. SBC will be permitted to transfer its units to any person
as long as the transferee agrees to comply with the operating partnership's
amended and restated limited partnership agreement.
SBC's rights relating to Prodigy Class B common stock and its units in the
operating partnership are described in more detail in the sections entitled
"Limited Partnership Agreement" and "Restated Certificate of Incorporation."
Representations and Warranties
The investment agreement contains representations and warranties of Prodigy,
the Prodigy subsidiary, the operating partnership, SBC and the SBC subsidiary.
These relate to:
. their organization, existence and good standing;
. the authorization, execution and enforceability of the SBC agreements and
related matters;
. compliance with laws and other obligations;
. consents and approvals that are required from governmental entities and
third parties;
. litigation;
. intellectual property and Year 2000 matters;
. brokers' fees;
. subscribers; and
. title to the assets contributed by them to the operating partnership.
In addition, Prodigy, the Prodigy subsidiary and the operating partnership
provide representations relating to:
. the corporate subsidiaries of Prodigy;
. Prodigy's SEC filings and financial statements;
. the absence of any adverse affect on their businesses;
. the absence of undisclosed liabilities;
. their capitalization;
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. taxes;
. real and personal property;
. contracts;
. insurance;
. employee matters;
. environmental matters;
. permits; and
. the federal investment company act.
Covenants of Prodigy and SBC
Prior to the closing, Prodigy has agreed to operate only in the ordinary
course of business consistent with past practice, and SBC has agreed to operate
its consumer and small business Internet operations only in the ordinary course
of business consistent with past practice.
Without SBC's consent, Prodigy and the operating partnership have also each
agreed, with some exceptions, not to:
. amend its charter or by-laws;
. issue any capital stock or units, except under outstanding options and
warrants and employee benefit plans;
. declare any dividends or repurchase any capital stock or units;
. sell any material assets or enter into any contracts or acquisitions
involving more than $25,000,000;
. incur indebtedness, make loans, make investments or encumber its assets;
. adopt or increase employment benefit plans or benefits;
. enter into material employment or severance agreements;
. enter into or modify contracts except in the ordinary course of business;
. settle material litigation or claims;
. change any accounting methods; or
. change their business policies.
Prodigy and SBC have agreed to use commercially reasonable efforts to satisfy
all closing conditions. Prodigy and the operating partnership have also each
agreed, among other things:
. to grant SBC the right to receive both confidential and non-confidential
information about Prodigy and its business, finances, properties and
accounts so long as SBC retains one-quarter of its initial interest in
Prodigy;
. that if Prodigy or the operating partnership elects to dispose of any
asset contributed to it by the SBC subsidiary, to offer SBC a right of
first refusal to purchase the asset at book value; and
. to adopt a customary stockholder rights plan which would be triggered if
any stockholder, other than SBC, Telmex or Carso Global Telecom, obtains
more than 15% of Prodigy's common stock.
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Restrictions on Alternative Transactions
Prodigy has agreed that prior to the closing it will not initiate, solicit,
encourage or otherwise facilitate an alternative transaction, defined as:
. the acquisition of Prodigy by anyone other than SBC or its affiliates;
. the acquisition by anyone other than SBC or its affiliates of 10% or more
of the total assets of Prodigy and its subsidiaries, taken as a whole;
. the acquisition by anyone other than SBC or its affiliates of 10% or more
of Prodigy's outstanding common stock;
. the adoption by Prodigy of a plan of partial or complete liquidation or
the declaration or payment of an extraordinary dividend;
. the repurchase by Prodigy on any of the its subsidiaries of 10% or more
of the outstanding Prodigy common stock;
. Prodigy's acquisition of another business whose revenues, income or
assets is equal to or greater than 10% of Prodigy's revenues, income or
assets; or
. any other transaction that could reasonably be expected to compete with,
impede, interfere with, delay or discourage the SBC transaction.
However, if the board of directors of Prodigy determines in good faith, after
consultation with outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to Prodigy stockholders under applicable law,
Prodigy's board of directors may do any of the following in response to an
inquiry, proposal or offer for an alternative transaction which was not
solicited by Prodigy:
. furnish non-public information with respect to Prodigy pursuant to a
customary confidentiality agreement;
. participate in discussions and negotiations regarding the inquiry,
proposal or offer;
. if Prodigy stockholder approval has not yet been obtained, terminate the
investment agreement and simultaneously with or following termination,
withdraw or modify its recommendation to stockholders to approve the SBC
transaction; and
. if Prodigy stockholder approval has not yet been obtained, terminate the
investment agreement and simultaneously with or following termination,
approve an alternative transaction.
Prodigy has agreed to notify SBC promptly if any inquiries relating to an
alternative transaction are received.
Closing Conditions
The obligations of Prodigy, the Prodigy subsidiary, the operating
partnership, SBC and the SBC subsidiary to complete the transactions
contemplated by the investment agreement and other SBC agreements are subject
to the satisfaction or waiver of the following conditions:
. the SBC transaction, including the related agreements and transactions,
must have been approved by Prodigy's stockholders;
. all required regulatory authorizations and consents must have been
obtained; and
. there must be no issued or threatened court order that restrains, enjoins
or otherwise prohibits the SBC transaction.
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In addition, the obligations of Prodigy, the Prodigy subsidiary and the
operating partnership to complete the SBC transaction are subject to the
satisfaction or waiver of the following conditions:
. SBC's and the SBC subsidiary's representations and warranties must be
true and correct;
. SBC and the SBC subsidiary must have performed in all material respects
its obligations under the SBC agreements;
. the registration rights agreement shall have been duly executed and
delivered by each of SBC and the SBC subsidiary; and
. the amended and restated limited partnership agreement shall have been
duly executed and delivered by the SBC subsidiary.
Prodigy will obtain stockholder approval before it waives a material closing
condition.
In addition, the obligations of SBC and the SBC subsidiary to complete the
SBC transaction are subject to the satisfaction or waiver of the following
conditions:
. Prodigy's, the Prodigy subsidiary's and the operating partnership's
representations and warranties must be true and correct;
. Each of Prodigy, the Prodigy subsidiary and the operating partnership
must have performed in all material respects its obligations under the
SBC agreements;
. Each of Prodigy, the Prodigy subsidiary and operating partnership must
have obtained all consents that are required from governmental entities
and third parties, except those for which failure to obtain would not
have a material adverse affect on Prodigy's business and on the ability
of Prodigy, Prodigy subsidiary or the operating partnership to consummate
the SBC transaction;
. the registration rights agreement shall have been executed and delivered
by Prodigy;
. Prodigy shall have duly adopted the restated certificate of incorporation
and the amended and restated by-laws, the restated certificate of
incorporation shall have been approved by the stockholders of Prodigy in
accordance with Prodigy's certificate of incorporation and by-laws and
the Delaware general corporation law and shall have been duly filed with
the Secretary of State of the State of Delaware, the amended and restated
by-laws shall have been approved by the stockholders of Prodigy in
accordance with Prodigy's certificate of incorporation and by-laws and
the Delaware general corporation law and the restated certificate of
incorporation and the amended and restated by-laws shall be in full force
and effect;
. the amended and restated limited partnership agreement shall have been
duly executed and delivered by each of Prodigy and the Prodigy
subsidiary;
. SBC must receive from Prodigy's counsel a legal opinion to the effect
that neither Prodigy nor the operating partnership is and, after giving
effect to the transactions contemplated by the investment agreement and
the strategic and marketing agreement, will be an investment company as
defined in the Investment Company Act of 1940; and
. there must not have been any change in Prodigy's, the operating
partnership's or the Prodigy's subsidiary assets, business, financial
condition or results of operations, or any event or development or
combination of events or developments since December 31, 1998 which,
individually or in the aggregate has had, or would reasonably be expected
to have, an adverse effect on the assets, businesses, financial condition
or results of operations of Prodigy, the Prodigy subsidiary or the
operating partnership taken as a whole.
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Indemnification
Prodigy and SBC have agreed to indemnify each other for damages resulting
from:
. breaches of representations or warranties;
. failures to perform covenants and other obligations; and
. claims for brokerage or finder's fees.
Claims for breaches of representations or warranties cannot be made more than
one year after the closing, except for claims for breaches of representations
and warranties regarding:
. the capitalization of Prodigy and compliance with environmental laws,
both of which shall survive indefinitely; and
. the timely filing of all tax returns and timely payment of all taxes and
employee benefit plans of Prodigy, both of which shall survive 90 days
after the expiration of all relevant statutes of limitations.
Each indemnification claim of a party must exceed $5,000,000 and all
indemnification claims of the party must exceed $30,000,000 before any
indemnification claims can be made. If these thresholds are met, the party may
recover its entire damages.
Termination
The investment agreement and SBC transaction may be terminated under the
following circumstances:
. by mutual consent of Prodigy and SBC;
. by either Prodigy or SBC if the SBC transaction has not been completed by
June 1, 2000, unless the failure to complete the SBC transaction is due
to the terminating party's breach of its obligations;
. by either Prodigy or SBC if a court order has been issued permanently
restraining, enjoining or prohibiting the SBC transaction, unless the
failure to complete the SBC transaction is due to the terminating party's
breach of its obligations;
. by Prodigy or SBC, if the other party has materially breached any
representation or obligation; or
. by Prodigy under the circumstances described above under "Restrictions on
Alternative Transactions".
If either Prodigy or SBC terminates the investment agreement and SBC
transaction, all obligations of the parties will terminate, except that the
provisions relating to payment of expenses and confidentiality will remain in
effect, and no party will have any liability, except for liability for breaches
of the SBC agreements and except as described below under "Termination Fee."
Transfer Taxes and Expenses
Prodigy will pay all transfer taxes applicable to the contribution of assets
by Prodigy and the SBC subsidiary to the operating partnership. Each party will
otherwise bear its own expenses incurred in connection with the investment
agreement and SBC transaction.
Termination Fee
Prodigy has agreed to pay SBC a termination fee of $45,000,000 if it
terminates the investment agreement and SBC transaction as described above
under "Restrictions on Alternative Transactions".
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Amendments
In general, Prodigy and SBC may amend the investment agreement and other SBC
agreements at any time prior to closing. However, after Prodigy's stockholders
approve the SBC transaction, any amendments will be restricted by the Delaware
general corporation law.
Limited Partnership Agreement
The operating partnership is a limited partnership between Prodigy as the
sole general partner and the Prodigy subsidiary as the sole limited partner. At
the closing, Prodigy, the Prodigy subsidiary and the SBC subsidiary will enter
into an amended and restated limited partnership agreement for the operating
partnership. As a result, Prodigy will remain the sole general partner and the
SBC subsidiary will replace the Prodigy subsidiary as the sole limited partner.
Asset and Capital Contributions
Prodigy's initial contribution to the operating partnership will consist of
all of Prodigy's assets and liabilities, including the assets and liabilities
acquired in the pending FlashNet merger, but excluding Prodigy's rights and
obligations under stock-based plans and agreements. The SBC subsidiary's
initial contribution to the operating partnership will consist of routers,
servers and associated hardware used in connection with SBC's consumer and
small business Internet operations and that are selected by Prodigy because
Prodigy determines that they will useful in connection with the provision of
services to SBC's customers and Prodigy's customers after the closing. In
addition, the SBC subsidiary will contribute intangible assets consisting
primarily of royalty-free licenses to use the following SBC trademarks in
connection with the marketing and operation of the Prodigy Internet service:
Ameritech, Nevada Bell, Pacific Bell, SBC, SBC Telecom, SNET and Southwestern
Bell. For tax purposes, Prodigy and the SBC subsidiary will have initial book
capital accounts equal to the fair market value of the assets contributed.
No additional capital contributions will be required unless Prodigy and the
SBC subsidiary mutually determine that the operating partnership needs
additional capital to satisfy its business objectives.
Percentage Interests and Units
Prodigy will have an initial interest of approximately 57% in the operating
partnership and the SBC subsidiary will have an initial interest of
approximately 43% in the operating partnership. At the closing, the SBC
subsidiary will be issued a number of units of the operating partnership equal
to 43% of the total number of units in the operating partnership that are
issued and outstanding immediately following the issuance of units to the SBC
subsidiary. The calculation of these percentages will assume that all Prodigy
stock options and specified warrants have been exercised. Based on the shares,
options and warrants outstanding as of March 31, 2000, at the closing of the
SBC transaction, Prodigy will own 55.5% of the operating partnership's units
and the SBC subsidiary will own 44.5% of the operating partnership's units.
After including the impact of closing the FlashNet merger, these percentages
will change to 57.3% and 42.7%. Subsequent issuances of stock by Prodigy will
dilute Prodigy's stockholders and the SBC subsidiary proportionately.
Based on the shares, options and warrants outstanding as of March 31, 2000,
and assuming the exercise of all outstanding options and warrants as of that
date, the exchange of SBC's units for Class A common stock and the conversion
of SBC's Class B common stock for Class A common stock, upon completion of the
SBC transaction and the FlashNet merger Prodigy will be owned as follows:
. current Prodigy stockholders -- 56.0%
. former FlashNet shareholders -- 4.5%
. SBC -- 39.5%
Allocations
The operating partnership's net income and net loss will be allocated as
follows:
. first, 100% to the partners so as to reverse any cumulative net loss and
net income allocations in prior fiscal years; and
. the balance, if any, to the partners pro rata in accordance with their
respective partnership interests.
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Prodigy will be required to revalue the operating partnership's property to
current market value upon:
. any material contributions to the operating partnership;
. any material distributions by the operating partnership as consideration
for a redemption of an interest in the operating partnership; or
. any liquidation of the operating partnership.
Any gain or loss resulting from revaluations or from the sale or exchange of
substantially all of the operating partnership's assets will be allocated first
to the extent necessary to cause the SBC subsidiary's book capital account to
reflect its imputed capital account. The remainder will be allocated pro rata
in accordance with the respective percentage interests of the partners.
Distributions
Distributions prior to the termination of the operating partnership will be
allocated pro rata in accordance with the respective partnership interests of
the partners.
Management
The operating partnership will be managed by Prodigy as the sole general
partner. Prodigy's officers will be the officers of the operating partnership.
As sole general partner of the operating partnership, Prodigy will have
unilateral control over all of the affairs and decision making of the operating
partnership, subject to the approval of the SBC subsidiary as to the following
matters:
. admitting new limited partners;
. requiring additional capital contributions;
. making distributions;
. instituting any bankruptcy proceedings; or
. dissolving the operating partnership.
As the sole general partner, Prodigy, acting through its executive steering
committee, board of directors and officers, will be responsible for nearly all
operational and administrative decisions of the operating partnership and the
day-to-day management of the operating partnership's business. Prodigy cannot
be removed as the sole general partner of the operating partnership. However,
under Delaware law, Prodigy will cease to be the general partner of the
operating partnership if Prodigy:
. voluntarily withdraws from the operating partnership;
. assigns its partnership interest;
. institutes any bankruptcy proceedings; or
. does not reinstate its charter within 90 days after the date of notice to
Prodigy of the filing of a certificate of dissolution.
If Prodigy ceases to be the general partner of the operating partnership, the
operating partnership will be dissolved unless, within 180 days, the limited
partners vote to continue the business of the operating partnership and appoint
one or more additional general partners of the operating partnership.
Transferability of Units
The SBC subsidiary will have the right to exchange its units for shares of
Prodigy Class A common stock. The SBC subsidiary will be permitted to transfer
its units to any person as long as the transferee agrees to comply with the
operating partnership's amended and restated limited partnership agreement.
Prodigy will not be entitled to transfer its units without approval of the SBC
subsidiary.
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Dissolution and Liquidation
The operating partnership will be dissolved:
. in the event of a decree of judicial dissolution;
. upon the written consent of the partners;
. at such time as there are no limited partners of the operating
partnership unless the business of the operating partnership is continued
by the written consent of the personal representative of the last limited
partner and all of the general partners; and
. if Prodigy ceases to be the general partner of the operating partnership,
except if the limited partners vote to continue the business of the
operating partnership and appoint one or more additional general partners
within 180 days.
Upon dissolution, the assets of the operating partnership will be used:
. first, to satisfy the debts and liabilities of the operating partnership;
and
. second, to the partners in accordance with their respective book capital
account balances.
Upon dissolution, all of the subscribers of the operating partnership will be
divided between Prodigy and the SBC subsidiary in accordance with their book
capital account balances. The liquidator will use commercially reasonable
efforts to allocate and to return to the partners those assets which they
contributed and will give due consideration to the retail local loop customers
of SBC and the markets in which SBC operates.
Indemnification
The operating partnership will indemnify the partners and the directors,
officers, employees and agents of the operating partnership and the partners to
the fullest extent of the law. However, no indemnification will be available
for a person who acted in a grossly negligent manner, committed willful
malfeasance or fraud or breached his or her duty to the operating partnership
or the partners.
Registration Rights Agreement
At closing Prodigy, SBC and the SBC subsidiary will enter into a registration
rights agreement. SBC and the SBC subsidiary will have rights to require that
Prodigy register the shares of Prodigy Class A common stock of Prodigy owned by
SBC, the SBC subsidiary or any direct or indirect transferee of SBC or the SBC
subsidiary with the Securities and Exchange Commission.
Demand Registrations
SBC or the SBC subsidiary may at any time demand that Prodigy file a
registration statement registering the sale of shares of Prodigy Class A common
stock issued to SBC, the SBC subsidiary or any direct or indirect transferee of
SBC or the SBC subsidiary upon conversion of shares of Prodigy Class B common
stock or in exchange for units in the operating partnership. Prodigy will file
each demand registration statement within 30 days of the demand. However, if
the board of directors determines that the filing of the demand registration
statement would require the disclosure of material non-public information that
would be materially harmful to Prodigy, Prodigy may extend the filing date for
120 days from the date of the demand. Prodigy may only exercise this extension
option once each calendar year.
In the event that the managing underwriter of an underwritten registration
determines that the number of shares of Prodigy Class A common stock proposed
to be included in a registration statement exceeds the number which can be sold
in the offering, Prodigy will include Prodigy Class A common stock in the
registration statement in the following priority:
. first, the shares of Prodigy Class A common stock requested to be
included in the registration by SBC and/or the SBC subsidiary;
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. second, the shares of Prodigy Class A common stock requested to be
included in the registration by any other holders of shares of Prodigy
Class A common stock which were transferred from SBC and/or the SBC
subsidiary;
. third, the shares of Prodigy Class A common stock proposed to be sold by
Prodigy; and
. fourth, other shares of Prodigy Class A common stock requested to be
included in the registration.
Piggyback Registrations
SBC and/or the SBC subsidiary may request that their shares of Prodigy Class
A common stock be included in any registration statement that Prodigy proposes
to file for a public offering by Prodigy or other stockholders. SBC and the SBC
subsidiary may not include their shares in any registration statement for a
merger, acquisition, exchange offer, subscription offer or stock option plan.
In the event that the managing underwriter of an underwritten registration
determines that the number of shares of Prodigy Class A common stock proposed
to be included in a registration statement exceeds the number which can be sold
in the offering, Prodigy will include the shares of Prodigy Class A common
stock in the registration statement in the following priority:
. first, the shares of Prodigy Class A common stock proposed to be sold by
Prodigy or a holder of Prodigy Class A common stock exercising a demand
registration right if the holder's registration rights exist as of the
closing date and require a priority;
. second, the shares of Prodigy Class A common stock requested to be
included in the registration by SBC and/or the SBC subsidiary and any
other holders of shares of Prodigy Class A common stock with similar
piggyback rights, pro rata among SBC, the SBC subsidiary and the other
holders; and
. third, other shares of Prodigy Class A common stock requested to be
included in the registration.
Registration Procedures
In connection with any registration in which SBC and/or the SBC subsidiary
may include its shares for registration, SBC and/or the SBC subsidiary will
have the right to participate in the preparation and filing of the registration
statement. Prodigy will pay all registration expenses.
Indemnification
Prodigy will indemnify SBC and/or the SBC subsidiary, among others, and their
directors and officers and controlling persons, against any losses, claims,
damages or liabilities to which they become subject which arise out of or are
based upon any untrue statement or any alleged untrue statement of a material
fact contained in a registration statement or prospectus, or the omission or
alleged omission of a material fact required to be stated in a registration
statement or prospectus or necessary to make the statements in a registration
statement or prospectus not misleading, or the failure of Prodigy to comply
with applicable law or the breach by Prodigy of the registration rights
agreement in which the shares of SBC and/or the SBC subsidiary have been
included for registration. In all other registration statements, Prodigy will
indemnify SBC and/or the SBC subsidiary, and their directors and officers and
controlling persons, against any losses, claims, damages or liabilities to
which they become subject which arise out of or are based upon any untrue
statement of a material fact or any alleged untrue statement contained in a
registration statement or prospectus, or the omission or alleged omission of a
material fact required to be stated in a registration statement or prospectus
or necessary to make the statements in a registration statement or prospectus
not misleading, or the failure of Prodigy to comply with applicable law or the
breach by Prodigy of the registration rights agreement.
SBC and the SBC subsidiary agree, as a consequence of the inclusion of any of
SBC's or the SBC subsidiary's Prodigy Class A common stock in a registration
statement or prospectus, to indemnify Prodigy,
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among others, against any losses, claims, damages or liabilities to which they
become subject which arise out of or are based upon any untrue statement or any
alleged untrue statement of a material fact contained in a registration
statement or prospectus, or the omission or alleged omission of a material fact
required to be stated in a registration statement or prospectus or necessary to
make the statements in a registration statement or prospectus not misleading,
or the failure of Prodigy to comply with applicable law or the breach by
Prodigy of the registration rights agreement which was based upon written
information furnished to Prodigy by SBC and/or the SBC subsidiary expressly for
use in a registration statement or prospectus.
Prior Notice of Registrations
As long as SBC and/or the SBC subsidiary own at least 10% of Prodigy Class A
common stock of Prodigy or is otherwise deemed to be a control person of
Prodigy or any direct or indirect transferee of SBC or the SBC subsidiary,
Prodigy will give SBC and/or the SBC subsidiary 10 days prior notice before it
files any registration statement. If, at that time, in the reasonable judgment
of SBC and/or SBC subsidiary, SBC and/or the SBC subsidiary may be deemed a
controlling person of Prodigy, then SBC and/or the SBC subsidiary will have the
right to participate in the preparation of the registration statement.
Termination of Registration Rights
Prodigy will no longer be required to register the shares of Prodigy Class A
common stock owned by SBC and/or the SBC subsidiary once:
. the shares have been disposed of in accordance with a registration
statement declared effective under the Securities Act;
. the shares are distributed to the public pursuant to Rule 144 under the
Securities Act;
. the shares may be sold to the public without restriction pursuant to Rule
144(k) under the Securities Act, unless in SBC's or the SBC subsidiary's
reasonable judgment, after consultation with Prodigy, an underwritten
registered offering is desirable to distribute the shares; or
. the shares have been transferred pursuant to an exemption under the
Securities Act, new certificates for the shares not bearing a legend
restricting further transfer shall have been delivered by Prodigy and the
shares shall be freely transferable to the public without registration
under the Securities Act.
Prodigy agrees to file timely the reports required to be filed by it under
the Securities Act and the Exchange Act and the rules and regulations adopted
by the SEC thereunder and to take whatever action as SBC and/ or SBC subsidiary
may request in order to permit them to sell their shares of Prodigy Class A
common stock without registration pursuant to the exemptions provided by Rule
144 under the Securities Act.
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RESTATED CERTIFICATE OF INCORPORATION
This section describes the material terms of the restated certificate of
incorporation of Prodigy which is attached as Annex F to this proxy statement
and is incorporated by reference into this summary. We urge all Prodigy
stockholders to read the restated certificate of incorporation carefully for a
more complete description of its terms and conditions.
Authorized Capital Stock
Prodigy currently is authorized to issue 150,000,000 shares of Prodigy common
stock and 10,000,000 shares of Prodigy preferred stock. As of April 7, 2000,
there were outstanding 64,644,561 shares of Prodigy common stock and no shares
of Prodigy preferred stock.
The restated certificate of incorporation would increase the authorized
capital stock of Prodigy to 290,000,001 shares, consisting of:
. 280,000,000 shares of Prodigy Class A common stock;
. one share of Prodigy Class B common stock; and
. 10,000,000 shares of Prodigy preferred stock.
Upon the effectiveness of the restated certificate of incorporation, each
share of Prodigy common stock will be automatically converted into one share of
Prodigy Class A common stock. Thereafter, all certificates formerly
representing Prodigy common stock will automatically represent Prodigy Class A
common stock.
The additional shares of Prodigy common stock to be authorized would be
available for possible future financing and acquisition transactions, stock
dividends or splits and other corporate purposes. Having these shares available
for issuance in the future would give Prodigy greater flexibility and allow
shares of Prodigy common stock to be issued without the expense and delay of a
stockholders' meeting. The additional shares would be available for issuance
without further action by the stockholders except as required by applicable law
or the rules of any stock exchange on which Prodigy common stock may be listed.
The Nasdaq National Market requires stockholder approval for the issuance of
additional shares in connection with acquisition transactions where the
issuance of shares could result in an increase in the number of shares of
Prodigy common stock outstanding by 20% or more. The holders of Prodigy common
stock do not have preemptive rights to acquire the additional authorized shares
of Prodigy common stock.
Prodigy has no plans to issue shares of Prodigy common stock for which
authorization is being sought other than:
. the issuance of one share of Prodigy Class B common stock to the SBC
subsidiary in connection with the SBC transaction;
. the issuance of Prodigy Class A common stock upon conversion of all
outstanding Prodigy common stock;
. upon exchange of units to be issued to the SBC subsidiary as contemplated
by the SBC transaction in accordance with the amended and restated
limited partnership agreement of the operating partnership;
. upon conversion of the shares of Prodigy Class B common stock to be
issued to the SBC subsidiary as contemplated by the SBC transaction in
accordance with the restated certificate of incorporation and the amended
and restated by-laws;
. the issuance of Class A common stock to complete the FlashNet merger;
. upon exercise of outstanding stock options and warrants, including
options and warrants to be assumed as part of the FlashNet merger; and
. under Prodigy's stock and option plans, including the proposed 1999
stock option plan.
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Voting Rights
All shares of Prodigy common stock will be identical in all respects and will
entitle the holders to the same rights and privileges except that:
. each holder of Prodigy Class A common stock will be entitled to one vote
per share; and
. each holder of Prodigy Class B common stock will be entitled to one vote
for each share of Prodigy Class B common stock and one vote for each unit
in the operating partnership not held by Prodigy.
Merger of Operating Partnership into Prodigy
The affirmative vote of 75% of holders of Prodigy Class B common stock,
voting as a separate class, will be required to approve the merger of the
operating partnership into Prodigy, and the holders of Prodigy common stock
will not be entitled to vote on such a merger.
Dividends and Distributions
The holders of Prodigy common stock will be entitled to receive dividends and
distributions when declared by the board of directors. Prodigy must pay the
same dividends or make the same distributions to holders of each class of
Prodigy common stock. In the case of stock dividends or distributions,
including stock splits, holders of each class of Prodigy common stock will only
be entitled to receive shares of the same class of Prodigy common stock which
they hold. In the case of a stock dividend or distribution, Prodigy will issue
the same number of shares of each class of Prodigy common stock.
In the case of dividends or other distributions of voting securities, Prodigy
will pay dividends in two separate classes of voting securities identical in
all respects except that the voting securities paid to the holders of Prodigy
Class B common stock will have the same voting and conversion rights as the
Prodigy Class B common stock and will have the same restrictions on
transferability applicable to the Prodigy Class B common stock.
In the case of dividends or other distributions of securities convertible
into voting securities, Prodigy will provide that these convertible securities
be identical in all respects except that the conversion and voting rights of
each security underlying the convertible security paid to the holders of
Prodigy Class B common stock shall be the same as for Prodigy Class B common
stock, and each security will have the same restriction on transferability
applicable to Prodigy Class B common stock.
Conversion of Prodigy Class B Common Stock
Each holder of Prodigy Class B common stock may at any time convert Prodigy
Class B common stock into Prodigy Class A common stock on a one-for-one basis.
Each share of Prodigy Class B common stock will be automatically converted into
Prodigy Class A common stock upon any transfer to anyone other than SBC or its
affiliates. In the event shares of Prodigy Class A common stock are
reclassified, a holder of Prodigy Class B common stock will be entitled to
receive upon conversion the securities that the holder would have received if
the conversion had occurred immediately prior to the record date of the
reclassification. Prodigy has agreed to reserve sufficient shares of Prodigy
Class A common stock for issuance upon conversion of Prodigy Class B common
stock and to list the shares of additional shares of Prodigy Class A common
stock on the Nasdaq National Market.
Stock Splits
Prodigy will not subdivide or combine the outstanding shares of one class of
Prodigy common stock without proportionately subdividing or combining the
outstanding shares of all classes of Prodigy common stock. Pursuant to the
amended and restated limited partnership agreement, if Prodigy subdivides or
combines the outstanding shares of Prodigy Class A common stock, then the
operating partnership must subdivide or combine the units of the operating
partnership concurrently with and in the same manner as the Prodigy Class A
common stock.
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Options, Rights or Warrants
Prodigy will not make any offering of options, rights or warrants to
subscribe for shares of Prodigy Class B common stock. If Prodigy makes an
offering of options, rights or warrants to subscribe for shares of any capital
stock, other than Prodigy Class B common stock, to all holders of a class of
Prodigy common stock, then Prodigy will simultaneously make an identical
offering to all holders of the other classes of Prodigy common stock. The
holders of Prodigy Class A common stock and Prodigy Class B common stock will
be offered the right to subscribe to any option, right or warrant offering at
the same rate per share.
Mergers, Consolidations and Similar Events
In the event of a merger, consolidation or other transaction into which
shares of Prodigy common stock are exchanged for other securities, cash and/or
other property, then the shares of each class of Prodigy common stock will be
exchanged for or changed into either:
. the same amount of securities, cash and/or property for which each share
of any other class of Prodigy common stock is exchanged; provided that if
shares of common stock are exchanged for shares of any other class of
common stock, the exchanged shares may only differ to the extent that the
Prodigy Class A common stock and Prodigy Class B common stock differ; or
. if the holders of each class of Prodigy common stock are to receive
different distributions of securities, cash and/or other property, an
amount of securities, cash and/or property per share having a value equal
to the value per share for which each share of any other class of Prodigy
common stock is exchanged.
Liquidation Rights
In the event of Prodigy's dissolution, liquidation or winding up, Prodigy's
available assets and funds will be divided ratably among all the holders of
Prodigy common stock as a single class.
No Preemptive Rights
In general, the holders of Prodigy common stock are not entitled to any
preemptive right to subscribe for, purchase or receive any additional capital
stock, debt securities or securities convertible or exchangeable for stock
issued by Prodigy.
Prodigy Preferred Stock
The board of directors of Prodigy may issue Prodigy preferred stock in one or
more series. Each series will have the voting powers, designations,
preferences, other rights and qualifications, limitations and restrictions that
are stated in the restated certificate of incorporation or in the board
resolutions providing for the issuance.
Board of Directors
Subject to a reduction in the number of directors, the board of directors of
Prodigy will consist of nine directors. The holders of Prodigy Class B common
stock, voting as a separate class, will be entitled to elect three of the nine
directors. The holders of all classes of Prodigy common stock, voting together,
will be entitled to elect the remaining six directors.
Reduction in Number of Directors
The number of Class B directors will be reduced following the transfer of
shares of Prodigy common stock and/or units by the holders of Prodigy Class B
common stock as follows:
. If the holders of Prodigy Class B common stock transfer in the aggregate
a number of shares of Prodigy common stock or units constituting an
aggregate of more than 33% of the initial number of units issued
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to them, then the number of Class B directors will be reduced from three
to two and the size of the board of directors will be reduced to eight.
. If the holders of Prodigy Class B common stock transfer in the aggregate
a number of shares of Prodigy common stock and/or units constituting an
aggregate of more than 67% of the initial number of units issued to them,
then the number of Class B directors will be reduced to one and the size
of the board of directors will be reduced to seven.
. If the holders of Prodigy Class B common stock transfer in the aggregate
a number of shares of Prodigy common stock and/or units constituting an
aggregate of 100% of the initial number of units issued to them, then the
number of Class B directors will be reduced to zero and the size of the
board of directors will be reduced to six.
Transfers of shares of Prodigy Class B common stock and/or units to SBC or
its affiliates, and the exchange of units into shares of Prodigy Class A common
stock, will not constitute a transfer of shares of Prodigy Class B common stock
and/ or units for the purpose of reducing the number of Class B directors.
Vacancies and Removals
If a Class A director dies, resigns or is removed from the board, the vacancy
will be filled by the affirmative vote of the remaining Class A directors then
in office, even if less than a quorum of the board. If a Class B director dies,
resigns or is removed from the board, the vacancy will be filled by the
affirmative vote of the remaining Class B directors then in office, even if
less than by a quorum of the board, or by a sole remaining Class B director. In
the absence of a sole remaining Class B director, a vacancy will be filled by a
majority vote of the holders of Prodigy Class B common stock, voting as a
separate class. Any director elected to fill a vacancy will hold office until
the next annual meeting of stockholders or until the director's term of office
otherwise terminates.
Any director may be removed from office only for cause by the affirmative
vote of the holders of at least 80% of the voting power of Prodigy common
stock, voting together as a single class. However, any Class A director may be
removed at any time, with or without cause, by a majority vote of the holders
of Prodigy common stock, voting together as a single class, and any Class B
director may be removed at any time, without cause, only by a majority vote of
the holders of Prodigy Class B common stock, voting as a separate class.
General Powers of the Board of Directors
The business and affairs of Prodigy will be managed by the board. Prodigy,
the operating partnership and any subsidiary of Prodigy are not permitted to
take any of the following actions without the prior approval of the board:
. any amendment of the restated certificate of incorporation or amended and
restated by-laws of Prodigy, the amended and restated limited partnership
agreement of the operating partnership or similar constitutive documents
of any other subsidiary of Prodigy;
. the merger, consolidation, dissolution, liquidation or similar event of
Prodigy, the operating partnership or any other subsidiary of Prodigy;
. the issuance, authorization, cancellation, alteration, modification,
reclassification or redemption of any equity security of Prodigy or any
unit or other equity interest in the operating partnership or any other
subsidiary of Prodigy, or any option, put, call or warrant with respect
to the foregoing, including pursuant to any merger, consolidation or
similar transaction, except under outstanding options and warrants or
employee benefit plans or agreements;
. the issuance, authorization, cancellation, alteration, modification,
reclassification or redemption of any shares of Prodigy Class B common
stock, including pursuant to any merger, consolidation or similar
transaction;
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. the transfer or other disposition of any material asset of Prodigy, the
operating partnership or any other subsidiary of Prodigy;
. the acquisition of any interest in, or making of any loan to, another
person or entity by Prodigy, the operating partnership or any other
subsidiary of Prodigy for or in an amount in excess of $5,000,000, or
capital expenditure, except for short-term cash management, or the
borrowing by Prodigy, the operating partnership or any other subsidiary
of Prodigy of an amount in excess of $5,000,000;
. the approval of any business plan for Prodigy, the operating partnership
or any other subsidiary of Prodigy;
. the appointment of the chief executive officer for Prodigy, the operating
partnership or any other subsidiary of Prodigy;
. the adoption of any employee benefit plan or any amendment to an existing
plan by Prodigy, the operating partnership or any other subsidiary of
Prodigy;
. the hiring of any employee of Prodigy, the operating partnership or any
other subsidiary of Prodigy with any annual salary in excess of $250,000
or increasing the compensation of any employee above $250,000;
. the appointment or dismissal of auditors for Prodigy, the operating
partnership or any other subsidiary of Prodigy;
. the conduct by Prodigy, the operating partnership or any other subsidiary
of Prodigy of any business other than its current business or the
establishment of any entity by Prodigy, the operating partnership or any
other subsidiary of Prodigy to conduct any business; or
. any action by, in respect of or otherwise involving any entity in which
Prodigy, the operating partnership or any other subsidiary of Prodigy has
or acquires a controlling interest which would require board approval if
the action were by, in respect of or otherwise involving Prodigy, the
operating partnership or any other subsidiary of Prodigy, as described
below.
Appointment and Powers of the Executive Steering Committee
The board will establish an executive steering committee consisting of two
Class A directors selected by Telmex and Carso Global Telecom and two Class B
directors selected by the Class B directors. The purpose of the executive
steering committee will be to evaluate the matters set forth below and to
report to the board for approval only those matters which have been unanimously
approved by the executive steering committee.
Approval by the board of directors of Prodigy or any committee of the board
of any action set forth below shall not be effective unless the action has been
unanimously approved by the executive steering committee. The executive
steering committee must evaluate the following matters:
. any amendment of the restated certificate of incorporation or amended and
restated by-laws of Prodigy or the amended and restated limited
partnership agreement of the operating partnership or similar governing
documents of any other subsidiary of Prodigy;
. the merger, consolidation, dissolution, liquidation or similar event of
Prodigy or any of its consolidated subsidiaries;
. the issuance, authorization, cancellation, alteration, modification,
reclassification or redemption of any equity security of Prodigy or any
unit in the operating partnership, or any option, put, call or warrant
with respect to the foregoing, including pursuant to any merger,
consolidation or similar transaction, except under outstanding options
and warrants or employee benefit plans or agreements;
. the issuance, authorization, cancellation, alternation, modification,
reclassification or redemption of any shares of Prodigy Class B common
stock, including pursuant to any merger, consolidation or similar
transaction;
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. the transfer or other disposition of any material asset of Prodigy and
its consolidated subsidiaries;
. the acquisition of any interest in, or making of any loan to, another
person or entity by Prodigy, the operating partnership or any other
subsidiary of Prodigy for or in an amount in excess of $20,000,000, or
capital expenditure, except for short-term cash management, or the
borrowing by Prodigy, the operating partnership or any other subsidiary
of Prodigy of an amount in excess of $20,000,000, except for borrowing
under revolving credit facilities approved by the board;
. the approval of any business plan for Prodigy and its consolidated
subsidiaries;
. the appointment of the chief executive officer for Prodigy and its
consolidated subsidiaries;
. the conduct by Prodigy and its consolidated subsidiaries of any business
other than its current business; or
. any action by, in respect of or otherwise involving any entity in which
Prodigy, the operating partnership or any other subsidiary of Prodigy has
or acquires a controlling interest which would require board approval if
the action were by, in respect of or otherwise involving Prodigy, the
operating partnership or any other subsidiary of Prodigy, as described
below.
Any director of Prodigy may bring any matter to, and discuss any matter with,
the executive steering committee.
Reduction in the Size of the Executive Steering Committee
The number of Class B directors on the executive steering committee will be
reduced following the transfer of shares of Prodigy common stock and/or units
by the holders of Prodigy Class B common stock as follows:
. If the holders of Prodigy Class B Common Stock transfer in the aggregate
a number of shares of Prodigy common stock and/or units constituting an
aggregate of more than 33% of the initial number of units issued to them,
then the number of Class B directors on the executive steering committee
will be reduced to one and the size of the executive steering committee
will be reduced to three.
. If the holders of Prodigy Class B common stock transfer in the aggregate
a number of shares of Prodigy common stock and/or units constituting an
aggregate of 67% of the initial number of shares or units initially
issued to them, then the number of Class B directors on the executive
steering committee will be reduced to zero and the size of the executive
steering committee will be reduced to two.
Transfers of shares of Prodigy Class B common stock and/or units to SBC or
its affiliates, and the exchange of units into shares of Prodigy Class A common
stock, will not constitute a transfer of shares of Prodigy Class B common stock
and/or units for the purpose of reducing the number of Class B directors on the
executive steering committee.
The number of Class A directors on the executive steering committee will be
reduced following the transfer of shares of Prodigy Class A common stock by
Telmex and Carso Global Telecom as follows:
. If Telmex and Carso Global Telecom, acting separately or jointly,
transfer in the aggregate a number of shares of Prodigy Class A common
stock constituting an aggregate of more than 33% of the number of shares
of Prodigy common stock owned by them as of November 19, 1999, then the
number of Class A directors on the executive steering committee will be
reduced to one and the size of the executive steering committee will be
reduced to three.
. If Telmex and Carso Global Telecom, acting separately or jointly,
transfer in the aggregate a number of shares of Prodigy Class A common
stock constituting an aggregate of more than 67% of the number of shares
of Prodigy common stock owned by them as of November 19, 1999, then the
number of Class A
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directors on the executive steering committee will be reduced to zero and
the size of the executive steering committee will be reduced to two.
Transfers of shares of Prodigy Class A common stock by Telmex or Carso Global
Telecom to an affiliate within the same corporate group will not constitute a
transfer of common stock for the purpose of reducing the number of Class A
directors on the executive steering committee.
In the event that the size of the executive steering committee is reduced to
zero, it will be dissolved.
Other Committees
As long as a Class B director is entitled to be a member of the executive
steering committee, each other committee designated by the board will contain
at least one Class B director.
Committee Resignations and Removal
Any member of any committee may resign at any time by giving notice to
Prodigy. Any member of any committee may be removed at any time, with or
without cause, by the affirmative vote of the board of the directors. However,
any member of the executive steering committee elected by the Class B directors
may be removed from the executive steering committee at any time, either with
or without cause, by the affirmative vote of a majority of the Class B
directors. Any member of the executive steering committee may be removed from
the executive steering committee for cause by the affirmative vote of all Class
A directors and Class B directors, even if less than a quorum of the board.
Limitation of a Director's Liability and Indemnification Provisions
A director's liability for monetary damages for a breach of a fiduciary duty,
including gross negligence, has been eliminated to the extent permitted by law.
However, directors may still be liable for specified 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.
Prodigy will indemnify its directors, officers, employees and agents to the
fullest extent permitted by the Delaware general corporation law.
Amendment
The restated certificate of incorporation can only be amended or repealed by
the affirmative vote of the holders of at least 80% of the issued and
outstanding voting stock, voting as one class. However, no amendment may be
adopted which would adversely affect the rights of the holders of any class of
Prodigy common stock unless the holders of the class of Prodigy common stock,
voting as a separate class, approve the amendment.
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AMENDED AND RESTATED BY-LAWS
This section describes the material terms of the material provisions of the
amended and restated by-laws of Prodigy which is attached as Annex G to this
proxy statement and is incorporated by reference into this summary. We urge all
Prodigy stockholders to read the amended and restated by-laws carefully for a
more complete description of its terms and conditions.
Voting
Except as required by law or provided in Prodigy's restated certificate of
incorporation, at the annual meeting of the stockholders and at any special
meeting of the stockholders, on all matters submitted to a vote of the holders
of Prodigy common stock:
. each holder of Prodigy Class A common stock will be entitled to one vote
per share; and
. each holder of Prodigy Class B common stock will be entitled to one vote
for each share of Prodigy Class B common stock and one vote for each unit
in the operating partnership not held by Prodigy.
Directors
Prodigy will have the number of directors set forth in the restated
certificate of incorporation. The procedures for filling any vacancies on the
board of directors and for removing any directors will be set forth in the
restated certificate of incorporation.
Officers
Subject to the approval procedures set forth in the restated certificate of
incorporation, the president, treasurer and the secretary will be elected
annually by the board of directors. Subject to the approval procedures set
forth in the restated certificate of incorporation, the board will appoint a
chairman of the board and will designate the chairman of the board as chief
executive officer.
Amendment
Subject to the approval procedures set forth in the restated certificate of
incorporation, the board may amend the by-laws by a majority vote. The
stockholders may also amend or repeal any provision of the by-laws by a
majority vote of the holders of a majority of shares of:
. the issued and outstanding voting stock, voting as a separate class; and
. the issued and outstanding Prodigy Class B common stock, voting as a
separate class, if any Class B director is then a member of the executive
steering committee.
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1999 STOCK OPTION PLAN
This section describes the material terms of the 1999 stock option plan which
is attached as Annex H to this proxy statement and is incorporated by reference
into this summary. We urge all Prodigy stockholders to read the 1999 stock
option plan carefully for a more complete description of its terms and
conditions.
The board of directors has adopted, subject to stockholder approval, the 1999
stock option plan. Up to 5,600,000 shares of Prodigy common stock, subject to
adjustment in the event of stock splits and other similar events, may be issued
pursuant to options granted under the plan.
As of March 31, 2000, under the 1999 stock option plan:
. there were outstanding options to purchase an aggregate of 2,181,290
shares at a weighted-average price of $19.11 per share;
. no shares had been issued on exercises; and
. 3,418,710 additional shares were reserved for future option grants.
Summary of the Plan
Description of Options
The plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options.
Incentive Stock Options and Nonstatutory Stock Options.
Optionees receive the right to purchase a specified number of shares of
Prodigy common stock at some time in the future at a specified option price and
subject to the other terms and conditions as are specified in connection with
the option grant. Options may be granted at an exercise price which may be less
than, equal to or greater than the fair market value of Prodigy common stock on
the date of grant. Under present law, however, incentive stock options and
options intended to qualify as performance-based compensation under Section
162(m) of the Internal Revenue Code may not be granted at an exercise price
less than the fair market value of Prodigy common stock on the date of grant,
or less than 110% of the fair market value in the case of incentive stock
options granted to optionees holding more than 10% of the voting power of
Prodigy. Options may not be granted for a term in excess of ten years. The plan
permits the board to determine the manner of payment of the exercise price of
options, including through payment by cash, check or in connection with a
"cashless exercise" through a broker, by surrender to Prodigy of shares of
Prodigy common stock, by delivery to Prodigy of a promissory note or by any
other lawful means.
Eligibility to Receive Options
Officers, employees, directors, consultants and advisors of Prodigy and its
subsidiaries are eligible to be granted options under the plan. Under present
law, however, incentive stock options may only be granted to employees. The
maximum aggregate number of shares with respect to which options may be granted
to any participant under the plan may not exceed 200,000 shares during any
calendar year of the plan.
As of March 31, 2000, approximately 438 persons were eligible to receive
options under the plan, including Prodigy executive officers and non-employee
directors. The granting of options under the plan is discretionary, and Prodigy
cannot now determine the number or type of options to be granted in the future
to any particular person or group.
On May 4, 2000, the last reported sale price of Prodigy's common stock on the
Nasdaq National Market was $11.6875 per share.
Administration
The plan is administered by the board of directors. The board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the plan and to interpret the
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provisions of the plan. Pursuant to the terms of the plan, the board of
directors may delegate authority under the plan to one or more committees of
the board, and subject to certain limitations, to one or more executive
officers of Prodigy. Subject to any applicable limitations contained in the
plan, the board of directors or any other committee or executive officer to
whom the board delegates authority, as the case may be, selects the recipients
of options and determines:
. the number of shares of Prodigy common stock covered by options and the
dates upon which these options become exercisable,
. the exercise price of options and
. the duration of options.
The board of directors is required to make appropriate adjustments in
connection with the plan and any outstanding options to reflect stock
dividends, stock splits and certain other events. In addition, if Prodigy
enters into a merger or consolidation with or into another entity, the board
shall provide that all outstanding options shall be assumed, or equivalent
options be substituted, by the acquiring or succeeding corporation. If the
acquiring or succeeding corporation does not agree to assume, or substitute
for, these options, then the board shall provide that all unexercised options
shall become fully exercisable as of a specified time prior to the merger or
consolidation and shall terminate immediately prior to the consummation of the
merger or consolidation.
If any option expires or is terminated, surrendered, canceled or forfeited,
the unused shares of Prodigy common stock covered by the option will again be
available for grant under the plan subject, however, in the case of incentive
stock options, to any limitation required under the code.
Amendment or Termination
No option may be granted under the plan after November 5, 2009, but options
previously granted may extend beyond that date. The board of directors may at
any time amend, suspend or terminate the plan, except that no outstanding
option designated as subject to Section 162(m) of the Internal Revenue Code by
the board of directors after the date of the amendment shall become
exercisable, realizable or vested to the extent the amendment was required to
grant the option, unless and until the amendment shall have been approved by
Prodigy's stockholders.
Federal Income Tax Consequences
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to options granted under
the plan and with respect to the sale of Prodigy common stock acquired under
the plan
Incentive Stock Options
In general, a participant will not recognize taxable income upon the grant or
exercise of an incentive stock option. Instead, a participant will recognize
taxable income with respect to an incentive stock option only upon the sale of
Prodigy common stock acquired through the exercise of the option. The exercise
of an incentive stock option, however, may subject the participant to the
alternative minimum tax.
Generally, the tax consequences of selling Prodigy common stock acquired upon
the exercise of an incentive stock option will vary with the length of time
that the participant has owned the stock at the time it is sold. If the
participant sells Prodigy common stock after having owned it for at least two
years from the date the option was granted and one year from the date the
option was exercised, then the participant will recognize long-term capital
gain in an amount equal to the excess of the sale price of Prodigy common stock
over the exercise price.
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If the participant sells Prodigy common stock acquired upon the exercise of
an incentive stock option for more than the exercise price prior to having
owned it for at least two years the date the option was granted and one year
from the date the option was exercised, then all or a portion of the gain
recognized by the participant will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held Prodigy common stock for
more than one year prior to the date of sale.
If a participant sells Prodigy common stock acquired upon the exercise of an
incentive stock option for less than the exercise price, then the participant
will recognize capital loss in an amount equal to the excess of the exercise
price over the sale price of the stock. This capital loss will be a long-term
capital loss if the participant has held the stock for more than one year prior
to the date of sale.
Nonstatutory Stock Options
As in the case of an incentive stock option, a participant will not recognize
taxable income upon the grant of a nonstatutory stock option. Unlike the case
of an incentive stock option, however, a participant who exercises a
nonstatutory stock option generally will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of Prodigy common
stock acquired through the exercise of the option on the date the option was
exercised over the exercise price.
With respect to any Prodigy common stock acquired upon the exercise of an
nonstatutory stock option, a participant will have a tax basis equal to the
exercise price plus any income recognized upon the exercise of the option. Upon
selling the stock, a participant generally will recognize capital gain or loss
in an amount equal to the difference between the sale price of Prodigy common
stock and the participant's tax basis in Prodigy common stock. This capital
gain or loss will be a long-term capital gain or loss if the participant has
held Prodigy common stock for more than one year prior to the date of the sale.
Tax Consequences to Prodigy
The grant of an option under the plan will have no tax consequences to
Prodigy. Moreover, in general, neither the exercise of an incentive stock
option nor the sale of any Prodigy common stock acquired under the plan will
have any tax consequences to Prodigy. Prodigy generally will be entitled to a
business-expense deduction, however, with respect to any ordinary compensation
income recognized by a participant under the plan, including that which results
from the exercise of a nonstatutory stock option, the sale of Prodigy common
stock acquired upon the exercise of an incentive stock option for more than the
exercise price prior to having owned it for at least two years from the date
the option was granted and one year from the date the option was exercised or a
Section 83(b) election will be subject to the limitations of Section 162(m) of
the Internal Revenue Code.
Prodigy's board of directors believes the adoption of the 1999 stock option
plan is in the best interests of Prodigy and its stockholders and recommends
that stockholders vote "FOR" the 1999 stock option plan.
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PRODIGY'S BUSINESS
Prodigy is a leading nationwide Internet service provider that provides fast
and reliable Internet access and other Internet-based services. Prodigy's
nationwide Internet service offering, customer base and well recognized brand
name have made it a leading national Internet service provider. Prodigy tailors
its services to target the consumer, small business and U.S. Hispanic markets.
Prodigy has nationwide brand recognition and customer acquisition not available
to regional and local Internet service providers. Prodigy utilizes a nationwide
network covering over 850 cities in all 50 states. This network allows
approximately 90% of the United States population to access Prodigy's services
with a local telephone call. Prodigy believes its scalable technology allows it
to grow cost-effectively without significant capital expenditures. The number
of billable subscribers to Prodigy Internet, including subscribers who switched
from Prodigy's original Prodigy Classic online service, increased from 221,000
at December 31, 1997 to 1,138,000 at December 31, 1999.
Prodigy Internet enables subscribers to use the Internet 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 and
partner-branded content and other member services. Prodigy is expanding its Web
hosting and electronic commerce services for business customers. Prodigy
believes that its extensive experience in operating a large data center with
electronic commerce applications positions it well for growth in these areas.
Prodigy has introduced or is introducing various Internet-based services, such
as Web-based email, chat, personal Web pages, instant messaging, long-distance
telephone services, Internet-based telephone and fax services and online
customer billing.
Prodigy has been an online pioneer since its inception in 1984. Prodigy
launched Prodigy Classic as the world's first consumer-focused online service
in 1988. Prodigy Classic featured custom content, e-mail and chat rooms and was
based on technologies owned by Prodigy. In October 1996, Prodigy launched
Prodigy Internet, a service allowing consumers with any computer operating
system to access the Internet. Prodigy Classic was discontinued in October 1999
as Prodigy completed the transition to Prodigy Internet. Since the autumn of
1997, Prodigy has focused on expanding the Prodigy Internet subscriber base and
introducing additional Internet-based services. Prodigy has also used outside
companies for network coverage, customer support and content. Due to these
initiatives, Prodigy has substantially reduced its fixed operating costs and
number of employees. Prodigy believes it can accommodate sustained subscriber
growth cost-effectively 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 communications 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 the number of Web users and Web
sites. Many factors are driving the growth in the number of Web users and Web
sites, including:
. the large and growing number of personal computers;
. the declining cost of computers;
. advances in the performance and speed of personal computers and modems;
. easier and alternative access to the Internet; and
. the increasing importance of the Internet for communications,
information and commerce.
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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.
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. The rapid
development and growth of the Internet have resulted in a highly fragmented
industry, consisting of more than 5,000 Internet service providers 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 Internet service providers, over the next few years.
Internet service providers vary widely in geographic coverage, customer focus
and the nature and quality of services provided to subscribers. Few Internet
service providers offer nationwide coverage, have a brand name with nationwide
recognition or can grow significantly without additional investment in
infrastructure. Internet service providers may concentrate on specific types of
customers that differ from the target markets of other Internet service
providers. Services offered by Internet service providers can range from simple
dial-up access to highly organized, personalized access coupled with value-
added services. Prodigy believes that consumers generally focus on speed and
reliability of access, ease of use, customer service and price as they evaluate
an Internet service provider. In addition, Prodigy believes many business
customers want all their Internet-based requirements, such as Internet access,
Web hosting and electronic commerce applications, met by a single provider.
Internet operations, including Web hosting and electronic commerce, are
increasingly becoming critical to businesses. However, many businesses lack the
resources and expertise to develop, maintain and enhance, on a cost-effective
basis, successful Internet operations. As a result, businesses increasingly use
outside companies to enhance Web site reliability and performance, provide
continuous operation of their Internet-based functions and reduce operating
expenses. By outsourcing these services, companies can focus on their business
rather than using their resources to support Internet operations.
As a result, there is increasing demand for Internet service providers to
offer electronic commerce services that businesses can establish quickly and
easily. An increasing number of Internet service providers supplement their
basic Internet access services with a variety of commercial services that
facilitate electronic commerce, such as hosting web sites, online customer
billing, co-location and other value-added services. These services expand an
Internet service provider's potential revenue sources from basic monthly access
fees to other fees such as set-up and maintenance charges. In addition, some
larger and more sophisticated Internet service providers market other Internet-
based services, such as paging, long-distance and cellular telephone services,
to both consumers and business customers nationwide.
The Prodigy Solution
Prodigy provides fast and reliable Internet access and other Internet-based
services. Prodigy intends to meet the rapidly changing needs of its customers
by offering new products and additional Internet-based services as demand
arises. Prodigy believes the following competitive strengths positions it to
meet this goal:
Nationwide Brand Name Recognition. Since the introduction of its original
service in 1988, Prodigy has established substantial nationwide brand
recognition it believes offers a significant competitive advantage in
attracting new subscribers. Prodigy uses a variety of advertising, promotional
and distribution channels to leverage its brand name, one of the oldest and
best-known in the Internet industry. Prodigy 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. Prodigy
believes the strength of the Prodigy brand has enhanced its Prodigy Internet
marketing efforts and facilitated the rapid growth in the number of Prodigy
Internet subscribers.
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Nationwide Customer Acquisition Channels. Prodigy has a variety of
arrangements to acquire customers, including:
. contract acquisition programs with selected major PC manufacturers and
retailers;
. bundling with PCs shipped by leading PC manufacturers;
. its relationship with Microsoft;
. Web-based marketing;
. retail channels;
. direct mail and telemarketing; and
. television, radio and print advertising.
Prodigy believes many of these customer acquisition channels are not
available to regional and local Internet service providers who lack a
nationwide presence. Prodigy Internet software is included on PCs shipped by
many leading PC manufacturers. This software is also included in the online
services folder of every copy of Windows 98 and Windows 2000 shipped by
Microsoft for sale in retail channels or for loading on new PCs. The Prodigy
Internet service is also included in Microsoft's Internet service providers
Internet Referral Service Program.
Scalable Business Model. Prodigy has created a business and operating model
that it believes can accommodate sustained subscriber growth cost-effectively
without significant capital expenditures. Prodigy outsources major capital- and
labor- intensive functions to companies that it believes 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
companies while drawing on its own 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. Prodigy's existing data hosting facilities have the capacity to
support millions of additional subscribers.
Fast and Reliable Service. Prodigy Internet offers fast and reliable Internet
connections. Prodigy Internet subscribers have direct Internet access at speeds
of up to 56 kilobits per second.
Nationwide Network Coverage. The networks used to offer the Prodigy Internet
service cover over 850 cities in all 50 states. The networks can provide dial-
up access, with a local telephone call, to approximately 90% 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. Prodigy
also offers high-speed DSL access in seven states and is negotiating agreements
expected to provide nationwide DSL coverage by the end of 2000.
Superior Customer Experience. In addition to being easy to use and
personalize, Prodigy believes Prodigy Internet offers a productive and
rewarding customer experience. Prodigy's customer services include toll-free
telephone support, various online support options and an online "members
helping members" program. Prodigy distributes its customer service calls over
multiple outsourcing partners to reduce call waiting times. Prodigy has
developed proprietary filters to limit unsolicited commercial email, or "spam,"
sent by or addressed to subscribers. Prodigy accepts banner advertisements and
sponsorships but does not generate pop-up advertisements which appear on
smaller screens that automatically overlay the user's PC screen. Prodigy also
offers a program that rewards subscribers for their loyalty with points that
can be redeemed for gift certificates at selected retail stores.
Business Strategy
Prodigy's objectives are to strengthen its position as a leading nationwide
Internet service provider and to expand the range of services it offers and
markets it serves. Key elements of Prodigy's business strategy include:
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Leverage Strong Brand Name. Prodigy intends to increase its brand equity by
promoting the Prodigy brand through increased marketing and advertising
activities. Prodigy is leveraging the Prodigy brand name to expand its customer
acquisition activities, offer new services and enter new markets.
Introduce New Services. Prodigy is expanding its Web hosting business and
introducing additional Internet-based services. In October 1999, Prodigy
acquired BizOnThe.Net, a Web hosting business which sells Web sites to
customers. The designs of these sites are based on standardized forms and
artwork, which are customized for specific lines of business. Prodigy is
enhancing its ability to obtain and organize customer data to enable targeted
sales and marketing of Internet-based services to existing subscribers. In
addition, Prodigy plans to expand its electronic commerce activities and has
introduced broadband services with Bell Atlantic and Covad.
Enter New Markets. Prodigy is leveraging its brand recognition to expand
beyond its existing consumer market to include the small business and U.S.
Hispanic markets. Prodigy's services for small businesses include dial-up
Internet access, Web hosting, communications provisioning and related services.
Since January 1999, Prodigy has managed Telmex's Prodigy Internet de Telmex
subscribers in exchange for a management fee. In April 1999, Prodigy introduced
its bilingual Prodigy en Espanol service for U.S. Hispanic consumers.
Evaluate Acquisition Opportunities. Prodigy evaluates acquisition
opportunities on an ongoing basis. At any given time Prodigy may be engaged in
discussions with respect to possible acquisitions or other business
combinations. Prodigy may seek strategic acquisitions that can complement its
current or planned business activities. The Internet services industry is
expected to undergo substantial consolidation over the next few years, and
Prodigy may also seek to acquire other Internet service providers as an
additional means of customer acquisition or to enter into new markets.
Products and Services
Prodigy Internet
Prodigy Internet is an open standards-based Internet access service, allowing
consumers with any computer operating system to access the Internet. 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 and partner-branded content and other Prodigy member services.
The Prodigy Internet service provides subscribers with, among other services:
. direct, high-speed Internet access;
. an electronic mailbox enabling subscribers to send and receive an
unlimited number of text, graphics and multimedia messages;
. instant messaging;
. space on Prodigy's servers to host a personal Web page; and
. Web-based email.
Prodigy Internet also offers for most Prodigy Internet subscribers:
. a personalized home page for each subscriber which includes personalized
news services through MSNBC, stock portfolios, weather through
Accuweather, local TV listings and sports scores;
. customer service and online member support, including help files,
tutorials and other online educational tools;
. content generated by community members using communication tools such as
chat, message boards, news groups, bulletin boards and personal Web
pages; and
. access to online transactions on the Web through the Prodigy home page
and other e-commerce platforms.
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The Prodigy Internet service is compatible with Internet standards and
protocols, allowing use of industry-standard client/server software. Unlike
some online services that use proprietary technologies, Prodigy Internet merges
seamlessly with Web content and can be regularly updated to incorporate
advances in Internet technologies, such as new browsers, RealAudio players and
security devices for electronic commerce. Prodigy Internet is compatible with
the Microsoft Internet Explorer and Netscape Navigator browsers 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.
As of December 31, 1999, there were 1,138,000 billable subscribers to the
Prodigy Internet service.
The price plans for the Prodigy Internet service vary and are subject to
change. Prodigy Internet's principal price plans currently are:
. $19.95 per month for unlimited usage with a 30-day money back guarantee;
. a discounted prepaid annual plan of $198 for one year of unlimited
usage, equivalent to $16.50 per month;
. $9.95 per month for three months of unlimited usage, and $19.95 per
month thereafter;
. a free trial for 30 days with unlimited usage, and $19.95 per month
thereafter;
. $21.95 per month for unlimited usage plus five mailboxes; and
. $21.95 or $19.95 per month for new customers acquired under contract
acquisition programs with major PC retailers.
Other Internet-Based Services
Prodigy's other Internet-based services include the following:
. The shopping tab on Prodigy Internet currently provides links to over
100 Web-based stores and retailers, including Amazon.com, Reel.com,
PETsMART, Godiva Chocolate, eToys, uBid, Outpost.com and Omaha Steaks.
. In September 1998, Prodigy began offering paging services in partnership
with SkyTel.
. In February 1999, Prodigy announced the launch of Prodigy MailLink, a
new Web-based e-mail program that allows Prodigy Internet members to
access their Prodigy e-mail from any PC connected to the Web.
. In June 1999, Prodigy rolled out the co-branded marketing of long-
distance telephone services through Talk.com.
. In December 1999, Prodigy announced a relationship with Metris and
Mastercard to offer a Prodigy Internet Mastercard to Prodigy members.
The program is scheduled to launch in the second quarter of 2000.
. In January 2000, Prodigy announced a relationship with AnyDay.com to
provide free calendaring and invitation services to its members.
. In March 2000, Prodigy announced a relationship with LookSmart to
provide the LookSmart search engine to its members.
Business Services
In October 1999, Prodigy acquired BizOnThe.Net, a Web hosting business, and
combined it with Prodigy's existing Web hosting business. The combined
operation is called Prodigy Biz. The majority of the Prodigy Biz business is
the sale of Web sites with standardized forms and artwork to customers. These
hosting services are sold through telemarketing and offer a simple, easy to use
and understandable Web site to small businesses. A small part of the Prodigy
Biz business is the sale of more complex and sophisticated shared Web hosting
services to small businesses, as developed by the Prodigy Business Solutions
Group before the purchase of BizOnThe.Net. This more sophisticated offering
allows Web hosting customers the ability to design their own Web sites. Prodigy
also offers these Web-hosting customers e-commerce capabilities, which permit
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the customer to set up an online store to promote, sell, bill for and collect
payments relating to its products and services.
Spanish-Speaking and Hispanic Market
Prodigy markets Internet services to Spanish-speaking and Hispanic customers
in the United States. According to U.S. 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.
In April 1999, Prodigy launched Prodigy en Espanol, the first completely
bilingual Spanish-English Internet access service offered nationwide in the
United States. Prodigy en Espanol is tailored to meet the needs of the large
and growing Hispanic community in the United States. Prodigy en Espanol
provides the same fast and reliable access to the Internet as Prodigy Internet.
Bilingual options for the customer include enrollment software, the customer
interface, customer service and technical service, allowing Prodigy en Espanol
subscribers the option using either Spanish or English. Content of interest to
the Hispanic community in the United States, and links to web sites with
Spanish language content, are featured on the home page of Prodigy en Espanol.
Prodigy en Espanol subscribers also have access to all of the English content
offered to Prodigy Internet subscribers.
In April 2000, Prodigy became the exclusive co-branded preferred Internet
service provider for Hispanic Broadcasting Company, a large Spanish-language
radio broadcasting company in the United States, and Prodigy en Espanol will be
the preferred Internet access service featured on Hispanic Broadcasting
Company's radio stations, Web sites and special events. The agreement between
Prodigy and Hispanic Broadcasting Company includes on-air and off-air
promotional time as well as provision for Prodigy to provide hosting services
for Hispanic Broadcasting Company's corporate Internet activities.
As of December 31, 1999, Prodigy managed approximately 364,000 Prodigy
Internet de Telmex subscribers. See "Transactions with Related Parties." 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. Carso Global Telecom currently controls
Telmex. Carso Global Telecom and Telmex are Prodigy's principal shareholders.
Electronic Commerce
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, meaning
using the quickest modem available to send and to receive information to and
from the Internet. Prodigy's strategy is to provide its customers with a bundle
of products and services containing everything needed to access the web and to
set up online stores to promote, sell, bill for and collect payments relating
to its products and services. Although e-commerce applications have not to date
generated a material portion of Prodigy's revenues, e-commerce applications
that Prodigy plans to roll out include:
. electronic shopping carts;
. order processing and tracking;
. online billing and payment processing; and
. in conjunction with partners, consulting and integration services for
complex and large electronic commerce sites.
Broadband Services
Prodigy's broadband strategy is designed to provide customers with a suite of
Internet access and other Internet-based services in conjunction with selected
technology and marketing partners. Prodigy has entered into agreements with
Bell Atlantic, Southwestern Bell and Covad Communications for the provisioning
of DSL services and is in discussions with others to support various broadband
applications.
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Customer Acquisition and Marketing
Prodigy uses a variety of methods to acquire customers. Prodigy believes that
the strong national brand recognition of the Prodigy name and the nationwide
network used by Prodigy provide it with access to customer acquisition methods
not available to local and regional Internet service providers.
The Prodigy Internet service is marketed through a variety of media outlets,
including television, radio and outdoor advertising. The target audiences for
Prodigy Internet are:
. purchasers of new desktop consumer PCs;
. existing subscribers to online services who may be interested in moving
to an Internet service provider; and
. existing Internet service subscribers who are dissatisfied with their
current service or attracted to the performance and features of Prodigy
Internet.
Prodigy believes that the purchasers of new desktop consumer PCs give Prodigy
effective access to both first-time Internet users, who may be attracted by
Prodigy Internet's ease-of-use, personalized home page 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.
Prodigy believes that consumers in the other target segments listed above are
less likely to switch back from Prodigy Internet to another Internet service
providers, are less price-sensitive and are more receptive to value-added
services.
Prodigy's marketing efforts position the Prodigy Internet service as the
right Internet choice and as a productivity tool to help users obtain and
communicate information quickly and efficiently. Marketing themes emphasize
that the Prodigy Internet service is superior in terms of:
. availability and reliability;
. speed--up to 56 kilobits;
. technology--a network architecture that places asynchronous transfer
mode switching devices at local phone access sites instead of
backhauling the data to a central location;
. navigation; and
. personalization.
Contract Acquisition Programs. Prodigy has relationships with selected major
PC retailers which enable the retailers to offer rebates to consumers who
purchase new PCs. Under these agreements, Prodigy makes a payment to the
retailer in exchange for the retailer enrolling a customer onto Prodigy
Internet and obtaining a signed contractual commitment from the customer to a
term subscription to Prodigy Internet. These payments range up to $400 for a
term subscription of up to three years.
PC Bundling. The Prodigy Internet service is bundled with PCs under
arrangements where Prodigy pays a negotiated fee to the PC manufacturer only if
a subscriber enrolls from the PC and continues as a service customer beyond an
introductory period. PC bundling is attractive to Prodigy because the supplier
bears the distribution cost and bundling reaches many more potential
subscribers than through most other acquisition channels. The Prodigy Internet
software is pre-loaded on selected PC models shipped by Hewlett Packard, IBM,
Gateway 2000, Sony and Toshiba.
Microsoft Relationship. Microsoft includes the Prodigy Internet service in
the online services folder of every copy of the Windows 98 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. Microsoft also includes
Prodigy Internet in Microsoft's Internet service providers Internet Referral
Service Program. Prodigy believes that these arrangements enhance Prodigy's
nationwide brand presence.
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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 believes its television advertising and other
programs help target consumers interested in switching providers.
Retail. Prodigy has relationships with major retailers in the computer,
software and consumer electronics areas, including Best Buy, Office Depot and
Electronics Boutique. The Prodigy Internet software is currently available at
approximately 6,000 retail stores nationwide. These relationships typically
entitle Prodigy to establish displays containing free software in prime
locations, such as next to cash registers. Prodigy supports these relationships
through the use of bounty programs, cooperative advertising, joint promotional
events and manufacturer development funds.
Direct. Prodigy pursues targeted audiences in its direct mailing and
telemarketing efforts. Prodigy targets its direct mail 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 toll-free telephone numbers--1-800-PRODIGY and 1-
888-PRODIGY--that it promotes widely. Prodigy's outbound telemarketing programs
focus on the reacquisition of recently disconnected members and highly-
qualified prospects. Prodigy outsources its telemarketing services. Prodigy
maintains an online, member-assisted referral program in which existing
subscribers receive cash payments for signing up new members.
Retention Programs. Prodigy also develops programs to encourage trial
customers to subscribe and improve customer retention. Prodigy designs these
promotions to increase usage, which results in a higher likelihood of
subscribing. In January 1999, Prodigy introduced the Prodigy Points program, a
member loyalty program designed to increase knowledge and usage of the Web for
transactions and other services. Through the Prodigy Points program, Prodigy
members can earn "points" based on usage and redeem points for gift
certificates at selected retail stores. Prodigy plans to extend this program to
travel services and other merchandise, including a free month of Prodigy
Internet service. Prodigy also uses incentives to retain subscribers who might
otherwise cancel service.
Customer Service
Prodigy designs its customer service programs to increase member satisfaction
and retention, while controlling costs by combining outsourcing with in-house
services. Prodigy believes that its customer service programs, coupled with a
new-release strategy that is sensitive to the concerns of existing members and
responsive to market trends, have positioned Prodigy to provide customer
support that is cost-effective and that it can expand to accommodate future
growth.
Telephone Support. Prodigy outsources its telephone support for initial
questions from users to various vendors. Telephone technical support is toll-
free and available twenty-four hours per day, 365 days per year. Customers are
assisted with Prodigy software installation, enrollment questions, account
management concerns, service access problems and disconnect requests. Prodigy
can direct customer calls between vendors on short notice, which Prodigy
believes creates a competitive environment between vendors, resulting in
enhanced quality, performance and pricing. Geographic distribution of call
centers allows for uninterrupted service in the event of regional disasters.
Administrative and billing support is available weekdays from 9:00 a.m. to
9:00 p.m., eastern time.
In-House Customer Support and Systems. Prodigy maintains an online member
services area that provides a variety of support options to all members,
including real-time chat, instant messaging, news groups, message boards and
email. 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 news groups, message boards and chat. Prodigy's customer
service organization monitors customer service vendor performance with
quantitative metrics such as average wait time, first call
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resolution rate and abandon rate, and qualitative controls such as 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
support request in a problem tracking system. This system allows recurring
problems to be identified and escalated for resolution. Prodigy maintains a
Web-based database that is accessible by all vendor and employee customer
service representatives on a real-time basis. This database helps ensure
accurate and consistent delivery of customer service regardless of where the
contact is handled.
Billing. Prodigy outsources its customer billing system and services to CSG
Systems, CSG Systems' billing system is highly customized and flexible and
supports prompt pricing changes. CSG Systems provides credit card and paper
billing, transaction processing and check handling. Prodigy bills a substantial
majority of its current subscribers through pre-authorized credit card charges.
Other subscribers receive invoices.
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 Prodigy.
Service Provider Platform. The service provider platform is a suite of
functions that creates the infrastructure of a large-scale Internet service
provider. 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 scalable to millions of subscribers. It is compatible with industry standard
products, such as Netscape and Apache Web servers and Oracle databases. The
service provider platform also interfaces effectively with Prodigy's mail
server. The platform is built to open standards to enable the use of
applications from other suppliers.
Portal. Highly scalable Web platform for delivery of a personalized
Internet experience. The platform is compatible with various content feeds.
Personalization is based on member preference and geographical data.
Instant Message/Chat. High function system that enables interactive and
real-time communication between members.
Community Platform. Various tools and systems that enable and promote
communities on the Prodigy Internet service, including a bulletin board
platform and an email-list platform. The email-list platform is capable of
supporting custom domains, and delegated administration making it possible
for Prodigy to leverage it not only for communities, but also for the small
business Web hosting line of business.
Alerts. A real-time notification system that is capable of alerting
Prodigy members to various interesting events, such as arrival of certain
emails, stock and Usenet alerts. The system is highly scalable and
extensible to various content and alert feeds.
Web-Hosting Platform. High scalable and functional system for hosting
small business Web sites. The system is compatible with e-commerce
applications and various Web publishing tools. The system also provides
small business users with custom email domains and mailboxes, as well 56
kilobits dial capabilities.
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. 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.
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Tools for Users. User-configured filters for prioritization and spam
removal. Messages can contain any number of attachments through technology
which allows the user to send and receive graphics, audio and video files
via the Internet, up to a size limitation of 10 megabytes per mailbox. The
mail system delivers messages without promotional tag lines.
Features for Business Customers. Support for multiple domains, which
enables Prodigy Internet to operate multiple Internet services under
different brands on the same system base and 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 a hypertext markup language
screen. Standard 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 and to Prodigy's hosting servers. The
hosting servers store some of the data accessed during subscriber sessions.
Network connections are made through communications hardware, such as telephone
lines, routers, switches and modems. These 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. Prodigy outsources its
consumer dialup network functions to Splitrock, Navinet and AT&T.
Network Architecture
The network infrastructure used by Prodigy Internet consists of three primary
tiers: local phone access sites; a middle tier, which connects local phone
access sites 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 over 750 local phone access sites nationwide and has the capability to
provide dial-up access, with a local telephone call, to approximately 90% 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 750 local phone access sites currently
provide 56 kilobits access to Prodigy Internet subscribers having modems of
that speed. All of the local phone access sites that provide 56 kilobits access
are V.90 supported.
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 that supports business support systems
such as subscriber session accounting and reporting and high-capacity servers
for 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, Windows(R) NT and OS/390, and
installed database products include Oracle and DB2.
Prodigy has equipped its data hosting center with triple redundant power
systems and housed it in a climate and humidity controlled environment. Prodigy
has installed both battery and diesel power backup systems to preclude outages.
All production host systems have backup processors or are designed to be fault
tolerant, and all critical data is backed up to tape daily. Prodigy physically
secures facilities and data by incrementally restrictive card key locks. Built-
in operating system security features provide logical data security. The
facility uses firewall technology to protect critical systems. Prodigy has
installed servers that are open directly to the Internet on a separate network.
In addition, the facility uses anti-hacking measures.
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Reliability and Availability
Reliability and availability are key objectives of Prodigy's network and
hosting configurations. Prodigy accumulates and analyzes statistics on each
access line. Lines exhibiting quality problems are removed from service and
referred for repair. When possible, problem lines are immediately replaced with
lines from other vendors. In addition, Prodigy has integrated Inverse's IP
Insight product into the Prodigy Internet software, allowing Prodigy to gather
data on the actual connection experiences of subscribers who have agreed to
have their connection experiences measured. Prodigy reports problem sites to
the network provider for action.
At Prodigy's data hosting center, Prodigy operates a 24x7 operations control
center. Where feasible, Prodigy distributes the telephone lines among multiple
modem subsystems and access servers to provide diversity. The hosting center
connects to the backbone via diversely routed, multi-vendor DS3 lines.
Principal Outsourcing Arrangements
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 a network, hire all
Prodigy employees engaged in Prodigy's network operations and assume various
local phone access site leases and other liabilities. 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 it meets designated coverage and usage parameters. Splitrock may also
provide access to the network to other customers. Splitrock is required to
provide a backbone network based on technology and is required to support
transmission via Serial Line Internet Protocol, Point-to-Point Protocol and
TCP/IP.
Splitrock is required to meet specified service levels. Splitrock's failure
to meet the specified service level objectives will result in financial
penalties. If Splitrock fails to meet specified service levels for an extended
period, Prodigy may terminate the agreement. In addition, if there is a system-
wide failure, Prodigy will have the right to terminate the agreement or assume
responsibility for operating the network at Splitrock's expense.
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 set threshold, Prodigy must pay Splitrock an additional amount per
hour in excess of the threshold. The agreement includes minimum monthly
charges. Prodigy may terminate the agreement at any time upon payment of an
early termination charge.
The agreement, as amended, will expire as December 31, 2001 and is subject to
automatic renewal for successive one-year terms unless terminated by either
party on 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. Please see
"Transactions with Related Parties--Splitrock Transaction" on page 93 for a
description of the affiliation between Prodigy and Splitrock.
CSG Systems
Prodigy outsources its customer billing to CSG Systems. CSG Systems is a
leading provider of customer care and billing services for telecommunications
providers, including many of the largest cable television and direct broadcast
satellite providers. Prodigy and CSG Systems have agreed that CSG Systems is
Prodigy's exclusive provider of billing services for the Prodigy Internet
service, but not for premium or other billing services. CSG Systems charges
Prodigy a monthly fee based on the number of subscribers, subject to a minimum
charge, and a monthly minimum fee for ongoing development and support. The
agreement between Prodigy and CSG Systems expires June 30, 2001.
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Competition
The industry in which Prodigy competes is intensely competitive and includes
many significant participants. These participants include:
. Internet service providers;
. proprietary online service providers;
. ultra high-speed service providers;
. major international telecommunications companies;
. wireless communications companies;
. Internet-search services; and
. various other telecommunications companies.
There are more than 5,000 Internet service providers in the United States,
most of which operate small, local businesses. Additional regional telephone
operating companies, long-distance carriers and cable companies may also enter
the market. Internet-search service companies and major telecommunications
companies have established various partnering arrangements, which could result
in increased competition for Prodigy. Moreover, Prodigy 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 the above-listed companies could include
Internet access in their basic service packages, could offer access for a
nominal additional charge or could prevent Prodigy from delivering Internet
access through the cable or wire connections that they own. Some competitors,
such as NetZero, offer free Internet access services.
Among the larger providers of Internet service providers services are
EarthLink, which has merged with MindSpring, Microsoft Network, AT&T WorldNet,
MCI Internet, IBM Internet Connection, PSINet, GTE Internetworking and
Concentric Network 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 and
Internet access.
Prodigy believes that the principal competitive factors in the Internet
service provider industry are speed and reliability of access, ease of use,
brand name recognition, network coverage, customer service and price. Prodigy
believes that it competes effectively on the basis of these factors.
Government Regulation
Internet access and online services are not subject to direct regulation in
the United States. Changes in the laws and regulations relating to the
telecommunications and media industry, however, could impact Prodigy's
business. For example, the Federal Communications Commission could begin to
regulate the Internet and online services industry, which could result in
increased costs for Prodigy.
The federal Child Online Protection Act, enacted in October 1998, creates
criminal penalties for content on the Internet that may be deemed harmful to
minors. Prodigy has not changed any of its plans or policies as a result of
this statute, and does not believe its current plans or policies violate this
statute. In February 1999, a federal judge enjoined this statute. The federal
Children's Online Privacy Act, also enacted in October 1998 and effective no
earlier than April 2000, will regulate the collection of personal information
from children by commercial Web site operators. Prodigy believes its plans and
policies will enable it to comply with the statute. There also are laws that
make it illegal to traffic in obscene or child pornographic materials,
including by a computer.
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In addition, the applicability to Prodigy of existing laws governing issues,
such as intellectual property ownership, defamation, access to the Internet for
the disabled and personal privacy is uncertain. Courts have indicated that
online service providers and Internet service providers could be held
responsible for the publication of defamatory material or for failure to
prevent the distribution of material that infringes copyrights. Further, the
applicability to Prodigy of international laws and regulations governing the
Internet is also uncertain.
Prodigy does not edit or otherwise monitor the content accessed by
subscribers to Prodigy Internet. In addition, Prodigy blocks access to news
groups that carry child pornography.
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, including method of cancellation, practices with
respect to electronic funds transfers and related matters. The consent order
has a duration of twenty years and imposes various record keeping requirements.
Prodigy believes that it is in compliance with the consent order and that its
continuing compliance with the order will not have a negative affect on
Prodigy. America Online is subject to a similar consent order that governs its
marketing of services under both the American Online and CompuServe brands.
In connection with the acquisition of BizOnThe.Net from U.S. Republic,
Prodigy became subject to an agreement between U.S. Republic and the Federal
Trade Commission that became final through a court order in November 1999. The
agreement requires full disclosure of "free" trial offers and cancellation
obligations, the verification of direct-to-phone-bill orders, clear
communication of the submission process and probable placement of customer Web
sites on search engines and various record keeping requirements. Prodigy
believes that it is in compliance with the agreement and that its continuing
compliance will not negatively affect Prodigy's business.
Proprietary Rights
Prodigy owns a variety of trademarks, including "Prodigy(R)", the Prodigy
globe logo, the Prodigy Internet logo, "Prodigy Internet", "Are you a
Prodigy?", "Prodigy MailLink" and others, many of which are the subject of
existing or pending registrations in the United States and various foreign
countries. Prodigy also owns other intellectual property rights, including
proprietary software used in its business. Prodigy protects its proprietary
technology through copyright and trade secrets laws, employee and third-party
confidentiality agreements and other methods.
Prodigy and IBM have licensed each other's 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, Prodigy is
required to grant IBM most favored nation status with respect to Prodigy's
software that it makes generally available to the public, meaning IBM can
obtain the software on terms no less favorable than any other company.
Employees
At March 31, 2000, Prodigy had 438 full-time employees, of whom 63 were in
sales and marketing, 166 were in technology and product development, 123 were
in customer service, and 86 were in management, finance and administration. As
necessary, Prodigy supplements its regular employees with temporary and
contract personnel, which totaled 130 persons at March 31, 2000.
None of Prodigy's employees is represented by a labor union. Prodigy believes
that its employee relations are good.
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Facilities
Prodigy leases 97,000 square feet of office space in White Plains, New York.
The lease expires December 31, 2004 and Prodigy has the right to offer to
extend the lease on expiration. The current annual base rent is $2,330,000 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 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 $764,000 and Prodigy is required to pay associated
taxes and operating expenses.
Prodigy leases approximately 20,000 square feet of office space in Stafford,
Texas under a lease expiring on September 14, 2003. The current annual base
rent is $69,000.
Prodigy believes that its existing facilities are adequate for its current
needs and that suitable additional space will be available as needed.
Legal Proceedings
In September 1998, Prodigy received a letter from the Office of the Attorney
General of New York notifying Prodigy that the Attorneys General of New York
and 19 other states were investigating the "advertising and certain other
practices" of Prodigy and other unnamed Internet service providers. 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; and
. unauthorized charges to credit cards or bank accounts and changes to the
service agreement.
The letter requested that Prodigy voluntarily supply various documents and
other information relating to the marketing and provision of its services.
Prodigy has submitted all requested materials. Since July 1999, Prodigy has
allowed the State of New York to share the documents and information submitted
in response to this inquiry with a number of additional states. No legal action
has been initiated against Prodigy as a result of the investigation.
On March 31, 2000, Giovanni R. Viana filed a class action lawsuit against
Prodigy in the 11th Judicial Circuit Court for Dade County, Florida. This class
action lawsuit arises out of the Best Buy mail-in rebate program. The plaintiff
alleges Prodigy violated Florida's Unfair Trade Practices Act when it
represented it would provide rebates and failed to do so. In addition, the
complaint contains a breach of contract claim for failure to pay the rebates.
The plaintiff seeks damages under the breach of contract claim not to exceed
$75,000 per member of the class, as well as actual damages plus attorneys' fees
and litigation costs. Given the early stage of this litigation, no prediction
as to its outcome can be made.
On February 24, 2000, Prodigy was served with a summons and complaint by
Carroll Wesley Chance in a class action lawsuit brought against Best Buy,
Prodigy and Young America in the State Court of Richmond County, State of
Georgia. The case was brought on behalf of the class of similarly situated
consumers who purchased a computer at Best Buy, enrolled in the Prodigy
Internet service under the rebate program and did not receive a rebate check.
The complaint alleges breach of contract, unjust enrichment, conversion and
negligence. The plaintiffs seek damages not to exceed $74,900 per member of the
class, including actual damages, rebates, interest, punitive damages, court
costs and litigation expenses. Given the early stage of this litigation, no
prediction as to its outcome can be made.
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On January 10, 2000, Christa Roberts filed a class action lawsuit in the
Superior Court of the State of California, County of Los Angeles, against
Prodigy, America Online, Circuit City Stores, Fry's Electronic, Microsoft and
other unnamed parties. On February 7, 2000, the plaintiff filed an amended
complaint naming Young H. Kim as the named plaintiff in place of Christa
Roberts. Prodigy has received a copy of the summons and complaint but has not
been properly served in the lawsuit. The lawsuit alleges that Prodigy and the
other defendants offered rebates to consumers and entered into retail sales
contracts with consumers which violated California law and engaged in false
advertising. The plaintiff is seeking restitution from the defendants of all
sums related to this conduct. Given the early stage of this litigation, no
prediction as to its outcome can be made.
On October 2, 1999, Irwin Sales filed a lawsuit against Prodigy in the United
States District Court of the Southern District of New York. The lawsuit alleges
that Prodigy breached an independent contractor agreement with the plaintiff
and engaged in fraud arising out of it. The plaintiff seeks $25,000,000 in
damages for the contract claim and $50,000,000 in damages for the fraud claim.
On January 5, 2000 Prodigy served its answer. On February 1, 2000, the
plaintiff filed an amended complaint, and, on February 25, 2000, Prodigy filed
a motion to dismiss the plaintiffs fraud claim. Prodigy believes it has
meritorious defenses to the claims and intends to vigorously contest them.
Transactions with Related Parties
Transactions with IBM and Sears
On June 17, 1996, Prodigy's predecessor business, Prodigy Services Company,
was acquired from IBM and Sears for $46,950,000 in cash plus the issuance of
convertible promissory notes valued at $30,500,000. In connection with the
acquisition:
. IBM and Sears assumed Prodigy Services Company's four existing
retirement plans and all obligations thereunder;
. IBM received sole ownership of six patents jointly-owned with Prodigy
Services Company, Prodigy received sole ownership of two other jointly-
owned patents, and IBM and Prodigy entered into patent cross-license
agreements; and
. Prodigy is obligated to indemnify IBM and Sears for claims and
liabilities arising out of Prodigy Services Company's business, whether
arising before or after the closing of the acquisition of Prodigy
Services Company, except with respect to the retirement plans assumed by
IBM and Sears.
Upon the closing of Prodigy's initial public offering in February 1999, IBM
and Sears each surrendered its convertible promissory note and received:
. 2,127,633 shares of common stock, and
. a warrant to purchase 2,409,145 shares of common stock at an exercise
price of $19.50 per share at any time prior to February 16, 2002.
IBM and Sears have customary piggyback and demand registration rights for
their shares. IBM and Sears have agreed to vote their shares of common stock in
accordance with the voting recommendations of Prodigy's board of directors.
In October 1998, Prodigy sold to IBM a version of Prodigy's service provider
platform software enabling an Internet service provider to manage subscriber
data. IBM paid Prodigy $2,000,000, and Prodigy retained a perpetual, royalty-
free license to use and upgrade the software for its own use. Prodigy does not
use this software to manage its own subscriber data.
Between June 1996 and October 1997, IBM and Sears paid the State of New York
$3.4 million for sales and use taxes assessed against Prodigy Services Company
for periods ended prior to the acquisition of Prodigy Services Company. In
October 1997, Prodigy, IBM and Sears agreed that each of them would be liable
for one-
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third of all sales and use taxes assessed against Prodigy Services Company for
periods ended prior to the acquisition of Prodigy Services Company, and Carso
Global Telecom paid $567,000 to each of IBM and Sears in light of prior
payments of these taxes by IBM and Sears.
Prior to outsourcing its network to Splitrock, Prodigy utilized a network
backbone and local phone access sites provided by Advantis and subsequently by
IBM Global Services after IBM acquired Sears' interest in Advantis during 1997.
Prodigy also purchases computer equipment from IBM on normal commercial terms.
For network services and equipment purchases, Prodigy paid IBM/Advantis
$15,091,000 during 1996, $33,244,000 during 1997, $8,742,000 during 1998 and
$6,770,000 during 1999.
At the time of outsourcing its network to Splitrock, Prodigy had non-
cancelable commitments to purchase network services from Advantis/IBM Global
Services. In December 1998, to satisfy these commitments, Prodigy agreed to
purchase from IBM, on normal commercial terms, maintenance and voice-related
network services in the amount of $7,500,000 prior to December 31, 2000. If the
amount of these purchases does not equal $7,500,000 by December 31, 2000,
Prodigy must pay the balance in cash on or before December 31, 2000.
Transactions with Carso Global Telecom and Telmex
Stock Purchases by Carso Global Telecom. Pursuant to a funding agreement
entered into in connection with the acquisition of Prodigy Services Company,
Carso Global Telecom granted Prodigy a stock put giving Prodigy the right to
require Carso Global Telecom to purchase up to $125,000,000 of common stock at
a price of $24.00 per share. The dollar amount of the stock put was subject to
reductions. On October 31, 1996, the exercise price of the stock put was
reduced to $12.00 per share.
Carso Global Telecom purchased the following shares of Prodigy in private
transactions prior to Prodigy's initial public offering in February 1999:
<TABLE>
<CAPTION>
Total
Number of Purchase
Date Shares Price Type of Transaction
- ---- ---------- ------------ ---------------------------
<S> <C> <C> <C>
February 1996-September
1996..................... 1,007,750 $ 12,057,750 Purchases from stockholders
March 1996-September
1996..................... 1,750,000 $ 21,000,000 Purchases from Prodigy
October 1996.............. 291,667 $ 3,500,000 Purchase from Prodigy
December 1996............. 675,000 $ 8,100,000 Warrant exercise
March 1997-October 1997... 8,661,538 $103,938,467 Purchases from Prodigy
December 1997............. 12,385,956 $ 49,543,822 Purchase from Prodigy
April 1998................ 3,250,000 $ 13,000,000 Warrant exercise
July 1998................. 1,375,000 $ 11,000,000 Purchase from Prodigy
</TABLE>
The warrants reflected in the above table were granted by Prodigy to Carso
Global Telecom in connection with its financing commitments to Prodigy.
Private Stock Purchases by Telmex. In August 1998, Telmex purchased 6,125,000
shares of common stock from Prodigy for $8.00 per share for a purchase price of
$49,000,000. Pending regulatory approval of the investment, Telmex made an
unsecured, interest-free loan of $49,000,000 to Prodigy. In August 1998, Telmex
also purchased 3,287,500 shares of common stock from two stockholders of
Prodigy for $8.00 per share for a total purchase price of $26,300,000. In
February 1999, Telmex purchased 2,000,000 shares of common stock from Prodigy
for $15.00 per share for a purchase price of $30,000,000.
Subscriber Management Agreement With Telmex. In January 1999, Prodigy and
Telmex signed an agreement under which Prodigy manages Telmex's Prodigy
Internet de Telmex subscribers in Mexico for a monthly management fee. The fee
is equal to 15% of the invoiced sales price minus discounts, excise taxes and
credits for returns on the first 200,000 subscribers and 10% on additional
subscribers. The agreement expires in January 2004 and may be terminated by
Telmex if Prodigy undergoes a change of control.
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Loans from Carso Global Telecom, Telmex and Banco Inbursa. In June 1996,
Prodigy borrowed $48,000,000 from Banco Inbursa, an affiliate of Carso Global
Telecom, in order to pay the cash portion of the purchase price for the
acquisition of Prodigy Services Company and related expenses and subsequently
borrowed an additional $2,000,000. These loans bore interest at the prime rate
plus one-half percentage point. In March 1997, Prodigy repaid $40,000,000 to
Banco Inbursa. Between February 1998 and July 1998, Banco Inbursa loaned
$22,100,000 to Prodigy to fund operations. These loans bore 9% interest and
were due December 31, 1999. In July 1998, Prodigy repaid the $32,100,000 then
owed to Banco Inbursa. Pending regulatory approval of some of the stock put
exercises described above, Carso Global Telecom loaned $71,500,000 to Prodigy
on an interest-free basis, and Banco Inbursa loaned Prodigy $13,650,000 at 9%
interest. These loans were unsecured, and the proceeds were used to finance
Prodigy's operations.
In August 1999, Carso Global Telecom agreed to provide Prodigy with a $130
million revolving line of credit. Advances are due 30 days after borrowing, but
Prodigy is permitted to roll over advances into new advances at its election.
Advances are uncollateralized and bear interest at the LIBOR rate plus between
one and five percentage points as negotiated on a case-by-case basis. As of
February 29, 2001, $96.4 million was outstanding under this line of credit.
In February 2000, Telmex committed to provide Prodigy with financing of up to
$200 million to fund its operations through February 2001.
Transactions with SBC
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement includes a preliminary summary
of principal terms and conditions, estimated expenses and the structuring fee
due Citibank at closing. The letter agreement does not constitute a firm
financing commitment from Citibank, and Prodigy cannot assure that the Citibank
financing will be completed. The Citibank financing is subject to the issuance
by SBC of a performance guarantee and satisfaction of the following conditions:
. satisfactory completion of Citibank's due diligence review of Prodigy;
. in Citibank's determination, the absence of any material adverse change
in the financial markets or in the financial condition or operations of
Prodigy;
. negotiation and execution of mutually satisfactory documentation for the
financing;
. the receipt of specified ratings from ratings agencies; and
. the receipt of internal Citibank credit approval and any other approvals
and legal opinions as Citibank may deem necessary or advisable.
In connection with this financing, SBC has agreed in principle to guarantee
Prodigy's ongoing performance obligations under its customer contracts. Prodigy
and SBC have not fully negotiated the terms of the guarantee. In exchange for
this guarantee, Prodigy and SBC have agreed in principle that SBC will receive
a contingent warrant to purchase 537,924 shares of Prodigy common stock for
$1.00 per share, expiring 3.5 years after the closing date of the Citibank
financing and exercisable only if:
. SBC's performance guarantee is triggered;
. Prodigy's chief executive officer is not then an SBC appointee; and
. SBC, Carso Global Telecom and Telmex then collectively own, on a fully-
diluted basis, securities representing less than 50% of the voting power
of Prodigy's the outstanding securities.
If the financing were to close on the date hereof, the condition specified in
the last bullet point above would not be satisfied, and Prodigy cannot predict
when, or if, the SBC warrant would become exercisable. See
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"Prodigy Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Allen Craft, an executive officer and director of Prodigy, is employed by
SBC. SBC pays the salary of and provides employee benefits to Mr. Craft. See
"Prodigy's Management--Executive Officers and Directors."
Splitrock Transaction
Prodigy has outsourced its network operations to Splitrock. Carso Global
Telecom owns 30% of Splitrock. Samer F. Salameh, Prodigy's chairman and chief
executive officer, is a former director of Splitrock and holds stock options to
purchase Splitrock common stock. During the years ended December 31, 1997, 1998
and 1999, Prodigy incurred network charges to Splitrock of $22,700,000,
$64,100,000 and $76,600,000 respectively.
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PRODIGY'S MANAGEMENT
Executive Officers and Directors
The current executive officers and directors of Prodigy and their ages and
positions with Prodigy are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Samer F. Salameh........ 35 Chairman of the Board and Chief Executive Officer
Alfredo Sanchez......... 44 Vice Chairman of the Board
David C. Trachtenberg... 37 President and Chief Operating Officer
Allen Craft............. 44 Executive Vice President of Finance, Chief Financial Officer, Treasurer
and Director
Andrea S. Hirsch........ 42 Executive Vice President, Business Development and General Counsel
James R. Adams(1)(2).... 60 Director
Arturo Elias(1)......... 33 Director
James M. Nakfoor(1)(2).. 36 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Salameh has served as chief executive officer and a director of Prodigy
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
Prodigy, Mr. Salameh served as director, long distance division of SBC,
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. 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
also serves as an advisor to the chief executive officer of Telmex.
Mr. Sanchez joined Prodigy'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. 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 Prodigy as president and chief operating officer in
December 1998. Prior to joining Prodigy, 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 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 M.B.A. 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.
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<PAGE>
Mr. Craft joined Prodigy as executive vice president of finance, chief
financial officer, treasurer and a director in March 2000. He has been employed
by SBC since 1993, serving as director of finance of SBC International from
March 1998 until March 2000, director of corporate financial planning from
August 1996 to February 1998 and manager of financial planning from June 1993
to August 1996. Previously, Mr. Craft was manager of financial planning at the
Permea division of Air Products from April 1990 to May 1993 and a plant
controller for Monsanto from December 1986 to March 1990. He holds a B.B.A.
degree from the University of Central Florida and an M.B.A. degree from the
University of Texas.
Ms. Hirsch joined Prodigy in September 1998 as executive vice president,
business development and general counsel. Prior to joining Prodigy, 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.
Mr. Adams joined Prodigy's board of directors in May 1999. Mr. Adams served
as chairman of the board of Texas Instruments Inc. from July 1996 to May 1998.
From November 1989 to August 1995, he served as president and chief executive
officer of Southwestern Bell Telephone Company, before becoming group president
of SBC. He currently serves as a director of Texas Instruments, Inet
Technologies and Storage Tek Corp.
Mr. Elias joined Prodigy'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.
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.
Mr. Nakfoor joined Prodigy'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 of Grupo Financiero
Inbursa, S.A. de C.V., 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. Mr. Nakfoor holds a B.A. degree in Economics and an M.B.A.
degree from the University of Texas at Austin.
Messrs. Salameh, Sanchez, Elias and Nakfoor were elected directors of Prodigy
pursuant to a voting agreement between Carso Global Telecom and a former
principal stockholder of Prodigy. The voting agreement was terminated in August
1998.
Officers of Prodigy 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.
Carlos Slim Helu, a Mexican citizen, and 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 Prodigy. 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 Prodigy's directors, executive officers and
principal shareholders and their affiliates.
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<PAGE>
Executive Compensation
The following lists the total compensation earned in the years ended December
31, 1997, 1998 and 1999 for Prodigy's chief executive officer, its two other
most highly compensated executive officers in 1999 who were serving as
executive officers on December 31, 1999, and four former executive officers who
were not serving as executive officers on December 31, 1999. These current and
former executive officers are sometimes referred to as the named executive
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------- --------------------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options(1) Compensation(2)
- --------------------------- ---- -------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers:
Samer F. Salameh......... 1999 $241,667 $127,250 -- -- $4,800
Chairman of the Board 1998 $200,000 $ 65,084(3) -- -- $6,000
and
Chief Executive Officer 1997 $ 50,000 $ 90,000 -- 156,250 $1,250
David C. 1999
Trachtenberg(4)......... $224,000 $115,828(3) -- -- $4,200
President and Chief 1998 $ 11,056 -- -- 125,000 --
Operating
Officer 1997 -- -- -- -- --
Andrea S. Hirsch(5)...... 1999 $201,083 -- -- -- $4,800
Executive Vice 1998 $ 56,878 $180,000 -- 93,750 --
President, Business 1997 -- -- -- -- --
Development, General
Counsel and Acting Chief
Financial Officer
Former Executive
Officers:
James P. Dougherty(6).... 1999 $126,667 $ 49,876 $148,346(7) -- $3,978
Former General Manager, 1998 $171,138 $ 44,904 -- -- $4,404
Business
Services 1997 $ 15,385 -- -- 93,750 $ 462
David R. Henkel(8)....... 1999 $201,083 $ 80,898 -- -- $4,800
Former Executive Vice 1998 $ 79,167 -- -- 187,500 $2,375
President,
Finance and Chief 1997 -- -- -- -- --
Financial
Officer
James L'Heureux(9)....... 1999 $149,686 $ 60,000 $ 12,423(7) -- --
Former Executive Vice 1998 $190,000 $ 11,756 -- 43,750 --
President,
Consumer Services 1997 $ 86,474 $ 40,000 -- 50,090 --
Carena M. Pooth(10)...... 1999 $174,167 $ 87,875 -- -- $4,800
Former Executive Vice 1998 $181,250 $ 26,250 -- 68,750 $4,313
President,
Technology 1997 $161,458 $ 22,500 -- -- $4,800
</TABLE>
- --------
(1) Represents the number of shares covered by options to purchase shares of
Prodigy's common stock. Prodigy has never granted any stock appreciation
rights.
(2) Represents company matching contributions under Prodigy's 401(k) plan.
(3) Includes payments for car and housing expenses.
(4) Commenced employment with Prodigy in December 1998.
(5) Commenced employment with Prodigy in September 1998.
(6) Ceased employment with Prodigy in August 1999.
(7) Represents severance payments and vacation payouts.
(8) Resigned as an executive officer of Prodigy in December 1999.
(9) Ceased employment with Prodigy in January 1999.
(10) Ceased employment with Prodigy in February 1999.
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Option Grants During 1999
Prodigy did not grant stock options to any of the named executive officers
during the year ended December 31, 1999.
1999 Year-End Option Values
The following table sets forth information about option exercises during 1999
by the named executive officers and the number and value of unexercised options
held by each of the named executive officers on December 31, 1999.
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(2)
Shares Acquired Value ------------------------------- -------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers:
Samer F. Salameh........ 68,750 $1,489,844 43,750 43,750 $672,656 $ 672,656
David C. Trachtenberg... -- $ -- 41,666 83,334 $592,701 $1,185,424
Andrea S. Hirsch........ 5,000 $ 109,998 26,250 62,500 $298,594 $ 710,938
Former Executive
Officers:
James P. Dougherty...... 68,750 $1,561,792 -- -- $ -- $ --
David R. Henkel......... 84,085 $1,486,052 9,323 94,092 $106,049 $1,070,296
James L'Heureux......... 27,083 $ 706,241 -- -- $ -- $ --
Carena M. Pooth......... 93,750 $1,577,475 -- -- $ -- $ --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of Prodigy common stock on the date of exercise.
(2) Represents the difference between the fair market value of Prodigy common
stock at December 31, 1999 ($19.375) and the option exercise price.
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
on the successful completion of mutually established personal and corporate
goals. Mr. Salameh is also eligible to participate in all of Prodigy's fringe
benefit programs. Prodigy has agreed to provide Mr. Salameh with a monthly
housing allowance of $4,000, a monthly car allowance of $1,050 and monthly
round-trip airfare between New York and Mexico City. Mr. Salameh was also
entitled to accelerated vesting of stock options as a result of the closing of
Prodigy's initial public offering in February 1999. In the event Prodigy
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 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 Prodigy. If Mr.
Salameh is terminated for any reason, Prodigy 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 on the successful completion of personal and corporate goals as
mutually established. Mr. Trachtenberg is also eligible to participate in all
of Prodigy's fringe benefit programs. Prodigy 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 previous car lease. For the first six months of employment,
Prodigy agreed to reimburse his reasonable temporary housing expenses and
weekly commuting expenses between New York and Washington, D.C., and thereafter
Prodigy will reimburse his relocation expenses and provide a monthly housing
allowance of $3,500. Prodigy has also agreed to reimburse Mr. Trachtenberg's
reasonable legal fees for review of his employment agreement. In the event
Prodigy 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 accelerated vesting of options.
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 $203,000. 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 on the successful completion of personal and corporate goals
as mutually established. Ms. Hirsch is also eligible to participate in all of
Prodigy's fringe benefit programs. In the event Prodigy terminates Ms. Hirsch's
employment other than for cause after Ms. Hirsch's third month of service with
Prodigy, Ms. Hirsch will continue to receive her base salary and fringe
benefits for six months and will be entitled to 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 the six-month period. In the event Prodigy terminates
Ms.Hirsch's employment other than for cause, she will continue to receive her
base salary for a length of time based on her length of service and will
receive accelerated vesting of options.
Mr. Craft is employed by SBC but serves as executive vice president of
finance, chief financial officer, treasurer and a director of Prodigy. SBC pays
the salary of and provides employee benefits to Mr. Craft. Prodigy provides Mr.
Craft with a monthly housing allowance, a monthly car allowance and the use of
a cellular phone.
Former Executive Officers
Mr. Dougherty was employed under an employment agreement scheduled to expire
on November 24, 2001 providing for an annual base salary of $190,000, a sign-on
bonus of $20,000 and an annual performance bonus of up to 50% of his base
salary, customary fringe benefits and other customary provisions. Effective
August 31, 1999, Mr. Dougherty resigned, and Prodigy agreed to pay him a lump
sum severance payment equal to nine months of base salary. Prodigy also agreed
that 25,000 of Mr. Dougherty's options would vest on termination of employment.
Mr. Henkel was employed under an employment agreement providing for an annual
base salary of $190,000 subject to annual review and increase, an annual
performance bonus of up to 50% of his base salary, a monthly housing allowance
of $3,000, allowances for airfare between New York City and Dallas for
Mr. Henkel and members of his family during the first year of his employment,
relocation expenses of up to $3,000, customary fringe benefits and other
customary provisions. Effective December 31, 1999, Mr. Henkel resigned as a
director and officer but agreed to work as a part time employee of Prodigy for
one fifth of his annual base salary until February 28, 2000. Prodigy agreed to
pay him an annual performance bonus of up to 50% of his annual base salary for
1999 and continued fringe benefits through the end of his part time employment.
Prodigy also agreed that 93,408 of his stock options would remain vested and
exercisable through June 30, 2000 and that an additional 47,046 of his options
would vest upon the closing of the SBC transaction and would remain vested and
exercisable for three months from the closing of the SBC transaction.
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
Prodigy 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. Prodigy also agreed that 27,083 of Mr. L'Heureux's
options would remain vested and exercisable through September 30, 1999.
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Ms. Pooth was employed under an employment agreement scheduled to expire on
May 31, 2000 providing for an annual base salary of $190,000. Ms. Pooth was
eligible to receive an annual performance bonus of up to
50% of her base salary, contingent on the successful completion of personal and
corporate goals as mutually established. Ms. Pooth was eligible to participate
in all of Prodigy's fringe benefit programs, and was entitled to accelerated
vesting of stock options on a change in control of Prodigy. Effective February
28, 1999, Ms. Pooth resigned from Prodigy, and pursuant to her employment
agreement, she was entitled to salary continuation for nine months and all of
her options accelerated and remained exercisable through December 31, 1999.
Stock Plans
1996 Stock Option Plan
Prodigy's 1996 stock option plan permits the issuance of up to 3,125,000
shares of Prodigy common stock on 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 and non-statutory stock options not
intended to qualify as incentive stock options. Stock options may be granted
under the option plan to employees, directors, consultants and advisors of
Prodigy. Only employees of Prodigy 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:
. to whom options will be granted;
. the time when options my be granted;
. the number of shares to be covered by each option;
. when the option becomes exercisable; and
. the exercise price of the option.
In the case of incentive stock options, the exercise price may not be less
than the fair market value of Prodigy 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 Prodigy, 110% of the fair market value of Prodigy common stock on the
date of the grant. Prodigy'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 these options, provided that no
grants may be made to executive officers and options may not exceed 25,000
shares per employee per year.
As of March 31, 2000, under the 1996 stock option plan:
. there were outstanding options to purchase an aggregate of 1,600,371
shares at a weighted-average price of $11.23 per share;
. an aggregate of 1,243,537 shares had been issued on exercises; and
. 281,092 additional shares were reserved for future option grants.
1999 Stock Option Plan
At its annual meeting of stockholders, Prodigy is also requesting stockholder
approval of a 1999 stock option plan covering 5,600,000 shares of Prodigy
common stock. See "1999 Stock Option Plan."
As of March 31, 2000, under the 1999 stock option plan:
. there were outstanding options to purchase an aggregate of 2,181,290
shares at a weighted-average price of $19.11 per share;
. no shares had been issued on exercises; and
. 3,418,710 additional shares were reserved for future option grants.
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1999 Employee Stock Purchase Plan
In January 1999, Prodigy's board of directors and stockholders adopted the
1999 employee stock purchase plan. The purchase plan authorizes the issuance of
up to 500,000 shares of Prodigy common stock to eligible employees of Prodigy
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 Prodigy
are not eligible to participate.
The purchase plan permits shares to be purchased at the end of purchase
periods occurring during each offering periods. Unless otherwise provided by
the board prior to commencement, an offering period will begin on each May 16
and November 16, and continue for a period of 24 months. A purchase period will
begin on each May 16 and November 16, and will continue for a period of six
months, ending on the following November 15 or May 15, respectively. The first
offering period and the first purchase period commenced on Prodigy's initial
public offering. The last day of each purchase period is the date on which
shares are actually purchased.
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 that the 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 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 date of the offering period and 85% of the fair market value of the
shares on the purchase date. Fair market value means the last sale price of
Prodigy 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 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 that 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, the employee will not be
entitled to acquire shares on any succeeding purchase date occurring with
respect to the 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 the offering period
but may, if the employee otherwise qualifies, rejoin the purchase plan with
respect to any subsequent offering period.
The purchase plan is administered by the compensation committee of the board.
The amounts paid to Prodigy 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 the shares.
Compensation Committee Report On Executive Compensation
Overview
The compensation committee makes recommendations to the board of directors
regarding the compensation of executive officers and directors and administers
Prodigy's stock plans. Prodigy's executive compensation program is intended to
promote the achievement of Prodigy's business goals and, thereby, to
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maximize corporate performance and stockholder returns. Compensation consists
of a mixture of base salary, performance bonuses and stock-based incentives.
The compensation committee utilizes base salaries and bonuses to tie an
individual's compensation to individual and corporate performance and utilizes
stock incentives to help align the long-term interests of executives and
stockholders.
In determining levels of compensation, the compensation committee considers a
number of factors, such as:
. competitive positioning, including compensation of executives and
managers at comparable companies;
. present compensation levels;
. individual performance, including expected future contributions to
Prodigy; and
. Prodigy's need to attract, retain and reward key management personnel.
The compensation committee, in determining Mr. Salameh's compensation,
reviewed compensation for chief executives of publicly-held companies of
similar size, particularly those in the ISP and similar businesses, Mr.
Salameh's individual performance against quantitative and qualitative goals and
the performance of Prodigy.
Base Salary
The base salary of each executive officer is reviewed annually. In setting
base salaries, the compensation committee considers the factors described
above. For 2000, the compensation committee has established Mr. Salameh's
annual base salary at $268,750.
Performance Bonuses
The payment of bonuses to executive officers is directly related to their
achievement of corporate and individual performance goals and Prodigy's
performance in relation to an industry peer group. The amount of the bonus
paid, if any, varies among executive officers depending on their success in
achieving individual performance goals, their contribution to the achievement
of corporate performance goals and Prodigy's performance compared to its peers.
At the beginning of each year, Mr. Salameh proposes base salary and bonus
parameters for the year to the compensation committee for consideration and
approval. This proposal incorporates corporate-wide goals as well as goals
jointly established by Mr. Salameh and each of the bonus plan participants for
their individual areas of responsibility. For 1999, the compensation committee
and the board of directors approved a target bonus based on the percentage of
the base salary of each executive officer specified in his or her employment
agreement, ranging from 30% to 50%. Depending upon each person's performance
during the year, actual bonuses may range from 0% to 120% of the bonus
percentage specified in his or her employment agreement. The individual and
corporate goals generally represent objective measures of performance. These
goals include quantifiable financial objectives, such as the achievement of
revenue or operating cash flow targets, and milestones in subscriber levels and
other areas. Prodigy's performance in relation to industry peers is based on
quantifiable financial measures and stock price information.
Throughout the year, Mr. Salameh meets with executive officers to review
their progress in achieving these goals. After the end of the year, Mr. Salameh
performs a final performance review with the compensation committee and
presents proposed bonus award levels for consideration and approval. The
compensation committee approved Mr. Salameh's proposals for bonuses for 1999.
In recognition of the achievement of corporate and his individual goals, the
compensation committee awarded Mr. Salameh a bonus of $ 150,000 in February
2000.
Equity-Based Compensation
Grants of options under Prodigy's stock option plans are intended to relate
executive compensation to corporate performance and to help align long-term
interests of Prodigy's executive officers and stockholders.
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The compensation committee considers options to be an important method of
providing an incentive for executive officers to remain with, and to continue
to make significant contributions to, Prodigy. Therefore, in granting options
the compensation committee considers the number and value of options held by
each executive officer which will vest in future periods, in addition to the
other factors described above. The compensation committee also seeks to
maintain equitable relationships among executive officers who have similar
levels of responsibility.
During 1999, no options were granted to Mr. Salameh or any of the other named
executive officers.
Compliance With Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation over $1,000,000 paid to the
corporation's chief executive officer and other named executive officers.
Qualifying "performance-based" compensation is not subject to the deduction
limit if certain requirements are met. Prodigy intends to structure the stock
options granted to its executive officers under its option plans in a manner
that complies with Section 162(m) so as to mitigate any disallowance of
deductions.
THE COMPENSATION COMMITTEE
James M. Nakfoor, Chairman
James R. Adams
Arturo Elias
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Comparative Stock Performance
The graph below compares the cumulative stockholder return on Prodigy's
common stock for the period from February 11, 1999 (the date on which it began
to trade on the Nasdaq National Market) through December 31, 1999 with the
cumulative total return on the Media General Market Weighted NASDAQ Index and a
peer group index comprised of Cavion, Concentric Network, E.Spire
Communications, EarthLink, Euro909.com, Euroweb Internet, Frontline
Communications, GlobalNet Financial, GRIC Communications, IDT Corporation,
Interactive Pictures, Internet Network Services, Internet America, Internet
Commerce, Internet Initiative, Internet.com, Juno Online Services, Korea
Thrunet, MindSpring Enterprises, Navisite, OneMan.com, Pacific Internet,
PSINet, RMI.Net, Satyam Infoway, Softnet Systems, Terra Networks, Verio,
Voyager.Net and Ziplink. The comparison below assumes the investment of $100 on
February 11, 1999 in Prodigy's common stock, the Media General Market Weighted
NASDAQ Index and the peer group index. In each case, the comparison assumes
reinvestment of all dividends. Measurement points are on February 11, 1999,
March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG PRODIGY COMMUNICATIONS CORPORATION
MEDIA GENERAL MARKET WEIGHTED NASDAX INDEX
AND PEER GROUP INDEX
[GRAPH APPEARS HERE]
ASSUMES $100 INVESTED ON FEBRUARY 11, 1999
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
February 11, March 31, June 30, September 30, December 31,
1999 1999 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Prodigy Communications
Corporation 100.00 136.44 92.00 63.11 68.89
Peer Group Index 100.00 160.81 124.22 117.00 177.06
Media General Market Weighted
NASDAQ Index 100.00 98.18 106.83 108.57 160.35
</TABLE>
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ELECTION OF DIRECTORS
Nominees for Director
At each annual meeting of stockholders, Prodigy's directors are elected to
serve until the sooner of the next annual meeting of stockholders or until
their respective successors are elected and qualified.
Upon completion of the SBC transaction:
. SBC will have the right to appoint three Prodigy directors;
. Carso Global Telecom and Telmex will have the right to appoint three
Prodigy directors;
. Prodigy's other three directors will be its chief executive officer and
two independent directors;
. Prodigy's board will establish a new executive steering committee, which
must approve all major corporate actions prior to being submitted to the
board for consideration; and
. SBC will have the right to appoint two members of the executive steering
committee and Carso Global Telecom and Telmex will have the right to
appoint the other two members of the executive steering committee.
The persons named in the enclosed proxy will vote to elect as directors
Prodigy's current six directors unless the proxy is marked otherwise. Prodigy's
current directors are Samer F. Salameh, Alfredo Sanchez, James R. Adams, Allen
Craft, Arturo Elias and James M. Nakfoor. They each have indicated their
willingness to serve if elected. However, if any nominee becomes unable to
serve, the proxies may be voted for substitute nominees selected by the board
of directors or for a reduction in the number of directors, as determined by
the board of directors.
The board of directors recommends that stockholders vote FOR each of the
nominees for director.
The section of this proxy statement entitled "Prodigy's Management" sets
forth the ages of the nominees for director, the year in which each first
became a director of Prodigy, their principal occupations and employment during
the past five years and the names of other public companies of which they are a
director. That section also sets forth the names of Prodigy's other current
executive officers, their ages and their principal occupations and employment
during the past five years.
Directors of Prodigy Following the SBC Transaction
Samer F. Salameh, as Prodigy's current chief executive officer, will remain a
director upon completion of the SBC transaction. Carso Global Telecom and
Telmex have indicated to Prodigy that two of their designees to Prodigy's board
will be James M. Nakfoor and Jaime Chico Pardo, whose biography appears below,
but that they have not yet selected their third designee. SBC has indicated to
Prodigy that its three designees to Prodigy's board will be James D. Gallemore,
James S. Kahan and Charles J. Roesslein, whose biographies appear below. Carso
Global Telecom, Telmex and SBC have not yet indicated to Prodigy who their
representatives on the executive steering committee will be. Prodigy expects
that Allen Craft, Arturo Elias and Alfredo Sanchez will resign as directors
upon completion of the SBC transaction. Prodigy intends to appoint two
independent directors within ninety days after completion of the SBC
transaction. As a result, Prodigy stockholders should understand that the
composition of the Prodigy board of directors following completion of the SBC
transaction will be significantly different than the directors elected at the
annual meeting.
Jaime Chico Pardo, age 50, currently serves as vice chairman and chief
executive officer of Telmex, which he joined as chief executive officer in
1995. From 1993 to 1995, Mr. Chico Pardo was president and chief executive
officer of Grupo Condumex, a manufacturer of products for the construction,
automobile and telecommunications industries. Mr. Chico Pardo is also vice
chairman of Carso Global Telecom and a director of Grupo Carso and Grupo
Financiero Inbursa, both of which are affiliated with Carso Global Telecom. He
also serves as a director of Honeywell International, a diversified technology
and manufacturing company.
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James D. Gallemore, age 48, has served as executive vice president--SBC
strategic marketing and planning of SBC Operations since April 1997.
Previously, he was vice president--marketing for Southwestern Bell Operations
from 1995 until April 1997. He served as vice president--marketing of
Southwestern Bell Telephone from 1994 to 1995 and as its assistant vice
president--marketing from 1992 to 1994. From 1973 to 1992, he held various
marketing and sales positions with SBC companies.
James S. Kahan, age 52, has been employed by various SBC affiliates since
1983. He has served as SBC's senior executive vice president--corporate
development since October 1999. He was SBC's senior vice president--corporate
development from 1992 to October 1999. Previously, he was managing director--
corporate development from 1988 to 1992. Mr. Kahan is also a director of Bell
Canada and Amdocs Ltd., a leading provider of product-driven information
systems solutions to major telecommunications companies.
Charles J. Roesslein, age 51, has served as a senior vice president of SBC
since March 2000. From October 1999 to March 2000, he was president--SBC CATV,
responsible for SBC's cable television operations at Ameritech and Southern New
England Telephone. From 1997 to 1999, Mr. Roesslein was president and chief
executive officer of SBC Technology Resources, responsible for the development
of SBC's long-term technology strategies. He was vice president--information
services of Southwestern Bell Telephone Company and vice president--chief
information officer for SBC Services from 1995 to 1997, except for the period
from October 1996 to August 1997, when he served as SBC's vice president--
strategic planning. From 1990 to 1994, Mr. Roesslein served as vice president--
chief financial officer and treasurer for Southwestern Bell Telephone Company.
Previously, he held a variety of network, strategic planning, corporate
development, and finance positions with SBC companies, dating back to 1970.
Board and Committee Meetings
The board of directors has an audit committee and compensation committee.
There is no standing nominating committee of the board of directors. The audit
committee, which is composed of Messrs. Adams and Nakfoor:
. reviews the annual financial statements of Prodigy prior to their
submission to the board;
. consults with Prodigy's independent accountants to review financial
results, internal financial controls and procedures, audit plans and
recommendations; and
. recommends to the board the selection, retention or termination of
independent accountants and approve services provided by independent
accountants.
The compensation committee, composed of Messrs. Adams, Elias and Nakfoor,
makes recommendations to the board regarding the compensation of executive
officers, key managers and directors and administers Prodigy's stock plans.
During 1999, the board of directors held 13 meetings, including regular,
special and telephonic meetings. During 1999, the audit committee held two
meetings and the compensation committee held six meetings. In 1999, each
current director attended at least 75% of the meetings of the board of
directors and of the committees on which he serves held while he was a member,
except that Mr. Elias attended four of the six meetings of the compensation
committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Prodigy's
directors and executive officers, and persons who beneficially own more than
10% of Prodigy's common stock, to file reports of beneficial ownership and
changes in beneficial ownership with the Securities and Exchange Commission.
Except as described below, and based solely on its review of the copies of
such forms received or written representations from certain reporting persons,
Prodigy believes that during 1999 its directors, executive officers and 10%
stockholders complied with all applicable Section 16(a) filing requirements.
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Mr. Elias failed to file a timely Form 4 for the purchase of 45,000 shares
and the acquisition of an option to purchase 30,000 shares in February 1999,
Mr. Sanchez failed to file a timely Form 4 for the purchase of 5,000 shares in
April 1999, Mr. Henkel failed to file a timely Form 4 for the purchase of 5,000
shares upon exercise of stock options and the simultaneous sale of such shares
in September 1999 and Mr. Dougherty failed to file a timely Form 4 for the
purchase of 25,000 shares upon exercise of stock options and the simultaneous
sale of such shares in October 1999. All such transactions were reported in
subsequent filings.
Director Compensation
All directors are reimbursed for their expenses in attending board and
committee meetings in accordance with Prodigy's expense reimbursement policies.
Directors who are also employees of Prodigy do not receive additional
compensation for serving as directors.
In January 1999, Prodigy's board of directors and stockholders adopted
Prodigy's 1999 outside director stock option plan. The director plan permits
the issuance of up to 250,000 shares of common stock on the exercise of options
granted under the director plan. All options granted under the director plan
are non-statutory stock options. Pursuant to the director plan, each director
of Prodigy who was not then employed by Prodigy received on the closing of
Prodigy's initial public offering an option to purchase 30,000 shares of common
stock at an exercise price equal to the price per share at which shares were
sold in the initial public offering. Accordingly, Messrs. Sanchez, Elias and
Nakfoor each received 30,000 options on the closing of the initial public
offering at an exercise price of $15.00 per share. Thereafter, each new non-
employee director will receive, on his or her initial election to the board of
directors, an option to purchase 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. As a result, Mr. Adams received an option to purchase
30,000 shares at an exercise price of $25.625 on his initial election to the
board of directors on May 17, 1999. All options granted under the director plan
vest in four equal annual installments, based on continued service as a
director, and expire three months after termination of service as a director.
In the event of an acquisition of Prodigy, 50% of all then unvested options
will accelerate and become exercisable.
Compensation Committee Interlocks and Insider Participation
The current members of the compensation committee of the board of directors
are Messrs. Adams, Elias and Nakfoor. Mr. Salameh makes recommendations and
participates in discussions regarding executive compensation, but he does not
participate directly in discussions regarding his own compensation. No
executive officer of Prodigy 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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PRODIGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the risk factors,
selected financial information, pro forma financial statements and other
financial statements.
Prodigy is a leading national Internet service provider. In October 1996,
Prodigy launched Prodigy Internet, an open standards-based Internet access
service. Since the autumn of 1997, Prodigy has focused on expanding the Prodigy
Internet subscriber base and introducing additional value-added services.
Prodigy has also made strategic decisions to outsource its network and use
multiple vendors for outsourced customer services functions. As a result of
these initiatives, Prodigy has substantially reduced its fixed operating costs
and headcount.
In conjunction with the launch of Prodigy Internet in October 1996, Prodigy
began offering a plan allowing subscribers unlimited usage of Prodigy Internet
for a flat monthly fee without hourly usage charges. In December 1996, Prodigy
introduced a similar plan for Prodigy Classic. Since the introduction of
Prodigy's unlimited usage plans, the portion of revenues generated from hourly
usage charges has decreased substantially.
The results of operations of Internet service providers, including those of
Prodigy, 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 Prodigy typically offered free
service for one or two months to new subscribers. In selected distribution
channels, Prodigy has replaced free trial programs with prepaid term plans and
subscriber contract acquisition programs in order to attract enrollees who are
less likely to terminate service.
Prodigy 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. Additionally, under subscriber contract acquisition programs, Prodigy
makes payments to computer retailers in return for, among other things, the
retailers enrolling a customer onto Prodigy Internet, obtaining a signed
contractual commitment from the customer to a term subscription of one, two or
three years, and committed marketing of Prodigy Internet by the retailer in
connection with the retailers' other product advertisements. Prodigy's recent
experience has been that subscribers obtained through subscriber contract
acquisition programs have lower rates of cancellation than those obtained
through other channels. As a result of these lower rates of cancellation,
Prodigy has made the strategic decision to focus its marketing efforts towards
these subscriber acquisition programs.
Prodigy historically has experienced seasonality in its business, with:
. higher expense 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.
Prodigy believes that the seasonal reductions in timed usage revenues
historically experienced by Prodigy will be mitigated by the movement from
timed usage plans to unlimited usage plans as well as growth in Prodigy's
subscriber base, although Prodigy expects to continue to have higher expenses
during its first and fourth quarters. Due to the seasonality of its business,
as well as to other factors, Prodigy experiences quarterly fluctuations in its
operating results.
On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business of
U.S. Republic Communications, Inc., an indirect majority owned subsidiary of
VarTec, including the subscribers of the BizOnThe.Net Web hosting business. In
consideration for BizOnThe.Net, Prodigy paid a $9 million loan from VarTec to
U.S. Republic and issued 2,840,993 shares of Prodigy common stock to U.S.
Republic including
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727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.
Based on the value of the 2,840,993 shares of common stock currently issued
in connection with the BizOnThe.Net acquisition and the $9 million cash used to
repay the loan, the total purchase price is approximately $58 million. The
excess of the purchase price over the fair value of the assets acquired and
liabilities assumed of $49.6 million has been allocated to goodwill and will be
amortized on a straight line basis over three years.
Results of Operations
Prodigy's total revenues have two components: Internet and online service
revenues, consisting of subscription revenues from subscribers to Prodigy
Internet and Prodigy Classic, and other revenues, consisting of small business
Web hosting fees from Prodigy's ProdigyBiz division, fees from a management
contract with Telmex under which Prodigy provides certain management and
consulting services to Telmex's Internet subsidiary Prodigy Internet de Telmex,
and advertising and transaction fees. Subscription revenues include revenues
from hourly usage charges ("timed usage revenues").
Prodigy defines billable subscribers as subscribers who remain enrolled
beyond completion of the applicable trial period or who enroll in a money-back
guarantee program. Prodigy defines "Internet subscribers managed" to include
billable Prodigy Internet subscribers and billable Prodigy Internet de Telmex
subscribers but excluding subscribers to the Prodigy Classic service which was
discontinued in October 1999.
Recent Results
On April 25, 2000, Prodigy reported the following results for the quarter
ended March 31, 2000:
. total revenues of $65.0 million in the quarter ended March 31, 2000,
consisting of Prodigy Internet revenues of $56.9 million and other
revenues of $8.0 million, compared to total revenues of $35.9 million in
the quarter ended March 31, 1999, consisting of Prodigy Internet
revenues of $27.9 million, Prodigy Classic revenues of $6.7 million and
other revenues of $1.3 million;
. total operating expenses of $97.3 million in the quarter ended March 31,
2000, including amortization of subscriber acquisition costs of $15.3
million, compared to total operating expenses of $54.4 million in the
quarter ended March 31, 1999;
. an operating loss of $32.3 million in the quarter ended March 31, 2000,
compared to an operating loss of $18.5 million in the quarter ended
March 31, 1999;
. interest expense of $2.6 million in the quarter ended March 31, 2000,
compared to interest income of $1.0 million in the quarter ended March
31, 1999;
. $1.7 million in non-recurring costs related to planning for the
integration of the FlashNet and SBC subscriber bases, which was included
in general and administrative expense for the quarter ended March 31,
2000;
. a net loss of $34.9 million in the quarter ended March 31, 2000,
compared to a net loss of $15.7 million in the quarter ended March 31,
1999, with the increase due to amortization of subscriber acquisition
costs resulting from Prodigy's contract subscriber acquisition programs
and its Cable & Wireless consumer Internet subscriber acquisition in
July 1999 as well as amortization of goodwill and other intangibles
resulting from Prodigy's acquisition of BizOnThe.Net in October 1999;
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. net loss per share (basic and diluted) of $0.54 per share in the quarter
ended March 31, 2000, compared to $0.29 per share in the quarter ended
March 31, 1999;
. an increase in the number of Internet subscribers managed from 731,000
at March 31, 1999 to 1,526,000 at March 31, 2000;
. an increase in the number of Internet subscribers managed from 1,502,000
at December 31, 1999, consisting of 1,138,000 Prodigy Internet
subscribers and 364,000 Prodigy Internet de Mexico subscribers, to
1,526,000 at March 31, 2000, consisting of 1,115,000 Prodigy Internet
subscribers and 411,000 Prodigy Internet de Mexico subscribers; and
. a decrease in the number of Prodigy Internet subscribers from 1,138,000
at December 31, 1999 to 1,115,000 at March 31, 2000, primarily due to
the termination of Prodigy's contract acquisition program with Best Buy
on November 30, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Subscribers
The number of Prodigy Internet billable subscribers increased 633,000, or
125%, from 505,000 billable subscribers at December 31, 1998 to 1,138,000 at
December 31, 1999. Prodigy Classic subscribers decreased from 166,000 at
December 31, 1998 to 70,000 on October 1, 1999, the date Prodigy Classic was
discontinued, and zero thereafter. Total Internet subscribers managed increased
by 997,000, or 197%, from 505,000 at December 31, 1998 to 1,502,000 at December
31, 1999. Billable subscribers of Prodigy Internet de Telmex accounted for
approximately 364,000 of the number of Internet subscribers managed at December
31, 1999.
Internet revenues
Subscription revenues from Prodigy Internet increased $73.5 million, or 91%,
from $80.7 million in 1998 to $154.2 million in 1999 due to the increase in
billable subscribers discussed above. Subscription revenues from Prodigy
Classic decreased $32.6 million, or 68%, from $48.2 million in 1998 to $15.6
million in 1999 due to the discontinuation of service as of October 1999. Timed
usage revenues decreased $2.7 million, or 64%, from $4.2 million in 1998 to
$1.5 million in 1999. The decrease in timed usage revenues was primarily
attributable to the decrease in Prodigy Classic subscribers during 1999.
Other revenues
Other revenues increased by $12.0 million, or 166%, from $7.2 million in 1998
to $19.2 million in 1999. The increase in other revenues consisted of $6.8
million in management fees relating to Prodigy's January 1999 agreement with
Telmex to manage the Prodigy Internet de Telmex Internet subscribers, $3.0
million from Prodigy's Web hosting business including revenues from
BizOnThe.Net, which was acquired in October 1999, $5.4 million attributable to
transition services revenue related to Prodigy's July 1999 acquisition of
Internet subscribers of Cable & Wireless USA, Inc., and a $1.0 million increase
in advertising display revenues primarily due to Prodigy's successful program
of re-establishing control over advertising content displayed on Prodigy
Internet's home page. These increases were offset, in part, by a decrease of
$4.4 million from Prodigy's African Internet operations that were sold in
October 1998.
Cost of revenues
Cost of revenues includes network and content expenses. Network expense
includes costs associated with Prodigy's hosting operations center in Yorktown,
New York as well as the costs of outsourced network provider services. Content
expenses consist of the costs of developing, or obtaining from third parties,
content for inclusion in Prodigy's service offerings. Cost of revenues
increased $8.8 million, or 9%, from $93.4 million in 1998 to $102.2 million in
1999 primarily related to increased network charges incurred by Prodigy in
1999.
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Network usage increased 65% in 1999 compared to 1998 primarily due to the shift
of the subscriber base from timed usage to unlimited usage plans which result
in higher hourly usage. However, network expense increased only 11% or $10.3
due to a monthly "cap" (based on average hourly usage by subscribers) contained
in the network agreement between Prodigy and Splitrock. The increase in network
charges was offset, in part, by a decrease of $1.5 million, or 40%, in content
expense attributable to the discontinuation of the Prodigy Classic service.
Sales and marketing
Sales and marketing expense includes advertising, salaries of sales and
marketing personnel and other general sales and marketing costs. Sales and
marketing expense increased $17.2 million, or 41%, from $41.7 million in 1998
to $58.9 million in 1999 . The increase in marketing costs was primarily
attributable to an increase of $5.6 million in production, media and other
costs associated with Prodigy's "There is a Choice" and "Are you a Prodigy?"
advertising campaigns that appeared during 1999. In early 1998, Prodigy
postponed certain of its marketing programs in response to network performance
issues encountered during the transition period accompanying the initial
rollout of the Splitrock network. Additionally, Prodigy spent $4.4 million in
establishing Prodigy's Business Solutions division and marketing its product
offerings and $1.4 million in marketing Prodigy's Hispanic Internet offering.
Sales and marketing expense also reflects increased bad debt provisions of $2.8
million related to amounts due from subscribers for contractual early
termination penalties. As a result of the significant increase in contract
subscribers during the period, Prodigy experienced a corresponding increase in
accounts receivable and the related provision for doubtful accounts associated
with the penalty fees charged on terminated subscriber contracts.
Product development
Product development expense includes research and development costs and other
product development costs. Product development expense increased $1.4 million,
or 13%, from $10.9 million in 1998 to $12.3 million in 1999. Product
development activities in 1999 centered on implementing the billing,
provisioning and customer service infrastructure to support Prodigy's small
business Web hosting business, improving the system infrastructure supporting
the Prodigy Internet de Telmex subscriber base, including Year 2000 remediation
efforts, developing a new home page for Prodigy Internet and developing future
Prodigy Internet product offerings and service enhancements.
General and administrative
General and administrative expense increased $17.1 million, or 38%, from
$44.6 million in 1998 to $61.7 million in 1999. The increase was primarily
attributable to substantially higher customer service charges incurred in
connection with the 125% increase of billable Prodigy Internet subscribers
achieved in the year, especially the heavy volume of enrollments emanating from
the contract subscriber acquisition program during the second half of 1999.
This increase primarily reflected a $10.2 million increase in customer service
charges, a $2.7 million increase in 800 number charges, and a $2.1 million
increase in billing and credit card interchange fees. General and
administrative expense also increased in 1999 due to increased charges for
accounting and legal fees, recruiting, office temporary workers and
compensation expense resulting from the issuance of stock options priced below
market.
Depreciation and amortization
Depreciation and amortization expense increased $5.7 million, or 35%, from
$16.1 million in 1998 to $21.8 million in 1999. The increase was primarily due
to $4.0 million of goodwill, tradename and other intangibles' amortization
incurred in connection with the BizOnThe.Net acquisition. In addition, the 1999
period reflects depreciation attributable to a new accounting system as well as
subscriber management software implemented during 1999.
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Amortization of subscriber acquisition costs
In May 1999, Prodigy entered into an agreement with Cable & Wireless to
purchase the dial-up access Internet subscriber base of that entity. At the
closing on July 20, 1999, Prodigy paid Cable & Wireless $40.9 million in cash.
Upon settlement of the transaction during the first quarter of 2000, Prodigy
received a purchase price reduction of $10.1 million from the original payment
due to fewer subscribers transitioning to the Prodigy Internet service than
originally projected. During 1999, Prodigy also entered into agreements with
major retailers of personal computers for the purpose of stimulating Prodigy
Internet enrollments. Under these agreements, Prodigy made payments to the
retailers in exchange for the retailers enrolling a customer onto Prodigy
Internet, obtaining a signed contractual commitment from the customer to a term
subscription of one, two or three years, and committed marketing of Prodigy
Internet by the retailers in connection with the retailers' other product
advertisements. These payments amounted to $100, $250, or $400, respectively,
for a term subscription of one, two or three years at Prodigy's standard
monthly rates. Payments pursuant to these agreements amounted to $161.7 million
through December 31, 1999. Prodigy has accounted for these payments, and the
purchase price paid for the acquired Cable & Wireless subscribers that migrated
to Prodigy Internet, as subscriber acquisition costs and amortizes these costs
over the term of the underlying subscriber contract or 36 months, respectively.
During 1999, Prodigy incurred amortization of subscriber acquisition costs of
$20.4 million consisting of $15.6 million related to the subscriber acquisition
contracts and $4.8 million related to the acquired Cable & Wireless
subscribers.
Interest and other income
Interest income, increased $3.6 million, from $1.5 million in 1998 to $5.1
million in 1999. The increase is primarily due to the investment of the cash
proceeds of Prodigy's initial public offering in February 1999 in short-term
money market instruments. These increases were offset by interest expense of
$2.9 million incurred to service notes payable during 1999.
During the year ended December 31, 1999, Prodigy recognized a gain of $3.3
million upon the sale of an equity investment. In addition, Prodigy recognized
a gain of $1.7 million when it paid $.75 million in full settlement of a
promissory note in the principal amount of $2.0 million plus all accrued
interest.
Income Taxes
Prodigy has evaluated the positive and negative evidence bearing on the
realizability of its deferred tax assets, which are comprised principally of
net operating loss carry forwards. Under the applicable accounting standards,
Prodigy has considered its history of losses and concluded that it is more
likely than not that Prodigy will not realize these favorable tax attributes.
Accordingly, the related deferred tax assets have been fully reserved.
Operating Loss
As a result of the foregoing factors, Prodigy's operating loss increased
$17.8 million, or 25%, from $70.5 million in 1998 to $88.2 million in 1999 and
its net loss increased $15.4 million, or 24%, from $65.1 million in 1998 to
$80.5 million in 1999.
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Subscription revenues from Prodigy Internet increased $51.2 million, or 174%,
from $29.5 million in 1997 to $80.7 million in 1998. The number of Prodigy
Internet billable subscribers increased 284,000, or 129%, from 221,000 at
December 31, 1997 to 505,000 billable subscribers at December 31, 1998,
representing 36% and 75% of total billable subscribers at December 31, 1997 and
December 31, 1998, respectively, Prodigy Internet subscribers accounted for 44%
and 80% of total network usage during 1997 and 1998, respectively. Subscription
revenues from Prodigy Classic decreased $50.6 million, or 51%, from $98.8
million in 1997 to $48.2 million in 1998 as the number of Prodigy Classic
billable subscribers decreased from 392,000 at December 31, 1997 to 166,000 at
December 31, 1998. Total billable subscribers increased by 58,000, or 9% from
613,000 at December 31, 1997 to 671,000 at December 31, 1998. Time usage
revenues decreased $7.8 million, or 65%, from $12.0 million in 1997 to $4.2
million in 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 $1.3
million, or 22%, from $5.9 million in 1997 to $7.2 million in 1998 primarily
due to increased sales by Prodigy's African Internet operations which were sold
on October 1, 1998. For the years 1997 and 1998, the other revenues derived
from Prodigy'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 increased by
$1.9 million from $134.2 million in 1997 to $136.1 million in 1998.
Cost of Revenues
Cost of revenues increased from $92.0 million in 1997 to $93.4 million in
1998. This increase was primarily attributable to increased network charges
incurred by Prodigy in 1998. Network usage increased 74% in 1998 compared to
1997 primarily due to the shift of the subscriber base from timed usage to
unlimited usage plans, but network charges increased only 40% because of a
monthly cap, based on average hourly usage by subscribers, contained in the
network agreement between Prodigy and Splitrock. This increase was offset in
part by a reduction in content expense, which declined as a result of the
renegotiation and/or termination of content contracts associated with Prodigy
Classic and Prodigy's content outsourcing agreement with Excite.
Sales and Marketing
Sales and marketing expense decreased from $59.6 million in 1997 to $41.7
million in 1998, a decrease of $17.9 million, or 30%. 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, Prodigy temporarily deferred 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.
Product Development
Product development expense decreased from $11.4 million in 1997 to $10.9
million in 1998, a decrease of $.5 million, or 4%. During 1997, product
development efforts were primarily focused on stabilization and enhancement of
Prodigy Internet 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 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 commercial application and value-added
services.
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General and Administrative
General and administrative expense decreased from $56.3 million to 1997 to
$44.6 million in 1998, a decrease of $11.7 million, or 21%. 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. As a result of the grant of employee stock options with
exercise prices deemed to be below fair market value, Prodigy recorded
compensation expense of $.7 million in 1998.
Depreciation and Amortization
Depreciation and amortization expense decreased $5.3 million, or 25%, from
$21.4 million in 1997 to $16.1 million in 1998. During the second half of 1997,
Prodigy entered into a third party network agreement realizing the cash
benefits of reduced capital expenditures for telecommunications equipment.
Moreover, during 1997 the remaining Prodigy Internet capitalized product
development costs were amortized whereas 1998 was a year of product
stabilization and integration into the new network.
Interest and other income
Interest income/expense, net improved from an expense of $1.3 million in 1997
to income of $.2 million in 1998. This improvement was due to higher cash
balances and reduced levels of borrowing during 1998.
In 1997, Prodigy 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
net realizable value, and an $.8 million loss on the sale of its African
cellular telephone operations. In 1998, Prodigy recognized a gain of $2.9
million from the sale of its African Internet operations and a gain of $2.3
million from the sale of internally developed customer service and content
applications.
Operating Loss
As a result of the foregoing factors, Prodigy's operating loss decreased from
$119.6 million in 1997 to $70.5 million in 1998. Its net loss decreased from
$132.8 million in 1997 to $65.1 million in 1998.
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Restructuring Charges
In response to changes in its business environment, and to decrease cash
outflows and more efficiently manage its business, Prodigy has incurred
restructuring and other special costs. The table below presents restructuring
and other special costs incurred and/or expended by Prodigy from January 1,
1997 through December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
-------- ------- -------
(in millions)
<S> <C> <C> <C>
Accrued Restructuring Costs beginning of
period: ......................................... $ 11.5 $ 7.9 $ 4.7
-------- ------- -------
Restructuring Accrual:
Network termination costs (A)..................... 4.7 -- --
Reductions-in-force (B)........................... 2.9 -- --
Content production (C)............................ 0.6 -- --
Facility closing (D).............................. 1.6 -- --
Headquarters lease termination.................... -- -- --
Idle leased space at former headquarters'
location......................................... -- -- --
-------- ------- -------
Subtotal, period accruals......................... 9.8 -- --
-------- ------- -------
Restructuring expenditures:
Network termination costs......................... -- (0.8) (0.1)
Reductions-in-force............................... (3.1) (1.0) --
Content production................................ -- (0.6) --
Facility closing.................................. -- (0.8) (0.8)
Headquarters lease termination.................... (7.8) -- --
Idle leased space at former headquarters'
location......................................... (2.5) -- --
-------- ------- -------
Subtotal, period expenditures..................... (13.4) (3.2) (0.9)
-------- ------- -------
Accrued restructuring costs at period end......... $ 7.9 $ 4.7 $ 3.8
======== ======= =======
</TABLE>
- --------
(A) In connection with the sale of its network, Prodigy incurred liabilities
related primarily to early termination payments and other contractual
obligations for certain non-cancelable network related agreements. Prodigy
expects to use this reserve in full during the year ending December 31,
2001
(B) In 1997, Prodigy implemented a restructuring plan to reduce costs through
job elimination and, as a result, recorded a charge of $2.9 million.
Approximately 80 employees throughout Prodigy were terminated. The entire
reserve was used in 1997 and 1998 to make severance payments to employees
identified as part of the original plan.
(C) Prodigy 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. The entire reserve
was used in 1997 and 1998 to make severance payments to employees
identified as part of the original plan.
(D) Prodigy's Medford, Massachusetts facility has been closed and a charge of
$1.6 million recorded in 1997 to account for the costs of employee
terminations and lease cancellation. This reserve was fully utilized at
December 31, 1999.
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Former International Operations
The historical results discussed above include the operating results of
Prodigy's Africa and China operations, which began in late-1995 and mid-1996,
respectively. The revenue and net loss from Prodigy's Africa and China
operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
-------- -------- -------
(in millions)
<S> <C> <C> <C>
Revenue........................................... $ 3.2 $ 4.4 --
Net loss.......................................... (8.5) 0.2 --
</TABLE>
Prodigy 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 Prodigy recorded a $0.8 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.
Liquidity and Capital Resources
Since formation, Prodigy has relied on private sales of equity securities
(totaling $294.1 million through December 31, 1999), borrowings and its initial
public offering in February 1999 with net proceeds of $157.2 million to fund
its operations. Prodigy has incurred significant losses since inception and, at
December 31, 1999, had an accumulated deficit of $373.3 million and a working
capital deficit of $128.1 million comprised of current liabilities of $179.9
million offset by current assets of $51.8 million. For the years ended December
31, 1997, 1998 and 1999, Prodigy incurred negative cash flow from operations of
$114.0 million, $68.0 million and $40.1 million, respectively.
The decrease in cash used in operating activities from 1997 to 1998 resulted
from decreased net losses partially offset by the timing of payable
settlements. The increase in cash used in operating activities from 1998 to
1999 resulted from timing of payable settlements and increased amortization
expense which offset the increased net losses.
Net cash from investing activities increased to $2.6 million provided from
investing activities in 1998 from $15.3 million used in 1997 due to the cash
proceeds of $5.2 million from the sale of assets and equity investments
combined with decreased capital expenditures. Net cash from investing
activities decreased in 1999 to $212.6 million used in investing activities due
to cash payments related to the acquisition of BizOnThe.Net, the acquisition of
subscribers from Cable & Wireless USA, subscriber contract acquisition programs
and increased capital expenditures.
In May 1999, Prodigy entered into an agreement with Cable & Wireless USA,
Inc. to purchase the dial-up Internet access subscriber base of that entity for
a purchase price of approximately $41.6 million in cash as determined by the
number of qualified Cable & Wireless subscribers who transitioned to Prodigy
Internet.
Commencing in July 1999 through the end of the year Prodigy paid
approximately $154.6 million in consideration for subscribers obtained through
its subscriber contract acquisition programs. Prodigy has $7.1 million accrued
related to these programs as of December 31, 1999. Prodigy has capitalized
these costs and will amortize these costs over the terms of the underlying
subscriber contracts (one, two or three years). At December 31, 1999, Prodigy
had capitalized related subscriber contract acquisition costs of $161.7 million
and had recognized amortization expense of $15.6 million. In February 2000,
Prodigy entered into a similar program with another retailer. Total amounts to
be paid under this program will depend on the number of subscriber contracts
received and could be material.
Prodigy's capital expenditures for the year ended December 31, 1999 were
$11.3 million, primarily for the purchase of data processing equipment,
compared to capital expenditures of $2.6 million in 1998. Prodigy anticipates
that its capital expenditures will be approximately $25 million in 2000.
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Net cash from financing activities in 1998 and 1999 and future financing
requirements are discussed in the following paragraphs.
To fund operations, Prodigy borrowed $16.4 million from Banco Inbursa, S.A.,
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, Prodigy borrowed $30.0 million from Bank
of America National Trust and Savings Association 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 below.
In August 1998, Telmex purchased 6,125,000 shares of common stock from
Prodigy for gross proceeds of $49.0 million, and in July 1998 Carso Global
Telecom purchased 1,375,000 shares of common stock from Prodigy for gross
proceeds of $11.0 million. Prodigy 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.
In August 1998, Prodigy obtained a $35.6 million line of credit commitment
from Carso Global Telecom. This credit facility, originally due to expire on
December 31, 1999, was cancelled in August 1999 when it was replaced by the
larger credit facility described below.
In February 1999, Prodigy sold 11,200,000 shares of common stock in its
initial public offering, including 2,000,000 shares of common stock sold to
Telmex, for aggregate net proceeds of $157.2 million.
In August 1999, Prodigy obtained a $130 million revolving line of credit from
Carso Global Telecom to fund its subscriber contract acquisition programs
during the third and fourth quarter of 1999. The terms of this line of credit
allow Prodigy to borrow, repay and reborrow amounts in minimum increments of $1
million. Advances are due 30 days after borrowing, but Prodigy is permitted to
rollover advances into new advances at its election. Advances are
uncollateralized and, during the third and fourth quarters of 1999 bore
interest of 9% and 12%, respectively. During the fourth quarter, Prodigy
borrowed the maximum amount permitted under this line of credit. At December
31, 1999, the line of credit had been paid down to $110.2 million. Prodigy
repaid $13.8 million of these notes in January 2000 and the remaining $96.4
million is due on April 7, 2000.
At December 31, 1999, Prodigy had available cash and cash equivalents of
$35.5 million ($21.1 million at March 31, 2000). Prodigy is currently
experiencing substantial negative cash flow each month and expects to continue
to experience negative cash flows through 2000. Telmex has unconditionally
committed to provide financing, either through capital and/or debt financing,
of up to $200 million to fund Prodigy's operations through February 2001. The
terms of this financing will be determined at the time such financing, if any,
is provided.
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement includes a preliminary summary
of principal terms and conditions, estimated expenses and the structuring fee
due Citibank at closing. The letter agreement does not constitute a firm
financing commitment from Citibank, and Prodigy cannot assure that the Citibank
financing will be completed. The Citibank financing is subject to the issuance
by SBC of a performance guarantee and satisfaction of the following conditions:
. satisfactory completion of Citibank's due diligence review of Prodigy;
. in Citibank's determination, the absence of any material adverse change
in the financial markets or in the financial condition of operations of
Prodigy;
. negotiation and execution of mutually satisfactory documentation for the
financing;
. the receipt of specified ratings from ratings agencies; and
. the receipt of internal Citibank credit approval and any other approvals
and legal opinions as Citibank may deem necessary or advisable.
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In connection with the Citibank financing, Prodigy and SBC have agreed in
principle that SBC will provide a contingent performance guarantee in exchange
for which Prodigy will grant SBC a contingent warrant to purchase 537,924
shares of Prodigy common stock for $1.00 per share. The performance guarantee
to be provided by SBC requires that, in the event Prodigy becomes unable to
continue to perform its service obligations under the subscriber contracts, SBC
will either perform Prodigy's service obligations directly or replace Prodigy
with a substitute Internet service provider. See "Transactions with SBC" at
page 93. Management believes that the Citibank financing or, if not completed,
the Telmex financing will be sufficient to enable Prodigy to meet its planned
expenditures through at least February 2001. Prodigy cannot assure that the
Citibank financing will be completed. If the Citibank financing or other
comparable third party financing is completed, Prodigy does not expect to
obtain financing through the Telmex commitment.
Prodigy's future financing requirements will depend on a number of factors,
including Prodigy's operating performance and increases in operating expenses
associated with growth in Prodigy's business. Based upon its current operating
plan, Prodigy believes that it will require significant external financing in
order to continue to expand its consumer business. Prodigy is considering a
number of alternatives to raise additional financing, including public or
private equity or debt financing, bank loans, strategic partner and joint
venture arrangements, vendor financing, leasing arrangements or a combination
of these sources. There can be no assurance that Prodigy will be able to obtain
sufficient financing on acceptable terms.
Year 2000 Compliance
The year 2000 issue was the cause of great concern before January 1, 2000.
The concern was that computer programs that have time-sensitive software may
not recognize the date "00" as the year 2000 but rather as the year 1900.
Currently, most computer systems are functioning properly and the compliance
and remediation work effected prior to January 1, 2000 was effective in
preventing Year 2000 problems. Computer experts still warn, however, of
residual consequences from the year 2000 issue. Although Prodigy currently
believes that its computer systems are Year 2000 compliant, its operations and
financial condition could suffer if Prodigy experiences any residual Year 2000
problems.
Prodigy maintains its Internet operations and internal operating systems.
Furthermore, Prodigy relies on third party vendors for the provision of
computerized billing and network operations and services. Residual Year 2000
problems experienced by Prodigy and its third party vendors could negatively
impact Prodigy's internal operating systems, as well as the computer systems of
the third party vendors and ultimately affect Prodigy's ability to provide
customer and business services.
Prodigy has evaluated its internal systems and programs related to both the
delivery of the Prodigy Internet service and the daily operations of the
business and has made any necessary changes. In addition, Prodigy has contacted
all vendors to verify Year 2000 compliance. Any application that was not
compliant by December 1999 was deactivated and removed.
Recently Issued Accounting Pronouncements
In November 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 100, "Restructuring and Impairment Charges." In
December 1999, the SEC issued SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of
impairment charges. SAB No. 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue
recognition issues. Prodigy has concluded that these SABs do not have a
material impact on its financial position or its results of operations.
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FLASHNET MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the risk factors,
selected financial information and other financial statements and related notes
of FlashNet included elsewhere in this document.
Overview
FlashNet is a nationwide provider of consumer Internet access services and
business services. FlashNet provides its Internet access in approximately 900
cities throughout the United States. As of December 31, 1999, FlashNet had
accumulated a subscriber base of approximately 235,000 users, including
approximately 3,200 customers for its business services.
In addition to access services as a national Internet service provider,
FlashNet offers a broad range of business services that enable businesses to
outsource their Internet and electronic commerce activities. FlashNet believes
that attracting additional business customers will result in a more stable,
higher quality customer base. FlashNet further believes that its business
services enable it to acquire new corporate customers more effectively and
provide many cross-selling opportunities.
During the quarter ended June 30, 1999, FlashNet contracted with several
vendors for the purchase of both new and refurbished personal computers.
FlashNet began reselling the personal computers through a bundled service
offering combining Internet access with a computer in exchange for a two or
three year contractual commitment for Internet service. In addition, FlashNet
also resold personal computers without Internet access. On September 30, 1999,
FlashNet discontinued its program of reselling refurbished personal computers
with bundled Internet service due to operational and cash considerations.
However, FlashNet expects to continue to sell new personal computers with
bundled Internet service on a limited basis.
Revenues
FlashNet's revenues generally are composed of:
. consumer access services;
. business services;
. shipping revenues; and
. set-up fees and other revenues.
Consumer access services revenues are composed of annual prepaid and monthly
subscriptions for consumer dial-up access to the Internet. FlashNet offers
prepaid and monthly subscribers a full money-back guarantee on cancellation of
their service if made within 30 days of initiating service. Amounts received on
the sale or renewal of prepaid annual and monthly subscriptions are recorded as
deferred revenue through the 30-day money-back cancellation period and then
amortized over the remaining period in which service is provided. Subscribers
may cancel their subscriptions at any time following the initial 30-day period,
in which case FlashNet charges the subscriber a $50 cancellation fee and
refunds any remaining prepaid amounts after the charge. Cash received from
subscribers is applied to working capital when received, and no cash reserves
are maintained for potential refund obligations.
Business services consisting of dedicated access services also are offered on
a prepaid annual and monthly subscription basis. The revenue recognition
policies and customer guarantee practices described above for consumer access
services also apply to dedicated access business services. Revenues from the
sale of business services involve set-up fees, which are included in set-up
fees and other revenues in the consolidated statement of operations, and a
service contract that provides for monthly billing. These business services
revenues are recognized as services are provided.
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Shipping revenues are derived primarily from the shipment of refurbished or
new personal computers issued in connection with FlashNet's bundled service
offering. The fees are non-refundable and are recognized as the personal
computers are shipped.
FlashNet derives set-up fees and other revenues through a variety of sources,
including set-up fees for subscribers to its consumer access services and
business services, sales of merchandise and hardware, sign-up and renewal fees
for independent representatives in its network marketing program and
advertising revenues. Set-up fees are charged to all new customers of consumer
access and to business services customers. These one-time set-up fees are non-
refundable and are deferred and amortized over a one-year period. Sales of
merchandise and hardware without bundled internet access and associated non-
refundable shipping fees are recognized as earned. Consulting services have
been provided from time to time on a limited basis by FlashNet on both a fixed
fee and a time-and-materials basis and are recognized as the services are
performed. Non-refundable fees are paid by representatives in FlashNet's
network marketing program at the commencement of participation in the program
and for renewal of participation on each anniversary of the representative's
commencement date. These fees are deferred and amortized over a one-year period
following the month of initial sign-up or renewal, as the case may be.
Advertising revenues are recognized as advertising services are provided.
Costs And Expenses.
FlashNet's costs include:
. cost of services that are primarily related to the number of
subscribers;
. costs related to merchandise and hardware sold and cost of material for
FlashNet's network marketing program;
. amortization of and loss on personal computers issued to customers;
. selling, customer support and general and administrative expenses that
are associated more generally with operations; and
. depreciation and amortization, which are related to the size of
FlashNet's network and capital lease obligations.
Cost of services is comprised of the costs incurred in providing consumer
access services and business services. These costs include costs for providing
local telephone lines into each company-owned point of presence, the use of
third-party networks and the use of leased lines to connect each company-owned
point of presence and third-party point of presence to its hub and to connect
its hub to the Internet backbone.
Cost of other revenues consists of costs of installation software, premium
support costs, cost of merchandise and hardware sold and the cost of user
guides and other materials for representatives and distributors involved in
FlashNet's network marketing program.
Amortization of customer hardware is the result of amortizing the cost of
capitalized personal computers issued to customers, over the life of the
subscriber contract with the amortization rate adjusted for estimates for non-
recoverability of equipment and uncollectable balances on cancelled contracts.
Loss on customer hardware resulted from personal computers returned by customer
which FlashNet was unable to recover from its vendors.
Cost of shipping is related primarily to the cost incurred by FlashNet to
have personal computers shipped by a third-party distributor, in connection
with FlashNet's bundled service offering.
Selling, general and administrative costs are incurred in the areas of sales
and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Sales and marketing expenses
consist primarily of media and production costs, commissions and expenses
related to FlashNet's network marketing program, sales and marketing overhead,
and personnel costs. General and administrative expenses
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consist of personnel and related costs associated with FlashNet's executive and
administrative functions and other miscellaneous expenses. Operations and
customer support expenses consist primarily of expenses associated with daily
support of FlashNet's subscriber base, including customer service and technical
support.
FlashNet has experienced operating losses since its inception as a result of
efforts to build its network infrastructure, customer base and internal
staffing, develop its systems and expand into new markets.
Results of Operations
The following table sets forth the percentage of total revenues represented
by items on FlashNet's consolidated statements of operations for the periods
indicated. Operating results for any period are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Consumer access services................................ 63% 68% 82% 77%
Business services....................................... 1 3 6 5
Shipping revenues....................................... -- -- -- 6
Set-up fees and other................................... 36 29 12 12
---- --- --- ---
Total revenues........................................ 100 100 100 100
---- --- --- ---
Operating costs and expenses:
Cost of services (including amortization of and loss on
customer hardware)..................................... 64 47 44 50
Cost of shipping........................................ -- -- -- 5
Cost of other revenues.................................. 13 5 1 5
Sales and marketing..................................... 118 59 31 52
General and administrative.............................. 28 20 20 26
Operations and customer support......................... 23 21 22 26
Depreciation and amortization........................... 15 12 11 12
---- --- --- ---
Total expenses........................................ 261 164 129 176
---- --- --- ---
Loss from operations...................................... (161) (64) (29) (76)
Interest expense (net).................................... (4) (4) (9) --
---- --- --- ---
Loss before extraordinary item............................ (165) (68) (38) (76)
Extraordinary item--Loss on early extinguishment of debt.. -- -- -- (4)
---- --- --- ---
Net loss.................................................. (165) (68) (38) (80)
==== === === ===
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
FlashNet experienced substantial growth in revenues in 1999 as compared to
1998. Total revenues increased 50% to $40.3 million in 1999 from $26.9 million
in 1998.
As reflected by the increase in consumer access and business services
revenues, subscriptions and renewals increased 42% to $31.1 million in 1999
from $22.0 million 1998. The increase in access service revenues was primarily
due to an increase in FlashNet's subscriber base of 37% to 235,000 at December
31, 1999 from 172,000 at December 31, 1998.
Shipping revenues of $2.4 million in 1999, were the result of FlashNet's
personal computer offer which began in June. Shipping fees are non-refundable
and are recognized as the personal computers are shipped. On September 30,
1999, FlashNet discontinued its program of reselling refurbished personal
computers with bundled Internet service due to operational and cash
considerations. FlashNet expects to continue to resell new computers with
bundled Internet service but anticipates less volume under this product
offering.
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Subscriber set-up fees and other revenues increased 42% to $4.7 million in
1999 from $3.3 million 1998. The increase was primarily the result of a $1.3
million increase in revenues from computer hardware and related add-on sales
such as upgraded processors and CD Roms.
Cost of Services
Cost of services increased 69% to $19.9 million in 1999 from $11.8 million in
1998, primarily due to a $4.1 million increase in dial tone costs and an
increase of $700,000 in Internet access charges resulting from the larger
subscriber base and greater usage per subscriber as subscribers spent more time
online and amortization of and loss on hardware of $3.1 million, as described
below. Cost of services as a percentage of total revenues increased to 50% from
44% during 1999 and 1998, respectively, primarily due to amortization of and
loss on customer hardware partially offset by the increases in total revenues
leveraging fixed costs and greater network efficiencies.
Cost of Other Revenues
Cost of other revenues increased to $2.0 million in 1999 from $0.3 million in
1998, respectively. Cost of other revenues as a percentage of total revenues
increased to 5% in 1999 from 1% in 1998. This increase was mainly due to the
costs associated with FlashNet's sales of computer hardware and various add-ons
such as upgraded processors and CD Roms.
Cost of Shipping, Amortization of and Loss on Customer Hardware
In June 1999, FlashNet began reselling personal computers through a bundled
service offering combining Internet access with a computer in exchange for a
two or three year contractual commitment. The costs of the personal computers
have been capitalized and are being amortized over the life of the subscriber
contract with the amortization term adjusted for estimates for the non-
recoverability of equipment and uncollectible balances on cancelled contracts.
Amortization expense for 1999 was approximately $1.5 million. On September 30,
1999, FlashNet discontinued its program of reselling refurbished personal
computers with bundled Internet service due to operational and cash
considerations. FlashNet expects to continue to resell new computers with
bundled Internet service but anticipates less volume under this product
offering. Loss of customer hardware resulted from personal computers returned
by customers which FlashNet was unable to recover from its vendor. See Note 12
to consolidated financial statements for further discussion. Both the
amortization of, and loss on, customer hardware have been included in cost of
services.
Sales and Marketing Expenses
Sales and marketing expenses increased 156% to $21.0 million in 1999 from
$8.2 million in 1998. Sales and marketing expenses as a percentage of total
revenues increased to 52% from 31% during 1999 and 1998, respectively. The
increases, both in absolute dollars and as a percentage of total revenues, were
primarily due to increased advertising and labor costs associated with
FlashNet's "Free Web PC" offer which began in June 1999 and was discontinued on
September 30, 1999 with respect to the refurbished PCs. FlashNet aggressively
marketed the "Free Web PC" offer during the third quarter, resulting in an
increase in advertising and promotion expense of $8.1 million including $1.0
million in agency fees in 1999 versus 1998. As a result of the tremendous
response to the offer, FlashNet increased the number of full-time and contract
employees in the sales department. Labor costs increased $2.9 million in 1999
versus 1998, which included $1.2 million spent on outsourcing the excess call
volume to third party call centers. In addition, commissions paid to FlashNet's
network marketing representatives increased $1.8 million in 1999 versus 1998.
Due to increases in subscribers obtained by such representatives FlashNet
suspended much of its advertising efforts in 1998 to conserve cash resources.
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General and Administrative Expenses
General and administrative expenses increased 96% to $10.3 million in 1999
from $5.3 million in 1998. General and administrative expenses as a percentage
of total revenues increased to 26% from 20% during 1999 and 1998, respectively.
The increases were primarily due to increases in payroll, credit card fees and
spending on facilities. Payroll costs increased $0.9 million in 1999 versus
1998, primarily due to growth in headcount as a result of FlashNet's continued
growth. Credit card processing fees increased $0.9 million in 1999 versus 1998,
due to the increase in sales as a result of the growth in FlashNet's subscriber
base. Facility costs increased $1.5 million in 1999 versus 1998, as a result of
FlashNet relocating to new office facilities. Professional fees increased $1.2
million in 1999 versus 1998, primarily as a result of costs associated with
FlashNet's financing activities and consulting fees.
Operations and Customer Support Expenses
Operations and customer support expenses increased 74% to $10.5 million in
1999 from $6.0 million in 1998. Operations and customer support expenses as a
percentage of total revenues increased to 26% from 22% during 1999 and 1998,
respectively. The increases, both in absolute dollars and as a percentage of
total revenues, were primarily due to increased labor costs and increased
telephone charges associated with FlashNet's "Free Web PC" offer. Due to the
significant increase in call volume as a result of the offer, FlashNet's
telephone charges increased $0.7 million in 1999 versus 1998. In addition, the
number of full-time and contract employees in the customer support department
increased by approximately 80 personnel during 1999. FlashNet also added
additional technical personnel to support the larger subscriber base. As a
result, labor costs increased $3.8 million in 1999 versus 1998.
Depreciation and Amortization
Depreciation and amortization expense increased 66% to $5.1 million in 1999
from $3.1 million in 1998. The increase primarily resulted from additional
purchases of equipment and software and equipment acquired under capital leases
needed to support FlashNet's expanding network. Depreciation and amortization
expense as a percentage of total revenues increased to 13% for 1999 from 11% in
1998.
Net Interest Expense
Net interest expense decreased 100% to $0 million from $2.5 million in 1998.
Interest expense decreased to $1.3 million in 1999 from $2.5 million in 1999
due to lower average debt levels throughout 1999. Interest and other income
increased to $1.4 million from $.1 million during 1999 and 1998, respectively,
offsetting interest expense recorded during the twelve month period. The
increase is due to interest earned on the net proceeds from FlashNet's initial
public offering effected March 16, 1999, which FlashNet has used for working
capital and the purchase of temporary investments consisting of cash, cash
equivalents, and short-term investments with original maturity dates of three
months or less at the date of purchase.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt represents the write-
off of unamortized debt discount costs of $1.4 million related to the repayment
of the $6.5 million Ascend note and $0.3 million of unamortized debt discount
and other costs related to the repayment of a $5.0 million term loan from
Goldman Sachs.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
FlashNet's total revenues increased $9.4 million, or 53%, to $26.9 million in
1998 from $17.5 million in 1997. Subscriptions and renewals increased $10.0
million, as reflected by the increase in consumer access services revenues, and
approximately $1.0 million was attributable to increased sales of business
services.
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These increases were offset by a $1.7 million decrease in subscriber set-up
fees and other revenues, resulting primarily from the elimination of set-up
fees applicable to annual prepaid consumer accounts made in connection with a
price increase for all consumer access and business access services in the
fourth quarter of 1997. New subscriptions increased in large part from the
expansion of FlashNet's network marketing program, which accounted for 27,521
new subscriber acquisitions in 1998 as compared to 10,050 new subscriber
acquisitions in 1997. Consumer access services revenues increased 84% in 1998
over 1997, primarily as a result of increases in FlashNet's subscriber base and
in average revenues per subscriber due to the price increase in the fourth
quarter of 1997. Business services revenues increased 180% in 1998 from 1997 as
FlashNet expanded its offerings of dedicated and broadband access and other
business services in response to escalating customer demand. Revenues from set-
up fees and other revenues decreased 34% in 1998 from 1997, primarily as a
result of FlashNet's decision in the fourth quarter of 1997 to discontinue
charging set-up fees for prepaid subscriptions and due to the receipt in 1997
of consulting fees of $1.0 million for a project that was completed in that
year.
Cost of Services
Cost of services increased $3.6 million, or 44%, to $11.8 million in 1998
from $8.2 million in 1997. Of this increase, $3.1 million was attributable to
an increase in dial tone costs associated with a higher level of subscribers on
FlashNet's network. As a percentage of total revenues, cost of services
decreased to 44% in 1998 from 47% in 1997 primarily due to the increases in
consumer access and business services partially offset by a decline in set-up
fees and other revenues in 1998. As a percentage of revenues derived from
consumer access services and business services, cost of recurring revenues
decreased to 50% in 1998 from 66% in 1997. This decrease resulted from the
price increase in the fourth quarter of 1997 and greater network efficiencies.
Cost of Other Revenues
Cost of other revenues decreased $450,000, or 56%, to $349,000 in 1998 from
$799,000 in 1997. As a percentage of total revenues, cost of other revenues
decreased to 1% in 1998 from 5% in 1997. The decrease in cost of other
revenues, both in absolute dollars and as a percentage of total revenues, was
primarily the result of cost savings of $315,000 attributable to FlashNet's
obtaining a royalty-free license for Netscape software in the fourth quarter of
1997 that was previously purchased by it and resold to customers.
Sales and Marketing Expenses
Sales and marketing expenses decreased $2.1 million, or 20%, to $8.2 million
in 1998 from $10.3 million in 1997. As a percentage of total revenues, sales
and marketing expenses decreased to 31% in 1998 from 59% in 1997. This
decrease, both in absolute dollars and as a percentage of total revenues, was
attributable to a $3.8 million decline in media expenses offset by an $1.5
million increase in expenses associated with FlashNet's network marketing
program. FlashNet's reduction in media expenditures in 1998 was primarily due
to its decision to conserve cash resources and, to a lesser extent, to its
decision to purchase national media spots rather than local media spots, with
the latter being generally more expensive on a per-impression basis. See the
subsection entitled "Overview."
General and Administrative Expenses
General and administrative expenses increased $1.8 million, or 53%, to $5.3
million in 1998 from $3.5 million in 1997. General and administrative expenses
increased primarily due to an increase in the number of staff members and
increased spending on facilities and supplies, due primarily to FlashNet's
expansion of its network marketing program. Facility costs increased $0.6
million in 1998 versus 1997, as FlashNet expanded its office space for the
additional employees. Labor costs increased $0.5 million in 1998 versus 1997.
In addition, credit card fees increased $0.4 million as a result of increased
sales. As a percentage of total revenues, general and administrative expenses
remained constant at 20%.
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Operations and Customer Support Expenses
Operations and customer support expenses increased $2.3 million, or 63%, to
$6.0 million in 1998 from $3.7 million in 1997. As a percentage of total
revenues, operations and customer support expenses increased to 22% in 1998
from 21% in 1997. These increases were primarily due to the addition of new
customer care and technical personnel to support a larger subscriber base.
Depreciation and Amortization
Depreciation and amortization expense increased $1.0 million, or 49%, to $3.1
million in 1998 from $2.1 million in 1997. This increase primarily resulted
from additional purchases of equipment and software that were needed to support
FlashNet's expanding network. As a percentage of total revenues, depreciation
and amortization expense decreased slightly to 11% in 1998 from 12% in 1997.
Net Interest Expense
Net interest expense increased $1.8 million to $2.5 million in 1998 from
$714,000 in 1997. This increase was primarily attributable to interest paid on
borrowings of $6.5 million from Ascend in the fourth quarter of 1997 and, to a
lesser extent, capitalized leases for the acquisition of additional networking
equipment.
Net Loss
Net loss decreased $1.4 million to $10.3 million in 1998 from $11.7 million
in 1997. As a percentage of total revenues, net loss decreased to 38% in 1998
from 68% in 1997. In 1998, the net loss attributable to common shareholders
included $2.7 million related to preferred stock deemed distributions and
accretion.
Liquidity and Capital Resources
FlashNet's principal capital and liquidity needs historically have related to
its sales and marketing activities, the development and expansion of its
network infrastructure, the establishment of its customer service and support
operations and general working capital needs. The capital needs of FlashNet
have historically been met by receipts from its prepaid subscriber customer
base, additional capital from outside sources, including vendor capital leases
and other vendor financing arrangements and through private placements of its
securities. FlashNet's initial public offering, completed in March 1999,
provided FlashNet with additional capital of $56.3 million.
FlashNet's operating activities used net cash of approximately $34.9 million
during 1999. Net cash used in operations resulted primarily from net losses,
adjusted for depreciation and amortization expense, the purchase of personal
computers included in FlashNet's new bundled service offering, the increase in
accounts receivable and the decrease in deferred revenue. In addition, FlashNet
funded a $700,000 note receivable bearing interest at 12% per annum maturing in
April 2000, which is convertible, at the option of FlashNet, into common stock
of a public company focused on developing communication services.
Cash used by investing activities has consisted primarily of equipment
purchases for point of presence and network expansion. For 1999, capital
expenditures amounted to approximately $8.5 million. Additionally, FlashNet
received approximately $2.9 million in proceeds from sale/leasebacks of data
communication equipment. At December 31, 1999 FlashNet does not have any
material commitments for capital expenditures.
Cash provided by financing activities was approximately $47.2 million during
1999. During January 1999, FlashNet received proceeds of a $5.0 million term
loan from Goldman Sachs. During March 1999, FlashNet effected its initial
public offering. Net proceeds to FlashNet were approximately $56.3 million.
Cash used for financing activities included $6.5 million and $5.0 million for
the early repayment of the Ascend note and the Goldman Sachs term loan,
respectively, during March 1999. Principal payments under capital lease
obligations were $3.1 million for 1999.
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Cash used in operating activities of $5.2 million during 1998 primarily was
attributable to a $10.3 million net loss, partially offset by $3.0 million in
depreciation expense and $1.9 million in non-cash interest expense. Cash used
in investing activities during 1998 was $1.4 million, principally as a result
of the purchase of property, plant and equipment to support increases in
FlashNet's subscriber base. Cash provided from financing activities during 1998
was $6.1 million, which consisted primarily of $7.8 million, after transaction
fees, raised in a private placement of convertible preferred stock offset by
debt principal payments.
During the quarter ended June 30, 1999, FlashNet began reselling personal
computers, or PCs, through a bundled service offering combining Internet access
with a computer in exchange for a two or three year contractual commitment for
Internet service. The initial response to this "Free PC" program was much
greater than anticipated and FlashNet's vendors could not service the demand
for refurbished computers thus causing significant delays in the fulfillment of
these customer orders. These delays caused the customers to place a significant
number of calls into FlashNet's call center. To handle this demand, FlashNet
increased the number of its telephone representatives by approximately 75%. The
resulting increased costs, coupled with the actual cost of the computers,
resulted in a significant decrease in FlashNet's cash balance. Although
FlashNet discontinued the "Free PC" program after September 30, 1999, it
continued to receive a significant number of calls into its call center
throughout the fourth quarter. Additionally, the delays in the fulfillment of
the customer orders caused a larger number of customers to cancel their service
contracts, which in turn caused FlashNet to incur a loss on its computer
hardware. Due to the operational and cash requirements of the "Free PC"
program, FlashNet was forced to make reductions in its cash expenditures in
other operational areas and discontinued the "Free PC" program to preserve its
cash resources. FlashNet identified its sales and marketing efforts as the
primary area to reduce its expenditures. The reduction in these efforts, which
was mainly accomplished by reducing its advertising and media expenditures, has
resulted in a decrease in new subscribers and cash receipts from revenue-
generating activities. The selling of new personal computers with bundled
Internet service require additional cash commitments. However, sales of new
computers with bundled Internet service have not been and are not expected to
be significant. Because the pending merger with Prodigy requires FlashNet to
maintain its basic infrastructure, FlashNet continues to conduct its operations
in a manner generally consistent with its historical practices (except
curtailing certain aspects of its sales and marketing as described above) and
has not sought additional financing nor has any commitments for financing at
December 31, 1999. FlashNet will be required to seek additional financing
sufficient to meet its working capital needs for fiscal 2000 if the merger with
Prodigy is not consummated. Based on FlashNet's recent efforts to raise
capital, management has determined that it most likely cannot raise additional
capital or financing on reasonable terms. The Report of Independent Auditors
dated March 3, 2000 with respect to FlashNet's consolidated financial
statements for the year ended December 31, 1999, contains an explanatory
paragraph regarding FlashNet's ability to continue as a going concern.
FlashNet's only plan at this time with respect to the going concern is the
merger with Prodigy and FlashNet has no contingency plans presently in place
should the merger with Prodigy fail to occur. If the merger is not consummated,
management could be forced to make significant reductions in its headcount and
expenditure levels, and would most likely be forced to raise capital, if
obtainable, on unfavorable terms. FlashNet does not believe that its current
cash and cash equivalents are sufficient to meet its working capital needs for
the next 12 months.
On April 26, 2000, Prodigy agreed to loan FlashNet up to $2,000,000 to fund
operations. Advances will be unsecured, bear interest at an annual rate of 12%
and are due October 26, 2000. As of May 5, 2000, no amounts had been advanced
under these arrangements. As of April 10, 2000, FlashNet had cash and cash
equivalents of approximately $1.0 million. However, in the judgment of
FlashNet's management, Prodigy's loan commitment coupled with FlashNet's cash
on hand should be sufficient to finance its operations until the closing of the
merger.
Impact of Year 2000
In prior years, FlashNet discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, FlashNet completed its remediation and
testing of systems. As a result of those planning and
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implementation efforts, FlashNet experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
FlashNet expensed approximately $200,000 during 1999 in connection with
remediating its systems. FlashNet is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. FlashNet will continue
to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the Year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Changes in and Disagreement with Independent Accountants
On August 20, 1999, FlashNet dismissed Deloitte & Touche LLP as its
independent accountants and appointed Ernst & Young LLP as its auditors for the
year ending December 31, 1999. The audit committee of FlashNet's board of
directors recommended the change in independent accountants and the change was
approved by the board of directors. Deloitte & Touche LLP's reports on
FlashNet's financial statements for the two most recent fiscal years ended
December 31, 1997 and 1998, did not contain an adverse opinion, disclaimer of
opinion, qualification or modification as to audit scope or accounting
principles. In addition, during the two most recent years and through August
20, 1999 there were no disagreements with Deloitte & Touche LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope and procedures, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP
to make reference to the subject matter of the disagreements in connection with
their reports on the financial statements of FlashNet.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business of
U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business. At
the closing, Prodigy repaid a $9 million loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy common stock to U.S. Republic including
727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.
Under accounting principles generally accepted in the United States, the
acquisition of BizOnThe.Net was accounted for under the purchase method of
accounting and accordingly the cost to acquire BizOnThe.Net was allocated to
the assets acquired and liabilities assumed based on their respective fair
values with the excess allocated to goodwill. The valuations and other studies
required to determine the fair value of the BizOnThe.Net assets acquired and
liabilities assumed were substantially completed and the respective adjustments
to the historical values are included in the balance sheet of Prodigy as of
December 31, 1999. The total purchase price is subject to change based on the
calculation of the amount by which the net book value of the acquired assets
and assumed liabilities as of October 5, 1999 exceeded or was less than the net
book value as of July 31, 1999, which is expected to be finalized in the second
quarter of 2000, and earn-out adjustments to be finalized over the next two
years. Changes in the purchase price based on these adjustments will be
recorded as corresponding increases or decreases in goodwill at the time the
related items are resolved and are not expected to exceed $10 million. Based on
the value of the 2,840,993 shares of common stock currently issued in
connection with the BizOnThe.Net acquisition and the $9 million cash used to
repay the loan, the total purchase price is approximately $58 million,
including transaction costs of $829 thousand. The excess of the purchase price
over the fair value of net assets acquired is approximately $50 million.
On November 5, 1999 Prodigy agreed to acquire FlashNet Communications, Inc.
In the merger, Prodigy will issue 0.35 share of Prodigy common stock for each
outstanding share of FlashNet common stock. Based on the number of FlashNet
shares outstanding on March 31, 2000, Prodigy will issue approximately
5,000,000 shares to complete the merger, representing approximately 7% of
Prodigy's then outstanding shares. In addition, Prodigy will assume all
FlashNet stock options and warrants outstanding as of the date of the merger.
Under accounting principles generally accepted in the United States, the
acquisition of FlashNet will be accounted for under the purchase method of
accounting. Accordingly, the cost to acquire FlashNet will be allocated to the
assets acquired and liabilities assumed based on their respective fair values,
with the excess to be allocated to goodwill. The valuations and other studies
required to determine the fair value of the FlashNet assets acquired and
liabilities assumed have not been performed and, accordingly, the related
adjustments reflected in the unaudited pro forma combined financial information
are preliminary and subject to further revisions and adjustments. For purposes
of this presentation, the carrying amounts of the FlashNet tangible net assets
acquired was assumed to approximate fair value. In addition, Prodigy expects to
recognize intangible assets such as subscriber relationships and trade name.
Therefore, the excess of purchase price over the historical net book value of
the net assets of FlashNet has been classified on the pro forma balance sheet
as "Goodwill and Other Intangibles." After the completion of the FlashNet
merger, Prodigy will arrange for an independent appraisal of significant assets
and liabilities of FlashNet. Upon completion of the determination of fair
value, the purchase price will be allocated to specific assets and liabilities
of FlashNet. It is anticipated that there will be reductions to and increases
in the carrying amounts of assets. Accordingly, the final valuation could
result in materially different allocations of the purchase price compared to
the amounts presented in the following pro forma information, resulting in
corresponding changes in depreciation and amortization amounts. Based on the
value of the estimated 5,000,000 shares of Prodigy common stock to be issued in
connection with the FlashNet acquisition, the total purchase price is
approximately $135.6 million including transaction costs incurred to date of
$2.2 million. The goodwill and other intangibles acquired, based on the excess
of the purchase price over the net book value of net assets to be acquired is
currently estimated to be $126 million.
128
<PAGE>
On November 19, 1999, SBC and Prodigy agreed to establish a strategic
relationship in which:
. Prodigy will contribute substantially all of its assets and liabilities,
and transfer its employees to a new limited partnership, called the
operating partnership, that will operate Prodigy's business;
. SBC will acquire an approximately 43% indirect interest in Prodigy upon
completion of the SBC transaction and approximately 39.5% indirect
interest after the FlashNet merger;
. SBC will contribute to the operating partnership routers, servers and
associated hardware used in connection with SBC's consumer and small
business Internet operations and that are selected by Prodigy because
Prodigy determines that they will be useful in connection with the
provision of services to SBC's customers and Prodigy's customers after
the closing;
. SBC will contribute to the operating partnership intangible assets
consisting primarily of royalty-free licenses to use SBC's trademarks in
connection with the marketing and operation of the Prodigy Internet
service and Prodigy's right to manage SBC's existing Internet customers;
. Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses;
. SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 690,000 existing Internet
subscribers--the wholesale price to be paid by SBC to Prodigy for the
Prodigy Internet service that SBC will resell to its existing Internet
subscribers will equal SBC's average retail price as of the closing less
reasonable and necessary expenses actually incurred by SBC in serving
its existing Internet subscribers;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period in exchange for fees of $40 to $75
per subscriber--all new subscribers obtained for Prodigy by SBC will be
Prodigy subscribers;
. SBC has agreed to pay Prodigy a penalty if SBC does not obtain 1,200,000
additional internet subscribers for Prodigy over the three-year period,
with the size of the penalty based on the number of subscribers actually
obtained by SBC who pay at least one monthly bill from Prodigy--for
example, the penalty will range from $165,000,000 if SBC acquires no new
subscribers for Prodigy, to $105,000,000 if SBC acquires 600,000 new
subscribers for Prodigy, to no penalty if SBC acquires 1,200,000 new
subscribers for Prodigy;
. SBC will have the exclusive right to market its long-distance phone
service, local phone service, wireless phone services, paging services
and related calling services to Prodigy's subscribers, so long as SBC's
service offerings are competitive with service offerings from other
providers;
. SBC will be Prodigy's exclusive network provider so long as SBC offers
its network services to Prodigy at the most favorable rates that it
offers to other similar purchasers, so long as SBC's terms are
competitive with those offered by other providers;
. SBC will have the exclusive right to provide telecommunications,
advertising, telecommunications e-commerce and Internet telephony
applications in conjunction with the Prodigy Internet service to
Prodigy's subscribers so long as SBC's terms are competitive with those
offered by other providers;
. SBC will be the exclusive provider of electronic yellow and white pages
and city guides Prodigy's subscribers;
. Prodigy will convert all outstanding common stock into Prodigy Class A
common stock; and
. Prodigy will issue to an SBC subsidiary one share of Prodigy Class B
common stock in consideration of $100.
129
<PAGE>
The tangible and intangible assets received in conjunction with the SBC
transaction will be recorded at fair value on the date the assets are
contributed. Based on the following assumptions, the fair value of the assets
received has been estimated at $968.75 million:
. SBC will receive approximately 50,000,000 partnership units, which
assuming that SBC's book capital account equals its imputed capital
account and that the partnership interests will be equivalent in value
to the Prodigy Class A common stock, will be convertible into
approximately 50,000,000 shares of Prodigy Class A common stock based on
pro forma shares outstanding after giving effect to the BizOnThe.Net and
FlashNet acquisitions; and
. the value of one share of Prodigy common stock was approximately $19.38
on December 31, 1999, which when multiplied by 50,000,000 shares,
results in an estimated value of $968.75 million.
For purposes of the pro forma financial information, and pending preparation of
a valuation to allocate the purchase price, the tangible and intangible assets
to be received have been aggregated and presented in total in the SBC Assets
balance sheet caption. These assets which are principally related to the
royalty-free licenses to use the SBC trademarks, which will be amortized over
the three year term of the agreement, and the routers, servers and associated
hardware, which are also assumed to have a three year life. If the amortization
period of any of these assets is longer than the three year period assumed for
purposes of the pro forma financial information, the corresponding annual
amortization expense will be decreased.
In addition to the equity investment, SBC will purchase from Prodigy the
Prodigy Internet service and resell these services to its existing Internet
service subscribers. Prodigy will charge SBC a fixed price per subscriber for
its services, to be fixed as of the closing date, and will incur incremental
costs associated with providing these services to SBC, principally related to
Prodigy's acquisition of additional network services and customer service.
Adjustments have not been made to revenue or cost of revenue included in the
pro forma statement of operations to reflect the services to be provided to the
existing SBC subscribers as contractual agreements have not been finalized with
respect to these services. Prodigy currently estimates that the revenue from
the sale of the subscribers services will approximate $16.61 per subscriber per
month, the costs of revenue associated with each subscriber will be
approximately $7.00 per month and customer service costs will approximate $1.70
per subscriber per month. Actual amounts ultimately incurred could differ
materially from these estimated amounts.
Additionally, the SBC agreement includes other services that Prodigy and SBC
will provide to each other. Impacts to revenue and expenses associated with
these services, however, cannot be estimated at this time and accordingly have
not been included in the pro forma statement of operations.
The unaudited pro forma condensed combined balance sheets give effect to the
acquisition of FlashNet and the SBC transaction as if these had occurred on
December 31, 1999. The acquisition of BizOnThe.Net is reflected in the
historical balance sheet of Prodigy as of December 31, 1999.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1999 give effect to the acquisition of BizOnThe.Net and
FlashNet, and the SBC transaction as if these occurred on January 1, 1999 and
are based on the historical results of operations of Prodigy, BizOnThe.Net and
FlashNet and the amortization associated with the assets acquired in the SBC
transaction. The results of BizOnThe.Net for the fourth quarter of 1999 are
included in the results of operations of Prodigy for the year ended
December 31, 1999.
The unaudited pro forma condensed combined financial statements are based on
the preliminary estimates and assumptions set forth in the notes to these
statements that have been made solely for purposes of developing this pro forma
information. The unaudited pro forma condensed combined financial statements
are not necessarily indicative of the results that would have been achieved had
these transactions been completed as of the dates indicated or that may be
achieved in the future.
130
<PAGE>
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
related notes and other financial information pertaining to Prodigy,
BizOnThe.Net and FlashNet, including the Prodigy and FlashNet "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors" included elsewhere in this document.
131
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Prodigy and BizOnThe.Net
For the Year Ended December 31, 1999
(In thousands, except per share amounts and shares outstanding)
<TABLE>
<CAPTION>
January 1, 1999
Year Ended through Pro Forma
December 31, 1999 September 30, 1999 Adjust- Prodigy and
Prodigy BizOnThe.Net ments BizOnThe.Net
----------------- ------------------ --------- ------------
<S> <C> <C> <C> <C>
Revenues:
Internet and online
service revenues...... $ 169,810 $ 169,810
Web hosting............ $19,069 19,069
Other.................. 19,228 19,228
---------- ------- --------- ----------
189,038 19,069 208,107
Operating costs and ex-
penses:
Costs of revenue....... 102,199 249 102,448
Amortization of
subscriber acquisition
costs................. 20,448 20,448
Sales and marketing.... 58,854 12,418 71,272
Product development.... 12,341 12,341
General and
administrative........ 61,652 6,720 68,372
Depreciation and
amortization.......... 21,792 277 $ 14,153 1(a) 36,222
---------- ------- --------- ----------
277,286 19,664 14,153 311,103
---------- ------- --------- ----------
Operating income
(loss)................. (88,248) (595) (14,153) (102,996)
Interest income / (ex-
pense), net............ 2,262 (473) 473 1(b) 2,262
Gain on sale of equity
investment............. 3,319 3,319
Gain on settlement of
note payable........... 1,714 1,714
Gain on settlement of
note receivable........ 500 500
Other................... (35) (35)
---------- ------- --------- ----------
Net loss................ $ (80,488) $(1,068) $ (13,680) $ (95,236)
========== ======= ========= ==========
Basic and diluted loss
per share.............. (1.34) (1.53)
========== ==========
Weighted average number
of common and common
equivalent shares out-
standing............... 59,958,111 2,156,041 1(c) 62,114,152
========== ========= ==========
</TABLE>
132
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
(in thousands except subscriber, share and per share information)
BizOnThe.Net
1. (a) Adjustment of amortization and depreciation to reflect the
amortization of goodwill and other intangible assets which will be amortized
over a period of three years, the expected period of benefit. The goodwill has
been calculated and the purchase price allocated based on the fair value of the
BizOnThe.Net net assets acquired, including other intangible assets acquired,
as follows:
<TABLE>
<S> <C>
Cash portion of purchase price.................................... $ 9,000
Value of stock portion of purchase price.......................... 48,439
Transaction costs................................................. 829
--------
Purchase price.................................................... 58,268
Add: fair value of liabilities assumed............................ 621
Less: fair value of tangible assets acquired...................... (3,091)
Less: fair value of intangible assets acquired
Developed software.............................................. (700)
Subscriber relationships........................................ (1,900)
Tradename....................................................... (3,600)
--------
Goodwill.......................................................... $ 49,598
========
The amortization of intangible assets was calculated as follows:
Total goodwill and intangible assets............................. $ 55,798
Average life of intangible assets................................ 3 years
--------
Annual amortization.............................................. $ 18,599
--------
278 days of amortization......................................... $ 14,153
--------
</TABLE>
The BizOnThe.Net liabilities, which were assumed by Prodigy, exclude
liabilities included in the September 30, 1999 financial statements on an
allocated basis as those amounts were paid by VarTec/U.S. Republic prior to
closing.
The 2,840,993 shares of common stock issued in connection with the
BizOnThe.Net acquisition were valued at $17.05 per share which represents the
average market value of a Prodigy share immediately before and after the terms
of the acquisition were announced. This amount excludes the 727,272 shares to
be issued in 2001 pending resolution of the related contingencies.
(b) Adjustment to remove interest expense on VarTec note payable to reflect
the repayment of the note in connection with the acquisition of BizOnThe.Net.
(c) Adjustment of the weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share to reflect issuance of
2,840,993 shares of common stock as of January 1, 1999, including the 727,272
shares held in escrow. The 727,272 shares which are issuable contingent upon
attainment of certain earnings targets have been excluded from the weighted
average shares as the effect would be anti-dilutive.
133
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Balance Sheets
Prodigy and FlashNet
As of December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Prodigy
and
Prodigy FlashNet Adjustments FlashNet
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:.................
Cash........................... $ 35,473 $ 7,045 $ 42,518
Accounts receivable, net....... 10,314 4,393 14,707
Note receivable................ 700 700
Due from affiliate............. 1,801 1,801
Prepaid expense................ 2,793 2,661 5,454
Other current assets........... 1,437 904 2,341
-------- ------- -------- --------
Total current assets.......... 51,818 15,703 67,521
-------- ------- -------- --------
Restricted cash................. 4,692 4,692
Property and equipment, net..... 18,201 17,783 35,984
Customer hardware............... 5,579 5,579
Subscriber Acquisition Costs.... 182,838 182,838
Goodwill and other intangibles.. 87,321 $125,982 2(a) 213,303
Software Licenses............... 338 338
Other assets.................... 1,118 182 1,300
-------- ------- -------- --------
Total assets.................... $345,988 $39,585 $125,982 $511,555
======== ======= ======== ========
Liabilities and Stockholders'
Equity
Current liabilities.............
Notes payable.................. $110,154 $110,154
Lease obligations--current
portion....................... 412 $ 4,129 4,541
Accounts payable and other
accrued expenses.............. 48,342 9,262 $ 2,215 2(a) 59,819
Accrued compensation........... 3,095 913 4,008
Unearned revenue............... 14,062 10,215 24,277
Accrued purchase and
restructuring costs........... 3,849 3,849
-------- ------- -------- --------
Total current liabilities..... 179,914 24,519 2,215 206,648
Lease obligations--long-term
portion........................ 983 5,410 6,393
-------- ------- -------- --------
Total Liabilities............... 180,897 29,929 2,215 213,041
Stockholders' equity
Common stock................... 645 68,776 (68,726)2(b) 695
Warrants to purchase common
stock......................... 3,330 10,893 2(c) 14,223
Additional paid-in capital--
common stock.................. 539,054 1,909 119,150 2(b) 658,204
(1,909)2(b)
Accumulated deficit............ (373,275) (62,932) 62,932 2(b) (373,275)
Unearned compensation ......... (1,427) 1,427 2(b)
-------- ------- -------- --------
166,424 9,656 123,767 299,847
Less note receivable from
stockholder................... (1,333) (1,333)
-------- ------- -------- --------
Total stockholders' equity.... 165,091 9,656 123,767 298,514
-------- ------- -------- --------
Total liabilities and
stockholders' equity......... $345,988 $39,585 $125,982 $511,555
======== ======= ======== ========
</TABLE>
134
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Prodigy, BizOnThe.Net and FlashNet
For the Year Ended December 31, 1999
(In thousands, except per share amounts and shares outstanding)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Prodigy,
Prodigy and Adjust- BizOnThe.Net
BizOnThe.Net FlashNet ments and FlashNet
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues:
Internet and online
service revenues....... $ 169,810 $ 31,104 $ 200,914
Web hosting............. 19,069 19,069
Other................... 19,228 9,147 28,375
----------- -------- ---------- -----------
208,107 40,251 248,358
Operating costs and
expenses:
Costs of revenue........ 126,325 23,877 126,325
Amortization of
subscriber acquisition
costs.................. 20,448 20,448
Sales and marketing..... 71,272 20,967 92,239
Product development..... 12,341 12,341
General and
administrative......... 68,372 20,783 89,155
Depreciation and
amortization........... 36,222 5,094 41,994 3(a) 83,310
----------- -------- ---------- -----------
311,103 70,721 41,994 423,818
----------- -------- ---------- -----------
Operating loss........... (102,996) (30,470) $ (41,994) (175,460)
Interest income / (ex-
pense), net............. 2,262 97 2,359
Gain on sale of equity
investment.............. 3,319 3,319
Gain on settlement of
note payable............ 1,714 1,714
Gain on settlement of
note receivable......... 500 500
Other.................... (35) (35)
----------- -------- ---------- -----------
Net loss before
extraordinary item...... $ (95,236) $(30,373) $ (41,994) $ (167,603)
=========== ======== ========== ===========
Basic and diluted loss
per share............... $ (1.53) $ (2.50)
=========== ===========
Weighted average number
of common and common
equivalent shares out-
standing................ 62,114,152 5,000,000 3(b) 67,114,152
=========== ========== ===========
</TABLE>
135
<PAGE>
FlashNet
2. (a) Adjustment to calculate goodwill and other intangible assets and to
allocate the purchase price over the estimated fair value of the FlashNet net
assets acquired calculated as follows:
<TABLE>
<S> <C>
Value of stock portion of purchase price........................ $119,200
Fair value of converted options and warrants.................... 14,223
Transaction costs............................................... 2,215
--------
Purchase price.................................................. 135,638
Less: estimated fair value of net assets acquired............... (9,656)
--------
Goodwill and other intangibles.................................. $125,982
========
</TABLE>
The value of the common stock to be issued to FlashNet is $23.84 a share which
represents the average market value of a share of Prodigy common stock
immediately before and after the terms of the acquisition were announced.
(b) Adjustment to eliminate the stockholders equity of FlashNet and reflect
the issuance of approximately 5,000,000 shares of common stock based on the
exchange ratio of .35 share of Prodigy common stock for each share of FlashNet
common stock valued at $23.84 per share. This results in common stock of $50
and $119,150 of additional paid in capital.
(c) Adjustment to recognize the fair value of FlashNet warrants and vested
options converted to Prodigy warrants and options based on the exchange ratio
of .35 share of Prodigy common stock for each share of FlashNet common stock.
All options and warrants that Prodigy assumes in the acquisition will be
fully vested. Additionally, prior to the acquisition, FlashNet will terminate
all FlashNet stock options that have exercise prices equal to or higher than
the market price of FlashNet common stock. Assuming the merger occurred on
December 31, 1999, approximately 210,000 options to purchase Prodigy common
stock would be issued on a fully-vested basis at the time of the merger.
Additionally, Prodigy will assume the warrant held by Ascend Communications,
Inc. to purchase 1,360,000 shares of FlashNet common stock at an exercise price
of $.003 and convert it into a warrant to purchase 476,000 shares of Prodigy
common stock at an exercise price of $.009 based on the exchange ratio.
A Black-Scholes option pricing model was utilized to determine the value of
these options and the warrant using the following assumptions:
<TABLE>
<S> <C>
Dividend Yield: None
Volatility: 60%
Risk free rate: 5.76% for the options; 6.12% for the warrant
Expected Option Life: 2 years for the options; 8.2 years for the warrant
Fair Value of Underlying
common stock: $23.84 per share
</TABLE>
There will be no unvested options or warrants assumed.
3. (a) Adjustment to amortization to reflect amortization of the FlashNet
goodwill and intangible assets based on an estimated three year useful life.
(b) Adjustment of the weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share to reflect the issuance
of approximately 5,000,000 shares of common stock as of January 1, 1999.
136
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Balance Sheets
Prodigy, FlashNet and SBC
As of December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Prodigy Prodigy,
and SBC FlashNet
FlashNet Adjustments and SBC
--------- ----------- ----------
<S> <C> <C> <C>
Assets
Current assets:........................
Cash.................................. $ 42,518 $ 42,518
Accounts receivable, net.............. 14,707 14,707
Note receivable....................... 700 700
Due from affiliate.................... 1,801 1,801
Prepaid expense....................... 5,454 5,454
Other current assets.................. 2,341 2,341
--------- ----------
Total current assets................. 67,521 67,521
--------- ----------
Restricted cash........................ 4,692 4,692
Property and equipment, net............ 35,984 35,984
Customer hardware...................... 5,579 5,579
Subscriber Acquisition costs........... 182,838 182,838
Goodwill and other intangibles......... 213,303 213,303
Software Licenses...................... 338 338
SBC assets............................. $968,750 4(a) 968,750
Other assets........................... 1,300 1,300
--------- -------- ----------
Total assets........................... $ 511,555 $968,750 $1,480,305
========= ======== ==========
Liabilities and Stockholders' Equity
Current liabilities....................
Notes payable......................... $ 110,154 $ 110,154
Lease obligations--current portion.... 4,541 4,541
Accounts payable and other accrued
expenses............................. 59,819 59,819
Accrued compensation.................. 4,008 4,008
Unearned revenue...................... 24,277 24,277
Accrued purchase and restructuring
costs................................ 3,849 3,849
--------- -------- ----------
Total current liabilities............ 206,648 206,648
Lease obligations--long-term portion... 6,393 6,393
--------- -------- ----------
Total Liabilities...................... 213,041 213,041
Minority Interest in Operating
Partnership........................... $499,302 4(b) 499,302
Stockholders' equity
Common stock.......................... 695 (695)4(c)
Class A common stock.................. 695 4(c) 695
Class B common stock.................. 4(c)
Warrants to purchase common stock..... 14,223 14,223
Additional paid-in capital--common
stock................................ 658,204 469,448 4(b) 1,127,652
Accumulated deficit................... (373,275) (373,275)
--------- -------- ----------
299,847 469,448 769,295
Less note receivable from
stockholder.......................... (1,333) (1,333)
--------- -------- ----------
Total stockholders' equity........... 298,514 469,448 767,962
--------- -------- ----------
Total liabilities and stockholders'
equity.............................. $ 511,555 $968,750 $1,480,305
========= ======== ==========
</TABLE>
137
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Prodigy, BizOnThe.Net, FlashNet and SBC
For the Year Ended December 31 , 1999
(In thousands, except per share amounts and shares outstanding)
<TABLE>
<CAPTION>
Pro Forma Prodigy,
Prodigy, SBC BizOnThe.Net
BizOnThe.Net Adjust- FlashNet
and FlashNet ments and SBC
------------ --------- ------------
<S> <C> <C> <C>
Revenues:
Internet and online
service revenues.................... $ 200,914 $ 200,914
Web hosting.......................... 19,069 19,069
Other................................ 28,375 28,375
----------- --------- -----------
248,358 248,358
Operating costs and expenses:
Costs of revenue..................... 126,325 126,325
Amortization of subscriber acquisi-
tion costs.......................... 20,448 20,448
Sales and marketing.................. 92,239 92,239
Product development.................. 12,341 12,341
General and administrative........... 89,155 89,155
Depreciation and amortization........ 83,310 $322,917 5(a) 406,227
----------- --------- -----------
423,818 322,917 5(a) 746,735
----------- --------- -----------
Operating loss........................ (175,460) (322,917) (498,377)
Interest income / (expense), net...... 2,359 2,359
Gain on sale of equity investment..... 3,319 3,319
Gain on settlement of note payable.... 1,714 1,714
Gain on settlement of note receiv-
able................................. 500 500
Other................................. (35) (35)
Minority interest in net loss......... 193,265 5(b) 193,265
----------- --------- -----------
Net loss before extraordinary item.... $ (167,603) $(129,652) $ (297,255)
=========== ========= ===========
Basic and diluted loss per share...... $ (2.50) $ (4.43)
=========== ===========
Weighted average number of common and
common equivalent shares
outstanding.......................... 67,114,152 1 5(c) 67,114,153
=========== ========= ===========
</TABLE>
138
<PAGE>
SBC Transaction
4. (a) Adjustment to recognize the fair value of the assets to be received
pursuant to the investment, issuance, contribution and assumption agreement
between Prodigy and SBC.
(b) The SBC interest in the operating partnership is reflected as minority
interest in the Prodigy pro forma combined balance sheet calculated as follows:
<TABLE>
<S> <C>
Pro Forma Prodigy, FlashNet net assets........................ $ 298,514
Contributed SBC Assets........................................ 968,750
----------
Partnership net assets........................................ 1,267,264
SBC Interest.................................................. 39.5%
----------
SBC Minority Interest....................................... $ 499,302
==========
</TABLE>
As a result of this transaction, Prodigy's interest in the partnership net
assets exceeds Prodigy's carrying value by $469,448 which has been reflected as
additional paid in capital.
(c) Reflects conversion of shares of Prodigy common stock into shares of
Prodigy Class A common stock and issuance of one share of Prodigy Class B
common stock.
5. (a) Adjustment to reflect amortization of the SBC Assets, primarily
related to the SBC brand assets and subscriber relationships, over the three
year life of the agreements. Tangible assets received from SBC may have longer
lives which would result in a decrease in the amortization expense presented in
this document, however, management does not expect this result to have a
significant impact.
(b) Adjustment to reflect SBC's minority interest in the net loss of the
operating partnership.
(c) Adjustment of the weighted average shares of Prodigy common stock
outstanding used in computing basic and diluted net loss per share to reflect
issuance of one share of Prodigy Class B common stock as of January 1, 1999.
139
<PAGE>
PRODIGY'S PRINCIPAL STOCKHOLDERS
The following table illustrates the beneficial ownership of Prodigy common
stock as of March 31, 2000 by:
. each person or entity known to Prodigy to own beneficially more than 5%
of Prodigy common stock;
. each of the directors of Prodigy;
. each of the named executive officers of Prodigy; and
. all current executive officers and directors of Prodigy as a group.
In addition, the table depicts the shares beneficially owned if the SBC
transaction is not completed, as illustrated in the first column, and the
shares beneficially owned if the SBC transaction is completed, as illustrated
in the second column. If the pending FlashNet merger is completed, all
percentages will be diluted by approximately 4.5%.
<TABLE>
<CAPTION>
Shares beneficially Shares beneficially
owned prior to the owned after the SBC
SBC transaction(1) transaction(1)
--------------------- ---------------------
Name Number Percentage Number Percentage
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current directors, executive
officers and 5% stockholders:
Carlos Slim Helu(2) 41,413,111 64.1% 41,413,111 35.6%
Carso Global Telecom(3) 29,396,911 45.5 29,396,911 25.3
Telmex(4) 12,016,200 18.6 12,016,200 10.3
Samer F. Salameh(5) 112,500 * 134,375 *
James R. Adams -- * 15,000 *
Allen Craft(6) -- * -- *
Arturo Elias(5) 45,000 * 60,000 *
James M. Nakfoor(5) 10,000 * 25,000 *
Alfredo Sanchez(5) 47,000 * 62,000 *
David C. Trachtenberg 41,666 * 83,333 *
Andrea S. Hirsch 26,250 * 57,500 *
All current executive officers
and directors as a group
(8 persons)(5)(7) 282,416 * 437,208 *
Other 5% stockholders:
SBC (8) -- -- 51,821,505 44.5
Sears(9) 4,536,778 7.0 4,536,778 3.8
Former executive officers:
James P. Dougherty 43,750 * 43,750 *
David R. Henkel 323 * 47,369 *
James L'Heureux -- -- -- --
Carena M. Pooth -- -- -- --
</TABLE>
- --------
* Denotes ownership of less than 1% of the outstanding shares of Prodigy
common stock.
(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 these 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 which the
individual or entity has the right to acquire within 60 days after March
31, 2000 through the exercise of any stock option, warrant or other right.
Beneficial ownership also includes the shares subject to options held by
current executive officers and directors that will accelerate and become
exercisable upon completion of the SBC transaction. However, these shares
are not deemed outstanding for purposes of calculating the percentage
ownership of any other person. The inclusion in this table of any shares
does not constitute an admission that the named
140
<PAGE>
stockholder is a direct or indirect beneficial owner of the shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power with respect to all shares of capital
stock listed as owned by the person or entity.
(2) Consists of the listed shares hold by Carso Global Telecom and Telmex.
Mr. Slim and 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 Prodigy. The business address of
Carso Global Telecom and Mr. Slim is Paseo de las Palmas, #736,
Col. Lomas de Chapultepec, Mexico City, Mexico 11000.
(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. Carso Global Telecom is a
Mexican holding company.
(4) Telmex's business address is Parque Via 190, Oficina 1016, Colonia
Cuauhtemoc, Mexico City, Mexico 06599.
(5) Excludes the listed shares held by Carso Global Telecom, Telmex and SBC.
(6) Excludes the listed shares held by SBC.
(7) Includes 169,792 shares that are subject to options that will become
exercisable on completion of the SBC transaction.
(8) Consists of shares issuable upon conversion of Prodigy Class B common
stock and units in the operating partnership to be issued to SBC on
completion of the SBC transaction. Does not include a contingent warrant
to purchase 537,924 shares of Prodigy common stock for $1.00 per share
which Prodigy and SBC have agreed in principle that SBC will receive in
exchange for guaranteeing Prodigy's ongoing performance obligations under
its customer contracts in connection with a proposed third party
financing. See "Prodigy Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
SBC's business address is 175 East Houston, San Antonio, Texas 78205.
(9) Ownership is based on a Schedule 13G/A filed by Sears with the Securities
and Exchange Commission on February 10, 2000. Includes 2,409,145 shares
issuable on exercise of a warrant. Sears' business address is 3333
Beverly Road, Hoffman Estates, Illinois 60179.
141
<PAGE>
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The board of directors has selected the firm of PricewaterhouseCoopers LLP as
Prodigy's independent accountants for fiscal year 2000. The board of directors
recommends that the stockholders vote FOR ratification of that appointment. If
the stockholders do not ratify the selection of PricewaterhouseCoopers LLP as
Prodigy's independent accountants, the board of directors will reconsider the
matter. Representatives of PricewaterhouseCoopers LLP are expected to be
present at the annual meeting and will have the opportunity to make a
statement, if desired, and will be available to respond to appropriate
questions from stockholders.
STOCKHOLDER PROPOSALS
Any proposal that a Prodigy stockholder intends to present at the 2001 annual
meeting of stockholders in accordance with Rule 14a-8 of the Exchange Act must
be submitted to the secretary of Prodigy at its offices, 44 South Broadway,
White Plains, New York 10601, no later than January 5, 2001 in order to be
considered for inclusion in the proxy statement relating to that meeting. With
respect to any stockholder proposal other than a proposal under Rule 14a-8, the
proxy included in Prodigy's proxy materials may confer discretionary authority
to vote on the stockholder proposal if Prodigy does not receive the proposal at
the address set forth in the preceding sentence on or before January 5, 2001.
Any stockholder proposal must also comply with the other applicable provisions
of law and Prodigy's certificate of incorporation and by-laws. No stockholder
proposal is required to be considered unless it is presented in accordance with
the foregoing requirements.
EXPERTS
The consolidated financial statements of Prodigy as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999
included in this proxy statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of FlashNet as of December 31, 1998 and
for each of the two years in the period ended December 31, 1998 included in
this proxy statement, have been audited by Deloitte & Touche LLP, independent
accountants, as set forth in their report appearing herein and have been so
included in reliance on the report of such firm given on their authority as
experts in auditing and accounting.
The consolidated financial statements of FlashNet Communications Inc. at
December 31, 1999 and for the year then ended and the financial statements of
the Web Hosting Business of U.S. Republic Communications, Inc. at December 31,
1998, and for the period from January 6, 1998 (inception) to December 31, 1998,
appearing in this proxy statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given on the authority
of such firm as experts in accounting and auditing.
142
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRODIGY COMMUNICATIONS CORPORATION
Three years ended December 31, 1999, 1998 and 1997
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statement of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)............... F-5
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
FLASHNET COMMUNICATIONS, INC.
Three years ended December 31, 1999, 1998 and 1997
Report of Independent Auditors.......................................... F-27
Independent Auditor's Report............................................ F-28
Consolidated Balance Sheets............................................. F-29
Consolidated Statements of Operations................................... F-30
Consolidated Statements of Cash Flows................................... F-31
Consolidated Statements of Shareholders' Equity (Deficit)............... F-32
Notes to Financial Statements........................................... F-33
WEB HOSTING BUSINESS OF U.S. REPUBLIC COMMUNICATIONS, INC.
January 6, 1998 (inception) to December 31, 1998 and unaudited nine
months ended
September 30, 1999
Report of Independent Auditors.......................................... F-45
Statement of Assets to Be Acquired and Liabilities to be Assumed........ F-46
Statement of Operations................................................. F-47
Statement of Cash Flows................................................. F-48
Notes to Financial Statements........................................... F-49
</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, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Prodigy Communications Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States
of America. 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 auditing standards generally accepted in the United States of
America, 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.
PricewaterhouseCoopers LLP
New York, New York
March 3, 2000
F-2
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.............................. $ 12,180 $ 35,473
Trade accounts receivable, net of allowances for
doubtful accounts of $367 and $3,380 at December 31,
1998 and 1999, respectively........................... 966 10,314
Due from affiliate..................................... -- 1,801
Prepaid expenses....................................... 1,691 2,793
Other current assets................................... 106 1,437
--------- ---------
Total current assets................................. 14,943 51,818
Restricted cash.......................................... 5,420 4,692
Property and equipment, net.............................. 12,998 18,201
Other intangibles, net................................... -- 1,748
Tradename, net........................................... 26,579 26,330
Goodwill, net............................................ 11,587 55,680
Deferred network costs, net.............................. 5,939 3,563
Subscriber acquisition costs, net........................ -- 182,838
Other assets............................................. 866 1,118
--------- ---------
Total assets......................................... $ 78,332 $ 345,988
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable.......................................... $ 2,000 $ 110,154
Accounts payable....................................... 10,442 24,351
Accrued compensation................................... 3,000 3,095
Accrued restructuring and other special costs.......... 4,705 3,849
Other accrued expenses................................. 18,193 16,847
Accrued subscriber acquisition costs................... -- 7,144
Unearned revenue....................................... 10,200 14,062
Capital lease obligation--short term................... -- 412
--------- ---------
Total current liabilities............................ 48,540 179,914
Capital lease obligation--long term...................... -- 983
--------- ---------
Total liabilities.................................... 48,540 180,897
--------- ---------
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued or outstanding................ -- --
Contingent convertible notes........................... 30,500 --
Common stock, $.01 par value; 150,000,000 shares
authorized; 45,034,297 and 64,502,608 shares issued
and outstanding at December 31, 1998 and 1999,
respectively.......................................... 450 645
Additional paid-in capital............................. 294,296 539,054
Accumulated deficit.................................... (292,787) (373,275)
Note receivable from stockholder....................... (2,667) (1,333)
--------- ---------
Total stockholders' equity........................... 29,792 165,091
--------- ---------
Total liabilities and stockholders' equity........... $ 78,332 $ 345,988
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Internet and online service revenues:
Prodigy Internet............................ $ 29,459 $ 80,696 $154,211
Prodigy Classic............................. 98,793 48,212 15,599
--------- -------- --------
128,252 128,908 169,810
Other......................................... 5,940 7,232 19,228
--------- -------- --------
Total revenues.............................. 134,192 136,140 189,038
--------- -------- --------
Operating costs and expenses:
Costs of revenue.............................. 91,998 93,355 102,199
Sales and marketing........................... 59,624 41,678 58,854
Product development........................... 11,407 10,880 12,341
General and administrative.................... 56,254 44,640 61,652
Depreciation and amortization................. 21,444 16,072 21,792
Amortization of subscriber acquisition costs.. -- -- 20,448
Restructuring and other special costs......... 9,854 -- --
Write-down of assets held for sale............ 2,400 -- --
Loss on sale of cellular assets............... 848 -- --
--------- -------- --------
Total operating costs and expenses.......... 253,829 206,625 277,286
--------- -------- --------
Operating loss.................................. (119,637) (70,485) (88,248)
Gain on sale of assets/equity investments..... 250 5,176 3,319
Gain on settlement of note payable............ -- -- 1,714
Gain on settlement of note receivable......... -- -- 500
(Loss) on equity investment in joint venture.. (12,101) -- --
Interest income............................... 272 1,541 5,121
Interest expense.............................. (1,559) (1,315) (2,859)
Other......................................... -- -- (35)
--------- -------- --------
Net loss.................................... $(132,775) $(65,083) $(80,488)
========= ======== ========
Basic and diluted loss per share................ $ (7.66) $ (1.60) $ (1.34)
========= ======== ========
Weighted average number of common shares
outstanding used in computing basic and diluted
net loss per share............................. 17,337 40,746 59,958
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Contingent Common Stock Additional
Convertible -------------- Paid-in Accumulated
Notes Shares Amount Capital Deficit
----------- ------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ $30,500 12,310 $123 $ 52,883 $ (94,929)
Issuance of common stock for
cash........................ 14,913 149 71,890
Issuance of common stock on
conversion of advances from
stockholders................ 8,547 86 102,565
Acquisition and retirement of
treasury shares............. (1,966) (20) (8,602)
Comprehensive loss:
Net loss.................... (132,775)
Other comprehensive losses:
Translation adjustment......
Comprehensive loss..........
------- ------ ---- -------- ---------
Balance at December 31,
1997........................ 30,500 33,804 338 218,736 (227,704)
------- ------ ---- -------- ---------
Issuance of common stock for
cash........................ 11,254 112 74,926
Issuance of common stock on
conversion of advances from
stockholders
Options granted below fair
market value................ 730
Acquisition and retirement of
treasury shares............. (24) (96)
Comprehensive loss:
Net loss.................... (65,083)
Comprehensive loss..........
------- ------ ---- -------- ---------
Balance at December 31,
1998........................ 30,500 45,034 450 294,296 (292,787)
------- ------ ---- -------- ---------
Issuance of common stock for
cash........................ 12,373 124 164,409
Issuance of common stock in
connection with the
acquisition of
BizOnThe.Net................ 2,841 28 48,411
Convertible securities
redemption.................. (30,500) 4,255 43 30,457
Options granted below fair
market value................ 1,481
Comprehensive loss:
Net loss.................... (80,488)
Comprehensive loss..........
------- ------ ---- -------- ---------
Balance at December 31,
1999........................ $ -- 64,503 $645 $539,054 $(373,275)
======= ====== ==== ======== =========
</TABLE>
F-5
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated Note
Other Receivable
Comprehensive From Comprehensive
(Loss) Profit Stockholder Total Loss
------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996....................... $ (30) $ (11,453)
Issuance of common stock for
cash....................... $(4,000) 68,039
Issuance of common stock on
conversion of advances from
stockholders............... 102,651
Acquisition and retirement
of treasury shares......... (8,622)
Comprehensive loss:
Net loss................... (132,775) $(132,775)
Other comprehensive losses:
Translation adjustment..... (159) (159) (159)
---------
Comprehensive loss......... $(132,934)
----- ------- --------- =========
Balance at December 31,
1997....................... (189) (4,000) 17,681
----- ------- ---------
Issuance of common stock for
cash....................... 75,038
Issuance of common stock on
conversion of advances from
stockholders............... 1,333 1,333
Options granted at below
fair market value.......... 730
Acquisition and retirement
of treasury shares......... (96)
Comprehensive loss:
Net loss................... (65,083) $ (65,083)
Other comprehensive losses:
Translation adjustment..... 189 189 189
---------
Comprehensive loss......... $ (64,894)
----- ------- --------- =========
Balance at December 31,
1998....................... $ -- (2,667) 29,792
----- ------- ---------
Issuance of common stock for
cash....................... 1,334 165,867
Issuance of common stock on
acquisition of
BizOnThe.Net............... 48,439
Convertible securities
redemption
Options granted below fair
market value............... 1,481
Comprehensive loss:
Net loss................... (80,488) $ (80,488)
---------
Comprehensive loss......... $ (80,488)
----- ------- --------- =========
Balance at December 31,
1999....................... $ -- $(1,333) $ 165,091
===== ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(132,775) $(65,083) $ (80,488)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on equity investment in joint venture.... 12,101 -- --
Recovery of equity investments................ (250) -- --
Write-down of assets held for sale............ 2,400 -- --
Gain on sale of assets........................ -- (5,176) (3,319)
Gain on settlement of note payable............ -- -- (1,714)
Gain on settlement of note receivable......... -- -- (500)
Option grants at below fair value............. -- 730 1,481
Loss on sale of cellular assets............... 848 -- --
Depreciation and amortization of property and
equipment.................................... 11,997 7,896 8,429
Amortization of goodwill...................... 1,551 1,551 5,505
Amortization of tradename..................... 3,455 3,667 3,849
Amortization of other intangibles............. -- -- 152
Amortization of deferred network asset........ 1,335 2,228 2,376
Amortization of subscriber acquisition costs.. -- -- 20,448
Amortization of deferred software development
costs........................................ 1,159 -- --
Write-down of deferred software development
costs to net realizable value................ 1,946 -- --
Provision for doubtful accounts............... (342) (49) (3,200)
Change in operating assets and liabilities,
net of effects of acquisitions and disposals:
Trade accounts receivable..................... 1,935 823 (4,711)
Due from affiliate............................ -- -- (1,801)
Prepaid expenses.............................. 1,340 (312) (1,078)
Other assets.................................. (1,690) 1,320 (1,083)
Assets held for sale.......................... (5,325) 1,650 --
Accounts payable and other accrued expenses... (11,650) (20,359) 12,997
Accrued compensation.......................... (1,089) 652 95
Accrued restructuring and other special
costs........................................ (2,178) (3,170) (856)
Unearned revenue.............................. 1,193 5,648 3,271
--------- -------- ---------
Net cash used in operating activities........ (114,039) (67,984) (40,147)
--------- -------- ---------
Cash flows from investing activities:
Acquisition of property and equipment......... (8,556) (2,567) (9,907)
Acquisition of subscribers.................... -- -- (196,142)
Acquisition of Web hosting business........... -- -- (9,829)
Proceeds from sale of assets/equity
investments.................................. -- 5,176 3,319
Investment in joint venture................... (7,006) -- --
Increase in other assets...................... 308 -- --
--------- -------- ---------
Net cash used in investing activities........ (15,254) 2,609 (212,559)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock........ 68,039 74,942 164,533
Repayment of notes payable to related
parties...................................... (46,000) (32,100) (19,846)
Proceeds from notes payable to related
parties...................................... -- 22,100 130,000
Repayment of borrowings....................... -- (30,000) (750)
Proceeds from borrowings...................... 102,651 30,000 --
Payment of note receivable from stockholder... -- 1,333 1,334
(Increase)/decrease in restricted cash........ (4,148) (1,272) 728
Other......................................... (161) 189 --
--------- -------- ---------
Net cash provided by financing activities.... 120,381 65,192 275,999
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (8,912) (183) 23,293
--------- -------- ---------
Cash and cash equivalents, beginning of
period........................................ 21,275 12,363 12,180
--------- -------- ---------
Cash and cash equivalents, end of period....... $ 12,363 $ 12,180 $ 35,473
========= ======== =========
</TABLE>
F-7
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(continued)
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
--------- ----------------
<S> <C> <C> <C>
Supplementary Cash Flow Information:
Cash paid for interest............................ $ 1,177 $ 1,164 $ 1,823
Noncash investing and financing activities:
Conversion of advances from stockholder to common
stock............................................ 102,651 -- --
Contingent convertible notes and contingent
warrants issued in exchange for contingent
convertible note................................. 30,500 -- --
Conversion of contingent convertible notes into
common stock..................................... -- (30,500)
Sale of network assets in exchange for service
agreement........................................ 9,502 -- --
Issuance of common stock in connection with
acquisition of Web hosting business.............. -- -- (48,439)
Contingent convertible note received as settlement
for sale of International Wireless cellular
communications business.......................... -- -- (875)
Capital lease obligations......................... -- -- 1,395
Option grants at below fair value................. -- 730 1,481
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
1. Organization and 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 64.1% direct and
indirect 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. 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., a wholly-owned
subsidiary engaged in Internet access and online services in Africa, and an
equity investment in a start-up joint venture in China.
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 would be as an ISP and decided to discontinue the production of
its own content for Prodigy Internet. In 1998, the Company sold its African
operations and negotiated a settlement of its liabilities in connection with
the closing of its Asian operations (see Note 5-Dispositions).
Since formation, Prodigy has relied on private sales of equity securities
(totaling $294,100 through December 31, 1999), borrowings and the initial
public offering in February 1999 (with net proceeds of $157,200) to fund its
operations. Prodigy has incurred significant losses since inception and, at
December 31, 1999, had an accumulated deficit of $373,275 and a working capital
deficit of $128,096 comprised of current liabilities of $179,914 offset by
current assets of $51,818. For the years ended December 31, 1997, 1998 and
1999, Prodigy incurred negative cash flow from operations of $114,039, $67,984
and $40,147, respectively. To the extent the Company is unable to fund its
current obligations as they become due from its operating cash flows, Carso
Global Telecom, through its subsidiary Telmex, has committed to provide
additional financing, either through capital and/or debt financing, of up to
$200,000 through February, 2001. Specific terms of this financing will be
determined at the time such financing, if any, is provided. Management believes
that this additional funding will be sufficient to enable the Company to meet
its planned expenditures through at least December 31, 2000.
2. Acquisitions
Acquisition of BizOnThe.Net
On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business of
U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business. At
the closing, Prodigy repaid a $9,000 loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy common stock to U.S. Republic including
727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.
The acquisition of BizOnThe.Net has been accounted for under the purchase
method of accounting and accordingly the cost to acquire BizOnThe.Net was
allocated to the assets acquired and liabilities assumed based on their
respective fair values with the excess allocated to goodwill. The total
purchase price is subject to change based on the calculation of the amount by
which the net book value of the acquired assets and assumed liabilities as of
October 5, 1999 exceeded or was less than the net book value as of July 31,
1999, which is expected to be finalized in the second quarter of 2000, and
earn-out adjustments to be finalized over the next two years. Changes in the
purchase price based on these adjustments will be recorded as corresponding
increases or decreases in
F-9
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
goodwill at the time the related items are resolved and are not expected to
exceed $10,000. Based on the value of the 2,840,993 shares of common stock
currently issued in connection with the BizOnThe.Net acquisition and the $9,000
cash used to repay the loan, the total purchase price is approximately $58,000.
The excess of the purchase price over the fair value of tangible and intangible
assets acquired and liabilities assumed of $49,598 has been allocated to
goodwill and will be amortized on a straight-line basis over 3 years.
Pro Forma (Unaudited)
The unaudited condensed pro forma results of operations presented below
assume that the Combination occurred at the beginning of each period presented.
The pro forma information is not necessarily indicative of the combined results
of operations of Prodigy and BizOnThe.Net that would have resulted if the
transaction had occurred on the dates indicated and they are not necessarily
indicative of the future operating results of the combined company.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues.............................................. $ 208,107 $ 143,246
Net loss.............................................. $ (95,236) $ (91,385)
Pro forma net loss per common share................... $ (1.53) $ (2.10)
</TABLE>
3. 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.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries, which were
disposed of in 1998, were the local currencies. Accordingly, assets and
liabilities of foreign subsidiaries were translated to U.S. dollars at period-
end exchange rates and revenues and expenses were 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. 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.
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 subscriber management fees, Web hosting fees and
marketing services, are recognized as fees are earned or services are provided.
Unearned revenue consists primarily of subscription fees billed in advance.
F-10
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Subscriber Acquisition Costs
Costs of acquisition programs which result in subscriber enrollments without
further effort required by the Company are capitalized and amortized over the
estimated life of the acquired subscriber (See Note 8-Subscriber Acquisition
Costs). 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.
Research and Development
Research and development costs 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, the
escrow portion of proceeds related to the Company's sale of a subsidiary and
collateral for a surety bond filed with a state government.
Property and Equipment
Property and equipment are 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.
Internal Use Software
The Company capitalizes the cost of acquiring internal use software once the
application development stage has begun and ceases to capitalize costs once the
software is put into use. Training, maintenance and data conversion costs are
expensed as incurred.
Equipment Under Capital Leases
The Company leases certain computer equipment under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lower of
the present value of the minimum lease payments or the fair value of the asset.
The assets are being depreciated over their related lease terms. Depreciation
of assets under capital leases is included in depreciation expense.
Intangible Assets
Intangible assets consist principally of tradenames and goodwill.
Amortization of these assets is computed on a straight-line basis over
estimated useful lives. Tradenames are amortized over a period of 3 to 10 years
and goodwill, which represents the excess of the purchase price over the
estimated fair values of net assets acquired, is amortized over a period of 3
to 10 years.
F-11
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Long-Lived Assets
The Company periodically reviews the recoverability of the carrying value of
these assets using the methodology prescribed in SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of. The Company reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amounts of such assets may not be recoverable. Recoverability of these assets
is determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount, including
associated intangible assets, of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then intangible
assets are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
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.
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 (APB 25),
"Accounting for Stock Issued to Employees," for the grants or awards of equity
instruments to employees. In accordance with APB 25 no expense was recorded
during 1997. During 1998 and 1999 approximately $730 and $1,481 of compensation
expense was recorded. 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 (see Note 12-Stock
Option and Purchase Plan).
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 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 prior periods have been reclassified to conform with the
current year presentation.
F-12
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Recent Accounting Pronouncements
In November 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 100, "Restructuring and Impairment Charges." In
December 1999, the SEC issued SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 100 express the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of
impairment charges. SAB No. 101 expresses the views of SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
Prodigy has concluded that these SABs do not have a material impact on its
financial position or its results of operations.
4. Restructuring and Other Special Costs
During 1997, 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 Accrued Accrued
Costs at Costs at Costs at
1997 1997 December 31, 1998 December 31, 1999 December 31,
Cost Payments 1997 Payments 1998 Payments 1999
------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(A) Network termination
costs.............. $4,740 $4,740 $ 849 $3,891 $ 42 $3,849
(B) Employee
severance.......... 2,900 $1,979 921 921
(C) Discontinuance of
content
production......... 585 585 585
(D) Medford, MA
Facility Closing... 1,629 1,629 815 814 814
------ ------ ------ ------ ------ ---- ------
$9,854 $1,979 $7,875 $3,170 $4,705 $856 $3,849
====== ====== ====== ====== ====== ==== ======
</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. Management expects to use this
reserve in full by the year ending December 31, 2001.
(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. The entire reserve was
used in 1997 and 1998 to make severance payments to employees identified as
part of the original plan.
(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. The entire reserve was used in
1997 and 1998 to make severance payments to employees identified as part of
the original plan.
(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 entire reserve has been utilized by December
31, 1999. The terminated employees were involved with the Company's
international operations and/or former headquarters management.
Approximately 20 employees were terminated.
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 selling price
F-13
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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 including the
following: (i) the due date was extended to January 31, 1999, (ii) the Note was
changed to make it unsecured, (iii) the interest rate was reduced to 8%, (iv)
the Note was subject to mandatory repayment out of the net proceeds from an
acquisition of IW. 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 revaluation of the Company's stock from $12.00 to $4.00 per share,
a loss on the sale of IW of $848,000 was recorded in 1997.
In October 1999 the note was restructured for a cash settlement of $500,000
and an 8% convertible note for $875,000 due in October 2006. The Note is
convertible into 1 million shares of common stock of Wireless Communications
Technology, which purchased the cellular division of IW. At December 31, 1997,
1998 and 1999 the respective notes receivable were valued at zero.
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"), an affiliate of Carso Global Telecom, certain of its network
assets. Splitrock agreed to: (i) assume 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.
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 $9,500 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 as a "Deferred Network Asset" 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. 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.
In March 1998, the Company terminated its Chinese joint ventures and
operations. On October 1, 1998, Africa Online, Inc. was sold for gross cash
proceeds of $2,815, of which $750 was placed in escrow to collateralize certain
indemnification obligations of the Company for a six month period. The sale
resulted in a gain to the Company of approximately $2,900.
Sale of Equity Investment
During 1997 the Company sold a subsidiary which eventually became part of TCI
Music. As a result of the sale, the Company acquired shares of TCI Music.
During April of 1999, TCI Music announced its merger with Liberty Media. As a
result, the value of the Company's investment increased and was sold for
$3,325, generating a gain of $3,319 which was recognized in 1999.
F-14
<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 1998 1999
----------- ------- -------
<S> <C> <C> <C>
Computer equipment................................. 3-5 years $24,711 $33,109
Capitalized software............................... 3-5 years 2,126 5,862
Leasehold improvements............................. 5-7 years 4,778 4,836
Furniture and equipment............................ 5-8 years 1,590 1,696
Property under capital lease....................... 39 months 1,538
------- -------
33,205 47,041
Less accumulated depreciation and amortization..... 20,207 28,840
------- -------
$12,998 $18,201
======= =======
</TABLE>
Depreciation and amortization of fixed assets was approximately $11,997,
$7,896 and $8,429 for the years ended December 31, 1997, 1998 and 1999,
respectively.
7. Intangible Assets
The cost and accumulated amortization of intangible assets was as follows at
December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Tradename:
Cost...................................................... $35,668 $39,217
Less: accumulated amortization............................ 9,089 12,887
------- -------
$26,579 $26,330
======= =======
Goodwill:
Cost...................................................... $15,529 $65,127
Less: accumulated amortization............................ 3,942 9,447
------- -------
$11,587 $55,680
======= =======
Deferred network costs:
Cost...................................................... $ 9,502 $ 9,502
Less: accumulated amortization............................ 3,563 5,939
------- -------
$ 5,939 $ 3,563
======= =======
Other Intangibles:
Cost...................................................... $ -- $ 1,900
Less: accumulated amortization............................ -- 152
------- -------
$ -- $ 1,748
======= =======
</TABLE>
8. Subscriber Acquisition Costs
In May 1999, the Company entered into an agreement with Cable & Wireless USA,
Inc. to purchase the dial-up access Internet subscriber base of that entity. At
the closing on July 20, 1999, the Company paid Cable & Wireless USA, Inc.
$40,900 in cash and anticipates finalizing the purchase price in the first
quarter of 2000.
F-15
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
The purchase price is expected to decrease by approximately $10 million from
the original payment due to fewer subscribers transitioning to the Prodigy
service than originally projected. The Company has capitalized the costs of the
subscribers purchased under this agreement and is amortizing these costs over
36 months representing the estimated weighted average term of the subscribers
acquired.
During 1999, the Company entered into agreements with major retailers of
personal computers (the "Retailers") to make specified payments to the
Retailers in exchange for the Retailers enrolling customers onto Prodigy
Internet and obtaining a signed contractual commitment from these customers to
term subscriptions to Prodigy Internet of one, two or three years at the
Company's standard monthly rates. The Company has capitalized these payments
and is amortizing them over the term of the individual subscriber contract. The
company reviews subscriber terminations on a quarterly basis and any
unamortized acquisition costs related to such terminations are written off.
Capitalized subscriber acquisition costs at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Cable & Wireless
Cost............................................................. $ 41,612
Less: accumulated amortization................................... (4,818)
--------
$ 36,794
========
Subscriber Contract Acquisition
Cost............................................................. $161,674
Less: accumulated amortization................................... (15,630)
--------
$146,044
========
</TABLE>
The amortization expense for subscriber acquisition costs for the year ended
December 31, 1999 is $20,448.
9. Notes Payable
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------ --------
<S> <C> <C>
Notes payable to related party.............................. $ 0 $110,154
------ --------
Loan payable to corporate lender............................ $2,000 $ 0
------ --------
</TABLE>
In March 1996, the Company borrowed $2,000 from a network company (the
"Corporate Lender") pursuant to an 8.25% convertible note. Principal and
interest were due on March 31, 1997. The note had 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. In January 1999, the Company paid the
Corporate Lender $750 in full settlement of its 8.25% convertible note in the
principal amount of $2,000 and all accrued interest. As a result the Company
recognized a gain of $1,714 in 1999.
In August 1998, the Company obtained a $35,600 line of credit from Carso
Global Telecom. This credit facility expired on December 31, 1999 and bore
interest at the LIBOR rate plus between one and five percentage points. There
were no outstanding amounts on this facility as of December 31, 1998 or 1999.
F-16
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
In August 1999, the Company obtained a $130,000 line of credit from Banco
Inbursa to fund its various subscriber acquisition programs during the third
and fourth quarter of 1999. The interest rate on this facility fluctuates based
on market conditions at the time of each drawdown. These borrowings reached a
maximum of $130,000 during 1999 at interest rates between 9% and 12%. At
December 31, 1999 the line had been paid down to $110,154. In January 2000,
Prodigy repaid $13,800 of these notes. The remaining $96,400 is due April 7,
2000.
10. Contingent Convertible Notes and Warrants
The Contingent Convertible Notes ("Contingent Notes") valued at $30,500, were
issued to International Business Machines Corporation ("IBM") and Sears Roebuck
and Co. ("Sears") in 1996 in connection with the acquisition of PSC and had an
interest rate of 8% annually commencing on December 17, 1997.
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 (with the aggregate consideration payable to IBM
and Sears still limited to $200,000 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 could not exceed 15%
of the number of shares outstanding upon completion of the IPO. 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) and established a $4,000 letter of credit, declining quarterly
over three years, to collateralize certain payment obligations of the Company
under PSC contracts for which IBM and Sears remain liable.
Upon the completion of the Company's initial public offering both IBM and
Sears acquired an interest in the Company's outstanding common stock in
accordance with the terms of the Contingent Convertible Notes. IBM and Sears
each received approximately 2,127,500 shares for a combined total of
approximately 4,255,000. Additionally, IBM and Sears each received warrants
which allow them to purchase 2,409,145 additional shares each at $19.50 per
share. Those warrants are exercisable for three years from the conversion date.
11. Income Taxes
The Company had no income tax expense for the years ended December 31, 1997,
1998 and 1999 as a result of net losses. As of December 31, 1998 and 1999, the
Company's deferred tax assets were as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Domestic net operating loss carryforwards............... $ 84,991 $ 114,840
Intangible assets....................................... 6,382 6,133
Restructuring and other nonrecurring reserves........... 3,838 1,844
Other................................................... 979 5,026
Valuation allowance..................................... (96,190) (127,843)
-------- ---------
Net deferred tax asset.................................. $ -- $ --
======== =========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $280,098 which may be used to
offset future taxable income, beginning to expire in 2010. The utilization of
the federal income tax loss carryforwards is subject to limitation as a result
of a change of ownership.
F-17
<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 deferred tax assets.
12. Stockholders' Equity
Authorized Shares of Common Stock
In 1997, the Board of Directors and the stockholders approved an increase in
the authorized shares of common stock to 280,000,000 shares.
Reverse Stock Split
On January 25, 1999, the Board of Directors effected a one-for-four reverse
common stock split. The share information in the accompanying consolidated
financial statements has been retroactively restated to reflect the effect of
the reverse stock split.
Reduction in Authorized Shares
On January 25, 1999, the Company effected a reduction in the number of
authorized shares from 280,000,000 to 150,000,000.
Private Placements
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 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 10--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.
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 a $30,000
note payable to Bank of America and a remaining $2,100 in notes payable to
Banco Inbursa, with the balance used for general corporate purposes.
Initial Public Offering
On February 11, 1999, the Company completed an initial public offering
("IPO") under the Securities Act of 1933. This resulted in the sale of 11.2
million shares of common stock for gross proceeds of approximately $168,000 and
net proceeds of approximately $157,200.
F-18
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
IBM and Sears Conversion of Contingent Notes
Upon the completion of the Company's IPO both IBM and Sears acquired 7.5% of
the Company's outstanding common stock in accordance with the Contingent Notes
Conversion feature (see Note 10 --Contingent and Convertible Notes and
Warrants). IBM and Sears each received approximately 2,127,500 shares for a
combined total of approximately 4,255,000 or 15% of the Company.
Additionally, IBM and Sears each received warrants which allow them to
purchase up to 15% of the Company at 130% of the fair market value at the date
of conversion of the Contingent Notes. Those warrants are exercisable for three
years from the conversion date. IBM and Sears each received approximately
2,409,000 warrants or approximately 4,818,000 in total.
Stock Warrants
A 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 another shareholder 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 for
arranging interim financing for the Company, 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. During 1998,
3,750,000 warrants were exercised at $4.00 per share. At December 31, 1998, the
Company had warrants outstanding with various shareholders to purchase 122,402
shares of the Company's common stock at an average price of $11.09 per share.
All the outstanding warrants were exercisable as of December 31, 1998. At
December 31, 1999 the Company had warrants outstanding with various
shareholders to purchase 117,402 shares of the Company's common stock at an
average price of $11.05 per share. During 1999, 5,000 warrants were exercised
at a price of $12.00 per share.
13. Stock Option and Purchase Plans
In 1996, the Board of Directors and the stockholders approved a Stock Option
Plan (the "1996 Plan"). Under the 1996 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 1996 Plan are exercisable over periods determined by the Board 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.
1999 Outside Directors Stock Option Plan
In January 1999, Prodigy's Board of Directors and stockholders adopted
Prodigy's 1999 outside director stock option plan. The director plan permits
the issuance of up to 250,000 shares of common stock on the exercise of options
granted under the director plan. All options granted under the director plan
are non-statutory stock options. Pursuant to the director plan, each director
of Prodigy who was not then employed by Prodigy received on the closing of
Prodigy's initial public offering an option to purchase 30,000 shares of common
stock at an exercise price equal to the price per share at which shares were
sold in the initial public offering. Thereafter, each new non-employee director
will receive, on 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
F-19
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
common stock on the date of grant. All options granted under the director plan
vest in four equal annual installments, based on continued service as a
director, and expire three months after termination of service as a director.
1999 Stock Option Plan
The Board of Directors has adopted, subject to shareholder approval, the 1999
Stock Option Plan (the "1999 Plan"). Under the 1999 Plan, options to purchase
up to 5,600,000 shares of common stock, subject to adjustment in the event of
stock splits, 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 1999 Plan are exercisable
over periods determined by the Board of Directors, not to exceed 10 years from
the date of grant. No options were granted under the 1999 Plan as of December
31, 1999.
The Company's stock option plans are administered by the Board of Directors.
Repricing of Stock Options
In June 1997, the Board approved a plan to reprice employee stock options
under the 1996 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 then 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 plan to reprice employee stock options
under the 1996 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 then 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 $3,123 at December 31, 1998.
The exercise and vesting periods of the outstanding options were not altered
by the repricings.
Stock option plan activity for the years ended December 31, 1997, 1998 and
1999 follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Outstanding at January 1.............................. 2,286 2,299 2,370
Options granted..................................... 828 1,441 1,093
Options exercised................................... (3) (1,092)
Options canceled/forfeited.......................... (815) (1,367) (464)
----- ------ ------
Outstanding at December 31............................ 2,299 2,370 1,907
===== ====== ======
Exercisable at December 31.......................... 867 691 413
===== ====== ======
Available for grant at December 31.................. 825 752 373
===== ====== ======
</TABLE>
F-20
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Weighted average option exercise price information for the years ended
December 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Outstanding at January 1............................... $12.48 $10.72 $ 5.83
Options granted...................................... $10.04 $ 5.84 $16.63
Options exercised.................................... $ 0 $11.46 $ 6.24
Options canceled..................................... $ 9.32 $10.64 $ 8.06
Outstanding at December 31............................. $10.72 $ 5.83 $11.17
====== ====== ======
Exercisable at December 31........................... $10.96 $ 6.87 $ 5.83
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------
Weighted-
Average 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>
$4.00 596 8.0 years $ 4.00 272 $ 4.00
$8.00-$8.60 336 8.6 years $ 8.06 95 $ 8.07
$9.00-$12.00 286 8.8 years $11.21 41 $ 9.30
$15.00-$25.63 689 9.6 years $18.87 5 $21.72
----- --------- ------ --- ------
$4.00 to 25.63 1,907 8.4 years $11.17 413 $ 5.83
===== ========= ====== === ======
</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, 1997, 1998, and 1999 would have been approximately
$136,921, $65,872 and $83,977, respectively, and basic and diluted net loss per
share would have been approximately $7.90, $1.62 and $1.40, respectively. The
weighted average fair value of the options granted during the years ended
December 31, 1997, 1998, and 1999 was estimated at $1.12, $4.15, and $8.18 per
share, respectively, on the date of grant using the Black-Scholes option-
pricing model and the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ------- ----------
<S> <C> <C> <C>
Dividend yield............................... 0 0 0
Volatility................................... 55% 60% 60%
Risk free rate............................... 5.99% 5.4% 5.34%
Expected option life......................... 4.6 years 3 years 3.35 years
</TABLE>
In determining the fair value of the common stock at the date of grant, the
Board considered a broad range of factors including the liquid 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.
1999 Employee Stock Purchase Plan
In January 1999, Prodigy'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 Prodigy's common stock to
eligible employees of Prodigy and its subsidiaries. Under the purchase plan,
F-21
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
eligible employees may purchase shares of the Company's common stock, subject
to certain limitations, at a price equal to the lower of 85% of the fair market
value of the shares on the first date of the offering period and 85% of the
fair market value of the shares on the purchase date. The purchase plan permits
shares to be purchased at the end of the purchase periods occurring during each
offering period. Unless otherwise provided by the Board prior to commencement,
an offering period will begin on each May 16 and November 16, and continue for
a period of 24 months. A purchase period will begin on each May 16 and November
16, and will continue for a period of six months, ending on the following
November 15 or May 15, respectively. The first offering period and the first
purchase period commenced on Prodigy's initial public offering. The last day of
each purchase period is the date on which shares are actually purchased.
Purchases are limited to 10% of an employee's eligible compensation up to a
maximum of $25 per year. During 1999 Prodigy issued 83,880 new shares to its
employees at an average price of $12.75 per share under the purchase plan.
14. Commitments and Contingencies
Commitments
At December 31, 1999, 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,
2000............................................................... $ 3,432
2001............................................................... 2,710
2002............................................................... 2,727
2003............................................................... 2,529
2004 and thereafter................................................ 2,490
-------
$13,888
=======
</TABLE>
The Company's rent expense in the years ended December 31, 1997, 1998, and
1999 was approximately $9,192, $2,302 and $2,970, respectively.
During 1999 the Company entered into capital leases for certain computer
equipment. Minimum future lease payments under the capital leases as of
December 31, 1999 are:
<TABLE>
<S> <C>
2000................................................................. $ 569
2001................................................................. 585
2002................................................................. 526
------
Total minimum lease payments......................................... 1,680
Less--amounts representing interest.................................. (285)
------
Present value of minimum lease payments.............................. $1,395
======
</TABLE>
In December 1993, PSC entered into a noncancelable agreement with a telephone
company to provide certain services at the Company's White Plains, 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.
F-22
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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 $1,116. For the years ended 1997, 1998 and 1999, the Company paid
$3,628, $3,039 and $3,723, respectively.
Under the Company's four-year agreement with Splitrock, the Company is
obligated to minimum annual payments of $45,000 in 1999, $51,000 in 2000 and
$54,000 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 on an
annual basis. The agreement is automatically renewed for successive 12-month
periods unless terminated by either party upon 12-months notice.
In August 1999, the Company entered into an agreement with a vendor to
provide network licensing and technical support. This agreement requires an
annual payment of $730 in 2000. 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 resulting from the sale of the Company's
network. The Company has negotiated 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 $3,849 as of
December 31, 1999, representing management's best estimate of the amount of the
purchase commitment that will not be used as of December 31, 2000. This amount
is included in the Company's accrued network termination cost (see Note 4--
Restructuring and Other Special Costs).
In February 1998 the Company contracted with a vendor to provide various data
communications services. The contract has a term of 36 months and requires
minimum annual payments to the vendor of $7,300. If the minimum annual payment
is not reached, the Company is subject to an underutilization charge equal to
50% of the difference between the minimum annual payment and the actual usage.
The Company can terminate the agreement upon written notice to the vendor and
the payment of a penalty equal to 50% of the minimum annual payment due for the
remaining term.
In May 1998 the Company contracted with a vendor to provide customer service
and technical support to its members. The contract is for 12 months expiring
April 1999. In March 1999 the Company extended this contract for an additional
12 months through April 2000. The agreement requires minimum monthly payments
to the vendor of $91.
In October 1999, the Company entered into an agreement with a telephone
company to provide certain network services for the Yorktown data center. These
services are due to commence during the first quarter of 2000. This agreement
has an initial term of seven years and requires minimum payments of $1,225 per
year. The agreement has termination and cancellation charges which would be
defined by New York's FCC Tariffs in effect at the time of cancellation.
In February 2000, the Company entered into an agreement with another major
electronics retailer to make specified payments to the retailer in exchange for
the retailer enrolling customers and obtaining a signed contractual commitment
from these customers to term subscriptions to Prodigy Internet at the Company's
standard monthly rates. The payments, amounting to $100, $225 or $400 per
subscriber (in whole dollars) for a one-year, two-year, or three-year Prodigy
Internet service contract, respectively, are required at the time the contract
is received and will be capitalized and amortized over the respective
contractual terms.
F-23
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Contingencies
The Company is a defendant in various lawsuits arising in the ordinary course
of business. It is the opinion of management that any liability to the Company
which may arise as a result of these matters will not have a material adverse
effect on the Company's financial condition or results of operations.
15. Defined Contribution Plan
On June 17, 1996, as part of the Company's acquisition of PSC, 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 $569, $469 and $698 in 1997, 1998 and 1999,
respectively.
16. Valuation and Qualifying Accounts
The following table sets forth activity in the Company's allowance for
doubtful accounts:
<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, 1997.............. $930 $ 342 $587 $ 685
December 31, 1998.............. 685 49 367 367
December 31, 1999.............. 367 3,200 187 3,380
</TABLE>
17. Related Party Transactions
Telmex Agreement
On January 25, 1999, Prodigy and Telmex, a subsidiary of Carso Global
Telecom, 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 subscriber 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
F-24
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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. The Company earned subscriber
management fees from Telmex of $6,833 during 1999, of which $1,801 was
receivable at December 31, 1999.
SplitRock Agreement
Carso Global Telecom owns a minority interest in Splitrock. As part of the
sale of its network operations, 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 with Splitrock, 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 14--
Commitments and Contingencies). The Company incurred network charges to
Splitrock of approximately $22,700, $64,100 and $76,600 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Additionally, the Company's accounts payable to Splitrock for the years ended
December 31, 1998 and December 31, 1999 was approximately $2,500 and $8,800,
respectively.
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 payments on
behalf of Splitrock through June 30, 1998.
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.
18. Subsequent Events
Pending Acquisition of FlashNet Communications
On November 5, 1999, the Company announced a definitive agreement to acquire
FlashNet Communications, Inc. in a stock-for-stock merger. Under the terms of
the merger agreement, Prodigy will issue 0.35 shares of Prodigy common stock
for each share of FlashNet common stock outstanding on the closing date of the
transaction. Based on the number of shares of FlashNet currently outstanding,
Prodigy will issue approximately 5,000,000 shares to complete the acquisition.
The acquisition is expected to be completed in the second quarter of 2000,
subject to FlashNet shareholder approval. The acquisition will be accounted for
under the purchase method of accounting.
F-25
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Pending Transaction with SBC Communications
During November 1999, Prodigy announced a proposed transaction with SBC
Communications Inc. ("SBC"). In the proposed transaction, SBC will acquire an
approximate 43% indirect interest in Prodigy. Prodigy will be the exclusive
retail Internet service marketed by SBC in the United States and SBC will
purchase the Prodigy Internet service from Prodigy on wholesale terms and
provide it to SBC's approximately 690,000 existing Internet subscribers. SBC
has committed to obtain for Prodigy an additional 1,200,000 Internet
subscribers over a three year period in exchange for a fee of $40 to $75 (in
whole dollars) for each subscriber obtained. SBC will pay Prodigy a penalty for
shortfalls in the number of subscribers delivered over the three year period,
with the size of the penalty based on the number of subscribers actually
obtained. The agreement also includes provisions under which SBC and Prodigy
can purchase other services from each other, including telecommunications and
network services.
In order to implement the transaction with SBC: (i) Prodigy will contribute
substantially all its assets and liabilities and transfer its employees to the
operating partnership; (ii) SBC will contribute to the operating partnership
routers, servers and associated hardware used in connection with its consumer
and small business Internet operations that are selected by Prodigy and
intangible assets consisting primarily of brand assets and subscriber
relationships; (iii) Prodigy will receive an initial interest in the operating
partnership of approximately 57%; (iv) SBC will receive an initial interest in
the operating partnership of approximately 43% and (v) SBC may convert its
interest in the operating partnership into a direct equity interest in Prodigy
at any time, or may require the operating partnership to be merged into Prodigy
at any time.
Prodigy will recognize the contribution of the assets by SBC to the operating
partnership at fair value in exchange for the partnership units issued. As a
result of the partnership units issued, Prodigy will consolidate the operating
partnership and will recognize the SBC minority interest in the operating
partnership. The contribution of the intangible assets at fair value will
result in a substantial amount of amortization which will reduce Prodigy's
future earnings or increase its future losses.
(Unaudited)
On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement includes a preliminary summary
of principal terms and conditions, estimated expenses and the structuring fee
due Citibank at closing. The letter agreement does not constitute a firm
financing commitment from Citibank, and Prodigy cannot assure that the Citibank
financing will be completed. The Citibank financing is subject to the issuance
by SBC of a performance guarantee and satisfaction of the following conditions:
. satisfactory completion of Citibank's due diligence review of Prodigy;
. in Citibank's determination, the absence of any material adverse change
in the financial markets or in the financial condition or operations of
Prodigy;
. negotiation and execution of mutually satisfactory documentation for the
financing;
. the receipt of specified ratings from ratings agencies; and
. the receipt of internal Citibank credit approval and any other approvals
and legal opinions as Citibank may deem necessary or advisable.
In connection with the Citibank financing, Prodigy and SBC have agreed in
principle that SBC will provide a contingent performance guarantee in exchange
for which Prodigy will grant SBC a contingent warrant to purchase 537,924
shares of Prodigy common stock for $1.00 per share. The performance guarantee
to be provided by SBC requires that, in the event Prodigy becomes unable to
continue to perform its service obligations under the subscriber contracts, SBC
shall either perform Prodigy's service obligations directly or replace Prodigy
with a substitute Internet service provider. See "Transactions with SBC" at
page 93.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
FlashNet Communications, Inc.
We have audited the accompanying consolidated balance sheet of FlashNet
Communications, Inc. as of December 31, 1999, and the related consolidated
statements of operations, cash flows, and shareholders' equity/(deficit) for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FlashNet
Communications, Inc. at December 31, 1999, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that FlashNet
Communications, Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred significant operating losses and has a
working capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Fort Worth, Texas
March 3, 2000
F-27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
FlashNet Communications, Inc.
We have audited the accompanying consolidated balance sheet of FlashNet
Communications, Inc. (the "Company") and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, shareholders' deficit
and cash flows for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries at
December 31, 1998, and the results of their operations and their cash flows for
the years ended December 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
February 23, 1999 (March 11,
1999 as to the last
paragraph in Note 12)
F-28
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,038,000 $ 7,045,000
Note receivable.................................... -- 700,000
Accounts receivable, net of allowance for doubtful
accounts of $28,000 and $181,000 in 1998 and 1999,
respectively...................................... 391,000 4,393,000
Prepaid expenses................................... 740,000 2,661,000
Other current assets............................... 551,000 904,000
---------- -----------
Total current assets............................. 2,720,000 15,703,000
Property and equipment, net.......................... 6,821,000 17,783,000
Software licenses, net of accumulated amortization of
$68,000 and $270,000 in 1998 and 1999,
respectively........................................ 6,000 338,000
Customer hardware, net of accumulated amortization of
$1,458,000.......................................... -- 5,579,000
Other assets......................................... 186,000 182,000
---------- -----------
Total............................................ $9,733,000 $39,585,000
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable....................................... $4,834,000 $ --
Trade accounts payable............................. 5,335,000 8,162,000
Accrued payroll and related expenses............... 535,000 913,000
Other accrued expenses............................. 438,000 1,100,000
Current portion of capital lease obligations....... 1,824,000 4,129,000
Current portion of convertible notes payable....... 186,000 --
Deferred revenue................................... 12,325,000 10,215,000
---------- -----------
Total current liabilities........................ 25,477,000 24,519,000
Capital lease obligations, net of current portion.... 52,000 5,410,000
---------- -----------
Total liabilities................................ 25,529,000 29,929,000
Commitments and contingencies (Note 7)
</TABLE>
<TABLE>
<S> <C> <C>
Redeemable Series A Preferred Stock, $1.00 par
value; 1,375,000 shares authorized, 1,364,085 and
none issued and outstanding, respectively......... 7,911,000 --
Shareholders' equity (deficit):
Common stock, no par value, 50,000,000 shares
authorized, 5,528,868 and 14,307,694 issued and
outstanding, respectively....................... 3,444,000 68,776,000
Additional paid-in capital, stock options........ -- 1,909,000
Unearned compensation............................ -- (1,427,000)
Warrants to purchase common stock................ 3,704,000 3,330,000
Accumulated deficit.............................. (30,855,000) (62,932,000)
------------ ------------
Total shareholders' equity (deficit)........... (23,707,000) 9,656,000
------------ ------------
Total.......................................... $ 9,733,000 $ 39,585,000
============ ============
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Consumer access services........... $ 11,942,000 $ 21,979,000 $ 31,104,000
Business services.................. 571,000 1,597,000 2,079,000
Shipping revenues.................. -- -- 2,374,000
Set-up fees and other.............. 5,024,000 3,316,000 4,694,000
------------ ------------ ------------
Total............................ 17,537,000 26,892,000 40,251,000
------------ ------------ ------------
Operating costs and expenses:
Cost of services (includes
amortization of and loss on
customer hardware of $1,537,000
and $1,581,000, respectively, for
the year ended December 31,
1999)............................. 8,215,000 11,797,000 19,909,000
Cost of shipping................... -- -- 1,995,000
Cost of other revenues............. 799,000 349,000 1,973,000
Sales and marketing................ 10,300,000 8,202,000 20,967,000
General and administrative......... 3,453,000 5,268,000 10,330,000
Operations and customer support.... 3,683,000 6,016,000 10,453,000
Depreciation and amortization...... 2,061,000 3,069,000 5,094,000
------------ ------------ ------------
Total............................ 28,511,000 34,701,000 70,721,000
------------ ------------ ------------
Loss from operations................. (10,974,000) (7,809,000) (30,470,000)
Interest expense..................... (735,000) (2,529,000) (1,274,000)
Interest and other income............ 21,000 73,000 1,371,000
------------ ------------ ------------
Loss before extraordinary item....... (11,688,000) (10,265,000) (30,373,000)
Extraordinary item--loss on early
extinguishment of debt.............. -- -- (1,656,000)
------------ ------------ ------------
Net loss............................. (11,688,000) (10,265,000) (32,029,000)
Deemed distributions and accretion on
redeemable preferred stock.......... -- (2,741,000) (48,000)
------------ ------------ ------------
Net loss attributable to common
shareholders........................ $(11,688,000) $(13,006,000) $(32,077,000)
============ ============ ============
Net loss per share, basic and
diluted:
Loss before extraordinary item..... $ (2.15) $ (2.36) $ (2.46)
Extraordinary item................. -- -- (0.13)
------------ ------------ ------------
Net loss............................. $ (2.15) $ (2.36) $ (2.59)
============ ============ ============
Weighted average shares, basic and
diluted............................. 5,449,000 5,505,000 12,370,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-30
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss............................ $(11,688,000) $(10,265,000) $(32,029,000)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Extraordinary loss................. -- -- 1,656,000
Depreciation....................... 2,040,000 3,010,000 4,796,000
Loss on customer hardware.......... -- -- 1,581,000
Amortization of customer hardware.. -- -- 1,537,000
Amortization of debt discount and
other............................. 236,000 1,951,000 650,000
Stock based compensation expense... -- -- 381,000
Provision for allowance for
doubtful accounts................. 100,000 21,000 197,000
(Gain) loss on sale of equipment... 12,000 -- (66,000)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable....................... (283,000) 82,000 (4,199,000)
Increase in prepaid expenses and
other current assets............. (254,000) (991,000) (2,500,000)
Increase in customer hardware..... -- -- (8,571,000)
Increase (decrease) in accounts
payable and and accrued
liabilities...................... 4,827,000 (816,000) 3,764,000
Increase (decrease) in deferred
revenue.......................... 6,352,000 1,779,000 (2,110,000)
------------ ------------ ------------
Net cash provided (used) by
operating activities............ 1,342,000 (5,229,000) (34,913,000)
------------ ------------ ------------
Investing activities:
Increase in note receivable......... -- -- (700,000)
Purchases of property and
equipment.......................... (4,664,000) (1,435,000) (7,829,000)
Purchases of software and other
assets............................. -- (10,000) (625,000)
Proceeds from sale of equipment..... 203,000 -- 2,910,000
------------ ------------ ------------
Net cash used in investing
activities...................... (4,461,000) (1,445,000) (6,244,000)
------------ ------------ ------------
Financing activities:
Proceeds from initial public
offering, net...................... -- -- 56,302,000
Proceeds from issuances of notes
payable............................ 6,500,000 -- 5,000,000
Proceeds from issuance of preferred
stock.............................. -- 7,802,000 --
Proceeds from employee stock
purchase plan and exercise of stock
options............................ -- -- 496,000
Principal payments under notes
payable............................ (27,000) (109,000) (11,500,000)
Principal payments under capital
lease obligations.................. (1,921,000) (1,551,000) (3,134,000)
------------ ------------ ------------
Net cash provided by financing
activities...................... 4,552,000 6,142,000 47,164,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 1,433,000 (532,000) 6,007,000
Cash and cash equivalents, beginning
of period........................... 137,000 1,570,000 1,038,000
------------ ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 1,570,000 $ 1,038,000 $ 7,045,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-31
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Paid in Warrants to Total
Common Stock Capital- Purchase Shareholders'
---------------------- Stock Unearned Common Accumulated Equity
Shares Amount Options Compensation Stock Deficit (Deficit)
---------- ----------- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 5,420,919 $ 462,000 $ -- $ -- $ 424,000 $ (6,161,000) $(5,275,000)
Conversion of notes
payable................ 66,300 195,000 -- -- -- -- 195,000
Warrants retired........ -- 45,000 -- -- (45,000) -- --
Issuance of warrants.... -- -- -- -- 3,332,000 -- 3,332,000
Net loss................ -- -- -- -- -- (11,688,000) (11,688,000)
---------- ----------- ---------- ----------- ---------- ------------ -----------
Balance, December 31,
1997................... 5,487,219 702,000 -- -- 3,711,000 (17,849,000) (13,436,000)
Conversion of notes
payable................ 34,679 102,000 -- -- -- -- 102,000
Exercise of warrants.... 6,970 7,000 -- -- (7,000) -- --
Deemed distribution
related to issuance of
redeemable preferred
stock.................. -- 2,633,000 -- -- -- (2,633,000) --
Accretion of discount
related to redeemable
preferred stock........ -- -- -- -- -- (108,000) (108,000)
Net loss................ -- -- -- -- -- (10,265,000) (10,265,000)
---------- ----------- ---------- ----------- ---------- ------------ -----------
Balance, December 31,
1998................... 5,528,868 3,444,000 -- -- 3,704,000 (30,855,000) (23,707,000)
Shares issued with
initial public
offering............... 3,625,000 56,302,000 -- -- -- -- 56,302,000
Conversion of Redeemable
Series A preferred
stock.................. 4,637,889 7,959,000 -- -- -- -- 7,959,000
Conversion of notes
payable................ 68,235 201,000 -- -- -- -- 201,000
Exercise of warrants.... 349,877 374,000 -- -- (374,000) -- --
Employee stock purchase
plan and exercise of
stock options.......... 97,825 496,000 -- -- -- -- 496,000
Accretion of discount
related to redeemable
preferred stock........ -- -- -- -- -- (48,000) (48,000)
Compensatory stock
option grants and
amortization........... -- -- 1,909,000 (1,427,000) -- -- 482,000
Net loss................ -- -- -- -- -- (32,029,000) (32,029,000)
---------- ----------- ---------- ----------- ---------- ------------ -----------
Balance, December 31,
1999................... 14,307,694 $68,776,000 $1,909,000 $(1,427,000) $3,330,000 $(62,932,000) $ 9,656,000
========== =========== ========== =========== ========== ============ ===========
</TABLE>
See notes to consolidated financial statements
F-32
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
General
FlashNet Communications, Inc. and its wholly-owned subsidiary, FlashNet
Marketing, Inc. ("FlashNet Marketing") (collectively referred to as the
"Company") were organized on September 25, 1995 and June 16, 1997,
respectively. The Company is a nationwide provider of consumer internet access
services and business services through a national network. FlashNet Marketing
is a marketing organization designed to increase utilization of the Company's
services through customer incentive marketing programs.
Going Concern
The Company has experienced significant operating losses since inception, a
working capital deficiency exists and it expects that it will continue to incur
net losses. The Company's operations are subject to certain risks and
uncertainties including, among others: (i) risks associated with technology and
regulatory trends; (ii) evolving industry standards; (iii) dependence on its
network infrastructure and suppliers; (iv) growth and acquisitions; (v) actual
and prospective competition by entities with greater financial and other
resources; and (vi) the development of the Internet market. There can be no
assurance that the Company will be successful in achieving or sustaining
profitability and positive cash flow in the future.
The merger agreement with Prodigy Communications Corporation (see Note 13 for
further discussion) requires the Company to maintain its basic infrastructure.
As a result, the Company has conducted its operations in a manner generally
consistent with its historical practices (except curtailing certain aspects of
its sales and marketing efforts) and has not sought additional financing. The
Company will be required to seek additional financing sufficient to meet its
working capital needs for fiscal 2000 if the merger with Prodigy is not
consummated. Based on the Company's recent efforts to raise capital, management
has determined that it most likely cannot raise additional capital or financing
on reasonable terms. If the merger is not consummated, management could be
forced to make significant reductions in its headcount and expenditure levels,
and would most likely be forced to raise capital, if obtainable, on unfavorable
terms. The Company has no contingency plans presently in place should the
merger with Prodigy fail to occur. Given that no assurance can be made that the
merger with Prodigy will be consummated or additional financing can be
obtained, substantial doubt exists about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or liabilities that may result from the outcome of these uncertainties.
Stock Split
During February 1999, the Company's Board of Directors and shareholders
approved a change in the number of authorized shares of common stock to
50,000,000, and approved a 3.4-to-1 stock split. Such change in authorized
shares and stock split became effective March 11, 1999.
Management Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Consolidation
All significant intercompany balances and transactions have been eliminated
in consolidation.
F-33
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less at date of purchase to be cash
equivalents. Cash and cash equivalents are stated at cost, which approximates
fair value.
Credit Risk
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards (approximately $4 million is due
from one credit card processor at December 31, 1999) and the ability to
terminate access on delinquent accounts. The large number of customers
comprising the customer base mitigates the concentration of credit risk.
Note Receivable
During the third quarter of 1999, the Company funded a $0.7 million note
receivable to a public telecommunications service company. The note bears
interest at 12% per annum and matures in April 2000. The note receivable is
convertible, at the option of the Company, into common stock of the
telecommunications service company.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of five years for customer
network equipment, three years for internal network equipment and two years for
software. Leasehold improvements are amortized over the shorter of the term of
the related lease or the estimated useful lives of the assets.
Equipment Under Capital Lease
The Company leases certain of its data communications equipment and other
fixed assets under capital lease agreements. The assets and liabilities under
capital leases are recorded at the lesser of the present value of aggregate
future minimum lease payments, or the fair value of the assets under lease.
Assets under these capital leases are depreciated over the shorter of the term
of the related lease (generally 36 to 48 months) or the useful life of the
asset.
Supplemental Disclosure Of Cash Flow Information
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1998 1999
-------- ---------- -----------
<S> <C> <C> <C>
Cash paid for interest..................... $512,000 $ 637,000 $ 926,000
Equipment acquired under capital leases.... 859,000 -- 10,771,000
Deemed distributions and accretion on
redeemable preferred stock................ -- 2,741,000 48,000
</TABLE>
Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets and would recognize impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated fair value of such assets. No
such impairments have been identified to date. The Company assesses the
impairment of long-lived assets when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
F-34
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Amounts received upon the sale or renewal of prepaid annual and monthly
business and consumer subscriptions are recorded as deferred revenue through a
30-day money back cancellation period and then amortized over the remaining
period in which service is provided. Annual business and consumer subscribers
canceling after the initial 30-day period are assessed a $50 cancellation fee.
Distributor sign-up and renewal fees are also recorded as deferred revenue and
amortized over the life of the related agreements. Revenue from the sale of
merchandise and hardware without bundled internet access is recognized
immediately upon the shipment of the merchandise. Consulting services have been
provided from time to time on a limited basis by the Company on both a fixed
fee and a time-and-materials basis and are recognized as the services are
performed. Consulting revenue for the years ended December 31, 1997, 1998 and
1999 was $1.0 million, $0 and $0, respectively. Advertising revenues, all of
which must be paid in cash by the customer, are recognized as advertising
services are provided. During the quarter ended June 30, 1999, the Company
began providing subscribers a bundled service offering combining Internet
access with a computer in exchange for a 2 or 3 year contractual commitment
payable on a monthly basis. Related revenue is recognized on a monthly basis
subject to deferral through a 30-day money back cancellation period. Shipping
revenues are derived primarily from the shipment of refurbished or new personal
computers issued in connection with the Company's new bundled service offering.
Shipping fees are non-refundable and are recognized as the personal computers
are shipped.
Cost of Revenues
Cost of services consist primarily of expenses related to customer hardware
and the monthly costs of telecommunications facilities necessary to provide
subscriber services, which are recognized as incurred. Cost of other revenues
include costs of installation, software, premium support costs, cost of
merchandise sold and hardware without bundled Internet access and the cost of
user guides and other materials for representatives and distributors and are
recognized as incurred. New customer bonuses paid to distributors and
continuing residual commission expenses are expensed as incurred.
Customer Hardware
In connection with the bundled service offering, the Company contracted with
vendors for the purchase of both new and refurbished personal computers
("PCs"). The costs of the PCs are capitalized as customer hardware and
amortized over the term of the contracts, with the amortization rate adjusted
for estimates for non-recoverability of equipment and uncollectible balances on
cancelled contracts. Amortization expense for the year ended December 31, 1999
was approximately $1.5 million. Net capitalized costs are reviewed periodically
for recoverability of balances on cancelled contracts.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expense
for the years ended December 31, 1997, 1998 and 1999 was $7.5 million, $5.8
million and $12.0 million, respectively.
Common Stock-Based Compensation
The Company accounts for its employee stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25 ("APB No.
25") and provides pro forma disclosures in the notes to the financial
statements, as if the measurement provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," had been adopted. The Company has adopted SFAS No. 123 for stock
based compensation related to nonemployees.
F-35
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
Share and per share amounts have been adjusted retroactively for the 3.4-to-1
stock split which was approved in February 1999 and became effective March 11,
1999. Basic loss per share is computed using the weighted average number of
common shares outstanding. Options, warrants and convertible securities, as
applicable at December 31, 1997, 1998 and 1999 are not included in the
computation of diluted loss per share as the effects would be antidilutive.
Source of Supplies
The Company relies on local telephone companies and other companies to
provide data communications capacity. Although management believes alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
The Company attempts to maintain multiple vendors for its modems, terminal
servers and high-performance routers, which are important components of its
network. If the suppliers are unable to meet the Company's needs as it expands
its network infrastructure, the Company may experience delays and increased
costs, which would adversely affect operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. In June
1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133".
The Statement defers for one year the effective date of SFAS No. 133. As the
Company does not have any derivative instruments or hedging transactions,
adoption of SFAS No. 133 is not anticipated to have any effect on the
consolidated financial statements.
Reclassification
Certain reclassifications have been made to prior period amounts to conform
to the 1999 presentation.
2. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Data communications equipment..................... $10,922,000 $19,741,000
Office and other equipment........................ 1,090,000 4,914,000
Purchased software................................ 361,000 2,969,000
----------- -----------
12,373,000 27,624,000
Less accumulated depreciation and amortization.... (5,552,000) (9,841,000)
----------- -----------
$ 6,821,000 $17,783,000
=========== ===========
</TABLE>
Property and equipment includes $4.7 million and $15.5 million of data
communications equipment under capital leases at December 31, 1998 and 1999,
respectively. Depreciation expense charged to operations was $2.0 million, $3.0
million and $4.8 million in the years ended December 31, 1997, 1998 and 1999,
respectively, including amortization of property under capital leases.
F-36
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Capital Lease Obligations
The Company has entered into capital leases for new data communications
equipment and software. The Company's capital lease obligations are generally
payable in 36 to 48 monthly installments from the dates of purchase and include
bargain purchase options at the end of the lease term.
Future minimum lease payments under capital leases at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000............................................................ $ 5,025,000
2001............................................................ 3,395,000
2002............................................................ 2,460,000
2003............................................................ 156,000
-----------
Total minimum lease payments.................................... 11,036,000
Less amounts representing interest and approximately $68,000 of
unamortized value attributed to warrants (see Note 6).......... 1,497,000
-----------
Present value of future minimum lease payments.................. 9,539,000
Less current portion............................................ 4,129,000
-----------
$ 5,410,000
===========
</TABLE>
In October 1999, the Company sold data communications equipment for $5.5
million. Such equipment was then leased back from a major financial services
company with a stated period of 36 months. The resulting leases are being
accounted for as capital leases. No gains or losses resulted from these
sale/leaseback transactions. Future minimum lease payments under these
sale/leasebacks are as follows (such amounts are included in minimum lease
payments in the table above):
<TABLE>
<S> <C>
2000............................................................. $2,259,000
2001............................................................. 2,303,000
2002............................................................. 1,778,000
----------
Total minimum lease payments..................................... $6,340,000
==========
</TABLE>
4. Convertible Notes Payable
During 1996, the Company issued units of convertible notes payable totaling
$0.6 million which were convertible into 215,900 shares of common stock. In
addition, the Company issued stock warrants exercisable at $0.003 per share for
177,038 shares of common stock, which were assigned a value of $0.2 million.
The remaining principal balance of the notes was due in July 1999 and bore 12%
annual interest, payable quarterly. At December 31, 1998, the notes payable
were presented net of approximately $16,000 in unamortized discount. During
1999, the outstanding balance of the notes payable was converted at $2.94 per
share, into an aggregate of 68,235 shares of the Company's common stock. The
outstanding stock warrants representing 170,068 shares of common stock were
also exercised during 1999.
5. Notes Payable
In January 1999, the Company entered into a $5.0 million term loan agreement
with Goldman Sachs Credit Partners L. P. ("Goldman Sachs"). The term loan's
stated maturity was January 15, 2000, bore interest at 13%, was subject to a
repayment fee of 1.13% to 4.50% of the repaid principal and was secured by a
second lien on the Company's assets. As part of this financing, a Goldman Sachs
affiliate obtained the right to acquire
F-37
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
within 180 days of the consummation of an initial public offering up to $5.0
million of the Company's common stock at the initial public offering price.
Goldman Sachs did not exercise its right to acquire the Company's common stock.
In December 1997, the Company issued a $6.5 million Secured Promisory Note to
Ascend Communications, Inc. ("Ascend Note"). Warrants initially exercisable at
$0.003 per share for 1,360,000 shares of the Company's common stock were issued
as part of the agreement and were assigned a value of $3.3 million (see Note
6). Substantially all of the Company's assets served as collateral for the
Ascend Note. The principal balance of the Ascend Note was due and payable at
the earlier of December 28, 1999 or the effective date of a defined initial
public offering by the Company providing gross proceeds in excess of $12.0
million or a change of control. Interest accrued at 6.0% per annum and was
payable monthly. At December 31, 1998, the principal balance outstanding was
$6.5 million and was presented net of approximately $1.7 million in unamortized
discount.
The Company repaid both the Goldman Sachs note and Ascend Note in March 1999
with proceeds from the initial public offering. As a result, the Company
recognized an extraordinary loss from early extinguishment of debt of $1.7
million comprised primarily of unamortized discount at the time of
extinguishment.
6. Capital Stock
At December 31, 1999, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Warrants........................................................... 1,360,000
Stock options...................................................... 4,164,705
---------
5,524,705
=========
</TABLE>
Initial Public Offering
On March 16, 1999, the Company effected its initial public offering ("IPO").
The IPO consisted of 3,450,000 shares of Common Stock issued at $17.00 per
share. Concurrently with the IPO, the Company sold an additional 175,000 shares
of Common Stock to SBC Communications Inc. at $17.00 per share. Net proceeds to
the Company were approximately $56.3 million.
Redeemable Convertible Preferred Stock
In May and August 1998, the Company issued a total of 1,364,085 shares of its
redeemable Series A Convertible Preferred Stock to investors including among
others, affiliates of certain directors, for $8.3 million and incurred stock
issuance costs of $0.5 million. Each share of Preferred Stock was convertible
into 3.4 shares of the Company's common stock. The Company has recorded
dividends in 1998 of $2.6 million for the deemed difference on the date of
issuance between the issuance price of the Preferred Stock and the fair value
of the common stock into which the Preferred Stock was convertible. Accretion
of stock issuance costs was $107,000 and $48,000 for the years ended December
31, 1998 and 1999, respectively. Effective with the IPO in March 1999, the
outstanding preferred stock was automatically converted into 4,637,889 shares
of the Company's common stock.
Warrants
During 1996, the Company entered into an agreement to issue warrants to
purchase shares of common stock at $0.003 per share in connection with a lease
line for equipment. The 179,809 warrants were assigned a value of $249,000. The
warrants were exercised in July 1999. Warrants issued with the Ascend Note are
currently exercisable at $0.003 per share for 1,360,000 shares through March
16, 2004.
F-38
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options
During 1997, the Company adopted a Stock Incentive Plan (the "Plan"). The
Plan provides for the issuance of incentive and non-qualified stock options to
key employees and directors of the Company. The Board of Directors increased
the number of shares of common stock authorized and reserved for issuance under
the 1997 Stock Incentive Plan to 1,327,230 shares in 1999. As of December 31,
1999, options to purchase 368,062 shares of common stock remained available for
grant under the Plan. Options vest over periods ranging from 1 to 5 years and
generally expire 10 years from date of grant. Stock option activity from
January 1, 1997 through December 31, 1999 is summarized by the following
(adjusted for the 3.4-to-1 stock split occurring in February 1999):
<TABLE>
<CAPTION>
Exercisable
----------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
-------- -------- ------- --------
<S> <C> <C> <C> <C>
January 1, 1997.......................... 53,550 $ 0.97 17,000 $0.79
Granted................................ 88,230 1.81 -- --
Cancelled.............................. (20,400) 0.90 -- --
--------
December 31, 1997........................ 121,380 1.59 64,090 1.16
Granted................................ 657,424 5.41 -- --
Cancelled.............................. (160,820) 1.87 -- --
--------
December 31, 1998........................ 617,984 5.58 74,970 3.11
Granted................................ 662,442 11.26 -- --
Exercised.............................. (81,320) 3.21 -- --
Cancelled.............................. (239,938) 11.53 -- --
--------
December 31, 1999........................ 959,168 8.41 18,928 2.35
========
</TABLE>
Options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Ranges of Average Average
Exercise Options Years to Exercise Currently
Price Outstanding Expiration Price Exercisable
------------ ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Options issued at market
price.................. $2.35-8.82 595,241 9.34 $ 5.87 18,928
$17.00-30.00 197,004 9.45 18.01 --
Options issued below
market price........... $5.88-8.82 166,923 9.18 6.16 --
------- ------
959,168 18,928
======= ======
</TABLE>
During January 1999, options to purchase 150,943 and 15,980 shares of common
stock at $5.88 per share and $8.82 per share, respectively, were granted to
officers, directors, and employees under the Plan. In conjunction with these
grants, the Company recognized unearned compensation expense of $1.8 million
for the difference between the total exercise price and fair market value of
the common stock. This expense is being amortized over the vesting periods
ranging from 3 to 5 years from the date of grant. Compensation expense for the
year ended December 31, 1999 related to these grants was $0.4 million.
F-39
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company applies the provisions of APB No. 25 and related interpretations
in accounting for its stock options. Accordingly, compensation cost has been
recognized only to the extent the exercise price assigned to the options at the
dates of grant were less than the estimated fair market value of the common
stock at the grant dates. Had compensation cost for the Company's stock options
been determined based on the fair value at the grant dates for awards
consistent with the method prescribed by SFAS No. 123, the Company's pro-forma
net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common
shareholders:
Actual........................ $(11,688,000) $(13,006,000) $(32,077,000)
Pro-forma..................... $(11,710,000) $(13,034,000) $(32,807,000)
Basic and diluted loss per
share:
Actual........................ $ (2.15) $ (2.36) $ (2.59)
Pro-forma..................... $ (2.15) $ (2.37) $ (2.65)
</TABLE>
The weighted average fair value of options granted at market price during
1997, 1998 and 1999 was estimated at $0.56, $2.62 and $8.63 per share,
respectively. The weighted average fair value of options granted below market
price during 1999 was estimated at $14.11 per share. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions used for the
grants: risk-free interest rates of 6.00% in 1997, 5.00% in 1998 and 6.00% in
1999, dividend yield of 0%, expected lives of three years in 1997, 1998 and
1999 and expected volatility of 1.1 in 1999. There was no expected volatility
in 1998 and 1997 because the Company's stock was not publicly traded.
Black-Scholes option valuation models are used in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock-price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Employee Stock Discount Purchase Plan
Effective with the IPO, the Company adopted an Employee Stock Discount
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is intended
to give employees a convenient means of purchasing shares of Common Stock
through payroll deductions. The Stock Purchase Plan is open to all employees of
the Company. Each participating employee's contributions will be used to
purchase shares for the employee's share account as promptly as practicable
after each calendar quarter. The cost per share will be 85% of the lower of the
closing price of the Company's Common Stock on the Nasdaq National Market on
the first or the last day of the calendar quarter. The Company has reserved
340,000 shares of Common Stock for issuance under the Stock Purchase Plan.
F-40
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies
Commitments
Guaranteed monthly levels of telecommunication services with certain of the
Company's telecommunication vendors at December 31, 1999 aggregate to the
following annual amounts:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000............................................................ $1,141,000
2001............................................................ 1,051,000
2002............................................................ 676,000
----------
$2,868,000
==========
</TABLE>
The Company leases certain of its facilities under non-cancelable operating
leases expiring in various years through 2009. Total rent expense for all
operating leases amounted to $1,806,000, $1,560,000 and $2,268,000 in the years
ended December 31, 1997, 1998 and 1999, respectively.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000............................................................ $1,707,000
2001............................................................ 925,000
2002............................................................ 657,000
2003............................................................ 540,000
2004............................................................ 540,000
Thereafter...................................................... 2,010,000
----------
$6,379,000
==========
</TABLE>
Contingencies
The Company is subject to certain claims and legal proceedings that arise in
the ordinary course of its business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be decided unfavorably to the Company. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition, operating
results or cash flows of the Company.
F-41
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
No provision for income taxes has been recognized as the Company incurred net
operating losses for income tax purposes.
Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Net operating loss carryforwards.................... $8,100,000 $18,662,000
Deferred revenue.................................... -- 518,000
Book depreciation in excess of tax.................. 450,000 148,000
Other............................................... 100,000 410,000
---------- -----------
Total deferred tax assets......................... 8,650,000 19,738,000
Deferred tax liabilities............................ -- --
---------- -----------
Net deferred tax asset.............................. 8,650,000 19,738,000
Valuation allowance................................. (8,650,000) (19,738,000)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets,
as it is more likely than not that these assets will not be realized.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $50.4 million for income tax purposes. These net operating loss
carryforwards begin to expire in 2013 and may be limited in their use due to
significant changes in the Company's ownership in prior years. The differences
between the Company's effective tax rate and the federal statutory rate of 34%
are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate.................... (34)% (34)% (34)%
State tax benefit, net of federal benefit............... (3) (3) (3)
Valuation allowance..................................... 37 37 35
Other................................................... -- -- 2
--- --- ---
Total income tax expense................................ --% --% --%
=== === ===
</TABLE>
9. Employee Savings Plan
During 1997, the Company began sponsoring an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan does not provide for
Company contributions.
10. Fair Value of Instruments
The Company has estimated the fair value of financial instruments as of
December 31, 1998 and 1999. The estimated fair value amounts are determined by
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
F-42
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's financial instruments include accounts receivable, note
receivable, accounts payable, notes payable and capital lease obligations. The
Company has estimated that the carrying amount of accounts receivable, note
receivable and accounts payable approximates fair value due to the short-term
maturities of these instruments.
The Company's notes payable and capital lease obligations bear fixed interest
rates and are privately placed with unique terms and no active market. The fair
value of such financial instruments was determined by discounting future cash
flows at current market yields, which were determined based on the market
yields for similar instruments with similar terms. The following is a summary
of both the carrying values and estimated fair values of such instruments.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1999
--------------------- ---------------------
Historical Historical
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Convertible note payable........ $ 186,000 $ 217,000 $ -- $ --
Note payable.................... 4,834,000 5,092,000 -- --
Capital lease obligations....... 1,876,000 1,876,000 9,539,000 9,266,000
</TABLE>
11. Valuation and Qualifying Accounts
The following table sets forth activity in the Company's reserve accounts:
<TABLE>
<CAPTION>
Beginning Charges to End of
Allowance for Doubtful Accounts of Period Operations Deductions Period
------------------------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997........ $28,000 $100,000 $93,000 $35,000
Year ended December 31, 1998........ 35,000 21,000 28,000 28,000
Year ended December 31, 1999........ 28,000 197,000 44,000 181,000
</TABLE>
12. Loss on Customer Hardware
During the fourth quarter, the Company filed a lawsuit against one of its
providers of refurbished computers due to a dispute regarding the magnitude of
reimbursement for returned computers. The Company believed that returns of
computers related to cancelled service agreements were the financial
responsibility of the provider and that all returns of refurbished computers
would be credited against amounts previously billed. In lieu of costly
litigation, the Company settled the claim with the vendor. Under the terms of
the settlement agreement, the Company agreed to pay this vendor $2.9 million
for an option to purchase 5,000 new PC's at substantially discounted levels
(approximately $1.9 million related to PC purchases is included in prepaid
expenses at December 31, 1999) and for the satisfaction of all billed and
unbilled invoices. Additionally, the Company agreed to bear the financial
burden of all future returns unrelated to warranty issues. Subsequent to the
date of the settlement agreement, the Company experienced actual returns in
excess of its estimate at the time of settlement. These excess returns resulted
in a charge in the fourth quarter of approximately $1.6 million as the Company
had no additional recourse to the vendor based on the terms of the settlement
agreement.
13. Pending Merger with Prodigy Communications Corporation
On November 5, 1999, the Company and Prodigy Communications Corporation
("Prodigy") entered into a definitive agreement whereby Prodigy will acquire
the Company in a stock-for-stock merger. Under the terms of the merger
agreement, Prodigy will issue 0.35 shares of Prodigy common stock for each
share of the Company's common stock outstanding on the closing date of the
transaction.
F-43
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Boards of Directors of both Prodigy and the Company unanimously approved
the merger; however, the merger is also subject to approval by the Company's
shareholders and to customary regulatory approvals. Closing of the merger is
expected to occur in the second quarter of 2000. In connection with the merger
agreement, the Company has granted Prodigy an option to purchase up to 19.9% of
the outstanding shares of the Company's common stock at $8.66 per share, which
may be exercised in certain circumstances. Based on the number of shares of the
Company and Prodigy currently outstanding, Prodigy will issue approximately 5.0
million shares to complete the merger.
F-44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. Republic Communications, Inc.
We have audited the accompanying statement of assets to be acquired and
liabilities to be assumed of the Web Hosting Business of U.S. Republic
Communications, Inc. (the Web Hosting Business as defined in Note 1 to the
financial statements), as of December 31, 1998, and the related statements of
operations and cash flows for the period from January 6, 1998 (inception) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets to be acquired and liabilities to be assumed
of the Web Hosting Business as of December 31, 1998, and the results of its
operations and its cash flows for the period January 6, 1998 (inception) to
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
July 8, 1999,
Except for the first paragraph of Note 1, as to which the date is September 7,
1999
F-45
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
STATEMENTS OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(in thousands)
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (Unaudited)
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts and adjustments of $2,729 and $4,824 at
December 31, 1998 and September 30, 1999,
respectively..................................... $3,495 $1,622
Prepaid expense................................... 24
------ ------
Total current assets............................ 3,495 1,646
Property and equipment:
Computer equipment................................ 566 1,311
Furniture and fixtures............................ 681 982
Leasehold improvements............................ 26 52
------ ------
1,273 2,345
Less accumulated depreciation and amortization.... 258 715
------ ------
Net property and equipment........................ 1,015 1,630
------ ------
Total assets.................................... $4,510 $3,276
====== ======
LIABILITIES
Current liabilities:
Demand note payable due to VarTec Telecom, Inc.... $9,000 $9,000
Accounts payable.................................. 308 1,802
Accrued taxes..................................... 412 --
Accrued payroll and benefits...................... 126 46
Accrued billing and collection costs.............. 374 26
Marketing costs payable........................... 1,310 113
Accrued liabilities............................... 76 43
Deferred revenue.................................. 790 591
------ ------
Total liabilities............................... 12,396 11,621
------ ------
Net liabilities................................. $7,886 $8,345
====== ======
Commitments and contingencies (Notes 3 and 4)
</TABLE>
See accompanying notes.
F-46
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Period from
January 6, 1998 Nine Months Ended
(inception) to September 30, 1999
December 31, 1998 (Unaudited)
----------------- ------------------
<S> <C> <C>
Net revenues............................... $ 7,106 $19,069
------- -------
Operating costs and expenses:
Cost of revenue.......................... 32 249
Marketing................................ 11,402 12,418
Billing and collection................... 710 2,165
Depreciation and amortization............ 114 277
Bad debts................................ 186 386
Other general and administrative......... 2,365 4,169
------- -------
14,809 19,664
------- -------
Operating loss............................. (7,703) (595)
Interest expense......................... 260 473
------- -------
Net loss............................... $(7,963) $(1,068)
======= =======
</TABLE>
See accompanying notes.
F-47
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
January 6, 1998 Nine Months Ended
(inception) to September 30, 1999
December 31, 1998 (Unaudited)
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................ $(7,785) $ (821)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 116 289
Bad debt expense...................... 186 386
Changes in operating assets and
liabilities:
Accounts receivable, net............ (3,680) 1,487
Prepaid expense..................... -- (24)
Accounts payable.................... 308 1,494
Accrued taxes....................... 412 (412)
Accrued payroll and benefits........ 126 (80)
Accrued billing and collection
costs.............................. 374 (348)
Marketing costs payable............. 1,310 (1,197)
Accrued liabilities................. 76 (33)
Deferred revenue.................... 790 (199)
------- -------
Net cash used in operating activities..... (7,767) 542
Cash flows from investing activities:
Purchase of property and equipment...... (1,124) (1,073)
------- -------
Net cash used in investing activities..... (1,124) (1,073)
Cash flows from financing activities:
Net transfers from USRC................. 8,891 531
------- -------
Net cash provided by financing
activities............................... 8,891 531
------- -------
Net increase in cash...................... -- --
Cash at beginning of period............... -- --
------- -------
Cash at end of period..................... $ -- $ --
======= =======
Cash paid during the period for interest.. $ 82 $ 227
======= =======
</TABLE>
See accompanying notes.
F-48
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
VarTec Telecom, Inc. (VTI), Vartec Telecom Holding Company (VTH), U.S.
Republic Communications, Inc. (USRC), the minority stockholders of USRC and
Prodigy Communications Corporation (the Buyer) entered into an Asset Purchase
Agreement dated as of September 7, 1999 (the Agreement). As specified in the
Agreement on the contractually designated closing date, the Buyer will acquire
certain assets and assume certain liabilities of the Web Hosting Business of
USRC (the Business). The financial statements present the assets to be acquired
and liabilities to be assumed and the related results of operations and cash
flows of the Business based upon the transaction as set forth in the Agreement.
This transaction is herein referred to as the Acquisition.
The Business provides server-based hosting of Internet Web pages for small to
medium sized businesses within the continental United States. The Business
offers these services through its BizOnThe.Net Web site. The Business began
operations on January 6, 1998 (inception). Since inception, the Business has
been in the start-up phase of its operations and is still in the process of
developing its business. As a result, the Business has incurred operating
losses and is dependent upon USRC and VTI for funding of its operations.
The Business is an operating division of USRC, a majority-owned subsidiary of
VTH which, in turn, is a wholly owned subsidiary of VTI. VTI is a majority-
owned subsidiary of CommuniGroup, Inc., which is a wholly owned subsidiary of
Telephone Electronics Corporation (TEC). USRC also operates a long distance
resell business with which the Business shares resources and certain costs and
expenses. Assets and liabilities of USRC have been included in the accompanying
Statement of Assets to be Acquired and Liabilities to be Assumed if the items
are to be acquired or assumed by the Buyer as specified in the Agreement.
The financial statements have been prepared in accordance with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
accompanying unaudited condensed consolidated financial statements for the
period ended September 30, 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating costs and expenses presented in the accompanying financial
statements reflect allocations based on management's best estimates as to what
the operating results of the Business would have been as if it had operated as
a stand-alone company. However, these estimates could differ from actual costs
and expenses incurred had the Business operated as a stand-alone company.
Accounts Receivable
Accounts receivable consist of amounts due from local exchange carriers
(LECs) that purchase USRC's customer billings for monthly service fees and
associated taxes on a full-recourse basis. The LECs purchase the accounts
receivable net of billing adjustments and estimates of bad debts. Unbillable
amounts that the LECs cannot bill to the customer due to incorrect or
incomplete billing information are excluded from gross revenues and related
receivables. Billing adjustments consist of amounts credited to customer
accounts by the LECs or USRC resulting from disputed charges. Bad debts are
estimated by the LECs either based on historical data or on a predetermined
percentage. These estimates are trued-up on periodic basis by the LECs based on
the actual uncollectible accounts.
F-49
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The allowance for doubtful accounts and adjustments at December 31, 1998
represents an estimate of the future adjustments to be reported by the LECs
which relate to billings through such date. This estimate is based on the
history of adjustments reported by the LECs to the Business.
Property and Equipment
Property and equipment are recorded at cost. All property and equipment of
USRC is to be acquired by the Buyer under the Agreement and, accordingly, is
included in the accompanying Statement of Assets to be Acquired and Liabilities
to be Assumed at its historical carrying value when transferred to the
Business. Maintenance and repairs are charged against operations as incurred,
while renewals and major replacements are capitalized.
The Business provides depreciation on fixed assets using the straight-line
method over the estimated useful lives of the respective assets as follows:
<TABLE>
<CAPTION>
Estimated Useful Life Years
---------------------------
<S> <C>
Office furniture and equipment................... 1 to 4 years
Leasehold improvements........................... 5 years
</TABLE>
Total depreciation and amortization expense recorded by USRC was $191,000 for
the year ended December 31, 1998. Depreciation and amortization expense was
allocated to the Business as follows: (1) assets identified as used only by the
Business were allocated the total depreciation and amortization for each asset
and (2) for assets that were utilized in both the Business and long distance
business, depreciation and amortization expense was allocated based on monthly
gross revenues generated by each business.
Accounts Payable
Accounts payable consist primarily of trade payables for equipment and
general and administrative costs. Total USRC accounts payable at December 31,
1998, was $466,000. Accounts payable which relates to both the Business and
long distance business have been allocated to the Business based on the ratio
of revenues to total gross revenues of USRC for the month of December 1998.
Accrued Taxes
Accrued taxes consist of state and local sales taxes and federal excise tax
payable. State and local taxes are calculated by the LECs for USRC and billed
to the customers. The LECs remit back the amount of sales and excise taxes
collected from customers to USRC. The total USRC accrued tax liability as of
December 31, 1998 was $916,000. The Business was allocated accrued taxes based
on the ratio of the Business' gross revenues to total gross revenues of USRC
for the month of December 1998.
Revenue Recognition
Revenues consist of monthly service fees for providing Web hosting services
on the Company's server and providing Internet users access to customers' Web
pages. Revenues are recognized as services are provided. Deferred revenues
represent the amount of gross revenues billed but not earned as of December 31,
1998.
Marketing Costs
Marketing costs are fees due to independent sales agents for obtaining
customers and are expensed as incurred.
F-50
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Billing and Collection Costs
Billing and collection costs consist of the LECs service charges to the
Business for performing the billing and collection functions for USRC. Total
billing and collection expense for USRC was $3,094,000 for the year ended
December 31, 1998. Billing and collection expense has been allocated to the
Business based on the ratio of the Business' monthly gross revenues to total
monthly gross revenues of USRC.
Accrued billing and collection costs represent amounts charged by the LECs to
provide billing and collection services on USRC's behalf. The total billings
and collections costs accrued as of December 31, 1998, for USRC was $832,000.
The Business has been allocated accrued billing and collection costs based on
the ratio of the Business' gross revenues to total gross revenues of USRC for
the month of December 1998.
Other General and Administrative Expenses
Other general and administrative expenses include payroll and benefits,
facilities charges, call rating, verification services and other general and
administrative expenses incurred by USRC. The total costs incurred by USRC for
general and administrative costs in 1998 were $5,920,000. General and
administrative expenses allocated to the Business, excluding call rating and
verification services represent the incremental increase over the historical
general and administrative expenses incurred by USRC's long distance resell
business since the inception of the Business. Call rating costs included in
general and administrative expense were allocated to the Business based on the
ratio of the Business' gross revenues to the total gross revenues of USRC for
the year ended December 31, 1998. Verification services included in general and
administrative costs represent actual costs incurred by the Business.
All facilities and personnel are to be assigned to the Buyer as a part of the
Acquisition. Therefore, all facility related accruals and payroll accruals have
been included in the statement of assets to be acquired and liabilities to be
assumed.
Software Development Costs
The Business expenses all internal costs related to the development and
implementation of internal-use software. Purchased software costs are
capitalized if the Business will realize future benefits. These costs are
amortized over a period of twelve months. Beginning in 1999, the Business will
adopt Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained For Internal Use. The Business is currently reviewing the
impact that SOP 98-1 and does not believe it will have a material effect on its
financial statements.
Income Taxes
The results of operations of the Business are included in the consolidated
income tax returns of TEC. Pursuant to the Agreement, TEC will retain
substantially all income tax liabilities and rights to all tax refunds relating
to operations prior to the closing date of the Acquisition. Accordingly, the
statements of assets to be acquired and liabilities to be assumed do not
reflect income tax receivables or payables. The Business has incurred losses
for both financial reporting and income tax reporting purposes since its
inception. No benefit for income taxes, as if the Business were liable for
federal and state income taxes as a separate legal entity for the period from
January 6, 1998 (inception) through December 31, 1998, has been recorded as the
deferred tax asset resulting from such losses would have been offset by a
valuation allowance as future realization of such asset is uncertain.
F-51
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Related Party Transactions
In the normal course of operations, USRC receives certain services or engages
in transactions with VTI, VTH, and TEC. The significant services and
transactions with affiliated companies and related parties not discussed
elsewhere are summarized below.
USRC received charges for interest and insurance expense from VTI, VTH, and
TEC which totaled $310,000 and $72,000, respectively, for the year ended
December 31, 1998. Such costs allocated to the Business represent the
incremental increase in these costs incurred by USRC since the inception of the
Business.
Commissions expense incurred by the Business for telemarketing services to
companies which an officer of USRC has an ownership interest was approximately
$896,000 for the period from January 6, 1998 (inception) to December 31, 1998.
As of December 31, 1998, USRC has a demand note payable to VTH in the amount
of $9,103,000. USRC also has a short-term payable to VTH in the amount of
$127,000. The Buyer has agreed to assume $9,000,000 of these payables as part
of the Acquisition and, therefore, only $9,000,000 of the total $9,230,000
payable to VTH has been included in the accompanying Statement of Assets to be
Acquired and Liabilities to be Assumed. Interest expense related to these notes
was allocated to the Business based on the increase in the level of borrowings
by USRC during 1998 to fund the start-up operations of the Business.
3. Commitments
The Company leases office space under three operating leases expiring in
2003. Total rental expense of USRC amounted to $243,000 for the year ended
December 31, 1998. Rental expense has been included in other general and
administrative expense allocated to the Business in the Statement of
Operations. The operating leases have escalation clauses with respect to
monthly rent. Rent may be adjusted each annual period by a proportionate share
of the landlord's operating and maintenance costs pertaining to the premises as
compared to a predetermined base.
At December 31, 1998, future minimum lease payments under the above
noncancelable lease are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 338,000
2000.............................................................. 344,000
2001.............................................................. 353,000
2002.............................................................. 356,000
2003.............................................................. 255,000
----------
Total........................................................... $1,646,000
==========
</TABLE>
4. Contingencies
The Federal Trade Commission (FTC) has conducted an inquiry into the
marketing and billing practices (especially the LECs billings) of USRC. A
settlement agreement has been reached whereby USRC will modify certain internal
procedures and offer potential refunds to customers who have been LECs billed
and who may have incurred unauthorized billings resulting from the actions of
telemarketers, without the actual knowledge of USRC. The number of customers
which could be eligible for refunds and the related amount of refunds which may
result from this proposed settlement cannot be estimated at this time.
F-52
<PAGE>
WEB HOSTING BUSINESS
OF U.S. REPUBLIC COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1999, the Attorney General for the State of Arkansas filed a
complaint against USRC alleging violations of the Arkansas Deceptive Trade
Practices Act seeking various forms of restitution to affected customers, civil
penalties, and revocation of the right to do business within the state. USRC
has responded to this initial complaint. However, the ultimate outcome of this
matter cannot be determined at this time.
In June 1999, the Attorney General for the State of North Carolina filed a
complaint against USRC alleging violations of the North Carolina Unfair and
Deceptive Trade Practices Act seeking various forms of restitution to affected
customers, civil penalties, and revocation of the right to do business within
the state. The Attorney General has also filed a temporary restraining order
prohibiting USRC or its agents from engaging in telephonic sales activities or
solicitations in North Carolina and barring all collection activity. On July 8,
1999, this original temporary restraining order was superseded by a consent
order agreed to by both USRC and the Attorney General which permits collection
activity on accounts billed through the LECs. The ultimate outcome of this
matter cannot be determined at this time.
USRC is currently responding to inquiries from various other states
concerning USRC's trade practices. However, no formal complaints have been
filed by these other states. The Business is also subject to other legal
proceedings and claims which have arisen in the ordinary course of its
business.
Losses and related obligations, if any, which may result from these matters
and proceedings will remain the obligation of USRC and are not being assumed by
the Buyer.
5. Employee Stock Ownership Plan (ESOP)
TEC has established an ESOP that covers substantially all employees with one
year or more of service with a participating company. Participating companies
include TEC and its subsidiaries (including USRC). This plan is funded by
participating company contributions determined annually by TEC's Board of
Directors. USRC contributed $255,000 to the ESOP during 1998. ESOP expense has
been included in other general and administrative expense allocated to the
Business in the Statement of Operations. The employees of the Business will no
longer participate in this plan effective with the closing date of the
Acquisition.
6. Year 2000 Issue--Unaudited
The Business operates numerous date-sensitive computer applications and
systems throughout their businesses. Management of the Business believes all of
its internal systems are Year 2000 compliant. Through December 31, 1998, the
Business has relied on the LECs for its billing and collection functions and
has no knowledge as to the compliance of these companies with the Year 2000
issue. Subsequent to December 31, 1998, the Business has begun to transition
the billing and collection functions in-house through the use of a direct-
billing system. No costs have been incurred in order to make the Business'
systems Year 2000 compliant. No contingency plans and back-up systems are
currently being written.
F-53
<PAGE>
ANNEX A
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
November 19, 1999
The Board of Directors
Prodigy Communications Corporation
44 South Broadway, 9th Floor
White Plains, NY 10601
Ladies and Gentlemen:
We understand that Prodigy Communications Corporation ("Prodigy"), SBC
Communications Inc. ("SBC") and wholly-owned subsidiaries of Prodigy and SBC
have proposed to enter into an Investment, Issuance, Contribution and
Assumption Agreement (the "Investment Agreement"), a Strategic and Marketing
Agreement (the "Marketing Agreement") and an Amended and Restated Limited
Partnership Agreement (the "Partnership Agreement" and, collectively, the
"Transaction Documents"), pursuant to which Prodigy and SBC would create a
newly-formed limited partnership that would consist of (i) substantially all of
the assets and liabilities of Prodigy and (ii) certain contracts and
commitments and assets of the consumer and small business Internet service
provider operations ("SBC Internet") of SBC (the "Transaction").
We further understand that, pursuant to the Transaction, Prodigy (i) would be
recapitalized whereby Prodigy shareholders would exchange each existing share
of common stock, par value $.01 per share, of Prodigy ("Prodigy Common Stock")
for one share of new class A common stock, par value $.01 per share, of Prodigy
("Prodigy Class A Common Stock") and (ii) would issue to SBC (a) limited
partnership interests exchangeable into approximately 50,136,000 shares of
Prodigy Class A Common Stock and (b) one share of new class B common stock, par
value $.01 per share, of Prodigy ("Prodigy Class B Common Stock" and, together
with the limited partnership interests exchangeable into shares of Prodigy
Class A Common Stock to be issued to SBC, the "Consideration"). In addition,
options and warrants to purchase shares of Prodigy Common Stock shall be
hereafter exercisable for shares of Prodigy Class A Common Stock on
substantially the same terms.
You have asked us to render our opinion as to whether the Consideration to be
issued is fair, from a financial point of view, to Prodigy. In the course of
performing our review and analyses for rendering this opinion, we have:
. reviewed a draft of the Transaction Documents in substantially final
form dated November 17, 1999;
. reviewed (i) Prodigy's Prospectus, dated February 10, 1999, relating to
its initial public offering of Prodigy Common Stock, (ii) its Annual
Report on Form 10-K for the year ended December 31, 1998, (iii) its
Quarterly Reports on Form 10-Q for the periods ended March 31, 1999,
June 30, 1999 and September 30, 1999 and (iv) its Current Reports on
Form 8-K filed on June 3, 1999, August 3, 1999, September 14, 1999,
October 21, 1999 and November 18, 1999;
. reviewed certain unaudited operating and financial information relating
to SBC Internet for the year ended December 31, 1998 and monthly periods
ended September 30, 1999;
A-1
<PAGE>
. reviewed certain operating and financial information relating to
Prodigy's business and prospects on a stand-alone basis, including
projections, prepared and provided to us by Prodigy management (the
"Prodigy Projections");
. reviewed certain projected SBC Internet subscriber data supplied by SBC
and incorporated by Prodigy management into the "Pro Forma Projections"
(as defined below);
. reviewed certain operating and financial information relating to
Prodigy's business and prospects as adjusted to reflect the pro forma
effects of the Transaction, including projections, prepared and provided
to us by Prodigy management (the "Pro Forma Projections") and certain
estimates of revenue enhancements, cost savings and other combination
benefits expected to result from the Transaction, prepared and provided
to us by Prodigy management (the "Combination Benefits");
. met with certain members of Prodigy's senior management to discuss
Prodigy's business, operations, historical and projected financial
results and future prospects;
. met with certain members of SBC's senior management to discuss SBC
Internet's business, operations, historical financial results and future
prospects;
. reviewed the historical prices, trading multiples and trading volumes of
shares of Prodigy Common Stock;
. reviewed publicly available financial data, stock market performance
data and trading multiples of companies which we deemed generally
comparable to Prodigy and SBC Internet;
. performed discounted cash flow analyses based on the Prodigy Projections
and the Pro Forma Projections, both including and excluding the
Combination Benefits;
. reviewed the pro forma financial condition and capitalization of Prodigy
giving effect to the Transaction; and
. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including
without limitation the Prodigy Projections, the Pro Forma Projections and the
Combination Benefits provided to us by Prodigy. With respect to the Prodigy
Projections, the Pro Forma Projections and Combination Benefits that could be
achieved upon consummation of the Transaction, we have assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the senior management of Prodigy as to the expected
future performance of Prodigy on a stand-alone basis and after giving effect to
the Transaction. We have not assumed any responsibility for the independent
verification of any such information or of the Prodigy Projections, the Pro
Forma Projections or the Combination Benefits provided to us, and we have
further relied upon the assurances of the senior management of Prodigy that
they are unaware of any facts that would make the information provided to us
incomplete or misleading.
In arriving at our opinion, we have not performed or obtained any independent
appraisal of the assets or liabilities of Prodigy or SBC Internet, nor have we
been furnished with any such appraisals. In rendering our opinion, we have, at
your direction, assumed renewals of the Marketing Agreement beyond its initial
three-year term on substantially the same terms as are in effect during the
initial three-year term. We have further assumed that both Prodigy and SBC
shall receive tax-free treatment in connection with the Transaction within the
meaning of Section 721 of the Internal Revenue Code. Our opinion is necessarily
based on economic, market and other conditions, and the information made
available to us, as of the date hereof.
We do not express any opinion as to the price or range of prices at which the
shares of Prodigy Common Stock may trade subsequent to the announcement of the
Transaction or as to the price or range of prices at which the shares of
Prodigy Class A Common Stock may trade subsequent to the consummation of the
Transaction.
We have acted as a financial advisor to Prodigy in connection with the
Transaction and will receive a fee for such services, a portion of which is
payable upon delivery of this opinion and a portion of which is payable
A-2
<PAGE>
upon consummation of the Transaction. Bear Stearns has been engaged previously
by Prodigy to provide certain investment banking and financial advisory
services in connection with the initial public offering of Prodigy Common Stock
and subsequent financial advisory engagements and received customary
compensation. In the ordinary course of business, Bear Stearns may actively
trade the equity and debt securities of Prodigy and SBC for our own account and
for the account of our customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Prodigy and does not constitute a recommendation to the
Board of Directors of Prodigy or any holders of Prodigy Common Stock as to how
to vote in connection with the Transaction. This opinion does not address
Prodigy's underlying business decision to pursue the Transaction. This letter
is not to be used for any other purpose, or reproduced, disseminated, quoted to
or referred to at any time, in whole or in part, without our prior written
consent; provided, however, that this letter may be included in its entirety in
any proxy statement to be distributed to the holders of Prodigy Common Stock in
connection with the Transaction.
Based on and subject to the foregoing, it is our opinion that, as of the date
hereof, the Consideration to be issued is fair, from a financial point of view,
to Prodigy.
Very truly yours,
/s/ Bear, Stearns & Co. Inc.
A-3
<PAGE>
ANNEX B
STRATEGIC AND MARKETING AGREEMENT
By and Among
SBC COMMUNICATIONS INC.
SBC INTERNET COMMUNICATIONS, INC.
PRODIGY COMMUNICATIONS CORPORATION
and
PRODIGY COMMUNICATIONS LIMITED PARTNERSHIP
Dated as of November 19, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS..................................................... B-1
ARTICLE II MARKETING...................................................... B-7
2.1 Generally......................................................... B-7
2.2 Branding.......................................................... B-7
2.3 License to Marketing Materials.................................... B-8
2.4 Exclusivity and Limits on Exclusivity............................. B-8
2.5 Marketing Commitments............................................. B-8
2.6 SBC New Subscriber Marketing Payments............................. B-9
2.7 Legacy Subscribers................................................ B-9
2.8 Telecommunications Services....................................... B-10
2.9 DSL Preference.................................................... B-11
2.10 Bundling.......................................................... B-11
2.11 Access to Subscriber Information.................................. B-12
2.12 Access to Arrangements............................................ B-12
ARTICLE III INTELLECTUAL PROPERTY......................................... B-12
3.1 License Grants.................................................... B-12
3.2 Portal Intellectual Property...................................... B-13
3.3 Future Products................................................... B-14
ARTICLE IV PRODUCT DEVELOPMENT; PORTAL.................................... B-15
4.1 Development of Client Software.................................... B-15
4.2 Prodigy Portal.................................................... B-15
4.3 Product Development Details....................................... B-16
ARTICLE V NETWORK SERVICES................................................ B-17
5.1 SBC Preference for Network Services............................... B-17
5.2 Qualifications on Preference...................................... B-17
5.3 Favored Pricing; Third Party Agreements........................... B-17
5.4 Day-to-Day Business Operations of Prodigy......................... B-17
5.5 Technical Assistance by SBC....................................... B-18
5.6 Global Services Provider.......................................... B-18
ARTICLE VI DISPUTE RESOLUTION............................................. B-18
6.1 Negotiation....................................................... B-18
6.2 Arbitration....................................................... B-18
ARTICLE VII ADDITIONAL AGREEMENTS......................................... B-19
7.1 Additional Agreements............................................. B-19
ARTICLE VIII TERMINATION.................................................. B-20
8.1 Termination of Agreement.......................................... B-20
ARTICLE IX REPRESENTATIONS AND WARRANTIES................................. B-21
9.1 Representations and Warranties of Prodigy and Operating
Partnership............................................................ B-21
9.2 Representations and Warranties of SBC and SBC Sub................. B-22
ARTICLE X MISCELLANEOUS................................................... B-22
10.1 Assignment........................................................ B-22
10.2 Governing Law; Venue; Waiver of Jury Trial........................ B-22
10.3 Counterparts...................................................... B-23
10.4 Notices........................................................... B-23
</TABLE>
B-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.5 Entire Agreement................................................... B-24
10.6 Amendment.......................................................... B-24
10.7 Severability....................................................... B-24
10.8 Headings; Recitals................................................. B-24
10.9 No Waiver of Rights................................................ B-24
10.10 Remedies Cumulative................................................ B-25
10.11 No Agency.......................................................... B-25
10.12 No Third Party Beneficiaries....................................... B-25
10.13 Force Majeure...................................................... B-25
10.14 Further Assurances; Affiliates..................................... B-25
10.15 Export Controls.................................................... B-25
10.16 Negotiated Terms................................................... B-25
10.17 Principles Of Construction......................................... B-25
10.18 Confidentiality.................................................... B-26
10.19 Taxes.............................................................. B-26
10.20 Treatment in Accordance with Future Transactions................... B-26
</TABLE>
B-ii
<PAGE>
STRATEGIC AND MARKETING AGREEMENT
This Agreement (the "Agreement") is made as of the 19th day of November, 1999
by and among SBC Communications Inc., a Delaware corporation ("SBC"), and SBC
Internet Communications, Inc., a Delaware corporation and an indirect wholly-
owned subsidiary of SBC ("SBC Sub"), on the one hand, and Prodigy
Communications Corporation, a Delaware corporation ("Prodigy"), and Prodigy
Communications Limited Partnership, a Delaware limited partnership ("Operating
Partnership"), on the other hand. Capitalized terms used but not defined herein
shall have the meaning assigned to them in the Investment Agreement (as defined
below).
WITNESSETH:
WHEREAS, contemporaneously with the execution and delivery of this Agreement
SBC, SBC Sub, Prodigy, Prodigy Transition Corporation, a Delaware corporation
and a wholly owned subsidiary of Prodigy ("PTC"), and Operating Partnership are
entering into an Investment, Issuance, Contribution and Assumption Agreement
(the "Investment Agreement") pursuant to which, among other things, Prodigy and
PTC are contributing to Operating Partnership all of the Prodigy Assets and
Prodigy Liabilities (as such terms are defined in the Investment Agreement);
SBC Sub is contributing to Operating Partnership all of the SBC Assets and SBC
Liabilities (as such terms are defined in the Investment Agreement); Prodigy is
issuing the Investment Share (as such term is defined in the Investment
Agreement) to SBC Sub; and Operating Partnership is issuing the SBC Units (as
such term is defined in the Investment Agreement) to SBC Sub;
WHEREAS, SBC Sub wishes to provide the existing subscribers of the Internet
access services of SBC Sub, as of the Closing, with the Prodigy Service, assist
Prodigy and Operating Partnership in acquiring new subscribers for the Prodigy
Service and provide certain network and other services to Prodigy and Operating
Partnership;
WHEREAS, Prodigy, Operating Partnership, SBC and SBC Sub (each a "Party" and
collectively the "Parties") wish for Prodigy and Operating Partnership to
become a leading analog dial-up, ISDN and DSL Retail ISP Service in the United
States;
WHEREAS, the Parties desire that SBC and its Affiliates be the preferred
provider of Network Services used to Deliver the Prodigy Service.
NOW, THEREFORE, in consideration of the premises, agreements,
representations, covenants and warranties herein contained, the Parties agree
as follows.
ARTICLE I
Definitions
As used in this Agreement, the following terms will have the meaning ascribed
to them below:
"Advertisement" means an interactive advertisement, promotion, link,
banner, pointer or sponsorship.
"Affiliate" of any specified Person means any other Person that directly,
or indirectly through one or more intermediaries, Controls, is Controlled
by, or is under common Control with such specified Person. For the purposes
of this Agreement, SBC Sub is an Affiliate of SBC and each of Operating
Partnership and PTC is an Affiliate of Prodigy.
"Aggregate Subscriber Commitment" means, with respect to the three year
period commencing on the Closing Date, 1,200,000 gross additional
Subscribers.
"Arbitration Notice" has the meaning set forth in Section 6.2(a).
B-1
<PAGE>
"Assume" has the meaning set forth in the Investment Agreement.
"Average Retail Price" means the average of the monthly price that
America Online, Inc., The Microsoft Network, and Mindspring Enterprises,
Inc. (or such other Internet service providers as the Parties may agree
from time to time specifically excluding the Prodigy Service) charge their
respective retail subscribers.
"Bankruptcy and Equity Exception" has the meaning set forth in Section
9.1(a).
"Broadband" or "Broadband Access" means Internet connectivity between an
End User's location and up to and including the backbone and any GSP
through DSL access or other forms of high speed access with speeds of at
least 144 kilobits per second downstream, including connectivity by means
of coaxial cable, wireless and satellite transmissions.
"Business Day" means any day other than Saturday, Sunday or a day on
which banks in the City of New York, New York are authorized or obligated
by law or executive order to close.
"Business Plan" means the two-year operating plan of each of Prodigy and
Operating Partnership (including the then-current (i) Development Plan and
(ii) Marketing Plan) and each subsequent two-year operating plan of each of
Prodigy and Operating Partnership.
"Category I Work Products" has the meaning set forth in Section 3.3(a).
"Category II Work Products" has the meaning set forth in Section 3.3(c).
"Claim" has the meaning set forth in Section 6.1.
"Client Documentation" means the documentation included with the
Commercial Client and the Licensed Client, including any Upgrades thereto.
"Closing" has the meaning set forth in Section 3.1 of the Investment
Agreement.
"Closing Date" has the meaning set forth in Section 3.1 of the Investment
Agreement.
"Co-Brand" means a composite mark or other combination of the
trademark(s), trade name(s), service mark(s) or logo(s) of two or more
Persons that is used to identify a particular product or service.
"Commercial Client" means the English and Spanish language versions (and
other versions as agreed by SBC Sub and Operating Partnership in writing)
of the Internet browser client software utilized by Prodigy and Operating
Partnership at the Closing Date for the Apple Macintosh OS and Microsoft
Windows platforms (and other platforms as agreed by SBC Sub and Operating
Partnership in writing), in executable object-code version only, and any
Upgrades or replacements thereto in executable object-code version only,
including any Third Party software embedded therein.
"Connectivity Software" means software drivers and small applications, in
some cases unseen by the user, typically provided by Microsoft, SBC Sub,
and Third Party vendors to allow networking drivers on the user's PC to
communicate with the network being used, as mutually agreed by SBC Sub and
Operating Partnership.
"Content" means text, images, video, audio (including music included in
synchronous or timed relation with visual displays) and other data,
Products, Advertisements and software, including any modifications,
upgrades, updates, enhancements and related documentation for any of the
foregoing.
"Control," including its various tenses and derivatives (such as
"Controlled"), means, with respect to any Person, the presence of one of
the following: (i) the legal, beneficial or equitable ownership, directly
or indirectly, of more than 50% of the capital or voting stock (or other
ownership or voting interest, if not a corporation) of such Person or (ii)
the ability, directly or indirectly, to direct the voting of a majority of
the directors of such Person's board of directors or, if the Person does
not have a board of directors, a majority of the positions on any similar
body, whether through appointment, voting agreement or otherwise.
B-2
<PAGE>
"CPE" means customer premises equipment.
"Customized Client" means versions of the Licensed Client which may be
modified by or for Prodigy or Operating Partnership and are Marketed and
distributed as a part of the Prodigy Service.
"Deliver" including its various tenses and derivatives (such as
"Delivered"), means providing the Prodigy Service to Prodigy Subscribers by
making broadband or narrowband access available to such Prodigy Subscriber
and distributing the appropriate client software to such Prodigy
Subscriber.
"Development Plan" has the meaning set forth in Section 4.3(a).
"Development Projects" has the meaning set forth in Section 4.3(a).
"Documentation" means the Client Documentation and Tools Documentation.
"DSL" means digital subscriber line.
"End User" means a subscriber to the Prodigy Service.
"Escalation Process" has the meaning set forth in Section 2.8(b).
"Excess Narrowband Subscriber" means, in any annual measurement period in
which SBC has procured for the Prodigy Service in excess of 300,000 gross
additional Subscribers (the "Excess Subscribers"), those Excess Subscribers
that are not receiving Broadband Access.
"Exclusivity Termination Date" means the earliest to occur of (i) a date
that is three years following the date hereof, and any successive third
anniversary of such date, at which one Party shall have delivered to the
other Party in writing at least 135 days prior to such date a notice
stating that it does not wish to continue this Agreement (as it may be
amended) and (ii) the occurrence of any Exclusivity Termination Event and
the delivery by SBC of a notice terminating its marketing exclusivity.
"Exclusivity Termination Event" means (x) any action by Prodigy or any of
its Subsidiaries that facilitates or encourages any direct or indirect
acquisition by a SBC Designated Entity of beneficial ownership of shares in
Prodigy or any of its Affiliates entitling the holder to cast 15% or more
of the votes in any election of directors in Prodigy or any of its
Affiliates (other than through the issuance of shares), (y) the occurrence
of an event referred to in Section 4.2(e)(ii), or (z) any material breach
by Prodigy or Operating Partnership of any covenant or agreement contained
in this Agreement as determined in accordance with Section 8.1(b) of this
Agreement.
"Executive Steering Committee" means a special committee of the Prodigy
Board, which will be established by Prodigy in accordance with the Amended
and Restated Certificate of Incorporation and the Amended and Restated By-
Laws at or prior to the Closing and which will consist of four members, two
of whom will be selected by the SBC Directors and two of whom will be
selected by Telefonos de Mexico, S.A. de C.V. and Carso Global Telecom,
S.A. de C.V. The purpose of the Executive Steering Committee will be to
evaluate certain corporate actions of Prodigy, which will be specified in
the Amended and Restated By-Laws and which will require the approval of the
Executive Steering Committee prior to being submitted for the approval of
the Prodigy Board.
"GSP" means global services provider.
"Home Page" of a Retail ISP Service means the first screen appearing to a
user accessing such Retail ISP Service, including any personalized versions
of such first screen customized by a user.
"Intellectual Property" means all (i) patents and patent applications,
(ii) copyrights and registrations thereof, (iii) mask works and
registrations and applications for registration thereof, (iv) computer
software, data and documentation, (v) know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, trade secrets, tangible or intangible proprietary
information or materials, (vi) trademarks, service marks, trade names and
applications and registrations therefor and (vii) other proprietary rights
relating to any of the foregoing.
B-3
<PAGE>
"ISDN" means integrated service digital network.
"ISP" means Internet service provider.
"Legacy Subscribers" has the meaning set forth in Section 2.7(a).
"Licensed Client" means versions of the Commercial Client modified, in
executable object-code version only, including any Third Party software
embedded therein, by or for Prodigy or Operating Partnership to remove
(including by disabling access to, or the user interface of, without
actually removing the code for) any functionality, advertising, trademarks
and other references that would violate the exclusive rights granted to SBC
in Section 2.8 of this Agreement, unless Operating Partnership determines,
with the approval of SBC, that certain such functionality, advertising,
trademarks or other references should not be removed, together with the
Licensed Connectivity.
"Licensed Connectivity" means the functionality, including drivers, data
link library, Winsock, dialers and configuration files, necessary to
provide connectivity for the Licensed Client through dial-up, local area
network and Broadband Access connections as developed by or for Prodigy or
Operating Partnership prior to the Closing Date for versions of the
Licensed Client initially developed from the Commercial Client and existing
at the Closing Date, in executable object-code version only.
"Licensed Tools" means any and all software provided by Prodigy (whether
produced by Prodigy or licensed to Prodigy by a Third Party) that
facilitates the modification (either in appearance, performance or content)
of the Client Software.
"Losses" means all direct losses, liabilities, suits, claims, costs,
expenses (including reasonable attorneys' fees) and disbursements and costs
of investigation, litigation, settlement, judgment and interest),
penalties, fines, judgments and/or damages, and in no event shall include
any indirect, consequential or special damages.
"Market," including its various tenses and derivatives (such as
"Marketed"), means, in any medium, to market, offer, advertise, promote,
distribute, register a subscriber (including fulfilling an order), or
complete a sale, as applicable given the context.
"Marketing Plan" has the meaning set forth in Section 2.1(c).
"Marks" means the Prodigy Marks and SBC Marks.
"Narrowband" or "Narrowband Access" means Internet connectivity between
an End User's location up to and including the backbone and any GSP with
speeds of less than 144 kilobits per second downstream.
"Network Services" means Broadband Access and Other Network Services.
"Non-SBC Telecommunications Offering" has the meaning set forth in
Section 2.8(b).
"Notice Period" has the meaning set forth in Section 6.2(a).
"Other Network Services" means all types of connectivity and transport
services required to Deliver the Prodigy Service between an End User's
location and up to and including the backbone and any GSP other than
Broadband Access, including but not limited to dial-up access, backbone,
transport, and Network Management and Integration Services.
"Participating Parties" has the meaning set forth in Section 6.1.
"Prodigy Board" means the Board of Directors as established pursuant to
the Amended and Restated Certificate of Incorporation and the Amended and
Restated By-Laws and any successor board of directors or similar governing
body of Prodigy.
"Prodigy Marks" means the trademarks, trade names, service marks and
logos set forth on Exhibit 3.1(a) hereto, together with any others adopted
by Prodigy or Operating Partnership and used for the Prodigy Service from
time to time. Operating Partnership shall notify SBC promptly in writing of
any such other Prodigy Marks.
B-4
<PAGE>
"Prodigy Portal" means the English version of the portal currently
accessible by the public via the Internet at the URL
http://www.prodigy.com/default.html and/or such other URL or location(s) as
Prodigy or Operating Partnership may designate, including any successor or
replacement implemented by Prodigy or Operating Partnership (on its own or
through a Third Party) for such site, from time to time and all pages
directly or indirectly linked to such address to the extent controlled by
Prodigy or Operating Partnership and which include any Prodigy or Operating
Partnership branding and any successors or replacements for such address
and pages.
"Prodigy Service" means all Retail ISP Services offered from time to time
by Prodigy or Operating Partnership.
"Prodigy Subscriber" means any Person that subscribes to the Prodigy
Service, either directly from Prodigy or Operating Partnership (including
its distributors) or from SBC (including its distributors).
"Performance Standards" has the meaning set forth in Section 4.2(d).
"Person" means a natural person, a corporation, a limited liability
company, a general or limited partnership, a trust, an estate, a joint
venture, any Governmental Entity, or any other entity or organization.
"Portal" means an interactive web site featuring a broad selection of
aggregated interactive Content (or navigation thereto) (e.g., an online
service or search and directory service) and/or marketing a broad selection
of Products across numerous interactive commerce categories (e.g., an
online mall or other online commerce site other than electronic yellow
pages), and all functionality included within such interactive site.
"Pre-existing Commitments" means the contracts, licenses and other
obligations or undertakings to which Prodigy and/or Operating Partnership
is subject as set forth in various Schedules to this Agreement.
"Product" means any product, good or service offered, sold, provided,
distributed, or licensed directly or indirectly through: (a) a Portal
(including through any interactive site linked to a Portal); (b) any other
electronic means directed at Prodigy Subscribers (e.g., e-mail offers); or
(c) an "offline" means (e.g., toll-free number) for receiving orders
related to specific offers made electronically to Internet users requiring
purchasers to reference a specific promotional identified or tracking code.
"Retail ISP Service" means any service for consumers and small businesses
using any transport, any speed via any device providing connectivity to the
Internet anywhere in the United States via a single IP address at any one
time, integrated with the provision of e-mail services, access to Usenet
newsgroups, chat or instant messaging and a default screen linking to an
aggregation of a broad variety of Internet based Content and excludes any
Web hosting services.
"Retail Price" has the meaning set forth in Section 2.7(b).
"Smart Pages" means the Internet site at the URL
http://www.SmartPages.com.
"Subscriber" means, with respect to any Retail ISP Service, a subscriber
that has remained a subscriber for at least one monthly billing cycle
(excluding any unpaid trial period) and has paid at least one monthly bill.
"SBC Brand Names" means SBC, Pacific Bell, Southwestern Bell, Nevada
Bell, Ameritech, SNET and SBC Telecom. In the event SBC initiates a
national brand of voice Telecommunications Service that utilizes a new
brand name, the term "SBC Brand Names" shall include such new brand name.
SBC shall notify Prodigy promptly in writing of any such other brand names.
"SBC Designated Entity" means AT&T, MCI Worldcom, Sprint, Microsoft,
Time-Warner, Bell Atlantic, Bellsouth, US West/Qwest and GTE and any of
their respective Affiliates and any Person in which any of such companies
or Affiliates owns a 25% or greater equity interest.
"SBC Marks" means the trademarks, trade names, service marks and logos
set forth on Exhibit 5.1(b) hereto, together with any others adopted by SBC
and used for the Prodigy Service from time to time. SBC shall notify
Prodigy promptly in writing of any such other SBC Marks.
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"SBC Territory" means the states of California, Nevada, Connecticut,
Texas, Missouri, Arkansas, Oklahoma, Kansas, Illinois, Indiana, Ohio,
Michigan, Wisconsin and any other state in which SBC acquires 40% or more
of the incumbent local exchange carrier lines.
"Telecommunications Advertisement" means an Advertisement related
primarily to Telecommunications Services.
"Telecommunications Services" means any of the following products or
services: (a) long distance phone service, local phone service, wireless
phone services, paging services, and any successors thereto; (b) all
current and future ancillary services offered in conjunction with any of
the services listed in (a), including voice mail, caller ID, call waiting,
call forwarding, directory listing services, calling card services, toll
calling plans and associated CPE and any successors thereto; (c) home and
business security services, virtual private networks and associated CPE;
and (d) any product or service that emulates or replicates the foregoing
utilizing an IP protocol and/or the PSTN (including IP telephony, IP fax,
unified messaging and Internet call waiting and associated CPE).
"Third Party" means any Person other than Prodigy, Operating Partnership,
SBC Sub, SBC or any of their respective Affiliates.
"Tools Documentation" means the documentation included with the Licensed
Tools, including any Upgrades thereto.
"Traditional ISP Services" means any products or services that ISPs
traditionally make available to their end users as part of their basic ISP
offering, including Internet access, customer support, member services,
billing, e-mail, bulletin boards, newsgroups, chat, instant messaging and
personal Web space.
"Transaction Expenses" means all governmental fees, sales, use and
Transfer Taxes and charges incurred by any Party in connection with the
transactions contemplated hereby, including all related fees and charges of
counsel and financial advisors of any Party.
"Transfer Taxes" means all federal, state, local or foreign sales, use or
value-added taxes that may be imposed in connection with the transfer of
assets, together with any interest, additions or penalties with respect
thereto and any interest in respect of such additions or penalties.
"Transition Date" means the date as of which the Retail ISP Service
Delivered to at least 60% of the then-existing subscribers of the Retail
ISP Services of SBC and its Affiliates have been transferred to the Prodigy
Service in a manner such that the Home Page of the Prodigy Service is
accessible by such subscribers as contemplated by Section 2.7(c).
"Transition Plan" has the meaning set forth in Section 7.3(c).
"United States" means the 50 states of the United States of America, the
District of Columbia and the Commonwealth of Puerto Rico.
"Upgrade" means, with respect to each of the Commercial Client, Licensed
Client, and Licensed Tools, any successor version or product (irrespective
of its name) of the foregoing reflecting one or more modifications,
upgrades, updates, enhancements, patches, "bug" fixes or other improvements
to the foregoing that is: (a) generally available to end-users or (b)
licensed by Prodigy or Operating Partnership to Third Parties licensed to
distribute the Commercial Client.
"Value Added Data Services" means products or services that ISPs
generally make available to their end users other than Traditional ISP
Services, including Web hosting (shared or dedicated), associated CPE and
virtual private networks.
"Wholesale Price" has the meaning set forth in Section 2.7(b).
"Work Product" means any reports, designs, computer software,
documentation, inventions, discoveries, works of authorship, and other
items made by or on behalf of a Party in providing Services, including any
and all Intellectual Property therein or with respect thereto, but
expressly excluding from the
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foregoing any items that are: (a) preexisting as of the Closing Date; or
(b) independently developed by or on behalf of a Party not pursuant to this
Agreement.
ARTICLE II
Marketing
2.1 Generally.
(a) The Parties agree that following the Closing Date, Prodigy and Operating
Partnership shall have the primary responsibility for Marketing the Prodigy
Service in accordance with the terms and subject to the conditions of this
Agreement. SBC and its Affiliates shall also be entitled to Market the Prodigy
Service in accordance with the terms and subject to the conditions of this
Agreement.
(b) Prior to the Closing Date, Prodigy and SBC shall prepare an initial
Business Plan covering the period from the Closing Date through calendar year
2002. Thereafter, the Parties shall prepare not later than October 1 of the
relevant year (beginning October 1, 2001) a Business Plan for the succeeding
two years. The Business Plan shall be subject to the approval of the Executive
Steering Committee prior to being submitted for the approval of the Prodigy
Board.
(c) Prior to the Closing Date, Prodigy and SBC shall prepare an initial
marketing plan (the "Marketing Plan") covering the period from the Closing Date
through calendar year 2001 that will include, among other things, a branding
strategy consistent with Section 2.2 below, the SBC marketing commitments set
forth in Section 2.5 below and a bundling strategy. Thereafter, the Parties
shall prepare not later than October 1 of each year (beginning October 1, 2000)
a Marketing Plan for the succeeding year, which plan shall reflect the
objective of Marketing the Prodigy Service to consumers and to small
businesses. The Marketing Plan shall reflect dial-up, ISDN and DSL Retail ISP
Service with a strong preference for Marketing the Prodigy Service through DSL
to the extent available.
2.2 Branding.
(a) The Parties agree the core brand name for the Prodigy Service shall be
Prodigy, and that prior to the Closing Date they shall agree upon additional
brand name or names and logo or logos for the Prodigy Service. Such brand names
and logos shall include, unless the Parties otherwise agree, the Prodigy name
and such SBC Brand Names as are geographically appropriate for use by Prodigy.
Such branding shall be implemented in accordance with the Parties' reasonable
guidelines for the use of such Parties' Intellectual Property, as provided in
writing from time to time to each other.
(b) Notwithstanding any other term of this Agreement, following the Closing
(i) the Parties agree that any Prodigy Service Delivered to (x) a Subscriber in
the SBC Territory or (y) a Subscriber outside the SBC Territory that is either
(a) procured by SBC Sub, its Affiliates or any of its distributors of the
Prodigy Service or (b) a retail local loop voice customer of SBC or any of its
Affiliates to the extent the identification of such Subscribers is commercially
reasonable (it being understood and agreed by the Parties that identification
of such Subscribers is not currently commercially reasonable) shall always be
Co-Branded on every page in which any Prodigy or Operating Partnership brand
appears with such of the SBC Brand Names as SBC Sub may request (which brands
may vary depending upon the portion of the SBC Territory if any, in which such
Prodigy Subscriber is located); provided, that, in respect of any new states
that become part of the SBC Territory after the date hereof, each of Prodigy
and Operating Partnership shall use its reasonable best efforts to implement
this Section 2.2(b) with respect to such states as soon as practicable, and
(ii) each of Prodigy and Operating Partnership will continue such service and
Co-Branding for one year after any termination of this Agreement if requested
to do so by SBC. Such Co-Branding shall be effected in accordance with SBC's
reasonable guidelines for the use of its Intellectual Property, as provided in
writing from time to time to Prodigy and Operating Partnership.
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2.3 License to Marketing Materials. At the Closing, each of Prodigy and
Operating Partnership shall grant to SBC and its Affiliates and its
distributors of Prodigy Services a non-transferable, non-exclusive, fully-paid,
royalty-free right and license to use any marketing materials developed by
Prodigy or Operating Partnership for the sole purpose of Marketing the Prodigy
Service, including the right to create derivative works based upon such Prodigy
or Operating Partnership materials; provided, that, SBC include any proprietary
rights, notices or legends included on the Prodigy or Operating Partnership
materials. SBC shall provide Prodigy and Operating Partnership copies of all
such derivative works prior to their use, and Prodigy and Operating Partnership
shall receive a non-transferable, non-exclusive, fully-paid, royalty-free
license to use such derivative works for the sole purpose of Marketing the
Prodigy Service; provided, however, that in the event the use by SBC and its
Affiliates of such derivative works is not within Prodigy's and Operating
Partnership's reasonable guidelines for the use of such derivative works, as
provided in writing from time to time to SBC, the use of such derivative works
will be subject to the consent of Prodigy and Operating Partnership (which
consent shall not be unreasonably withheld).
2.4 Exclusivity and Limits on Exclusivity.
(a) Except as otherwise set forth in this Agreement, from and after the
Closing Date and continuing until the Exclusivity Termination Date, SBC agrees
that it and its Affiliates shall exclusively Market the Prodigy Service as the
only dial-up analog, ISDN and DSL Retail ISP Service within the United States
Marketed by SBC and its Affiliates to consumers and small businesses, and for a
period of one year after the Exclusivity Termination Date, SBC shall not Market
on a stand-alone basis any other dial-up analog, ISDN or DSL Retail ISP Service
within the United States to Prodigy Subscribers; provided, however, that SBC
and its Affiliates will be permitted to engage in mass market advertising
during such one-year period; provided, further, that SBC and its Affiliates
will only be subject to this one-year restriction in the event that the
Exclusivity Termination Date results from SBC's delivery of a notice stating
that it does not wish to continue this Agreement or SBC's material breach of
this Agreement. Each Party understands and agrees that the Parties shall
consult with each other with respect to new access technologies and new Retail
ISP Services over time.
(b) The exclusivity obligations set forth in Section 2.4(a) above shall not
prohibit SBC or its Affiliates from (i) taking any action to preserve and
retain Legacy Subscribers prior to their transition to the Prodigy Service,
(ii) Co-Branding with a competitive dial-up analog, ISDN or DSL Retail ISP
Service any products or services offered by SBC or its Affiliates, other than a
dial-up analog, ISDN or DSL Retail ISP Service of SBC or its Affiliates, (iii)
entering into arrangements, including agreements to provide DSL services, with
competitive Retail ISP Services pursuant to which the competitive Retail ISP
Service Markets or Delivers their service in conjunction with products or
services of SBC or its Affiliates, (iv) listing competitive Retail ISP Services
and service providers on its web sites or in its products so long as they are
not more prominent than or otherwise treated more favorably than the Prodigy
Service and assisting customers who refuse the Prodigy Service to select and
procure competitive Retail ISP Services, (v) providing any individual products
and services (other than a Portal) constituting a Retail ISP Service to a
competitor whose services and products are branded under the competitor's marks
or on a retail basis in bundles so long as such bundle does not constitute a
dial-up analog, ISDN or DSL Retail ISP Service, (vi) conducting activities as a
seller and supplier of advertising and e-commerce through any medium, including
electronic yellow pages or a Portal or (vii) Marketing any device not
manufactured by or exclusively for SBC or its Affiliates and which includes a
competitive dial-up analog, ISDN or DSL Retail ISP Service so long as such
Marketing efforts are not predominantly concentrated on the use of a dial-up
analog, ISDN or DSL Retail ISP Service or product.
2.5 Marketing Commitments.
(a) Following the Closing Date, Operating Partnership, Prodigy, SBC Sub and
SBC agree to use commercially reasonable efforts to facilitate and coordinate
the Marketing of the Prodigy Service.
(b) Promptly after the execution and delivery of this Agreement, Prodigy and
SBC shall commit a Vice President level (or higher) marketing executive
empowered to make final Marketing decisions to confer with
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the other on Marketing matters at least once each quarter and coordinate the
Marketing efforts, including the Marketing of bundles in accordance with
Section 2.10, for the Prodigy Service.
2.6 SBC New Subscriber Marketing Payments.
(a) Following the Closing Date, Operating Partnership shall pay SBC Sub a
one-time marketing fee in respect of each new gross additional Subscriber of
the Prodigy Service that was procured as a Subscriber by SBC, its Affiliates or
its distributors of the Prodigy Service of $40 per Narrowband Subscriber and
$75 per Broadband Subscriber. SBC Sub shall not be entitled to any payment
pursuant to this Section 2.6(a) for any Legacy Subscriber to the Retail ISP
Service of SBC or its Affiliates as of the Closing Date even if such Subscriber
switches to become a Subscriber of the Prodigy Service. The Parties agree that
Prodigy and Operating Partnership shall have the primary responsibility for
service activation and support for Subscribers procured by SBC, its Affiliates
or its distributors of the Prodigy Service and that SBC, its Affiliates and its
distributors of the Prodigy Service may refer potential subscribers to Prodigy
and Operating Partnership for service activation and support.
(b) In addition to the payments referred to in Section 2.6(a), in any annual
measurement period commencing on the Closing Date in which SBC, its Affiliates
and its distributors of the Prodigy Service in the aggregate procure for the
Prodigy Service in excess of 300,000 gross additional Subscribers, Operating
Partnership shall pay SBC Sub an additional one-time marketing fee of $20 per
new Excess Narrowband Subscriber in accordance with Section 2.6(e) of this
Agreement.
(c) If SBC, its Affiliates and its distributors of the Prodigy Service in the
aggregate procure in the three-year measurement period commencing on the
Closing Date for the Prodigy Service fewer gross additional Subscribers than
SBC's Aggregate Subscriber Commitment, SBC Sub shall pay Operating Partnership
the following amounts: in the event that SBC, its Affiliates and its
distributors of the Prodigy Service in the aggregate procure less than (i)
900,000 gross additional Subscribers, $100 times the difference between 900,000
and the number of gross additional Subscribers credited in such three-year
measurement period plus $75 million; or (ii) 1,050,000 but at least 900,000
gross additional Subscribers, $400 times the difference between 1,050,000 and
the number of gross additional Subscribers credited in the three-year
measurement period plus $15 million; or (iii) the Aggregate Subscriber
Commitment but at least 1,050,000 gross additional Subscribers, $100 times the
difference between the Aggregate Subscriber Commitment and the number of gross
additional Subscribers credited in the three-year measurement period; provided,
that, SBC Sub shall not be required to make any payment in respect of any
shortfall in the three-year measurement period except to the extent that gross
additional Subscribers procured in the three-year measurement period by SBC,
its Affiliates and its distributors of the Prodigy Service in the aggregate
were fewer than the gross additional Subscribers of the Prodigy Service
procured through all other channels excluding acquisitions by Prodigy and
Operating Partnership in such three-year measurement period in the aggregate so
long as SBC used its good faith efforts to Market the Prodigy Service.
(d) Unless SBC otherwise agrees in its sole discretion, neither SBC nor SBC
Sub shall be required to bear any one-time, up-front or other non-recurring
charges (e.g., for CPE, installation or software) and such charges shall be
borne either by Prodigy, Operating Partnership or the customer.
(e) The marketing fees described in Sections 2.6(a) and 2.6(b) above shall be
jointly calculated by Operating Partnership and SBC Sub monthly and paid to SBC
Sub quarterly.
2.7 Legacy Subscribers.
(a) Following the Closing Date, SBC Sub shall retain a direct relationship
(contractual, billing and payment) with each subscriber of SBC's Retail ISP
Services (e.g. Pacific Bell Internet, SW Bell Internet, Nevada Bell Internet,
SNET Internet, and Ameritech.net) as of the Closing Date ("Legacy
Subscribers"), all such Legacy Subscribers shall be transitioned to receive the
Prodigy Service, and Prodigy and Operating Partnership shall provide the
Prodigy Service to such Legacy Subscribers in accordance with this Section 2.7
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and the Transition Plan. All costs associated with transitioning such Legacy
Subscribers shall be borne by Operating Partnership and Prodigy. Following the
Closing Date, SBC Sub will retain responsibility for its Legacy Subscribers for
billing, including bad debt risk and contractual relationships (which SBC shall
use commercially reasonable efforts to conform with the contractual terms for
Subscribers of the Prodigy Service). Following the Closing Date, SBC shall
cooperate with Prodigy and Operating Partnership to provide, to the extent
lawful, credit card information and authorizations to Prodigy and Operating
Partnership for Legacy Subscribers or to use commercially reasonable efforts to
obtain such information and any necessary consents from Legacy Subscribers.
(b) Following the Closing Date, SBC Sub shall purchase from Operating
Partnership the Prodigy Service and resell it to Legacy Subscribers. Operating
Partnership will set the wholesale price for narrowband and broadband service
equal to (i) the weighted average price of the amounts charged by SBC and its
Affiliates to the Legacy Subscribers at retail as of the Closing Date (the
"Retail Price"); provided, that, in the event that following the Closing Date,
the Average Retail Price increases or decreases by more than ten percent (10%)
from the Average Retail Price as of the Closing Date, SBC Sub and Operating
Partnership agree to hold discussions to determine whether its is appropriate
to adjust the Retail Price, less (ii) any reasonable and necessary expenses,
direct or indirect, actually incurred by SBC Sub or its Affiliates in serving
Legacy Subscribers, such expenses to be determined in a manner consistent with
SBC Sub's historical practices and consistent with regulatory cost accounting
requirements applicable to SBC and its regulated subsidiaries (such sum, the
"Wholesale Price"). For illustrative purposes only, an example of how this
provision would be implemented in practice is attached hereto as Schedule
2.7(b)(i). SBC Sub shall pay to Operating Partnership the Wholesale Price for
each Legacy Subscriber in respect of which it is obligated to purchase from
Operating Partnership the Prodigy Service pursuant to this Section 2.7(b) on a
monthly basis so long as such Legacy Subscriber (x) is (i) a Prodigy Subscriber
during the month for which such payment is made or (ii) a subscriber on a full
or partial payment waiver pursuant to a SBC promotional offer and (y) has not
cancelled the Prodigy Service. On a quarterly basis, such monthly payments
shall be reconciled to reflect actual experience.
(c) SBC Sub shall use commercially reasonable efforts to cause the Home Page
of each dial-up Legacy Subscriber to be the start page of the Prodigy Service
on or as promptly after the Closing Date as is practicable; provided, that, SBC
Sub shall not be required to override any Legacy Subscriber's designated start
page or prohibit such overrides. SBC Sub will coordinate with Prodigy and
Operating Partnership, to the extent necessary, to implement this Section
2.7(c).
2.8 Telecommunications Services.
(a) Subject to the Pre-existing Commitments set forth in Schedule 2.8(i) of
this Agreement, in no event following the Closing Date will the Prodigy Service
include any advertising or other promotion or product offering for a
Telecommunications Service, Value Added Data Service, electronic yellow or
white pages from any Person other than SBC or an Affiliate of SBC unless such
action complies with the requirements of Section 4.2(b) and such exclusivity
would materially disadvantage Operating Partnership (financially or
competitively) as determined in accordance with Section 2.8(b). Following the
Closing Date, SBC and its Affiliates shall not offer any Telecommunications
Service, Value Added Data Service, electronic yellow or white pages to any
other Retail ISP, which is comparable to Operating Partnership in terms of both
product offerings and number of subscribers, on terms more favorable than those
offered to Operating Partnership.
(b) In the event Prodigy or Operating Partnership wishes to include in the
Prodigy Service any such advertising or other promotion or product offering for
a Telecommunications Service, Value Added Data Service, electronic yellow or
white pages from any Person other than SBC or an Affiliate of SBC (a "Non-SBC
Telecommunications Offering") because (i) neither SBC nor any of its Affiliates
offer such Telecommunications Service, Value Added Data Service, electronic
yellow or white pages and (ii) Prodigy or Operating Partnership believes the
failure to include in the Prodigy Service any such advertising or other
promotion or other product offering would materially disadvantage Prodigy or
Operating Partnership (financially or competitively), Prodigy or Operating
Partnership shall notify SBC in writing that it wishes to include such
advertising or other promotion or product offering and such notice shall
include the terms and conditions of such advertising or
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other promotion or product offering and a detailed written statement of the
reasons Prodigy or Operating Partnership believes such failure would materially
disadvantage Prodigy or Operating Partnership. In the event that SBC disagrees
with Prodigy's or Operating Partnership's belief that such failure would
materially disadvantage Prodigy or Operating Partnership (financially or
competitively), representatives of SBC and Prodigy shall meet in good faith and
use commercially reasonable efforts to resolve whether such failure would
materially disadvantage Prodigy or Operating Partnership (financially and
competitively). If the disagreement is not resolved within five Business Days,
either Prodigy or SBC may request in writing that such disagreement be referred
to the SBC and Prodigy representatives appointed pursuant to Section 2.5(b) of
this Agreement, who shall consult and negotiate with each other in good faith
and, recognizing their mutual interests, attempt to reach an agreement as to
whether such failure would materially disadvantage Prodigy or Operating
Partnership (financially and competitively). If such agreement is not reached
by such representatives within five Business Days, the disagreement will be
resolved pursuant to Article VI of this Agreement; provided, however, that for
purposes of this process, any award to be made pursuant to Article VI shall be
made within one month of filing of the Arbitration Notice notwithstanding
anything to the contrary contained in Section 6.2(f) (the foregoing process set
forth in this Section 2.8(b), which shall also be used by the Parties to
resolve certain disagreements among them as specified in the relevant
provisions of this Agreement, being hereinafter referred to as the "Escalation
Process"). If SBC agrees, or if it is determined through the Escalation
Process, that Prodigy or Operating Partnership is permitted to include in the
Prodigy Service a Non-SBC Telecommunications Offering, Prodigy in consultation
and cooperation with SBC shall first use its commercially reasonable efforts to
include in the Prodigy Service a Non-SBC Telecommunications Offering offered by
a Person that is not a SBC Designated Entity. In the event that such Non-SBC
Telecommunications Offering is not offered by a Person that is not a SBC
Designated Entity, Prodigy and Operating Partnership may include in the Prodigy
Service such Non-SBC Telecommunications Offering offered by a SBC Designated
Entity so long as the term of the agreement pursuant to which Prodigy and
Operating Partnership agree to do so is limited in its duration to one year or
less or is otherwise terminable by Prodigy in its sole discretion on 60 days'
notice or less.
2.9 DSL Preference. Each of Prodigy and Operating Partnership agrees that
whenever a SBC-owned or controlled method of Broadband Access is available to a
broadband subscriber or potential subscriber, each of Prodigy and Operating
Partnership shall offer the Prodigy Service to such subscriber only through
such SBC-owned access unless the potential subscriber requests that the Prodigy
Service be Delivered via a competitive Broadband Access and refuses Prodigy's
or Operating Partnership's offer of the SBC-owned or controlled access. In
areas where SBC owned or controlled Broadband Access is not available, each of
Prodigy and Operating Partnership agrees that if DSL access is available that
each of Prodigy and Operating Partnership shall offer the Prodigy Service to
broadband subscribers only through such DSL access unless the potential
broadband subscriber requests that the Prodigy Service be delivered through a
non-DSL access and refuses Prodigy's or Operating Partnership's offer of DSL
access. Neither Prodigy nor Operating Partnership will promote any non-DSL or
non-ISDN Broadband Access; provided, that, Prodigy or Operating Partnership may
offer the Prodigy Service to broadband subscribers through cable modem access
so long as the promotion of such offer through cable modem access is
appreciably less prominent than the promotion of its offer of DSL access (e.g.,
such promotion of cable modem access does not take place on the Prodigy
Service's Home Page).
2.10 Bundling. The Parties acknowledge that they expect to offer the Prodigy
Service bundled with products and services of SBC and its Affiliates. SBC,
SBC's Affiliates, Prodigy and Operating Partnership each agrees to work with
the other and use commercially reasonable efforts to facilitate the creation
and Marketing by SBC and its Affiliates of such bundles and to make available
products and services for inclusion within bundles on terms, including pricing,
and conditions (taking into account volume requirements) that are not less
favorable than those offered to any unaffiliated Third Party. In respect of
this Section 2.10 and other provisions in the Agreement, the Parties agree to
comply with the rules and regulations set forth in the Telecommunications Act
of 1996.
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2.11 Access to Subscriber Information.
(a) Except to the extent prohibited by Law or confidentiality policies of
general applicability of SBC or its Affiliates that have been communicated in
writing to Prodigy and Operating Partnership, SBC will furnish Prodigy and
Operating Partnership with such information concerning Legacy Subscribers as
Prodigy and Operating Partnership may reasonably request. Except to the extent
prohibited by Law or confidentiality policies of general applicability of
Prodigy or Operating Partnership or any of their Affiliates that have been
communicated in writing to SBC, each of Prodigy and Operating Partnership will
furnish SBC with such information concerning Prodigy Service Subscribers as SBC
may reasonably request.
(b) Except as provided in Section 4.2(b), no Party may directly or indirectly
utilize any Subscriber information in connection with the Marketing or Delivery
of any Retail ISP Service other than the Prodigy Service. Neither Prodigy nor
Operating Partnership may directly or indirectly utilize any Subscriber
information in connection with Marketing any Telecommunications Service, Value
Added Data Service, electronic yellow or white pages unless such action
complies with the requirements of Section 2.8; provided, however, that in no
event may Prodigy or Operating Partnership directly or indirectly utilize any
Subscriber information in connection with Marketing any Telecommunications
Service, Valued Added Data Service, electronic yellow or white pages of a SBC
Designated Entity.
2.12 Access to Arrangements. Following the Closing Date, each of Prodigy and
Operating Partnership shall use its respective commercially reasonable efforts
to allow SBC and Prodigy's Affiliates to have access to, participate in and
benefit from Prodigy's and Operating Partnership's purchasing and distribution
agreements including but not limited to Prodigy's and Operating Partnership's
wholesale DSL contracts.
ARTICLE III
Intellectual Property
3.1 License Grants.
(a) Subject to the terms and conditions of this Agreement, each of Prodigy
and Operating Partnership hereby grants to SBC its Affiliates and its
distributors of the Prodigy Service a non-transferable, royalty-free, fully-
paid, non-exclusive license for the term of this Agreement to use the Prodigy
Marks in the United States in connection with the identification, rendering,
operation, Marketing and Delivery of the Prodigy Service, including the Prodigy
Portal and product bundles including the Prodigy Service. Following the
Closing, neither Prodigy nor Operating Partnership shall grant or permit to be
granted any right to any SBC Designated Entity to use the Prodigy Marks to
identify, render, operate, Market or Deliver a Retail ISP Service or any
Telecommunications Services, Value Added Data Services, electronic yellow or
white pages, provided that either Prodigy or Operating Partnership may license
SBC Designated Entities to use the Prodigy Marks in connection with any
separate Prodigy Products or services (other than those that in the aggregate
constitute a Retail ISP Service) so long as the Prodigy Marks are appreciably
less prominent than the identifying marks of the Retail ISP Service and do not
create an impression of sponsorship or ownership of such Retail ISP Service.
(b) Subject to the terms and conditions of this Agreement, at the Closing SBC
shall grant to each of Prodigy and Operating Partnership a non-transferable,
royalty-free, fully-paid, non-exclusive license for the term of this Agreement
to use the SBC Marks in the United States in connection with the
identification, rendering, operation, Marketing and Delivery of the Prodigy
Service, including the Prodigy Portal and product bundles including the Prodigy
Service. Following the Closing, SBC shall not grant or permit any Third Party
to use the SBC Marks to identify, render, operate, Market or Deliver a Retail
ISP Service in the United States, provided that SBC may license third parties
to use the SBC Marks in connection with any separate SBC products or services
(other than those that in the aggregate constitute a Retail ISP Service) so
long as the SBC Marks are appreciably less prominent than the identifying marks
of the Retail ISP Service and do not create an impression of sponsorship or
ownership of such Retail ISP Service.
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(c) Following the Closing, each of SBC, its Affiliates and its distributors
of the Prodigy Service, on the one hand, and Prodigy and Operating Partnership,
on the other hand, shall enter into such agreements, with respect to usage
guidelines, quality standards, quality control monitoring and other matters as
Prodigy and Operating Partnership and SBC, respectively, may reasonably request
in order to protect their ownership interest in the Prodigy Marks and SBC
Marks. SBC and Prodigy and Operating Partnership agree that they shall, at
their own expense, bring and control legal proceedings or other actions to
eliminate any infringement, misappropriation or other violation of its
respective marks and that the other Party may not bring any such proceedings or
take any such action unless Prodigy and Operating Partnership or SBC, as the
case may be, has failed after a written request to do so to protect its
interests and, in the case of Prodigy and Operating Partnership, such failure
would materially disadvantage Prodigy or Operating Partnership (as determined
in accordance with the Escalation Process).
(d) Each of Prodigy and Operating Partnership jointly and severally
represents and warrants to SBC with respect to the Prodigy Marks and each of
SBC and SBC Sub represents and warrants to Prodigy and Operating Partnership
with respect to the SBC Marks that (i) it or its Affiliate is the sole and
exclusive owner of such marks and has the full right and authority to grant the
licenses hereunder, (ii) such Marks do not infringe the trademark, trade name,
service mark, logo or copyright rights or other intellectual property right of
any Third Party and (iii) there are not any pending or threatened material
claims of infringement, misappropriation or dilution against such marks.
(e) SBC agrees to indemnify and hold harmless Operating Partnership, its
Affiliates and permitted sublicensees, and the respective partners, directors,
officers, employees and agents of any of the foregoing from and against any and
all Losses that may be incurred by them to the extent arising out of or
relating to Third Party claims that Operating Partnership's use of the SBC
Marks as authorized or licensed by SBC hereunder infringes such Third Party's
Intellectual Property rights.
(f) Operating Partnership agrees to indemnify and hold harmless SBC, its
Affiliates and permitted sublicensees, and the respective partners, directors,
officers, employees and agents of any of the foregoing from and against any and
all Losses that may be incurred by them to the extent arising out of or
relating to Third Party claims that SBC's use of the Prodigy Marks as
authorized or licensed by Prodigy or Operating Partnership hereunder infringes
such Third Party's Intellectual Property rights.
(g) Operating Partnership and SBC recognize and agree that the Prodigy
Service, including the Prodigy Portal, and certain Internet sites of SBC and
its Affiliates, will be available globally on the Internet and accordingly
agree that each of Prodigy and Operating Partnership and SBC shall not be in
breach of their respective licenses granted hereunder as a result of access by
end users to material containing the Marks on the Internet outside of the
United States, incidental communications with persons located outside of the
United States and the unintentional dissemination of Marketing materials
outside the United States.
(h) The licenses granted under this Section 3.1 shall commence on the Closing
Date and continue for the term of this Agreement.
3.2 Portal Intellectual Property.
(a) Each of Prodigy and Operating Partnership acknowledges that ownership of
all proprietary rights in and to the SBC Content shall remain the property of
SBC or its information provider, licensor or supplier. Each of Prodigy and
Operating Partnership shall include any Intellectual Property notices, legends,
symbols or labels appearing in the SBC Content on all copies thereof in the
same manner as they appear in the SBC Content.
(b) SBC acknowledges that ownership of all proprietary rights in and to the
Prodigy Portal and Prodigy Content shall remain the property of Prodigy,
Operating Partnership or their respective information provider, licensor or
supplier.
(c) Each of Prodigy and Operating Partnership shall enter into such
agreements with respect to usage guidelines, quality standards and other
matters as SBC may reasonably request in order to protect its ownership or
other interest in the SBC Content.
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3.3 Future Products.
(a) Following the Closing Date, any Work Products developed in connection
with Development Projects paid for by Prodigy or Operating Partnership
("Category I Work Product") shall be owned by and are the exclusive property of
Prodigy or Operating Partnership, except that if SBC contracts to perform a
Development Project on behalf of Prodigy or Operating Partnership, SBC shall
reserve the perpetual right to use the methods, techniques, algorithms,
knowledge, underlying design and architectural elements and reusable
subroutines contained or used in Category I Work Products developed in
connection with such Development Projects that are of general applicability,
but not any actual code included therein.
(b) For the term of this Agreement, each of Prodigy and Operating Partnership
shall grant SBC on the Closing Date an irrevocable, fully-paid (except as
expressly provided herein), worldwide, non-exclusive, transferable license to
use, reproduce (in any medium), adapt, distribute, perform, display, modify and
create derivative works of any such Category I Work Product, which license
shall include the right to grant sublicenses, such license to be effective
after final acceptance of such Category I Work Product by Prodigy or Operating
Partnership in accordance with the terms of this Agreement and any agreement
relating to a particular project; provided, that in connection with the grant
of sublicenses, SBC shall pay Prodigy or Operating Partnership, as the case may
be, on a quarterly basis not later than 30 days after the end of the quarter in
which such royalties accrue, a royalty equal to a percentage of its revenues,
net of direct costs, relating to the sublicensee's use of such Category I Work
Product, such percentage to be mutually agreed by Prodigy or Operating
Partnership, as the case may be, and SBC; provided, further, that if Prodigy or
Operating Partnership, as the case may be, and SBC are unable to agree on such
percentage, such percentage shall be determined in accordance with the
Escalation Process; provided, however, that SBC shall not grant such
sublicenses to a Retail ISP Service.
(c) To the extent SBC and Prodigy or Operating Partnership agree that SBC
shall undertake a Development Project at SBC's expense (a "Category II Work
Product") then all Work Products developed by SBC in connection with such
Development Project shall be owned by and will be the exclusive property of
SBC. In addition, to the extent SBC develops any product or service at its own
expense that would be useful for the Prodigy Service, SBC shall make such
product or service available to Prodigy and Operating Partnership, on
commercially reasonable terms not later than the time it makes such product or
service available for resale by any Third Party.
(d) For the term of this Agreement, on the Closing Date SBC shall grant to
Prodigy and Operating Partnership an irrevocable, fully-paid (except as
expressly provided herein), worldwide, non-exclusive, transferable license to
use, reproduce (in any medium), adopt, distribute, perform, display, modify and
create derivative works of such Category II Work Products and distribute such
Category II Work Products to Prodigy Subscribers, which license shall include
the right to grant sublicenses to facilitate the business of Prodigy and
Operating Partnership; provided, that in connection with the grant of
sublicenses, Prodigy or Operating Partnership, as the case may be, shall pay
SBC, on a quarterly basis not later than 30 days after the end of the quarter
in which such royalties accrue, a royalty equal to a percentage of its
revenues, net of direct costs, relating to the sublicensee's use of such
Category II Work Product, such percentage to be mutually agreed by Prodigy or
Operating Partnership, as the case may be, and SBC; provided, further, that if
Prodigy or Operating Partnership, as the case may be, and SBC are unable to
agree on such percentage, such percentage shall be determined in accordance
with the Escalation Process; provided, however, that neither Prodigy nor
Operating Partnership shall grant such sublicenses to any provider of
Telecommunications Services or its Affiliates.
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ARTICLE IV
Product Development; Portal
4.1 Development of Client Software.
(a) Licensed Client; Connectivity. Following the Closing, each of Prodigy and
Operating Partnership agrees that prior to obtaining a Commercial Client it
shall contract for the ability to remove (including by disabling access to, or
the user interface of, without actually removing the code for) functionality,
advertising, trademarks and other references from such Commercial Client,
including any Upgrades thereto, if such items would violate the exclusive
rights granted to SBC in Section 2.8 of this Agreement. In the event Operating
Partnership is unable to contract for the ability to remove such functionality,
advertising, trademarks and other references from such Commercial Client
including any Upgrades thereto, Operating Partnership shall not enter into a
contract with such Commercial Client without the prior written consent of SBC
(which consent shall not be unreasonably withheld). Operating Partnership shall
obtain Documentation to reflect the removal of such functionality from such
Commercial Client. Operating Partnership shall utilize Connectivity Software to
Deliver the Prodigy Service.
(b) Support. Operating Partnership shall provide the back-end technical
support and assistance reasonably required by SBC for the Licensed Client,
Licensed Tools and Customized Client on commercially reasonable terms.
4.2 Prodigy Portal.
(a) Provision of Prodigy Portal. The intent of the Parties is to enable
Prodigy and Operating Partnership to Deliver a Portal, within 90 days of the
Closing Date, that is comparable in respect of quality, depth of content, and
ability to generate revenue as the Portals used by other Retail ISPs and that
takes advantage of the functionality afforded by DSL access.
(b) Telecommunications and Value Added Data Services Advertisements and
Products. Following the Closing, subject to Pre-existing Commitments set forth
on Schedule 4.2(b), SBC shall have the exclusive right to sell and to place all
of the Telecommunications Advertisements and Value Added Data Services
Advertisements on the Prodigy Portal (subject to payment by SBC to Operating
Partnership of rates that are the best rates offered by Operating Partnership
to any unaffiliated Third Party for similar Advertisements on the Prodigy
Portal on a non-exclusive basis) and provide all products for the provision of
Telecommunications Services to Subscribers of the Prodigy Service except to the
extent such sale, placement or provision materially disadvantages Operating
Partnership (either financially or competitively) as determined in accordance
with the Escalation Process. Notwithstanding SBC's exclusive right to sell and
place all of the Value Added Data Services Advertisements on the Prodigy Portal
as described above, Operating Partnership may sell and place Advertisements on
the Prodigy Portal relating to Prodigy's or its Subsidiaries' Web hosting
services (shared or dedicated) that are provided directly by Prodigy or its
Subsidiaries to its customers. In the event SBC does not offer a
Telecommunications Service, Value Added Data Service, electronic yellow or
white pages which the Prodigy Board determines that Operating Partnership
should provide, Operating Partnership shall notify SBC in writing that
Operating Partnership wishes to provide such Telecommunications Service, Value
Added Data Service, electronic yellow or white pages. SBC shall have 60 days
from receipt of such notification within which to provide or procure such
service on a basis that does not materially disadvantage Operating Partnership
(as determined in accordance with the Escalation Process) relative to
competitive alternatives and if SBC fails to provide such service on such basis
Operating Partnership shall be permitted to carry such services of a Third
Party; provided, that, Operating Partnership in consultation and cooperation
with SBC, shall first use its commercially reasonable efforts to procure such
services from a Person that is not an SBC Designated Entity. In the event that
Operating Partnership is unable to procure such services from a Person that is
not an SBC Designated Entity, Operating Partnership may procure such services
from an SBC Designated Entity so long as the term of the agreement pursuant to
which Operating Partnership agrees to do so is limited to one year or less
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or is otherwise terminable by Prodigy in its sole discretion on 60 days' or
less notice. If SBC subsequently obtains the ability to provide such services
then, subject to the Pre-existing Commitments set forth in Schedule 4.2(b)(i)
of this Agreement or other commitments entered into in accordance with this
Section 4.2(b) after the date hereof, Operating Partnership will give SBC an
opportunity to match the terms upon which any Third Party is providing such
services and replace the Third Party as promptly as is commercially practicable
if SBC does match such terms.
(c) Distribution of Smart Pages and City Guides.
(i) Following the Closing, the Parties agree that, except as required by
the Pre-existing Commitments set forth in Schedule 4.2(b)(ii) of this
Agreement, the Prodigy Portal shall Deliver Smart Pages and any city guide
services provided by SBC or its Affiliates (at SBC's sole expense) as the
exclusive yellow and white pages and city guide offerings of the Prodigy
Portal with no sharing by SBC of revenue with Prodigy or Operating
Partnership (subject to payment by SBC to Operating Partnership of rates
that are the best rates offered by Prodigy or Operating Partnership to any
unaffiliated Third Party for the Delivery of similar services on the
Prodigy Portal on a non-exclusive basis); provided, that, the foregoing
exclusivity shall terminate to the extent and for so long as (x) Operating
Partnership determines, based on objective criteria, that Smart Pages or a
city guide, as the case may be, functionality has become inferior to
competitive products in ways that materially disadvantages Operating
Partnership (either financially or competitively) as determined in
accordance with the Escalation Process and SBC has failed to correct such
competitive or financial inferiority within six months after written notice
from Operating Partnership of such inferiority and intention to add an
additional electronic yellow or white pages or city guide or (y) neither
SBC nor any of its Affiliates are able to provide such Smart Pages or city
guide services.
(ii) Following the Closing, in no event shall the Prodigy Portal cease to
Deliver Smart Pages or any city guide services of SBC or its Affiliates on
the Prodigy Portal. The Parties agree that the operation of Smart Pages and
city guide services by SBC (including any future development as an e-
commerce mall or other functionality) shall not violate any exclusivity or
other obligations of SBC under this Agreement.
(d) Performance Standards. Following the Closing, the Prodigy Portal must
demonstrate compliance with the following performance standards (the
"Performance Standards"), to be measured on a quarterly calendar basis. The
Prodigy Portal shall comply with the following performance standards, to be
measured on a quarterly calendar basis: (i) nonsubcriber revenue per Subscriber
will be substantially equivalent to or exceed the nonsubscriber revenue per
subscriber of other competitive ISPs, taking into account the relative size of
subscriber base, access mix and other relevant factors to be mutually
determined, and (ii) the Prodigy Portal will be accessible to Subscribers on
average of at least ninety-eight (98%) of the time, (excluding planned
outages).
(e) Remedies for Failure to Meet Performance Standards.
(i) Quarterly Failure. In the event that the Performance Standards are
not met in any quarter, then representatives of Prodigy and SBC shall meet
to discuss such under performance and seek to identify ways to improve the
performance of the Prodigy Portal. In the event that the Performance
Standards are not met in any two consecutive quarters or any two quarters
out of four consecutive quarters, then Prodigy and SBC shall meet to
develop corrective actions and Prodigy and Operating Partnership shall use
commercially reasonable efforts to implement such corrective actions.
(ii) Three Consecutive Quarters. The Prodigy Portal's failure to meet the
Performance Standard in any three or more consecutive quarters after the
Transition Date shall be an Exclusivity Termination Event.
4.3 Product Development Details.
(a) Development Plan. On or before the Closing Date (for the calendar year of
the Closing Date), and annually thereafter on a calendar year basis during the
term of this Agreement, in consultation with SBC, Operating Partnership shall
prepare and adopt a twelve month plan, which plan shall be approved by the
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Prodigy Board (the "Development Plan") of the software and other development
and related integration, support and maintenance activities that desires to
undertake, and other operating services each desires to obtain from SBC or
Third Parties, in connection with the Prodigy Service during such twelve month
period which shall be implemented through individual projects (the "Development
Projects"). Each Development Plan shall be approved by the Prodigy Board prior
to the adoption and implementation of such Development Plan and shall be
updated quarterly. Each Development Plan shall include reasonable detail such
as personnel requirements, budget and description of work to be done. Once
approved by the Prodigy Board, the Development Plan may only be modified in any
material respect with the approval of the Prodigy Board, provided that Prodigy
Board approval of modifications shall not be required so long as the
Development Plan is being implemented within the budget and general strategy
set forth therein. Operating Partnership shall manage Development Projects
substantially in accordance with the Development Plan.
(b) Designation of Client Software. Following the Closing, Operating
Partnership shall have the rights to designate client software and SBC shall
provide or designate any required Connectivity Software.
(c) Similar Software. Following the Closing, subject to the restrictions
contained herein, SBC may develop software that is similar to software it has
developed for Operating Partnership provided that such software is developed
without reference to, or using any confidential information of Operating
Partnership unless otherwise agreed in writing between SBC and Operating
Partnership.
ARTICLE V
Network Services
5.1 SBC Preference for Network Services. Subject to the Pre-existing
Commitments set forth in Schedule 5.1(i) of this Agreement, following the
Closing, each of Prodigy and Operating Partnership shall offer SBC the first
opportunity to provide all Network Services for Delivery via analog dial-up,
ISDN and DSL of the Prodigy Service and shall, subject to Section 5.2, utilize
such Network Services provided by SBC.
5.2 Qualifications on Preference. The rights granted to SBC in Section 5.1
shall only apply to the extent SBC provides Network Services on terms that do
not materially disadvantage Prodigy or Operating Partnership (as determined in
accordance with the Escalation Process) as compared to terms available from a
Third Party and with a service quality level competitive, in the aggregate,
with that of Third Parties.
5.3 Favored Pricing; Third Party Agreements. To the best of its knowledge,
following the Closing, SBC shall always offer Network Services to Operating
Partnership at the best price that it offers such particular Network Service to
any other similarly situated non-governmental Third Party purchaser of a
similar type and quantity of such Network Services. To the extent SBC offers
any Third Party Retail ISP Service access to any cable Broadband Access
networks that are owned by Affiliates of SBC for the purpose of providing a
Retail ISP Service, following the Closing, SBC shall make such cable Broadband
Access available to Operating Partnership on at least equivalent terms and
conditions. Each of Prodigy and Operating Partnership agrees that it shall not
enter into any exclusive contracts with Third Parties for the provision of
Network Services following the Closing. Following the Closing, each of Prodigy
and Operating Partnership agrees that it shall not enter into any long-term
contracts with Third Parties for the provision of Network Services without the
consent of SBC (which consent shall not be unreasonably withheld).
5.4 Day-to-Day Business Operations of Prodigy. Subject to the Pre-existing
Commitments as set forth in Schedule 4.2(b) and Schedule 5.4(i), or as
contemplated by Section 4.2(b), following the Closing, each of Prodigy and
Operating Partnership shall use commercially reasonable efforts to acquire the
Telecommunications Services for its day-to-day business operations (other than
for the Delivery of the Prodigy Service) from SBC to the extent such
Telecommunications Services are available to be provided by SBC; provided,
that, Prodigy shall not be required to connect its current in-house security
system to SBC's security system, if any. Subject to compliance with applicable
law, following the Closing, SBC shall offer such Telecommunications Services to
Prodigy and Operating Partnership on terms that are no less favorable than
those offered by SBC to other comparable Retail ISPs.
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5.5 Technical Assistance by SBC. Following the Closing, SBC shall provide on
terms at least as favorable as those offered to any other similarly situated
unaffiliated Third Party the technical support and assistance reasonably
required by Prodigy and Operating Partnership in connection with the use by
Prodigy and Operating Partnership of the Network Services.
5.6 Global Services Provider. Following the Closing, SBC shall provide
Network Services to Prodigy and Operating Partnership consistent with such
SBC's GSP obligations. Nothing in this Agreement shall require SBC to modify
its existing, or enter into new, GSP contractual arrangements. Each of Prodigy,
Operating Partnership and SBC, where required, shall comply with applicable GSP
legal requirements. Subject to applicable legal requirements, SBC agrees to
cooperate with the reasonable requests of Operating Partnership in connection
with the management of GSP relationships. Each of Prodigy and Operating
Partnership agrees that promptly after the date hereof it shall diligently
pursue the actions necessary to satisfy all applicable GSP obligations prior to
the Closing Date. Following the Closing Date, each of Prodigy and Operating
Partnership agrees that it will continue to comply with such GSP obligations,
if applicable.
ARTICLE VI
Dispute Resolution
6.1 Negotiation. In the event of any controversy or claim arising from or
relating to this Agreement or the breach thereof (each, a "Claim"), SBC and SBC
Sub, on the one hand, and Prodigy and Operating Partnership, on the other hand,
shall use commercially reasonable efforts to resolve the Claim. To this end,
representatives (or persons to be representatives, if before the Closing) on
the Prodigy Board of parties having an interest in the Claim (collectively, the
"Participating Parties"), shall consult and negotiate with each other in good
faith and, recognizing their mutual interests, attempt to reach a just and
equitable solution satisfactory to all Participating Parties. If they do not
reach such solution within a period of 30 Business Days from the date of their
first meeting, then the Participating Parties shall commence an arbitration in
accordance with this Article VI.
6.2 Arbitration. If the Claim is not resolved by negotiation by the
conclusion of the negotiation period referred to above, such Claim shall be
resolved by final and binding arbitration administered by the American
Arbitration Association (AAA) in accordance with its Commercial Arbitration
Rules and Title 9 of the U.S. Code. Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(a) Any Participating Party desiring to commence arbitration shall send a
written notice (an "Arbitration Notice") to the other Participating Parties and
to the AAA describing the dispute and setting forth the matters to be resolved
by the arbitration. Within ten Business Days of the date of such notice (the
"Notice Period"), any other Participating Party may, if such Participating
Party does not agree with the description or statement of matters to be
resolved, send an Arbitration Notice to the other Participating Parties and to
the AAA describing the dispute and setting forth the matters to be resolved by
the arbitration. Within ten Business Days of the end of the Notice Period, the
Participating Parties shall, if they can agree, select an arbitrator to resolve
the dispute. In the event that the Participating Parties have not selected an
arbitrator within ten Business Days of the end of the Notice Period, then the
dispute shall be resolved by majority decision of a panel of three arbitrators,
selected by the AAA in accordance with its rules.
(b) In selecting arbitrators, the Participating Parties or the AAA shall
select persons who are experienced in and knowledgeable about the information
technology and telecommunications industries and are rendering no advice or
services to, and within the past two years have rendered no material advice or
services to, any party to this Agreement.
(c) The place of arbitration shall be New York, New York.
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(d) The arbitrator(s) shall have no authority to award punitive damages or
any other damages not measured by the prevailing party's actual damages, and
may not, in any event, make any ruling, finding or award that does not conform
to the terms and conditions of this Agreement.
(e) At any time after the commencement of a proceeding hereunder, any Party
may make an application to the arbitrators seeking injunctive relief until such
time as the arbitration award is rendered or the controversy is otherwise
resolved. Any Participating Party may also apply to any court having
jurisdiction hereof at any time to seek injunctive relief until such time as
the arbitration award is rendered or the controversy is otherwise resolved.
(f) The award shall be made within four months of filing of the Arbitration
Notice, and the arbitrator(s) shall agree to comply with this schedule before
accepting appointment. However, this time limit may be extended by agreement of
the parties or by the arbitrator(s) if necessary. The failure to meet these
time limits shall not invalidate the award when rendered.
(g) Except as required by law or by regulation, or with the consent of all
parties involved in the proceeding, no party hereto shall disclose or
disseminate any information relating to a Claim or to the dispute resolution
proceedings called for hereby except for disclosure to those of its officers,
employees, accountants, attorneys and agents whose duties reasonably require
them to have access to such information.
(h) The Participating Parties in the arbitration shall share equally the
costs and expenses of the arbitration. Each Participating Party shall otherwise
bear its own fees and expenses.
ARTICLE VII
Additional Agreements
7.1 Additional Agreements. (a) Each of Prodigy and Operating Partnership
acknowledges that the transactions contemplated by this Agreement create a
strategic relationship with SBC and in order to facilitate the fullest possible
cooperation between Prodigy and Operating Partnership, on the one hand, and SBC
and SBC Sub, on the other hand, each of Prodigy and Operating Partnership
agrees for itself and its Subsidiaries that:
(i) they shall not issue or sell, or facilitate the issuance or sale, to
any SBC Designated Entity of any equity or other voting securities of
Prodigy or any Affiliate of Prodigy, or make any investment in the
securities of or enter into any joint venture with any SBC Designated
Entity;
(ii) they shall not enter into any agreement, arrangement or
understanding with any SBC Designated Entity that includes any Co-Branding,
co-Marketing, co-funded advertising or bundling of any Prodigy or Prodigy
Affiliate name, product or service provided that the prohibitions in this
Section 7.1(a)(ii), shall not prohibit Prodigy and its Affiliates from: (y)
including the Prodigy Service in a bundle with any SBC Designated Entity
products so long as the Prodigy Service is just one of several products in
the bundle, the Prodigy Brand is used materially less prominently than that
of the SBC Designated Entity and there is no Co-Branding or co-Marketing or
co-funded advertising of the bundle or (z) agreeing to "ingredient
branding" of a unique function which requires ingredient branding as a
condition to its availability, that is competitively significant for
Operating Partnership to offer its Subscribers and which function Prodigy
or Operating Partnership has been unable to obtain after 60 days of
commercially reasonable efforts from SBC or any non-SBC Designated Entity;
and
(iii) they shall not utilize any method of Internet access (e.g., cable,
satellite or broadband wireless) obtained from any SBC Designated Entity
unless such access is non-exclusive and available (by law or otherwise) to
all Internet service providers, including Operating Partnership, on a non-
discriminatory basis on the same terms and conditions.
(b) Except as otherwise provided in Section 10.19(a), Operating Partnership
and Prodigy, on the one hand, and SBC and SBC Sub, on the other hand, shall
each bear their own Transaction Expenses.
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(c) Prodigy shall, as soon as practicable after the execution and delivery of
this Agreement, prepare with SBC a transition plan (the "Transition Plan")
covering the period from the date of this Agreement through the Closing Date,
which will include, among other things, strategies consistent with this
Agreement relating to Network Services, the transitioning of the Legacy
Subscribers to the Prodigy Service, customer care services, the implementation
of interim marketing arrangements and the implementation of the Business Plan.
The Parties agree, in the context of the Transition Plan, to discuss the
feasibility of SBC's provisioning of billing services to Prodigy Subscribers
located in the SBC Territory.
ARTICLE VIII
Termination
8.1 Termination of Agreement.
(a) This Agreement shall terminate upon the earliest to occur of the
following: (i) the termination of the Investment Agreement in accordance with
its terms; (ii) the mutual written consent of SBC and Prodigy by action of
their respective boards of directors to so terminate this Agreement; and (iii)
the Exclusivity Termination Date; provided, that, following the occurrence of
an event referred to in clause (x) of the definition of Exclusivity Termination
Event that SBC does not utilize to declare an Exclusivity Termination Date,
Article V shall survive until the later of the fifth anniversary of the date of
this Agreement and the second anniversary of such event.
(b) (i) In the event one Party materially breaches or fails to perform any of
its material obligations under this Agreement, the other Party (the "Notifying
Party") may notify the allegedly breaching Party (the "Receiving Party") of
such breach or failure (a "Breach Notice") and the Parties shall first meet in
good faith to try to determine whether a material breach has occurred, and if
so, an appropriate manner for correcting or otherwise addressing such breach or
failure, with a preference where appropriate for a remedy other than
termination, and establish a plan for the prevention of similar breaches or
failures in the future. The Receiving Party shall use commercially reasonable
efforts to remedy promptly any such breach or failure.
(ii) In the event the Parties disagree over whether such breach or
failure has occurred or such breach or failure is not cured within 30 days
after the Receiving Party's receipt of such breach notice, or, in the case
of a breach or failure that is not capable of being remedied, the Parties
cannot reach agreement on an appropriate manner for addressing such breach
or failure, other than termination, either of the Parties may request in
writing that such matter be referred to senior management officers of each
of the Parties for an appropriate resolution. Upon such a request, senior
management officers of each of the Parties shall meet in good faith to
determine an appropriate manner for addressing such breach or failure, with
a preference where appropriate for a remedy other than termination.
(iii) In the event such breach or failure is not cured within 30 days
after the referral of the matter to senior management officials, or, in the
case of a breach or failure that is not capable of being remedied, the
Parties cannot reach agreement on an appropriate manner for addressing such
breach or failure, other than termination, within such 30 day period, the
Notifying Party shall have the right to commence an action affirming the
existence of such breach or failure and may terminate this Agreement only
upon receipt of a final arbitral award pursuant to Article VI of this
Agreement affirming the existence of such breach or failure; provided,
however, that for purposes of this Section 8.1(b)(iii), any award to be
made pursuant to Article VI shall be made within one month of filing of the
Arbitration Notice notwithstanding anything to the contrary contained in
Section 6.2(f) of this Agreement.
(iv) Notwithstanding the foregoing, in the event that any such breach or
failure occurs again within 120 days of the Receiving Party's receipt of a
Breach Notice for the first such breach or failure, the Notifying Party
shall have the right to terminate this Agreement immediately only upon
receipt of a final arbitral award pursuant to Article VI of this Agreement
affirming the existence of such breach or failure and that such breach or
failure was material; provided, however, that for purposes of this Section
8.1(b)(iv), any award to be made pursuant to Article VI shall be made
within one month of filing of the
B-20
<PAGE>
Arbitration Notice notwithstanding anything to the contrary contained in
Section 6.2(f) of this Agreement. Termination in accordance with Section
8.1(b)(iii) or 8.1(b)(iv) shall be immediately effective upon the receipt
by the Receiving Party of written notice of the final arbitral award
affirming the existence of such breach or failure and termination from the
Notifying Party. This Section 8.1(b) shall not in any way limit any Party's
right to seek injunctive relief or any other remedy available at law or in
equity prior to any termination of this Agreement.
ARTICLE IX
Representations and Warranties
9.1 Representations and Warranties of Prodigy and Operating Partnership. Each
of Prodigy and Operating Partnership jointly and severally hereby makes the
following representations and warranties to SBC and SBC Sub:
(a) Authorization; Enforcement. Each of Prodigy and Operating Partnership
has all requisite corporate power and authority to execute and to deliver
this Agreement and to perform its obligations under this Agreement in
accordance with its terms. Each of Prodigy and Operating Partnership has
taken all necessary action to authorize the execution and delivery of this
Agreement, and the consummation of the transactions contemplated hereby.
This Agreement is a valid and legally binding obligation of each of Prodigy
and Operating Partnership, enforceable against each of them in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles
(the "Bankruptcy and Equity Exception").
(c) Compliance with Law and Obligations. The execution and delivery by
each of Prodigy and Operating Partnership of this Agreement do not and the
performance by each of Prodigy and Operating Partnership of its respective
obligations under this Agreement and the consummation by each of Prodigy
and Operating Partnership of the transactions contemplated hereby will not,
violate any provision of any law or regulation, or any existing writ or
decree of any court or Governmental Entity applicable to Prodigy or
Operating Partnership, or violate, conflict with or constitute a breach of,
or a default under, the certificate of incorporation or bylaws of Prodigy,
the Amended and Restated Certificate of Incorporation of Prodigy or the
Amended and Restated By-Laws of Prodigy or the Certificate of Limited
Partnership of Operating Partnership or the comparable governing
instruments of any of their respective Subsidiaries, or result in a
violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination,
cancellation, modification or acceleration) (whether after the giving of
notice or the passage of time or both) under any material contract to which
Prodigy or Operating Partnership is a party or which is binding on it or
its assets, and will not result in the creation of any Lien on, or security
interest in, any of the assets or properties of Prodigy or Operating
Partnership or any of their Subsidiaries. Schedule 9.1(b) sets forth a
correct and complete list of material Contracts of Prodigy and its
Subsidiaries pursuant to which consents or waivers are or may be required
prior to consummation of the transactions contemplated by this Agreement.
(d) Consents and Approvals. All notices, reports or other filings
required to be made by Prodigy or Operating Partnership, and all consents,
registrations, approvals, permits, authorizations and orders of
Governmental Entities or other third parties required to be obtained by
Prodigy or Operating Partnership, in connection with the execution and
delivery of this Agreement by each of Prodigy and Operating Partnership,
the performance by each of Prodigy and Operating Partnership of its
respective obligations under this Agreement and the consummation by each of
Prodigy and Operating Partnership of the transactions contemplated hereby
have been made or obtained.
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<PAGE>
9.2 Representations and Warranties of SBC and SBC Sub. Each of SBC and SBC
Sub jointly and severally hereby makes the following representations and
warranties to Prodigy and Operating Partnership:
(a) Authorization; Enforcement. Each of SBC and SBC Sub has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement in accordance with its terms.
Each of SBC and SBC Sub has taken all necessary action to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement is a valid and legally
binding obligation of each of SBC and SBC Sub, enforceable against each of
them in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
(b) Compliance with Law and Obligations. The execution and delivery by
each of SBC and SBC Sub of this Agreement do not, and the performance by
each of SBC and SBC Sub of its respective obligations under this Agreement
and the consummation by each of SBC and SBC Sub of the transactions
contemplated hereby will not, violate any provision of any law or
regulation, or any existing writ or decree of any court or Governmental
Entity applicable to SBC or SBC Sub, or violate, conflict with or
constitute a breach of, or a default under, the certificate of
incorporation or bylaws of SBC or SBC Sub, or result in a violation or
breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation,
modification or acceleration) (whether after the giving of notice or the
passage of time or both) under any material Contract to which SBC or SBC
Sub is a party or which is binding on it or its assets, and will not result
in the creation of any Lien on, or security interest in, any of the assets
or properties of SBC or any of its Subsidiaries.
(c) Consents and Approvals. All notices, reports or other filings
required to be made by SBC or SBC Sub, and all consents, registrations,
approvals, permits, authorizations and orders of Governmental Entities or
other third parties required to be obtained by SBC or SBC Sub in connection
with the execution and delivery of this Agreement by each of SBC and SBC
Sub, the performance by each of SBC and SBC Sub of its respective
obligations under this Agreement and the consummation by each of SBC and
SBC Sub of the transactions contemplated hereby, have been made or
obtained.
ARTICLE X
Miscellaneous
10.1 Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned by any Party without the prior written consent of the
other Parties hereto. Any attempted assignment that does not comply with this
Section 10.1 shall be void.
10.2 Governing Law; Venue; Waiver of Jury Trial. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH AND SUBJECT TO THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO CONFLICTS OF LAWS PRINCIPLES.
The parties hereby irrevocably submit to the jurisdiction of the courts of
the State of New York and the Federal court of the United States of America
located in the State of New York solely in respect of the interpretation and
enforcement of the provisions of this Agreement, and hereby waive, and agree
not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or
is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any such document may not be enforced in
or by such courts, and the parties hereto irrevocably agree that all claims
with respect to such action or proceeding shall be heard and determined in such
a New York State or Federal court. The parties hereby consent to and grant any
such court jurisdiction over the person of such parties and over the subject
matter of such dispute and agree that mailing of process or other papers in
connection with any such action or proceeding in the manner provided in Section
10.4 of this Agreement or in such other manner as may be permitted by Law shall
be valid and sufficient service thereof.
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<PAGE>
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 10.2.
10.3 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and may be executed by facsimile signature. All counterparts shall collectively
constitute one and the same Agreement.
10.4 Notices. In any case where any notice or other communication is required
or permitted to be given hereunder, such notice or communication shall be in
writing and deemed to have been duly given and delivered: (a) if delivered in
person, on the date of such delivery; (b) if sent by overnight express or
registered or certified mail (with return receipt requested), on the date of
receipt of such mail; or (c) if sent by confirmed facsimile transmission (with
answer back received), on the date of such facsimile transmission provided that
notice is also sent on the same day by one of the methods set forth in (a) or
(b) above. Such notice or other communication shall be sent to the following
address(es) (or such other address(es) as a Partner may designate from time to
time in writing):
If to SBC or SBC Sub:
James S. Kahan
Senior Vice President
Corporate Development
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Telecopy: (210) 351-5034
Telephone: (210) 351-5030
With copies, which shall not constitute notice, to:
Senior Counsel--M&A
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Telecopy: (210) 351-3488
Telephone: (210) 351-3445
Joseph B. Frumpkin, Esq.
Keith A. Pagnani, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telecopy: (212) 558-3588
Telephone: (212) 558-4000
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<PAGE>
If to Prodigy or Operating Partnership:
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
Telecopy: (914) 448-8198
Telephone: (914) 448-8000
Attention: Andrea S. Hirsch
Executive Vice President
Business Development
and General Counsel
With a copy, which shall not constitute notice, to:
David A. Westenberg, Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Telecopy: (617) 526-5000
Telephone: (617) 526-6000
10.5 Entire Agreement. The terms and conditions contained in this Agreement
(including the exhibits and/or schedules attached hereto) constitute the entire
agreement between or among the Parties relating to the subject matter of this
Agreement and shall supersede all previous communications between the Parties
with respect to the subject matter of this Agreement. No Party has entered into
this Agreement in reliance upon any representation, warranty, covenant or
undertaking of any other Party that is not set out or referred to in this
Agreement.
10.6 Amendment. Except as expressly provided otherwise in this Agreement,
this Agreement may be varied, amended or extended only by the written agreement
executed and delivered by duly authorized officers or representatives of the
respective Parties.
10.7 Severability. In the event that any provision of this Agreement is held
to be illegal, invalid or unenforceable in a final, unappealable Order or
judgment (each such provision, an "invalid provision"), then such provision
shall be severed from this Agreement and shall be inoperative, and the Parties
promptly shall negotiate in good faith a lawful, valid and enforceable
provision that is as similar to the invalid provision as may be possible and
that preserves the original intentions and economic positions of the Parties as
set forth herein to the maximum extent feasible, while the remaining provisions
of this Agreement shall remain binding on the Parties hereto. Without limiting
the generality of the foregoing sentence, in the event a change in any
applicable Law, rule or regulation makes it unlawful for a Party to comply with
any of its obligations hereunder, the Parties shall negotiate in good faith a
modification to such obligation to the extent necessary to comply with such
Law, rule or regulation that is as similar in terms to the original obligation
as may be possible while preserving the original intentions and economic
positions of the Parties as set forth herein to the maximum extent feasible.
10.8 Headings; Recitals. The descriptive headings of the articles and
sections of this Agreement and its Schedules and Exhibits and the recitals
herein are inserted for convenience only and do not constitute a part of this
Agreement.
10.9 No Waiver of Rights. No failure or delay on the part of a Party in the
exercise of any power or right hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or power hereunder shall operate as a
waiver of such right or of any other right or power. The waiver by any Party of
a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any other or subsequent breach hereunder. No waiver shall be
effective unless in writing signed by the waiving Party.
B-24
<PAGE>
10.10 Remedies Cumulative. Unless expressly provided otherwise herein, all
rights and remedies granted to each Party under this Agreement are cumulative
and in addition to, and not in lieu of, any other rights or remedies otherwise
available to such Party at law or in equity.
10.11 No Agency. Each of the Parties hereto is an independent contractor and
shall have no right, power or authority to assume or create any obligation or
responsibility on behalf of any of the other Parties. This Agreement shall not
create or imply, or be construed to create or imply, any partnership,
association, agency, or joint venture between or among the Parties.
10.12 No Third Party Beneficiaries. This Agreement is entered into solely
among, and may be enforced only by, the Parties hereto. This Agreement shall
not be deemed to create any rights in any Third Parties, including suppliers,
customers and employees of any Party, or to create any obligations of a Party
to any such Third Parties.
10.13 Force Majeure. If any circumstance beyond the reasonable control of any
Party occurs which delays or renders impossible the performance of that Party's
obligations under this Agreement on the dates herein provided, such obligation
shall be postponed for such time as such performance necessarily has had to be
suspended or delayed on account thereof, provided such Party shall notify the
other Parties in writing as soon as practicable, but in no event more than ten
days, after the occurrence of such force majeure. In such event, the Parties
shall meet promptly to determine an equitable solution to the effects of any
such event, provided that such Partner who fails because of force majeure to
perform its obligations hereunder shall use commercially reasonable efforts to
implement work-arounds or otherwise minimize the length of the delay and to
resume promptly performance upon the cessation of the force majeure. Events of
force majeure shall include war, revolution, invasion, insurrection, riots, mob
violence, sabotage or other civil disorders, power outages, and acts of God;
provided, however, that, in the event that a change in any applicable Law, rule
or regulation makes it unlawful for a Party to comply with any of its
obligations hereunder and could be considered an event of force majeure, the
characterization of such change in Law, rule or regulation as an event of force
majeure shall be without prejudice to the obligations of the Parties under
Section 10.7 above.
10.14 Further Assurances; Affiliates. In addition to any other obligations
set forth in the Agreement, each Party agrees to take such action (including,
but not limited to, the execution, acknowledgment and delivery of documents) as
may reasonably be requested by the other Party for the implementation or
continuing performance of this Agreement. Unless otherwise expressly set forth
herein, any agreement by a Party to take or refrain from taking any action
shall constitute an agreement by such Party to cause each of its Subsidiaries,
and to use all reasonable best efforts to cause each of its Affiliates, to so
act or refrain from acting.
10.15 Export Controls. Each Party agrees to comply fully with all relevant
export laws and regulations of the United States to ensure that no information
or technical data provided pursuant to this Agreement is exported or re-
exported directly or indirectly in violation of law.
10.16 Negotiated Terms. Each Party acknowledges that the provisions of this
Agreement were negotiated to reflect an informed, voluntary allocation between
the Parties of all risks (both known and unknown) associated with the
transactions contemplated by this Agreement.
10.17 Principles Of Construction. In this Agreement and all other attached
Schedules, Exhibits or Attachments to this Agreement, unless otherwise
expressly indicated or required by the context:
(a) reference to and the definition of any document shall be deemed a
reference to such document as it may be amended, supplemented, revised, or
modified, in writing, from time to time but disregarding any amendment,
supplement, replacement or novation made in breach of this Agreement;
(b) references in this Agreement to any statute, decree or regulation
shall be construed as a reference to such statute, law, decree or
regulation as re-enacted, redesignated, amended or extended from time to
time and references herein or in this Agreement to any document or
agreement shall be deemed to include
B-25
<PAGE>
references to such document or agreement as amended, varied, supplemented
or replaced from time to time in accordance with such document's or
agreement's terms;
(c) defined terms in the singular shall include the plural and vice
versa, and the masculine, feminine or neuter gender shall include all
genders;
(d) the words "including" or "includes" shall be deemed to mean
"including without limitation" and "including but not limited to" (or
"includes without limitation" and "includes but is not limited to")
regardless of whether the words "without limitation" or "but not limited
to" actually follow the term;
(e) accounting terms used herein but not defined herein shall have their
respective meanings provided under U.S. GAAP;
(f) the words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement or its Schedules or Exhibits shall refer
to this Agreement and its Schedules and Exhibits as a whole and not to any
particular provision hereof or thereof, as the case may be; and
(g) any reference herein to a time of day means the time of day in New
York, New York.
10.18 Confidentiality. The Parties shall maintain the confidentiality of this
Agreement and of any provisions of this Agreement in accordance with any
applicable laws, rules and regulations.
10.19 Taxes.
(a) Payments. All payments under of this Agreement shall be made exclusive of
any applicable taxes and shall be made free and clear of, and without reduction
for (and the payor shall be responsible for and shall indemnify the payee
against), any applicable federal, state, local or foreign sales, use or value-
added taxes pertaining to the payments under this Agreement (but specifically
excluding taxes based upon the net income of the payee). At the payee's
request, the payor shall promptly furnish the payee with receipts evidencing
the payment of any taxes referred to in the preceding sentence. The payor and
the payee shall cooperate with each other in minimizing any applicable tax and
in obtaining any exemption from or reduced rate of tax available under any
applicable law.
10.20 Treatment in Accordance with Future Transactions. Each of Prodigy and
Operating Partnership agrees that it shall provide SBC with copies of all
agreements and documentation relating to the Marketing or Delivery of a Retail
ISP Service within the United States that it enters into with any Third Party
("Third Party Agreement"). If SBC reasonably believes that any such Third Party
Agreement materially disadvantages SBC with respect to its obligations and
rights under this Agreement, SBC may request a determination, pursuant to the
Escalation Process, whether SBC has been or will be materially disadvantaged as
a result of such Third Party Agreement and seek appropriate remedies therefor.
B-26
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to
be duly executed in its name and on its behalf, all as of the date first above
written.
SBC COMMUNICATIONS INC.
By: /s/ James S. Kahan
-----------------------------------
Name: James S. Kahan
Title: Senior Executive Vice
President of Corporate
Development
SBC INTERNET COMMUNICATIONS, INC.
By: /s/ Stephen A. McGaw
-----------------------------------
Name: Stephen A. McGaw
Title: President
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Andrea S. Hirsch
-----------------------------------
Name: Andrea S. Hirsch
Title: Executive Vice President
and General Counsel
PRODIGY COMMUNICATIONS LIMITED
PARTNERSHIP
By: Prodigy Communications
Corporation, as general partner
of Prodigy Communications Limited
Partnership
By: /s/ Andrea S. Hirsch
-----------------------------------
Name: Andrea S. Hirsch
Title: Executive Vice President
and General Counsel
B-27
<PAGE>
ANNEX C
Composite Copy
INVESTMENT, ISSUANCE,
CONTRIBUTION AND ASSUMPTION AGREEMENT
dated as of November 19, 1999
and amended as of April 19, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
RECITALS
ARTICLE I
CERTAIN DEFINITIONS
ARTICLE II
INVESTMENT AND ISSUANCE; CONTRIBUTION AND ASSUMPTION
<C> <S> <C>
2.1 Prodigy Contribution............................................. C-7
2.2 Unit Issuance and SBC Contribution............................... C-7
2.3 Issuance of Investment Share..................................... C-7
ARTICLE III
CLOSING; CONDITIONS
3.1 Closing.......................................................... C-8
3.2 Conditions to Obligations of SBC and SBC Sub..................... C-8
3.3 Conditions to Obligations of Prodigy, Prodigy Sub and Operating
Partnership...................................................... C-10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Prodigy, Prodigy Sub and
Operating Partnership............................................ C-12
4.2 Representations and Warranties of SBC and SBC Sub................ C-24
ARTICLE V
COVENANTS
5.1 Covenants of Prodigy, Prodigy Sub and Operating Partnership...... C-27
5.2 Covenants of SBC and SBC Sub..................................... C-29
5.3 Provisions Regarding Third Party Acquisitions.................... C-31
5.4 Provisions Regarding Prodigy Stockholder Approval................ C-32
5.5 Additional Covenants............................................. C-33
ARTICLE VI
FURTHER AGREEMENTS
6.1 Directors of Prodigy............................................. C-34
6.2 Assignments and Officers......................................... C-35
6.3 Company Headquarters............................................. C-35
6.4 Cooperation...................................................... C-35
6.5 Publicity........................................................ C-35
6.6 Registration Rights.............................................. C-35
6.7 Expenses......................................................... C-35
ARTICLE VII
TERMINATION
7.1 Termination by Mutual Consent.................................... C-36
7.2 Termination by Either Prodigy or SBC............................. C-36
</TABLE>
C-i
<PAGE>
<TABLE>
<C> <S> <C>
7.3 Termination by SBC.................................................. C-36
7.4 Termination by Prodigy.............................................. C-37
7.5 Effect of Termination and Abandonment............................... C-37
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.1 Survival............................................................ C-37
8.2 Indemnification and Reimbursement by Prodigy........................ C-38
8.3 Indemnification and Reimbursement by SBC............................ C-38
8.4 Limitations on Amount--Prodigy...................................... C-39
8.5 Limitations on Amount--SBC.......................................... C-39
8.6 Notice and Payment of Claims........................................ C-39
8.7 Procedure for Indemnification--Third Party Claims................... C-40
8.8 Other Indemnification Provisions.................................... C-41
ARTICLE IX
MISCELLANEOUS
9.1 Assignment.......................................................... C-41
9.2 Governing Law....................................................... C-41
9.3 Venue; WAIVER OF JURY TRIAL......................................... C-41
9.4 Counterparts........................................................ C-42
9.5 Notices............................................................. C-42
9.6 Entire Agreement.................................................... C-43
9.7 Amendment........................................................... C-43
9.8 Severability........................................................ C-43
9.9 Headings; Recitals.................................................. C-44
9.10 No Waiver of Rights................................................. C-44
9.11 Remedies Cumulative................................................. C-44
9.12 No Agency........................................................... C-44
9.13 No Third Party Beneficiaries........................................ C-44
9.14 Force Majeure....................................................... C-44
9.15 Further Assurances; Affiliates...................................... C-44
9.16 Export Controls..................................................... C-45
9.17 Negotiated Terms.................................................... C-45
9.18 Principles of Construction.......................................... C-45
9.19 Confidentiality..................................................... C-45
9.20 Transfer Taxes...................................................... C-45
9.21 Legend.............................................................. C-45
</TABLE>
<TABLE>
<C> <S>
EXHIBIT A SBC MANDATORY CONTRIBUTED ASSETS
EXHIBIT B SBC DISCRETIONARY CONTRIBUTED ASSETS
EXHIBIT C FORM OF AMENDED AND RESTATED LIMITED PARTNERSHIP
AGREEMENT
EXHIBIT D FORM OF RESTATED CERTIFICATE OF INCORPORATION
EXHIBIT E FORM OF AMENDED AND RESTATED BY-LAWS
EXHIBIT F FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT G PRODIGY NON-CONTRIBUTED ASSETS
EXHIBIT H PRODIGY NON-CONTRIBUTED LIABILITIES
</TABLE>
C-ii
<PAGE>
INVESTMENT, ISSUANCE, CONTRIBUTION AND ASSUMPTION AGREEMENT (hereinafter
called this "Agreement"), dated as of November 19, 1999 and amended as of April
19, 2000, by and among SBC Communications Inc., a Delaware corporation ("SBC"),
SBC Internet Communications, Inc., a Delaware corporation and an indirect
wholly owned subsidiary of SBC ("SBC Sub"), Prodigy Communications Corporation,
a Delaware corporation ("Prodigy"), Prodigy Transition Corporation, a Delaware
corporation and a wholly owned subsidiary of Prodigy ("Prodigy Sub"), and
Prodigy Communications Limited Partnership, a Delaware limited partnership
("Operating Partnership") (each of SBC, SBC Sub, Prodigy, Prodigy Sub and
Operating Partnership, a "Party" and collectively, the "Parties"). Capitalized
terms used but not defined herein shall have the meaning assigned to them in
the Strategic and Marketing Agreement (as defined below).
RECITALS
WHEREAS, Prodigy and Prodigy Sub have formed Operating Partnership and
Prodigy and Prodigy Sub own a combined 100% interest in Operating Partnership;
WHEREAS, the respective boards of directors of each of Prodigy and Prodigy
Sub have approved the Contribution of all of the Prodigy Assets and Prodigy
Liabilities to the Operating Partnership and the acceptance of all of the
Prodigy Contributed Assets by Operating Partnership and the Assumption of all
of the Prodigy Liabilities by Operating Partnership (the "Prodigy
Contribution") upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the respective boards of directors of each of Prodigy, SBC and SBC
Sub have approved the issuance of the SBC Units in exchange for the
Contribution to Operating Partnership of all of the SBC Mandatory Contributed
Assets and SBC Mandatory Liabilities associated with such SBC Mandatory
Contributed Assets, the Contribution to Operating Partnership of all of the SBC
Discretionary Contributed Assets and SBC Discretionary Liabilities associated
with such SBC Discretionary Contributed Assets, the acceptance by Operating
Partnership of all of the SBC Mandatory Contributed Assets and SBC
Discretionary Contributed Assets and the Assumption by Operating Partnership of
all of the SBC Mandatory Liabilities associated with such SBC Mandatory
Contributed Assets and SBC Discretionary Liabilities associated with such SBC
Discretionary Contributed Assets upon the terms and subject to the conditions
set forth in this Agreement (the "Unit Issuance and SBC Contribution");
WHEREAS, the respective boards of directors of each of Prodigy, SBC and SBC
Sub have approved the issuance of the Investment Share to SBC Sub in
consideration of $100 upon the terms and subject to the conditions set forth in
this Agreement (the "Investment Share Issuance");
WHEREAS, contemporaneously with the execution of this Agreement, Prodigy,
Operating Partnership, SBC and SBC Sub have entered into a Strategic and
Marketing Agreement (the "Strategic Agreement"), providing for the transactions
contemplated thereby upon the terms and subject to the conditions set forth in
the Strategic Agreement;
WHEREAS, the respective boards of directors of each of Prodigy, Prodigy Sub,
SBC and SBC Sub have approved the Amended and Restated Limited Partnership
Agreement substantially in the form attached as Exhibit C hereto upon the terms
and subject to the conditions set forth in this Agreement;
WHEREAS, the board of directors of Prodigy has approved the Restated
Certificate of Incorporation substantially in the form attached as Exhibit D
hereto upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the board of directors of Prodigy has approved the Amended and
Restated By-Laws substantially in the form attached as Exhibit E hereto upon
the terms and subject to the conditions set forth in this Agreement;
C-1
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WHEREAS, the respective boards of directors of each of Prodigy, SBC and SBC
Sub have approved the Registration Rights Agreement substantially in the form
attached as Exhibit F hereto upon the terms and subject to the conditions set
forth in this Agreement;
WHEREAS, contemporaneously with the execution and delivery of this Agreement,
as a condition and inducement to SBC's and SBC Sub's willingness to enter into
this Agreement and the Strategic Agreement, the Stockholders (as defined in the
Voting Agreement) and SBC are entering into a Voting Agreement (the "Voting
Agreement") pursuant to which, among other things, the Stockholders shall agree
to deliver to SBC an irrevocable proxy to vote all shares of Prodigy Common
Stock owned by them on the date hereof and any other such shares of capital
stock of Prodigy acquired by them prior to the Closing Date or, under certain
circumstances, to consent with respect to any such shares in favor of the
approval and adoption of this Agreement, the Strategic Agreement and the
transactions contemplated thereby, the Restated Certificate of Incorporation
and the Amended and Restated By-Laws and the approval of the Investment Share
Issuance, the Prodigy Contribution, the Unit Issuance and SBC Contribution and
any and all of the other transactions contemplated hereby;
WHEREAS, it is intended that, for federal income tax purposes, the Unit
Issuance and SBC Contribution shall qualify as an exchange governed by Section
721 of the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder (the "Code"); and
WHEREAS, Prodigy, Prodigy Sub, Operating Partnership, SBC and SBC Sub desire
to make certain representations, warranties, covenants and agreements in
connection with this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
ARTICLE I
Certain Definitions
As used in this Agreement, the following terms shall have the meaning
ascribed to them below:
"Affiliate" has the meaning assigned to such term in the Amended and
Restated Limited Partnership Agreement.
"Agreement" has the meaning assigned to such term in the Preamble.
"Amended and Restated By-Laws" means the Amended and Restated By-Laws of
Prodigy in the form attached hereto as Exhibit E, with such changes as
Prodigy and SBC shall approve.
"Amended and Restated Limited Partnership Agreement" means that certain
Amended and Restated Limited Partnership Agreement for Operating
Partnership, to be entered into as of the Closing Date, by and among SBC
Sub, Prodigy and Prodigy Sub in the form attached hereto as Exhibit C, with
such changes as Prodigy and SBC shall approve.
"Assume" means to pay, perform and otherwise discharge Liabilities of SBC
or Prodigy, as the case may be, and indemnify and hold harmless SBC or
Prodigy, as the case may be, against any such Liabilities. "Assumption"
shall have a correlative meaning.
"Bankruptcy and Equity Exception" has the meaning assigned to such term
in Section 4.1(b).
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Certificate of Limited Partnership" means the certificate of limited
partnership of Operating Partnership, as duly filed with the Secretary of
State of the State of Delaware on November 19, 1999.
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"Class A Common Stock" has the meaning assigned to such term in the
Restated Certificate of Incorporation.
"Class B Common Stock" has the meaning assigned to such term in Section
2.3.
"Closing" has the meaning assigned to such term in Section 3.1.
"Closing Date" has the meaning assigned to such term in Section 3.1.
"Code" has the meaning assigned to such term in the Recitals.
"Common Stock" has the meaning assigned to such term in the Restated
Certificate of Incorporation.
"Competing Transaction" has the meaning assigned to such term in Section
5.3(a).
"Contract" means any agreement, lease, license, contract, note, mortgage,
indenture, arrangement or other obligation.
"Contribute" means the conveyance of all right, title, proprietary or
other interest of SBC Sub, Prodigy or Prodigy Sub, as the case may be.
"Contribution" shall have correlative meaning.
"Damages" means direct losses, liabilities, suits, actions, claims,
deficiencies, diminution of value, costs, expenses (including disbursements
and costs of investigation, litigation, settlement, judgment, interest and
defense and reasonable attorneys' and accountants' fees), penalties, fines,
judgments and/or damages of any kind or nature whatsoever, whether or not
involving a third-party claim, and in no event shall include any indirect,
consequential or special damages.
"Employee Benefit Plan" has the meaning assigned to such term in Section
4.1(r).
"ERISA" has the meaning assigned to such term in Section 4.1(r).
"ERISA Affiliate" has the meaning assigned to such term in Section
4.1(r).
"Environmental Law" means any Law or the common law relating to the
environment or occupational health and safety, including without limitation
any statute, regulation, administrative decision or Order pertaining to (i)
treatment, storage, disposal, generation and transportation of, or exposure
to, industrial, toxic or hazardous materials or substances or solid or
hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and
soil contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous materials or substances, or
solid or hazardous waste, including without limitation emissions,
discharges, injections, spills, escapes or dumping of pollutants,
contaminants or chemicals; (v) the protection of wild life, marine life and
wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels, containers, abandoned or discarded
barrels, and other closed receptacles; (vii) health and safety of employees
and other persons; and (viii) manufacturing, processing, using,
distributing, treating, storing, disposing, transporting or handling of
materials regulated under any Law as pollutants, contaminants, toxic or
hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms "release" and "environment" shall
have the meaning set forth in CERCLA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles as practiced in the
United States.
"Governmental Entity" means a court of competent jurisdiction or any
governmental, regulatory, self-regulatory or administrative authority,
agency, commission, body or other governmental entity.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnified Party" has the meaning assigned to such term in Section 8.6.
"Indemnifying Party" has the meaning assigned to such term in Section
8.6.
"Intellectual Property" means all (i) patents and patent applications,
(ii) copyrights and registrations thereof, (iii) mask works and
registrations and applications for registration thereof, (iv) computer
software,
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data and documentation, (v) know-how, manufacturing and production
processes and techniques, research and development information,
copyrightable works, trade secrets, tangible or intangible proprietary
information or materials, (vi) trademarks, service marks, trade names and
applications and registrations therefor and (vii) other proprietary rights
relating to any of the foregoing.
"Investment Share" has the meaning assigned to such term in Section 2.3.
"Investment Share Issuance" has the meaning set forth in the Recitals.
"Law" means any federal, state, local or foreign law, statute, ordinance,
rule, regulation, judgment, Order, injunction, decree, arbitration award,
agency requirement, franchise, license or permit of any Governmental
Entity.
"Lien" shall mean any mortgage, pledge, lien, deed of trust,
hypothecation, claim, security interest, title defect, encumbrance, burden,
tax lien (as used in Section 6321 of the Code or similarly by any state,
local, or foreign tax authority), charge, or other similar restriction,
title retention agreement, option, easement, covenant, encroachment or
other adverse claim.
"Limited Partnership Agreement" means that certain Limited Partnership
Agreement for Operating Partnership, dated as of November 19, 1999, by and
between Prodigy and Prodigy Sub.
"Materials of Environmental Concern" means any chemicals, pollutants or
contaminants, hazardous substances (as such term is defined under CERCLA),
solid wastes and hazardous wastes (as such terms are defined under the
Resource Conservation and Recovery Act), toxic materials, oil or petroleum
and petroleum products or any other material subject to regulation under
any Environmental Law.
"Merger Agreement" has the meaning assigned to such term in Section 2.2.
"Nasdaq" means The Nasdaq Stock Market.
"Operating Employees" means all employees of SBC or SBC Sub who are
involved in operating and managing the SBC Contributed Assets.
"Operating Partnership" has the meaning assigned to such term in the
Preamble.
"Order" means any Law, statute, ordinance, rule, regulation, judgment,
decree, injunction or other order (whether temporary, preliminary or
permanent).
"Party" and "Parties" have the meanings assigned to such terms in the
Preamble.
"Permits" means all permits, licenses, franchises, concessions,
variances, certificates, exemptions, Orders and other authorizations,
consents and approvals from any Governmental Entity.
"Permitted Encumbrances" means such pledges, Liens or similar
encumbrances as do not materially detract from or interfere with the assets
to which such pledges, Liens or similar encumbrances relate.
"Prodigy" has the meaning assigned to such term in the Preamble.
"Prodigy Advisors" has the meaning assigned to such term in Section
5.3(a).
"Prodigy Assets" or "Prodigy Contributed Assets" means all assets of
Prodigy and Prodigy Sub (except for those assets listed on Exhibit G), all
of which shall be Contributed to Operating Partnership at the Closing.
"Prodigy Common Stock" means shares of the common stock, par value $0.01
per share, of Prodigy.
"Prodigy Contribution" has the meaning assigned to such term in the
Recitals.
"Prodigy Financial Advisor" has the meaning assigned to such term in
Section 5.3(a).
"Prodigy Indemnified Persons" has the meaning assigned to such term in
Section 8.3.
"Prodigy Intellectual Property" has the meaning assigned to such term in
Section 4.1(o).
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"Prodigy Liabilities" means all of the liabilities, obligations and
expenses of Prodigy and Prodigy Sub (except for those listed on Exhibit H),
all of which shall be Assumed by Operating Partnership at the Closing.
"Prodigy Material Adverse Effect" means a change or effect on Prodigy,
Operating Partnership or any Subsidiary of Prodigy that is materially
adverse to the assets, business, financial condition, or results of
operations of Prodigy, Prodigy Sub, Operating Partnership and any other
Subsidiary of Prodigy, taken as a whole, but shall not include any changes
or effects (x) relating to or resulting from general economic, political or
market conditions, including (i) changes after the date of this Agreement
in any Law or in the interpretation of any Law by any Governmental Entity
and (ii) changes in GAAP, (y) generally affecting the retail Internet
service provider industry or (z) attributable to the public announcement of
this Agreement or any of the transactions contemplated hereby, or any legal
proceeding brought by or on behalf of stockholders of Prodigy alleging that
the Board of Directors of Prodigy breached its fiduciary duties in
connection with its approval of this Agreement, or the expiration of
Prodigy's agreement with Best Buy on or after November 30, 1999.
"Prodigy Most Recent Balance Sheet Date" has the meaning assigned to such
term in Section 4.1(h).
"Prodigy Preferred Stock" has the meaning assigned to such term in
Section 4.1(k).
"Prodigy Reports" has the meaning assigned to such term in Section
4.1(h).
"Prodigy Stockholder Approval" means the approval by the stockholders of
Prodigy of each of this Agreement, the Strategic Agreement and the
transactions contemplated thereby, the Prodigy Contribution, the Restated
Certificate of Incorporation, the Amended and Restated By-Laws, the Unit
Issuance and SBC Contribution, the Investment Share Issuance, and the other
transactions contemplated by this Agreement (including the issuance of
Class A Common Stock upon conversion of Class B Common Stock or exchange of
Units), obtained in accordance with Prodigy's certificate of incorporation
and by-laws and the Delaware General Corporation Law.
"Prodigy Sub" has the meaning assigned to such term in the Preamble.
"Prodigy 10-K" has the meaning assigned to such term in Section 4.1(h).
"Prodigy Third Party Acquisition" has the meaning assigned to such term
in Section 5.3(b).
"Proxy Statement" has the meaning assigned to such term in Section
5.4(a).
"Registration Rights Agreement" means that certain Registration Rights
Agreement, to be entered into as of the Closing Date, among SBC, SBC Sub
and Prodigy, substantially in the form attached hereto as Exhibit F, with
such changes as Prodigy and SBC shall approve.
"Restated Certificate of Incorporation" means the Restated Certificate of
Incorporation of Prodigy in the form attached hereto as Exhibit D, with
such changes as Prodigy and SBC shall approve.
"SBC" has the meaning assigned to such term in the Preamble.
"SBC Contributed Assets" means the SBC Mandatory Contributed Assets and
the SBC Discretionary Contributed Assets.
"SBC Discretionary Contributed Assets" has the meaning assigned to such
term in Section 2.2.
"SBC Discretionary Liabilities" means the liabilities, obligations and
expenses associated with the SBC Discretionary Contributed Assets, which
SBC Discretionary Liabilities shall be Assumed by Operating Partnership at
the Closing.
"SBC Indemnified Persons" has the meaning assigned to such term in
Section 8.2.
"SBC Internet Businesses" means the analog dial-up, ISDN and DSL consumer
and small business Retail ISP Services provided by SBC Sub.
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"SBC Mandatory Contributed Assets" means those assets listed on Exhibit
A.
"SBC Mandatory Liabilities" means the liabilities, obligations and
expenses associated with the SBC Mandatory Contributed Assets, which SBC
Mandatory Liabilities shall be Assumed by Operating Partnership at the
Closing.
"SBC Sub" has the meaning assigned to such term in the Preamble.
"SBC Units" has the meaning assigned to such term in Section 2.2.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Strategic Agreement" has the meaning assigned to such term in the
Recitals.
"Subsidiary" of an entity means any entity in which the specified entity
directly or indirectly owns at least a majority of the outstanding stock or
other equity or general voting interest and for purposes of this Agreement,
each of Operating Partnership and Prodigy Sub is a Subsidiary of Prodigy.
"Taxes" has the meaning assigned to such term in Section 4.1(l)(i).
"Tax Returns" has the meaning assigned to such term in Section 4.1(l)(i).
"Termination Date" has the meaning assigned to such term in Section 7.2.
"Third Party" has the meaning assigned to such term in Section 5.3(b).
"Third Party Claim" has the meaning assigned to such term in Section 8.7.
"Transfer Taxes" means all federal, state, local or foreign sales, use or
value-added taxes that may be imposed in connection with the transfer of
assets, together with any interest, additions or penalties with respect
thereto and any interest in respect of such additions or penalties.
"Unit Issuance and SBC Contribution" has the meaning assigned to such
term in the Recitals.
"Units" has the meaning assigned to such term in the Amended and Restated
Limited Partnership Agreement.
"Voting Agreement" has the meaning assigned to such term in the Recitals.
"Voting Debt" means any outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or to convert into
or be exercised or exchanged for securities having the right to vote) with
the stockholders of Prodigy on any matter.
"Year 2000 Compliant" means that the applicable system or item, in each
case without human intervention, other than original data entry (i) will
accurately receive, record, store, provide, recognize and process all date
and time data from, during, into and between the years 1999 and 2000; (ii)
will accurately perform all date-dependent calculations and operations
(including, without limitation, mathematical operations, sorting, comparing
and reporting) from, during, into and between the years 1999 and 2000; and
(iii) will not malfunction, cease to function or provide invalid or
incorrect results as a result of (x) the change from December 31, 1999 to
January 1, 2000, (y) date data, including date data which represents or
references different centuries or more than one century or (z) the
occurrence of any particular date, including without limitation January 1,
2000 and February 29, 2000.
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ARTICLE II
INVESTMENT AND ISSUANCE;
CONTRIBUTION AND ASSUMPTION
2.1 Prodigy Contribution.
Subject to the terms and conditions stated herein, Prodigy and Prodigy Sub
agree to Contribute all of the Prodigy Assets and Prodigy Liabilities to
Operating Partnership, and Operating Partnership agrees to accept all such
Prodigy Assets from Prodigy and Prodigy Sub and Assume all such Prodigy
Liabilities from Prodigy and Prodigy Sub, in each case at the Closing.
2.2 Unit Issuance and SBC Contribution.
Subject to the terms and conditions stated herein, Operating Partnership
agrees to issue to SBC Sub at the Closing a number of Units of Operating
Partnership (the "SBC Units"), which shall be equal to 43.0% of a fraction, the
numerator of which shall be (A) the total number of shares of Prodigy Common
Stock issued and outstanding on a fully-diluted basis immediately prior to the
Closing after giving effect to the issuance by Prodigy of the number of shares
of Prodigy Common Stock issuable pursuant to the Agreement and Plan of Merger
(including, without limitation, shares issuable upon exercise of assumed
options and warrants) (the "Merger Agreement"), dated as of November 5, 1999,
by and among Prodigy, Pucknut Corporation and Fig, and the exercise of all
rights to receive Prodigy Common Stock, whether pursuant to stock options,
convertible securities, warrants or otherwise, less the sum of (i) 4,818,290
shares of Prodigy Common Stock issuable as of the date hereof pursuant to
outstanding warrants issued by Prodigy and (ii) the number of shares of Prodigy
Common Stock issued or issuable by Prodigy pursuant to the Merger Agreement
(including, without limitation, shares issued or issuable upon exercise of
assumed options and warrants) as of the Closing, and the denominator of which
shall be (B) fifty-seven one hundredths (.57), in exchange for the Contribution
by SBC Sub to Operating Partnership of all of the SBC Mandatory Contributed
Assets and SBC Mandatory Liabilities associated with such SBC Mandatory
Contributed Assets, the Contribution by SBC Sub to Operating Partnership of all
of the SBC Discretionary Contributed Assets and SBC Discretionary Liabilities
associated with such SBC Discretionary Contributed Assets, and Operating
Partnership agrees to accept all such SBC Mandatory Contributed Assets and SBC
Discretionary Contributed Assets from SBC Sub and Assume all such SBC Mandatory
Liabilities associated with such SBC Mandatory Contributed Assets and the SBC
Discretionary Liabilities associated with such SBC Discretionary Contributed
Assets from SBC Sub, in each case at the Closing. The SBC Units shall have the
rights and privileges set forth in the Amended and Restated Limited Partnership
Agreement.
Notwithstanding the inclusion of an asset on Exhibit B as of the date hereof,
as the Parties perform transition planning between the date hereof and the
Closing, SBC Sub may exclude and retain any of the assets listed on Schedule B
that could reasonably be used in support of related SBC DSL products by written
notice to Prodigy prior to the Closing. For purposes of this Agreement, "SBC
Discretionary Contributed Assets" shall mean only those assets listed on
Exhibit B, which Prodigy selects by giving written notice to SBC Sub at least
five Business Days prior to the Closing Date, which assets shall not include
any assets that have been excluded and retained by SBC Sub in accordance with
this Section 2.2.
2.3 Issuance of Investment Share.
Subject to the terms and conditions stated herein, Prodigy agrees to issue to
SBC Sub on the Closing Date, and SBC Sub agrees to purchase from Prodigy, one
share (the "Investment Share") of Class B Common Stock, par value $0.01 per
share (the "Class B Common Stock"), of Prodigy, in consideration of $100, which
Class B Common Stock shall have the rights and privileges set forth in the
Restated Certificate of Incorporation and Amended and Restated By-Laws.
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ARTICLE III
Closing; Conditions
3.1 Closing.
The closing of the Prodigy Contribution, the Unit Issuance and SBC
Contribution and the Investment Share Issuance shall take place on the third
Business Day which follows the date upon which satisfaction or waiver of the
conditions set forth in Sections 3.2 and 3.3 hereof occurs (other than
conditions which by their nature are to be satisfied at the Closing, but
subject to the satisfaction or waiver of such conditions), at 10:00 A.M., New
York time, at the offices of Sullivan & Cromwell, 125 Broad Street, New York,
New York 10004, or at such other time and place as the Parties may agree in
writing (the "Closing"). The actual date on which the Closing shall occur is
referred to herein as the "Closing Date." At the Closing, (a) Operating
Partnership shall deliver to SBC Sub certificates (in such denominations as
shall be designated in writing by SBC Sub not less than five Business Days
prior to the Closing) registered in the name of SBC Sub representing the SBC
Units, (b) Prodigy shall deliver to SBC Sub a certificate registered in the
name of SBC Sub representing the Investment Share, (c) SBC Sub shall Contribute
to Operating Partnership all of the SBC Mandatory Contributed Assets and SBC
Mandatory Liabilities associated with such SBC Mandatory Contributed Assets and
the SBC Discretionary Contributed Assets and the SBC Discretionary Liabilities
associated with such SBC Discretionary Contributed Assets, (d) Operating
Partnership shall accept all of the SBC Mandatory Contributed Assets and all of
the SBC Discretionary Contributed Assets and Assume all of the SBC Mandatory
Liabilities associated with such SBC Mandatory Contributed Assets and the SBC
Discretionary Liabilities associated with the SBC Discretionary Contributed
Assets, (e) Prodigy and Prodigy Sub shall Contribute to Operating Partnership
all of the Prodigy Assets and Prodigy Liabilities and (f) Operating Partnership
shall accept all of the Prodigy Assets and Assume all of the Prodigy
Liabilities.
3.2 Conditions to Obligations of SBC and SBC Sub.
The obligations of SBC and SBC Sub to effect the Unit Issuance and SBC
Contribution, the Investment Share Issuance and the other transactions
contemplated by this Agreement and the transactions contemplated by the
Strategic Agreement are subject to the satisfaction or waiver at or prior to
the Closing of each of the following conditions precedent:
(a) Representations and Warranties of Prodigy, Prodigy Sub and Operating
Partnership. The representations and warranties made by Prodigy, Prodigy
Sub and Operating Partnership in this Agreement and the Strategic Agreement
shall have been true and correct in all respects when made, and shall be
true and correct in all respects on the Closing Date as though such
representations and warranties were made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks
as of an earlier date, in which case such representation and warranty need
be true and correct in all respects as of such earlier date); provided,
however, that notwithstanding anything herein to the contrary, the
conditions set forth in this Section 3.2(a) shall be deemed to have been
satisfied even if such representations or warranties are not so true and
correct unless the failure of such representations or warranties to be so
true and correct, individually or in the aggregate, has had, or is
reasonably likely to have, a Prodigy Material Adverse Effect or is
reasonably likely to prevent or to materially burden or materially impair
the ability of Prodigy, Prodigy Sub or Operating Partnership to consummate
the Prodigy Contribution, the Unit Issuance and SBC Contribution, the
Investment Share Issuance or the other transactions contemplated by this
Agreement or the transactions contemplated by the Strategic Agreement.
(b) Prodigy, Prodigy Sub and Operating Partnership Compliance with
Agreements and Conditions. Each of Prodigy, Prodigy Sub and Operating
Partnership shall have performed and complied in all material respects with
all covenants, agreements, obligations and conditions required by this
Agreement and the Strategic Agreement to be performed or complied with by
it at or before the Closing.
(c) Certificates and Other Documents of Prodigy, Prodigy Sub and
Operating Partnership. SBC shall have received a certificate executed on
behalf of Prodigy, Prodigy Sub and Operating Partnership by
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an executive officer of Prodigy to the effect that the conditions set forth
in clauses (a) and (b) above have been satisfied as of the Closing Date and
such other documents and certificates as may be required to be delivered or
made available by Prodigy, Prodigy Sub and Operating Partnership pursuant
to this Agreement and the Strategic Agreement or that may be reasonably
requested by SBC.
(d) Registration Rights Agreement. The Registration Rights Agreement
shall have been duly executed and delivered by Prodigy.
(e) Litigation. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any Order that
restrains, enjoins or otherwise prohibits consummation of the Unit Issuance
and SBC Contribution, the Investment Share Issuance, the Prodigy
Contribution or the other transactions contemplated by this Agreement or
the transactions contemplated by the Strategic Agreement, and no
Governmental Entity shall have threatened or instituted any proceeding
seeking any such Order.
(f) Regulatory Consents. (i) All required filings under the HSR Act shall
have been made and any applicable waiting period under the HSR Act shall
have expired or been terminated.
(ii) All required notices, reports and filings with the Nasdaq Stock
Market shall have been made and the issuance by Prodigy of the Class B
Common Stock to SBC Sub and the rights and privileges of such Class B
Common Stock as set forth in the Restated Certificate of Incorporation and
the Amended and Restated By-Laws shall have been approved and authorized by
The Nasdaq Stock Market prior to the Closing. Any other notices, reports
and filings required to be made prior to the Closing by Prodigy, Prodigy
Sub, Operating Partnership, SBC or SBC Sub or any of their respective
Subsidiaries with, and any other consents, registrations, approvals,
Permits and authorizations required to be obtained prior to the Closing by
Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or any of their
respective Subsidiaries from, The Nasdaq Stock Market in connection with
the execution and delivery of this Agreement, and the consummation of the
Unit Issuance and SBC Contribution, the Investment Share Issuance, the
Prodigy Contribution and the other transactions contemplated by this
Agreement shall have been made or obtained (as the case may be).
(iii) In addition to those described in Section 3.2(f)(ii), all other
notices, reports and filings required to be made prior to the Closing by
Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or any of their
respective Subsidiaries with, and all other consents, registrations,
approvals, Permits and authorizations required to be obtained prior to the
Closing by Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or
any of their respective Subsidiaries from, any Governmental Entity in
connection with the execution and delivery of this Agreement and the
Strategic Agreement and the consummation of the Unit Issuance and SBC
Contribution, the Investment Share Issuance, the Prodigy Contribution and
the other transactions contemplated by this Agreement and the transactions
contemplated by the Strategic Agreement shall have been made or obtained
(as the case may be), except those that the failure to make or to obtain
are not, individually or in the aggregate, reasonably likely to have a
Prodigy Material Adverse Effect or a material adverse effect on SBC or to
provide a reasonable basis to conclude that the Parties hereto or any of
their Affiliates or respective directors, officers, agents, advisors or
other representatives would be subject to the risk of criminal liability.
(g) Restated Certificate of Incorporation and Amended and Restated By-
Laws. Prodigy shall have duly adopted the Restated Certificate of
Incorporation and the Amended and Restated By-Laws, the Restated
Certificate of Incorporation shall have been approved by the stockholders
of Prodigy in accordance with Prodigy's certificate of incorporation and
by-laws and the Delaware General Corporation Law and shall have been duly
filed by Prodigy with the Secretary of State of the State of Delaware, the
Amended and Restated By-Laws shall have been approved by the stockholders
of Prodigy in accordance with Prodigy's certificate of incorporation and
by-laws and the Delaware General Corporation Law and the Restated
Certificate of Incorporation and the Amended and Restated By-Laws shall be
in full force and effect.
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(h) Amended and Restated Limited Partnership Agreement. The Amended and
Restated Limited Partnership Agreement shall have been duly executed and
delivered by each of Prodigy and Prodigy Sub.
(i) Stockholder Approval. Prodigy Stockholder Approval shall have been
obtained.
(j) Consents under Agreements. Each of Prodigy, Prodigy Sub and Operating
Partnership shall have obtained the consent or approval of each Person
whose consent or approval shall be required in order to consummate the Unit
Issuance and SBC Contribution, the Prodigy Contribution, the Investment
Share Issuance and the other transactions contemplated by this Agreement
and the transactions contemplated by the Strategic Agreement under any
Contract to which Prodigy, Prodigy Sub or Operating Partnership or any of
Prodigy's Subsidiaries is a party, except those for which failure to obtain
such consents and approvals, individually or in the aggregate, is not
reasonably likely to have a Prodigy Material Adverse Effect or is not
reasonably likely to prevent or to materially burden or materially impair
the ability of Prodigy, Prodigy Sub or Operating Partnership to consummate
the Unit Issuance and SBC Contribution, the Prodigy Contribution, the
Investment Share Issuance or the other transactions contemplated by this
Agreement or the transactions contemplated by the Strategic Agreement;
provided, however, that in determining whether a Prodigy Material Adverse
Effect has occurred for purposes of this Section 3.2(j), no consideration
shall be given to those Contracts for which consents and approvals were not
obtained if Prodigy is able to perform fully its obligations and exercise
all of its rights under such Contracts, in each case on behalf of Operating
Partnership.
(k) Legal Opinion. SBC shall have received an opinion of Hale and Dorr
LLP, counsel to Prodigy, dated the Closing Date, to the effect that neither
Prodigy nor Operating Partnership is, and after giving effect to the
Prodigy Contribution, the Unit Issuance and SBC Contribution, the
Investment Share Issuance and the other transactions contemplated by this
Agreement and the transactions contemplated by the Strategic Agreement,
will be an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended. In rendering such opinion, Hale and Dorr
LLP may rely as to factual matters on a certificate of an officer of
Prodigy.
(l) No Prodigy Material Adverse Effect. There shall not have been any
change in the assets, business, financial condition, or results of
operations of Prodigy, Operating Partnership or any Subsidiary of Prodigy
or any event or development or combination of events or developments since
the Prodigy Most Recent Balance Sheet Date which, individually or in the
aggregate has had, or would reasonably be expected to have, a Prodigy
Material Adverse Effect.
3.3 Conditions to Obligations of Prodigy, Prodigy Sub and Operating
Partnership.
The obligations of Prodigy, Prodigy Sub and Operating Partnership to effect
the Prodigy Contribution, the Unit Issuance and SBC Contribution, the
Investment Share Issuance and the other transactions contemplated by this
Agreement and the transactions contemplated by the Strategic Agreement are
subject to the satisfaction or waiver at or prior to the Closing of each of the
following conditions precedent:
(a) Representations and Warranties of SBC and SBC Sub. The
representations and warranties made by SBC and SBC Sub in this Agreement
and the Strategic Agreement shall have been true and correct in all
respects when made, and shall be true and correct in all respects on the
Closing Date as though such representations and warranties were made on and
as of the Closing Date (except to the extent any such representation or
warranty expressly speaks as of an earlier date, in which case such
representation and warranty need be true and correct in all respects as of
such earlier date); provided, however, that, notwithstanding anything
herein to the contrary, the conditions set forth in this Section 3.3(a)
shall be deemed to have been satisfied even if such representations or
warranties are not so true and correct unless the failure of such
representations or warranties to be so true and correct, individually or in
the aggregate, has had, or is reasonably likely to have, a material adverse
effect on SBC or is reasonably likely to prevent or to materially burden or
materially impair the ability of SBC to consummate the Unit Issuance and
SBC Contribution, the Investment Share Issuance or the other transactions
contemplated by this Agreement or the transactions contemplated by the
Strategic Agreement.
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(b) SBC and SBC Sub Compliance with Agreements and Conditions. Each of
SBC and SBC Sub shall have performed and complied in all material respects
with all covenants, agreements, obligations and conditions required by this
Agreement and the Strategic Agreement to be performed or complied with by
SBC at or before the Closing.
(c) Certificates and Other Documents of SBC and SBC Sub. Prodigy shall
have received a certificate executed on behalf of SBC and SBC Sub by an
executive officer of SBC to the effect that the conditions set forth in
clauses (a) and (b) above have been satisfied as of the Closing Date and
such other documents and certificates as may be required to be delivered or
made available by SBC and SBC Sub pursuant to this Agreement and the
Strategic Agreement or that may be reasonably requested by Prodigy.
(d) Registration Rights Agreement. The Registration Rights Agreement
shall have been executed and delivered by each of SBC and SBC Sub.
(e) Litigation. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any Order that
restrains, enjoins or otherwise prohibits consummation of the Unit Issuance
and SBC Contribution, the Investment Share Issuance, the Prodigy
Contribution or the other transactions contemplated by this Agreement or
the transactions contemplated by the Strategic Agreement, and no
Governmental Entity shall have threatened or instituted any proceeding
seeking any such Order.
(f) Regulatory Consents. (i) All required filings under the HSR Act shall
have been made and any applicable waiting period under the HSR Act shall
have expired or been terminated.
(ii) All required notices, reports and filings with The Nasdaq Stock
Market shall have been made and the issuance by Prodigy of the Class B
Common Stock to SBC Sub and the rights and privileges of such Class B
Common Stock as set forth in the Restated Certificate of Incorporation and
the Amended and Restated By-Laws shall have been approved and authorized by
The Nasdaq Stock Market prior to the Closing. Any other notices, reports
and filings required to be made prior to the Closing by Prodigy, Prodigy
Sub, Operating Partnership, SBC or SBC Sub or any of their respective
Subsidiaries with, and any other consents, registrations, approvals,
Permits and authorizations required to be obtained prior to the Closing by
Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or any of their
respective Subsidiaries from, The Nasdaq Stock Market in connection with
the execution and delivery of this Agreement, and the consummation of the
Unit Issuance and SBC Contribution, the Investment Share Issuance, the
Prodigy Contribution and the other transactions contemplated by this
Agreement shall have been made or obtained (as the case may be).
(iii) In addition to those described in Section 3.3(f)(ii), all other
notices, reports and filings required to be made prior to the Closing by
Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or any of their
respective Subsidiaries with, and all other consents, registrations,
approvals, Permits and authorizations required to be obtained prior to the
Closing by Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub or
any of their respective Subsidiaries from, any Governmental Entity in
connection with the execution and delivery of this Agreement and the
Strategic Agreement and the consummation of the Unit Issuance and SBC
Contribution, the Investment Share Issuance, the Prodigy Contribution and
the other transactions contemplated by this Agreement and the transactions
contemplated by the Strategic Agreement shall have been made or obtained
(as the case may be), except those that the failure to make or to obtain
are not, individually or in the aggregate, reasonably likely to have a
Prodigy Material Adverse Effect or a material adverse effect on SBC or to
provide a reasonable basis to conclude that the Parties hereto or any of
their Affiliates or respective directors, officers, agents, advisors or
other representatives would be subject to the risk of criminal liability.
(g) Amended and Restated Limited Partnership Agreement. The Amended and
Restated Limited Partnership Agreement shall have been duly executed and
delivered by SBC Sub.
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(h) Stockholder Approval. Prodigy Stockholder Approval shall have been
obtained.
ARTICLE IV
Representations and Warranties
4.1 Representations and Warranties of Prodigy, Prodigy Sub and Operating
Partnership.
Each of Prodigy, Prodigy Sub and Operating Partnership jointly and severally
hereby makes the following representations and warranties to SBC and SBC Sub:
(a) Corporate Existence; Ownership. (i) Each of Prodigy and Prodigy Sub
is a corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation and has all requisite
corporate power and authority to own, lease and operate its properties and
assets and conduct its business as now conducted by it. Each of Prodigy and
Prodigy Sub is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which it owns or leases
properties or assets or conducts business so as to require such
qualification (except where the failure of Prodigy or Prodigy Sub to be so
qualified or in good standing, when taken together with all other such
failures, is not reasonably likely to have a Prodigy Material Adverse
Effect).
(ii) Operating Partnership has been duly formed and is validly existing
as a limited partnership in good standing under the laws of the State of
Delaware, with all requisite power and authority to own, lease and operate
its properties and assets and conduct its business as now conducted by it.
Operating Partnership is duly qualified to transact business and is in good
standing in each jurisdiction in which it owns or leases properties or
assets or conducts business so as to require such qualification (except
where the failure of Operating Partnership to be so qualified or in good
standing, when taken together with all other such failures, is not
reasonably likely to have a Prodigy Material Adverse Effect).
(b) Authorization; Enforcement. (i) Each of Prodigy and Prodigy Sub has
all requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations under this Agreement in accordance
with its terms and, in respect of Prodigy, to issue and sell the Investment
Share. Operating Partnership has all requisite power and authority to
execute and deliver this Agreement and to perform its obligations under
this Agreement in accordance with its terms and to issue the SBC Units.
Each of Prodigy and Prodigy Sub has taken all necessary corporate action to
authorize the execution and delivery of this Agreement and, in respect of
Prodigy, the issuance and sale of the Investment Share, and the
consummation of the transactions contemplated hereby. Operating Partnership
has taken all necessary action to authorize the execution of this Agreement
and the issuance of the SBC Units, and the consummation of the transactions
contemplated hereby. This Agreement is a valid and legally binding
obligation of each of Prodigy, Prodigy Sub and Operating Partnership,
enforceable against each of them in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles (the "Bankruptcy and Equity
Exception"). On the Closing Date, each of Prodigy and Prodigy Sub will have
all requisite corporate power and authority to execute and deliver the
Amended and Restated Limited Partnership Agreement and to perform its
respective obligations under the Amended and Restated Limited Partnership
Agreement in accordance with its terms. On the Closing Date, each of
Prodigy and Prodigy Sub will have taken all necessary corporate action to
authorize the execution and delivery of the Amended and Restated Limited
Partnership Agreement and the consummation of the transactions contemplated
thereby. When executed, the Amended and Restated Limited Partnership
Agreement will be a valid and legally binding obligation of each of Prodigy
and Prodigy Sub, enforceable against each of them in accordance with its
terms, subject to the Bankruptcy and Equity Exception. Prodigy has taken
all action necessary so that neither SBC nor SBC Sub will be an "interested
stockholder" within the meaning of Section 203 of the Delaware General
Corporation Law as a result of the execution and delivery of this Agreement
or the Voting Agreement.
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(ii) Prior to the Closing Date, Prodigy will have taken all necessary
action to permit it to issue the number of shares of Prodigy Class B Common
Stock required to be issued pursuant to the Investment Share Issuance. The
Prodigy Class B Common Stock, when issued in connection with the Investment
Share Issuance, will be validly issued, fully paid and nonassessable, and
no stockholder of Prodigy will have any preemptive right of subscription or
purchase in respect thereof.
(iii) Prior to the Closing Date, Operating Partnership will have taken
all necessary action to permit it to issue the number of SBC Units required
to be issued pursuant to the Unit Issuance and SBC Contribution. The SBC
Units, when issued in connection with the Unit Issuance and SBC
Contribution, will be validly issued, fully paid and nonassessable, and no
Person will have a preemptive right of subscription or purchase in respect
thereof.
(iv) Prior to the Closing Date, Prodigy will have taken all necessary
action to permit it to issue the number of shares of Prodigy Class A Common
Stock required to be issued upon conversion of the Investment Share or
exchange of SBC Units. The Prodigy Class A Common Stock, when issued upon
conversion of the Investment Share or exchange of SBC Units, will be
validly issued, fully paid and nonassessable, and no stockholder of Prodigy
will have any preemptive right of subscription or purchase in respect
thereof.
(c) Compliance with Law. (i) The execution and delivery by each of
Prodigy, Prodigy Sub and Operating Partnership of this Agreement do not
and, subject to the satisfaction of the Closing conditions specified in
Sections 3.3(e), (f) and (h), the issuance of the SBC Units, in respect of
Operating Partnership, the issuance and sale of the Investment Share, in
respect of Prodigy, the performance by each of Prodigy, Prodigy Sub and
Operating Partnership of its respective obligations under this Agreement
and the consummation by each of Prodigy, Prodigy Sub and Operating
Partnership of the transactions contemplated hereby will not, violate any
provision of any Law or regulation, or any existing writ or decree of any
court or Governmental Entity applicable to Prodigy, Prodigy Sub or
Operating Partnership.
(ii) The execution and delivery by each of Prodigy and Prodigy Sub of the
Amended and Restated Limited Partnership Agreement will not, and the
performance by each of Prodigy and Prodigy Sub of its respective
obligations under the Amended and Restated Limited Partnership Agreement
and the consummation by each of Prodigy and Prodigy Sub of the transactions
contemplated thereby will not, violate any provision of any Law or
regulation, or any existing writ or decree of any court or Governmental
Entity applicable to Prodigy or Prodigy Sub.
(d) Compliance with Obligations. (i) The execution and delivery by each
of Prodigy, Prodigy Sub and Operating Partnership of this Agreement do not,
and, subject to the satisfaction of the Closing conditions specified in
Sections 3.3(e), (f) and (h), the issuance of the SBC Units, in respect of
Operating Partnership, the issuance and sale of the Investment Share, in
respect of Prodigy, the performance by each of Prodigy, Prodigy Sub and
Operating Partnership of its respective obligations under this Agreement
and the consummation by each of Prodigy, Prodigy Sub and Operating
Partnership of the transactions contemplated hereby will not, violate,
conflict with or constitute a breach of, or a default under, the
certificate of incorporation or By-Laws of Prodigy or Prodigy Sub, the
Restated Certificate of Incorporation of Prodigy or the Amended and
Restated By-Laws of Prodigy or the Certificate of Limited Partnership of
Operating Partnership or the comparable governing instruments of any of
their respective Subsidiaries, or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation, modification or
acceleration) (whether after the giving of notice or the passage of time or
both) under any material Contract to which Prodigy, Prodigy Sub or
Operating Partnership is a party or which is binding on it or its assets,
and will not result in the creation of any Lien on, or security interest
in, any of the assets or properties of Prodigy, Prodigy Sub or Operating
Partnership or any of their Subsidiaries. Schedule 4.1(d)(i) sets forth a
correct and complete list of material Contracts of Prodigy and its
Subsidiaries pursuant to which consents or waivers are or may be required
prior to consummation of the transactions contemplated by this Agreement.
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(ii) The execution and delivery by each of Prodigy and Prodigy Sub of the
Amended and Restated Limited Partnership Agreement will not, and the
performance by each of Prodigy and Prodigy Sub of its respective
obligations under the Amended and Restated Limited Partnership Agreement
and the consummation by each of Prodigy and Prodigy Sub of the transactions
contemplated thereby will not, violate, conflict with or constitute a
breach of, or a default under the certificate of incorporation or by-laws
of Prodigy or Prodigy Sub, the Restated Certificate of Incorporation of
Prodigy or the Amended and Restated By-Laws of Prodigy or the comparable
governing instruments of any of Prodigy's Subsidiaries, or result in a
violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination,
cancellation, modification or acceleration) (whether after the giving of
notice or the passage of time or both) under any material Contract to which
Prodigy or Prodigy Sub is a party or which is binding on it or its assets,
and will not result in the creation of any Lien on, or security interest
in, any of the assets or properties of Prodigy or Prodigy Sub or any of
their Subsidiaries. Schedule 4.1(d)(ii) sets forth a correct and complete
list of material Contracts of Prodigy and its Subsidiaries pursuant to
which consents or waivers are or may be required prior to the consummation
of the transactions contemplated by the Amended and Restated Limited
Partnership Agreement.
(e) Consents and Approvals. (i) All notices, reports or other filings
required to be made by Prodigy, Prodigy Sub or Operating Partnership, and
all consents, registrations, approvals, Permits, authorizations and Orders
of Governmental Entities or other third parties required to be obtained by
Prodigy, Prodigy Sub or Operating Partnership, in connection with the
execution and delivery of this Agreement by each of Prodigy, Prodigy Sub
and Operating Partnership, the performance by each of Prodigy, Prodigy Sub
and Operating Partnership of its respective obligations under this
Agreement and the consummation by each of Prodigy, Prodigy Sub and
Operating Partnership of the transactions contemplated hereby (other than,
as of the date hereof, the expiration or termination of the waiting period
under the HSR Act, Prodigy Stockholder Approval, the approval of The Nasdaq
Stock Market and those set forth on Schedule 4.1(e)(i)) have been made or
obtained.
(ii) On the Closing Date, all notices, reports or other filings required
to be made by each of Prodigy or Prodigy Sub, and all consents,
registrations, approvals, Permits, authorizations and Orders of
Governmental Entities or other third parties required to be obtained by
each of Prodigy or Prodigy Sub, in connection with the execution and
delivery of the Amended and Restated Limited Partnership Agreement by each
of Prodigy and Prodigy Sub, the performance by each of Prodigy and Prodigy
Sub of its respective obligations under the Amended and Restated Limited
Partnership Agreement and the consummation by each of Prodigy and Prodigy
Sub of the transactions contemplated thereby will have been made or
obtained.
(f) Litigation. There is no legal action, suit, investigation or
proceeding pending or, to the knowledge of Prodigy, Prodigy Sub or
Operating Partnership, threatened against or affecting Prodigy, Prodigy
Sub, Operating Partnership, any of Prodigy's Affiliates or the assets of
Prodigy, Prodigy Sub or Operating Partnership which, if adversely
determined, would reasonably be expected to have a Prodigy Material Adverse
Effect, or would materially and adversely affect Prodigy's, Prodigy Sub's
or Operating Partnership's ability to perform or observe any obligation or
condition under this Agreement.
(g) Corporate Subsidiaries. (i) Schedule 4.1(g) sets forth (w) the name
of each corporate Subsidiary of Prodigy; (x) the number and type of
outstanding equity securities of each corporate Subsidiary of Prodigy and a
list of the holders thereof; (y) the jurisdiction of organization of each
corporate Subsidiary of Prodigy; and (z) the jurisdictions in which each
corporate Subsidiary of Prodigy is qualified or holds licenses to do
business as a foreign corporation.
(ii) Each corporate Subsidiary of Prodigy is a corporation duly
organized, validly existing and in good standing under the laws of the
state of its incorporation and has all requisite corporate power and
authority to own and operate its properties and assets and conduct its
business as now conducted by it. Each corporate Subsidiary of Prodigy is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which it owns or leases properties or
assets or conducts business
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so as to require such qualification (except where the failure to be so
qualified or in good standing, when taken together with all other such
failures, is not reasonably likely to have a Prodigy Material Adverse
Effect). Prodigy has delivered or made available to SBC complete and
accurate copies of the charter and By-Laws (or comparable governing
instruments) of each corporate Subsidiary of Prodigy, as amended to date.
No corporate Subsidiary of Prodigy is in default under or in violation of
any provision of its charter or By-Laws (or comparable governing
instruments). All of the issued and outstanding shares of capital stock of
each corporate Subsidiary of Prodigy are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. All shares of each
corporate Subsidiary of Prodigy that are held of record or owned
beneficially by either Prodigy or any corporate Subsidiary of Prodigy are
held or owned free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), claims,
Liens, options, warrants, rights, Contracts, calls, commitments, equities
and demands. There are no outstanding options, warrants or other rights to
subscribe for or acquire from any corporate Subsidiary of Prodigy, or any
Contracts or commitments providing for the issuance of, or the granting of
rights to acquire, any capital stock of or other ownership interest in any
corporate Subsidiary of Prodigy, or any securities or obligations
convertible into or exchangeable for any of such capital stock or other
ownership interest. There are no agreements, voting trusts, proxies or
understandings with respect to the voting, or registration under the
Securities Act of 1933, of any capital stock of any corporate Subsidiary of
Prodigy.
(h) Prodigy Reports; Financial Statements. Prodigy has delivered or made
available to SBC a complete and accurate copy of each registration
statement, report, proxy statement or information statement filed with the
SEC by it since January 1, 1998, including (i) Prodigy's Annual Report on
Form 10-K (the "Prodigy 10-K") for the fiscal year ended December 31, 1998
(the "Prodigy Most Recent Balance Sheet Date") and (ii) Prodigy's Quarterly
Reports on Form 10-Q for the periods ended March 31, 1999 and June 30,
1999, respectively, each in the form (including exhibits, annexes and any
amendments thereto) filed with the SEC (collectively, including any such
reports filed subsequent to the date hereof, the "Prodigy Reports"). As of
their respective dates, each of the Prodigy Reports complied, and any
Prodigy Reports filed with the SEC after the date hereof will comply, as to
form in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, and the Prodigy Reports did not, and
any Prodigy Reports filed with the SEC after the date hereof will not, at
the time of their filing, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. Each of the consolidated balance sheets
included in or incorporated by reference into Prodigy Reports (including
the related notes and schedules) fairly presents, or will fairly present,
in all material respects the consolidated financial position of Prodigy and
its Subsidiaries as of its date and each of the consolidated statements of
operations and of changes in stockholders' equity and of cash flows
included in or incorporated by reference into the Prodigy Reports
(including any related notes and schedules) fairly presents, or will fairly
present, in all material respects the results of operations, retained
earnings, changes in stockholders' equity and cash flow, as the case may
be, of Prodigy and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
audit adjustments that will not be material in amount or effect), in each
case in accordance with GAAP, consistently applied during the periods
involved. Prodigy has heretofore made available or promptly will make
available to SBC a complete and correct copy of all amendments or
modifications which are required to be filed with the SEC but have not yet
been filed with the SEC to the Prodigy Reports, agreements, documents or
other instruments which previously had been filed by Prodigy with the SEC
pursuant to the Exchange Act.
(i) Absence of Certain Changes. Since the Prodigy Most Recent Balance
Sheet Date, except as described in Schedule 4.1(i) or in the Prodigy
Reports filed since the Prodigy Most Recent Balance Sheet Date,
(i) there has not been any change in the assets, business, financial
condition or results of operations of Prodigy, Operating Partnership or
any Subsidiary of Prodigy or any event or
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development or combination of events or developments which,
individually or in the aggregate has had, or would reasonably be
expected to have, a Prodigy Material Adverse Effect;
(ii) neither Prodigy, Operating Partnership nor any Subsidiary of
Prodigy has taken any of the actions set forth in Section 5.1(a);
(iii) there has not been any material damage, destruction or other
casualty loss with respect to any material asset or property owned,
leased or otherwise used by Prodigy, Operating Partnership or any
Subsidiary of Prodigy, whether or not covered by insurance;
(iv) there has not been any entry into, termination of, receipt of
notice of termination of, or cancellation or waiver of any material
claims or rights with respect to, any material Contract to which
Prodigy, Operating Partnership or any Subsidiary of Prodigy is or was a
party; and
(v) there has not been any change by Prodigy, Operating Partnership
or any Subsidiary of Prodigy in accounting principles, practices or
methods;
(j) Undisclosed Liabilities. Except as disclosed in the Prodigy Reports
filed prior to the date hereof or as set forth on Schedule 4.1(j), none of
Prodigy and its Subsidiaries has any obligation or liability (whether known
or unknown, whether absolute or contingent, whether liquidated or
unliquidated, whether due or to become due, and whether or not required to
be disclosed in the Prodigy Reports, including those relating to
environmental and occupational health and safety matters), and there are no
other facts or circumstances of which Prodigy or its Subsidiaries has
knowledge that could result in any obligations or liabilities of Prodigy or
its Subsidiaries, except for those that are not, individually or in the
aggregate, reasonably likely to have a Prodigy Material Adverse Effect or
prevent or materially burden or materially impair the ability of Prodigy or
Operating Partnership to consummate the Prodigy Contribution, the Unit
Issuance and SBC Contribution, the Investment Share Issuance or the other
transactions contemplated by this Agreement or the transactions
contemplated by the Strategic Agreement.
(k) Capitalization. (i) As of the date of this Agreement, the authorized
capital stock of Prodigy consists of 150,000,000 shares of Prodigy Common
Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock,
par value $0.01 per share, none of which preferred shares are issued or
outstanding as of the date hereof (the "Prodigy Preferred Stock"). As of
the Closing Date, Prodigy will have an authorized capitalization as set
forth in the Restated Certificate of Incorporation. All of the issued
shares of capital stock of Prodigy have been duly authorized and are
validly issued, fully paid and nonassessable. Except as set forth in
Schedule 4.1(k)(i), there are no outstanding options, warrants or other
rights to subscribe for or acquire from Prodigy, or any plans, Contracts or
commitments providing for the issuance of, or the granting of rights to
acquire, any capital stock of or other ownership interest in Prodigy, or
any securities or obligations convertible into or exchangeable for any of
such capital stock or other ownership interest. Prodigy is not a party to
any agreements, voting trusts, proxies or understandings with respect to
the voting, or registration under the Securities Act, of any Prodigy Common
Stock, except as set forth in Schedule 4.1(k)(i). There are no preemptive
rights in respect of the capital stock of Prodigy. Prodigy does not have
outstanding any Voting Debt having the right to vote with the stockholders
of Prodigy on any matter. As of the date of this Agreement, the Prodigy
Common Stock constitutes and, as of the Closing Date the Class A Common
Stock will constitute, the only class of securities of Prodigy or any of
its Subsidiaries registered or required to be registered under the Exchange
Act.
(ii) As of the date of this Agreement, the Operating Partnership has an
authorized capitalization as set forth in the Limited Partnership
Agreement, and all of the issued and outstanding interests in Operating
Partnership have been duly authorized and are validly issued, fully paid
and non-assessable and the interests owned by each of Prodigy and Prodigy
Sub are owned free and clear of all Liens. As of the Closing Date,
Operating Partnership will have an authorized capitalization as set forth
in the Amended and Restated Limited Partnership Agreement, and all of the
issued and outstanding Units will have been duly authorized and will be
validly issued, fully paid and nonassessable and the Units owned by each of
Prodigy and SBC Sub will be owned free and clear of all Liens. There are
(a) no other Units or voting
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interests of Operating Partnership, (b) no securities of Operating
Partnership convertible into or exchangeable for Units or voting interests
of Operating Partnership, and (c) no options or other rights to acquire
from Operating Partnership, and no obligations of Operating Partnership to
issue, any Units, voting interests or securities convertible into or
exchangeable for Units or voting interests of Operating Partnership, except
pursuant to the Unit Issuance and SBC Contribution. Operating Partnership
has not conducted any business prior to the date hereof and does not have
any, and prior to the Closing Date will not have any, assets, liabilities
or obligations of any nature other than those incident to its formation and
pursuant to this Agreement and the transactions contemplated by this
Agreement. Schedule 4.1(k)(ii) contains true, complete and correct copies
of the Certificate of Limited Partnership of Operating Partnership as in
full force and effect on the date hereof. Operating Partnership does not
own, or have any Contract to acquire, any equity securities or other
securities of any Person or any direct or indirect equity or ownership
interest in any other Person. Upon consummation of the transactions
contemplated by this Agreement, SBC will own a number of Units (free and
clear of all Liens) equal to forty-three percent (43%) of a fraction, the
numerator of which shall be (A) the total number of shares of Prodigy
Common Stock issued and outstanding on a fully-diluted basis immediately
prior to Closing after giving effect to the issuance by Prodigy of the
number of shares of Prodigy Common Stock issuable pursuant to the Merger
Agreement (including, without limitation, shares issuable upon exercise of
assumed options and warrants) and the exercise of all rights to receive
Prodigy Common Stock, whether pursuant to stock options, convertible
securities, warrants or otherwise, less the sum of (i) 4,818,290 shares of
Prodigy Common Stock issuable as of the date hereof pursuant to outstanding
warrants issued by Prodigy and (ii) the number of shares of Prodigy Common
Stock issued or issuable by Prodigy pursuant to the Merger Agreement
(including, without limitation, shares issued or issuable upon exercise of
assumed options and warrants) as of the Closing, and the denominator of
which shall be (B) fifty-seven one hundredths (.57).
(l) Taxes. (i) For purposes of this Agreement, the following terms shall
have the following meanings:
(A) "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income,
profits, gross receipts, ad valorem, premium, value-added, excise, real
property, personal property, sales, service, license, lease, use,
transfer, withholding, employment, unemployment, insurance, social
security, business license, business organization, environmental,
workers compensation, payroll, severance, stamp, occupation, customs,
duties and franchise taxes imposed by the United States of America or
any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government, and
any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any tax
or any contest or dispute thereof.
(B) "Tax Returns" means all reports, returns, declarations,
statements or other information required to be supplied to a taxing
authority in connection with Taxes.
(ii) Each of Prodigy and its Subsidiaries has filed on a timely basis all
Tax Returns that it was required to file, and all such Tax Returns were
complete and accurate in all material respects. Neither Prodigy nor any
Subsidiary of Prodigy is or has ever been a member of a group of
corporations with which it has filed (or been required to file)
consolidated, combined or unitary Tax Returns, other than a group of which
only Prodigy and the Subsidiaries of Prodigy are or were members. Each of
Prodigy and the Subsidiaries of Prodigy has paid on a timely basis all
Taxes that were shown to be due and payable on the Tax Returns referred to
in the first sentence of this paragraph. The unpaid Taxes of Prodigy and
the Subsidiaries of Prodigy for tax periods through the Prodigy Most Recent
Balance Sheet Date do not exceed the accruals and reserves for Taxes
(excluding reserves for deferred taxes) set forth on the balance sheet
included in the Prodigy 10-K. Neither Prodigy nor any Subsidiary of Prodigy
has any actual or potential liability for any tax obligation of any
taxpayer (including without limitation any affiliated group of corporations
or other entities that included Prodigy or any Subsidiary of Prodigy during
a prior period) other than Prodigy and the Subsidiaries of Prodigy. All
Taxes that Prodigy or any Subsidiary of Prodigy is or was required by Law
to withhold or collect have been duly withheld or collected and, to the
extent required, have been paid to the proper Governmental Entity.
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(iii) Prodigy has delivered or made available to SBC complete and
accurate copies of all federal income Tax Returns, examination reports and
statements of deficiencies assessed against or agreed to by Prodigy or any
Subsidiary of Prodigy since January 1, 1996. The federal income Tax Returns
of Prodigy and each Subsidiary of Prodigy have not been audited by the
Internal Revenue Service and are not closed by the applicable statute of
limitations for any taxable year. Prodigy has delivered or made available
to SBC complete and accurate copies of all other Tax Returns of Prodigy and
the Subsidiaries of Prodigy together with all related examination reports
and statements of deficiency for all periods from and after January 1,
1996. Except as described in Schedule 4.1(l)(iii), no examination or audit
of any Tax Return of Prodigy or any Subsidiary of Prodigy by any
Governmental Entity is currently in progress or, to the knowledge of
Prodigy, threatened or contemplated. Neither Prodigy nor any Subsidiary of
Prodigy has been informed by any jurisdiction that the jurisdiction
believes that Prodigy or any Subsidiary of Prodigy was required to file any
Tax Return that was not filed. Neither Prodigy nor any Subsidiary of
Prodigy has waived any statute of limitations with respect to Taxes or
agreed to an extension of time with respect to a Tax assessment or
deficiency.
(iv) Neither Prodigy nor any Subsidiary of Prodigy:
(C) is a "consenting corporation" within the meaning of Section
341(f) of the Code, and none of the assets of Prodigy or the
Subsidiaries of Prodigy are subject to an election under Section 341(f)
of the Code;
(D) has been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(l)(A)(ii) of the Code;
(E) except as set forth in Schedule 4.1(l)(ii), has made any
payments, is obligated to make any payments, or is a party to any
agreement that could obligate it to make any payments that may be
treated as an "excess parachute payment" under Section 280G of the Code
in connection with any transaction contemplated by this Agreement;
(F) has any actual or potential liability for any Taxes of any person
(other than Prodigy and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of federal, state, local, or
foreign law), or as a transferee or successor, by Contract, or
otherwise; or
(G) is or has been required to make a basis reduction pursuant to
Treasury Regulation Section 1.1502-20(b) or Treasury Regulation Section
1.337(d)-2(b).
(v) None of the assets of Prodigy or any Subsidiary of Prodigy: (A) is
property that is required to be treated as being owned by any other person
pursuant to the provisions of former Section 168(f)(8) of the Code; (B) is
"tax-exempt use property" within the meaning of Section 168(h) of the Code;
or (C) directly or indirectly secures any debt the interest on which is tax
exempt under Section 103(a) of the Code.
(vi) Neither Prodigy nor any Subsidiary of Prodigy has undergone a change
in its method of accounting resulting in an adjustment to its taxable
income pursuant to Section 481 of the Code.
(vii) On the Closing Date, except as set forth in Schedule 4.1(l)(vii),
no state or federal "net operating loss" of Prodigy determined as of the
Closing Date will be subject to limitation on its use pursuant to Section
382 of the Code or comparable provisions of state law as a result of any
"ownership change" within the meaning of Section 382(g) of the Code or
comparable provisions of any state law occurring prior to the Closing Date.
(m) Real Property. Neither Prodigy nor any Subsidiary of Prodigy owns any
real property. Schedule 4.1(m) identifies the real property leased to
Prodigy in White Plains, New York, Yorktown Heights, New York and Houston,
Texas and lists the term of such lease, any extension and expansion
options, and the rent payable thereunder. Other than the leases identified
on Schedule 4.1(m), no other real property which is material to the
business and operations of Prodigy, Operating Partnership or any Subsidiary
of Prodigy is leased or subleased to or by Prodigy, Operating Partnership
or any Subsidiary of Prodigy. With respect to each lease listed on Schedule
4.1(m):
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(i) the lease or sublease is legal, valid, binding, enforceable
against Prodigy (and, to Prodigy's knowledge, against the other party
thereto) and in full force and effect;
(ii) the lease or sublease will continue to be legal, valid, binding,
enforceable against Prodigy (and, to Prodigy's knowledge, against the
other party thereto) and in full force and effect immediately following
the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing;
(iii) neither Prodigy nor any Subsidiary of Prodigy nor, to the
knowledge of Prodigy or Operating Partnership, any other party, is in
breach or violation of, or default under, any such lease or sublease in
any material respect, and no event has occurred, is pending or, to the
knowledge of Prodigy or Operating Partnership, is threatened, which,
after the giving of notice, with lapse of time, or otherwise, would
constitute a breach or default by Prodigy or any Subsidiary of Prodigy
or, to the knowledge of Prodigy or Operating Partnership, any other
party under such lease or sublease in any material respect;
(iv) neither Prodigy nor any Subsidiary of Prodigy has assigned,
transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest in the leasehold or subleasehold; and
(v) neither Prodigy nor Operating Partnership is aware of any Lien,
mortgage, easement, covenant or other restriction applicable to the
real property subject to such lease, except for recorded mortgages,
easements, covenants and other restrictions which do not materially
impair the current uses or the occupancy by Prodigy or a Subsidiary of
Prodigy of the property subject thereto.
(n) Personal Property. Each of Prodigy and its Subsidiaries has good
title to, or a valid leasehold interest in, or other good and sufficient
right to use, all tangible personal properties that are material to the
business and operations of Prodigy or such Subsidiary.
(o) Intellectual Property; Year 2000. (i) Each of Prodigy and the
Subsidiaries of Prodigy owns or has the right to use each item of
Intellectual Property incorporated in its products or necessary for, or
used in, the operation of its business as presently conducted (the "Prodigy
Intellectual Property"), which is material to Prodigy and the Subsidiaries
of Prodigy (it being understood and agreed that each of the Prodigy Marks
specified in the Strategic Agreement is a material item of Prodigy
Intellectual Property) and has the full right and authority to grant the
licenses in respect of such Prodigy Intellectual Property to SBC under the
Strategic Agreement. Each of Prodigy and Operating Partnership has taken
all reasonable measures to protect the proprietary nature of each material
item of Prodigy Intellectual Property, and to maintain in confidence all
trade secrets and confidential information, that it owns or uses. To the
knowledge of Prodigy or Operating Partnership, no other person or entity
has any rights to any material Prodigy Intellectual Property owned by
Prodigy and the Subsidiaries of Prodigy (except pursuant to agreements or
licenses specified in Schedule 4.1(o)(i) or incidental licenses granted in
the ordinary course of business). To the knowledge of Prodigy or Operating
Partnership, no other person or entity is infringing, violating or
misappropriating any material item of Prodigy Intellectual Property. Each
of Prodigy and Operating Partnership has made available to SBC complete and
accurate copies of all written documentation in its possession relating to
pending claims or disputes known to it concerning any material item of
Prodigy Intellectual Property, and all such claims and disputes are
described on Schedule 4.1(o)(ii). Schedule 4.1(o)(iii) lists each Prodigy
patent, patent application, registered trademark, registered service mark,
registered trade name, registered copyright and material unregistered
trademark, service mark and copyright, including all applications for
registration thereof. The consummation of the transactions contemplated by
this Agreement will not alter, impair or extinguish any of the rights of
Prodigy or Operating Partnership to any material item of Prodigy
Intellectual Property.
(ii) None of the activities or business presently conducted by Prodigy or
a Subsidiary of Prodigy and none of the Prodigy Marks infringes or
violates, or constitutes a misappropriation of, any Intellectual Property
rights of any person or entity except for such infringement, violation or
misappropriation that, individually or in the aggregate, would not
reasonably be likely to have a Prodigy Material Adverse
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Effect. Neither Prodigy nor any Subsidiary of Prodigy has received any
complaint, claim or notice alleging any such infringement, violation or
misappropriation and no such claim has been threatened by any Third Party.
(iii) Schedule 4.1(o)(iv) identifies each license or other agreement
pursuant to which Prodigy or a Subsidiary of Prodigy has licensed,
distributed or otherwise granted any rights to any Third Party with respect
to, any Prodigy Intellectual Property, except as is not material to Prodigy
and its Subsidiaries taken as a whole.
(iv) Schedule 4.1(o)(iv) identifies each item of Prodigy Intellectual
Property that is owned by a party other than Prodigy or a Subsidiary of
Prodigy, and the license or agreement pursuant to which Prodigy or a
Subsidiary of Prodigy uses it (excluding off-the-shelf software programs
licensed by Prodigy pursuant to "shrink wrap" licenses), except as is not
material to Prodigy and its Subsidiaries taken as a whole.
(v) Prodigy has conducted "year 2000" audits with respect to
(A) all of the internal systems used in the business or operations of
Prodigy or its Subsidiaries, including, without limitation, computer
hardware systems, software applications, firmware, equipment containing
embedded microchips and other embedded systems; and
(B) all of the software, hardware, firmware and other technology
which constitute part of the products and services manufactured,
marketed, sold or licensed by Prodigy or its Subsidiaries.
(vi) Except as set forth in Schedule 4.1(o)(vi), all of
(A) the internal systems used in the business or operations of
Prodigy or its Subsidiaries, including, without limitation, computer
hardware systems, software applications, firmware, equipment containing
embedded microchips and other embedded systems; and
(B) the software, hardware, firmware and other technology of Prodigy
and its Subsidiaries which constitute part of the products and services
manufactured, marketed, sold or licensed by Prodigy or its Subsidiaries
are Year 2000 Compliant and will not be materially adversely affected
with respect to value, utility, marketability, operability or any other
aspect by virtue of the arrival of the year 2000.
(vii) Neither Prodigy nor any of its Subsidiaries is aware of any failure
to be Year 2000 Compliant of any third-party system, software, hardware,
firmware or other technology used in connection with the business or
operations of Prodigy or its Subsidiaries, including without limitation any
system belonging to one of the suppliers or service providers of Prodigy or
its Subsidiaries.
(p) Contracts. (i) Prodigy has filed with the SEC complete and accurate
copies of each Contract to which Prodigy or any Subsidiary of Prodigy is a
party and which is required to be filed by Prodigy with the SEC under Item
601 of Regulation S-K. With respect to each such Contract:
(A) the Contract is legal, valid, binding and enforceable against
Prodigy (and, to Prodigy's knowledge, against the other party thereto)
and in full force and effect;
(B) the Contract will continue to be legal, valid, binding and
enforceable against Prodigy (and, to Prodigy's knowledge, against the
other party thereto) and in full force and effect immediately following
the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing; and
(C) neither Prodigy nor any Subsidiary of Prodigy nor, to the
knowledge of Prodigy, any other party, is in breach or violation of, or
default under, any such Contract, and no event has occurred, is pending
or, to the knowledge of Prodigy, is threatened, which, after the giving
of notice, with lapse of time, or otherwise, would constitute a breach
or default by Prodigy or any Subsidiary of Prodigy or, to the knowledge
of Prodigy, any other party under such Contract, in each case except as
would not individually or in the aggregate reasonably be expected to
have a Prodigy Material Adverse Effect.
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(ii) None of Prodigy or Operating Partnership or any Subsidiary of
Prodigy, nor, to the knowledge of Prodigy, any other party to any Contracts
to which any of Prodigy or Operating Partnership or any Subsidiary of
Prodigy is bound or is a party, is (or, with notice or lapse of time or
both, would be) in material breach or default thereof which breaches or
defaults individually or in the aggregate, are reasonably likely to have a
Prodigy Material Adverse Effect or prevent or materially burden or
materially impair the ability of Prodigy or Operating Partnership or any
Subsidiary of Prodigy to consummate the Prodigy Contribution, the Unit
Issuance and SBC Contribution, the Investment Share Issuance or the other
transactions contemplated by this Agreement or the transactions
contemplated by the Strategic Agreement.
(q) Insurance. Prodigy maintains, and Operating Partnership will
maintain, in full force and effect insurance policies (including, without
limitation, fire, theft, casualty, general liability, workers'
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) of the type
and in amounts customarily carried by organizations conducting businesses
or owning assets similar to those of Prodigy, Operating Partnership and the
Subsidiaries of Prodigy. There is no material claim pending under any such
policy as to which coverage has been questioned, denied or disputed by the
underwriter of such policy. All premiums due and payable under all such
policies have been paid and Prodigy and the Subsidiaries of Prodigy are
otherwise in compliance in all material respects with the terms of such
policies. Prodigy has no knowledge of any threatened termination of, or
material premium increase with respect to, any such policy. Each such
policy will continue to be enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof as
in effect immediately prior to the Closing.
(r) Employee Matters. (i) For purposes of this Agreement, the following
terms shall have the following meanings:
(A) "Employee Benefit Plan" means any "employee pension benefit plan"
(as defined in Section 3(2) of ERISA), any "employee welfare benefit
plan" (as defined in Section 3(1) of ERISA), and any other written or
oral plan, agreement or arrangement involving direct or indirect
compensation, including without limitation insurance coverage,
severance benefits, disability benefits, deferred compensation,
bonuses, stock options, stock purchase, phantom stock, stock
appreciation or other forms of incentive compensation or post-
retirement compensation covering current or former employees or
directors of Prodigy, Operating Partnership or any Subsidiary of
Prodigy.
(B) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(C) "ERISA Affiliate" means any entity which is considered one
employer with Prodigy under Section 4001 of ERISA or which is, or at
any applicable time was, a member of (1) a controlled group of
corporations (as defined in Section 414(b) of the Code), (2) a group of
trades or businesses under common control (as defined in Section 414(c)
of the Code), or (3) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of
the Code), any of which includes or included Prodigy or a Subsidiary of
Prodigy.
(ii) Schedule 4.1(r)(ii) contains a complete and accurate list of all
Employee Benefit Plans maintained, or contributed to, by Prodigy, any
Subsidiary of Prodigy or any ERISA Affiliate. Complete and accurate copies
of (i) all Employee Benefit Plans which have been reduced to writing, (ii)
written summaries of all unwritten Employee Benefit Plans, (iii) all
related trust agreements, insurance Contracts and summary plan
descriptions, and (iv) all annual reports filed on IRS Form 5500, 5500C or
5500R and (for all funded plans) all plan financial statements for the last
five plan years for each Employee Benefit Plan, have been delivered or made
available to SBC. Each Employee Benefit Plan has been administered in all
material respects in accordance with its terms and each of Prodigy, the
Subsidiaries of Prodigy and each ERISA Affiliate has met its obligations
with respect to such Employee Benefit Plan and has timely made or has
reflected in its audited financial statements all contributions required to
be made under the terms of such Employee Benefit Plan. Prodigy, each ERISA
Affiliate and each Employee Benefit Plan are in compliance in all material
respects with the currently applicable provisions of ERISA and the Code and
the regulations thereunder (including without limitation Section 4980 B of
the Code, Subtitle K,
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Chapter 100 of the Code and Sections 601 through 608 and Section 701 et
seq. of ERISA). All filings and reports as to each Employee Benefit Plan
required to have been submitted to the Internal Revenue Service or to the
United States Department of Labor have been timely submitted.
(iii) There are no actions, suits, proceedings, claims, arbitrations or
investigations pending before any Governmental Entity or before any
arbitrator (except claims for benefits payable in the normal operation of
the Employee Benefit Plans and proceedings with respect to qualified
domestic relations orders), or to the knowledge of Prodigy, threatened
against or involving any Employee Benefit Plan or asserting any rights or
claims to benefits under any Employee Benefit Plan.
(iv) All the Employee Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received favorable determination
letters from the Internal Revenue Service to the effect that such Employee
Benefit Plans are so qualified and the plans and the trusts related thereto
are exempt from federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code, no such determination letter has been revoked
and revocation has not been threatened, and no such Employee Benefit Plan
has been amended or operated since the date of its most recent
determination letter or application therefor in any respect, and no act or
omission has occurred, that would adversely affect the qualification or
materially increase the cost of such Employee Benefit Plan. Each Employee
Benefit Plan which is required to satisfy Section 401(k)(3) or Section
401(m)(2) of the Code has been tested for compliance with, and satisfies
the requirements of, Section 401(k)(3) and Section 401(m)(2) of the Code
for each plan year ending prior to the Closing Date.
(v) None of Prodigy, any Subsidiary of Prodigy, or any ERISA Affiliate
has ever maintained an Employee Benefit Plan subject to Section 412 of the
Code or Title IV of ERISA.
(vi) At no time has Prodigy, any Subsidiary of Prodigy or any ERISA
Affiliate been obligated to contribute to any "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA).
(vii) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of
Prodigy or any Subsidiary of Prodigy (or to any beneficiary of any such
employee), including but not limited to retiree health coverage and
deferred compensation, but excluding continuation of health coverage
required to be continued under Section 4980B of the Code or other
applicable Law and insurance conversion privileges under state law. The
assets of each Employee Benefit Plan which is funded are reported at their
fair market value on the books and records of such Employee Benefit Plan.
(viii) No act or omission has occurred and no condition exists with
respect to any Employee Benefit Plan maintained by Prodigy, any Subsidiary
of Prodigy or any ERISA Affiliate that would subject Prodigy, any
Subsidiary of Prodigy or any ERISA Affiliate to (x) any material fine,
penalty, tax or liability of any kind imposed under ERISA or the Code or
(y) any Contractual indemnification or contribution obligation protecting
any fiduciary, insurer or service provider with respect to any Employee
Benefit Plan.
(ix) No Employee Benefit Plan is funded by, associated with or related to
a "voluntary employee's beneficiary association" within the meaning of
Section 501(c)(9) of the Code.
(x) Each Employee Benefit Plan is amendable and terminable unilaterally
by Prodigy at any time without liability to Prodigy as a result thereof and
no Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to
employees by its terms prohibits Prodigy from amending or terminating any
such Employee Benefit Plan.
(xi) Schedule 4.1(r)(xi) discloses each:
(A) agreement, plan, understanding or arrangement under which any
person may receive payments from Prodigy or any Subsidiary of Prodigy
that may be subject to the tax imposed by Section 4999 of the Code or
included in the determination of such person's "parachute payment"
under Section 280G of the Code; and
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(B) agreement, understanding or plan binding Prodigy or any
Subsidiary of Prodigy, including without limitation any Employee
Benefit Plan, any of the benefits of which will be triggered or
increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
(xii) Neither Prodigy nor any Subsidiary of Prodigy is a party to or
bound by any collective bargaining agreement, Contract or other agreement
with a labor union or labor organization, nor is there pending or, to the
knowledge of Prodigy, threatened, any strike, dispute, walk-out, work
stoppage, slow-down, lockout, grievance, claim of unfair labor practices or
other collective bargaining disputes involving Prodigy or any Subsidiary of
Prodigy. Prodigy has no knowledge of any organizational effort made or
threatened, either currently or within the past two years, by or on behalf
of any labor union with respect to employees of Prodigy or any Subsidiary
of Prodigy. Each of Prodigy and any Subsidiary of Prodigy is in compliance
with all currently applicable Laws regarding employment and employment
matters, terms and conditions of employment and wages and hours and is not
engaged in any unfair labor practice, except for any failures that would
not, individually or in the aggregate, reasonably be expected to have a
Prodigy Material Adverse Effect or prevent or materially impair the ability
of Prodigy, Prodigy Sub or Operating Partnership to consummate the Prodigy
Contribution, the Unit Issuance and SBC Contribution, the Investment Share
Issuance or the other transactions contemplated hereby or the transactions
contemplated by the Strategic Agreement.
(s) Environmental Matters. (i) Each of Prodigy and the Subsidiaries of
Prodigy has complied with all applicable Environmental Laws, except for any
violations that would not, individually or in the aggregate, reasonably be
expected to have a Prodigy Material Adverse Effect. There is no pending or,
to the knowledge of Prodigy, threatened, civil or criminal litigation,
notice of violation, claim, notice of liability, administrative proceeding,
or investigation, inquiry or information request by any Governmental Entity
or Third Party, relating to any Environmental Law involving Prodigy or any
Subsidiary of Prodigy.
(ii) There have been no releases of any Materials of Environmental
Concern into the environment at or from any parcel of real property or any
facility formerly or currently owned, operated or controlled by Prodigy or
a Subsidiary of Prodigy, except for any releases that would not,
individually or in the aggregate, reasonably be expected to have a Prodigy
Material Adverse Effect or prevent or materially impair the ability of
Prodigy, Prodigy Sub or Operating Partnership to consummate the Prodigy
Contribution, the Unit Issuance and SBC Contribution, the Investment Share
Issuance or the other transactions contemplated hereby or the transactions
contemplated by the Strategic Agreement. There have not been any releases
of Materials of Environmental Concern or threatened releases at parcels of
real property or facilities other than those owned, operated or controlled
by Prodigy or a Subsidiary of Prodigy that could reasonably be expected to
result in liability to Prodigy or any Subsidiary of Prodigy or have an
impact on the real property or facilities owned, operated or controlled by
Prodigy or a Subsidiary of Prodigy, except for any releases that would not,
individually or in the aggregate, reasonably be expected to have a Prodigy
Material Adverse Effect or prevent or materially impair the ability of
Prodigy, Prodigy Sub or Operating Partnership to consummate the Prodigy
Contribution, the Unit Issuance and SBC Contribution, the Investment Share
Issuance or the other transactions contemplated hereby or the transactions
contemplated by the Strategic Agreement.
(iii) Neither Prodigy nor any Subsidiary of Prodigy is subject to any
Order, decree, injunction or other arrangement with any Governmental Entity
or any indemnity or other agreement with any Third Party relating to
liability under any Environmental Law or relating to any Materials of
Environmental Concern and there are no other circumstances or conditions
involving Prodigy or any Subsidiary of Prodigy that could reasonably be
expected to result in any claim, liability, investigation, cost or
restriction on the ownership, use, or transfer of any property in
connection with any Environmental Law.
(iv) There are no documents (whether in hard copy or electronic form)
known to Prodigy's current executive officers that contain any
environmental reports, investigations and audits relating to premises
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currently or previously owned or operated by Prodigy or a Subsidiary of
Prodigy (whether conducted by or on behalf of Prodigy or a Subsidiary of
Prodigy or a Third Party, and whether done at the initiative of Prodigy or
a Subsidiary of Prodigy or directed by a Governmental Entity or other Third
Party) which were issued or conducted during the past five years and which
Prodigy has possession of or access to. A complete and accurate copy of
each such document has been provided to SBC.
(t) Permits. Each of Prodigy and its Subsidiaries has all Permits
necessary to conduct their respective businesses as presently conducted or
as proposed to be conducted, except for those the absence of which would
not reasonably be expected to have a Prodigy Material Adverse Effect. Each
such Permit is in full force and effect and, to the best of the knowledge
of Prodigy, no suspension or cancellation of such Permit is threatened and
there is no basis for believing that such Permit will not be renewable upon
expiration. Each such Permit will continue in full force and effect
immediately following the Closing.
(u) Brokers Fees. Neither Prodigy nor any Subsidiary of Prodigy has any
liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by this
Agreement, except that Prodigy has employed Bear, Stearns & Co. Inc. as its
financial advisor, all fees of which shall be borne by Prodigy.
(v) Investment Company Act. Neither Prodigy nor Operating Partnership is,
and after giving effect to the Prodigy Contribution, the Unit Issuance and
SBC Contribution, the Investment Share Issuance and the other transactions
contemplated by this Agreement and the transactions contemplated by the
Strategic Agreement, will be an "investment company," as such term is
defined in the Investment Company Act of 1940, as amended.
(w) Subscribers. As of the date of this Agreement, the number of managed
Subscribers to Prodigy's Retail ISP Service is at least 1,400,000.
(x) Title to Prodigy Contributed Assets. As to each Prodigy Contributed
Asset, Prodigy, Prodigy Sub or a Subsidiary of Prodigy has lawful title to,
a proprietary interest in, or a Contractual interest in such Prodigy
Contributed Asset (including, in the case of Intellectual Property, an
ownership interest, license or other lawful right to the benefit or use of
such Intellectual Property) and the ability to convey such title to, or
proprietary or Contractual interest in, such Prodigy Contributed Asset,
free of all Liens and encumbrances other than Permitted Encumbrances (or in
the case of Contracts that cannot be assigned to Operating Partnership, the
ability to perform fully such contracts for the benefit of Operating
Partnership).
4.2 Representations and Warranties of SBC and SBC Sub.
Each of SBC and SBC Sub jointly and severally hereby makes the following
representations and warranties to Prodigy, Prodigy Sub and Operating
Partnership:
(a) Corporate Existence; Ownership. Each of SBC and SBC Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation and has all requisite corporate
power and authority to own and operate its properties and assets and
conduct its business as now conducted by it. Each of SBC and SBC Sub is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which it owns or leases properties or
assets or conducts business so as to require such qualification (except
where the failure of SBC or SBC Sub to be so qualified or in good standing,
when taken together with all other such failures, is not reasonably likely
to have a material adverse effect on SBC).
(b) Authorization; Enforcement. (i) Each of SBC and SBC Sub has all
requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations under this Agreement in accordance
with its terms. Each of SBC and SBC Sub has taken all necessary action to
authorize the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby. This Agreement is a valid and
legally binding obligation of each of SBC and SBC Sub, enforceable against
each of them in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
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(ii) On the Closing Date, SBC Sub will have all requisite corporate power
and authority to execute and deliver the Amended and Restated Limited
Partnership Agreement and to perform its obligations under the Amended and
Restated Limited Partnership Agreement in accordance with its terms. On the
Closing Date, SBC Sub will have taken all necessary corporate action to
authorize the execution and delivery of the Amended and Restated Limited
Partnership Agreement and the consummation of the transactions contemplated
thereby. When executed, the Amended and Restated Limited Partnership
Agreement will be a valid and legally binding obligation of SBC Sub,
enforceable in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
(c) Compliance with Law. (i) The execution and delivery by each of SBC
and SBC Sub of this Agreement do not, and, subject to the satisfaction of
the Closing conditions specified in Sections 3.2(e) and (f), the
performance by each of SBC and SBC Sub of its respective obligations under
this Agreement and the consummation by each of SBC and SBC Sub of the
transactions contemplated hereby will not, violate any provision of any Law
or regulation, or any existing writ or decree of any court or Governmental
Entity applicable to SBC or SBC Sub.
(ii) The execution and delivery by SBC Sub of the Amended and Restated
Limited Partnership Agreement will not, and the performance by it of its
obligations under the Amended and Restated Limited Partnership Agreement
and the consummation of the transactions contemplated thereby will not,
violate any provision of any Law or regulation, or an existing writ or
decree of any court or Governmental Entity applicable to it.
(d) Compliance with Obligations. (i) The execution and delivery by each
of SBC and SBC Sub of this Agreement do not, and, subject to the
satisfaction of the Closing conditions specified in Sections 3.2(e) and
(f), the performance by each of SBC and SBC Sub of its respective
obligations under this Agreement and the consummation by each of SBC and
SBC Sub of the transactions contemplated hereby will not, violate, conflict
with or constitute a breach of, or a default under, the certificate of
incorporation or By-Laws of SBC or SBC Sub, or result in a violation or
breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation,
modification or acceleration) (whether after the giving of notice or the
passage of time or both) under any material Contract to which SBC or SBC
Sub is a party or which is binding on it or its assets, and will not result
in the creation of any Lien on, or security interest in, any of the assets
or properties of SBC or any of its Subsidiaries.
(ii) The execution and delivery by SBC Sub of the Amended and Restated
Limited Partnership Agreement will not, and the performance by it of its
obligations under the Amended and Restated Limited Partnership Agreement
and the consummation by SBC Sub of the transactions contemplated thereby
will not, violate, conflict with or constitute a breach of, or a default
under, its certificate of incorporation or By-Laws, or result in a
violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination,
cancellation, modification or acceleration) (whether after the giving of
notice or the passage of time or both) under any material Contract to which
SBC Sub is a party or which is binding on it or its assets, and will not
result in the creation of any Lien on, or security interest in, any of the
assets or properties of SBC Sub.
(e) Consents and Approvals. (i) All notices, reports or other filings
required to be made by SBC or SBC Sub, and all consents, registrations,
approvals, Permits, authorizations and Orders of Governmental Entities or
other third parties required to be obtained by SBC or SBC Sub in connection
with the execution and delivery of this Agreement by each of SBC and SBC
Sub, the performance by each of SBC and SBC Sub of its respective
obligations under this Agreement and the consummation by each of SBC and
SBC Sub of the transactions contemplated hereby, (other than, as of the
date hereof, the expiration or termination of the waiting period under the
HSR Act) have been made or obtained.
(ii) On the Closing Date, all notices, reports or other filings required
to be made by SBC Sub, and all consents, registrations, approvals, Permits,
authorizations and Orders of Governmental Entities or other third parties
required to be obtained by SBC Sub in connection with the execution and
delivery of the
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Amended and Restated Limited Partnership Agreement by SBC Sub, the
performance by SBC Sub of its obligations under the Amended and Restated
Limited Partnership Agreement and the consummation by SBC Sub of the
transactions contemplated thereby, will have been made or obtained.
(f) Litigation. There is no legal action, suit, investigation or
proceeding pending or, to the knowledge of SBC or SBC Sub, threatened
against or affecting SBC, SBC Sub or the assets of SBC or SBC Sub which, if
adversely determined, would reasonably be expected to have a material
adverse effect on SBC or would materially and adversely affect SBC's or SBC
Sub's ability to perform or observe any obligation or condition under this
Agreement.
(g) Investment Intent. SBC Sub is taking possession of the SBC Units and
the Investment Share for the purpose of investment and not with a view to
any resale, distribution or other disposition thereof.
(h) Title to SBC Contributed Assets. As to each SBC Contributed Asset,
SBC represents and warrants that it, SBC Sub or an Affiliate of SBC, has
lawful title to, a proprietary interest in, or a Contractual interest in
such SBC Contributed Asset (including, in the case of Intellectual
Property, an ownership interest, license or other lawful right to the
benefit or use of such Intellectual Property) and the ability to convey
such title to, or proprietary or Contractual interest in, such SBC
Contributed Asset, free of all Liens and encumbrances other than Permitted
Encumbrances.
(i) Subscribers. As of the date of this Agreement, the number of
Subscribers to the Retail ISP Services of SBC and its Affiliates is at
least 625,000.
(j) Disclaimer of Warranties. Except as otherwise provided herein, all
SBC Contributed Assets are transferred to Operating Partnership "AS IS,"
"WHERE IS," and "WITH ALL FAULTS." Other than the warranty of title in
paragraph (h) of this Section 4.2, neither SBC nor SBC Sub makes any other
warranty, express or implied, including without limitation any implied
warranty of merchantability or fitness for a particular purpose, with
respect to the SBC Contributed Assets. Without limiting the foregoing,
Prodigy hereby waives and releases SBC and SBC Sub from any claims or
demands that Prodigy may have regarding any defect, error, or other
condition of any SBC Contributed Asset.
(k) Brokers Fees. Neither SBC nor any Subsidiary of SBC has any liability
or obligation to pay any fees or commissions to any broker, finder or agent
with respect to the transactions contemplated by this Agreement, except
that SBC has employed Goldman, Sachs & Co., Inc. as its financial advisor,
all fees of which shall be borne by SBC.
(l) Intellectual Property; Year 2000. (i) SBC or a Subsidiary of SBC owns
or has the right to use each material item of Intellectual Property
necessary for, or used in, the SBC Contributed Assets and the assets used
in providing billing services and Network Services (the "SBC Intellectual
Property") (it being understood and agreed that each of the SBC Marks
specified in the Strategic Agreement is a material item of SBC Intellectual
Property) and has the full right and authority to grant the licenses in
respect of such SBC Intellectual Property to Prodigy under the Strategic
Agreement. SBC has taken all reasonable measures to protect the proprietary
nature of each material item of SBC Intellectual Property, and to maintain
in confidence all trade secrets and confidential information, that it owns
or uses. To the knowledge of SBC, no other person or entity has any rights
to any material SBC Intellectual Property owned by SBC and the Subsidiaries
of SBC (except pursuant to licenses granted in the ordinary course of
business). To the knowledge of SBC, no other person or entity is
infringing, violating or misappropriating any material item of SBC
Intellectual Property. SBC has made available to Prodigy complete and
accurate copies of all written documentation in its possession relating to
pending claims or disputes known to it concerning any material item of SBC
Intellectual Property. The consummation of the transactions contemplated by
this Agreement will not alter, impair or extinguish any of the rights of
SBC or any Subsidiary of SBC to any material item of SBC Intellectual
Property.
(ii) None of the activities or business presently conducted by SBC or a
Subsidiary of SBC and none of the SBC Marks infringes or violates, or
constitutes a misappropriation of, any Intellectual Property
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rights of any person or entity except for such infringement, violation or
misappropriation that, individually or in the aggregate, would not
reasonably be likely to have a material adverse effect on SBC. Neither SBC
nor any Subsidiary of SBC has received any complaint, claim or notice
alleging any such infringement, violation or misappropriation and no such
claim has been threatened by any Third Party.
(iii) SBC has conducted "year 2000" audits with respect to all of the
internal systems used in the SBC Contributed Assets and the assets used in
providing billing services and Network Services, including, without
limitation, computer hardware systems, software applications, firmware,
equipment containing embedded microchips and other embedded systems.
(iv) All of the internal systems used in the SBC Contributed Assets and
the assets used in providing billing services and Network Services,
including, without limitation, computer hardware systems, software
applications, firmware, equipment containing embedded microchips and other
embedded systems are Year 2000 Compliant and will not be materially
adversely affected with respect to value, utility, marketability,
operability or any other aspect by virtue of the arrival of the year 2000.
(v) Neither SBC nor any of its Subsidiaries is aware of any failure to be
Year 2000 Compliant of any third-party system, software, hardware, firmware
or other technology used in connection with the SBC Contributed Assets and
the assets used in providing billing services and Network Services,
including without limitation any system belonging to one of the suppliers
or service providers of SBC or its Subsidiaries.
ARTICLE V
Covenants
5.1 Covenants of Prodigy, Prodigy Sub and Operating Partnership.
(a) Conduct of Business. (i) During the period from the date hereof until
the consummation of the Closing, Prodigy shall, except as otherwise
expressly provided in this Agreement, operate only in the ordinary course
of business consistent with past practice. Prodigy shall use all reasonable
efforts to preserve intact the present organization of its business, keep
available the services of its officers and employees and preserve its
relationships with subscribers, suppliers, and others having significant
business dealings with its business.
(ii) Without limiting the generality of the foregoing, except as
otherwise expressly provided in this Agreement, from the date of this
Agreement until the consummation of the Closing, each of Prodigy and
Operating Partnership shall not, and Prodigy shall cause its Subsidiaries
not to, without the written consent of SBC (which consent shall not be
unreasonably withheld or delayed):
(1) amend or propose to amend its certificates of incorporation or
By-Laws (or other similar organizational documents) or alter through
merger, liquidation, reorganization, restructuring or in any other
fashion, its corporate or ownership structure or ownership or any of
its Subsidiaries;
(2) issue, sell or agree or commit to issue, sell or deliver (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), pledge or otherwise
encumber any of its shares of capital stock, Units, Voting Debt or the
shares of capital stock of any Subsidiary, or any securities
convertible into, or exchangeable for, any such shares, Units or Voting
Debt, except pursuant to possible issuances, sales or deliveries
disclosed in Schedule 5.1(a)(ii)(2), or amend the terms of any such
securities or agreements outstanding on the date hereof;
(3) (x) declare, set aside, make or pay any dividend or other
distribution in respect of its capital stock or Units or (y) redeem,
repurchase or otherwise acquire any of its securities or split, combine
or reclassify any shares of its capital stock or Units;
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(4) (x) transfer, sell, lease, license or dispose of any material
assets or rights, unless in the ordinary course of business consistent
with past practice; (y) enter into any Contract, note, lease, license
or other agreement which requires the payment or receipt of an amount
(in one or a series of transactions) in excess of $25 million or (z)
acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of or by
any other manner any business or any corporation, partnership,
association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets of any other person
requiring consideration payable or assumption of liabilities in excess
of $25 million;
(5) except as set forth on Schedule 5.1(a)(ii)(5), other than in the
ordinary course of business and other than transactions with wholly-
owned Subsidiaries, (u) incur, assume, discharge, cancel or prepay any
material indebtedness or other obligation or issue or sell any debt
securities or rights to acquire any debt securities, (v) assume,
guarantee, endorse or otherwise become liable (whether directly,
contingently or otherwise) for the obligations of any other person, (w)
make any loans, advances or capital contributions to, or investments
in, any other person; (x) change any practices with respect to the
timing of payments or collections; (y) pledge or otherwise encumber
shares of capital stock of Prodigy or its Subsidiaries or Units of
Operating Partnership; or (z) mortgage or pledge any of the assets or
permit to exist any Lien (other than those liens arising in the
ordinary course of business) thereupon;
(6) enter into, adopt, amend or terminate any employee benefit plan,
or increase the compensation or benefits of any officer or employee of
Prodigy or Operating Partnership or pay any benefit not required by any
existing plan or agreement, except in the ordinary course of business
or as required by applicable Law or existing Contractual arrangements;
(7) enter into any material employment or severance agreement with
any officer or employee, or adopt or enter into any collective
bargaining agreement;
(8) enter into, amend, assign or terminate any Contract, except in
the ordinary course of business and consistent with past practices;
(9) settle or compromise any material litigation (whether or not
commenced prior to the date of this Agreement) or settle, pay or
compromise any claims, liabilities or obligations not required to be
paid, individually in an amount in excess of $1 million;
(10) change or agree to change any accounting method or policy other
than as required by GAAP or by applicable Law;
(11) change, or agree to change, any business policies which relate
to advertising, pricing, personnel, labor relations, sales, returns, or
product acquisitions, in each case in a manner which would have a
Prodigy Material Adverse Effect; or
(12) take, or agree in writing or otherwise to take, any of the
foregoing actions.
(iii) During the period from the date hereof until the consummation of
the Closing, each of Prodigy and Operating Partnership shall not, and
Prodigy shall cause its Subsidiaries not to, take, or agree in writing or
otherwise to take, any other actions that are or would be prohibited by, or
would require SBC's consent or approval, under this Agreement, the
Strategic Agreement (as of the date hereof or as of the Closing) or any of
the following, if in effect on the date hereof: the Restated Certificate of
Incorporation, the Amended and Restated By-Laws, the Amended and Restated
Limited Partnership Agreement, or the Registration Rights Agreement.
(b) HSR Approvals. Each of Prodigy and Operating Partnership agrees to
use its commercially reasonable efforts to assist SBC in obtaining the
early termination or expiration of the waiting period provided under the
HSR Act.
(c) Information. So long as SBC owns in the aggregate a number of shares
of Class A Common Stock, Class B Common Stock and/or Units constituting at
least one-quarter of the initial number of SBC
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Units issued pursuant to this Agreement and the Amended and Restated
Limited Partnership Agreement (subject to adjustment in accordance with
Article FOURTH, Clause (b)(iv) of the Restated Certificate of
Incorporation), Prodigy shall permit SBC, upon reasonable notice, to visit
and inspect at SBC's expense any of the properties, corporate books, and
financial and other records of Prodigy and its Subsidiaries, and to discuss
the affairs, finances and accounts of Prodigy and its Subsidiaries with the
officers of Prodigy, its Subsidiaries and Prodigy's independent public
accountants, all at such times and as often as SBC may reasonably request.
(d) Right of First Refusal. In the event Prodigy or Operating Partnership
elects to dispose of any SBC Contributed Asset, each of Prodigy and
Operating Partnership hereby undertakes and agrees to offer to SBC a right
of first refusal to purchase such SBC Contributed Asset at its book value.
(e) Amended and Restated Limited Partnership Agreement. At or prior to
the Closing, Prodigy and Operating Partnership each shall execute and
deliver the Amended and Restated Limited Partnership Agreement.
(f) Registration Rights Agreement. At or prior to the Closing, Prodigy
shall execute and deliver the Registration Rights Agreement.
(g) Restated Certificate of Incorporation and Amended and Restated By-
Laws. The board of directors of Prodigy shall (i) use its best efforts to
obtain the approval of the stockholders of Prodigy of the Restated
Certificate of Incorporation, the Amended and Restated By-Laws and the
other transactions contemplated in the Agreement and the Strategic
Agreement prior to the Closing in accordance with Prodigy's certificate of
incorporation and by-laws and the Delaware General Corporation Law and (ii)
duly file the Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware immediately prior to the Closing.
(h) Rights Agreement. As soon as practicable following the Closing Date,
Prodigy shall adopt a Stockholder Protection Rights Agreement, in a form to
be agreed between Prodigy and SBC, which shall, among other things, provide
for a 15% "flip-in" triggering level; a "flip-over" trigger; an exchange
option; and an exception to the definition of "Acquiring Person" to exclude
therefrom SBC, Telefonos de Mexico, S.A. de C.V. and Carso Global Telecom,
S.A. de C.V. and their respective Affiliates and transferees.
5.2 Covenants of SBC and SBC Sub.
(a) Conduct of Business. (i) During the period from the date hereof until
the consummation of the Closing, SBC and SBC Sub shall, except as otherwise
expressly provided in this Agreement, operate the SBC Internet Businesses
only in the ordinary course of business consistent with past practice. SBC
Sub and SBC shall use all reasonable efforts to preserve intact the present
organization of the SBC Internet Businesses, keep available the services of
the officers and employees associated with the SBC Internet Businesses and
preserve the relationships with subscribers, suppliers, and others
associated with the SBC Internet Businesses having significant business
dealings with the SBC Internet Businesses.
(ii) Without limiting the generality of the foregoing, except as
otherwise expressly provided in this Agreement, from the date of this
Agreement until the consummation of the Closing, SBC shall not, and shall
cause its Subsidiaries not to, in each case solely with respect to the SBC
Internet Businesses, without the written consent of Prodigy (which consent
shall not be unreasonably withheld or delayed):
(1) (x) transfer, sell, lease, license or dispose of any material
assets or rights, unless in the ordinary course of business consistent
with past practice; (y) enter into any Contract, note, lease, license
or other agreement which involves the payment or receipt of an amount
(in one or a series of transactions) in excess of $25 million or (z)
acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of or by
any other manner any business or any corporation, partnership,
association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets of any other person in
excess of $25 million;
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(2) enter into, adopt, amend or terminate any employee benefit plan,
or increase in any material respect the compensation or fringe benefits
of any officer or employee of the SBC Internet Businesses or pay any
benefit not required by any existing plan, except in the ordinary
course of business or as required by applicable Law or existing
contractual arrangements;
(3) enter into any employment or severance agreement with any
employee of the SBC Internet Businesses, adopt or enter into any
collective bargaining agreement applicable to such employees;
(4) enter into, amend, assign or terminate any contract, except in
the ordinary course of business and consistent with past practices;
(5) change, or agree to change, any business policies which relate to
advertising, pricing, personnel, labor relations, sales, returns, or
product acquisitions, in each case in a manner which would have a
material adverse effect on the SBC Internet Businesses; or
(6) take, or agree in writing or otherwise to take, any of the
foregoing actions.
(iii) During the period from the date hereof until the consummation of
the Closing, SBC shall not, and shall cause its Subsidiaries not to, take,
or agree in writing or otherwise to take, any other actions that are or
would be prohibited by, or would require Prodigy's consent or approval,
under this Agreement or the Strategic Agreement (as of the date hereof or
as of the Closing).
(iv) The limitations in this Section 5.2(a) shall apply only to the
extent affecting the SBC Internet Businesses.
(b) HSR Approvals. SBC agrees that it will use its commercially
reasonable efforts to obtain the early termination or expiration of the
waiting period provided under the HSR Act.
(c) Observance of Securities Act. SBC Sub agrees that it will not offer
to sell, sell or otherwise dispose of any of the SBC Units or the
Investment Share in violation of the Securities Act.
(d) Third Party Warranties. If any warranties applicable to any SBC
Contributed Asset cannot be assigned to Operating Partnership, SBC will, to
the extent it is able, allow Operating Partnership to be subrogated to
SBC's rights under such warranties. SBC agrees that, to the extent such it
is able, it will be permitted at Operating Partnership's expense to
prosecute any claims or causes of action relating to such warranties in
SBC's name.
(e) Use of SBC's Marks. Operating Partnership may use the SBC Contributed
Assets without removing SBC's or its Affiliate's name, logo, or other
proprietary marks for a mutually agreeable reasonable period of time
following the Closing Date.
(f) Access to Operating Employees. Following the Closing, SBC shall make
the Operating Employees reasonably available to Operating Partnership so as
to enable Operating Partnership to continue to operate the SBC Contributed
Assets.
(g) Registration Rights Agreement. At or prior to the Closing, each of
SBC and SBC Sub shall execute and deliver the Registration Rights
Agreement.
(h) Amended and Restated Limited Partnership Agreement. At or prior to
Closing, SBC Sub shall execute and deliver the Amended and Restated Limited
Partnership Agreement.
(i) Investments. During the period from the date hereof until the
Exclusivity Termination Date, SBC agrees that it will not invest directly
in other ISPs whose primary business is the consumer ISP business. SBC
shall be permitted to invest directly in an entity having a consumer ISP
business if such consumer ISP business is not the primary business of such
entity and so long as SBC agrees to negotiate in good faith with Prodigy in
an attempt to transfer such consumer ISP business to Prodigy on terms
acceptable to both SBC and Prodigy.
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5.3 Provisions Regarding Third Party Acquisitions.
(a) Prodigy agrees that neither it nor any of its Subsidiaries nor any of
its or its Subsidiaries' employees or directors shall, and it shall direct
and use its best efforts to cause its and its Subsidiaries' agents and
representatives (including Bear, Stearns & Co. Inc. (the "Prodigy Financial
Advisor") or any other investment banker and any attorney or accountant
retained by it or any of its Subsidiaries (collectively, the "Prodigy
Advisors")) not to, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries in respect of, or the making of any
proposal for, a Prodigy Third Party Acquisition (as hereinafter defined) or
any other transaction that could reasonably be expected to compete with,
impede, interfere with or discourage the transactions contemplated hereby
or inhibit the timely consummation of the transactions contemplated hereby
(a "Competing Transaction"). Prodigy further agrees that neither it nor any
of its Subsidiaries nor any of its or its Subsidiaries' employees or
directors shall, and it shall direct and use its best efforts to cause all
Prodigy Advisors not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Third Party (as hereinafter defined) relating to the
proposal of a Prodigy Third Party Acquisition or any Competing Transaction,
or otherwise facilitate any effort or attempt to make or implement a
Prodigy Third Party Acquisition or any Competing Transaction; provided,
however, that if the board of directors of Prodigy determines in good
faith, after consultation with its outside counsel, that it is necessary to
do so in order to comply with its fiduciary duties to Prodigy stockholders
under applicable Law, Prodigy may, in response to an inquiry, proposal or
offer for a Prodigy Third Party Acquisition which was not solicited
subsequent to the date hereof, (x) furnish only such information with
respect to Prodigy or any Subsidiary of Prodigy to any such person pursuant
to a customary confidentiality agreement and (y) participate in the
discussions and negotiations regarding such inquiry, proposal or offer.
Prodigy shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any Third Parties conducted
heretofore with respect to any of the foregoing. Prodigy agrees to notify
SBC promptly if (i) any inquiries relating to or proposals for a Prodigy
Third Party Acquisition are received by Prodigy, any of its Subsidiaries or
any of the Prodigy Advisors, (ii) any confidential or other non-public
information about Prodigy or any of its Subsidiaries is requested from
Prodigy, any of its Subsidiaries or any of the Prodigy Advisors, or (iii)
any negotiations or discussions in connection with a possible Prodigy Third
Party Acquisition are sought to be initiated or continued with Prodigy, any
of its Subsidiaries or any of the Prodigy Advisors, indicating, in
connection with such notice, the principal terms and conditions of any
proposals or offers.
(b) Except as expressly permitted by this Section 5.3(b), neither the
board of directors of Prodigy nor any committee thereof shall (i) withdraw
or modify, or propose publicly to withdraw or modify, its recommendation of
the approval of this Agreement, the Strategic Agreement and the
transactions contemplated thereby, the Prodigy Contribution, the Restated
Certificate of Incorporation, the Amended and Restated By-Laws, the Unit
Issuance and SBC Contribution, the Investment Share Issuance and the other
transactions contemplated by this Agreement (including the issuance of
Class A Common Stock upon conversion of Class B Common Stock or conversion
of Units), or (ii) approve or recommend, or propose publicly to approve or
recommend, or cause Prodigy to enter into any agreement, letter of intent,
agreement in principle or similar agreement with respect to, any Prodigy
Third Party Acquisition. Notwithstanding the preceding sentence, if, prior
to obtaining Prodigy Stockholder Approval, the board of directors of
Prodigy determines in its good faith judgment, after consultation with its
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties, the board of directors of Prodigy may terminate this
Agreement and, simultaneously with or following such termination, if it so
chooses, take any of the actions referred to in the preceding sentence. For
purposes of this Agreement, "Prodigy Third Party Acquisition" means the
occurrence of any of the following events: (i) the acquisition of Prodigy
by merger or otherwise by any person (which includes a "person" as such
term is defined in Section 13(d)(3) of the Exchange Act) other than any
Party hereto or any Affiliate thereof (a "Third Party"); (ii) the
acquisition by a Third Party of 10% or more of the total assets of Prodigy
and its Subsidiaries, taken as a whole; (iii) the acquisition by a Third
Party of 10% or more of the outstanding Prodigy Common Stock; (iv) the
adoption by Prodigy of a plan of partial or complete liquidation or the
declaration or payment of
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an extraordinary dividend; (v) the repurchase by Prodigy or any of its
Subsidiaries of 10% or more of the outstanding Prodigy Common Stock; or
(vi) the acquisition by Prodigy or any of its Subsidiaries by merger,
purchase of stock or assets, joint venture or otherwise of a direct or
indirect ownership interest or investment in any business whose annual
revenues, net income or assets is equal to or greater than 10% of the
annual revenues, net income or assets of Prodigy and its Subsidiaries,
taken as a whole.
5.4 Provisions Regarding Prodigy Stockholder Approval.
(a) As soon as reasonably practicable following the date of this
Agreement, Prodigy shall prepare and file with the SEC a proxy statement
providing information in connection with the Prodigy Stockholder Approval
(the "Proxy Statement"). Prodigy shall use commercially reasonable efforts
to respond to and resolve all SEC comments on the Proxy Statement, and to
mail the Proxy Statement to Prodigy's stockholders, as promptly as
practicable after such filing. SBC shall furnish for inclusion in the Proxy
Statement all information regarding SBC, SBC Sub and the SBC Internet
Businesses, as is required to be disclosed in the Proxy Statement, and
shall cooperate fully with Prodigy in the preparation of the Proxy
Statement and in responding to and resolving SEC comments thereon. No
filing of, or amendment or supplement to, the Proxy Statement will be made
by Prodigy without providing SBC the opportunity to review and comment
thereon and without the consent of SBC (which consent shall not be
unreasonably withheld or delayed). Prodigy will advise SBC, promptly after
it receives notice thereof, of any request by the SEC for amendment of the
Proxy Statement or comments thereon and responses thereto or requests by
the SEC for additional information. If at any time prior to the date of the
meeting of Prodigy's stockholders contemplated by Section 5.4(b) below, any
information relating to Prodigy or SBC, or any of their respective
Affiliates, officers, directors or businesses, is discovered by Prodigy or
SBC that should be set forth in an amendment or supplement to the Proxy
Statement, so that the Proxy Statement would not include any misstatement
of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, the Party that discovers such information shall
promptly notify the other Party hereto and an appropriate amendment or
supplement describing such information shall be promptly filed with the SEC
and, to the extent required by Law, disseminated to the stockholders of
Prodigy.
(b) Prodigy shall, as soon as reasonably practicable following the date
of this Agreement, duly call, give notice of, convene and hold a meeting of
its stockholders for the purpose of obtaining the Prodigy Stockholder
Approval and shall, through its board of directors or a special committee
thereof, recommend o31to its stockholders the approval and adoption of this
Agreement, the Prodigy Contribution, the Restated Certificate of
Incorporation, the Amended and Restated By-Laws, the Unit Issuance and SBC
Contribution, the Investment Share Issuance and the other transactions
contemplated hereby (including the issuance of Class A Common Stock upon
conversion of Class B Common Stock or conversion of Units) and the
Strategic Agreement and the transactions contemplated thereby. Without
limiting the generality of the foregoing but subject to its right to
terminate this Agreement pursuant to Section 7.4(a) and its right to
withdraw or modify its recommendation pursuant to Section 5.3(b), Prodigy
agrees that its obligations pursuant to the first sentence of this Section
5.4(b) shall not be affected by the commencement, public proposal, public
disclosure or communication to Prodigy of any Prodigy Third Party
Acquisition or any withdrawal or modification of its recommendation.
(c) SBC represents and warrants to Prodigy that to the extent that any
statements or omissions made in the Proxy Statement or any amendment or
supplement thereto are made in reliance upon and in conformity with written
information furnished to Prodigy by SBC expressly for use therein, such
Proxy Statement and any further amendments or supplements to the Proxy
Statement, at the time the Proxy Statement is first mailed to Prodigy's
stockholders, at the time of the Prodigy stockholders meeting and at the
time of any amendment or supplement thereto, will not contain any untrue
statements of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they are made, not misleading.
(d) Prodigy represents and warrants to SBC that the Proxy Statement will
not, at the time the Proxy Statement is first mailed to Prodigy's
stockholders, at the time of the Prodigy stockholders meeting and at
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the time of any amendment or supplement thereto, contain any untrue
statements of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they are made, not misleading,
except that no representation or warranty is made by Prodigy with respect
to statements or omissions made in reliance upon and in conformity with
written information furnished to Prodigy by SBC expressly for use therein.
The Proxy Statement and any amendments or supplements to the Proxy
Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, except that no representation or warranty is made by Prodigy
with respect to statements or omissions made in reliance upon and in
conformity with written information furnished to Prodigy by SBC expressly
for use therein.
(e) Prodigy Votes. Prodigy shall vote (or consent with respect to) or
cause to be voted (or a consent to be given with respect to) any shares of
capital stock of Prodigy beneficially owned (as such term is used in
Section 13d-3 of the Exchange Act) by it or any of its Subsidiaries or with
respect to which it or any of its Subsidiaries has the power (by agreement,
proxy or otherwise) to cause to be voted (or to provide a consent), in
favor of the adoption and approval of this Agreement, the Restated
Certificate of Incorporation, the Amended and Restated By-Laws, the
Investment Share Issuance, the Prodigy Contribution, the Unit Issuance and
SBC Contribution and any and all of the other transactions contemplated
hereby and the Strategic Agreement and the transactions contemplated
thereby at any meeting of stockholders of Prodigy at which such matters
shall be submitted for adoption and approval and at all adjournments and
postponements thereof (or, if applicable, by any action of stockholders of
Prodigy by consent in lieu of a meeting).
5.5 Additional Covenants.
(a) Filings; Other Actions; Notification. (i) SBC and SBC Sub, on the one
hand, and Prodigy, Prodigy Sub and Operating Partnership, on the other
hand, shall cooperate with each other and use (and shall cause their
respective Subsidiaries to use) commercially reasonable efforts to take or
cause to be taken all actions, and do or cause to be done all things,
necessary, proper or advisable on its part under this Agreement and
applicable Laws to cause to be satisfied all of the conditions set forth in
Sections 3.2 and 3.3 of this Agreement and to consummate and make effective
each of the transactions contemplated by this Agreement and the Strategic
Agreement as soon as practicable, including preparing and filing as
promptly as practicable all documentation to effect all necessary notices,
reports and other filings and to obtain as promptly as practicable all
consents, registrations, approvals, Permits and authorizations necessary or
advisable to be obtained from any Third Party and/or any Governmental
Entity in order to consummate each of the transactions contemplated by this
Agreement and the Strategic Agreement and responding as promptly as
practicable to any inquiries received from any Governmental Entity in
connection therewith. Subject to applicable laws relating to the exchange
of information, Prodigy, Prodigy Sub, Operating Partnership, SBC and SBC
Sub each shall have the right to review in advance, and to the extent
practicable each will consult the other on, all the information relating to
Prodigy, Prodigy Sub, Operating Partnership, SBC or SBC Sub, as the case
may be, and any of their respective Subsidiaries, that may appear in any
filing made with, or written materials submitted to, any Third Party and/or
any Governmental Entity in connection with the transactions contemplated by
this Agreement and the Strategic Agreement. In exercising the foregoing
right, each of SBC, SBC Sub, Prodigy, Prodigy Sub and Operating Partnership
shall act reasonably and as promptly as practicable.
(ii) Except as provided in Section 5.4(a), SBC and SBC Sub, on the one
hand, and Prodigy, Prodigy Sub and Operating Partnership, on the other
hand, shall, upon request by the other, furnish the other with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or
advisable in connection with any statement, filing, notice or application
made by or on behalf of Prodigy, Prodigy Sub, Operating Partnership, SBC,
SBC Sub or any of their respective Subsidiaries to any Third Party and/or
any Governmental Entity in connection with the transactions contemplated by
this Agreement and the Strategic Agreement.
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(iii) SBC and SBC Sub, on the one hand, and Prodigy, Prodigy Sub and
Operating Partnership, on the other hand, each shall keep the other
apprised of the status of matters relating to completion of the
transactions contemplated by this Agreement and the Strategic Agreement,
including promptly furnishing the other with copies of notices or other
communications received by Prodigy, Prodigy Sub or Operating Partnership or
SBC or SBC Sub, as the case may be, or any of their respective
Subsidiaries, from any Third Party and/or any Governmental Entity with
respect to the transactions contemplated by this Agreement and the
Strategic Agreement. SBC and Prodigy each shall give prompt notice to the
other of any change that is reasonably likely to result in a material
adverse effect upon SBC or a Prodigy Material Adverse Effect, respectively.
(b) Additional Information and Confidentiality. Upon reasonable notice,
and subject to applicable Law, SBC and SBC Sub each agrees to provide
Prodigy, Prodigy Sub and Operating Partnership promptly with all
information which may be reasonably requested by Prodigy, Prodigy Sub or
Operating Partnership concerning the business, financial condition and
prospects of the SBC Internet Businesses. Upon reasonable notice, and
subject to applicable Law, Prodigy, Prodigy Sub and Operating Partnership
each agrees to provide SBC and SBC Sub promptly with all information which
may reasonably be requested by SBC or SBC Sub concerning its business,
financial condition and prospects. In addition, Prodigy, Prodigy Sub and
Operating Partnership shall afford SBC's officers, employees, counsel,
accountants and other authorized representatives access, during normal
business hours throughout the period prior to the consummation of the
Closing, to its properties, books, Contracts and records; provided that no
investigation pursuant to this Section 5.5(b) shall affect or be deemed to
modify any representation or warranty made by SBC, SBC Sub, Prodigy,
Prodigy Sub or Operating Partnership; provided, further, that the foregoing
shall not require SBC or SBC Sub, on the one hand, or Prodigy, Prodigy Sub
or Operating Partnership, on the other hand, to permit any inspection, or
to disclose any information, that in the reasonable judgment of SBC, SBC
Sub or Prodigy, Prodigy Sub or Operating Partnership, as the case may be,
would result in the disclosure of any trade secrets of third parties or
violate any of its obligations with respect to confidentiality if SBC or
SBC Sub or Prodigy, Prodigy Sub or Operating Partnership, as the case may
be, shall have used reasonable best efforts to obtain the consent of such
Third Party to such inspection or disclosure. Each of SBC and SBC Sub, on
the one hand, and Prodigy, Prodigy Sub and Operating Partnership, on the
other hand, agrees to keep all such information confidential and not to
disclose any such information to any third party or use it for its own
benefit unless (i) it receives the express written consent of SBC, SBC Sub,
Prodigy, Prodigy Sub or Operating Partnership, as the case may be, (ii)
such information otherwise becomes publicly available or
(iii) in its reasonable judgment it is required by applicable Law to do
so, and then only to the extent it is so required, in each case, to the
extent practicable, only after notice to and consultation with SBC, SBC
Sub, Prodigy, Prodigy Sub or Operating Partnership, as the case may be. In
the event that this Agreement is terminated prior to Closing, all
information (including all copies of any documents) obtained by one Party
from another pursuant to this paragraph shall be returned.
ARTICLE VI
Further Agreements
6.1 Directors of Prodigy.
(a) Prodigy hereby agrees that Prodigy shall at or prior to the Closing
Date cause three vacancies to be created on the board of directors of
Prodigy (by increasing the size of the board or otherwise) and at the
Closing (or such later date as shall be specified by SBC) the three persons
designated by SBC to be elected to the board of directors of Prodigy shall
be elected to the board of directors of Prodigy in accordance with the
Restated Certificate of Incorporation and the Amended and Restated By-Laws.
The designees of SBC shall serve on the board of directors of Prodigy in
accordance with the Restated Certificate of Incorporation and the Amended
and Restated By-Laws.
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(b) Except for the Executive Steering Committee (on which two of SBC's
designees elected to the board of directors of Prodigy shall be elected to
serve), Prodigy shall at or prior to the Closing cause at least one of
SBC's designees elected to the board of directors of Prodigy in accordance
with Section 6.1(a) above to be elected to serve on each committee of the
board of directors of Prodigy in accordance with the Amended and Restated
By-Laws.
(c) Prodigy agrees that any designees of SBC who are elected to serve on
the board of directors of Prodigy shall be furnished with all information
generally provided to the board of directors of Prodigy, shall have access
to information regarding Prodigy on a basis equal to that of the other
outside or its inside directors and shall be entitled to the same
perquisites as Prodigy's other outside directors. The designees of SBC
elected to serve on any committee of the board of directors of Prodigy
shall be provided with, and have access to, all information regarding
Prodigy provided to other members of such committee.
6.2 Assignments and Officers.
The management of Prodigy and Operating Partnership, including the Chairman
of the Board of Directors, Chief Executive Officer, Chief Operating Officer and
President shall be appointed in accordance with the Restated Certificate of
Incorporation and the Amended and Restated By-Laws and the Amended and Restated
Limited Partnership Agreement, respectively, to serve until such time as
provided in the Restated Certificate of Incorporation and the Amended and
Restated By-Laws and the Amended and Restated Limited Partnership Agreement,
respectively.
Other officers and managers shall be selected from among the officers and
managers of the Prodigy and SBC businesses, with a view towards selecting the
management team best able to preserve and increase the Retail ISP businesses
that will receive the Prodigy brand. The Chief Executive Officer of Prodigy
shall consult with an executive of SBC designated by SBC for transition and
regarding all executive appointments.
6.3 Company Headquarters.
The company headquarters will be in White Plains, New York, unless the board
of directors of Prodigy approves another location.
6.4 Cooperation.
Subject to the terms and conditions of this Agreement, Prodigy and SBC agree
to use their commercially reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective, as soon as reasonably practicable, the transactions contemplated by
this Agreement.
6.5 Publicity.
Between the date hereof and the Closing Date (or, if the Closing does not
occur, the date this Agreement terminates), Prodigy and SBC agree to consult
with each other and to coordinate the issuance of any press release or similar
public announcement or communication and prior to making any filings with any
Third Party and/or Governmental Entity (including any national securities
exchange) relating to the execution or performance of this Agreement or to the
transactions contemplated hereby; provided, however, that no Party shall be
restrained, after consultation with the other Parties, from making such
disclosure as it shall be advised by counsel it is required by Law or by the
applicable regulations of any stock exchange to make.
6.6 Registration Rights.
Prodigy shall comply with the provisions of the Registration Rights
Agreement.
6.7 Expenses.
Except as otherwise provided in Section 9.20 of this Agreement, whether or
not any of the transactions contemplated by this Agreement are consummated, all
costs and expenses incurred in connection with this
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Agreement and the transactions contemplated by this Agreement shall be paid by
the Party incurring such expense.
ARTICLE VII
Termination
7.1 Termination by Mutual Consent.
All or any portion of this Agreement may be terminated and any or all of the
Prodigy Contribution, the Unit Issuance and SBC Contribution and the Investment
Share Issuance may be abandoned at any time prior to the Closing, whether
before or after the receipt of Prodigy Stockholder Approval, by mutual written
consent of SBC and Prodigy by action of their respective boards of directors.
7.2 Termination by Either Prodigy or SBC.
Prodigy may, by action of its board of directors, terminate this Agreement
and SBC may, by action of its board of directors, terminate this Agreement, and
the Prodigy Contribution, the Unit Issuance and SBC Contribution and the
Investment Share Issuance, in the case of a termination by Prodigy, and the
Unit Issuance and SBC Contribution and Investment Share Issuance, in the case
of a termination by SBC, may be abandoned at any time prior to the Closing if
(a) the Prodigy Contribution, the Unit Issuance and SBC Contribution and the
Investment Share Issuance, in the case of Prodigy, or the Unit Issuance and SBC
Contribution and Investment Share Issuance, in the case of SBC, shall not have
been consummated by June 1, 2000 whether such date is before or after the date
of the receipt of Prodigy Stockholder Approval (the "Termination Date"), (b)
Prodigy Stockholder Approval shall not have been obtained at a meeting(s) duly
convened therefor or at any adjournment or postponement thereof or pursuant to
consent given in accordance with Section 228 of the Delaware General
Corporation Law and the certificate of incorporation and by-laws of Prodigy
prior to the Termination Date, (c) the approval of The Nasdaq Stock Market
referred to in Sections 3.2(f)(ii) and 3.3(f)(ii) shall not have been obtained
prior to the Termination Date or (d) any Order permanently restraining,
enjoining or otherwise prohibiting consummation of the Unit Issuance and SBC
Contribution or Investment Share Issuance, in the case of SBC, or the Prodigy
Contribution, the Unit Issuance and SBC Contribution or the Investment Share
Issuance, in the case of Prodigy, shall become final and non-appealable whether
before or after the receipt of Prodigy Stockholder Approval; provided, that the
right to terminate any or all of this Agreement pursuant to this Section 7.2
shall not be available to any Party that has breached in any material respect
its obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure of the transactions contemplated
hereby to be consummated.
7.3 Termination by SBC.
(a) SBC may, by action of its board of directors, terminate its
obligations and rights under this Agreement and the Unit Issuance and SBC
Contribution and Investment Share Issuance may be abandoned at any time
prior to the Closing, whether before or after the receipt of Prodigy
Stockholder Approval, by action of the board of directors of SBC if there
has been a material breach by Prodigy, Prodigy Sub or Operating Partnership
of any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by SBC to the Party committing
such breach or if either of the Stockholders (as defined in the Voting
Agreement) shall not execute and deliver to SBC the Voting Agreement and
the irrevocable proxy required thereby at or prior to the date hereof.
(b) This Agreement may be terminated and the Unit Issuance and SBC
Contribution and the Investment Share Issuance may be abandoned at any time
prior to the Closing, whether before or after the receipt of Prodigy
Stockholder Approval, by action of the board of directors of SBC if any of
the
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conditions set forth in Section 3.2 of this Agreement has not been
satisfied as of the Termination Date or if satisfaction of such a condition
is or becomes impossible (other than through the failure of SBC or SBC Sub
to comply fully with its respective obligations hereunder) and SBC has not
waived such condition on or before the Termination Date.
7.4 Termination by Prodigy.
(a) This Agreement may be terminated and the Prodigy Contribution, the
Unit Issuance and SBC Contribution and the Investment Share Issuance may be
abandoned at any time prior to the receipt of Prodigy Stockholder Approval
by action of the board of directors of Prodigy in accordance with Section
5.3(b) of this Agreement.
(b) This Agreement may be terminated and the Prodigy Contribution, the
Unit Issuance and SBC Contribution and the Investment Share Issuance may be
abandoned at any time prior to the Closing, whether before or after the
receipt of Prodigy Stockholder Approval, by action of the board of
directors of Prodigy if there has been a material breach by SBC or SBC Sub
of any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by Prodigy to the Party
committing such breach.
(c) This Agreement may be terminated and the Prodigy Contribution, the
Unit Issuance and SBC Contribution and the Investment Share Issuance may be
abandoned at any time prior to the Closing, whether before or after the
receipt of Prodigy Stockholder Approval, by action of the board of
directors of Prodigy, if any of the conditions set forth in Section 3.3 of
this Agreement has not been satisfied as of the Termination Date or if
satisfaction of such a condition is or becomes impossible (other than
through the failure of Prodigy, Prodigy Sub or Operating Partnership to
comply fully with its respective obligations hereunder) and Prodigy has not
waived such condition on or before the Termination Date.
7.5 Effect of Termination and Abandonment.
In the event of termination of this Agreement and the abandonment of the
Prodigy Contribution, the Unit Issuance and SBC Contribution and Investment
Share Issuance pursuant to this Article VII, this Agreement (other than this
Section 7.5 and Sections 6.7 (Expenses), 9.2 (Governing Law), 9.3 (Venue;
WAIVER OF JURY TRIAL) and 9.19 (Confidentiality), which shall remain in full
force and effect) shall become void and of no effect and no Party hereto (or of
any of its directors, officers, employees, agents, legal and financial advisors
or other representatives) shall have any liability or further obligation to any
other Party hereto, except as provided in this Section 7.5; provided, however,
that if this Agreement is terminated by a Party because of the breach of this
Agreement by the other Party or because one or more of the conditions to the
terminating Party's obligations under this Agreement is not satisfied as a
result of the other Party's failure to comply with its obligations under this
Agreement, the terminating Party's rights to pursue all legal remedies will
survive such termination unimpaired. Notwithstanding the foregoing, Prodigy
shall, within two business days after termination of this Agreement, pay SBC
$45 million if this Agreement is terminated by Prodigy pursuant to Section
7.4(a) hereof.
ARTICLE VIII
Survival and Indemnification
8.1 Survival.
Notwithstanding (a) the making of this Agreement, (b) any investigation or
examination conducted with respect to, or any knowledge acquired (or capable of
being acquired) about the accuracy or inaccuracy of or compliance with, any
representation, warranty, covenant, agreement, undertaking or obligation made
by or on behalf of the Parties hereto, (c) the waiver of any condition based on
the accuracy of any representation or warranty, or on the performance of or
compliance with any covenant, agreement, undertaking or obligation, and (d) the
Closing hereunder:
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(i) All of the representations and warranties of the Parties contained in
this Agreement and any other certificate or document delivered pursuant to
this Agreement shall survive the Closing until the first anniversary of the
Closing Date, except for the representations and warranties contained in
(A) Section 4.1(k) (Capitalization) and Section 4.1(s)(Environmental
Matters) both of which shall survive
the execution and delivery of this Agreement and the Closing indefinitely,
and (B) Section 4.1(l) (Taxes) and Section 4.1(r) (Employee Matters), which
shall survive the execution and delivery of this Agreement and the Closing
until 90 days after the expiration of all relevant statutes of limitations
(and any extensions thereof).
(ii) All of the covenants, agreements, undertakings and obligations of
the Parties contained in this Agreement and any other certificate or
document delivered pursuant to this Agreement shall survive until fully
performed or fulfilled, unless non-compliance with such covenants,
agreements, undertakings or obligations is waived in writing by the Party
or Parties entitled to such performance.
No claim for indemnification, reimbursement or any other remedy pursuant to
Sections 8.2 and 8.3 hereof may be brought with respect to breaches of
representations or warranties contained herein after the applicable
expiration date set forth in clause (i) of this Section 8.1; provided,
however, that if, prior to such applicable date, a Party hereto shall have
notified the other Party hereto in writing of a claim for indemnification
under this Article VIII (whether or not formal legal action shall have been
commenced based upon such claim), such claim shall continue to be subject
to indemnification in accordance with this Article VIII notwithstanding
such expiration date.
8.2 Indemnification and Reimbursement by Prodigy.
Prodigy shall indemnify and hold harmless SBC and its successors, assigns,
stockholders, controlling persons, officers, directors, employees, agents,
representatives and Affiliates or direct or indirect owners of any of the
foregoing (collectively, the "SBC Indemnified Persons") from and against, and
shall reimburse the SBC Indemnified Persons for, any and all Damages incurred
thereby or caused thereto based on, arising out of, resulting from, relating
to, or in connection with:
(a) Any breach of or inaccuracy in any representation or warranty made by
Prodigy, Prodigy Sub or Operating Partnership in this Agreement or any
other certificate or document delivered by Prodigy, Prodigy Sub or
Operating Partnership pursuant to this Agreement, other than those, if any,
that have been waived in writing by SBC;
(b) Any breach or violation of or failure to fully perform any covenant,
agreement, undertaking or obligation of Prodigy, Prodigy Sub or Operating
Partnership set forth in this Agreement, other than those, if any, that
have been waived in writing by SBC; or
(c) Any claim by any Person for brokerage or finder's fees or commissions
or similar payments based upon any agreement or understanding alleged to
have been made by any such Person with Prodigy, Prodigy Sub or Operating
Partnership or any Prodigy Subsidiary (or any Person acting on their
behalf) in connection with any of the transactions contemplated herein.
For purposes of this Article VIII and for purposes of determining whether
SBC is entitled to indemnification from Prodigy pursuant to this Section
8.2 and for calculating Damages hereunder, any breach of or inaccuracy in
any representation or warranty of Prodigy shall be determined without
regard to any materiality qualifications set forth in such representation
or warranty, and all references to the terms "material", "materially",
"materiality", "Prodigy Material Adverse Effect" or any similar terms shall
be ignored for purposes of determining whether such representation or
warranty was true and correct when made.
8.3 Indemnification and Reimbursement by SBC.
SBC shall indemnify and hold harmless Prodigy and its successors, assigns,
stockholders, controlling persons, officers, directors, employees, agents,
representatives and Affiliates or direct or indirect owners of any
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of the foregoing (collectively, the "Prodigy Indemnified Persons") from and
against, and shall reimburse the Prodigy Indemnified Persons for, any and all
Damages incurred thereby or caused thereto based on, arising out of, resulting
from, relating to, or in connection with:
(a) any breach of or inaccuracy in any representation or warranty made by
SBC or SBC Sub in this Agreement or in any other certificate or document
delivered by SBC or SBC Sub pursuant to this Agreement, other than those,
if any, that have been waived in writing by Prodigy;
(b) any breach or violation of or failure to fully perform any covenant,
agreement, undertaking or obligation of SBC or SBC Sub set forth in this
Agreement, other than those, if any, that have been waived in writing by
Prodigy; or
(c) any claim by any Person for brokerage or finder's fees or commissions
or similar payments based upon any agreement or understanding alleged to
have been made by any such Person with SBC or SBC Sub (or any Person acting
on its behalf) in connection with any of the transactions contemplated
herein.
For purposes of this Article VIII and for purposes of determining whether
Prodigy is entitled to indemnification from SBC pursuant to this Section
8.3 and for calculating Damages hereunder, any breach of or inaccuracy in
any representation or warranty of SBC shall be determined without regard to
any materiality qualifications set forth in such representation or
warranty, and all references to the terms "material", "materially",
"materiality", "material adverse effect" or any similar terms shall be
ignored for purposes of determining whether such representation or warranty
was true and correct when made.
8.4 Limitations on Amount--Prodigy.
(a) Prodigy shall not be liable for Damages arising in connection with
its indemnification obligations under Section 8.2 hereof until the amount
of such Damages exceeds $30 million, in the aggregate. If the aggregate
amount of such Damages exceeds $30 million, Prodigy shall be liable for all
such Damages, including the first $30 million. No breach of any
representation or warranty, covenant or agreement shall be deemed to have
occurred unless the actual Damages incurred as a result thereof is in
excess of $5 million.
(b) The limitations set forth in this Section 8.4 will not apply to any
intentional or willful breach of any of Prodigy's representations and
warranties or any intentional or willful breach by either Prodigy or any
Subsidiary of Prodigy of any covenant, agreement, undertaking or
obligation, and Prodigy shall be liable for all Damages with respect to
such breach or breaches.
8.5 Limitations on Amount--SBC.
(a) SBC shall not be liable for Damages arising in connection with its
indemnification obligations under Section 8.3 hereof until the amount of
such Damages exceeds $30 million, in the aggregate. If the aggregate amount
of such Damages exceeds $30 million, SBC shall be liable for all such
Damages, including the first $30 million. No breach of any representation
or warranty, covenant or agreement shall be deemed to have occurred unless
the actual Damages incurred as a result thereof is in excess of $5 million.
(b) The limitations set forth in this Section 8.5 will not apply to any
intentional or willful breach of any of SBC's representations and
warranties or any intentional or willful breach by either SBC or any
Subsidiary of SBC of any covenant, agreement, undertaking or obligation,
and SBC shall be liable for all Damages with respect to such breach or
breaches.
8.6 Notice and Payment of Claims.
(a) Notice. The Party entitled to indemnification pursuant to this
Article VIII (the "Indemnified Party") shall notify the Party liable for
indemnification pursuant to this Article VIII (the "Indemnifying Party")
within ten (10) days after becoming aware of, and shall provide to the
Indemnifying Party as soon as practicable thereafter all information and
documentation necessary to support and verify, any Damages
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that the Indemnified Party shall have determined to have given or is
reasonably likely to give rise to a claim for indemnification hereunder,
and the Indemnifying Party shall be given access to all books and records
in the possession or under the control of the Indemnified Party which the
Indemnifying Party reasonably determines to be related to such claim.
Notwithstanding the foregoing, the failure to so notify the Indemnifying
Party shall not relieve the Indemnifying Party of any liability that it may
have to any Indemnified Party, except to the extent that the Indemnifying
Party demonstrates that it is prejudiced by the Indemnified Party's failure
to give such notice.
(b) Payment. In the event an action for indemnification under this
Article VIII shall have been finally determined, such final determination
shall be paid by the Indemnifying Party to the Indemnified Party on demand
in immediately available funds in U.S. dollars; provided, however, that any
payments to SBC Indemnified Persons shall be increased by a factor of 1.75
(subject to proportionate reduction based on reductions in SBC's voting
interest in Prodigy, if any). An action, and the liability for and amount
of Damages therefor, shall be deemed to be "finally determined" for
purposes of this Article VIII when the parties to such action have so
determined by mutual agreement or, if disputed, when a final non-appealable
Order shall have been entered.
(c) Interest. Any amounts not paid when due pursuant to this Article VIII
shall bear interest from the date thereof until the date paid at a rate
equal to 6% per annum.
8.7 Procedure for Indemnification--Third Party Claims.
(a) Upon receipt by an Indemnified Party of notice of the commencement of
any action by a Third Party (a "Third Party Claim") against it, such
Indemnified Party shall, if a claim is to be made against an Indemnifying
Party under this Article VIII, give notice to the Indemnifying Party of the
commencement of such Third Party Claim as soon as practicable, but in no
event later than ten (10) days after the Indemnified Party shall have been
served, but the failure to so notify the Indemnifying Party shall not
relieve the Indemnifying Party of any liability that it may have to any
Indemnified Party, except to the extent that the Indemnifying Party
demonstrates that the defense of such Third Party Claim is prejudiced by
the Indemnified Party's failure to give such notice.
(b) If a Third Party Claim is brought against an Indemnified Party and it
gives proper notice to the Indemnifying Party of the commencement of such
Third Party Claim, the Indemnifying Party will, unless the claim involves
Taxes, be entitled to participate in such Third Party Claim and, to the
extent that it wishes (unless (i) the Indemnifying Party is also a party to
such Third Party Claim and the Indemnified Party determines in good faith
that joint representation would be inappropriate, or (ii) the Indemnifying
Party fails to provide reasonable assurance to the Indemnified Party of its
financial capacity to defend such Third Party Claim and provide
indemnification with respect to such Third Party Claim) to assume the
defense of such Third Party Claim with counsel satisfactory to the
Indemnified Party and, after notice from the Indemnifying Party to the
Indemnified Party of its election to assume the defense of such Third Party
Claim, the Indemnifying Party shall not, as long as it legitimately
conducts such defense, be liable to the Indemnified Party under this
Article VIII for any fees of other counsel or any other expenses with
respect to the defense of such Third Party Claim, in each case subsequently
incurred by the Indemnified Party in connection with the defense of such
Third Party Claim, other than reasonable costs of investigation.
If the Indemnifying Party assumes the defense of a Third Party Claim, (i) it
shall be conclusively established for purposes of this Agreement that the
claims made in such Third Party Claim are within the scope of and subject to
indemnification; (ii) no compromise, discharge or settlement of, or admission
of liability in connection with, such claims may be effected by the
Indemnifying Party without the Indemnified Party's written consent (which
consent shall not be unreasonably withheld or delayed) unless (A) there is no
finding or admission of any violation of Law or any violation of the rights of
any Person and no effect on any other claims that may be made against the
Indemnified Party, and (B) the sole relief provided is monetary damages that
are paid in full by the Indemnifying Party; (iii) the Indemnifying Party shall
have no liability with respect to any compromise or settlement of such claims
effected without its written consent; and (iv) the Indemnified
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Party shall cooperate in all reasonable respects with the Indemnifying Party in
connection with such defense, and shall have the right to participate, at the
Indemnified Party's sole expense, in such defense, with counsel selected by it.
If proper notice is given to an Indemnifying Party of the commencement of any
Third Party Claim and the Indemnifying Party does not, within ten (10) days
after the Indemnified Party's notice is given, give notice to the Indemnified
Party of its election to assume the defense of such Third Party Claim, the
Indemnifying Party shall be bound by any determination made in such Third Party
Claim or any compromise or settlement effected by the Indemnified Party.
(c) Notwithstanding the foregoing, if an Indemnified Party determines in
good faith that there is a reasonable probability that a Third Party Claim
may materially adversely affect it or its successors, assigns,
stockholders, controlling persons, officers, directors, employees, agents,
representatives or Affiliates or direct or indirect owners of any of the
foregoing other than as a result of monetary damages for which it could be
entitled to indemnification under this Agreement, the Indemnified Party
may, by notice to the Indemnifying Party, assume the exclusive right to
defend, compromise, or settle such Third Party Claim, but the Indemnifying
Party shall not be bound by any determination of a Third Party Claim so
defended or any compromise or settlement effected without its written
consent (which may not be unreasonably withheld or delayed).
(d) The Indemnifying Party hereby consents to the non-exclusive
jurisdiction of any court in which a Third Party Claim is brought against
the Indemnified Party for purposes of any claim that the Indemnified Party
may have under this Agreement with respect to such Third Party Claim or the
matters alleged therein, and agree that process may be served on the
Indemnifying Party with respect to such a claim anywhere in the world.
8.8 Other Indemnification Provisions.
The indemnification rights provided by this Article VIII shall be the
exclusive remedy of any Indemnified Party hereunder seeking money damages with
respect to any breach or violation of, or failure to fully perform, any
covenant, agreement, undertaking, or obligation of the Parties set forth in
this Agreement. Notwithstanding the foregoing, any Indemnified Party hereunder
shall have the right to seek specific performance or other injunctive relief
with respect to any breach or violation of, or failure to fully perform, any
covenant, agreement, undertaking, or obligation of the Parties set forth in
this Agreement.
ARTICLE IX
Miscellaneous
9.1 Assignment.
Neither this Agreement nor any rights or obligations hereunder may be
assigned by any Party without the prior written consent of the other Parties
hereto. Any attempted assignment that does not comply with this Section 9.1
shall be void.
9.2 Governing Law.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH AND SUBJECT TO THE LAWS OF THE
STATE OF DELAWARE, WITHOUT REFERENCE TO CONFLICTS OF LAWS PRINCIPLES.
9.3 Venue; WAIVER OF JURY TRIAL.
The parties hereby irrevocably submit to the jurisdiction of the courts of
the State of Delaware and the Federal court of the United States of America
located in the State of Delaware solely in respect of the interpretation and
enforcement of the provisions of this Agreement and of the documents governed
by
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Delaware law referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 9.5 of this Agreement or in such
other manner as may be permitted by Law shall be valid and sufficient service
thereof.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.3.
9.4 Counterparts.
This Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and may be executed by
facsimile signature. All counterparts shall collectively constitute one and the
same Agreement.
9.5 Notices
In any case where any notice or other communication is required or permitted
to be given hereunder, such notice or communication shall be in writing and
deemed to have been duly given and delivered: (a) if delivered in person, on
the date of such delivery; (b) if sent by overnight express or registered or
certified mail (with return receipt requested), on the date of receipt of such
mail; or (c) if sent by confirmed facsimile transmission (with answer back
received), on the date of such facsimile transmission provided that notice is
also sent on the same day by one of the methods set forth in (a) or (b) above.
Such notice or other communication shall be sent to the following address(es)
(or such other address(es) as a Party may designate from time to time in
writing):
If to SBC or SBC Sub:
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Facsimile: 210-351-5034
Attention: James S. Kahan
Senior Vice President
Corporate Development
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With copies, which shall not constitute notice, to:
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Facsimile: 210-351-3488
Attention: Senior Counsel--M&A
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Facsimile: 212-558-3588
Attention: Joseph B. Frumkin
Keith A. Pagnani
If to Prodigy, Prodigy Sub or Operating Partnership:
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
Facsimile: 914-448-8198
Attention: Andrea S. Hirsch
With a copy, which shall not constitute notice, to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: 617-526-5000
Attention: David Westenberg
9.6 Entire Agreement.
The terms and conditions contained in this Agreement (including the exhibits
and schedules attached hereto) constitute the entire agreement between or among
the Parties relating to the subject matter of this Agreement and shall
supersede all previous communications between the Parties with respect to the
subject matter of this Agreement. No Party has entered into this Agreement in
reliance upon any representation, warranty, covenant or undertaking of any
other Party that is not set out or referred to in this Agreement.
9.7 Amendment.
Except as expressly provided otherwise in this Agreement, this Agreement may
be varied, amended or extended only by written agreement executed and delivered
by duly authorized officers or representatives of the respective Parties.
9.8 Severability.
In the event that any provision of this Agreement is held to be illegal,
invalid or unenforceable in a final, unappealable Order or judgment (each such
provision, an "invalid provision"), then such provision shall be severed from
this Agreement and shall be inoperative, and the Parties promptly shall
negotiate in good faith a lawful, valid and enforceable provision that is as
similar to the invalid provision as may be possible and that preserves the
original intentions and economic positions of the Parties as set forth herein
to the maximum extent feasible, while the remaining provisions of this
Agreement shall remain binding on the Parties hereto. Without limiting the
generality of the foregoing sentence, in the event a change in any applicable
Law, rule or regulation makes it unlawful for a Party to comply with any of its
obligations hereunder, the Parties shall negotiate in good faith a modification
to such obligation to the extent necessary to comply with such Law, rule
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or regulation that is as similar in terms to the original obligation as may be
possible while preserving the original intentions and economic positions of the
as set forth herein to the maximum extent feasible.
9.9 Headings; Recitals.
The descriptive headings of the articles and sections of this Agreement and
its Schedules and Exhibits and the recitals herein are inserted for convenience
only and do not constitute a part of this Agreement.
9.10 No Waiver of Rights.
No failure or delay on the part of a Party in the exercise of any power or
right hereunder shall operate as a waiver thereof. No single or partial
exercise of any right or power hereunder shall operate as a waiver of such
right or of any other right or power. The waiver by any Party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver
of any other or subsequent breach hereunder. No waiver shall be effective
unless in writing signed by the waiving Party.
9.11 Remedies Cumulative.
Unless expressly provided otherwise herein, all rights and remedies granted
to each Party under this Agreement are cumulative and in addition to, and not
in lieu of, any other rights or remedies otherwise available to such Party at
law or in equity.
9.12 No Agency.
Each of the Parties hereto is an independent contractor and shall have no
right, power or authority to assume or create any obligation or responsibility
on behalf of any of the other Parties. This Agreement shall not create or
imply, or be construed to create or imply, any partnership, association,
agency, or joint venture between or among the Parties.
9.13 No Third Party Beneficiaries
This Agreement is entered into solely among, and may be enforced only by, the
Parties hereto. This Agreement shall not be deemed to create any rights in any
third parties, including suppliers, customers and employees of any Party, or to
create any obligations of a Party to any such third parties.
9.14 Force Majeure
If any circumstance beyond the reasonable control of any Party occurs which
delays or renders impossible the performance of that Party's obligations under
this Agreement on the dates herein provided, such obligation shall be postponed
for such time as such performance necessarily has had to be suspended or
delayed on account thereof, provided such Party shall notify the other Parties
in writing as soon as practicable, but in no event more than ten days, after
the occurrence of such force majeure. In such event, the Parties shall meet
promptly to determine an equitable solution to the effects of any such event,
provided that such Partner who fails because of force majeure to perform its
obligations hereunder shall use commercially reasonable efforts to implement
work-arounds or otherwise minimize the length of the delay and to resume
promptly performance upon the cessation of the force majeure. Events of force
majeure shall include war, revolution, invasion, insurrection, riots, mob
violence, sabotage or other civil disorders, power outages, and acts of God;
provided, however, that, in the event that a change in any applicable Law, rule
or regulation makes it unlawful for a Party to comply with any of its
obligations hereunder and could be considered an event of force majeure, the
characterization of such change in Law, rule or regulation as an event of force
majeure shall be without prejudice to the obligations of the Parties under
Section 9.8 above.
9.15 Further Assurances; Affiliates.
In addition to any other obligations set forth in the Agreement, each Party
agrees to take such action (including, but not limited to, the execution,
acknowledgment and delivery of documents) as may reasonably be requested by the
other Party for the implementation or continuing performance of this Agreement.
Unless
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otherwise expressly set forth herein, any agreement by a Party to take or
refrain from taking any action shall constitute an agreement by such Party to
cause each of its Subsidiaries, and to use all reasonable best efforts to cause
each of its Affiliates, to so act or refrain from acting.
9.16 Export Controls.
Each Party agrees to comply fully with all relevant export laws and
regulations of the United Sates to ensure that no information or technical data
provided pursuant to this Agreement is exported or re-exported directly or
indirectly in violation of Law.
9.17 Negotiated Terms.
Each Party acknowledges that the provisions of this Agreement were negotiated
to reflect an informed, voluntary allocation between the Parties of all risks
(both known and unknown) associated with the transactions contemplated by this
Agreement.
9.18 Principles of Construction.
In this Agreement and all other attached Schedules, Exhibits or Attachments
to this Agreement, unless otherwise expressly indicated or required by the
context:
(a) reference to and the definition of any document shall be deemed a
reference to such document as it may be amended, supplemented, revised, or
modified, in writing, from time to time but disregarding any amendment,
supplement, replacement or novation made in breach of this Agreement;
(b) references in this Agreement to any statute, decree or regulation
shall be construed as a reference to such statute, Law, decree or
regulation as re-enacted, redesignated, amended or extended from time to
time and references herein or in this Agreement to any document or
agreement shall be deemed to include references to such document or
agreement as amended, varied, supplemented or replaced from time to time in
accordance with such document's or agreement's terms;
(c) defined terms in the singular shall include the plural and vice
versa, and the masculine, feminine or neuter gender shall include all
genders;
(d) the words "including" or "includes" shall be deemed to mean
"including without limitation" and "including but not limited to" (or
"includes without limitation" and "includes but is not limited to")
regardless of whether the words "without limitation" or "but not limited
to" actually follow the term;
(e) accounting terms used herein but not defined herein shall have their
respective meanings provided under GAAP;
(f) the words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement or its Schedules or Exhibits shall refer
to this Agreement and its Schedules and Exhibits as a whole and not to any
particular provision hereof or thereof, as the case may be; and
(g) any reference herein to a time of day means the time of day in New
York, New York.
9.19 Confidentiality.
The Parties shall maintain the confidentiality of this Agreement and of any
provisions of this Agreement in accordance with any applicable laws, rules and
regulations.
9.20 Transfer Taxes.
All Transfer Taxes imposed on transfers to Operating Partnership pursuant to
this Agreement shall be paid by Prodigy.
9.21 Legend.
The share certificates evidencing the SBC Units and the share certificate
evidencing the Investment Share (unless a registration statement under the
Securities Act with respect to such SBC Units or Investment Share is
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<PAGE>
then effective) shall bear the following legend until such time as SBC or any
transferee thereof delivers an opinion of counsel reasonably acceptable to
Prodigy to the effect that such legend is no longer required under the
Securities Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, NOR REGISTERED OR QUALIFIED UNDER ANY STATE
SECURITIES LAWS, AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS SO REGISTERED OR AN EXEMPTION THEREFROM IS
AVAILABLE.
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IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to
be duly executed in its name and on its behalf, all as of the date first above
written.
SBC COMMUNICATIONS INC.
By: /s/ James S. Kahan
-----------------------------------
Name: James S. Kahan
Title: Senior Executive Vice
President of Corporate
Development
SBC INTERNET COMMUNICATIONS, INC.
By: /s/ Stephen A. McGaw
-----------------------------------
Name: Stephen A. McGaw
Title: President
PRODIGY COMMUNICATIONS CORPORATION
By: /s/ Andrea S. Hirsch
-----------------------------------
Name: Andrea S. Hirsch
Title: Executive Vice President
and General Counsel
PRODIGY TRANSITION CORPORATION
By: /s/ Andrea S. Hirsch
-----------------------------------
Name: Andrea S. Hirsch
Title: Vice President and General
Counsel
PRODIGY COMMUNICATIONS LIMITED
PARTNERSHIP
By: Prodigy Communications
Corporation, as general partner
of Prodigy Communications Limited
Partnership
By: /s/ Andrea S. Hirsch
-----------------------------------
Name: Andrea S. Hirsch
Title: Executive Vice President
and General Counsel
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<PAGE>
ANNEX D
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
FOR
PRODIGY COMMUNICATIONS LIMITED PARTNERSHIP
By and Among
PRODIGY COMMUNICATIONS CORPORATION
SBC INTERNET COMMUNICATIONS, INC.
and
PRODIGY TRANSITION CORPORATION
Dated as of , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
ARTICLE 1 OFFICES AND PURPOSES; DEFINITIONS........................... D-1
1.1 Principal Office............................................. D-1
1.2 Registered Office and Agent.................................. D-1
1.3 Purposes and Powers.......................................... D-1
1.4 Definitions.................................................. D-2
ARTICLE 2 PARTNERS AND FINANCIAL MATTERS.............................. D-5
2.1 Identity of Partners......................................... D-5
2.2 Limitation of Liability of Partners.......................... D-5
2.3 Initial Capital Contributions................................ D-5
2.4 Additional Capital Contributions............................. D-5
2.5 Initial Percentage Interests and Units....................... D-5
2.6 Withdrawals of Capital; Interest............................. D-6
2.7 Tax Classification and Treatment............................. D-6
2.8 Tax Allocations and Capital Accounts......................... D-6
2.9 Distributions................................................ D-8
2.10 Accounting and Books of Account.............................. D-10
2.11 Tax Returns.................................................. D-10
2.12 Banking...................................................... D-10
2.13 Tax Matters Partner.......................................... D-10
2.14 Reports...................................................... D-10
2.15 Freedom of Action............................................ D-11
2.16 Tax Elections and Accounting................................. D-11
ARTICLE 3 MANAGEMENT.................................................. D-12
3.1 General Partner.............................................. D-12
3.2 Officers..................................................... D-13
ARTICLE 4 ACTIONS BY PARTNERS......................................... D-13
4.1 Meetings..................................................... D-13
4.2 Quorum for Meetings and Vote of the Partners................. D-14
4.3 Written Action without a Meeting; Telephone Meetings......... D-14
4.4 Proxies...................................................... D-14
ARTICLE 5 DISSOLUTION AND LIQUIDATION................................. D-14
5.1 Events of Dissolution........................................ D-14
5.2 Procedure Upon Dissolution................................... D-14
5.3 Liquidating Trustee.......................................... D-15
5.4 Powers of the Liquidating Trustee............................ D-15
5.5 Duties of Liquidating Trustee................................ D-16
5.6 Withdrawal of Limited Partners............................... D-16
5.7 Indemnification of Liquidating Trustee....................... D-16
5.8 Contributions for Deficiencies............................... D-16
ARTICLE 6 INDEMNIFICATION............................................. D-16
6.1 General...................................................... D-16
6.2 Nonexclusivity............................................... D-17
6.3 Enforcement.................................................. D-17
6.4 Insurance.................................................... D-17
ARTICLE 7 TRANSFERABILITY OF UNITS.................................... D-18
7.1 Transfer of Units............................................ D-18
7.2 Transfer of General Partner Interests........................ D-18
</TABLE>
D-i
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
ARTICLE 8 UNITS; CERTIFICATES......................................... D-18
8.1 Certificates................................................. D-18
8.2 Lost or Destroyed Certificates............................... D-19
8.3 Transfer of Units............................................ D-19
8.4 Exchange of Units............................................ D-19
8.5 Combinations and Subdivisions................................ D-20
8.6 Incentive Plans; Registered and Private Offerings............ D-20
ARTICLE 9 MISCELLANEOUS............................................... D-21
9.1 Amendment of this Agreement.................................. D-21
9.2 Governing Law................................................ D-21
9.3 Counterparts................................................. D-21
9.4 Headings; Recitals........................................... D-21
9.5 Integration.................................................. D-21
9.6 Severability................................................. D-21
9.7 Notices...................................................... D-22
9.8 Further Assurances........................................... D-23
9.9 No Third Party Beneficiaries................................. D-23
9.10 Assignment................................................... D-23
9.11 Successors and Assigns....................................... D-23
9.12 No Agency.................................................... D-23
9.13 Consent to Jurisdiction; Venue; WAIVER OF JURY TRIAL......... D-23
9.14 Equitable Remedies........................................... D-24
9.15 Principles of Construction................................... D-24
9.16 No Waiver of Rights.......................................... D-24
9.17 Force Majeure................................................ D-24
9.18 Negotiated Terms............................................. D-25
</TABLE>
D-ii
<PAGE>
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
FOR PRODIGY COMMUNICATIONS LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (as amended from time
to time in accordance with its terms, this "Agreement"), dated as of ,
2000, by and among Prodigy Communications Corporation, a Delaware corporation
(in its capacity as general partner of the Partnership, together with any
additional or substitute general partners of the Partnership, the "General
Partner" or "Public Corp."), Prodigy Transition Corporation, a Delaware
corporation, as the Initial Limited Partner (the "Initial Limited Partner"),
and SBC Internet Communications, Inc., a Delaware corporation ("SBC Partner").
This Agreement constitutes the "limited partnership agreement" for PRODIGY
COMMUNICATIONS LIMITED PARTNERSHIP (the "Partnership"), a limited partnership
formed under the Delaware Revised Uniform Limited Partnership Act, as amended
from time to time (the "Act"). Capitalized terms used but not defined herein
shall have the meaning assigned to such terms in the Investment Agreement (as
defined below).
WHEREAS, the Partnership was formed as a limited partnership pursuant to the
Act by the filing of a Certificate of Limited Partnership with the Office of
the Secretary of State of Delaware on November 19, 1999, and in connection
therewith, the General Partner and the Initial Limited Partner entered into a
Limited Partnership Agreement of the Partnership, dated as of November 19, 1999
(the "Original Partnership Agreement");
WHEREAS, the parties hereto desire to amend and to restate the Original
Partnership Agreement to provide for the admission of SBC Partner, as a Limited
Partner and the withdrawal of the Initial Limited Partner from the Partnership
and to establish the respective rights and obligations of SBC Partner and the
General Partner with respect to the Partnership.
Now therefore, in consideration of the respective covenants and agreements
contained herein, the Original Partnership Agreement is hereby amended and
restated in its entirety as follows:
ARTICLE 1
Offices and Purposes; Definitions
1.1 Principal Office. The principal office of the Partnership shall be
located at such place as may be determined by the General Partner. The
principal office may be changed by the General Partner at any time. The
Partnership may have such other offices as the General Partner may designate or
as the business of the Partnership may from time to time require.
1.2 Registered Office and Agent. The registered office of the Partnership, as
required by the Act to be maintained in the State of Delaware, shall be located
at 1209 Orange Street, Wilmington, Delaware 19801, and the original registered
agent at such address shall be The Corporation Trust Company. The registered
office and registered agent may be changed from time to time by the General
Partner and by the filing of the prescribed forms with and the payment of any
prescribed fees to the Delaware Secretary of State.
1.3 Purposes and Powers. The Partnership has been formed for the following
purposes:
(i) To create, manage, operate and market an Internet access service
providing broadband and narrowband Internet access targeted at consumers
and small businesses in the United States and to engage in any and all
legal action in furtherance thereof; and
(ii) Subject to Sections 2.1 and 3.1 of the By-Laws, the Partnership
shall have the power to do any and all acts necessary, appropriate, proper,
advisable, incidental or convenient to or for the furtherance of the
purposes and the Business, and shall have, without limitation (other than
the limitations imposed by Sections 2.1 and 3.1 of the By-Laws), any and
all of the powers that may be exercised on behalf of the Partnership by the
General Partner pursuant to this Agreement.
D-1
<PAGE>
1.4 Definitions. As used herein, the following terms have the following
meanings:
"Affiliate" of any specified Person means any other Person that directly,
or indirectly through one or more intermediaries, Controls, is Controlled
by, or is under common Control with the specified Person.
"Bankruptcy" means with respect to any Person (a) the entry of a decree
or order by a court having jurisdiction in the premises judging such Person
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjudication or composition of or in respect
of such Person under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
such Person or of any substantial part of its property or ordering the
winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 60 consecutive days;
or (b) the institution by such Person of proceedings to be adjudicated
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law, or the consent by it to the filing of any such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or similar official) of such Person or of any substantial part of its
property or the making by it of an assignment for the benefit of creditors,
or the admission by it in writing of its inability to pay its debts
generally as they become due and its willingness to be adjudicated a
bankrupt, or the taking of corporate action by such Person in furtherance
of any such action.
"Book Value" means, with respect to any asset, the asset's adjusted basis
for federal income tax purposes; provided, however, (i) the initial Book
Value of any asset contributed to the Partnership shall be adjusted to
equal its gross fair market value at the time of its contribution and (ii)
the Book Values of all assets held by the Partnership shall be adjusted to
equal their respective gross fair market values (taking Code Section
7701(g) into account) upon an adjustment to the Capital Accounts of the
Partners described in Section 2.8(a)(vi). The Book Value of any asset whose
Book Value was adjusted pursuant to the preceding sentence thereafter shall
be adjusted in accordance with the provisions of Treasury Regulations
Section 1.704-1 (b)(2)(iv)(g).
"Business" means the business of the Partnership as specified in the
Business Plan as of the date of determination.
"Business Day" means any day other than Saturday, Sunday or a day on
which banks in the City of New York, New York are authorized or obligated
by law or executive order to close.
"Business Plan" means the two-year operating plan of the Partnership
(including the then-current (i) Development Plan and (ii) Marketing
Plan)(as defined in the Strategic Agreement)) and each subsequent two-year
operating plan of the Partnership.
"By-laws" mean the Amended and Restated By-Laws of Public Corp., as
adopted on the Closing Date.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership as duly filed with the Secretary of State of
the State of Delaware on November 19, 1999 pursuant to the Act, as amended
or restated from time to time.
"Certificate of Incorporation" means the Amended and Restated Certificate
of Incorporation of Public Corp. as filed on the Closing Date with the
Secretary of State of the State of Delaware pursuant to the Delaware
General Corporation Law and in accordance with Investment Agreement, as
amended or restated from time to time.
"Class A Common Stock" shall have the meaning assigned in the Certificate
of Incorporation.
"Code" means the Internal Revenue Code of 1986, as amended as of the date
hereof.
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"Control," including its various tenses and derivatives (such as
"Controlled"), means, with respect to any Person, the presence of one of
the following: (i) the legal, beneficial or equitable ownership, directly
or indirectly, of more than 50% of the capital or voting stock (or other
ownership or voting interest, if not a corporation) of such Person or (ii)
the ability, directly or indirectly, to direct the voting of a majority of
the directors of such Person's board of directors or, if the Person does
not have a board of directors, a majority of the positions on any similar
body, whether through appointment, voting agreement or otherwise.
"Investment Agreement" means the Investment, Issuance, Contribution and
Assumption Agreement, dated as of November 19, 1999, by and among SBC
Communications Inc., SBC Partner, Public Corp., the Initial Limited Partner
and the Partnership, as amended from time to time.
"Limited Partners" means, at any time, SBC Partner, if at such time it
owns a Partnership Interest in the Partnership, and any additional or
substitute limited partners of the Partnership admitted in accordance with
this Agreement.
"Liquidating Trustee" means the liquidating trustee of the Partnership
provided for in Section 5.3 hereof.
"Net Income" and "Net Loss" for any taxable period shall mean the Taxable
income or loss, as the case may be, of the Partnership for such period
determined in accordance with Code Section 703(a) computed with the
following adjustments:
(i) Items of gain, loss, and deduction shall be computed based upon
the Book Values of the Partnership's assets (in accordance with
Treasury Regulation Section 1.704(b)(2)(iv)(g) and/or 1.704-3(d))
rather than upon the assets' adjusted bases for federal income tax
purposes;
(ii) Any tax exempt income received by the Partnership shall be
included as an item of gross income;
(iii) The amount of any adjustments to the Book Values of any assets
of the Partnership pursuant to Code Section 743 shall not be taken into
account;
(iv) Any expenditure of the Partnership described in Code Section
705(a)(2)(B)(including any expenditure treated as being described in
Code Section 705(a)(2)(B) pursuant to Treasury Regulations under Code
Section 704(b)) shall be treated as a deductible expense;
(v) The amount of items of income, gain, loss, or deduction specially
allocated to any Partners pursuant to Sections 2.8(d), 2.8(e), and
2.8(f) shall not be included in the computation; and
(vi) The amount of any items of Net Income or Net Loss deemed
realized pursuant to Section 2.8(a)(v) shall be included in the
computation.
"Partners" mean the General Partner and SBC Partner and any other person
admitted to the Partnership as a partner.
"Partnership Interest" means, the interest representing a Partner's
interest in the Partnership.
"Percentage Interest" means a Partner's aggregate percentage interest in
the Partnership as determined by dividing the number of Units owned by such
Partner by the number of Units then owned by all Partners. The Percentage
Interests of the Partners as of the effective date of the Agreement are set
forth in Section 2.5.
"Person" means a natural person, a corporation, a limited liability
company, a partnership, a trust, a joint venture, any governmental
authority, or any other entity or organization.
"Regulations" means the income tax regulations, including temporary
regulations, promulgated under the Code, as such regulations are in effect
on the date hereof.
"Retail ISP Service" means any service for consumers and small businesses
using any transport at any speed via any device providing connectivity to
the Internet anywhere in the United States via a single
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IP address at any one time, integrated with the provision of e-mail
services, access to Usenet newsgroup, chat or instant messaging and a
default screen linking to an aggregation of a broad variety of Internet-
based content and excludes any Web hosting services.
"Strategic Agreement" means the Strategic and Marketing Agreement, dated
as of November 19, 1999, by and among SBC Communications Inc., SBC Partner,
Public Corp. and the Partnership, as amended from time to time.
"Subscriber" means with respect to any Retail ISP Service, a subscriber
that has remained a subscriber for at least one monthly billing cycle
(excluding any unpaid trial period) and has paid at least one monthly bill.
"Transfer" means any disposition of all or a portion of a Partnership
Interest (legal or equitable) by any means, direct or indirect, absolute or
conditional, voluntary or involuntary, including, but not limited to, by
sale, assignment, put, transfer, distribution, gift, bequest or disposal.
"Unit" means an interest (or portion thereof) of a Partner or an assignee
in the Partnership representing such fractional part of the interests of
all Partners or assignees pursuant to this Agreement as is equal to the
quotient of one divided by the number of outstanding Units in the
Partnership. The number of Units initially issued to, and the Percentage
Interest held by, each Partner are set forth on Schedule 2.5 attached
hereto. The General Partner shall modify Schedule 2.5 attached hereto from
time to time to reflect changes in Units and Percentage Interests held by
the Partners or assignees due to Transfers of Units or other events
permitted by the terms of this Agreement.
In addition, the following terms are defined in the following Sections of
this Agreement:
<TABLE>
<CAPTION>
Term Reference
---- ---------
<C> <S>
Act Introduction
Agreement Introduction
Another Enterprise 6.1
Book Capital Account 2.8(a)(i)
Capital Accounts 2.8(a)(iii)
Capital Call 2.4(a)
Capital Call Notice 2.4(a)
Covered Person 2.15(d)
Event of Dissolution 5.1
General Partner Introduction
Imputed Capital Account 2.8(a)(ii)
Indemnitees 6.1
Initial Limited Partner Introduction
Objection Notice 2.11
Officers 3.2
Other Enterprise 6.1
Partner Introduction
Partnership Introduction
Partnership Tax Returns 2.11
Proceeding 6.1
Public Corp. Introduction
Relevant Tax Audits 2.13
Revaluation 2.8(e)
SBC 5.2(f)
SBC Partner Introduction
Securities Act 8.1
Tax Matters Partner 2.13
</TABLE>
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<PAGE>
ARTICLE 2
Partners and Financial Matters
2.1 Identity of Partners. Without the need for any additional action on the
part of any Person, (i) Public Corp. shall continue to be a general partner of
the Partnership and (ii) SBC Partner is hereby admitted as a limited partner of
the Partnership. Upon the admission of SBC Partner as a limited partner, the
Initial Limited Partner shall be deemed to have withdrawn from the Partnership
as a limited partner. Upon such withdrawal, the Initial Limited Partner shall
have its capital contribution returned to it without any interest or deduction
and shall have no further interest in the Partnership. The Partners shall
consist of the General Partner and the Limited Partner. Subject to the prior
written consent of the Partners, but subject to Article 7, a new Person may be
admitted from time to time as a Limited Partner; provided, however, that each
such new Limited Partner shall execute an appropriate supplement to this
Agreement pursuant to which the new Limited Partner agrees to be bound by and
subject to all of the terms and conditions of this Agreement. Admission of a
new Limited Partner shall not be cause for the dissolution of the Partnership.
2.2 Limitation of Liability of Partners. Except as otherwise provided for
herein and in the Act, no Limited Partner (in its capacity as Limited Partner)
shall be required under any circumstance to contribute to the capital of the
Partnership any amount beyond that amount required pursuant to this Article 2,
nor shall any Limited Partner (in its capacity as a Limited Partner) be
obligated to lend any funds to the Partnership. No Limited Partner (in its
capacity as a limited partner of the Partnership) shall have any obligation
with respect to any debts, obligations or liabilities of the Partnership
whether arising in contract, tort or otherwise. No Limited Partner, in its
capacity as such, except as otherwise provided herein, shall take part in the
day-to-day management, operation or control of the business and affairs of the
Partnership. The Limited Partners shall not have any right, power or authority
to transact any business in the name of the Partnership or to act for or on
behalf of or to bind the Partnership. A Limited Partner shall have no rights
other than those specifically provided herein or granted by law. A Limited
Partner and its Affiliates or an employee, agent, director or officer thereof
may also be an employee, agent, director or officer of the Partnership or the
General Partner. The existence of these relationships and acting in such
capacities will not result in a Limited Partner being deemed to be
participating in the control of the business of the Partnership or otherwise
affect the liability of the Limited Partner or the Person so acting.
2.3 Initial Capital Contributions. Each of the Partners shall make an initial
capital contribution to the Partnership, to which Code Section 721 will apply,
of the assets and liabilities set forth in Article II of the Investment
Agreement.
2.4 Additional Capital Contributions. Except as provided in Section 2.3
hereof or this Section 2.4, no Partner shall have any obligation to make any
capital contribution to the Partnership. In the event that the Partners
determine that the Partnership needs additional capital to satisfy its business
objectives, the General Partner shall make a capital call (a "Capital Call") to
the Partners by delivering to each such Partner a written notice (a "Capital
Call Notice") specifying the amount of such Capital Call, the time and manner
for satisfying such Capital Call and the proposed use of the proceeds thereof.
The General Partner shall have the authority to specify any penalties or
consequences to be imposed on defaulting Partners.
2.5 Initial Percentage Interests and Units. Once the initial capital
contributions have been made pursuant to Section 2.3 hereof, the Partners shall
have the following respective Percentage Interests and Units in the Partnership
(as also set forth on Schedule 2.5 hereto which schedule may be modified by the
General Partner from time to time in accordance with the terms of this
Agreement):
<TABLE>
<CAPTION>
Percentage
Interest Units
---------- ------
<S> <C> <C>
Public Corp........................................... -- % [ ]*
SBC Partner........................................... -- % [ ]**
</TABLE>
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<PAGE>
- --------
* Public Corp. shall have a number of Units equal to the number of issued and
outstanding shares of Common Stock (as defined in the Restated Certificate
of Incorporation as of the date hereof) of Prodigy Communications
Corporation upon issuance of the Units and the Class B Common Stock to SBC
Partner.
** SBC Partner shall have a number of Units equal to 43.0% of a fraction, the
numerator of which shall be (A) the total number of shares of Prodigy Common
Stock issued and outstanding on a fully-diluted basis immediately prior to
the Closing after giving effect to the issuance by Prodigy of the number of
shares of Prodigy Common Stock issuable pursuant to the Agreement and Plan
of Merger (including, without limitation, shares issuable upon exercise of
assumed options and warrants) (the "Merger Agreement"), dated as of November
5, 1999, by and among Prodigy, PUCKnut Corporation and FlashNet, and the
exercise of all rights to receive Prodigy Common Stock, whether pursuant to
stock options, convertible securities, warrants or otherwise, less the sum
of (i) 4,818,290 shares of Prodigy Common Stock issuable as of the Closing
by Prodigy pursuant to outstanding warrants issued by Prodigy and (ii) the
number of shares of Prodigy Common Stock issued or issuable by Prodigy
pursuant to the Merger Agreement (including, without limitation, shares
issuable upon exercise of assumed options and warrants) as of the Closing,
and the denominator of which shall be (B) fifty-seven one hundredths (.57).
2.6 Withdrawals of Capital; Interest. Except as otherwise provided herein, no
Partner shall have the right to withdraw any part of its capital contributions
to the Partnership without the consent of the other Partners. No interest shall
be paid on or on account of any capital contributions to the Partnership.
2.7 Tax Classification and Treatment. It is the intention of the Partners
that the Partnership will be classified as a partnership for purposes of
federal and any state income tax law. The General Partner is authorized to make
any election it may deem to be prudent to maintain partnership classification.
The Partnership shall take all reasonable actions to prevent its being treated
as a "publicly traded partnership" under Code Section 7704.
2.8 Tax Allocations and Capital Accounts.
(a) Capital Account Maintenance.
(i) A "Book Capital Account" shall be maintained for each Partner and
shall be adjusted from time to time thereafter in accordance with the
terms of this Agreement. The Partners agree that for the purposes of
determining the initial Book Capital Accounts, the fair market values
of all of the assets contributed pursuant to the Investment Agreement
is as set forth on Schedule 2.8(a)(i).
(ii) An "Imputed Capital Account" shall be maintained for each
Partner and shall be adjusted from time to time in accordance with the
terms of this Agreement. Initially, the Imputed Capital Account of each
Partner shall be credited with the amounts set forth with respect to
such Partner in Schedule 2.8(a)(ii).
(iii) The Book Capital Accounts and the Imputed Capital Accounts of
each Partner (together, the "Capital Accounts") shall be increased by
(A) the amount of any cash and the fair market value of any property
contributed by such Partner to the Partnership, net of any liabilities
of the Partner assumed by the Partnership or to which property
contributed by the Partner to the Partnership was subject, pursuant to
this Agreement and (B) such Partner's share of Net Income allocated to
such Partner pursuant to Section 2.8(b) hereof and of any items in the
nature of income or gain separately allocated to the Partners, and
decreased by (C) the amount of cash or the fair market value of any
property, net of any liabilities assumed by the Partner or to which
such property is subject under Section 752 of the Code, distributed to
such Partner pursuant to this Agreement and (D) such Partner's share of
Net Loss allocated to such Partner pursuant to Section 2.8(c) hereof
and of any items in the nature of losses or deductions separately
allocated to the Partners.
(iv) The Capital Accounts shall be maintained in accordance with the
Regulations implementing Section 704(b) of the Code as currently in
effect to the extent applicable and to the extent, if any, that any
required adjustments thereunder are not otherwise effected through any
allocations made pursuant to this Agreement.
D-6
<PAGE>
(v) If the Partnership at any time distributes any of its assets in
kind to any Partner, the Capital Account of each Partner shall be
adjusted to account for that Partner's allocable share of the Net
Income, Net Loss or items thereof that would be realized by the
Partnership if it sold the assets that were distributed at their
respective fair market values (taking Code Section 7701(g) into
account) immediately prior to their distribution.
(vi) Upon a revaluation required pursuant to Section 2.8(e), the Book
Capital Account balance of each Partner shall be adjusted to the extent
provided under Treasury Regulations Section 1.704-1 (b)(2)(iv)(f) to
reflect the Partner's allocable share as determined under Section
2.8(e) of items of gain or loss that would be realized by the
Partnership if it sold all of its property at its fair market value
(taking Code Section 7701(g) into account) on the day of the
adjustment.
(vii) In the event any Units in the Partnership are Transferred in
accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it
relates to the Units.
(b) Net Income. After giving effect to the special allocations set forth
in Section 2.8(d) and (f) hereof, Net Income for any fiscal year shall be
allocated in the following order of priority:
(i) First, 100% to the Partners in proportion to and to the extent of
the excess, if any, of (A) the cumulative Net Loss allocated to each
such Partner pursuant to Section 2.8(c)(ii) hereof for all prior fiscal
years, over (B) the cumulative Net Income allocated to each such
Partner pursuant to this Section 2.8(b)(i) for all prior fiscal years;
and
(ii) The balance, if any, to the Partners pro rata in accordance with
the respective Percentage Interests held by them.
(c) Net Loss. After giving effect to the special allocations set forth in
Section 2.8(d), (e) and (f) hereof, Net Loss for any fiscal year shall be
allocated in the following order of priority:
(i) First, 100% to the Partners in proportion to and to the extent of
the excess, if any, of (1) the cumulative Net Income allocated to each
such Partner pursuant to Section 2.8(b)(ii) hereof for all prior fiscal
years, over (2) the cumulative Net Loss allocated to each such Partner
pursuant to this Section 2.8(c)(i) for all prior fiscal years; and
(ii) The balance, if any, to the Partners pro rata in accordance with
the respective Percentage Interests held by them.
(d) Certain Allocations upon Distributions. Any allocation of items of
income or loss made with respect to the accounting period ending
immediately prior to a distribution of Partnership capital in connection
with the liquidation or winding-up of the Partnership (or a sale of the
Partnership) shall be allocated, first, among the Partners' Book Capital
Accounts to the extent necessary to cause each such Partner's Book Capital
Account to equal such Partner's Imputed Capital Account after giving effect
to all such allocations for such accounting period and, then, ratably in
accordance with the respective Percentage Interests.
(e) Revaluation. The General Partner shall be required to revalue the
Partnership's property upon (i) the contribution of more than a de minimis
amount of cash or other property to the Partnership, (ii) the distribution
of more than a de minimis amount of cash or other property to a Partner as
consideration for the redemption, repurchase or discharge of an interest in
the Partnership or (iii) the liquidation, winding up or incorporation of
the Partnership (in any such case, a "Revaluation"). Any gain or loss
resulting directly from such Revaluation shall be allocated for the period
in which such Revaluation occurs, first, among the Partners' Book Capital
Accounts to the extent necessary to cause each such Partner's Book Capital
Account to equal such Partner's Imputed Capital Account and, thereafter,
ratably in accordance with their respective Percentage Interests. Any such
Revaluation shall be made in a manner consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(e) or (f) and Net Income (Loss) shall thereafter
be determined in a manner consistent with Treasury Regulation Section
1.704-1(b)(2)(iv)(g). For the purposes of this
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<PAGE>
Section 2.8(e), the aggregate value of the Partnership's property shall be
determined by an independent investment banker or national accounting firm
selected by SBC or in a manner otherwise agreed upon between the General
Partner and SBC Partner.
(f) Regulatory Allocations. Section 704 of the Code and the Regulations
issued thereunder as currently in effect, including, without limitation,
the provisions of such Regulations addressing qualified income offset
provisions, minimum gain charge back requirements and allocations of
deductions attributable to nonrecourse debt and partner nonrecourse debt,
are hereby incorporated by reference. If any allocation is required by the
first sentence of this Section 2.8(f) (the "Original Allocation"), special
offsetting allocations of other items of Partnership income, gain, loss and
deduction shall be made as rapidly as possible so that, after such
offsetting allocations are made, each Partner's Capital Account balance is,
to the extent possible, equal to the Capital Account balance such Partner
would have had if the allocations made under the first sentence of this
Section 2.8(f) had not been made; provided, however, that no such special
offsetting allocations shall be made if (i) the Original Allocation had the
effect of offsetting a prior Original Allocation, or (ii) the Original
Allocation (in the opinion of the Partnership's accountants) likely will be
offset by another Original Allocation in the future (e.g., an Original
Allocation of "nonrecourse deductions" that likely will be offset by a
subsequent "minimum gain chargeback").
(g) Tax Allocations.
(i) Except as otherwise provided in this Section 2.8(g), for federal,
state and local income tax purposes, each item of income, gain, loss
and deduction shall be allocated among the Partners in the same manner
as its correlative item of "book" income, gain, loss or deduction is
allocated pursuant to Section 2.8(b) through (f) hereof.
(ii) Income, gain, loss or deductions of the Partnership shall,
solely for income tax purposes, be allocated among the Partners in
accordance with Section 704 (c) of the Code and the Treasury
Regulations promulgated thereunder, so as to take account of any
difference between the adjusted bases of the assets of the Partnership
and their respective fair market values in accordance with the
traditional method set forth in Section 1.704-3(b) of the Treasury
Regulations.
(h) If the amount of income or loss allocable under Section 2.8(d) or
Section 2.8(e) is insufficient to allow the Book Capital Account balance of
each Partner to equal such Partner's Imputed Capital Account balance, such
income or loss shall be allocated among the Partners in such a manner as to
decrease the differences between the Partners' respective Book Capital
Account balances and their respective Imputed Capital Account balances in
proportion to such differences.
(i) In the event that a Partner acquires an interest in the Partnership
either by Transfer from another Partner or by acquisition from the
Partnership, the Partnership shall close its books as of the date of the
acquisition and (i) Net Income, Net Loss, gross income, nonrecourse
deductions and items thereof computed for the portion of the year ending as
of the end of the day on the date of the acquisition shall be allocated
among the Partners without regard to such acquisition, and (ii) Net Income,
Net Loss, gross income, nonrecourse deductions and items thereof computed
for the portion of the year commencing on the day following the acquisition
shall be allocated among the Partners taking into account such acquisition.
For purposes of determining the date on which the acquisition occurs, the
Partnership may make use of any convention allowable under Section 706(d)
of the Code.
(j) Timing of Allocations. Allocations of Net Income and Net Loss
provided for in this Section 2.8 shall generally be made as of the end of
the fiscal year of the Partnership; provided, however, that allocation of
items of Net Income and Net Loss described in clause (vi) of the definition
of "Net Income" and "Net Loss" shall be made at the time deemed realized as
described in Section 2.8(a)(v).
2.9 Distributions. (a) General. Subject to Sections 2.9(b), 2.9(d), 2.9(e)
and 5.2 hereof, distributions shall be made by the General Partner on behalf of
the Partnership at such times and in such amounts as the Partners shall
determine.
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<PAGE>
(b) Allocation of Amounts Distributed. Except as provided in Sections
2.9(d) and 2.9(e) and Article 5 hereof, any amounts distributed by the
Partnership hereunder shall be distributed to the Partners pro rata in
accordance with their respective Percentage Interests.
(c) Withholding Taxes. Each Partner hereby authorizes the Partnership to
withhold from or pay on behalf of or with respect to such Partner any
amount of federal, state, local, or foreign taxes that the General Partner
determines that the Partnership is required to withhold or pay with respect
to any amount distributable or allocable to such Partner pursuant to this
Agreement, including, without limitation, any taxes required to be withheld
or paid by the Partnership pursuant to Code Sections 1441, 1442, 1445 or
1446. Any amount paid on behalf of or with respect to a Partner pursuant to
the preceding sentence shall constitute a loan by the Partnership to such
Partner, which loan shall be repaid by such Partner within 15 days after
notice from the General Partner that such payment must be made unless (i)
the Partnership withholds such payment from a distribution which would
otherwise be made to the Partner, or (ii) the General Partner determines,
in its sole and absolute discretion, that such payment may be satisfied out
of the available funds of the Partnership which would, but for such
payment, be distributed to the Partner. Any amounts withheld pursuant to
the foregoing clauses (i) or (ii) shall be treated as having been
distributed to such Partner. In the event that a Partner fails to pay any
amounts owed to the Partnership pursuant to this Section 2.9(c) when due,
the General Partner may, in its sole and absolute discretion, elect to make
the payment to the Partnership on behalf of such defaulting Partner and in
such event shall be deemed to have loaned such amount to such defaulting
Partner. Until repayment of such loan, the General Partner (i) shall have a
security interest in such defaulting Partner's Partnership Interest and
(ii) shall succeed to all rights and remedies of the Partnership as against
such defaulting Partner (including, without limitation, the right to
receive distributions). Any amounts payable by a Partner hereunder shall
bear interest at the lower of (i) the base rate on corporate loans at large
United States money center commercial banks, as published from time to time
in The Wall Street Journal, plus four percentage points and (ii) the
maximum lawful rate from the date such amount is due (i.e., 15 days after
demand) until such amount is paid in full. Each defaulting Partner shall
take such actions as the Partnership or the General Partner shall request
in order to perfect or enforce the security interest created hereunder.
(d) Limitations on Distributions. Notwithstanding anything to the
contrary contained in this Agreement, the Partnership and the General
Partner, on behalf of the Partnership, shall not make a distribution to any
Partner on account of its interest in the Partnership if such distribution
would violate the Act or other applicable law.
(e) Tax Distributions. Notwithstanding the foregoing provisions of
Section 2.9, on or before March 15 of each fiscal year commencing after the
date hereof during the term of this Agreement. the Partnership shall
distribute (i) to Prodigy, in cash, an amount equal to Prodigy's actual tax
liability attributable to the income of the Partnership that was allocated
to Prodigy in the immediately preceding taxable year, and (ii) to SBC, in
cash, an amount sufficient to make all distributions pursuant to this
Section 2.9(e) pro rata among the Partners, in accordance with their
Percentage Interests; provided, however, that any distributions required to
be made to the Partners pursuant to this Section 2.9(e) shall be required
to be so made by the Partnership only to the extent of cash available
therefor, and the Partnership shall not be required to dispose of assets
outside of the ordinary course of business or engage in any other
extraordinary transactions in order to obtain the cash necessary for such
distributions. Amounts distributed to a Partner pursuant to the immediately
preceding sentence shall be treated as advances against amounts
distributable to it pursuant to Section 2.9(b) or Section 5.2 and shall,
accordingly, reduce the amounts otherwise to be distributed to the Partner
pursuant to such Sections in the future.
(f) Distributions Upon Transfer or Admission. In the event that a Partner
acquires an interest in the Partnership either by Transfer from another
Partner (subject to the provisions of Article 7) or by acquisition from the
Partnership, the Partnership shall close its books as of the date of the
acquisition and (i) all distributions attributable to the portion of the
year ending as of the end of the day of the date of the acquisition shall
be made to the Partners without regard to such acquisition, and (ii) all
distributions attributable to the portion of the year commencing on the day
following the date of the acquisition shall be
D-9
<PAGE>
made to the Partners taking into account such acquisition. The date on
which the acquisition occurs shall be determined in a manner consistent
with the last sentence of Section 2.8(i).
2.10 Accounting and Books of Account. The accounts, books and records of the
Partnership shall be maintained at the principal office of the Partnership and
shall be open for inspection, copying and audit upon reasonable notice by any
of the Partners or their duly authorized representatives (at the expense of any
such Partners) during reasonable business hours, irrespective of any
requirements or limitations set forth in Section 17-305 of the Act. The
Partnership's books shall be closed and balanced at the end of each month. Each
Partner represents that it is not a "foreign partner" within the meaning of
Code Section 1446(e).
2.11 Tax Returns. The General Partner shall designate an officer of the
Partnership to be responsible for the preparation of all required federal,
state, local and foreign tax returns for the Partnership. The General Partner
shall deliver an Internal Revenue Service Form 1065 and drafts of any other
federal, state or local partnership income tax returns (including related
information returns) (collectively, the "Partnership Tax Returns"), prepared by
the officer of the Partnership responsible for the preparation of the
Partnership Tax Returns pursuant to this Section 2.11 by no later than May 1 of
each year. On or before June 1 of that year, SBC Partner shall have the right
to deliver a notice (an "Objection Notice") to the General Partner stating that
SBC Partner objects to any information contained on or omitted from any draft
Partnership Tax Return and setting forth an alternative tax treatment of the
item or items disputed. If SBC Partner files an Objection Notice, the relevant
Partnership Tax Return shall be filed in accordance with the alternative tax
treatment described in the Objection Notice. The General Partner shall send to
each Partner a final schedule K-1 by no later than June 15 of each year. No
final Partnership Tax Return shall be amended without the prior written consent
of SBC Partner, which consent may be withheld in SBC Partner's sole and
absolute discretion.
2.12 Banking. All funds of the Partnership shall be deposited in its name in
one or more separate accounts with such financial institutions as shall be
designated by the General Partner. Funds of Partners or other Persons shall not
be deposited in such Partnership accounts. The funds in such accounts shall be
used solely for the Partnership's purposes. Withdrawals from, or checks drawn
upon, such accounts shall require the signatures of such Persons as may be
designated by the General Partner.
2.13 Tax Matters Partner. The "Tax Matters Partner," within the meaning of
Code Section 6231(a)(7), of the Partnership shall be the General Partner. The
General Partner shall promptly notify SBC Partner in writing upon receipt by
the General Partner or the Partnership of notice of (i) any pending or
threatened federal, state or local tax audits or assessments for which the
General Partner is the Tax Matters Partner (the "Relevant Tax Audits"), (ii)
any meeting with the Internal Revenue Service or the appropriate state or local
tax authority regarding the Relevant Tax Audits, and (iii) any hearing or other
proceeding relating to or arising out of the Relevant Tax Audits. SBC Partner
shall be entitled to participate in all such meetings at its own expense. The
General Partner shall send SBC Partner a draft of all written documents
expected to be submitted to a relevant taxing authority, court or other entity
in connection with the Relevant Tax Audits 10 days before such written document
is required or expected to be submitted. SBC Partner shall make all final
decisions regarding the Relevant Tax Audits (including whether and how to
litigate and the contents of any written document submitted to any taxing
authority). General Partner shall not settle any Relevant Tax Audit or any
litigation or other proceeding relating to or arising out of any Relevant Tax
Audit without the prior written consent of SBC Partner, which consent may be
withheld in SBC Partner's sole and absolute discretion.
2.14 Reports. The General Partner shall furnish to the SBC Partner:
(a) within 20 days after the end of each month, unaudited summary
financial information for the Partnership for such month and individual
Capital Accounts reconciliations; and
(b) within 60 days after the end of each fiscal year, a balance sheet and
statement of operations and a statement of the Partners' capital for the
Partnership for such year (audited by a firm of independent public
accountants of recognized national standing chosen by the General Partner),
and individual Capital Accounts reconciliations.
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2.15 Freedom of Action. To the fullest extent permitted by law, the Limited
Partners hereby expressly disclaim any fiduciary duties owed by the Limited
Partners to the Partnership or to each other. Except as expressly provided
herein, in the Strategic Agreement or in any other agreement between or among
the Partners:
(a) No Limited Partner or its Affiliates (other than the General Partner)
shall have any obligation to the Partnership, the other Partners or Public
Corp. to refrain from (i) engaging in activities similar or dissimilar to
the Business or developing or marketing any products or services that
compete, directly or indirectly, with those of the Partnership, (ii)
investing in or owning any interest publicly or privately, or developing a
business relationship, with any Person engaged in activities similar or
dissimilar to the Business, or otherwise in competition with the
Partnership, (iii) conducting business with any client or customer of the
Partnership, or (iv) employing or otherwise engaging any officer or
employee of the Partnership; provided, that, no Limited Partner may
actively solicit any officer or employee of the Partnership without the
consent of the Chief Executive Officer of Public Corp; provided, further,
that, the foregoing provisions in this subsection (a) shall not modify any
of the duties owed by such Limited Partners or their respective Affiliates
to Public Corp. in their other capacities;
(b) No Limited Partner, its Affiliates (other than the General Partner)
or any of such Limited Partner's or its Affiliate's (other than the General
Partner's) officers, directors, employees or former employees shall have
any obligation, or be liable, to the Partnership or any of the Partners (i)
for or arising out of the conduct described in Section 2.15(a) and (c)
hereof, (ii) for exercising or failing to exercise its rights under this
Agreement, or the Strategic Agreement, or (iii) for exercising or failing
to exercise its rights as a partner of the Partnership. The Partnership and
each Partner therefore waives, to the fullest extent permitted by law, any
claim or cause of action against the Limited Partners or the Partnership
asserting, in connection with the determination of any and all matters
presented to the Limited Partners for action, breach of fiduciary duty or
any other duty, or breach of any duty created by special circumstances
arising out of this Agreement or the Partnership;
(c) If any Limited Partner or any officer, director, employee or former
employee (other than a Limited Partner's designees to the Board of
Directors of Public Corp.) of any Limited Partner acquires knowledge of a
potential transaction, agreement, arrangement or other matter that may be
an opportunity for both such Person (or its Affiliate (other than the
General Partner)), on the one hand, and the Partnership, on the other hand,
neither such Person nor its officers, directors, employees or former
employees shall have any duty to communicate or offer such opportunity to
the Partnership, and neither such Person nor its officers, directors,
employees or former employees (other than (i) any former employee who is a
current employee of the Partnership and (ii) a Limited Partner's designees
to the Board of Directors of Public Corp.) shall be liable to the
Partnership for breach of any fiduciary or other duty, as a Partner or
otherwise, by reason of the fact that such Person pursues or acquires such
opportunity for itself, directs such opportunity to another Person or does
not communicate such opportunity or information to the Partnership; and
(d) To the extent that, at law or in equity, a Partner, its Affiliates,
or any officer, director, employee or former employee of such Partner or
its Affiliates (each, a "Covered Person" and collectively, the "Covered
Persons") have duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to another Partner, such Covered Person
acting in connection with the Partnership's business or affairs, shall not
be liable to the Partnership or to any Partner for such Covered Person's
good faith reliance on the provisions of this Agreement. The provisions of
this Agreement, to the extent that they restrict the duties and liabilities
of a Covered Person otherwise existing at law or in equity, are agreed by
the Partners to replace such other duties and liabilities of such Covered
Person.
2.16 Tax Elections and Accounting. Neither, the General Partner nor the
Partnership shall make any tax elections or change any method of tax accounting
without the prior written consent of SBC Partner, which consent may be withheld
in SBC Partner's sole and absolute discretion. If SBC Partner and the General
Partner disagree on whether an election or change in method of tax accounting
should be made, the Partnership shall
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make the election or change that minimizes or defers the recognition of income
or maximizes or accelerates a deduction, credit or similar tax benefit.
ARTICLE 3
Management
3.1 General Partner. (a) The business, property and affairs of the
Partnership shall be managed under the direction of the General Partner. The
General Partner shall have the general power to manage or cause the management
of the Partnership within the scope of the business purpose set forth in
Section 1.3 and shall have the authority to delegate to any officer of the
Partnership the authority to make any lawful decision on the Partnership's
behalf. No Limited Partner shall have any power or authority to bind the
Partnership.
(b) Except as otherwise expressly provided herein, the General Partner
(acting on behalf of the Partnership), shall have the right, power and
authority, in the management of the business and affairs of the
Partnership, to do or cause to be done any and all acts, at the expense of
the Partnership, as the case may be, deemed by the General Partner to be
necessary or appropriate to effectuate the business, purposes and
objectives of the Partnership. The power and authority of the General
Partner shall include, without limitation, the power and authority:
(1) To pay, collect, compromise, litigate, arbitrate, or otherwise
adjust or settle any and all other claims or demands of or against the
Partnership or to hold such proceeds against the payment of contingent
liabilities;
(2) To borrow money or to obtain credit in such amounts, at such rate
of interest and upon such other terms and conditions as the General
Partner deems appropriate, recourse or nonrecourse, from banks, other
lending institutions or any other Person, including the Partners, and
pursuant to indentures, loan agreements or any other type of
instrument, for any purpose of the Partnership and to secure payment of
the principal of any such indebtedness and the interest thereon by
mortgage, pledge, conveyance or assignment in trust of or grant
security interest in the whole or any part of any or all of the
property and assets of the Partnership;
(3) To make, execute, assign, acknowledge and file on behalf of the
Partnership any and all documents or instruments of any kind that the
General Partner may deem necessary or appropriate in carrying out the
purposes and business of the Partnership; and any Person dealing with
the General Partner shall not be required to determine or inquire into
its authority or power to bind the Partnership or to execute,
acknowledge or deliver any and all documents in connection therewith;
(4) To invest funds of the Partnership;
(5) To employ and engage suitable agents, employees, advisors,
consultants and counsel (including any custodian, investment advisor,
accountant, attorney, corporate fiduciary, bank or other reputable
financial institution, or any other agents, employees or Persons who
may serve in such capacity for the General Partner or any Affiliate of
the General Partner) to carry out any activities that the General
Partner is authorized or required to carry out under this Agreement
(subject to the supervision and control of the General Partner),
including without limitation, a Person who may be engaged to undertake
some or all of the general management, property management, financial
accounting and recordkeeping or other duties of the General Partner and
to indemnify such Persons against liabilities incurred by them in
acting in such capacity as on behalf of the Partnership;
(6) To qualify the Partnership to do business in any state,
territory, dependency or foreign country; and
(7) To possess and exercise any additional rights and powers of a
General Partner under the partnership laws of the State of Delaware,
including, without limitation, the Act and the Delaware
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Uniform Partnership Law (and any other applicable laws, to the extent
not expressly prohibited by this Agreement).
The expression of any power or authority of the General Partner in this
Agreement shall not in any way limit or exclude any other power or authority
which is not specifically or expressly set forth in this Agreement.
Notwithstanding any of the foregoing, the Partnership shall be operated in such
a manner as the General Partner deems reasonable and necessary or appropriate
to preserve the limited liability of the Limited Partners.
(c) Notwithstanding the foregoing provisions of Sections 3.1(a) and (b),
the General Partner shall have no authority, without written approval of
all of the Limited Partners to:
(1) subject to Article VII, admit a new Limited Partner to the
Partnership;
(2) make any Capital Call or deliver to the Partners a Capital Call
Notice;
(3) make any distributions;
(4) institute any proceeding for Bankruptcy on behalf of the
Partnership; or
(5) dissolve the Partnership.
(d) Except as provided elsewhere in this Agreement (including the
provisions regarding distributions, payments and allocations to which it
may be entitled), the General Partner shall not be compensated for its
services as general partner of the Partnership.
3.2 Officers.
(a) The officers of the Partnership (the "Officers") shall at all times
be identical in name and title to the then officers of Public Corp. Any
changes in the officers of Public Corp., whether by election, resignation,
removal, death or otherwise, shall automatically and concurrently take
effect with respect to the Officers of the Partnership. No Officer may
resign from the Partnership unless such Officer concurrently resigns as an
officer of Public Corp. Any resignation by an officer of Public Corp. shall
constitute such officer's concurrent resignation as an Officer of the
Partnership. The Chief Executive Officer of the Partnership and other
Officers and employees of the Partnership shall develop and implement
management policies consistent with the general policies and programs
established by the management and the Chairman of the Board of Directors of
Public Corp. for Public Corp.
(b) Except to the extent set forth in this Agreement, the Officers shall
have the duties of officers with comparable titles of a corporation for
profit organized under the General Corporation Law of the State of
Delaware.
ARTICLE 4
Actions by Partners
4.1 Meetings. Meetings of the Partners, for any purpose or purposes, may be
called by the General Partner or by any Partner and may be held at the
principal office of the Partnership, at any location within the States of Texas
or New York as determined by the General Partner or at any other location as
determined by the General Partner. Notice of any such meeting shall be given to
each Partner at least 10 and no more than 60 days prior to the date thereof.
Such notice shall specify the date, time and place of such meeting and shall
set forth an agenda of items to be discussed or acted upon at such meeting.
Partners may participate in any meeting of the Partners by means of a
conference telephone or similar communications equipment by means of which all
Persons participating in the meeting can hear each other at the same time and
participation by such means shall constitute a waiver of notice of such
meeting, except when a Partner participates for the express purpose of
objecting to the transaction of any business because such meeting has not been
(or has allegedly not been) duly noticed.
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4.2 Quorum for Meetings and Vote of the Partners. The presence in person or
by proxy of each of the Limited Partners shall constitute a quorum at the
Partners' meeting for the transaction of any business. No action of the
Partners shall be valid in the absence of a quorum. Except as otherwise set
forth in this Agreement, any action taken at a meeting of the Partners at which
a quorum is present shall require approval of Partners holding all of the
outstanding Partnership Interests present at such meeting. Nothing in this
Section 4.2 shall be deemed to modify the requisite vote on any matter as
provided in this Agreement.
4.3 Written Action without a Meeting; Telephone Meetings. Any action required
or permitted to be taken at any meeting of the Partners may be taken without a
meeting and without prior notice, if consent in writing to such action is
provided by all Partners entitled to vote to approve such action. Such written
consent or consents shall be filed with the books and records of the
Partnership and made a part of the minutes of the meeting of the Partners.
Action by written consent shall have the same force and effect as a vote of the
Partners.
4.4 Proxies. Each Partner may appear and vote at any meeting of the Partners,
and may execute waivers of notice, consents, or approvals, through the agency
of one or more Persons, provided such agents are authorized to so act on behalf
of the Partner by the terms of a written proxy which has been executed by such
Partner and delivered to the secretary of the Partnership. The secretary of the
Partnership shall cause such written proxies to be filed with the books and
records of the Partnership. If a written proxy authorizes an agent to appear
and/or to vote at any meeting of the Partnership, such written proxy must be
delivered to the secretary of the Partnership.
ARTICLE 5
Dissolution and Liquidation
5.1 Events of Dissolution. The Partnership shall have a perpetual existence.
Notwithstanding the foregoing, the Partnership shall be dissolved and its
affairs shall be wound up upon the earliest occurrence of any of the following
events (each an "Event of Dissolution"):
(a) the entry of a decree of dissolution under Section 17-802 of the Act;
(b) upon the written consent of the General Partner and the Limited
Partners;
(c) at such time as there are no limited partners of the Partnership,
unless the business of the Partnership is continued in accordance with the
Act; and
(d) any event that results in the General Partner's ceasing to be a
general partner of the Partnership under the Act; provided, that, the
Partnership shall not be dissolved and required to be wound up in
connection with any such event if (i) at the time of the occurrence of such
event there is at least one remaining general partner of the Partnership
who is hereby authorized to and does carry on the business of the
Partnership, or (ii) within 180 days after the occurrence of such event,
the Limited Partners agrees in writing or vote to continue the business of
the Partnership and to the appointment, effective as of the date of such
event, if required, of one or more additional general partners of the
Partnership. The occurrence of the event described in Section 17-402(a)(4)
or (5) of the Act shall not cause the General Partner to cease to be a
general partner of the Partnership.
5.2 Procedure Upon Dissolution.
(a) Upon the dissolution of the Partnership, the Liquidating Trustee
appointed pursuant to Section 5.3 hereof shall immediately commence to wind
up the Partnership's affairs, and shall proceed with reasonable promptness
to liquidate the business of the Partnership;
(b) If the Partnership is dissolved while its business is in progress,
the winding up of the affairs of the business of the Partnership may
include completion of any work in progress and any contracts in
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existence on the date of dissolution, provided that, the Liquidating
Trustee shall use all reasonable efforts to terminate any such contracts as
soon as practicable;
(c) Except as otherwise required by the Act, upon the dissolution of the
Partnership, the assets of the Partnership shall be applied in the
following order:
(i) To the satisfaction (whether by payment or by establishment of
reasonable reserves thereof including for any contingent, conditional
or unmatured liabilities or obligations of the Partnership) of debts
and liabilities of the Partnership to creditors in the order of
priority provided by law, and the expenses of dissolution and
liquidation; and
(ii) To the Partners in accordance with their respective positive
Book Capital Account balances.
(d) Reserves for any contingent, conditional or unmatured liabilities or
obligations shall be held in trust by the Liquidating Trustee for the
purpose of disbursing such reserves in payment of any such liabilities or
obligations and, at the expiration of such period as the Liquidating
Trustee shall deem advisable, to distribute the balance of the trust corpus
in the manner herein provided.
(e) Subject to subsection (c), upon the dissolution of the Partnership,
all of the Partnership's Subscribers shall be divided among SBC Partner and
Public Corp. in accordance with their respective positive Book Capital
Account balances.
(f) Subject to subsections (c) and (e), in making distributions pursuant
to a dissolution of the Partnership and in the assignment of Subscribers,
the Liquidating Trustee (i) shall use commercially reasonable efforts to
allocate and to return to the Partners the assets contributed by such
Partners to the Partnership and (ii) shall give due consideration to the
Retail Local Loop Customers of SBC Communications Inc. ("SBC") and the
markets in which SBC operates; provided, that, each of the Partners shall
assume all liabilities associated with the assets distributed to such
Partner, and the allocation of assets to the Partners shall be based on the
net value of such assets after taking into account such associated
liabilities. The fair value of such assets shall be determined by the
Liquidating Trustee in such manner as it deems appropriate. In furtherance
of the foregoing, whenever assets are distributed in kind under this
Agreement, a Partner shall accept a distribution of any asset in kind from
the Partnership regardless of whether the percentage of the asset
distributed to such Partner differs from the percentage in which such
Partner otherwise shares in distributions from the Partnership.
5.3 Liquidating Trustee. The liquidating trustee of the Partnership shall be
appointed by the General Partner or, if there is no General Partner, by a
Person selected by the unanimous consent of the Limited Partners.
5.4 Powers of the Liquidating Trustee. The Liquidating Trustee, subject to
the provisions of Section 5.5 hereof, shall have full power and authority to,
and shall, wind up the business and affairs of the Partnership, including
without limiting the generality of the foregoing, full power and authority to:
(a) sell, transfer, hypothecate, pledge or otherwise encumber or dispose
of all or any part of the Partnership's assets for cash or a cash
equivalent at such price and on such terms as the Liquidating Trustee shall
determine to be necessary, appropriate or desirable in order to accomplish
an orderly and prompt dissolution of the Partnership at the most favorable
price and on the most favorable terms reasonably obtainable; provided,
that, such sale, transfer, hypothecation, pledge, encumbrance or
disposition of any such asset is in accordance with Sections 5.2(c),
5.2(d), 5.2(e) and 5.2(f) hereof;
(b) represent and act for and on behalf of the Partnership in all
matters, including, without limitation, the power and authority to engage
professional and technical services including, without limitation,
accountants, attorneys, appraisers, brokers and auctioneers, and to
institute and defend any legal proceedings that may be pending or brought
by or against the Partnership;
(c) prepare, execute, file, record and publish on behalf of the Partners
and the Partnership any agreements, documents or instruments relating to
the dissolution and winding up of the business and affairs of the
Partnership;
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(d) satisfy or pay or otherwise settle or discharge all of the debts,
liabilities and other obligations of the Partnership;
(e) distribute to the Partners any of the Partnership's assets, including
without limitation, the proceeds of any sale of assets remaining after
payment of debts, liabilities and other obligations in accordance with
Sections 5.2(c), 5.2(d), 5.2(e) and 5.2(f) hereof; and
(f) take all other action necessary, appropriate or incidental to the
foregoing powers or to the performance of the duties of the Liquidating
Trustee under this Agreement.
5.5 Duties of Liquidating Trustee. The Liquidating Trustee shall devote such
time as it deems reasonably necessary to wind up the Partnership in the manner
provided in this Article 5. In addition, the Liquidating Trustee shall:
(a) arrange for an independent certified public accountant to supervise a
complete inventory and accounting of the Partnership's assets and
liabilities as of the date of dissolution; and
(b) prepare, file, publish and record in a timely manner all appropriate
agreements, documents and instruments, including federal and state tax
returns, to reflect the dissolution and termination of the Partnership and
the cessation of the use of its name; obtain any necessary or desirable
permits or other authorizations, including, without limitation, tax rulings
relating to the dissolution and winding up of the Partnership or the
disposition of its business, assets and goodwill; and, to the extent
required by law, cancel any existing authorizations, licenses or permits
and resolve or dispose of other matters relating to the dissolution and
winding up as required by law and consistent with the purposes and
provisions of this Agreement. In the performance of these duties, the
Liquidating Trustee shall act diligently, honestly and in good faith and
shall account to the Partners for any benefit or profits derived from
transactions connected with the liquidation and winding up.
5.6 Withdrawal of Limited Partners. No Limited Partner shall have the right
to voluntarily withdraw as a Limited Partner of the Partnership other than
following a Transfer of all of its Units, which Transfer shall be in accordance
with Article 7.
5.7 Indemnification of Liquidating Trustee. To the fullest extent permitted
by law, the Partnership shall indemnify the Liquidating Trustee as provided in
Article 6 hereof.
5.8 Contributions for Deficiencies. No Partner shall have any obligation to
restore a deficit balance in its Capital Account at any time, and such deficit
shall not be considered as owed to the Partnership or any other Person for any
purpose whatsoever.
ARTICLE 6
Indemnification
6.1 General. Each Person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"Proceeding"), arising out of the fact (a) that such Person is or was a General
Partner, Limited Partner, Liquidating Trustee, officer, employee or agent of
the Partnership or the General Partner, or a director, officer, employee, or
agent of one or more of the Partners acting on behalf of the Partnership, or
(b) that such Person is or was serving at the request of the Partnership as a
general partner, limited partner, liquidating trustee, trustee, director,
officer, employee or agent of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(collectively, "Another Enterprise" or "Other Enterprise"), whether either in
case (a) or in case (b) the basis of such Proceeding is alleged action or
inaction (x) in an official capacity as a general partner, limited partner,
liquidating trustee, officer, employee or agent of the Partnership, or as an
agent, employee, officer or director of one or more of the Partners acting on
behalf of
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the Partnership or as a director, general partner, limited partner, liquidating
trustee, trustee, director, officer, employee or agent of such Other
Enterprise, or (y) in any other capacity related to the Partnership or such
Other Enterprise while so serving as a director, general partner, limited
partner, liquidating trustee, trustee, director, officer, employee or agent, is
and shall be indemnified and held harmless by the Partnership to the fullest
extent not prohibited by applicable law against all expense, liability and loss
(including, without limitation, attorneys' fees, judgments, fines, excise taxes
or penalties and amounts paid in settlement) reasonably incurred or suffered by
such Person in connection therewith, unless such Person, in connection with a
matter for which indemnification is sought, is found by a court of competent
jurisdiction to have acted in a grossly negligent manner, to have committed
willful malfeasance or fraud, or to have breached (taking into account the
provisions of Section 2.15 hereof) such Person's duty to the Partnership or the
Partners. The Persons indemnified by this Article 6 are hereinafter referred to
as "Indemnitees." Such indemnification as to such alleged action or inaction
shall continue as to an Indemnitee who has after such alleged action or
inaction ceased to be a General Partner, Limited Partner, Liquidating Trustee,
officer, employee or agent of the Partnership, or agent, manager, employee,
officer or director of one or more of the Partners acting on behalf of the
Partnership, or director, officer, general partner, limited partner,
liquidating trustee, trustee, employee or agent of Another Enterprise; and
shall inure to the benefit of the Indemnitee's heirs, executors and
administrators. The right to indemnification conferred in this Article 6: (i)
is a contract right; (ii) shall not be affected adversely as to any Indemnitee
by any amendment of this Agreement with respect to any action or inaction
occurring prior to such amendment; and (iii) subject to any requirements
imposed by law, includes the right to be paid by the Partnership the expenses
incurred in investigating, defending or settling any such Proceeding in advance
of its final disposition, which expenses shall be paid promptly upon request of
the Indemnitee; provided, however, that a Person shall have the right to
require such advance payment by the Partnership only upon receipt by the
Partnership of an undertaking by or on behalf of such Person to repay such
amount to the Partnership if it is ultimately determined by a court of
competent jurisdiction that the Person is not entitled to be indemnified by the
Partnership under this Agreement.
6.2 Nonexclusivity. The rights to indemnification and to the advancement of
expenses conferred in this Article 6 are not exclusive of any other right that
any Person may have or hereafter acquire under any statute, agreement, vote of
Partners or otherwise.
6.3 Enforcement. If a claim for indemnification hereunder is not paid in full
by the Partnership within 60 days after it has been received in writing by the
Partnership, except in the case of a claim for an advancement of expenses, in
which case the applicable period is 20 days, the Indemnitee may at any time
thereafter bring suit against the Partnership to recover the unpaid amount of
the claim. If successful as a whole or in part in any such suit, or in a suit
brought by the Partnership to recover an advancement of expenses pursuant to
the terms of an undertaking, the Indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. Neither the failure of the
Partnership (including the General Partner, independent legal counsel or its
Partners) to have made a determination prior to the commencement of such suit
that indemnification of the Indemnitee is proper under the circumstances
because the Indemnitee has met the applicable standard of conduct, nor an
actual determination by the Partnership (including the General Partner,
independent legal counsel or its Partners) that the Indemnitee has not met such
applicable standard of conduct, creates or shall create a presumption that the
Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit.
6.4 Insurance. The Partnership shall maintain insurance, at its expense, to
protect itself and any Indemnitee against any expense, liability or loss,
whether or not the Partnership would have the power to indemnify such
Indemnitee against such expense, liability or loss; provided, that, the
Partnership shall not be required to maintain such insurance if it cannot be
obtained on commercially reasonable terms, as determined by the General
Partner.
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ARTICLE 7
Transferability of Units
7.1 Transfer of Units.
(a) No Limited Partner shall Transfer, or cause or permit to be
Transferred, all or any portion of its respective Units, except for
Transfers in compliance with this Article 7, and, to the fullest extent
permitted by law, any purported Transfer in violation hereof shall be null
and void. Upon any Transfer of any Units in accordance with this Agreement,
the General Partner shall appropriately adjust (i) the number of Units
owned by each Partner and the Percentage Interest of each Partner as set
forth on Schedule 2.5 and (ii) each Partner's Capital Account.
(b) A Limited Partner may Transfer, or cause or permit to be Transferred,
all or any portion of its Units to any Person as long as (i) prior to any
such Transfer, such Person shall agree in writing that such Person shall be
bound by and subject to all of the terms and conditions of this Agreement
and (ii) if a Limited Partner makes any such Transfer to a wholly-owned
Affiliate, such Limited Partner shall remain liable to the Partnership and
the Partners to the same extent it was prior to such Transfer, unless
otherwise required by law or regulation.
(c) Notwithstanding anything in this Agreement to the contrary, SBC
Partner may Transfer some or all of its Units to Public Corp. in exchange
for Class A Common Stock in accordance with Article 8. Public Corp. shall
receive such transferred Units in its capacity as General Partner.
7.2 Transfer of General Partner Interests.
The General Partner shall not Transfer, or cause or permit to be Transferred,
all or any of its Units without the written consent of the Limited Partners.
ARTICLE 8
Units; Certificates
8.1 Certificates. Units shall be represented by a certificate or
certificates, setting forth upon the face thereof that the Partnership is a
limited partnership formed under the laws of the State of Delaware, the name of
the Person to which it is issued and the number of Units which such certificate
represents. Such certificates shall be entered in the books of the Partnership
as they are issued, and shall be signed by the Chairman or the Chief Executive
Officer of the Partnership. Upon any Transfer permitted under this Agreement,
the transferring Partner shall (i) issue to the transferee a certificate
representing the number of Units so transferred and (ii) surrender to the
Partnership and the Partnership shall issue to the transferring Partner
certificates representing the remaining Units, if any, held by such
transferring Partner after taking into account such Transfer. All certificates
representing Units (unless registered under the Securities Act of 1933, as
amended (the "Securities Act")), shall bear the following legend:
THE PARTNERSHIP INTERESTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, AND MAY NOT BE
SOLD, ASSIGNED, PLEDGED, ENCUMBERED, TRANSFERRED, GRANTED AN OPTION WITH
RESPECT TO OR OTHERWISE DISPOSED OF, (I) UNLESS AND UNTIL THEY HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OR SUCH SALE, ASSIGNMENT, PLEDGE,
ENCUMBRANCE, TRANSFER, OPTION GRANT OR OTHER DISPOSITION IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT AND (II) UNLESS IN ACCORDANCE WITH
THE PROVISIONS OF THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF
THE PARTNERSHIP (AS AMENDED AND RESTATED FROM TIME TO TIME), A COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE PARTNERSHIP.
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<PAGE>
8.2 Lost or Destroyed Certificates. The Partnership may issue a new
certificate for Units in place of any certificate or certificates theretofore
issued by it, alleged to have been lost or destroyed, upon the making of an
affidavit of that fact, and providing an indemnity in form and subject
reasonably satisfactory to the General Partner by the Person claiming the
certificate to be lost or destroyed.
8.3 Transfer of Units. No Transfer of Units shall be valid as against the
Partnership except upon surrender to and cancellation of the certificate
therefor, accompanied by an assignment or transfer by the Partner, subject to
any restrictions on Transfer contained in this Agreement.
8.4 Exchange of Units. (a) Each holder (other than Public Corp. or any of its
Subsidiaries) of a Unit shall be entitled to exchange, at any time and from
time to time, any or all of such holder's Units, for a number of fully paid and
non-assessable shares of Class A Common Stock equal to the difference between
(i) the number of shares of Class A Common Stock outstanding divided by (A) one
minus (B) a fraction, the numerator of which shall be the Book Capital Account
(as defined in Section 2.8(a)(i) and computed as if, immediately prior to the
exchange, there was a Revaluation pursuant to Section 2.8(e)) of such holder
attributable to the Units exchanged at the time of the proposed exchange, and
the denominator of which shall be the Book Capital Accounts (as defined in
Section 2.8(a)(i) and computed as if, immediately prior to the exchange, there
was a Revaluation pursuant to Section 2.8(e)) of Prodigy immediately after the
exchange of Units (giving effect to Section 2.8(a)(vii) and (ii) the number of
shares of Class A Common Stock outstanding; provided, however, that from and
after such time that the Book Capital Account of such holder equals the Imputed
Capital Account of such holder, each holder (other than Public Corp. or any of
its Subsidiaries) of a Unit shall be entitled to exchange, at any time and from
time to time, any or all of such holder's Units, on a one-for-one basis, into
the same number of fully paid and non-assessable shares of Class A Common
Stock. Such right shall be exercised by the surrender to Public Corp. of the
certificate or certificates representing the Units to be exchanged at any time
during normal business hours at the principal executive offices of Public Corp.
or at the office of the Transfer Agent (as defined in the Restated Certificate
of Incorporation), accompanied by a written notice of the holder of such Units
stating that such holder desires to exchange such Units, or a stated number of
Units represented by such certificate or certificates, into the relevant number
of shares of Class A Common Stock, and, if any such Class A Common Stock
certificate is to be issued in a name other than that of the holder of the Unit
or Units exchanged, by instruments of transfer to Public Corp., in form
satisfactory to Public Corp. and to the Transfer Agent, duly executed by such
holder or such holder's duly authorized attorney, and transfer tax stamps or
funds therefor, if required pursuant to Section 8.4(e).
(b) As promptly as practicable following the surrender for exchange of a
certificate representing Units in the manner provided in Section 8.4(a),
and the payment in cash of any amount required by Section 8.4(e), Public
Corp. will deliver or cause to be delivered at the office of the Transfer
Agent, a certificate or certificates representing the number of full shares
of Class A Common Stock issuable upon such exchange, issued in such name or
names as such holder may direct. Such exchange shall be deemed to have been
effected immediately prior to the close of business on the date of the
surrender of the certificate or certificates representing Units. Upon the
date any such exchange is made or effected, all rights of the holder of
such Units as such holder shall cease, and the person or persons in whose
name or names the certificate or certificates representing the shares of
Class A Common Stock are to be issued shall be treated for all purposes as
having become the record holder or holders of such shares of Class A Common
Stock; provided, however, that if any such surrender and payment occurs on
any date when the stock transfer books of Public Corp. shall be closed, the
person or persons in whose name or names the certificate or certificates
representing shares of Class A Common Stock are to be issued shall be
deemed the record holder or holders thereof for all purposes immediately
prior to the close of business on the next succeeding day on which the
stock transfer books are open.
(c) In the event of a reclassification or other similar transaction
approved in accordance with Article FIFTH, Clauses (f)(ii) and (g)(i) of
the Restated Certificate of Incorporation as a result of which the shares
of Class A Common Stock are converted into another security, then a holder
of Units shall be entitled to receive upon exchange the amount of such
security that such holder would have received if such exchange
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<PAGE>
had occurred immediately prior to the record date of such reclassification
or other similar transaction. No adjustments in respect of dividends shall
be made upon the exchange of any Unit; provided, however, that if a Unit
shall be exchanged subsequent to the record date for the payment of a
dividend or other distribution on Units but prior to such payment, then the
registered holder of such Unit at the close of business on such record date
shall be entitled to receive the dividend or other distribution payable on
such Unit on such date notwithstanding the exchange thereof or the default
in payment of the dividend or distribution due on such date.
(d) Public Corp. covenants that it will at all times reserve and keep
available out of its authorized but unissued shares of Class A Common
Stock, solely for the purpose of issuance upon exchange of the outstanding
Units, such number of shares of Class A Common Stock that shall be issuable
upon the exchange of all such outstanding Units. Public Corp. covenants
that if any shares of Class A Common Stock require registration with or
approval of any governmental authority under any federal or state law
before such shares of Class A Common Stock may be issued upon exchange,
Public Corp. will cause such shares to be so registered or approved, as the
case may be. Public Corp. will use its best efforts to list the shares of
Class A Common Stock required to be delivered upon exchange prior to such
delivery upon the Nasdaq National Market and/or each national securities
exchange upon which the outstanding Class A Common stock is listed at the
time of such delivery. Public Corp. covenants that all shares of Class A
Common Stock that shall be issued upon exchange of the Units will, upon
issue, be validly issued, fully paid and non-assessable.
(e) The issuance of certificates for shares of Class A Common Stock upon
exchange of Units shall be made without charge to the holders of such Units
for any stamp or other similar tax in respect of such issuance; provided,
however, that if any such certificate is to be issued in a name other than
that of the holder of the Units exchanged, then the person or persons
requesting the issuance thereof shall pay to Public Corp. the amount of any
tax that may be payable in respect of any transfer involved in such
issuance or shall establish to the satisfaction of Public Corp. that such
tax has been paid or is not payable.
8.5 Combinations and Subdivisions. The Partnership will not in any manner
subdivide (by any split, distribution, reclassification, recapitalization or
otherwise) or combine (by reverse split, reclassification, recapitalization or
otherwise) the outstanding Units unless an identical event is occurring with
respect to the Class A Common Stock, in which event the Units shall be combined
or subdivided concurrently with and in the same manner as the Class A Common
Stock.
8.6 Incentive Plans; Registered and Private Offerings.
(a) At any time Public Corp. issues a share of Class A Common Stock
pursuant to an Employee Benefit Plan (whether pursuant to the exercise of a
stock option or the grant of a restricted share award or otherwise), the
following shall occur: (i) Public Corp. shall be deemed to contribute to
the capital of the Partnership an amount of cash equal to the current per
share market price of a share of Class A Common Stock on the date such
share is issued (or, if earlier, the date the related option is exercised);
(ii) the Partnership shall be deemed to purchase from Public Corp. a share
of Class A Common Stock for an amount of cash equal to the amount of cash
deemed contributed by Public Corp. to the Partnership in clause (i) above
(and such share is deemed delivered to its owner under the Employee Benefit
Plan); (iii) the net proceeds (including the amount of any payments made on
a loan with respect to a stock purchase award) received by Public Corp.
with respect to such share, if any, shall be concurrently transferred to
the Partnership (and such net proceeds so transferred shall not constitute
a capital contribution); and (iv) the Partnership shall issue to Public
Corp., in its capacity as General Partner, one (1) Unit registered in the
name of Public Corp. The Partnership shall retain any net proceeds that are
paid directly to the Partnership.
(b) At any time Public Corp. issues a share of Class A Common Stock
pursuant to a primary public offering registered under the Securities Act
or in a private placement (including in connection with any acquisition,
business combination, merger or similar transaction), the net proceeds,
assets or securities
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<PAGE>
received by Public Corp. with respect to such share, if any, shall be
concurrently transferred to the Partnership and the Partnership shall issue
to Public Corp., in its capacity as General Partner, one (1) Unit
registered in the name of Public Corp.
ARTICLE 9
Miscellaneous
9.1 Amendment of this Agreement. Other than the right of the General Partner
to adjust the number of Units and Percentage Interests set forth in Schedule
2.5 hereto in accordance with this Agreement, this Agreement may be amended
only upon the unanimous approval thereof by the Partners.
9.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
9.3 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and may be executed by facsimile signature. All counterparts shall collectively
constitute one and the same Agreement.
9.4 Headings; Recitals. The descriptive headings of this Agreement and its
Schedules and Exhibits and the recitals herein are inserted for convenience and
identification only and are in no way intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provisions
hereof.
9.5 Integration. This Agreement, including the Schedules and Exhibits hereto
and all other documents referenced herein or contemplated hereby, constitutes
the entire agreement and understanding of the parties hereto with respect to
the matters herein set forth, and all prior negotiations and understandings
relating to the subject matter of this Agreement are merged herein and are
superceded and canceled by this Agreement.
9.6 Severability. In the event that any provision of this Agreement is held
to be illegal, invalid or unenforceable in a final, unappealable Order or
judgment (each such provision, an "invalid provision"), then such provision
shall be severed from this Agreement and shall be inoperative, and the parties
promptly shall negotiate in good faith a lawful, valid and enforceable
provision that is as similar to the invalid provision as may be possible and
that preserves the original intentions and economic positions of the parties as
set forth herein to the maximum extent feasible, while the remaining provisions
of this Agreement shall remain binding on the parties hereto. Without limiting
the generality of the foregoing sentence, in the event a change in any
applicable law, rule or regulation makes it unlawful for a party to comply with
any of its obligations hereunder, the parties shall negotiate in good faith a
modification to such obligation to the extent necessary to comply with such
law, rule or regulation that is as similar in terms to the original obligation
as may be possible while preserving the original intentions and economic
positions of the parties as set forth herein to the maximum extent feasible.
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<PAGE>
9.7 Notices. In any case where any notice or other communication is required
or permitted to be given hereunder, such notice or communication shall be in
writing and deemed to have been duly given and delivered: (a) if delivered in
person, on the date of such delivery; (b) if sent by overnight express or
registered or certified mail (with return receipt requested), on the date of
receipt of such mail; or (c) if sent by confirmed facsimile transmission (with
answer back received), on the date of such facsimile transmission provided that
notice is also sent on the same day by one of the methods set forth in (a) or
(b) above. Such notice or other communication shall be sent to the following
address(es) (or such other address(es) as the relevant party may designate from
time to time in writing):
If to SBC Partner:
James S. Kahan
Senior Vice President
Corporate Development
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Telecopy: (210) 351-5034
Telephone: (210) 351-5030
With copies, which shall not constitute notice, to:
Senior Counsel--M&A
SBC Communications Inc.
175 East Houston Street
San Antonio, Texas 78705
Telecopy: (210) 351-3488
Telephone: (210) 351-3445
Joseph B. Frumkin, Esq.
Keith A. Pagnani, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telecopy: (212) 558-3588
Telephone: (212) 558-4000
If to Prodigy Communications Limited Partnership or Public Corp.:
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
Telecopy: (914) 448-8198
Telephone: (914) 448-8000
Attention: Andrea S. Hirsch
Executive Vice President
Business Development
and General Counsel
D-22
<PAGE>
With a copy, which shall not constitute notice, to:
David A. Westenberg, Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Telecopy: (617) 526-5000
Telephone: (617) 526-6000
9.8 Further Assurances. In addition to any other obligations set forth in
this Agreement, each party agrees to take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by the other party for the implementation or continuing
performance of this Agreement. Unless otherwise expressly set forth herein, any
agreement by a party to take or refrain from taking any action shall constitute
an agreement by such party to cause each of its subsidiaries, and to use all
reasonable best efforts to cause each of its Affiliates, to so act or refrain
from acting.
9.9 No Third Party Beneficiaries. This Agreement is entered into solely
among, and may be enforced only by, the parties hereto. This Agreement shall
not be deemed to create any rights in any third parties, including suppliers,
customers and employees of any party, or to create any obligations of a party
to any such third parties. Notwithstanding the foregoing, any Person entitled
to indemnification hereunder shall be deemed to be an express third party
beneficiary hereof with respect to all matters relating to such
indemnification, and may enforce the provisions of this Agreement relating
thereto to the same extent as if such Person were a party hereto.
9.10 Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned by any party without the prior written consent of the
other parties hereto. Any attempted assignment that does not comply with this
Section 9.10 shall be void.
9.11 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the respective successors and permitted assigns of each party
hereto.
9.12 No Agency. Each of the parties hereto shall have no right, power or
authority to assume or create any obligation or responsibility on behalf of any
of the other parties.
9.13 Consent to Jurisdiction; Venue; WAIVER OF JURY TRIAL. The parties hereby
irrevocably submit to the jurisdiction of the courts of the State of Delaware
and the federal court of the United States of America located in the State of
Delaware solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents governed by Delaware law
referred to in this Agreement, and in respect of the transactions contemplated
hereby, and hereby waive, and agree not to assert, as a defense in any action,
suit or proceeding for the interpretation or enforcement hereof or of any such
document, that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said courts or that the
venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and, to the fullest
extent permitted by law, agree that mailing of process or other papers in
connection with any such action or proceeding in the manner provided in Section
9.7 of this Agreement or in such other manner as may be permitted by law shall
be valid and sufficient service thereof.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
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<PAGE>
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.13.
9.14 Equitable Remedies. Each party acknowledges that no adequate remedy of
law would be available for any breach of this Agreement, and any breach of any
Section or Article of this Agreement by one party would irreparably injure the
other party or parties and accordingly agrees that in the event of a breach of
any Section or Article of this Agreement, the respective rights and obligations
of the parties hereunder shall be enforceable by specific performance,
injunction or other equitable remedy (without bond or security being required),
and each party waives the defense in any action and/or proceeding brought to
enforce this Agreement that there exists an adequate remedy or that the other
party is not irreparably harmed.
9.15 Principles of Construction. In this Agreement and all other attached
Schedules, Exhibits or Attachments to this Agreement, unless otherwise
expressly indicated or required by the context:
reference to and the definition of any document shall be deemed a
reference to such document as it may be amended, supplemented, revised, or
modified, in writing, from time to time but disregarding any amendment,
supplement, replacement or novation made in breach of this Agreement;
references in this Agreement to any statute, decree or regulation shall
be construed as a reference to such statute, law, decree or regulation as
re-enacted, redesignated, amended or extended from time to time and
references herein or in this Agreement to any document or agreement shall
be deemed to include references to such document or agreement as amended,
varied, supplemented or replaced from time to time in accordance with such
document's or agreement's terms;
defined terms in the singular shall include the plural and vice versa,
and the masculine, feminine or neuter gender shall include all genders;
the words "including" or "includes" shall be deemed to mean "including
without limitation" and "including but not limited to" (or "includes
without limitation" and "includes but is not limited to") regardless of
whether the words "without limitation" or "but not limited to" actually
follow the term;
accounting terms used herein but not defined herein shall have their
respective meanings provided under GAAP;
the words "hereof," "herein" and "hereunder" and words of similar import
when used in this Agreement or its Schedules or Exhibits shall refer to
this Agreement and its Schedules and Exhibits as a whole and not to any
particular provision hereof or thereof, as the case may be; and
any reference herein to a time of day means the time of day in New York,
New York.
9.16 No Waiver of Rights. No failure or delay on the part of a party in the
exercise of any power or right hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or power hereunder shall operate as a
waiver of such right or of any other right or power. The waiver by any party of
a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any other or subsequent breach hereunder. No waiver shall be
effective unless in writing signed by the waiving party.
9.17 Force Majeure. If any circumstance beyond the reasonable control of any
party occurs which delays or renders impossible the performance of that party's
obligations under this Agreement on the dates
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<PAGE>
herein provided, such obligation shall be postponed for such time as such
performance necessarily has had to be suspended or delayed on account thereof,
provided such party shall notify the other parties in writing as soon as
practicable, but in no event more than ten days, after the occurrence of such
force majeure. In such event, the parties shall meet promptly to determine an
equitable solution to the effects of any such event, provided that such party
who fails because of force majeure to perform its obligations hereunder shall
use commercially reasonable efforts to implement work-arounds or otherwise
minimize the length of the delay and to resume promptly performance upon the
cessation of the force majeure. Events of force majeure shall include war,
revolution, invasion, insurrection, riots, mob violence, sabotage or other
civil disorders, power outages, and acts of God; provided, however, that, in
the event that a change in any applicable law, rule or regulation makes it
unlawful for a party to comply with any of its obligations hereunder and could
be considered an event of force majeure, the characterization of such change in
law, rule or regulation as an event of force majeure shall be without prejudice
to the obligations of the parties under Section 9.6 above.
9.18 Negotiated Terms . Each party acknowledges that the provisions of this
Agreement were negotiated to reflect an informed, voluntary allocation between
the parties of all risks (both known and unknown) associated with the
transactions contemplated by this Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the
date first above written.
GENERAL PARTNER
PRODIGY COMMUNICATIONS CORPORATION
By: ____________________________________
Name:
Title:
INITIAL LIMITED PARTNER
PRODIGY TRANSITION CORPORATION
BY: ____________________________________
Name:
Title:
LIMITED PARTNER
SBC INTERNET COMMUNICATIONS, INC.
By: ____________________________________
Name:
Title:
D-26
<PAGE>
ANNEX E
REGISTRATION RIGHTS AGREEMENT
Dated as of , 2000
by and among
Prodigy Communications Corporation
SBC Communications Inc.
and
SBC Internet Communications Inc.
<PAGE>
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into
as of , 2000, by and among Prodigy Communications Corporation, a Delaware
corporation ("Prodigy"), SBC Communications Inc. a Delaware corporation ("SBC")
and SBC Internet Communications, Inc., a Delaware corporation and an indirect
wholly owned subsidiary of SBC ("SBC Sub").
RECITALS
WHEREAS, Prodigy, Prodigy Transition Corporation, a Delaware corporation and
a wholly owned subsidiary of Prodigy, Prodigy Communications Limited
Partnership, a Delaware limited partnership, SBC and SBC Sub have entered into
an Investment, Issuance, Contribution and Assumption Agreement, dated as of
November 19, 1999 (the "Investment Agreement"); and
WHEREAS, pursuant to the Investment Agreement, SBC Sub received SBC Units (as
defined in the Investment Agreement), which are exchangeable into Registrable
Securities (as defined below) in accordance with the Restated Certificate of
Incorporation (as defined below), and the Investment Share (as defined in the
Investment Agreement), which is convertible into a Registrable Security in
accordance with the Restated Certificate of Incorporation; and
WHEREAS, Prodigy has agreed to provide the registration rights set forth in
this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and subject to and on the
terms and conditions herein set forth, the parties hereto agree as follows:
1. Definitions.
Capitalized terms used but not defined in this Agreement shall have the
respective meanings assigned to such terms in the Investment Agreement. As used
in this Agreement, the following capitalized terms shall have the following
meanings:
"Amended and Restated By-Laws" means the Amended and Restated By-Laws of
Prodigy as adopted on . , 2000.
"Class A Common Shares" shall mean the shares of Class A Common Stock,
par value $.01 per share, of Prodigy.
"Demand Registration" shall have the meaning set forth in Section 2(a)
hereof.
"Demand Registration Statement" shall have the meaning set forth in
Section 2(a) hereof.
"Effective Time" shall mean the date on which the SEC declares a
Registration Statement effective or on which such Registration Statement
otherwise becomes effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Indemnified Person" shall have the meaning set forth in Section 6(a)
hereof.
"Investment Agreement" shall have the meaning set forth in the Recitals.
"NASD Rules" shall mean the Rules of the National Association of
Securities Dealers, Inc., as amended from time to time.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political
subdivision thereof.
"Piggyback Registration" shall have the meaning set forth in Section 3(a)
hereof.
"Prodigy" shall have the meaning set forth in the Preamble.
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<PAGE>
"Proposed Registration" shall have the meaning set forth in Section 3(a)
hereof.
"Prospectus" shall mean the prospectus (including, without limitation,
any preliminary prospectus, any final prospectus and any prospectus that
discloses information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A under the
Securities Act) included in a Registration Statement, as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to such
prospectus, including all material incorporated by reference in such
prospectus and all documents filed after the date of such prospectus by
Prodigy under the Exchange Act and incorporated by reference therein.
"Registration Expenses" shall have the meaning set forth in Section 5(a)
hereof.
"Registrable Securities" shall mean the Class A Common Shares issued to
SBC, SBC Sub or any direct or indirect transferee of SBC or SBC Sub upon
conversion of shares of Class B Common Stock or in exchange for Units, from
time to time, together with any other Class A Common Shares owned by SBC,
SBC Sub or such transferee, provided that a security ceases to be a
Registrable Security when it is no longer a Restricted Security.
"Registration Statement" shall mean any registration statement of Prodigy
which covers Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including pre- and post-effective amendments, and
all exhibits and all material incorporated by reference in such
registration statement.
"Restated Certificate of Incorporation" means the Restated Certificate of
Incorporation of Prodigy as filed on . , 2000 with the Secretary of State
of the state of Delaware pursuant to the Delaware General Corporation Law.
"Restricted Security" shall mean any security unless and until:
(i) a registration statement with respect to the sale of such
security shall have been declared effective under the Securities Act
and such security shall have been disposed of in accordance with such
registration statement,
(ii) it is distributed to the public pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act,
(iii) the provisions of Section 7(b) hereof apply, or
(iv) such security shall have been otherwise transferred pursuant to
an applicable exemption under the Securities Act, new certificates for
such security not bearing a legend restricting further transfer shall
have been delivered by Prodigy and such security shall be freely
transferable to the public without registration under the Securities
Act.
"SBC" shall have the meaning set forth in the Preamble.
"SBC Sub" shall have the meaning set forth in the Preamble.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SEC" shall mean the Securities and Exchange Commission.
"underwritten", "underwritten registration", "underwritten offering" or
"underwritten registered offering" shall mean a registration in which
securities of Prodigy are sold to an underwriter for re-offering to the
public pursuant to an effective Registration Statement.
2. Demand Registrations.
(a) Notice. SBC or SBC Sub may at any time make a written request to
Prodigy that Prodigy file a registration statement (a "Demand Registration
Statement") registering for offer and sale all or a part of
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<PAGE>
its Registrable Securities with the SEC under and in accordance with
provisions of the Securities Act (a "Demand Registration"). All requests
made pursuant to this paragraph will specify the aggregate number of the
Registrable Securities to be registered and will also specify the intended
methods of disposition thereof.
(b) Restrictions. Each Demand Registration Statement shall be filed as
soon as possible but in no event later than 30 days (which time period may
be extended at the option of Prodigy for up to one hundred twenty (120)
days no more than one time in any calendar year if the Board of Directors
of Prodigy provides written notice (accompanied by a resolution of the
Board setting forth the following) to SBC and/or SBC Sub, as the case may
be, that it has determined that the filing of a Demand Registration
Statement would require Prodigy to disclose material non-public
information, the disclosure of which Prodigy's Board of Directors believes
would be materially harmful to Prodigy and its stockholders at that time)
after the date SBC and/or SBC Sub, as the case may be, makes the written
request for registration under the preceding paragraph, so long as
Registrable Securities are still outstanding at each such time. Prodigy
shall not be required to effect more than two Demand Registrations pursuant
to this Section 2 in any calendar year.
(c) Effectiveness. Prodigy agrees to use its best efforts to cause each
such Demand Registration Statement to be declared effective by the SEC
within 45 calendar days after filing, and to keep it continuously effective
for a period of 120 days following the dates on which each such Demand
Registration Statement is declared effective or until all Registrable
Securities included therein have been sold, if earlier.
(d) Priority of Securities in Demand Registrations. In connection with
any underwritten Demand Registration, if the managing underwriter or
underwriters advise Prodigy in writing that, in its or their reasonable
opinion, the inclusion of the number of securities proposed to be
registered exceeds the number which can be sold in such offering, Prodigy
will include in such registration the number of securities which, in the
opinion of such underwriter or underwriters, can be sold as follows: (i)
first, the Registrable Securities requested to be included in such Demand
Registration by SBC and/or SBC Sub, as the case may be; (ii) second, the
Registrable Securities requested to be included in such Demand
Registration, pro rata among the holders of Registrable Securities which
have requested their Registrable Securities to be included therein; (iii)
third, any Class A Common Shares Prodigy proposes to sell; and (iv) fourth,
other Class A Common Shares requested to be included in such Demand
Registration.
(e) Selection of Underwriters. SBC and/or SBC Sub, as the case may be,
shall have the right, with respect to any Registration Statement to be
filed as a result of a Demand Registration, to determine whether such
registration shall be underwritten or not and to select any managing
underwriter or underwriters to administer the offering, which managing
underwriter or underwriters will be of nationally recognized standing and
which will be reasonably acceptable to Prodigy.
3. Piggyback Registration Rights.
(a) Rights to Piggyback. Subject to the last sentence of this paragraph,
whenever Prodigy proposes to file a registration statement under the
Securities Act (a "Proposed Registration") with respect to any proposed
public offering by Prodigy or by any holders of Class A Common Shares (or
securities convertible into or exchangeable or exercisable for Class A
Common Shares) and the registration form to be used may be used for the
registration of the Registrable Securities (a "Piggyback Registration"),
Prodigy will give prompt written notice to SBC and SBC Sub of its intention
to effect such a registration and will, subject to Section 3(b) below,
include in such Piggyback Registration all Registrable Securities with
respect to which Prodigy has received written request for inclusion therein
within 15 days after receipt of Prodigy's notice. Registrable Securities
with respect to which such requests for registration have been received
will be registered by Prodigy and offered to the public pursuant to this
Section 3 on the same terms and subject to the same conditions applicable
to the registration in a Proposed Registration of Class A Common Shares to
be sold by Prodigy or by persons selling under such Proposed Registration.
Holders of Registrable Securities will not be entitled to include Class A
Common Shares pursuant to this
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Section 3(a) in any Registration Statement pertaining to the registration
of any securities of Prodigy in connection with mergers, acquisitions,
exchange offers, subscription offers, dividend reinvestment plans or stock
options or other employee benefit plans.
(b) Priority on Piggyback Registrations. In connection with an
underwritten Piggyback Registration, if the managing underwriter or
underwriters advise Prodigy in writing that, in its or their reasonable
opinion, the inclusion of the number of securities proposed to be
registered exceeds the number which can be sold in such offering, Prodigy
will include in such registration the number of securities which, in the
opinion of such underwriter or underwriters, can be sold as follows: (i)
first, the Class A Common Shares Prodigy proposes to sell or if the
registration is in response to a demand registration right of a Person
(other than SBC or SBC Sub) whose registration rights exist as of the date
hereof and require such a priority, the securities that the Person(s)
demanding such registration propose or proposes to sell to the extent of
such a priority, (ii) second, the Registrable Securities requested to be
included in such registration and any securities requested to be included
in such registration by a Person who exercises its rights to have its
securities included in such registration, but only to the extent of such
rights, pro rata among the holders of Registrable Securities which have
requested their Registrable Securities to be included therein and such
Persons which have requested their securities to be included therein and
(iii) third, other Class A Common Shares requested to be included in such
registration.
(c) Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, Prodigy will select a managing underwriter or
underwriters to administer the offering, which managing underwriter or
underwriters will be of nationally recognized standing and which will be
reasonably acceptable to SBC.
4. Registration Procedures.
In connection with Prodigy's obligation to file Registration Statements
pursuant to Sections 2 or 3 hereof, Prodigy shall use its best efforts to
effect such registration to permit the sale of such Registrable Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto Prodigy shall:
(a) before filing a Registration Statement or Prospectus or any
amendments or supplements thereto, including documents incorporated by
reference after the initial filing of the Registration Statement, furnish
to SBC and/or SBC Sub, as the case may be, and the managing underwriters,
if any, copies of all such documents proposed to be filed, which documents
will be subject to the review of SBC and/or SBC Sub, as the case may be,
and such managing underwriters, and Prodigy shall not file any Registration
Statement or amendment thereto or any Prospectus or any supplement thereto
(including such documents incorporated by reference) to which SBC or the
managing underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to any Registration Statement, and such supplements to the
Prospectus, as may be reasonably requested by SBC and/or SBC Sub, as the
case may be, or any underwriter of Registrable Securities or as may be
required by the Securities Act or any rules or regulations promulgated
thereunder or otherwise necessary to keep the Registration Statement
effective for the applicable period;
(c) cause the final Prospectus as supplemented to be filed pursuant to
Rule 424 under the Securities Act if then required by the Securities Act;
(d) comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during
the applicable period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement
or supplement to the Prospectus;
(e) notify SBC and/or SBC Sub, as the case may be, and the managing
underwriters, if any, promptly, and (if requested by any such Person)
confirm such notification in writing:
(1) when the Prospectus or any Prospectus supplement or post-
effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective,
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(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information,
(3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose,
(4) of the receipt by Prodigy of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding
for such purpose, and
(5) of the happening of any event or the existence of any state of
facts that requires the making of any changes in the Registration
Statement or the Prospectus included therein so that, as of such date,
such Registration Statement and Prospectus do not contain an untrue
statement of a material fact and do not omit to state a material fact
required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading (which advice shall be
accompanied by an instruction to SBC and SBC Sub to suspend the use of
the Prospectus until the requisite changes have been made);
(f) use its best efforts to prevent the issuance, and if issued to obtain
the withdrawal, of any order suspending the effectiveness of the
Registration Statement at the earliest possible time;
(g) if reasonably requested by SBC and/or SBC Sub, as the case may be, or
the managing underwriter, immediately incorporate in a Prospectus
supplement or post-effective amendment such information as SBC and/or SBC
Sub, as the case may be, and the managing underwriters agree should be
included therein relating to the sale of the Registrable Securities,
including, without limitation, information with respect to the number of
Registrable Securities being sold to such underwriters, the purchase price
being paid therefor by such underwriters and with respect to any other
terms of the underwritten (or best efforts underwritten) offering of the
Registrable Securities to be sold in such offering, including the plan of
distribution therefor; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as notified of the matters
to be incorporated in such Prospectus supplement or post-effective
amendment;
(h) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) (i) provide copies of
such document to counsel to SBC and/or SBC Sub, as the case may be, and to
the managing underwriters, if any, and (ii) make Prodigy's representatives
available for discussion of such document and make such changes in such
document prior to the filing thereof as counsel for SBC and/or SBC Sub, as
the case may be, or underwriters may reasonably request;
(i) furnish to SBC and/or SBC Sub, as the case may be, and each managing
underwriter, without charge, at least one signed copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, all documents incorporated therein by reference
and all exhibits (including those incorporated by reference);
(j) deliver to SBC and/or SBC Sub, as the case may be, and the
underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary Prospectus) and any amendment or supplement
thereto as such Persons may reasonably request; Prodigy consents (except
during the continuance of any event described in Section 4(e)(5) above) to
the use of the Prospectus and any amendment or supplement thereto by SBC
and/or SBC Sub, as the case may be, and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered
by the Prospectus and any amendment or supplement thereto;
(k) prior to any offering of Registrable Securities pursuant to any
Registration Statement, (i) Prodigy shall register or qualify or cooperate
with SBC and/or SBC Sub, as the case may be, and its or their counsel in
connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or "blue sky" laws of
such jurisdictions of or within the United States of America as SBC or any
underwriter reasonably requests in writing, (ii) keep such registrations or
qualifications in effect and comply with such laws so as to permit the
continuance of offers and sales in such jurisdictions
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for so long as may be necessary to enable SBC and/or SBC Sub, as the case
may be, or the managing underwriters, if any, to complete its distribution
of Registrable Securities pursuant to a Registration Statement, and (iii)
take any and all other actions necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by
the Registration Statement; provided, however, that in no event shall
Prodigy be obligated to (i) qualify as a foreign corporation or as a dealer
in securities in any jurisdiction where it would not otherwise be required
to so qualify but for this Section 4(k) or (ii) file any general consent to
service of process in any such jurisdiction where it is not as of the date
hereof so subject;
(l) cooperate with SBC and/or SBC Sub, as the case may be, and the
managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold
pursuant to the Registration Statement, which certificates, if so required
by any securities exchange upon which any Registrable Securities are
listed, shall be penned, lithographed or engraved, or produced by any
combination of such methods, on steel engraved borders, and which
certificates shall be free of any restrictive legends and in such
denominations and registered in such names as SBC and/or SBC Sub, as the
case may be, or the managing underwriters may request at least two business
days prior to the sale of Registrable Securities pursuant to the
Registration Statement;
(m) use its reasonable best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities of or within
the United States of America as may be necessary to enable SBC and/or SBC
Sub, as the case may be, or the managing underwriters, if any, to
consummate the disposition of such Registrable Securities;
(n) if any fact contemplated by Section 4(e)(5) above shall exist,
promptly prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable
Securities, the Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, if the Board of Directors of Prodigy provides written
notice (accompanied by a resolution of the board setting forth the
following) to SBC and/or SBC Sub, as the case may be, that it has
determined that it is advisable to disclose in the Registration Statement
material non-public information, the disclosure of which Prodigy's Board of
Directors believes would be materially harmful to Prodigy and its
stockholders at that time, Prodigy shall not be required to prepare and
file such amendment, supplement or document for such period as the Board of
Directors of Prodigy believes such disclosure would be materially harmful
to Prodigy; provided that such period shall be no more than sixty calendar
days. If Prodigy notifies SBC and/or SBC Sub, as the case may be, of the
occurrence of any event contemplated by Section 4(e)(5) above, each of SBC
and SBC Sub agrees, as a consequence of the inclusion of any of SBC's or
SBC Sub's Registrable Securities in the Registration Statement, to suspend
the use of the Prospectus until the requisite changes to the Prospectus
have been made;
(o) use all reasonable efforts to cause the Registrable Securities
covered by the Registration Statement to be listed for quotation on the
Nasdaq National Market or other stock exchange or trading system on which
the Registrable Securities primarily trade on or prior to the Effective
Time of the Registration Statement;
(p) enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in underwritten offerings) and
take all such other actions in connection therewith as may be reasonably
requested by SBC and/or SBC Sub, as the case may be, and the managing
underwriters, if any, in order to expedite or facilitate the disposition of
such Registrable Securities and in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration
is an underwritten registration:
(1) make such representations and warranties to SBC and/or SBC Sub,
as the case may be, and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to underwriters in
underwritten offerings;
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(2) obtain opinions of counsel to Prodigy and bring-downs of such
opinions (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to SBC and to the managing
underwriters, if any, and addressed to SBC and/or SBC Sub, as the case
may be, and the underwriters, if any, covering: (i) in the case of an
underwritten offering, the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be
reasonably requested by SBC and/or SBC Sub, as the case may be, and the
underwriters (it being agreed that the matters to be covered shall
include, without limitation, as of the date of the opinion and as of
the Effective Time of the Registration Statement or most recent post-
effective amendment thereto, as the case may be, a statement as to the
absence from the Registration Statement and the Prospectus, including
the documents incorporated by reference therein, of an untrue statement
of a material fact or the omission of a material fact required to be
stated therein or necessary to make the statements therein not
misleading), and (ii) in the case of offerings not involving an
underwriter, the matters customarily covered in opinions requested in
the type of offering involved, and, in the case of (i) or (ii), stating
that the Registration Statement complies, as to form, with the
requirements of the Securities Act;
(3) obtain "cold comfort" letters and updates thereof from the
independent public accountants of Prodigy (and, if necessary, from the
independent public accountants of any Subsidiary of Prodigy or of any
business acquired by Prodigy for which financial statements and
financial data are, or are required to be, included in the Registration
Statement) addressed to SBC and/or SBC Sub, as the case may be, and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with underwritten offerings;
(4) if an underwriting agreement is entered into, the same shall set
forth in full the indemnification and contribution provisions and
procedures of Section 6 hereof with respect to all parties to be
indemnified pursuant to Section 6 hereof; and
(5) Prodigy shall deliver such documents and certificates as may be
reasonably requested by SBC and/or SBC Sub, as the case may be, and the
managing underwriters, if any, to evidence the continued validity of
the representations and warranties made pursuant to Section 4(p)(1)
above and to evidence compliance with any conditions contained in the
underwriting agreement or other agreement entered into by Prodigy.
The above shall be done at each closing under such underwriting or similar
agreement or as and to the extent required thereunder;
(q) make available for inspection by SBC and/or SBC Sub, as the case may
be, any underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant retained by SBC
and/or SBC Sub, as the case may be, or such underwriter, all pertinent
financial and other records, pertinent corporate documents and properties
of Prodigy and its Subsidiaries, cause the officers, directors, agents and
employees of Prodigy and its Subsidiaries to supply all information in each
case reasonably requested by SBC and/or SBC Sub, as the case may be, or any
such underwriter, attorney or accountant in connection with the
Registration Statement, provide SBC and/or SBC Sub, as the case may be, and
any such underwriter, attorney or accountant with opportunities to discuss
the business of Prodigy and its Subsidiaries with Prodigy's officers and
provide SBC and/or SBC Sub, as the case may be, and any such underwriter,
attorney or accountant with opportunities to discuss the business of
Prodigy and its Subsidiaries with the independent public accountants who
have certified Prodigy's most recent annual financial statements in each
case, as is customary for similar due diligence investigations; provided
that any records, information or documents that are designated in writing
by Prodigy, in good faith, as confidential shall be kept confidential by
such Persons unless disclosure is made in connection with a court
proceeding or required by law, or such records, information or documents
become available to the public generally or through a third party without
an accompanying obligation of confidentiality; and provided further that,
if the foregoing inspection and information gathering would otherwise
disrupt Prodigy's
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conduct of its business, such inspection and information gathering shall,
to the greatest extent possible, be coordinated on behalf of SBC and/or SBC
Sub, as the case may be, and the other parties entitled thereto by one
counsel designated by and on behalf of SBC and/or SBC Sub, as the case may
be, and other parties;
(r) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make generally available to its
securityholders as soon as practicable, but in any event not later than
eighteen months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Securities Act), an earnings statement of
Prodigy and its Subsidiaries complying with Section 11(a) of the Securities
Act and the rules and regulations of the SEC thereunder (including, at the
option of Prodigy, Rule 158);
(s) in the event that any broker-dealer registered under the Exchange Act
shall be an "affiliate" (as defined in Rule 2720(b)(1) of the NASD Rules
(or any successor provision thereto)) of Prodigy or has a "conflict of
interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any
successor provision thereto)) and such broker-dealer shall underwrite,
participate as a member of an underwriting syndicate or selling group or
assist in the distribution of any Registrable Securities covered by a
Registration Statement, whether as a holder of such Registrable Securities
or as an underwriter, a placement or sales agent or a broker or dealer in
respect thereof, or otherwise, Prodigy shall assist such broker-dealer in
complying with the requirements of the NASD Rules, including, without
limitation, by (A) engaging a "qualified independent underwriter" (as
defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision
thereto)) to participate in the preparation of the registration statement
relating to such Registrable Securities, to exercise usual standards of due
diligence in respect thereto and to recommend the public offering price of
such Registrable Securities, (B) indemnifying such qualified independent
underwriter to the extent of the indemnification of underwriters provided
in Section 6 hereof, and (C) providing such information to such broker-
dealer as may be required in order for such broker-dealer to comply with
the requirements of the NASD Rules;
(t) use its reasonable efforts to assist SBC and/or SBC Sub, as the case
may be, and the underwriters, if any, in marketing the Registrable
Securities, including causing its executive officers to participate in such
"road show" presentations and conference calls as may be customary in the
marketing of equity securities; provided, however, that SBC and/or SBC Sub,
as the case may be, shall cause the managing underwriters or placement
agents of any Securities to give such executives reasonable advance notice
concerning the scheduling of any such presentation or call; provided,
further, that such presentations and conference calls shall be scheduled
with the understanding that the regular responsibilities of such executive
officers will take priority over any such activities; and
(u) take all other steps necessary to effect the registration, offering
and sale of the Registrable Securities covered by the Registration
Statement contemplated hereby.
Prodigy may require SBC and/or SBC Sub, as the case may be, to furnish to
Prodigy such information regarding SBC and/or SBC Sub, as the case may be, and
the distribution of such securities as is required to be disclosed in the
Registration Statement.
Each of SBC and SBC Sub agrees by acquisition of such Registrable Securities
that, upon receipt of any notice from Prodigy of the happening of any event of
the kind described in Section 4(e)(5) hereof, SBC and/or SBC Sub, as the case
may be, will forthwith discontinue disposition of Registrable Securities
pursuant to the Registration Statement until SBC's and/or SBC Sub's, as the
case may be, receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(n) hereof, or until it is advised in writing by
Prodigy that the use of the Prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference
in the Prospectus, and, if so directed by Prodigy, SBC and/or SBC Sub, as the
case may be, will deliver to Prodigy (at Prodigy's expense) all copies, other
than permanent file copies then in SBC's and/or SBC Sub's, as the case may be,
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice; provided that nothing in this paragraph
shall prohibit or restrict SBC and/or SBC Sub, as the case may be, from
effecting sales or transfers
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otherwise than under a Registration Statement. In the event Prodigy shall give
any such notice, the time periods mentioned in Section 2(c) hereof shall be
extended by the number of days during the period from and including the date of
the giving of such notice to and including the date when SBC and/or SBC Sub, as
the case may be, either receives the copies of the supplemented or amended
prospectus contemplated by Section 4(n) hereof or is advised in writing by
Prodigy that the use of the Prospectus may be resumed.
5. Registration Expenses.
(a) All expenses incident to Prodigy's performance of, or compliance,
with this Agreement, including without limitation:
(1) all registration and filing fees (including with respect to
filings required to be made with the National Association of Securities
Dealers);
(2) fees and expenses of compliance with securities or blue sky laws
of or within the United States of America (including fees and
disbursements of counsel for the underwriters or selling holders in
connection with blue sky qualifications of the Registrable Securities
and determination of their eligibility for investment under the laws of
such jurisdictions as the managing underwriters or SBC and/or SBC Sub,
as the case may be, may designate);
(3) printing, messenger, telephone, delivery, distribution and
reproduction expenses;
(4) fees and disbursements of counsel for Prodigy and up to $100,000
of the fees and disbursements of counsel for SBC and/or SBC Sub, as the
case may be, (including the expenses of any opinions required by or
incident to such performance) and fees and disbursements for other
advisors for SBC and/or SBC Sub, as the case may be;
(5) fees and disbursements of all independent certified public
accountants of Prodigy (including the expenses of any special audit and
"cold comfort" letters required by or incident to such performance);
(6) fees and disbursements of underwriters (excluding discounts,
commissions or fees of underwriters, selling brokers, dealer managers
or similar securities industry professionals relating to the
distribution of the Registrable Securities or legal expenses of any
person other than Prodigy, SBC and SBC Sub);
(7) fees and expenses of other Persons retained by Prodigy; and
(8) all out-of-pocket expenses and disbursements arising out of or
related to any marketing efforts undertaken pursuant to Section 4(t) of
this Agreement
(all such expenses being, herein called "Registration Expenses") will be borne
by Prodigy, regardless whether the Registration Statement becomes effective.
To the extent that any Registration Expenses are incurred, assumed or paid by
SBC or SBC Sub, or any underwriter, Prodigy shall reimburse such Person for the
full amount of the Registration Expenses so incurred, assumed or paid promptly
after receipt of a written request therefor, which shall specify in reasonable
detail the nature and amount of the Registration Expenses.
Prodigy will, in any event, pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit, rating agency
fees, the fees and expenses incurred in connection with the listing of the
securities to be registered on each securities exchange on which similar
securities issued by Prodigy are then listed and the fees and expenses of any
Person, including special experts, retained by Prodigy.
(b) In connection with each Registration Statement required hereunder,
Prodigy shall not be responsible for the payment of any transfer taxes
relating to the sale or disposition of the Registrable Securities by SBC or
SBC Sub or for any underwriting discounts and commissions attributable to
the sale of Registrable Securities by or on behalf of SBC or SBC Sub.
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6. Indemnification.
(a) Indemnification by Prodigy. In the event of any registration of
securities of Prodigy under the Securities Act, Prodigy shall indemnify and
hold harmless (i) in the case of any registration of Registrable Securities
hereunder, SBC and/or SBC Sub, as the case may be, and each underwriter,
selling agent or other securities professional, if any, which facilitates
the disposition of Registrable Securities, and each of their respective
officers and directors and each Person who controls SBC and/or SBC Sub, as
the case may be, or such underwriter, selling agent or other securities
professional within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and (ii) in the case of any registration
statement of Prodigy, SBC, its directors and officers and each Person who
controls SBC within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act (each such person being sometimes referred
to as an "Indemnified Person") against any losses, claims, damages or
liabilities, joint or several, to which such Indemnified Person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon (x) an untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement under which such
Registrable Securities are to be registered under the Securities Act, or
any Prospectus contained therein or furnished by Prodigy to any Indemnified
Person, or any amendment or supplement thereto, or (y) the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (z)
the failure of Prodigy to comply with applicable law or the breach by
Prodigy of this Agreement, and Prodigy hereby agrees to reimburse such
Indemnified Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such action or claim
as such expenses are incurred; provided, however, that Prodigy shall not be
liable to any such Indemnified Person in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or Prospectus, or amendment or
supplement, in reliance upon and in conformity with written information
furnished to Prodigy by such Indemnified Person expressly for use therein.
(b) Indemnification by SBC and any Underwriters. SBC agrees, as a
consequence of the inclusion of any of SBC's Registrable Securities in such
Registration Statement, SBC Sub agrees, as a consequence of the inclusion
of any of SBC Sub's Registrable Securities in such Registration Statement,
and each underwriter, selling agent or other securities professional, if
any, which facilitates the disposition of Registrable Securities shall
agree, as a consequence of facilitating such disposition of Registrable
Securities, severally and not jointly, to (i) indemnify and hold harmless
Prodigy, its directors, officers who sign the registration statement and
each person, if any, who controls Prodigy within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, against
any losses, claims, damages or liabilities to which Prodigy or such other
persons may become subject, under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in such Registration
Statement or Prospectus, or any amendment or supplement, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to Prodigy by SBC and/or SBC Sub, as the case may be,
or such underwriter, selling agent or other securities professional
expressly for use therein, and (ii) reimburse Prodigy for any legal or
other expenses reasonably incurred by Prodigy in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Notices of Claims, Etc. Promptly after receipt by an indemnified
party under subsection (a) or (b) above of notice of the commencement of
any action, such indemnified party shall, if a claim in respect thereof is
to be made against an indemnifying party under this Section 6 notify such
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under this
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Section 6. In case any such action shall be brought against any indemnified
party and it shall notify an indemnifying party of the commencement
thereof, such indemnifying party shall be entitled to participate therein
and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party (which consent shall not be
unreasonably withheld or delayed), be counsel to the indemnifying party),
and, after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, such indemnifying party
shall not be liable to such indemnified party under this Section 6 for any
legal expenses of other counsel or any other expenses, in each case
subsequently incurred by such indemnified party, in connection with the
defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of
any judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to
such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to
act, by or on behalf of any indemnified party.
(d) Contribution. If the indemnification provided for in this Section 6
is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and the
indemnified party in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and indemnified party shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission
to state a material fact relates to information supplied by such
indemnifying party or by such indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 6(d)
were determined by pro rata allocation (even if SBC and/or SBC Sub, as the
case may be, or any underwriters, selling agents or other securities
professionals or all of them were treated as one entity for such purpose)
or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 6(d). The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The obligations of SBC and/or SBC
Sub, as the case may be, and any underwriters, selling agents or other
securities professionals in this Section 6(d) to contribute shall be
several in proportion to the percentage of Registrable Securities
registered or underwritten, as the case may be, by them and not joint.
(e) Notwithstanding any other provision of this Section 6, in no event
will either (i) SBC or SBC Sub be required to undertake liability to any
person under this Section 6 for any amounts in excess of the dollar amount
of the proceeds to be received by SBC or SBC Sub, respectively, from the
sale of its Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) pursuant to any Registration Statement
under which such Registrable Securities are to be registered under the
Securities Act, or (ii) any underwriter, selling agent or other securities
professional be required to undertake liability to any person hereunder for
any amounts in excess of the discount, commission or other compensation
payable to such underwriter, selling agent or other securities professional
with respect to the Registrable Securities underwritten by it and
distributed to the public.
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(f) The obligations of Prodigy under this Section 6 shall be in addition
to any liability which Prodigy may otherwise have to any Indemnified Person
and the obligations of any Indemnified Person under this Section 6 shall be
in addition to any liability which such Indemnified Person may otherwise
have to Prodigy. The remedies provided in this Section 6 are not exclusive
and shall not limit any rights or remedies which may otherwise be available
to an indemnified party at law or in equity.
7. Rule 144.
(a) Prodigy covenants that it will timely file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder (or, if Prodigy is not required
to file such reports, it will, upon the request of SBC make publicly
available such information as necessary to permit sales pursuant to Rule
144 under the Securities Act), and it will take such further action as SBC
and SBC Sub may reasonably request, all to the extent required from time to
time to enable SBC and SBC Sub to sell Registrable Securities without
registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC, including providing any legal opinions. Upon
the request of SBC and/or SBC Sub, as the case may be, Prodigy will deliver
to SBC and/or SBC Sub, as the case may be, a written statement as to
whether it has complied with such information and requirements.
(b) A security ceases to be a Restricted Security when SBC or SBC Sub, as
the case may be, is permitted to sell such security to the public without
restriction pursuant to Rule 144(k) (or any similar provisions then in
force), unless in SBC's or SBC Sub's, as the case may be, reasonable
judgment, after consultation with Prodigy, an underwritten registered
offering is desirable to distribute the security. The determination as to
whether SBC or SBC Sub, as the case may be, is permitted to sell such
security to the public without restriction pursuant to Rule 144(k)
(including, without limitation, the determination as to whether SBC or SBC
Sub, as the case may be, is an "affiliate" of Prodigy, as such term is used
in Rule 144), shall be made promptly and in good faith by counsel to SBC or
SBC Sub, as the case may be, and counsel to Prodigy at such time as SBC or
SBC Sub, as the case may be, seeks to sell such security to the public
pursuant to Rule 144(k). In the event that an underwritten registered
offering is deemed to be desirable by SBC or SBC Sub, as the case may be,
to distribute a security, such security shall continue to be deemed a
Restricted Security hereunder.
8. Approval for Listing.
Promptly after the date hereof and after any subsequent increase in the
number of Registrable Securities, Prodigy shall take all necessary action to
cause all of the Registrable Securities to be approved for listing, subject to
official notice of issuance, on the Nasdaq National Market or other securities
exchange or dealer quotation system on which the Class A Common Shares may then
be listed or authorized for quotation.
9. Term of Registration Rights.
The rights of SBC and SBC Sub with respect to the registration rights granted
pursuant to this Agreement shall remain in effect, subject to the terms hereof,
so long as there are Registrable Securities or securities which are convertible
or exchangeable for Registrable Securities issued and outstanding.
10. Further Agreements.
(a) The parties agree that, subject to the advance notice requirements
set forth in the Restated Certificate of Incorporation, any conversion of
Class B Common Stock or exchange of Units for Class A Common Shares shall
occur, at the option of the exchanging or converting holder,
contemporaneously with the registration of the Class A Common Shares to be
received, or the consummation of the sale of such Class A Common Shares
pursuant to such registration, or at such other time as such holder shall
request in writing.
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(b) Prodigy will not file any registration statement under the Securities
Act unless it shall first have given to SBC and/or SBC Sub, as the case may
be, for so long as SBC and/or SBC Sub, as the case may be, owns
beneficially (as such term is defined in the Exchange Act) 10% or more of
the Common Stock (as defined in the Restated Certificate of Incorporation)
of Prodigy at the time outstanding or is otherwise deemed to be a control
person under the Securities Act, at least 10 days' prior written notice
thereof and, if so requested by SBC and/or SBC Sub, as the case may be,
within 10 days after such notice, SBC and/or SBC Sub, as the case may be,
shall have the right, at any time when, in the reasonable judgment of SBC
and/or SBC Sub, as the case may be, SBC and/or SBC Sub, as the case may be,
is or might be deemed a controlling person of Prodigy within the meaning of
the Securities Act, (a) to participate in the preparation and filing of
each such registration statement to the extent provided in Section 4
hereof; (b) to receive the documents and notices specified in Section 4
hereof and to make the requests specified in Section 4 hereof; (c) to
receive signed copies of the documents specified in Section 4 hereof
addressed to SBC and/or SBC Sub, as the case may be; and (d) to pay the
fees and disbursements of counsel to SBC and/or SBC Sub, as the case may
be, which assists in such participation. If any such registration statement
refers to SBC and/or SBC Sub, as the case may be, by name or otherwise as
the holder of any securities of Prodigy, then SBC and/or SBC Sub, as the
case may be, shall have the right (in addition to any other rights it may
have under this Agreement) to require, in the event that such reference to
SBC and/or SBC Sub, as the case may be, by name or otherwise is not
required by the Securities Act or any rules and regulations promulgated
thereunder, the deletion of the references to SBC and/or SBC Sub, as the
case may be.
11. Miscellaneous.
(a) Remedies. Each of SBC and SBC Sub, in addition to being entitled to
exercise all rights provided herein and granted by law, including recovery
of damages, will be entitled to specific performance of its rights under
this Agreement. Prodigy agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(b) Registration Rights of Other Persons. Prodigy may grant to any Person
other than SBC and SBC Sub the right to request a registration of
securities of Prodigy under the Securities Act or the right to be included
as a selling stockholder in connection with any registration of Registrable
Securities; provided, however, that the granting of any such rights shall
not conflict with or otherwise alter any rights granted to SBC and SBC Sub
hereunder. The rights granted to SBC and SBC Sub hereunder do not in any
way conflict with and are not inconsistent with the rights granted to the
holders of Prodigy's securities under any other agreements.
(c) Adjustments Affecting Registrable Securities. Prodigy will not take
any action, or permit any change to occur, with respect to the Registrable
Securities which would (i) adversely affect the ability of SBC or SBC Sub
to include such Registrable Securities in a registration undertaken
pursuant to this Agreement or (ii) adversely affect the marketability of
such Registrable Securities in any such registration.
(d) Amendments and Waivers. This Agreement, including this Section 11(d),
may be amended, and waivers or consents to departures from the provisions
hereof may be given, only by a written instrument duly executed by Prodigy,
SBC and SBC Sub. Each holder of Registrable Securities outstanding at the
time of any such amendment, waiver or consent or thereafter shall be bound
by any amendment, waiver or consent effected pursuant to this Section
11(d), whether or not any notice, writing or marking indicating such
amendment, waiver or consent appears on the Registrable Securities or is
delivered to such holder.
(e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or air courier guaranteeing overnight
delivery:
(1) if to SBC or SBC Sub, initially at its address at . , Attention:
. , with a copy to General Counsel, and thereafter at such other
address, notice of which is given in accordance with the provisions of
this Section 11(e); and
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(2) if to Prodigy, initially at its address at . , Attention: . ,
and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 11(e).
All such notices and communications shall be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; when receipt acknowledged, if telecopied; and on the next
business day, if timely delivered to an air courier guaranteeing overnight
delivery.
(f) Parties in Interest; Benefits of Registration Rights. The parties to
this Agreement intend that each of SBC and SBC Sub shall be entitled to
receive the benefits of this Agreement and that each of SBC and SBC Sub
shall be bound by the terms and provisions of this Agreement by reason of
its election with respect to the Registrable Securities which are included
in a Registration Statement. All the terms and provisions of this Agreement
shall be binding upon, shall inure to the benefit of and shall be
enforceable by the respective successors and assigns of the parties hereto.
In the event that any transferee of SBC or SBC Sub shall acquire
Registrable Securities, in any manner, whether by gift, bequest, purchase,
operation of law or otherwise, SBC, SBC Sub and such transferee may,
without any further writing or action of any kind, jointly exercise the
registration rights hereunder in such manner and in such proportion as SBC
and SBC Sub shall determine and, if such transferee jointly exercises such
registration rights with SBC and/or SBC Sub hereunder, such transferee
shall be conclusively deemed to have agreed to be bound by and to perform
all of the terms and provisions of this Agreement to the aforesaid extent.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
any provisions relating to conflicts of laws.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way
impaired or affected thereby, it being intended that all of the rights and
privileges of the parties hereto shall be enforceable to the fullest extent
permitted by law.
(k) Survival. The respective indemnities, agreements, representations,
warranties and other provisions set forth in this Agreement or made
pursuant hereto shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on
behalf of SBC, SBC Sub, any director or officer of SBC or SBC Sub, any
agent or underwriter, any director, officer or partner of such agent or
underwriter, or any controlling person of any of the foregoing, and shall
survive the transfer and registration of the Registrable Securities of SBC
and SBC Sub.
(l) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein with respect to the registration rights granted
by Prodigy with respect to the Registrable Securities. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PRODIGY COMMUNICATIONS CORPORATION
By:__________________________________
Name:
Title:
SBC COMMUNICATIONS INC.
By: _________________________________
Name:
Title:
SBC INTERNET COMMUNICATIONS INC.
By: _________________________________
Name:
Title:
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ANNEX F
RESTATED CERTIFICATE OF INCORPORATION
OF
PRODIGY COMMUNICATIONS CORPORATION
(originally incorporated under the name Prodigy, Inc. on June 13, 1996)
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 name of the Corporation is: Prodigy Communications Corporation.
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 the State of Delaware.
FOURTH. (a) Authorized Capital Stock. The total number of shares of stock
that the Corporation shall have the authority to issue is 290,000,001 shares,
consisting of: (i) 280,000,000 shares of Class A Common Stock, par value $.01
per share (the "Class A Common Stock"); (ii) 1 share of Class B Common Stock,
par value $.01 per share (the "Class B Common Stock"); and (iii) 10,000,000
shares of Series Preferred Stock, par value $.01 per share (the "Preferred
Stock"), issuable in one or more series as hereinafter provided. The Class A
Common Stock and the Class B Common Stock shall hereinafter collectively be
called the "Common Stock." The number of authorized shares of any class or
classes of capital stock of the Corporation may be increased or decreased (but
not below the number of shares thereof then outstanding) by each of the
following, voting separately as a class: (y) the affirmative vote of the
holders of a majority of the voting power of the stock of the Corporation
entitled to vote generally in the election of directors ("Voting Stock")
irrespective of the provisions of Section 242(b)(2) of the General Corporation
Law of the State of Delaware or any corresponding provision hereinafter
enacted; and (z) if a Class B Director (as defined below) is then entitled to
be a member of the Executive Steering Committee (as defined), by the
affirmative vote of the holders of a majority of the Class B Common Stock.
(b) Terms of Common Stock; Voting; Directors.
(i) Rights and Privileges; Voting Rights. (A) All shares of Common Stock will
be identical in all respects and will entitle the holders thereof to the same
rights and privileges, except as otherwise provided in this Restated
Certificate of Incorporation.
(B) The holders of shares of Common Stock shall have the following voting
rights:
(1) Each holder of Class A Common Stock shall be entitled to one vote for
each share of Class A Common Stock held by such holder on all matters submitted
to a vote of the holders of Common Stock.
(2) Each holder of Class B Common Stock shall be entitled to one vote for
each share of Class B Common Stock held by such holder and one vote for each
Unit (as defined below) held by such holder on all matters submitted to a vote
of the holders of Common Stock. "Units" shall mean units in Prodigy
Communications, Limited Partnership, the Delaware limited partnership in which
the Corporation is the sole General Partner, or any successor entity thereto
(the "Operating Partnership"), issued under its Amended and
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Restated Limited Partnership Agreement, as amended from time to time (the "L.P.
Agreement"). A copy of the L.P. Agreement shall be made available to any
stockholder of the Corporation upon request.
(3) Except as may be provided pursuant to resolutions of the Board, adopted
pursuant to the provisions of this Restated Certificate of Incorporation and
the Amended and Restated By-Laws of the Corporation (the "Amended and Restated
By-Laws"), establishing any series of Preferred Stock and granting to the
holders of such shares of Preferred Stock rights to elect additional directors
under specified circumstances, and subject to Article FIFTH, Clause (c) below,
the Board of Directors shall consist of nine (9) directors. Subject to Article
FIFTH, Clause (c) below: (x) the holders of the Class B Common Stock, voting
separately as a class, shall be entitled to elect three (3) of the nine (9)
directors of the Board (each a "Class B Director"); and the remaining six (6)
directors (each a "Class A Director"), shall be elected by the vote of the
holders of the Common Stock (or if any holders of shares of Preferred Stock are
entitled to vote together with the holders of Common Stock, as a single class
with such holders of shares of Preferred Stock), voting as a class.
(4) Except as otherwise required in this Restated Certificate of
Incorporation or the Amended and Restated By-Laws or by applicable law, the
holders of shares of Common Stock shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation (or if any
holders of shares of Preferred Stock are entitled to vote together with the
holders of Common Stock, as a single class with such holders of shares of
Preferred Stock).
(5) There shall be no cumulative voting.
(C) Notwithstanding anything in this Restated Certificate of Incorporation to
the contrary, no vote of the holders of Class A Common Stock, and only the vote
of seventy-five percent (75%) of the holders of the Class B Common Stock voting
separately as a class, shall be required to approve or take any action
necessary to authorize a merger of the Operating Partnership (and optionally
any one or more of its subsidiaries) into the Corporation, and to amend this
Restated Certificate of Incorporation accordingly, provided that the
Corporation is the surviving entity in the merger and the economic and voting
interests of the holders of Class A Common Stock in the merged entities (taken
as a whole) immediately after such merger are the same as the economic and
voting interests of the holders of Class A Common Stock in the merged entities
(taken as a whole) immediately before such merger.
(ii) Dividends and Distributions.
(A) Subject to the preferences applicable to Preferred Stock, if any,
outstanding at any time, the holders of shares of Common Stock shall be
entitled to receive such dividends and other distributions in cash, property or
shares of stock of the Corporation as may be declared thereon by the
Corporation's Board of Directors (the "Board") from time to time out of assets
or funds of the Corporation legally available thereof; provided, that, subject
to the provisions of this Article FOURTH, Clause (b)(ii), the Corporation shall
not pay dividends or make distributions to any holders of any class of Common
Stock unless simultaneously with such dividend or distribution, as the case may
be, the Corporation makes the same dividend or distribution with respect to
each outstanding share of Common Stock regardless of class.
(B) In the case of dividends or other distributions payable in Class A Common
Stock or Class B Common Stock including distributions pursuant to stock splits
or divisions of Class A Common Stock or Class B Common Stock which occur after
the first date upon which the Corporation has issued shares of any of Class A
Common Stock or Class B Common Stock, only shares of Class A Common Stock shall
be distributed with respect to Class A Common Stock and only shares of Class B
Common Stock shall be distributed with respect to Class B Common Stock. In the
case of any such dividend or distribution payable in shares of Class A Common
Stock or Class B Common Stock, the number of shares of each class of Common
Stock payable per share of such class of Common Stock shall be equal in number.
(C) In the case of dividends or other distributions consisting of other
voting securities of the Corporation or of voting securities of any corporation
which is a wholly owned subsidiary of the Corporation, the
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Corporation shall declare and pay such dividends in two separate classes of
such voting securities, identical in all respects, except that: (1) the voting
rights of each such security paid to the holders of Class B Common Stock, when
compared to the voting rights of each such security paid to the holders of
Class A Common Stock, shall have voting rights determined pursuant to the same
formula as provided in Clause (b)(i)(B)(2) of Article FOURTH above; (2) such
security paid to the holders of Class B Common Stock shall convert into the
security paid to the holders of Class A Common Stock upon the same terms and
conditions applicable to the conversion of Class B Common Stock into Class A
Common Stock and shall have the same restrictions on transfer and ownership
applicable to the transfer and ownership of Class B Common Stock; and (3) with
respect only to dividends or other distributions of voting securities of any
corporation which is a wholly owned subsidiary of the Corporation, the
respective voting rights of each such security paid to holders of Class A
Common Stock and Class B Common Stock with respect to the election of directors
shall otherwise be as comparable as is practicable, as determined by the Board,
to those of the Class A Common Stock and Class B Common Stock, respectively.
(D) In the case of dividends or other distributions consisting of securities
convertible into, or exchangeable for, voting securities of the Corporation or
voting securities of another corporation which is a wholly owned subsidiary of
the Corporation, the Corporation shall provide that such convertible or
exchangeable securities and the underlying securities be identical in all
respects (including, without limitation, the conversion or exchange rate),
except that: (1) the voting rights of each security underlying the convertible
or exchangeable security paid to the holders of Class B Common Stock, when
compared to the voting rights of each security underlying the convertible or
exchangeable security paid to the holders of the Class A Common Stock, shall
have voting rights determined pursuant to the same formula as provided in
Clause (b)(i)(B)(2) of Article FOURTH above; and (2) such underlying securities
paid to the holders of the Class B Common Stock shall convert into the
underlying securities paid to the holders of Class A Common Stock upon the same
terms and conditions applicable to the conversion of Class B Common Stock into
Class A Common Stock and shall have the same restrictions on transfer and
ownership applicable to the transfer and ownership of the Class B Common Stock.
(iii) Conversion of Class B Common Stock.
(A) Each holder of Class B Common Stock shall be entitled to convert, at any
time and from time to time, any or all of the shares of such holder's Class B
Common Stock, on a one-for-one basis, into the same number of fully paid and
non-assessable shares of Class A Common Stock. Such right shall be exercised by
the surrender to the Corporation of the certificate or certificates
representing the shares of Class B Common Stock to be converted at any time
during normal business hours at the principal executive offices of the
Corporation or at the office of the Corporation's transfer agent (the "Transfer
Agent"), accompanied by a written notice of the holder of such shares stating
that such holder desires to convert such shares, or a stated number of the
shares represented by such certificate or certificates, into an equal number of
shares of Class A Common Stock, and, if any such Class A Common Stock
certificate is to be issued in a name other than that of the holder of the
share or shares of Class B Common Stock converted, by instruments of transfer,
in form satisfactory to the Corporation and to the Transfer Agent, duly
executed by such holder or such holder's duly authorized attorney, and transfer
tax stamps or funds therefor, if required pursuant to Article FOURTH, Clause
(b)(iii)(F) below.
(B) Each share of Class B Common Stock transferred by one or more Parent
Entities (as defined below) to one or more persons or entities other than
Parent Entities, and each share of Class B Common Stock held by one or more
entities other than Parent Entities, shall automatically convert into one (1)
fully paid and non-assessable share of Class A Common Stock upon such transfer;
provided that no such conversion shall occur solely as a result of the pledge
or hypothecation of any Class B Common Stock by a Parent Entity. "Parent
Entities" shall mean, collectively, SBC Communications Inc. (and any successors
thereto), and any of its Affiliates. "Affiliate" shall have the meaning
ascribed thereto in the L.P. Agreement.
(C) As promptly as practicable following the surrender for conversion of a
certificate representing shares of Class B Common Stock in the manner provided
in Article FOURTH, Clauses (b)(iii)(A) or (B) above, and the payment in cash of
any amount required by the provisions of Article FOURTH, Clause (b)(iii)(F)
below, the Corporation will deliver or cause to be delivered at the office of
the Transfer Agent, a certificate or certificates
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representing the number of full shares of Class A Common Stock issuable upon
such conversion, issued in such name or names as such holder may direct. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the date of the surrender of the certificate or certificates
representing shares of Class B Common Stock. Upon the date any such conversion
is made or effected, all rights of the holder of such shares of Class B Common
Stock as such holder shall cease, and the person or persons in whose name or
names the certificate or certificates representing the shares of Class A Common
Stock are to be issued shall be treated for all purposes as having become the
record holder or holders of such shares of Class A Common Stock; provided,
however, that if any such surrender and payment occurs on any date when the
stock transfer books of the Corporation shall be closed, the person or persons
in whose name or names the certificate or certificates representing shares of
Class A Common Stock are to be issued shall be deemed the record holder or
holders thereof for all purposes immediately prior to the close of business on
the next succeeding day on which the stock transfer books are open.
(D) In the event of a reclassification or other similar transaction approved
in accordance with Article FIFTH, Clauses (f)(ii) and (g)(i) as a result of
which the shares of Class A Common Stock are converted into another security,
then a holder of Class B Common Stock shall be entitled to receive upon
conversion the amount of such security that such holder would have received if
such conversion had occurred immediately prior to the record date of such
reclassification or other similar transaction. No adjustments in respect of
dividends shall be made upon the conversion of any share of Class B Common
Stock; provided, however, that if a share of Class B Common Stock shall be
converted subsequent to the record date for the payment of a dividend or other
distribution on shares of Class B Common Stock but prior to such payment, then
the registered holder of such share at the close of business on such record
date shall be entitled to receive the dividend or other distribution payable on
such share on such date notwithstanding the conversion thereof or the default
in payment of the dividend or distribution due on such date.
(E) The Corporation covenants that it will at all times reserve and keep
available out of its authorized but unissued shares of Class A Common Stock,
solely for the purpose of issuance upon conversion of the outstanding shares of
Class B Common Stock, such number of shares of Class A Common Stock that shall
be issuable upon the conversion of all such outstanding shares of Class B
Common Stock. The Corporation covenants that if any shares of Class A Common
Stock require registration with or approval of any governmental authority under
any federal or state law before such shares of Class A Common Stock may be
issued upon conversion, the Corporation will cause such shares to be registered
or approved, as the case may be. The Corporation will use its best efforts to
list the shares of Class A Common Stock required to be delivered upon
conversion prior to such delivery upon the Nasdaq National Market and/or each
national securities exchange upon which the outstanding Class A Common stock is
listed at the time of such delivery. The Corporation covenants that all shares
of Class A Common Stock that shall be issued upon conversion of the shares of
Class B Common Stock will, upon issue, be validly issued, fully paid and non-
assessable.
(F) The issuance of certificates for shares of Class A Common Stock upon
conversion of shares of Class B Common Stock shall be made without charge to
the holders of such shares for any stamp or other similar tax in respect of
such issuance; provided, however, that if any such certificate is to be issued
in a name other than that of the holder of the share or shares of Class B
Common Stock converted, then the person or persons requesting the issuance
thereof shall pay to the Corporation the amount of any tax that may be payable
in respect of any transfer involved in such issuance or shall establish to the
satisfaction of the Corporation that such tax has been paid or is not payable.
(G) Shares of Class B Common Stock that are converted into shares of Class A
Common Stock as provided herein shall continue to be authorized shares of Class
B Common Stock and available for reissue by the Corporation; provided, however,
that no shares of Class B Common Stock shall be reissued except as expressly
permitted by Article FOURTH, Clause (b)(ii) above and Article FOURTH, Clause
(b)(iv) below.
(iv) Stock Splits. The Corporation shall not in any manner subdivide (by any
stock split, stock dividend, reclassification, recapitalization or otherwise)
or combine (by reverse stock split, reclassification,
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recapitalization or otherwise) the outstanding shares of one class of Common
Stock unless the outstanding shares of all classes of Common Stock shall be
proportionately subdivided or combined.
(v) Options, Rights or Warrants.
(A) The Corporation shall not make any offering of options, rights or
warrants to subscribe for shares of Class B Common Stock. If the Corporation
makes an offering of options, rights or warrants to subscribe for shares of any
class or classes of capital stock, other than Class B Common Stock, to all
holders of a class of Common Stock, then the Corporation shall simultaneously
make an identical offering to all holders of the other classes of Common Stock
other than to any class of Common Stock the holders of which, voting as a
separate class, determine that such offering need not be made to such class.
All such options, rights or warrants offerings shall offer the respective
holders of Class A Common Stock and Class B Common Stock the right to subscribe
at the same rate per share.
(B) Subject to Article FOURTH, clause (b)(v)(A) above, the Corporation shall
have the power to create and issue, whether or not in connection with the issue
and sale of any shares of stock or other securities of the Corporation, rights
or options entitling the holders thereof to purchase from the Corporation any
shares of its capital stock of any class or classes at the time authorized
(other than Class B Common Stock), such rights or options to have such terms
and conditions, and to be evidenced by or in such instrument or instruments, as
shall be approved by the Board.
(vi) Mergers, Consolidation, Etc. In the event that the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then, and in such event, the shares
of each class of Common Stock shall be exchanged for or changed into either (A)
the same amount of stock, securities, cash and/or any other property, as the
case may be, into which or for which each share of any other class of Common
Stock is exchanged or changed; provided, however, that if shares of Common
Stock are exchanged for or changed into shares of capital stock, such shares so
exchanged for or changed into may differ to the extent and only to the extent
that the Class A Common Stock and the Class B Common Stock differ as provided
herein, or (B) if holders of each class of Common Stock are to receive
different distributions of stock, securities, cash and/or any other property
(other than as contemplated by clause (b)(vi)(A) of this Article FOURTH), an
amount of stock, securities, cash and/or property per share having a value, as
determined by an independent investment banking firm of national reputation
selected by the Board, equal to the value per share into which or for which
each share of any other class of Common Stock is exchanged or changed.
(vii) Liquidation Rights. In the event of any dissolution, liquidation or
winding-up of the affairs of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and other liabilities of
the Corporation and after making provision for the holders of each series of
Preferred Stock, if any, the remaining assets and funds of the Corporation, if
any, shall be divided among and paid ratably to the holders of the shares of
the Class A Common Stock and the Class B Common Stock treated as a single
class.
(viii) No Preemptive Rights. Except as provided in Article FOURTH, Clause
(b)(v) above, the holders of shares of Common Stock are not entitled to any
preemptive right to subscribe for, purchase or receive any part of any new or
additional issue of stock of any class, whether now or hereafter authorized, or
of bonds, debentures or other securities convertible into or exchangeable for
stock.
(ix) Reclassification. Immediately upon the effectiveness of this Restated
Certificate of Incorporation, each share of issued and outstanding common stock
of the Corporation immediately prior to such effectiveness shall be changed
into and reclassified as one (1) share of Class A Common Stock. Promptly after
such effectiveness, all certificates that, immediately prior to such
effectiveness, represented common stock of the Corporation shall automatically
represent Class A Common Stock.
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(c) Preferred Stock.
(i) Subject to the voting and approval procedures set forth in this Restated
Certificate of Incorporation, 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 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.
(ii) Subject to the voting and approval procedures set forth in this Restated
Certificate of Incorporation, authority is hereby expressly granted to the
Board 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 the State of Delaware.
FIFTH. (a) Unless and except to the extent that the Amended and Restated By-
Laws of the Corporation shall so require, the election of directors of the
Corporation need not be by written ballot.
(b) Subject to the approval procedures in Article FIFTH, Clauses (f)(ii) and
(g)(i), the Board may from time to time make, amend, supplement or repeal the
Amended and Restated By-Laws by a vote of a majority of the Board; provided,
however, that the stockholders may change or amend or repeal any provision of
the Amended and Restated By-Laws by each of: (i) the affirmative vote of the
holders of a majority of the Voting Stock voting as one class; and (ii) if a
Class B Director is then entitled to be a member of the Executive Steering
Committee, by the affirmative vote of the holders of a majority of the Class B
Common Stock, voting separately as a class.
(c) Reduction in Number of Directors.
(i) At any time that the holders of Class B Common Stock shall have
transferred (other than to Parent Entities) in the aggregate (i.e., together
with all other shares of Common Stock and/or Units previously transferred by
holders of Class B Common Stock other than to Parent Entities) a number of
shares of Common Stock and/or Units constituting an aggregate of more than
thirty-three percent (33%) of the initial number of Units issued to holders of
Class B Common Stock (subject to adjustment in accordance with Section 8.5 of
the L.P. Agreement) (the "First Class B Triggering Event"), then the number of
Class B Directors shall be reduced from three (3) to two (2) (and the resulting
size of the Board shall be reduced by one (1) and no vacancy shall be created)
and the term of one of the Class B Directors, selected by the holders of Class
B Common Stock within ten (10) days of the occurrence of the First Class B
Triggering Event, shall terminate; provided, however, that the exchange by the
holders of Class B Common Stock of Units into shares of Class A Common Stock
pursuant to Section 8.4 of the L.P. Agreement, shall not constitute a transfer
of such Units for purposes of this Article FIFTH, Clause (c)(i). In the absence
of such selection within said ten-day period, the Class A Directors shall
select the Class B Director whose term shall terminate. In calculating whether
the First Class B Triggering Event has occurred, each time a transfer of shares
of Common Stock and/or Units by the holders of Class B Common Stock occurs
(other than to a Parent Entity), a calculation shall be made with respect to
the percentage that such number of shares and/or Units transferred bears to the
number of Units initially issued to the holders of Class B Common Stock
(subject to adjustment in accordance Section 8.5 of the L.P. Agreement). This
percentage shall be added to the aggregate of such percentages calculated at
the respective times of all prior transfers by the holders of the Class B
Common Stock (other than to a Parent Entity).
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(ii) At any time that the holders of Class B Common Stock shall have
transferred (other than to Parent Entities) in the aggregate (i.e. together
with all other shares of Common Stock and/or Units transferred by holders of
Class B Common Stock other than to Parent Entities) a number of shares of
Common Stock and/or Units constituting an aggregate of more than sixty-seven
percent (67%) of the initial number of Units issued to holders of Class B
Common Stock (subject to adjustment in accordance with Section 8.5 of the L.P.
Agreement) (the "Second Class B Triggering Event"), then the number of Class B
Directors shall be reduced to one (1) (and the resulting size of the Board
shall be reduced by the relevant number and no vacancy or vacancies shall be
created) and the term of the relevant number of Class B Directors, selected by
the holders of Class B Common Stock within ten (10) days of the occurrence of
the Second Class B Triggering Event, shall terminate; provided, however, that
the exchange by the holders of Class B Common Stock of Units into shares of
Class A Common Stock pursuant to Section 8.4 of the L.P. Agreement, shall not
constitute a transfer of such Units for purposes of this Article FIFTH, Clause
(c)(ii). In the absence of such selection within said ten-day period, the Class
A Directors shall select the Class B Director or Directors whose term shall
terminate. In calculating whether the Second Class B Triggering Event has
occurred, each time a transfer of shares of Common Stock and/or Units by the
holders of Class B Common Stock occurs (other than to a Parent Entity), a
calculation shall be made with respect to the percentage that such number of
shares and/or Units transferred bears to the number of Units initially issued
to the holders of Class B Common Stock (subject to adjustment in accordance
with Section 8.5 of the L.P. Agreement). This percentage shall be added to the
aggregate of such percentages calculated at the respective times of all prior
transfers by the holders of the Class B Common Stock (other than to a Parent
Entity).
(iii) At any time that the holders of Class B Common Stock shall have
transferred (other than to Parent Entities) in the aggregate (i.e. together
with all other shares of Common Stock and/or Units transferred by holders of
Class B Common Stock other than to Parent Entities) a number of shares of
Common Stock and/or Units constituting an aggregate of one hundred percent
(100%) of the initial number of Units issued to holders of Class B Common Stock
(subject to adjustment in accordance with Section 8.5 of the L.P. Agreement)
(the "Third Class B Triggering Event"), then the number of Class B Directors
shall be reduced to zero (0) (and the resulting size of the Board shall be
reduced by the relevant number and no vacancy or vacancies shall be created)
and the term of each remaining Class B Director shall terminate; provided,
however, that the exchange by the holders of Class B Common Stock of Units into
shares of Class A Common Stock pursuant to Section 8.4 of the L.P. Agreement,
shall not constitute a transfer of such Units for purposes of this Article
FIFTH, Clause (c)(iii). In calculating whether the Third Class B Triggering
Event has occurred, each time a transfer of shares of Common Stock and/or Units
by the holders of Class B Common Stock occurs (other than to a Parent Entity),
a calculation shall be made with respect to the percentage that such number of
shares and/or Units transferred bears to the number of Units initially issued
to the holders of Class B Common Stock (subject to adjustment in accordance
with Section 8.5 of the L.P. Agreement). This percentage shall be added to the
aggregate of such percentages calculated at the respective times of all prior
transfers by the holders of the Class B Common Stock (other than to a Parent
Entity).
(d) Vacancies in the Board. Any vacancies resulting from death, resignation,
disqualification, removal or other cause with respect to a Class A Director
shall be filled by the affirmative vote of the remaining Class A Directors then
in office, even if less than a quorum of the Board. Any vacancies resulting
from death, resignation, disqualification, removal or other cause with respect
to a Class B Director shall be filled only by the affirmative vote of the
remaining Class B Directors then in office, even if less than a quorum of the
Board, or by a sole remaining Class B Director. In the absence of a sole
remaining Class B Director, such vacancies shall be filled by a majority vote
of the holders of the Class B Common Stock, voting separately as a class. Any
director elected in accordance with this Clause (d) shall hold office until the
next annual meeting of stockholders and until such director's successor shall
have been duly elected and qualified, or until such director's term of office
otherwise terminates.
(e) Removal of Directors. (i) Subject to Article FIFTH, Clause (e)(ii) below,
any director may be removed from office only for cause by the affirmative vote
of the holders of at least eighty percent (80%) of the voting power of the
Voting Stock, voting together as a single class.
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(ii) Notwithstanding the foregoing, (A) any Class A Director may be removed
at any time, with or without cause, by a majority vote of the holders of the
Voting Stock, voting together as one class, and (B) any Class B Director may be
removed at any time, with or without cause, only by a majority vote of the
holders of the Class B Common Stock, voting separately as a class.
(f) General Powers of the Board of Directors. (i) Subject to Article FIFTH,
Clause (g), the business and affairs of the corporation shall be managed by or
under the direction of the Board. The Board may, subject to the approval
procedures of Article FIFTH, Clause (f)(ii) and Article FIFTH, Clause (g)(i)
hereof, exercise all of the powers of the Corporation except as otherwise
provided by law or this Restated Certificate of Incorporation.
(ii) Subject to Article FIFTH, Clause (g) hereof, and without limiting the
powers of the Board set forth in Article FIFTH, Clause (f)(i), the Corporation
shall not, and shall not permit any Subsidiary (as defined below) to, and no
officer, employee or agent of the Corporation or any Subsidiary shall, take any
of the actions specified in Schedule FIFTH, Clause (f)(ii), without the prior
approval of the Board. "Subsidiary" shall mean each of Operating Partnership
and Prodigy Communications Sub Corporation, a Delaware corporation and a wholly
owned subsidiary of Prodigy, and any other corporation, limited liability
company, partnership or other entity in which the Corporation, directly or
indirectly, has a controlling equity interest.
(g) Appointment and Powers of Executive Steering Committee. (i) The Board
shall establish a four (4) member Executive Steering Committee (the "Executive
Steering Committee") consisting of two (2) Class A Directors selected by
Telefonos de Mexico, S.A. de C.V. ("Telmex") and Carso Global Telecom, S.A. de
C.V. ("Carso") and two (2) Class B Directors selected by the Class B Directors,
subject to reduction as provided in Article FIFTH, Clauses (g)(ii) and (g)(iii)
below. The purpose of the Executive Steering Committee shall be to evaluate the
matters set forth on Schedule FIFTH, Clause (g)(i) of this Restated Certificate
of Incorporation and to report to the Board for approval only those matters
specified on said Schedule which have been unanimously approved by the
Executive Steering Committee. Approval by the Board or any committee of the
Board of any action set forth on Schedule FIFTH, Clause (g)(i) shall not be
effective unless and until such action has been unanimously approved by the
Executive Steering Committee. Nothing contained herein shall restrict the right
of any director of the Corporation to bring any matter to, or discuss any
matter with, the Executive Steering Committee.
(ii) At any time that a First Class B Triggering Event shall have occurred,
then the number of Class B Directors on the Executive Steering Committee shall
be reduced from two (2) to one (1) (and the resulting size of the Executive
Steering Committee shall be reduced by one (1) and no vacancy shall be created)
and the term of one (1) of the Class B Directors on such Committee, selected by
the holders of Class B Common Stock within ten (10) days of the occurrence of
the Second Class B Triggering Event, shall terminate. In the absence of such
selection within said ten-day period, the Class A Directors shall select the
Class B Director whose term shall terminate. At any time that a Second Class B
Triggering Event shall have occurred, then the number of Class B Directors on
the Executive Steering Committee shall be reduced to zero (0) (and the
resulting size of the Committee shall be reduced by the relevant number and no
vacancy or vacancies shall be created) and the term of each remaining Class B
Director on such Committee shall terminate.
(iii) At any time that Telmex and Carso, acting separately or jointly, shall
have transferred (other than to an Affiliate within the same corporate group)
in the aggregate (i.e., together with all other shares of Common Stock
previously transferred by Telmex or Carso other than to an Affiliate within the
same corporate group) a number of shares of Common Stock constituting an
aggregate of more than thirty-three percent (33%) of the number of shares of
Common Stock owned or held of record by Telmex and Carso as of November 19,
1999 (subject to adjustment in accordance with Article FOURTH, Clause (b)(iv))
(the "First Telmex/Carso Triggering Event"), then the number of Class A
Directors on the Executive Steering Committee shall be reduced from two (2) to
one (1) (and the resulting size of such Committee shall be reduced by one (1)
and no vacancy shall be created) and the term of one of the Class A Directors
on such Committee, selected by Telmex and Carso within ten (10) days of the
occurrence of the First Telmex/Carso Triggering Event, shall terminate.
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In the absence of such selection within said ten-day period, the Class B
Directors or, if there are no Class B Directors, the Class A Directors not
selected by Telmex and Carso, shall select the Class A Director whose term
shall terminate. In calculating whether the First Telmex/Carso Triggering Event
has occurred, each time a transfer of shares of Common Stock by Telmex or Carso
occurs (other than to an Affiliate within the same corporate group), a
calculation shall be made with respect to the percentage that such number of
shares transferred bears to the number of shares owned or held or record by
Telmex and Carso as of November 19, 1999 (subject to adjustment in accordance
with Article FOURTH, Clause (b)(iv)). This percentage shall be added to the
aggregate of such percentages calculated at the respective times of all prior
transfers by Telmex or Carso (other than to Affiliates within the same
corporate group). At any time that Telmex and Carso, acting separately or
jointly, shall have transferred (other than to an Affiliate within the same
corporate group) in the aggregate (i.e., together with all other shares of
Common Stock transferred by Telmex or Carso other than to Affiliates within the
same corporate group) a number of shares of Common Stock constituting an
aggregate of more than sixty-seven percent (67%) of the number of shares of
Common Stock owned or held of record by Telmex and Carso as of November 19,
1999 (subject to adjustment in accordance with Article FOURTH, Clause (b)(iv))
(the "Second Telmex/Carso Triggering Event"), then the number of Class A
Directors on the Executive Steering Committee shall be reduced to zero (0) (and
the resulting size of such Committee shall be reduced by the relevant number
and no vacancy or vacancies shall be created) and the term of each remaining
Class A Director on such Committee shall terminate. In calculating whether the
Second Telmex/Carso Triggering Event has occurred, each time a transfer of
shares of Common Stock by Telmex or Carso occurs (other than to an Affiliate
within the same corporate group), a calculation shall be made with respect to
the percentage that such number of shares transferred bears to the number of
shares owned or held of record by Telmex and Carso as of November 19, 1999
(subject to adjustment in accordance with Article FOURTH, Clause (b)(iv)). This
percentage shall be added to the aggregate of such percentages calculated at
the respective times of all prior transfers by Telmex or Carso (other than to
Affiliates within the same corporate group).
(iv) At any time that both a Second Class B Triggering Event and a Second
Telmex/Carso Triggering Event shall have occurred, the Executive Steering
Committee shall be deemed dissolved as of such time, and this Article FIFTH,
Clause (g) shall cease to have any effect.
(h) Other Committees. (i) For so long as a Class B Director is entitled to be
a member of the Executive Steering Committee, each such committee designated by
the Board in accordance with Section 3.1 of the Amended and Restated By-Laws
shall contain at least one Class B Director.
(ii) Except as the Board may otherwise determine, any such committee may
adopt, amend and repeal rules for the conduct of its business, but unless
otherwise provided by the directors or in such rules, a majority of the total
number of the authorized members of such committee, which majority must include
at least one Class B Director, shall constitute a quorum for the transaction of
business, the vote of a majority of the members present at a meeting at the
time of such vote if a quorum is then present shall be the act of such
committee, and in other respects each committee shall conduct its business as
nearly as possible in the same manner as the Board conducts its business
pursuant to this Restated Certificate of Incorporation and the Amended and
Restated By-Laws of the Corporation.
(i) Committee Resignation; Removals. Any member of any committee may resign
at any time by giving notice to the Corporation; provided, however, that notice
to the Board, the Chairman of the Board, the Chief Executive Officer of the
Corporation, the chairman of such committee or the Secretary of the Corporation
shall be deemed to constitute notice to the Corporation. Such resignation shall
take effect upon receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, acceptance of such resignation shall
not be necessary to make it effective. Any member of any such committee may be
removed at any time, either with or without cause, by the affirmative vote of a
majority of the authorized number of directors at any meeting of the Board
called for that purpose; except that any member of the Executive Steering
Committee elected by the Class B Directors may be removed from the Executive
Steering Committee at any time, either with or without cause, by the
affirmative vote of a majority of the Class B Directors. Any member of the
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Executive Steering Committee may be removed from the Executive Steering
Committee for cause by the affirmative vote of two (2) Class A Directors (or
the sole Class A Director) and two (2) Class B Directors (or the sole Class B
Director), even if less than a quorum of the Board. Any vacancies on any
committee of the Board shall be filled in the manner set forth above and in the
Amended and Restated By-Laws in respect of the appointment of such committee.
SIXTH. 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 279 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 class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
SEVENTH. Except to the extent that the General Corporation Law of the State
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. For the purposes of this
Article SEVENTH and Article EIGHTH below, the term "director" shall include any
member of the Executive Steering Committee serving in such capacity.
EIGHTH. 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.
F-10
<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.
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'
F-11
<PAGE>
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.
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 indemnitees 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 General Corporation Law of the State 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
F-12
<PAGE>
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 the State of Delaware.
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 the State 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 the State 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
the State of Delaware, as so amended.
NINTH. The affirmative vote of the holders of at least eighty percent (80%)
of the issued and outstanding Voting Stock, voting as one class, shall be
required to amend or repeal this Restated Certificate of Incorporation;
provided, however, that no such amendment which shall adversely affect the
rights of the holders of Class A Common Stock or Class B Common Stock,
respectively, may be adopted unless the holders of such Class A Common Stock or
Class B Common Stock, as the case may be, voting separately as a class, shall
by majority vote approve such amendment.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, provided that such action is
approved in the manner, and otherwise complies with the requirements, set forth
in this Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
F-13
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates, integrates and further amends the provisions of the Certificate of
Incorporation of the Corporation, and which was duly adopted in accordance with
Sections 242 and 245 of the General Corporation Law of the State of Delaware,
has been signed by its President this , 2000.
PRODIGY COMMUNICATIONS CORPORATION
By: _________________________________
President
F-14
<PAGE>
Schedule FIFTH, Clause (f)(ii)
ACTIONS REQUIRING BOARD APPROVAL
(Except as indicated below, capitalized terms used and not defined in this
Schedule shall have the respective meanings ascribed thereto in the Restated
Certificate of Incorporation to which this Schedule is attached.)
1. Any amendment, change or other modification or restatement of the Restated
Certificate of Incorporation or Amended and Restated By-Laws of the
Corporation, the L.P. Agreement, or similar constitutive documents of any other
Subsidiary; or the merger, consolidation, dissolution or liquidation of the
Corporation, the Operating Partnership or any other Subsidiary, or any
transaction having the same effect.
2. Except pursuant to (i) outstanding options, warrants or other rights to
subscribe for or acquire equity securities of the Corporation, or any
outstanding securities or obligations convertible into or exchangeable for any
such equity securities of the Corporation, in each case as set forth on Annex A
hereto, (ii) incentive or other employee benefit plans or agreements adopted by
the Board after the date hereof in accordance with paragraph 7 of this Schedule
FIFTH, Clause (f)(ii) or (iii) a conversion or exchange right set forth in the
Restated Certification of Incorporation, the L.P. Agreement or similar
constitutive documents of any other Subsidiary, the issuance, authorization,
cancellation, alteration, modification, reclassification, redemption or any
change in, of, or to, any equity security of the Corporation or any Unit or
other equity interest in the Operating Partnership or any other Subsidiary, or
any option, put, call or warrant with respect to the foregoing, including,
without limitation, any such issuance, authorization, cancellation, alteration,
modification, reclassification, redemption or change pursuant to any merger,
consolidation or similar transaction. Notwithstanding the foregoing, in no
event shall the exceptions set forth in clauses (i), (ii) and (iii) above apply
to the issuance, authorization, cancellation, alteration, modification,
reclassification, redemption or any change in, of, or to, any shares of Class B
Common Stock of the Corporation, or any option, put, call or warrant with
respect to any shares of Class B Common Stock of the Corporation, including,
without limitation, any such issuance, authorization, cancellation, alteration,
modification, reclassification, redemption or change pursuant to any merger,
consolidation or similar transaction.
3. The transfer or other disposition (other than inventory or obsolete assets
of the Corporation, the Operating Partnership or any other Subsidiary) of, or
placing any encumbrance (other than encumbrances arising by operation of law)
on, any material asset of the Corporation, the Operating Partnership or any
other Subsidiary, except Permitted Encumbrances (as defined in the L.P.
Agreement).
4. The acquisition of any interest in, or the making of any loan or extension
of credit to, another person or entity by the Corporation, the Operating
Partnership or any other Subsidiary for or in an amount in excess of
$5,000,000, except for short-term cash management with recognized money market
institutions; any capital expenditure (or series of related capital
expenditures) by the Corporation, the Operating Partnership or any other
Subsidiary in excess of $5,000,000; or any debt, loan or borrowing of the
Corporation, the Operating Partnership or any other Subsidiary (other than
borrowings under revolving credit facilities approved by the Board) exceeding
$5,000,000 outstanding in the aggregate at any time, or any revolving credit
facility of the Corporation, the Operating Partnership or any other Subsidiary
permitting aggregate borrowings at any one time outstanding to exceed
$5,000,000.
5. Adoption and approval of any Business Plan for the Corporation, the
Operating Partnership or any other Subsidiary.
6. Appointment of the Chief Executive Officer for the Corporation, the
Operating Partnership or any other Subsidiary.
7. Adoption of any incentive or other employee benefit plan by the
Corporation, the Operating Partnership or any other Subsidiary or any material
amendment to any such existing plan.
8. Hiring any personnel of the Corporation, the Operating Partnership or any
other Subsidiary with any annual salary in excess of $250,000 or increasing the
compensation of any such personnel above $250,000.
F-15
<PAGE>
9. Appointment or dismissal of auditors for the Corporation, the Operating
Partnership or any other Subsidiary.
10. The conduct by the Corporation, the Operating Partnership or any other
Subsidiary of any business other than the Business (as defined in the L.P.
Agreement) and any ancillary or related businesses, or the establishment of any
entity (or the creation of any entity owned jointly with any other party) by
the Corporation, the Operating Partnership or any other Subsidiary to conduct
any business.
11. Any action by, in respect of or otherwise involving any entity in which
the Corporation, the Operating Partnership or any other Subsidiary has or
acquires a controlling interest which would require Board approval under FIFTH,
Clause (f)(ii) if such action were by, in respect of or otherwise involving the
Corporation, the Operating Partnership or any other Subsidiary, as described
above.
F-16
<PAGE>
Schedule FIFTH, Clause (g)(i)
MATTERS FOR THE EXECUTIVE STEERING COMMITTEE
(Except as indicated below, capitalized terms used and not defined in this
Schedule shall have the respective meanings ascribed thereto in the Restated
Certificate of Incorporation to which this Schedule is attached.)
1. Any amendment, change or other modification or restatement of the Restated
Certificate of Incorporation or Amended and Restated By-Laws of the
Corporation, the L.P. Agreement or similar constitutive documents of any other
Subsidiary; or the merger, consolidation, dissolution or liquidation of the
Corporation, the Operating Partnership or any other Subsidiary, or any
transaction having the same effect.
2. Except pursuant to (i) outstanding options, warrants or other rights to
subscribe for or acquire equity securities of the Corporation, or any
outstanding securities or obligations convertible into or exchangeable for any
such equity securities of the Corporation, in each case as set forth on Annex A
hereto, (ii) incentive or other employee benefit plans or agreements adopted by
the Board after the date hereof in accordance with paragraph 7 of Schedule
FIFTH, Clause (f)(ii) hereof or (iii) a conversion or exchange right set forth
in the Restated Certificate of Incorporation, the L.P. Agreement or similar
constitutive documents of any other Subsidiary, the issuance, authorization,
cancellation, alteration, modification, reclassification, redemption or any
change in, of, or to, any equity security of the Corporation or any Unit or
other equity interest in the Operating Partnership or any other Subsidiary, or
any option, put, call or warrant with respect to the foregoing, including,
without limitation, any such issuance, authorization, cancellation, alteration,
modification, reclassification, redemption or change pursuant to any merger,
consolidation or similar transaction. Notwithstanding the foregoing, in no
event shall the exceptions set forth in clauses (i), (ii) and (iii) above apply
to the issuance, authorization, cancellation, alteration, modification,
reclassification, redemption or any change in, of, or to, any shares of Class B
Common Stock of the Corporation, or any option, put, call or warrant with
respect to any shares of Class B Common Stock of the Corporation, including,
without limitation, any such issuance, authorization, cancellation, alteration,
modification, reclassification, redemption or change pursuant to any merger,
consolidation or similar transaction.
3. The transfer or other disposition (other than inventory or obsolete assets
of the Corporation, the Operating Partnership or any other Subsidiary) of, or
placing any encumbrance (other than encumbrances arising by operation of law)
on, any material asset of the Corporation, the Operating Partnership or any
other Subsidiary, except Permitted Encumbrances (as defined in the L.P.
Agreement).
4. The acquisition of any interest in, or the making of any loan or extension
of credit to, another person or entity by the Corporation, the Operating
Partnership or any other Subsidiary for or in an amount in excess of
$20,000,000, except for short-term cash management with recognized money market
institutions; any capital expenditure (or series of related capital
expenditures) by the Corporation, the Operating Partnership or any other
Subsidiary in excess of $20,000,000; or any debt, loan or borrowing of the
Corporation, the Operating Partnership or any other Subsidiary (other than
borrowings under revolving credit facilities approved by the Board) exceeding
$20,000,000 outstanding in the aggregate at any time, or any revolving credit
facility of the Corporation, the Operating Partnership or any other Subsidiary
permitting aggregate borrowings at any one time outstanding to exceed
$20,000,000.
5. Approval of any Business Plan for the Corporation, the Operating
Partnerships or any other Subsidiary.
6. Approval of the Chief Executive Officer for the Corporation, the Operating
Partnership or any other Subsidiary.
7. The conduct by the Corporation, the Operating Partnership or any other
Subsidiary of any business other than the Business (as defined in the L.P.
Agreement) and any ancillary or related businesses, or the establishment of any
entity (or the creation of any entity owned jointly with any other party) by
the Corporation, the Operating Partnership or any other Subsidiary to conduct
any business.
F-17
<PAGE>
8. Any action by, in respect of or otherwise involving any entity in which
the Corporation, the Operating Partnership or any other Subsidiary has or
acquires a controlling interest which would require Executive Steering
Committee approval under Article FIFTH, Clause (g)(i) if such action were by,
in respect of, or otherwise involving the Corporation, the Operating
Partnership or any other Subsidiary, as described above.
F-18
<PAGE>
ANNEX G
AMENDED AND RESTATED BY-LAWS
OF
PRODIGY COMMUNICATIONS CORPORATION
Adopted as of , 2000
<PAGE>
AMENDED AND RESTATED BY- LAWS
OF
PRODIGY COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 1--Stockholders................................................. G-1
1.1 Place of Meetings.............................................. G-1
1.2 Annual Meeting................................................. G-1
1.3 Special Meetings............................................... G-1
1.4 Notice of Meetings............................................. G-1
1.5 Voting List.................................................... G-1
1.6 Quorum......................................................... G-2
1.7 Adjournments................................................... G-2
1.8 Voting and Proxies............................................. G-2
1.9 Action at Meeting.............................................. G-2
1.10 Action without Meeting......................................... G-2
ARTICLE 2--Directors.................................................... G-2
2.1 Number; Election and Qualification............................. G-2
2.2 Tenure......................................................... G-3
2.3 Vacancies...................................................... G-3
2.4 Resignation.................................................... G-3
2.5 Regular Meetings............................................... G-3
2.6 Special Meetings............................................... G-3
2.7 Notice of Special Meetings..................................... G-3
2.8 Meetings by Telephone or Video Conference Calls................ G-3
2.9 Quorum......................................................... G-3
2.10 Action at Meeting.............................................. G-3
2.11 Action by Consent.............................................. G-3
2.12 Removal........................................................ G-3
2.13 Compensation of Directors...................................... G-4
ARTICLE 3--Committees of the Board...................................... G-4
3.1 Other Committees............................................... G-4
Action by Consent; Participation by Telephone, Video or Similar
3.2 Equipment...................................................... G-4
ARTICLE 4--Officers..................................................... G-4
4.1 Enumeration.................................................... G-4
4.2 Election....................................................... G-4
4.3 Qualification.................................................. G-4
4.4 Tenure......................................................... G-5
4.5 Resignation and Removal........................................ G-5
4.6 Vacancies...................................................... G-5
4.7 Chairman of the Board and Vice-Chairman of the Board........... G-5
4.8 President...................................................... G-5
4.9 Vice Presidents................................................ G-5
4.10 Secretary and Assistant Secretaries............................ G-5
4.11 Treasurer and Assistant Treasurers............................. G-6
4.12 Salaries....................................................... G-6
</TABLE>
G-i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE 5--Capital Stock................................................... G-6
5.1 Issuance of Stock.................................................. G-6
5.2 Certificates of Stock.............................................. G-6
5.3 Transfers.......................................................... G-7
5.4 Lost, Stolen or Destroyed Certificates............................. G-7
5.5 Record Date........................................................ G-7
ARTICLE 6--General Provisions.............................................. G-7
6.1 Fiscal Year........................................................ G-7
6.2 Corporate Seal..................................................... G-7
6.3 Waiver of Notice................................................... G-7
6.4 Voting of Securities............................................... G-8
6.5 Evidence of Authority.............................................. G-8
6.6 Certificate of Incorporation....................................... G-8
6.7 Severability....................................................... G-8
6.8 Pronouns........................................................... G-8
ARTICLE 7--Amendments...................................................... G-8
</TABLE>
G-ii
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
PRODIGY COMMUNICATIONS CORPORATION
ARTICLE 1--Stockholders
1.1 Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President or, if not so designated, at
the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the
place where the meeting is to be held) at the time and place to be fixed by the
Board of Directors or the President and stated in the notice of the meeting. If
no annual meeting is held in accordance with the foregoing provisions, the
Board of Directors shall cause the meeting to be held as soon thereafter as
convenient. If no annual meeting is held in accordance with the foregoing
provisions, a special meeting may be held in lieu of the annual meeting, and
any action taken at that special meeting shall have the same effect as if it
had been taken at the annual meeting, and in such case all references in these
By-Laws to the annual meeting of the stockholders shall be deemed to refer to
such special meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at any
time by the President, any member of the Executive Steering Committee (as
defined below), or by the Board of Directors pursuant to a resolution approved
by a majority of the then authorized number of directors. Any such call must
specify the matter or matters to be acted upon at such meeting and only such
matter or matters shall be acted upon thereat.
1.4 Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notices of all meetings shall
state the place, date and hour of the meeting. The notice of a special meeting
shall state, in addition, the purpose or purposes for which the meeting is
called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on
the records of the corporation, unless such stockholder shall have filed with
the Secretary of the Corporation a written request that notices to such
stockholder be mailed to some other address in which case it shall be directed
to such stockholder at such other address.
1.5 Voting List. The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order for each class of stock, and showing
the address of each stockholder and the number of shares of the Corporation and
the number of Units (as defined in the Certificate of Incorporation) in the
Operating Partnership (as defined in Section 1.8 below), which are registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior to the meeting, at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting. The list shall also be produced and
kept at the time and place of the meeting during the whole time of the meeting,
and may be inspected by any stockholder who is present. The Corporation shall
cause the Operating Partnership to provide complete, current and accurate
records of the holdings of Units in the Operating Partnership to be made
available to the Corporation at all times to be used for the purposes of
maintaining the above-described list.
G-1
<PAGE>
1.6 Quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the voting power
of the capital stock of the corporation issued and outstanding and entitled to
vote at the meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business. Where a separate vote by a
class or classes or series is required, a majority of the shares of such class
or classes or series in person or represented by proxy shall constitute a
quorum entitled to take action with respect to that vote on that matter.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any other
time and to any other place at which a meeting of stockholders may be held
under these By-Laws by a majority vote of the stockholders present or
represented at the meeting and entitled to vote, although less than a quorum,
or, if no stockholder is present, by any officer entitled to preside at or to
act as Secretary of such meeting. It shall not be necessary to notify any
stockholder of any adjournment of less than 30 days if the time and place of
the adjourned meeting are announced at the meeting at which adjournment is
taken, unless after the adjournment a new record date is fixed for the
adjourned meeting. At the adjourned meeting at which a quorum shall be present
or represented by proxy, the corporation may transact any business which might
have been transacted at the original meeting called if a quorum had been
present or represented by proxy thereat.
1.8 Voting and Proxies. Except as otherwise provided in a resolution of the
Board adopted pursuant to the Restated Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation") and these By-Laws establishing
a series of Preferred Stock of the Corporation ("Preferred Stock"), at each
meeting of stockholders, each holder of shares of the Corporation's Class A
Common Stock, par value $.01 per share ("Class A Common Stock"), shall be
entitled to one (1) vote for each such share, and each holder of the
Corporation's Class B Common Stock, par value $.01 per share ("Class B Common
Stock", and together with the Class A Common Stock, the "Common Stock"), shall
be entitled to one vote for each share of Class B Common Stock and one vote for
each Unit in the Operating Partnership standing in such holder's name on the
stock records of the Corporation maintained in accordance with Section 1.5
hereof. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting, may vote or express such consent or dissent in person or may
authorize another person or persons to vote or act for him by proxy executed or
authorized by the stockholder in accordance with applicable law or his
authorized agent and delivered to the Secretary of the corporation. No such
proxy shall be voted or acted upon after three years from the date of its
execution, unless the proxy expressly provides for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, all matters
shall be decided by a majority of the votes cast at such meeting by the holders
of shares of capital stock present or represented by proxy and entitled to vote
thereon, except when a different vote is required by express provision of law,
the Certificate of Incorporation or these By-Laws. When a quorum is present at
any meeting, any election of directors by stockholders shall be determined by a
plurality of the votes cast on the election.
1.10 Action without Meeting. Any action required or permitted to be taken at
any annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
ARTICLE 2--Directors
2.1 Number; Election and Qualification. The Corporation shall have the number
of directors as is set forth in the Certificate of Incorporation. The directors
shall be elected at the annual meeting of stockholders by such stockholders as
have the right to vote on such election. Directors need not be stockholders of
the corporation.
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2.2 Tenure. Each director shall hold office until the next annual meeting and
until his successor is elected and qualified, or until his earlier death,
resignation or removal or until his term otherwise terminates.
2.3 Vacancies. Any vacancies on the Board resulting from death, resignation,
disqualification, removal or other cause shall be filled in the manner provided
in the Certificate of Incorporation.
2.4 Resignation. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some
other event.
2.5 Regular Meetings. Regular meetings of the Board shall be held at such
time and place, either within or without the State of Delaware, in accordance
with a yearly meeting schedule as determined by the Board; or such meetings may
be held on such other days and at such other times as the Board may from time
to time determine; provided that any director who is absent when such a
determination is made shall be given notice of the determination.
2.6 Special Meetings. Special meetings of the Board of Directors may be held
at any time and place, within or without the State of Delaware, designated in a
call by the Chairman of the Board, President, a majority of the directors then
in office, any member of the Executive Steering Committee or by one director in
the event that there is only a single director in office.
2.7 Notice of Special Meetings. Notice of any special meeting of directors
stating the time, place and expected purposes thereof shall be given to each
director by the Secretary or by the officer or one of the directors calling the
meeting. Notice shall be duly given to each director (i) by giving notice to
such director in person or by telephone at least 48 hours in advance of the
meeting, (ii) by sending a telegram or telex, or delivering written notice by
hand, to his last known business or home address at least 48 hours in advance
of the meeting, or (iii) by mailing written notice to his last known business
or home address at least five (5) days in advance of the meeting.
2.8 Meetings by Telephone or Video Conference Calls. Directors or any members
of any committee designated by the directors may participate in a meeting of
the Board of Directors or such committee by means of conference telephone,
video or similar communications equipment or any other forms of communication
as may be authorized from time to time under the Delaware General Corporation
Law, by means of which all persons participating in the meeting can hear each
other, and participation by such means shall constitute presence in person at
such meeting.
2.9 Quorum. A majority of the total number of the whole Board of Directors
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such
director so disqualified; provided, however, that in no case shall less than
one-third (1/3) of the number so fixed constitute a quorum. In the absence of a
quorum at any such meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice other than announcement at the
meeting, until a quorum shall be present.
2.10 Action at Meeting. At any meeting of the Board of Directors at which a
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.11 Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee of the Board of Directors
may be taken without a meeting, if all members of the Board or committee, as
the case may be, consent to the action in writing, and the written consents are
filed with the minutes of proceedings of the Board or committee.
2.12 Removal. Subject to the rights of the holders of Preferred Stock to
elect directors under circumstances specified in a resolution of the Board,
adopted pursuant to the provisions of the Certificate of
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Incorporation or these By-Laws establishing such series, and further subject to
the respective rights of holders of Voting Stock and Class B Common Stock to
remove Class A Directors and Class B Directors as provided in the Certificate
of Incorporation, any director may be removed from office only for cause by the
affirmative vote of the holders of at least eighty percent (80%) of the Voting
Power of the Voting Stock (as defined in the Certificate of Incorporation),
voting together as a single class.
2.13 Compensation of Directors. Directors may be paid such compensation for
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3--Committees of the Board
3.1 Other Committees. In addition to the Executive Steering Committee
provided for in the Certificate of Incorporation, the Board of Directors may,
by resolution passed by a majority of the whole Board, designate one or more
other committees, each such committee to consist of one or more of the
directors of the corporation. The Board may designate one or more directors as
alternate members of any such committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of any such committee, the member or members of
the committee present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in the place of any such absent
or disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors
may from time to time request.
3.2 Action by Consent; Participation by Telephone, Video or Similar
Equipment. Unless the Board shall otherwise provide, any action required or
permitted to be taken by any committee may be taken without a meeting if all
members of the committee consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consents thereto by the
members of the committee shall be filed with the minutes of the proceedings of
the committee. Unless the Board shall otherwise provide, any one or more
members of any such committee may participate in any meeting of the committee
by means of conference telephone, video or similar communications equipment or
any other forms of communication as may be authorized from time to time under
the Delaware General Corporation Law, by means of which all persons
participating in the meeting can hear each other. Participation by such means
shall constitute presence in person at a meeting of the committee.
ARTICLE 4--Officers
4.1 Enumeration. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board (subject to the approval procedures of Article FIFTH, Clause (g)(i) of
the Certificate of Incorporation), a Vice-Chairman of the Board, and one or
more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The
Board of Directors may appoint such other officers as it may deem appropriate.
4.2 Election. Subject to the approval procedures of Article FIFTH, Clause
(g)(i) of the Certificate of Incorporation, the President, Treasurer and
Secretary shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other officers may be
appointed by the Board of Directors at such meeting or at any other meeting.
4.3 Qualification. No officer need be a stockholder. Any two or more offices
may be held by the same person.
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4.4 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
4.5 Resignation and Removal. Any officer may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer
for any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the
year or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
4.6 Vacancies. The Board of Directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
4.7 Chairman of the Board and Vice-Chairman of the Board. Subject to the
approval procedures of Article FIFTH, Clause (g)(i) of the Certificate of
Incorporation, the Board of Directors shall appoint a Chairman of the Board and
shall designate the Chairman of the Board as Chief Executive Officer. The
Chairman of the Board shall perform such duties and possess such powers as are
assigned to him by the Board of Directors. If the Board of Directors appoints a
Vice-Chairman of the Board, he shall, in the absence or disability of the
Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such
other powers as may from time to time be vested in him by the Board of
Directors.
4.8 President. The President shall, subject to the direction of the Board of
Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors. The President shall perform such other
duties and shall have such other powers as the Board of Directors may from time
to time prescribe.
4.9 Vice Presidents. Any Vice President shall perform such duties and possess
such powers as the Board of Directors or the President may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
4.10 Secretary and Assistant Secretaries. The Secretary shall perform such
duties and shall have such powers as the Board of Directors or the President
may from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
holders of Units and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on
documents.
Any Assistant Secretary shall perform such duties and possess such powers as
the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to
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act of the Secretary, the Assistant Secretary (or if there shall be more than
one, the Assistant Secretaries in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting of
stockholders or directors, the person presiding at the meeting shall designate
a temporary secretary to keep a record of the meeting.
4.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
duties and shall have such powers as may from time to time be assigned to him
by the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds
of the corporation in depositories selected in accordance with these By-Laws,
to disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers as
the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors), shall
perform the duties and exercise the powers of the Treasurer.
4.12 Salaries. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 5--Capital Stock
5.1 Issuance of Stock. Subject to the approval procedures of Article FIFTH,
Clauses (f)(ii) and (g)(i) of the Certificate of Incorporation, unless
otherwise voted by the stockholders and subject to the provisions of the
Certificate of Incorporation, the whole or any part of any unissued balance of
the authorized capital stock of the corporation or the whole or any part of any
unissued balance of the authorized capital stock of the corporation held in its
treasury may be issued, sold, transferred or otherwise disposed of by vote of
the Board of Directors in such manner, for such consideration and on such terms
as the Board of Directors may determine.
5.2 Certificates of Stock. Every holder of stock of the corporation shall be
entitled to have a certificate, in such form as may be prescribed by law and by
the Board of Directors, certifying the number and class of shares owned by him
in the corporation. Each such certificate shall be signed by, or in the name of
the corporation by, the Chairman or Vice-Chairman, if any, of the Board of
Directors, or the President or a Vice President, and the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction on
transfer pursuant to the Certificate of Incorporation, the By-Laws, applicable
securities laws or any agreement among any number of shareholders or among such
holders and the corporation shall have conspicuously noted on the face or back
of the certificate either the full text of the restriction or a statement of
the existence of such restriction.
If the corporation shall be authorized to issue more than one class of stock
or more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of each certificate representing shares of such class or series of
stock, provided that in lieu of the foregoing requirements there may be set
forth on the face or back of each certificate representing shares of such class
or series of stock a statement that the corporation will furnish without charge
to each stockholder who so requests a copy of the full text of the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications
limitations or restrictions of such preferences and/or rights.
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5.3 Transfers. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to
the corporation or its transfer agent of the certificate representing such
shares properly endorsed or accompanied by a written assignment or power of
attorney properly executed, and with such proof of authority or the
authenticity of signature as the corporation or its transfer agent may
reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the
right to vote with respect to such stock, regardless of any transfer, pledge or
other disposition of such stock until the shares have been transferred on the
books of the corporation in accordance with the requirements of these By-Laws.
5.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new
certificate of stock in place of any previously issued certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
5.5 Record Date. The Board of Directors may fix in advance a date as a record
date for the determination of the stockholders entitled to notice of or to vote
at any meeting of stockholders or to express consent (or dissent) to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 10 days after the date of adoption of a
record date for a written consent without a meeting, nor more than 60 days
prior to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the date on which the
first written consent is properly delivered to the corporation. The record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote at
a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
ARTICLE 6--General Provisions
6.1 Fiscal Year. Except as from time to time otherwise designated by the
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January in each year and end on the last day of December in each year.
6.2 Corporate Seal. The corporate seal shall be in such form as shall be
approved by the Board of Directors.
6.3 Waiver of Notice. Whenever any notice whatsoever is required to be given
by law, by the Certificate of Incorporation or by these By-Laws, a waiver of
such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver,
or the appearance of such person or persons at such meeting in person or by
proxy, shall be deemed equivalent to such notice.
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6.4 Voting of Securities. Except as the directors may otherwise designate,
the President or Treasurer may waive notice of, and act as, or appoint any
person or persons to act as, proxy or attorney-in-fact for this corporation
(with or without power of substitution) at, any meeting of stockholders or
shareholders of any other corporation or organization, the securities of which
may be held by this corporation.
6.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith
be conclusive evidence of such action.
6.6 Certificate of Incorporation. All references in these By-Laws to the
Certificate of Incorporation shall be deemed to refer to the Restated
Certificate of Incorporation of the corporation, as amended and in effect from
time to time.
6.7 Severability. Any determination that any provision of these By-Laws is
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
6.8 Pronouns. All pronouns used in these By-Laws shall be deemed to refer to
the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
ARTICLE 7--Amendments
Subject to the approval procedures in Article FIFTH, Clause (g)(i) of the
Certificate of Incorporation, the Board may from time to time make, amend,
supplement or repeal these By-Laws by vote of a majority of the Board;
provided, however, that the stockholders may change or amend or repeal any
provision of these By-Laws by each of: (a) the affirmative vote of the holders
of a majority of the Voting Stock (as defined in the Certificate of
Incorporation), voting as one class; and (b) if a Class B Director is then
entitled to be a member of the Executive Steering Committee, by the affirmative
vote of the holders of a majority of the Class B Common Stock, voting
separately as a class. In addition to and not in limitation of the foregoing,
these By-Laws or any of them may be amended or supplemented in any respect at
any time, either: (i) at any meeting of stockholders, provided that any
amendment or supplement proposed to be acted upon at any such meeting shall
have been described or referred to in the notice of such meeting; or (ii) at
any meeting of the Board, provided that any amendment or supplement proposed to
be acted upon at any such meeting shall have been described or referred to in
the notice of such meeting or an announcement with respect thereto shall have
been made at the last previous Board meeting, and provided further that no
amendment or supplement adopted by the Board shall vary or conflict with any
amendment or supplement adopted by the stockholders.
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ANNEX H
PRODIGY COMMUNICATIONS CORPORATION
1999 STOCK OPTION PLAN
1. Purpose
The purpose of this 1999 Stock Option Plan (the "Plan") of Prodigy
Communications Corporation, a Delaware corporation (the "Company"), is to
advance the interests of the Company's stockholders by enhancing the Company's
ability to attract, retain and motivate persons who make (or are expected to
make) important contributions to the Company by providing such persons with
equity ownership opportunities and performance-based incentives and thereby
better aligning the interests of such persons with those of the Company's
stockholders. Except where the context otherwise requires, the term "Company"
shall include any of the Company's present or future subsidiary corporations as
defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder (the "Code") and any other business
venture (including, without limitation, joint venture or limited liability
company) in which the Company has a significant interest, as determined by the
Board of Directors of the Company (the "Board").
2. Eligibility
All of the Company's employees, officers, directors, consultants and advisors
(and any individuals who have accepted an offer for employment) are eligible to
be granted options (an "Option") under the Plan. Each person who has been
granted an Option under the Plan shall be deemed a "Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Options and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem
advisable. The Board may correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option in the manner and to the extent it
shall deem expedient to carry the Plan into effect and it shall be the sole and
final judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Option. No director or person
acting pursuant to the authority delegated by the Board shall be liable for any
action or determination relating to or under the Plan made in good faith.
(b) Appointment of Committees. To the extent permitted by applicable law, the
Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer. The Board shall appoint one such Committee of not less than
two members, each member of which shall be an "outside director" within the
meaning of Section 162(m) of the Code ("Section 162(m)") and a "non-employee
director" as defined in Rule 16b-3 promulgated under the Exchange Act.
4. Stock Available for Options
(a) Number of Shares. Subject to adjustment under Section 8, Options may be
made under the Plan for up to 5,600,000 shares of common stock of the Company
(the "Common Stock"). If any Option expires or is terminated, surrendered or
canceled without having been fully exercised or is forfeited in whole or in
part or results in any Common Stock not being issued, the unused Common Stock
covered by such Option shall again be available for the grant of Options under
the Plan, subject, however, in the case of Incentive Stock Options (as
hereinafter defined), to any limitation required under the Code. Shares issued
under the Plan may consist in whole or in part of authorized but unissued
shares or treasury shares.
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(b) Per-Participant Limit. Subject to adjustment under Section 8, for Options
granted after the Common Stock is registered under the Securities Exchange Act
of 1934 (the "Exchange Act"), the maximum number of shares of Common Stock with
respect to which Options may be granted to any Participant under the Plan shall
be 200,000 per calendar year. The per-Participant limit described in this
Section 4(b) shall be construed and applied consistently with Section 162(m).
5. Stock Options
(a) General. The Board may grant options to purchase Common Stock (each, an
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the time
each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
option agreement, provided, however, that no Option shall be granted for a term
in excess of 10 years.
(e) Exercise of Option. Options may be exercised by delivery to the Company
of a written notice of exercise signed by the proper person or by any other
form of notice (including electronic notice) approved by the Board together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide in
an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the
Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company
cash or a check sufficient to pay the exercise price;
(3) when the Common Stock is registered under the Exchange Act, by
delivery of shares of Common Stock owned by the Participant valued at their
fair market value as determined by (or in a manner approved by) the Board
in good faith ("Fair Market Value"), provided (i) such method of payment is
then permitted under applicable law and (ii) such Common Stock was owned by
the Participant at least six months prior to such delivery;
(4) to the extent permitted by the Board, in its sole discretion by (i)
delivery of a promissory note of the Participant to the Company on terms
determined by the Board, or (ii) payment of such other lawful consideration
as the Board may determine; or
(5) by any combination of the above permitted forms of payment.
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(g) Substitute Options. In connection with a merger or consolidation of an
entity with the Company or the acquisition by the Company of property or stock
of an entity, the Board may grant Options in substitution for any options or
other stock or stock-based Options granted by such entity or an affiliate
thereof. Substitute Options may be granted on such terms as the Board deems
appropriate in the circumstances, notwithstanding any limitations on Options
contained in the other sections of this Section 5.
6. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse stock
split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this
Plan, (ii) the per-Participant limit set forth in Section 4(b), and (iii) the
number and class of securities and exercise price per share subject to each
outstanding Option shall be appropriately adjusted by the Company (or
substituted Options may be made, if applicable) to the extent the Board shall
determine, in good faith, that such an adjustment (or substitution) is
necessary and appropriate. If this Section 6(a) applies and Section 6(c) also
applies to any event, Section 6(c) shall be applicable to such event, and this
Section 6(a) shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of
which the Common Stock is converted into or exchanged for the right to
receive cash, securities or other property or (b) any exchange of shares of
the Company for cash, securities or other property pursuant to a statutory
share exchange transaction.
(2) Consequences of an Acquisition Event on Options. Upon the occurrence
of an Acquisition Event, or the execution by the Company of any agreement
with respect to an Acquisition Event, the Board shall provide that all
outstanding Options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof). For purposes hereof, an Option shall be considered to be assumed
if, following consummation of the Acquisition Event, the Option confers the
right to purchase, for each share of Common Stock subject to the Option
immediately prior to the consummation of the Acquisition Event, the
consideration (whether cash, securities or other property) received as a
result of the Acquisition Event by holders of Common Stock for each share
of Common Stock held immediately prior to the consummation of the
Acquisition Event (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the
outstanding shares of Common Stock); provided, however, that if the
consideration received as a result of the Acquisition Event is not solely
common stock of the acquiring or succeeding corporation (or an affiliate
thereof), the Company may, with the consent of the acquiring or succeeding
corporation, provide for the consideration to be received upon the exercise
of Options to consist solely of common stock of the acquiring or succeeding
corporation (or an affiliate thereof) equivalent in fair market value to
the per share consideration received by holders of outstanding shares of
Common Stock as a result of the Acquisition Event.
Notwithstanding the foregoing, if the acquiring or succeeding corporation (or
an affiliate thereof) does not agree to assume, or substitute for, such
Options, then the Board shall, upon written notice to the Participants, provide
that all then unexercised Options will become exercisable in full as of a
specified time prior to the Acquisition Event and will terminate immediately
prior to the consummation of such Acquisition Event, except to the extent
exercised by the Participants before the consummation of such Acquisition
Event; provided,
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however, that in the event of an Acquisition Event under the terms of which
holders of Common Stock will receive upon consummation thereof a cash payment
for each share of Common Stock surrendered pursuant to such Acquisition Event
(the "Acquisition Price"), then the Board may instead provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and that each Participant shall receive, in exchange therefor, a cash payment
equal to the amount (if any) by which (A) the Acquisition Price multiplied by
the number of shares of Common Stock subject to such outstanding Options
(whether or not then exercisable), exceeds (B) the aggregate exercise price of
such Options.
7. General Provisions Applicable to Options
(a) Transferability of Options. Except as the Board may otherwise determine
or provide in an Option, Options shall not be sold, assigned, transferred,
pledged or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable
only by the Participant. References to a Participant, to the extent relevant in
the context, shall include references to authorized transferees.
(b) Documentation. Each Option shall be evidenced by a written instrument in
such form as the Board shall determine. Such written instrument may be in the
form of an agreement signed by the Company and the Participant or a written
confirming memorandum to the Participation from the Company. Each Option may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Option
may be made alone or in addition or in relation to any other Option. The terms
of each Option need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an Option
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Option.
(e) Withholding. Each Participant shall pay to the Company, or make provision
satisfactory to the Board for payment of, any taxes required by law to be
withheld in connection with Options to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Option, when the Common Stock is registered under the Exchange
Act, Participants may, to the extent then permitted under applicable law,
satisfy such tax obligations in whole or in part by delivery of shares of
Common Stock, including shares retained from the Option creating the tax
obligation, valued at their Fair Market Value. The Company may, to the extent
permitted by law, deduct any such tax obligations from any payment of any kind
otherwise due to a Participant.
(f) Amendment of Option. The Board may amend, modify or terminate any
outstanding Option, including but not limited to, substituting therefor another
Option of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be
required unless the Board determines that the action, taking into account any
related action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Option have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been
satisfied, including any applicable securities laws and any applicable stock
exchange or stock market rules and regulations, and (iii) the Participant has
executed and delivered to the Company such representations or agreements as the
Company may consider appropriate to satisfy the requirements of any applicable
laws, rules or regulations.
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(h) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part.
8. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim or
right to be granted an Option, and the grant of an Option shall not be
construed as giving a Participant the right to continued employment or any
other relationship with the Company. The Company expressly reserves the right
at any time to dismiss or otherwise terminate its relationship with a
Participant free from any liability or claim under the Plan, except as
expressly provided in the applicable Option.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Option, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Option until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board, but no Option granted to a
Participant that is intended to comply with Section 162(m) shall become
exercisable, unless and until the Plan has been approved by the Company's
stockholders to the extent stockholder approval is required by Section 162(m)
in the manner required under Section 162(m) (including the vote required under
Section 162(m)). No Options shall be granted under the Plan after the
completion of ten years from the earlier of (i) the date on which the Plan was
adopted by the Board or (ii) the date the Plan was approved by the Company's
stockholders, but Options previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time, provided that to the extent required by
Section 162(m), no Option granted to a Participant that is intended to comply
with Section 162(m) after the date of such amendment shall become exercisable,
unless and until such amendment shall have been approved by the Company's
stockholders as required by Section 162(m) (including the vote required under
Section 162(m)).
(e) Governing Law. The provisions of the Plan and all Options made hereunder
shall be governed by and interpreted in accordance with the laws of the State
of Delaware, without regard to any applicable conflicts of law.
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PROXY
PRODIGY COMMUNICATIONS CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MAY 24, 2000
THIS PROXY IS SOLICITED ON BEHALF OF OUR BOARD OF DIRECTORS
The undersigned hereby appoints Andrea S. Hirsch and David A. Westenberg, and
each of them as proxies, each with the power of substitution, and hereby
authorizes them to vote all shares of Prodigy common stock which the
undersigned is entitled to vote at the special meeting of stockholders, to be
held at Crowne Plaza Hotel, 66 Hale Avenue, White Plains, New York 10601 on
Wednesday, May 24, 2000 at 11:00 a.m., local time, and at any adjournments or
postponements of the special meeting, as specified on this proxy card upon the
proposals listed on the reverse side and as more particularly described in the
proxy statement and in their discretion upon such other matters as may properly
come before the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
PRESENTED AT THE MEETING.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
P
R
O
X
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This proxy will be voted as directed. If no direction is given, this
proxy will be voted FOR the proposals.
The Board of Directors recommends a vote FOR the proposals.
1. To approve FOR AGAINST ABSTAIN MARK HERE IF YOU PLAN [_]
Prodigy's proposed [_] [_] [_] TO ATTEND THE MEETING
transaction with SBC
Communications Inc.
described in the
proxy statement.
2. To adopt the 1999 stock option plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW
[_]
3. To elect the following six (6) nominees as Directors of Prodigy:
Samer F. Salameh, Alfredo Sanchez,Allen Craft, James R. Adams,Arturo Elias
and James M. Nakfoor
FOR ALL NOMINEES
WITH- HOLD
FOR ALL EXCEPT
[_] [_] [_]
INSTRUCTIONS: To withhold authority to vote
for any individual nominee, mark the "For
All Except" box and strike a line through
the name of the nominee for whom you do not
want to vote. Your shares will be voted for
the remaining nominees.
4. To ratify the selection of PricewaterhouseCoopers LLP as independent
auditors of Prodigy for the fiscal year ending December 31, 2000.
FOR AGAINST ABSTAIN
[_] [_] [_]
Sign exactly as your name(s)
appear(s) on your stock certificate.
If shares of stock stand of record in
the names of two or more or in the
name of husband and wife, whether as
joint tenants or otherwise, both or
all of such persons should sign the
above proxy. If shares of stock are
held of record by a corporation, the
proxy should be executed by the
president or vice president and the
secretary or assistant secretary, and
the corporate seal should be affixed
thereto. Executors or administrators
or other fiduciaries who execute the
above proxy for a deceased
stockholder should give their full
title. Please date the proxy.
Signature: ___________ Date: _____ Signature: ___________ Date: _____
