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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-25333
PRODIGY COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 04-3323363
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
44 SOUTH BROADWAY, WHITE PLAINS, NEW YORK 10601
(Address of principal executive offices)
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Registrant's telephone number, including area code: (914) 448-8000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of outstanding shares of the registrant's Common
Stock held by non-affiliates as of March 1, 2000 was $418,705,886. For this
purpose, any officer, director and known 5% stockholder is deemed to be an
affiliate.
The number of shares of the registrant's Common Stock outstanding on March 1,
2000 was 64,581,965.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the registrant's definitive proxy
statement to be filed in connection with the registrant's 2000 annual meeting
of stockholders (the "2000 Proxy Statement") are incorporated by reference into
Part III.
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INDEX
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Item Description Page
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PART I
Item 1 Business....................................................... 3
Item 2 Properties..................................................... 18
Item 3 Legal Proceedings.............................................. 19
Item 4 Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 20
Item 6 Selected Financial Data........................................ 21
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 25
Certain Factors That May Affect Future Operating Results................ 33
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 40
Item 8 Financial Statements and Supplementary Data.................... 41
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 67
PART III
Item 10 Directors and Executive Officers of the Registrant............. 67
Item 11 Executive Compensation......................................... 67
Security Ownership of Certain Beneficial Owners and
Item 12 Management..................................................... 67
Item 13 Certain Relationships and Related Transactions................. 67
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 67
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This report on Form 10-K includes "forward-looking statements", including
statements containing the words "believes", "anticipates", "expects" and words
of similar import. All statements other than statements of historical fact
included in this report including, without limitation, such statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere herein, regarding Prodigy or any of
the transactions described herein, including the timing, financing, strategies
and effects of such transactions and Prodigy's growth strategy and anticipated
growth, are forward-looking statements. Important factors that could cause
actual results to differ materially from expectations are disclosed in this
report, including, without limitation, in conjunction with the forward-looking
statements in this report and under the heading "Certain Factors That May
Affect Future Operating Results" under Item 7.
Prodigy, the Prodigy globe logo and Prodigy Internet are registered
trademarks, and Are You A Prodigy?, the Are You A Prodigy? logo, It's a tool
for living, Prodigy Classic, the Prodigy Internet logo and Prodigy MailLink are
trademarks of Prodigy. All other brand or product names may be trademarks or
registered trademarks of their respective owners.
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Item 1. 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 750 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. Combining
these strengths, the Prodigy Internet service has achieved one of the fastest
subscriber growth rates among U.S. Internet service providers. The number of
billable subscribers to Prodigy Internet, including subscribers who switched
from Prodigy's original Prodigy Classic online service, has 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 Prodigy Internet's 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 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. Since the autumn of 1997, Prodigy has created a
business and operating model that it believes can accommodate sustained
subscriber growth cost-effectively without significant capital expenditures.
Prodigy has outsourced 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 750 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.
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. Pop-up advertisements
appear on smaller screens that automatically overlay the user's PC screen.
Prodigy also 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.
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 powered by Excite 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 homepage 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 and security
devices for electronic commerce. Prodigy Internet is compatible with Microsoft
Internet Explorer and Netscape Navigator on the Windows 98, Windows 95 and
Windows 3.1 operating systems and on Macintosh computers. Microsoft Internet
Explorer is the primary browser shipped on disks that contain the Prodigy
Internet software.
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 $189 for one year of unlimited
usage, equivalent to $15.75 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 access plus five mailboxes; and
. $21.95 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 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.
As of December 31, 1999, Prodigy managed approximately 364,000 Prodigy
Internet de Telmex subscribers. 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 on 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.
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, even offer free Internet access services.
Among the larger providers of Internet service provider 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 December 31, 1999, Prodigy had 445 full-time employees, of whom 83 were in
sales and marketing, 166 were in technology and product development, 111 were
in customer service, and 85 were in management, finance and administration. As
necessary, Prodigy supplements its regular employees with temporary and
contract personnel, which totaled 73 persons at December 31, 1999.
None of Prodigy's employees is represented by a labor union. Prodigy believes
that its employee relations are good.
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Pending Transactions
SBC
Prodigy has a pending transaction with SBC Communications in which, among
other things, SBC will acquire an approximate 43% interest in Prodigy and
Prodigy will be the exclusive retail Internet service marketed by SBC to
consumers and small businesses in the United States. For a more complete
understanding of the SBC transaction, you should read the 2000 Proxy Statement.
On November 22, 1999, Prodigy and SBC Communications announced that they had
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;
. SBC has committed to obtain for Prodigy 1,200,000 additional Internet
subscribers over a three-year period;
. 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 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, 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.
Following the SBC transaction, Prodigy will continue to provide the Prodigy
Internet service to its current subscribers and will continue to offer the
Prodigy Internet service through existing and new channels on a nationwide
basis.
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.
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;
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. 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 SBC transaction will be implemented as follows:
Prodigy and a subsidiary have formed the operating partnership. Prodigy is
the sole general partner of the operating partnership. At the closing, Prodigy
will contribute substantially all of its assets and liabilities, and transfer
its employees, to the operating partnership. At the closing, a subsidiary of
SBC will contribute routers, servers and associated hardware used in connection
with SBC's consumer and small business Internet operations that are selected by
Prodigy and intangible assets consisting primarily of brand assets and
subscriber relationships in exchange for a number of units of the operating
partnership equal to approximately 43% of the total number of units issued and
outstanding immediately following the issuance of units to the SBC subsidiary.
After the FlashNet merger, however, SBC will hold approximately 39.4% of these
units. Prodigy will retain an approximate 57% interest in the operating
partnership.
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 into Prodigy Class A common stock. When
transferred to any person or entity not affiliated with SBC, 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 limited partnership agreement.
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.
Following the SBC transaction, Prodigy's stockholders will have the following
rights:
Prodigy's stockholders will exchange their Prodigy common stock for 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 Prodigy
common stock formerly 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 the 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 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
stock generally will vote together as a single class on all
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matters, including the election of the directors who are not elected directly
by SBC. SBC, as holder of Prodigy Class B common stock, may approve a merger of
the operating partnership into Prodigy by a vote of at least 75% of Prodigy
Class B common stock without a vote of the holders of Prodigy Class A common
stock.
Following the SBC transaction, 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. As the sole general partner,
Prodigy 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. With some exceptions, Prodigy cannot be
removed as the sole general partner of the operating partnership and the
operating partnership cannot be dissolved without Prodigy's approval.
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
outstanding shares of Prodigy common stock. After the closing, the number of
units owned by Prodigy is intended to be at all times equal to the number of
shares of outstanding common stock of Prodigy. The net cash proceeds received
by Prodigy from any issuance of shares of common stock, such as from the
exercise of options and warrants, will be concurrently transferred to the
operating partnership in exchange for units equal in number to the number of
shares of Prodigy common stock issued by Prodigy.
Following the SBC transaction, Prodigy's board of directors will consist of
nine members:
. three directors elected by SBC;
. three directors designated by Carso Global Telecom and Telmex;
. Prodigy's chief executive officer; and
. two independent directors.
Following the SBC transaction, Prodigy will establish an executive steering
committee of the board of directors. This 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 committee will be to evaluate all major
corporate actions of Prodigy and its subsidiaries, such as mergers,
acquisitions, capital expenditures or borrowings in excess of $20,000,000. The
executive steering committee must approve major corporate actions before it
submits them to the board of directors of Prodigy for approval.
FlashNet
On November 5, 1999, Prodigy announced a definitive agreement to acquire
FlashNet Communications in a stock-for-stock merger pursuant to which Prodigy
will issue 0.35 of a share of Prodigy common stock for each share of FlashNet
common stock outstanding immediately prior to the close of the merger. In
addition Prodigy will assume all FlashNet stock options and warrants
outstanding upon the close of the merger. Prodigy expects to issue
approximately 5,000,000 shares of Prodigy common stock in the merger. Upon
completion of the merger, FlashNet shareholders will own approximately 7.6% of
Prodigy's outstanding common stock. Following completion of the SBC
transaction, FlashNet shareholders will own 4.6% of Prodigy and SBC will own
approximately 39.4% of Prodigy.
Item 2. Properties
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.
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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.
Item 3. 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 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.
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. 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. Ms. Roberts 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information and Holders
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.
<TABLE>
<CAPTION>
Prodigy
Common Stock
-----------------
High Low
-------- --------
<S> <C> <C>
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
</TABLE>
As of December 31, 1999, there were 64,502,608 shares of common stock issued
and outstanding and held of record by 539 record holders. This number does not
include stockholders who hold the stock in "street name" through brokers or
nominees.
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.
Recent Sales of Unregistered Securities
On October 5, 1999, in partial consideration of our acquisition of the
BizOnThe.Net Web hosting business of U.S. Republic Communications, Prodigy
issued 2,840,993 shares of our 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 stockholders. The shares issued in the U.S. Republic
transaction were offered and sold in reliance upon exemptions set forth in
Sections 3(b) and 4(2) of the Securities Act of 1933, or Regulation D
promulgated thereunder, relating to sales by an issuer not involving a public
offering. No underwriters or placement agents were involved in the foregoing
issuance of shares.
20
<PAGE>
Item 6. Selected Financial Data
The following data contains selected consolidated financial information and
other data for Prodigy. 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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data".
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) 1996 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>
21
<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.
22
<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>
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>
23
<PAGE>
Supplementary Financial Data (Unaudited)
The following table sets forth unaudited consolidated quarterly statement of
operations data for each of the four quarters during the years ended December
31, 1998 and 1999. In the opinion of management, this information has been
prepared substantially on the same basis as the audited financial statements
appearing elsewhere in this report on Form 10-K, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations. The quarterly data should be read in conjunction with
the audited consolidated financial statements of Prodigy and the notes thereto
appearing elsewhere in this report on Form 10-K. The results of operations for
any quarter are not necessarily indicative of the results of operations for any
future period.
<TABLE>
<CAPTION>
1998 1999
------------------------------------------------ ------------------------------------------------
Quarter Ended March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues........ $ 33,387 $ 33,923 $ 34,158 $ 34,672 $ 35,926 $ 37,090 $ 48,899 $ 67,123
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Costs and
Expenses:
Cost of Revenue....... 25,078 23,533 22,202 22,542 21,846 22,105 27,743 30,505
Sales and marketing... 6,958 8,411 10,435 15,874 12,412 11,100 13,446 21,896
Product Development... 2,792 2,339 2,539 3,210 3,450 3,405 2,761 2,725
General and
Administrative....... 11,285 11,088 11,075 11,192 12,653 12,861 16,827 19,311
Depreciation and
amortization......... 4,098 3,973 3,861 4,140 4,073 4,208 4,196 9,315
Amortization of
subscriber
acquisition cost..... 8,604 11,844
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating costs
and expenses......... 50,211 49,344 50,112 56,958 54,434 53,679 73,577 95,596
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Loss........ (16,824) (15,421) (15,954) (22,286) (18,508) (16,589) (24,678) (28,473)
Interest
income/(expense),
net.................. (215) (113) (135) 689 1,064 1,842 1,127 (1,771)
Gain on sale of equity
investment........... 385 3,319 500
Gain of settlement of
note payable......... 1,714
Gain on asset sale.... 400
Other................. 4,391 44 (59) (20)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss.............. $ (16,639) $ (15,534) $ (15,704) $ (17,206) $ (15,730) $ (11,384) $ (23,610) $ (29,764)
========== ========== ========== ========== ========== ========== ========== ==========
Basic and diluted net
loss per share....... $ (0.49) $ (0.40) $ (0.39) $ (0.38) $ (0.29) $ (0.19) $ (0.39) $ (0.46)
========== ========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding.......... 33,804,894 38,466,399 40,002,234 45,034,027 53,455,241 61,007,546 61,145,041 64,094,423
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with "Item 6. Selected
Financial Data" and "Item 8. Financial Statements and Supplementary Data."
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 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
25
<PAGE>
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 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
26
<PAGE>
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. 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 the costs to acquire and retain
subscribers, advertising 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 in connection with the pending recovery of defaulted 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.
27
<PAGE>
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.
Amortization of subscriber acquisition costs
During 1999 Prodigy entered into agreements with several national 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 retailer 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. 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.
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.
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%
28
<PAGE>
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.
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.
29
<PAGE>
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.
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.
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
30
<PAGE>
(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.
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.
31
<PAGE>
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. 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. Prodigy has $7.1 million
accrued related to these programs as of December 31, 1999. 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.
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 ($10.8 million at February 29, 2000). Prodigy is currently
experiencing substantial negative cash flow each month and expects to continue
to experience negative cash flows through 2000. Telmex has committed to provide
financing of up to $200 million to fund Prodigy's operations through February
2001. Management believes that this additional funding will be sufficient to
enable Prodigy to meet its planned expenditures through at least December 31,
2000.
32
<PAGE>
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.
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.
Certain Factors That May Affect Future Operating Results
This report on Form 10-K contains "forward-looking statements" relating to,
without limitation, future economic performance, plans and projections of
revenue and other financial items, that are based on the beliefs of,
assumptions made by and information currently available to Prodigy. The words
"expect", "estimate", "anticipate", "believe", "intend", "plan" and similar
expressions and variations thereof are intended to identify forward-looking
statements. The cautionary statements set forth in this "Certain Factors That
May Affect Future Operating Results" section and elsewhere in this report on
Form 10-K identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those expressed in or implied by such
forward-looking statements.
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.
Since inception, Prodigy has incurred significant losses. Prodigy cannot
assure that it will achieve or sustain profitability. 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> <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.
33
<PAGE>
Since formation, Prodigy has not 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>
Negative cash flows from
operations..................... $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. Prodigy may fail
to compete effectively in its market.
Prodigy's industry is intensely competitive and includes many significant
participants, including:
. Internet service providers;
. proprietary online service providers;
. major international telecommunications companies;
. Internet-search services; and
. various other telecommunications companies.
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 Corporation. 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.
Many 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
34
<PAGE>
new service offerings and interfere with Prodigy's efforts to maintain or grow
its subscriber base. Prodigy cannot assure it will compete effectively.
Increasing competition could have a material adverse effect on Prodigy's future
revenues and liquidity.
Prodigy may be subject to increasing pricing pressures, which could result in
lower revenues.
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 pressure on
Prodigy's revenues and profit margins. 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.
Subscriber cancellations are common in Prodigy's industry and may adversely
affect 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. 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 have a material adverse effect on
Prodigy's future revenues.
Prodigy relies on Splitrock's network. Splitrock's failure to provide network
servicer as required could damage Prodigy's business.
Splitrock operates a telecommunications network to carry Prodigy's subscriber
traffic. 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.
Telecommunications networks are subject to security problems and other network
failures. The occurrence of a network problem could damage Prodigy's business.
Security problems represent an ongoing threat to telecommunications networks.
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
competitive position and future revenues.
Prodigy relies on third-party providers, including local phone companies. The
inability or unwillingness of these companies to continue to provide
telecommunications, customer service, billing and other services to Prodigy
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
35
<PAGE>
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 affiliates 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.
Two significant shareholders currently control Prodigy. These shareholders can
determine the outcome of all matters submitted to shareholders irrespective of
the votes of other shareholders.
If Carso Global Telecom and Telmex act together, they 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.
Accordingly, Carso Global Telecom and Telmex can control the management and
affairs of Prodigy. The voting control of Carso Global Telecom and Telmex could
be used as a means or have the effect of delaying or preventing a change in
control or acquisition of Prodigy.
Carlos Slim Helu 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 Carso Global Telecom, Telmex and Prodigy. This common
control means that Carso Global Telecom and Telmex acting together can
determine the outcome of all matters submitted to a vote of Prodigy's
stockholders.
Carso Global Telecom, Telmex and Prodigy's directors may be subject to
conflicts of interest.
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.
36
<PAGE>
Prodigy cannot fund its operations with the cash generated from its business.
Additional financing may result in dilution to existing stockholders and
additional operating restrictions.
Prodigy's future financing requirements will depend in part on its operating
performance and increases in operating expenses associated with growth in its
business. Prodigy is currently experiencing substantial negative cash flow each
month and expects to continue to experience negative cash flow through 2000.
Prodigy has approximately $10,800,000 of cash available at February 29, 2000.
Telmex has committed to provide financing of up to $200,000,000 to fund
Prodigy's operations through February 2001. Prodigy is in the process of
seeking third party financing of approximately $150,000,000 secured by the
future service fees payable by contract subscribers to the Prodigy Internet
service. In connection with this financing, Prodigy has requested SBC to
guarantee Prodigy's ongoing performance obligations under its customer
contracts. Prodigy and SBC are negotiating the terms under which SBC would
agree to provide such a guarantee. There can be no assurance that the parties
will come to an agreement. Any additional equity financing may cause investors
to experience dilution, and 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 contract acquisition
programs, Prodigy's financial condition may decline.
A majority of Prodigy Internet enrollments historically 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.
Prodigy, however, cannot predict whether future contract acquisition programs
will generate as many enrollments as in the past. If Prodigy subscriber base
does not continue to increase at a rapid rate, its financial condition may
decline.
If Prodigy does not manage the integration of acquired companies successfully,
it may not achieve the desired results of the acquisitions.
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.
Risks associated with the pending SBC transaction
Prodigy and SBC have agreed to establish the strategic relationship described
above under the caption "Pending Transactions--SBC" in Item 1 of this report on
Form 10-K. Completion of the SBC transaction is not a condition to completion
of the FlashNet merger, and the SBC transaction may not be completed. If the
SBC transaction is completed:
. Prodigy's network and operations may be unable to accommodate SBC's
Internet subscribers without disruptions in service;
. Prodigy will be subject to the restrictions imposed on Bell operating
company affiliates by the Communications Act;
37
<PAGE>
. the dilution to existing investors may adversely affect the price of
Prodigy's stock;
. the change in ownership and management structure of Prodigy following
the SBC transaction could make it more difficult for Prodigy to attract
and retain key personnel and directors; and
. the price of Prodigy's stock could decline if the effect of the SBC
transaction on Prodigy's subscriber base and financial results does not
meet the expectations of financial or industry analysts.
Risks associated with the pending FlashNet transaction
Prodigy has agreed to enter into a merger with FlashNet Communications
described above under the caption "Pending Transactions--FlashNet" in Item 1 of
this report on Form 10-K. Completion of the FlashNet merger is not a condition
to completion of the SBC transaction, and the FlashNet merger may not be
completed. If the FlashNet merger is completed:
. Prodigy may have difficulty in integrating the operations and personnel
of Prodigy and FlashNet;
. FlashNet customers may terminate service as a result of concerns over
the merger;
. the dilution to existing investors may adversely affect the price of
Prodigy's stock; and
. the price of Prodigy's stock could decline if the perceived benefits of
the merger do not meet the expectations of financial or industry
analysts.
Prodigy's expansion strategy 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 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.
38
<PAGE>
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
. 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.
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, its business could be
harmed.
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. 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.
If Prodigy is unable to attract and retain key personnel, its operations could
be adversely affected.
Competition for key personnel is intense, and there can be no assurance that
Prodigy will be successful in attracting and retaining necessary personnel.
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 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's failure to expand its business through acquisitions may materially
adversely affect its competitive position.
39
<PAGE>
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. 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. 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.
Prodigy's attraction and retention of customers depends on its ability to
anticipate and adapt to rapidly changing technology.
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 technological 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 and to introduce 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 on 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 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................ 42
Consolidated Balance Sheets at December 31, 1998 and 1999................ 43
Consolidated Statement of Operations for each of the three years in the
period ended December 31, 1999.......................................... 44
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
three years in the period ended December 31, 1999....................... 45
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999.......................................... 47
Notes to Consolidated Financial Statements............................... 49
</TABLE>
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
41
<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 ("Prodigy") 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 Prodigy'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
42
<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.
43
<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.
44
<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>
45
<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.
46
<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>
47
<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.
48
<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 ("Prodigy") is a leading nationwide
Internet Service Provider ("ISP"). Prodigy is controlled by Carso Global
Telecom, S.A. de C.V. ("Carso Global Telecom") through a 64.2% direct and
indirect majority voting equity interest in Prodigy's common stock. Prodigy 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, Prodigy has been in the midst of a major
transformation, both domestically and internationally. In the United States,
Prodigy launched its open standards based Internet access service ("Prodigy
Internet") in October 1996. Prodigy's cellular telephone assets and operations
were sold in January 1997. In 1997, Prodigy 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, Prodigy 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 Prodigy 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. Management believes that this additional funding will
be sufficient to enable Prodigy 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 adjustments related to the closing
balance sheet which are expected to be finalized in the second quarter of 2000,
and earn-out adjustments and other contractual terms 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 $10,000. 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.
49
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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
Prodigy 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 Prodigy'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.
Subscriber Acquisition Costs
Costs of acquisition programs which result in subscriber enrollments without
further effort required by Prodigy 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.
50
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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
Prodigy 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 Prodigy'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
Prodigy 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
Prodigy 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.
Long-Lived Assets
Prodigy 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. Prodigy reviews long-lived assets and the related intangible assets for
impairment whenever
51
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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
Prodigy adopted Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," in 1996. As permitted by SFAS
No. 123, Prodigy 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, Prodigy 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
Prodigy 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 Prodigy 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 Prodigy 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 Prodigy to concentrations of
credit risk consist principally of cash and trade receivables. Concentration of
credit risk with respect to cash is limited as Prodigy 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.
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
52
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
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, Prodigy decided to restructure its operations and
outsource its network and content production functions. Prodigy'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), Prodigy 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) Prodigy implemented a restructuring plan to reduce costs through job
elimination and as a result recorded a charge of $2,900. 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 $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) Prodigy'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 Prodigy's international
operations and/or former headquarters management. Approximately 20
employees were terminated.
5. Dispositions
Sale of International Wireless
Effective January 1997, Prodigy sold all issued outstanding capital stock of
IW to a company (the "Buyer") formed by a former executive and shareholder of
Prodigy (the "Executive"). The selling price consisted of (i) the surrender of
1,392,857 shares of common stock of Prodigy, (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
53
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
expenditures made by Prodigy for the benefit of IW, secured by a pledge of 67%
of the shares of IW purchased from Prodigy, 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, Prodigy 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 Prodigy 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 Prodigy'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, Prodigy 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
Prodigy, including commitments to meet certain capacity and performance
requirements.
As a result of the sale of the network effective July 1, 1997, Prodigy 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. Prodigy 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, Prodigy 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 Prodigy for a six month period. The sale
resulted in a gain to Prodigy of approximately $2,900.
Sale of Equity Investment
During 1997 Prodigy sold a subsidiary which eventually became part of TCI
Music. As a result of the sale, Prodigy acquired shares of TCI Music. During
April of 1999, TCI Music announced its merger with Liberty Media. As a result,
the value of Prodigy's investment increased and was sold for $3,325, generating
a gain of $3,319 which was recognized in 1999.
54
<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, Prodigy 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, Prodigy paid Cable & Wireless USA, Inc. $40,900
in cash and anticipates finalizing the purchase price in the first quarter of
2000.
55
<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 $10,000 from the
original payment due to fewer subscribers transitioning to the Prodigy service
than originally projected. Prodigy 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, Prodigy 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 Prodigy's
standard monthly rates. Prodigy has capitalized these payments and is
amortizing them over the term of the individual subscriber contract. Prodigy
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, Prodigy 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 Prodigy's common stock is issued in the
private placement. In January 1999, Prodigy 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 Prodigy recognized a gain of $1,714 in
1999.
In August 1998, Prodigy 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.
56
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
In August 1999, Prodigy 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
Prodigy 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 Prodigy 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 initial public
offering. As a condition to these arrangements, Carso Global Telecom prepaid
(on behalf of and as an advance to Prodigy) the balance due on Prodigy'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 Prodigy under PSC contracts for which IBM and Sears remain
liable.
Upon the completion of Prodigy's initial public offering both IBM and Sears
acquired an interest in Prodigy'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
Prodigy 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, Prodigy'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, Prodigy 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.
57
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Management of Prodigy 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 Prodigy's history of losses and
concluded that it is more likely than not that Prodigy 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, Prodigy effected a reduction in the number of authorized
shares from 280,000,000 to 150,000,000.
Private Placements
In October 1996, Prodigy offered up to 2,000,000 shares of its common stock
in a private placement, resulting in net proceeds to Prodigy from investors of
approximately $1,843. In February 1997, Prodigy 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, Prodigy 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. Prodigy received aggregate gross
proceeds of $88,843 and issued 7,403,603 shares of common stock.
In November 1997, Prodigy made a Rights Offering whereby each eligible
stockholder was entitled to purchase at a price of $4.00 per share, one share
of Prodigy's common stock for each share held. Prodigy 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 Prodigy.
In August 1998, Prodigy 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 Prodigy. 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
Prodigy. 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, Prodigy completed an initial public offering 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.
58
<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 Prodigy's initial public offering both IBM and Sears
acquired 7.5% of Prodigy'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 Prodigy.
Additionally, IBM and Sears each received warrants which allow them to
purchase up to 15% of Prodigy 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 Prodigy 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 Prodigy, the exercise price was reduced from $12.00 per
share to $4.00 per share.
At December 31, 1997, Prodigy had warrants outstanding with various
shareholders, including Carso Global Telecom, to purchase 3,859,347 shares of
Prodigy'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,
Prodigy had warrants outstanding with various shareholders to purchase 122,402
shares of Prodigy'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 Prodigy had warrants outstanding with various shareholders to purchase
117,402 shares of Prodigy'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 Prodigy. 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 Director 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
59
<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 Prodigy. 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.
Prodigy'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 Prodigy'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. Prodigy 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>
60
<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 Prodigy 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, Prodigy'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 Prodigy's common stock, transactions in Prodigy's common stock,
Prodigy'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,
61
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
eligible employees may purchase shares of Prodigy'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, Prodigy'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>
Prodigy'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 Prodigy 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 Prodigy'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. Prodigy 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.
62
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Prodigy 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, Prodigy paid $3,628, $3,039
and $3,723, respectively.
Under Prodigy's four-year agreement with Splitrock, Prodigy 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 Prodigy'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, Prodigy 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, Prodigy can
terminate the agreement without penalty. The agreement can be extended for an
additional 12 months.
As of December 31, 1997, Prodigy was contractually obligated to pay IBM a
network termination penalty of $7,500 resulting from the sale of Prodigy's
network. Prodigy has negotiated with IBM to settle this liability through a
defined purchasing plan, whereby Prodigy 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. Prodigy 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 Prodigy's accrued network termination cost (see Note 4--
Restructuring and Other Special Costs).
In February 1998 Prodigy 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, Prodigy is subject to an underutilization charge equal to 50%
of the difference between the minimum annual payment and the actual usage.
Prodigy 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 Prodigy 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 Prodigy 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, Prodigy 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, Prodigy 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 Prodigy'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.
63
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Contingencies
Prodigy is a defendant in various lawsuits arising in the ordinary course of
business. It is the opinion of management that any liability to Prodigy which
may arise as a result of these matters will not have a material adverse effect
on Prodigy's financial condition or results of operations.
15. Defined Contribution Plan
On June 17, 1996, as part of Prodigy's acquisition of PSC, Prodigy 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 Prodigy.
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. Prodigy
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.
Prodigy'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 Prodigy'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
64
<PAGE>
PRODIGY COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
the invoiced sales price less discounts, excise taxes and credits for returns)
on the first 200,000 IDP subscribers and 10% of the net subscriber revenue (as
defined above) on additional IDP subscribers. The agreement has a term of five
years and may be terminated by Telmex if Prodigy undergoes a change of control.
Prodigy 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, Prodigy also entered into a Sublease Agreement
pursuant to which Splitrock subleases a portion of Prodigy'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 Prodigy network services consisting primarily of
end-to-end connection services from subscriber dial-up lines to Prodigy'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).
Prodigy 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, Prodigy'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 Prodigy
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, Prodigy 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.
65
<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 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.
66
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to this item will appear in the sections captioned
"Executive Officers and Directors," "Nominees for Director" and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the 2000 Proxy
Statement. Such information is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to this item will appear in the sections captioned
"Executive Compensation," "Director Compensation," "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Related Parties"
appearing in the 2000 Proxy Statement. Such information is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item will appear in the section captioned
"Prodigy's Principal Stockholders" appearing in the 2000 Proxy Statement. Such
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item will appear in the sections captioned
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with Related Parties" appearing in the 2000 Proxy Statement. Such information
is incorporated herein by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) See Item 8 of this report on Form 10-K.
(b)Reports on Form 8-K
On November 18, 1999, Prodigy filed a Current Report on Form 8-K dated
November 16, 1999 to report under Item 5 (Other Events) the execution of a
definitive agreement to acquire FlashNet Communications, Inc. No financial
statements were required to be filed with such report.
On October 20, 1999 Prodigy filed a Current Report on Form 8-K dated October
5, 1999 to report under Item 2 (Acquisition or Disposition of Assets) the
acquisition of the BizOnThe.Net web hosting business and subscribers of U.S.
Republic Communications, an indirect majority-owned subsidiary of VarTec
Telecom. At the closing, Prodigy issued to U.S. Republic 2,113,721 shares of
Prodigy common stock and repaid a $9 million loan from VarTec to U.S. Republic.
Prodigy also issued an additional 727,272 shares into an escrow account. In
addition to the amounts paid at closing, in 2001 Prodigy will be required to
issue up to 727,272 shares, contingent upon the attainment by the acquired
business of specified earn-out targets. Prodigy utilized cash proceeds raised
in its initial public offering to pay the cash portion of the purchase price.
On December 2, 1999, Prodigy filed a Current Report on Form 8-K dated
November 24, 1999 to report under Item 5 (Other Events) the execution of a
definitive agreement to enter into a strategic relationship with SBC
Communications Inc. pursuant to which SBC will acquire a 43% interest in
Prodigy, Prodigy will be the exclusive provider of Internet service to SBC's
690,000 existing Internet subscribers, SBC will exclusively market Prodigy's
Internet service to U.S. consumers and small businesses and SBC will agree to
obtain for Prodigy 1,200,000 additional Internet subscribers over a three-year
period. No financial statements were required to be filed with such report.
On December 20, 1999, Prodigy filed Amendment No. 1 to Current Report on Form
8-K/A filing the financial statements required to be filed with the Current
Report on Form 8-K filed on October 20, 1999.
On December 29, 1999, Prodigy filed Amendment No. 2 to Current Report on Form
8-K/A refiling the financial statements required to be filed with the Current
Report on Form 8-K filed on October 20, 1999.
67
<PAGE>
(a) 3. and (c)--Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1(1)+ Asset Purchase Agreement, dated as of May 26, 1999, by and among
Cable & Wireless USA, Inc., Cable & Wireless USA Internet, L.L.C.
and the Registrant.
2.2(2) Asset Purchase Agreement, dated as of September 7, 1999, by and
among the Registrant, U.S. Republic Communications, Inc., VarTec
Telecom, Inc., VarTec Telecom Holding Company, T. Gary Remy and Tom
D. Johnson.
2.3 Agreement and Plan of Merger, dated as of November 5, 1999 and as
amended as of March 15, 2000, among the Registrant, PUCKnut
Corporation and FlashNet Communications, Inc.
2.4(3) Stock Option Agreement, dated as of November 5, 1999, among the
Registrant and FlashNet Communications, Inc.
2.5(3) Stockholders Agreement, dated as of November 5, 1999, among the
Registrant, Applied Telecommunications Technologies, Inc., James B.
Francis, Jr., Global Undervalued Securities Fund, L.P., Andrew N.
Jent, John B. Kleinheinz, Kleinheinz Capital Partners LDC, Michael
Scott Leslie, Kevin A. Stadtler, Albert Lee Thurburn and Russell A.
Wiseman.
3.1(4) Certificate of Incorporation of the Registrant, as amended.
3.2(4) By-laws of the Registrant, as amended.
3.3(5) Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective following the closing of the SBC
transaction.
3.4(5) Form of Amended and Restated By-laws of the Registrant, to be
effective following the closing of the SBC transaction.
3.5(5) Form of Amended and Restated Limited Partnership Agreement for
Prodigy Communications Limited Partnership by and among the
Registrant, SBC Internet Communications, Inc. and Prodigy Transition
Corporation, to be effective following the closing of the SBC
transaction.
4.1(4) Specimen certificate for shares of Common Stock.
10.1(4)* 1996 Stock Option Plan of the Registrant, as amended.
10.2(4)* 1999 Employee Stock Purchase Plan of the Registrant.
10.3* 1999 Stock Option Plan of the Registrant.
10.4(4)* 1999 Outside Director Stock Option Plan of the Registrant.
10.5(4)+ Software License and Services Agreement, dated April 16, 1997,
between Prodigy Services Corporation and ORACLE Worldwide Tech
Support.
10.6++ Amended and Restated Splitrock Full Service Agreement, dated
February 16, 2000, between Splitrock Services, Inc. and Prodigy
Services Corporation.
10.7(4) Agreement of Sublease, dated June 24, 1997, between Splitrock
Services, Inc. and Prodigy Services Corporation.
10.8(4)* Employment Agreement, dated September 1, 1998, between the
Registrant and Samer F. Salameh.
10.9(4)* Employment Agreement, dated September 14, 1998, between the
Registrant and Andrea S. Hirsch.
10.10(4)* Employment Agreement, dated December 14, 1998, between the
Registrant and David C. Trachtenberg.
10.11(4) Lease, dated August 14, 1997, between Prodigy Services Corporation
and Westchester One LLC, as amended.
10.12(4)+ Promotion & Distribution Agreement, effective October 7, 1996,
between Microsoft Corporation and Prodigy Services Corporation, as
amended.
10.13(4)+ Distribution and Licensing Agreement, effective October 1, 1996,
between Packard Bell NEC, Inc. and Prodigy Services Corporation.
10.14(4)+ Excite Services Distribution and Co-Branded Area Agreement, dated
January 20, 1998, between Excite, Inc. and Prodigy Services
Corporation.
10.15(4) Lease Agreement, dated June 6, 1998, between Prodigy Services
Company and Crow-Kelly#1, as amended.
10.16(6)+ Microsoft Windows 98 "Get Connected" Co-Marketing Agreement, dated
July 2, 1998, between Prodigy Services Corporation and Microsoft
Corporation.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.17 Amendment No. 1 to Microsoft Windows 98 "Get Connected" Co-Marketing
Agreement, dated October 1, 1998, by and between Microsoft
Corporation and Prodigy Services Corporation.
10.18++ Renewal and Amendment to that certain Microsoft Windows 98 "Get
Connected" Co-Marketing Agreement, dated June 1, 1999, by and
between Microsoft Corporation and Prodigy Services Corporation.
10.19 Amendment No. 3 to that certain Microsoft Windows 98 "Get Connected"
Co-Marketing Agreement, dated January 19, 2000, by and between
Microsoft Corporation and Prodigy Services Corporation.
10.20(4)+ Software Development and Processing Services Agreement, dated
January 1, 1992, between Prodigy Services Company and CSG Systems,
Inc., as amended.
10.21(4) Form of Prodigy Service Member Agreement.
10.22(4) Agreement, dated January 25, 1999, among the Registrant, Telefonos
de Mexico, S.A. de C.V. and others.
10.23(6) Microsoft Internet Explorer Logo License Agreement, dated July 2,
1998, by and between Prodigy Services Corporation and Microsoft
Corporation.
10.24(6) Microsoft Internet Explorer License and Distribution Agreement,
dated July 2, 1998, by and between Prodigy Services Corporation and
Microsoft Corporation.
10.25(5) Investment, Issuance, Contribution and Assumption Agreement, dated
as of November 19, 1999, by and among SBC Communications Inc., SBC
Internet Communications, Inc., the Registrant, Prodigy Transition
Corporation and Prodigy Communications Limited Partnership.
10.26(5) Strategic and Marketing Agreement, dated as of November 19, 1999, by
and among SBC Communications Inc., SBC Internet Communications,
Inc., the Registrant and Prodigy Communications Limited Partnership.
10.27(5) Voting Agreement, dated as of November 19, 1999, by and among SBC
Communications Inc., Carso Global Telecom, S.A. de C.V. and
Telefonos de Mexico, S.A. de C.V.
10.28(5) Form of Registration Rights Agreement by and among the Registrant,
SBC Communications Inc. and SBC Internet Communications, Inc, to be
effective following the closing of the SBC transaction.
10.29 Letter, dated February 28, 1999, from Telefonos de Mexico, S.A. de
C.V. to PricewaterhouseCoopers LLP.
21 Subsidiaries of the Registrant.
23 Consent of PriceswaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on August 3, 1999.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on October 20, 1999.
(3) Incorporated by reference to the Registrant's Schedule 13D filed on
November 15, 1999.
(4) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-64233).
(5) Incorporated by reference to the Schedule 13D/A filed on March 9, 2000 by
Carlos Slim Helu, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim
Domit, Maria Soumaya Slim Domit, Vanessa Paula Slim Domit, Johanna Monique
Slim Domit, Carso Global Telecom, S.A. de C.V. and Telefonos de Mexico,
S.A. de C.V.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
* Management contract or compensation plan or arrangement filed in response to
Item 14(c) of Form 10-K.
+ Confidential treatment granted as to certain portions.
++ Confidential treatment requested as to certain portions.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Prodigy has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PRODIGY COMMUNICATIONS CORPORATION
Date: March 30, 2000 By: /s/ Samer F. Salameh
-----------------------------------
Samer F. Salameh
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Prodigy and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Samer F. Salameh Chairman of the Board and March 30, 2000
- ------------------------------- Chief Executive Officer
Samer F. Salameh (Principal Executive
Officer)
/s/ Alfredo Sanchez Vice Chairman of the Board March 30, 2000
- ------------------------------
Alfredo Sanchez
/s/ Allen Craft Executive Vice President of March 30, 2000
- ------------------------------ Finance, Chief Financial
Allen Craft Officer, Treasurer and
Director (Principal
Financial and Accounting
Officer)
/s/ James R. Adams Director March 30, 2000
- ------------------------------
James R. Adams
/s/ Arturo Elias Director March 30, 2000
- -----------------------------
Arturo Elias
/s/ James M. Nakfoor Director March 30, 2000
- -----------------------------
James M. Nakfoor
</TABLE>
70
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1(1)+ Asset Purchase Agreement, dated as of May 26, 1999, by and among
Cable & Wireless USA, Inc., Cable & Wireless USA Internet, L.L.C.
and the Registrant.
2.2(2) Asset Purchase Agreement, dated as of September 7, 1999, by and
among the Registrant, U.S. Republic Communications, Inc., VarTec
Telecom, Inc., VarTec Telecom Holding Company, T. Gary Remy and Tom
D. Johnson.
2.3 Agreement and Plan of Merger, dated as of November 5, 1999 and as
amended as of March 15, 2000, among the Registrant, PUCKnut
Corporation and FlashNet Communications, Inc.
2.4(3) Stock Option Agreement, dated as of November 5, 1999, among the
Registrant and FlashNet Communications, Inc.
2.5(3) Stockholders Agreement, dated as of November 5, 1999, among the
Registrant, Applied Telecommunications Technologies, Inc., James B.
Francis, Jr., Global Undervalued Securities Fund, L.P., Andrew N.
Jent, John B. Kleinheinz, Kleinheinz Capital Partners LDC, Michael
Scott Leslie, Kevin A. Stadtler, Albert Lee Thurburn and Russell A.
Wiseman.
3.1(4) Certificate of Incorporation of the Registrant, as amended.
3.2(4) By-laws of the Registrant, as amended.
3.3(5) Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective following the closing of the SBC
transaction.
3.4(5) Form of Amended and Restated By-laws of the Registrant, to be
effective following the closing of the SBC transaction.
3.5(5) Form of Amended and Restated Limited Partnership Agreement for
Prodigy Communications Limited Partnership by and among the
Registrant, SBC Internet Communications, Inc. and Prodigy Transition
Corporation, to be effective following the closing of the SBC
transaction.
4.1(4) Specimen certificate for shares of Common Stock.
10.1(4)* 1996 Stock Option Plan of the Registrant, as amended.
10.2(4)* 1999 Employee Stock Purchase Plan of the Registrant.
10.3* 1999 Stock Option Plan of the Registrant.
10.4(4)* 1999 Outside Director Stock Option Plan of the Registrant.
10.5(4)+ Software License and Services Agreement, dated April 16, 1997,
between Prodigy Services Corporation and ORACLE Worldwide Tech
Support.
10.6++ Amended and Restated Splitrock Full Service Agreement, dated
February 16, 2000, between Splitrock Services, Inc. and Prodigy
Services Corporation.
10.7(4) Agreement of Sublease, dated June 24, 1997, between Splitrock
Services, Inc. and Prodigy Services Corporation.
10.8(4)* Employment Agreement, dated September 1, 1998, between the
Registrant and Samer F. Salameh.
10.9(4)* Employment Agreement, dated September 14, 1998, between the
Registrant and Andrea S. Hirsch.
10.10(4)* Employment Agreement, dated December 14, 1998, between the
Registrant and David C. Trachtenberg.
10.11(4) Lease, dated August 14, 1997, between Prodigy Services Corporation
and Westchester One LLC, as amended.
10.12(4)+ Promotion & Distribution Agreement, effective October 7, 1996,
between Microsoft Corporation and Prodigy Services Corporation, as
amended.
10.13(4)+ Distribution and Licensing Agreement, effective October 1, 1996,
between Packard Bell NEC, Inc. and Prodigy Services Corporation.
10.14(4)+ Excite Services Distribution and Co-Branded Area Agreement, dated
January 20, 1998, between Excite, Inc. and Prodigy Services
Corporation.
10.15(4) Lease Agreement, dated June 6, 1998, between Prodigy Services
Company and Crow-Kelly#1, as amended.
10.16(6)+ Microsoft Windows 98 "Get Connected" Co-Marketing Agreement, dated
July 2, 1998, between Prodigy Services Corporation and Microsoft
Corporation.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.17 Amendment No. 1 to Microsoft Windows 98 "Get Connected" Co-Marketing
Agreement, dated October 1, 1998, by and between Microsoft
Corporation and Prodigy Services Corporation.
10.18++ Renewal and Amendment to that certain Microsoft Windows 98 "Get
Connected" Co-Marketing Agreement, dated June 1, 1999, by and
between Microsoft Corporation and Prodigy Services Corporation.
10.19 Amendment No. 3 to that certain Microsoft Windows 98 "Get Connected"
Co-Marketing Agreement, dated January 19, 2000, by and between
Microsoft Corporation and Prodigy Services Corporation.
10.20(4)+ Software Development and Processing Services Agreement, dated
January 1, 1992, between Prodigy Services Company and CSG Systems,
Inc., as amended.
10.21(4) Form of Prodigy Service Member Agreement.
10.22(4) Agreement, dated January 25, 1999, among the Registrant, Telefonos
de Mexico, S.A. de C.V. and others.
10.23(6) Microsoft Internet Explorer Logo License Agreement, dated July 2,
1998, by and between Prodigy Services Corporation and Microsoft
Corporation.
10.24(6) Microsoft Internet Explorer License and Distribution Agreement,
dated July 2, 1998, by and between Prodigy Services Corporation and
Microsoft Corporation.
10.25(5) Investment, Issuance, Contribution and Assumption Agreement, dated
as of November 19, 1999, by and among SBC Communications Inc., SBC
Internet Communications, Inc., the Registrant, Prodigy Transition
Corporation and Prodigy Communications Limited Partnership.
10.26(5) Strategic and Marketing Agreement, dated as of November 19, 1999, by
and among SBC Communications Inc., SBC Internet Communications,
Inc., the Registrant and Prodigy Communications Limited Partnership.
10.27(5) Voting Agreement, dated as of November 19, 1999, by and among SBC
Communications Inc., Carso Global Telecom, S.A. de C.V. and
Telefonos de Mexico, S.A. de C.V.
10.28(5) Form of Registration Rights Agreement by and among the Registrant,
SBC Communications Inc. and SBC Internet Communications, Inc, to be
effective following the closing of the SBC transaction.
10.29 Letter, dated February 28, 1999, from Telefonos de Mexico, S.A. de
C.V. to PricewaterhouseCoopers LLP.
21 Subsidiaries of the Registrant.
23 Consent of PriceswaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on August 3, 1999.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on October 20, 1999.
(3) Incorporated by reference to the Registrant's Schedule 13D filed on
November 15, 1999.
(4) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-64233).
(5) Incorporated by reference to the Schedule 13D/A filed on March 9, 2000 by
Carlos Slim Helu, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim
Domit, Maria Soumaya Slim Domit, Vanessa Paula Slim Domit, Johanna Monique
Slim Domit, Carso Global Telecom, S.A. de C.V. and Telefonos de Mexico,
S.A. de C.V.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
* Management contract or compensation plan or arrangement filed in response to
Item 14(c) of Form 10-K.
+ Confidential treatment granted as to certain portions.
++ Confidential treatment requested as to certain portions.
72
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF MERGER
by and among
PRODIGY COMMUNICATIONS CORPORATION,
PUCKNUT CORPORATION
and
FLASHNET COMMUNICATIONS, INC.
Dated as of November 5, 1999
and amended as of March 15, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER................................................. 1
1.1 Effective Time of the Merger............................... 1
1.2 Closing.................................................... 1
1.3 Effects of the Merger...................................... 2
1.4 Directors and Officers..................................... 2
ARTICLE II CONVERSION OF SECURITIES................................... 2
2.1 Conversion of Capital Stock................................ 2
2.2 Exchange of Certificates................................... 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............. 5
3.1 Organization, Standing and Power; Subsidiaries............. 5
3.2 Capitalization............................................. 6
3.3 Authority; No Conflict; Required Filings and Consents...... 7
3.4 SEC Filings; Financial Statements.......................... 8
3.5 No Undisclosed Liabilities................................. 9
3.6 Absence of Certain Changes or Events....................... 9
3.7 Taxes...................................................... 9
3.8 Owned and Leased Real Properties........................... 11
3.9 Intellectual Property...................................... 11
3.10 Agreements, Contracts and Commitments...................... 11
3.11 Litigation................................................. 12
3.12 Environmental Matters...................................... 12
3.13 Employee Benefit Plans..................................... 13
3.14 Compliance With Laws....................................... 14
3.15 Permits.................................................... 14
3.16 Registration Statement; Proxy Statement/Prospectus......... 14
3.17 Labor Matters.............................................. 15
3.18 Insurance.................................................. 15
3.19 Business Activity Restrictions............................. 15
3.20 Year 2000 Compliance....................................... 15
3.21 Assets..................................................... 16
3.22 Subscribers................................................ 17
3.23 Accounts Receivable........................................ 17
3.24 No Existing Discussions.................................... 17
3.25 Opinion of Financial Advisor............................... 17
3.26 Part Thirteen of the TBCA Not Applicable................... 17
3.27 Tax Matters................................................ 17
3.28 Transactions with Affiliate................................ 17
3.29 Brokers; Schedule of Fees and Expenses..................... 17
3.30 Disclosure................................................. 17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE
TRANSITORY SUBSIDIARY...................................... 18
4.1 Organization, Standing and Power........................... 18
4.2 Capitalization............................................. 18
4.3 Authority; No Conflict; Required Filings and Consents...... 18
4.4 SEC Filings; Financial Statements.......................... 19
4.5 Absence of Certain Changes or Events....................... 19
4.6 Tax Matters................................................ 20
4.7 Litigation................................................. 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
4.8 Compliance with Laws...................................... 20
4.9 Registration Statement; Proxy Statement/Prospectus........ 20
4.10 Operations of the Transitory Subsidiary................... 20
4.11 Brokers................................................... 20
4.12 Disclosure................................................ 20
ARTICLE V CONDUCT OF BUSINESS....................................... 20
5.1 Covenants of the Company.................................. 20
5.2 Cooperation............................................... 23
5.3 Confidentiality........................................... 23
ARTICLE VI ADDITIONAL AGREEMENTS..................................... 23
6.1 No Solicitation........................................... 23
6.2 Proxy Statement/Prospectus; Registration Statement........ 24
6.3 Nasdaq Quotation.......................................... 25
6.4 Access to Information..................................... 25
6.5 Stockholders Meeting...................................... 25
6.6 Legal Conditions to the Merger............................ 26
6.7 Public Disclosure......................................... 27
6.8 Tax-Free Reorganization................................... 27
6.9 Affiliate Agreements...................................... 27
6.10 Nasdaq National Market Listing............................ 27
6.11 Company Stock Options, Warrants and Plans................. 27
6.12 Stockholder Litigation.................................... 28
6.13 Indemnification........................................... 28
6.14 Notification of Certain Matters........................... 29
ARTICLE VII CONDITIONS TO MERGER...................................... 29
Conditions to Each Party's Obligation To Effect the
7.1 Merger.................................................... 29
7.2 Additional Conditions to Obligations of the Buyer and the
Transitory Subsidiary..................................... 30
7.3 Additional Conditions to Obligations of the Company....... 30
ARTICLE VIII TERMINATION AND AMENDMENT................................. 31
8.1 Termination............................................... 31
8.2 Effect of Termination..................................... 32
8.3 Fees and Expenses......................................... 32
8.4 Amendment................................................. 33
8.5 Extension; Waiver......................................... 33
ARTICLE IX MISCELLANEOUS............................................. 33
9.1 Nonsurvival of Representations and Warranties............. 33
9.2 Notices................................................... 34
9.3 Entire Agreement.......................................... 34
9.4 No Third Party Beneficiaries.............................. 34
9.5 Assignment................................................ 35
9.6 Severability.............................................. 35
9.7 Counterparts and Signature................................ 35
9.8 Interpretation............................................ 35
9.9 Governing Law............................................. 35
9.10 Remedies.................................................. 35
9.11 Waiver of Jury Trial...................................... 36
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
EXHIBITS
Exhibit A Form of Company Stock Option Agreement
Exhibit B Form of Stockholder Agreement
Exhibit C Form of Company Affiliate Agreement
</TABLE>
[The exhibits and schedules to this agreement were omitted from the agreement
as filed with the Securities and Exchange Commission by the Registrant. The
Registrant agrees to furnish supplementally a copy of any omitted schedule or
exhibit to the Securities and Exchange Commission upon request.]
iii
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- ---------------
<S> <C>
Affiliate....................................................... Section 6.9
Affiliate Agreement............................................. Section 6.9
Agreement....................................................... Preamble
Alternative Transaction......................................... Section 8.3(g)
Antitrust Laws.................................................. Section 6.6(b)
Antitrust Order................................................. Section 6.6(b)
Articles of Merger.............................................. Section 1.1
Buyer........................................................... Preamble
Buyer Balance Sheet............................................. Section 4.4(b)
Buyer Common Stock.............................................. Section 2.1(c)
Buyer Disclosure Schedule....................................... Article IV
Buyer Material Adverse Effect................................... Section 4.1
Buyer Preferred Stock........................................... Section 4.2
Buyer SEC Reports............................................... Section 4.4(a)
Certificates.................................................... Section 2.2(b)
Certificate of Merger........................................... Section 1.1
Closing......................................................... Section 1.2
Closing Date.................................................... Section 1.2
Code............................................................ Preamble
Company......................................................... Preamble
Company Balance Sheet........................................... Section 3.4(b)
Company Common Stock............................................ Section 2.1(b)
Company Disclosure Schedule..................................... Article III
Company Employee Plans.......................................... Section 3.13(a)
Company Intellectual Property Rights............................ Section 3.9(a)
Company Leases.................................................. Section 3.8(b)
Company Material Adverse Effect................................. Section 3.1(a)
Company Material Contracts...................................... Section 3.10
Company Meeting................................................. Section 3.16
Company Permits................................................. Section 3.15
Company Preferred Stock......................................... Section 3.2(a)
Company SEC Reports............................................. Section 3.4(a)
Company Stock Options........................................... Section 3.2(b)
Company Stock Option Agreement.................................. Preamble
Company Stock Plans............................................. Section 3.2(b)
Company Voting Proposal......................................... Section 6.5(a)
Company Warrants................................................ Section 3.2(b)
Confidentiality Agreement....................................... Section 5.3
Constituent Corporations........................................ Section 1.3
DGCL............................................................ Section 1.1
Effective Time.................................................. Section 1.1
Employee Benefit Plan........................................... Section 3.13(a)
Environmental Law............................................... Section 3.12(b)
ERISA Affiliate................................................. Section 3.13(a)
ERISA........................................................... Section 3.13(a)
Exchange Agent.................................................. Section 2.2(a)
Exchange Fund................................................... Section 2.2(a)
Exchange Act.................................................... Section 3.3(c)
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- --------------------
<S> <C>
Exchange Ratio............................................ Section 2.1(c)
Governmental Entity....................................... Section 3.3(c)
Hazardous Substance....................................... Section 3.12(c)
HSR Act................................................... Section 3.3(c)
Indemnified Parties....................................... Section 6.13
Insurance Policies........................................ Section 3.18
Liens..................................................... Section 3.21
Merger.................................................... Preamble
Outside Date.............................................. Section 8.1(b)
Proxy Statement........................................... Section 3.16
Registration Statement.................................... Section 3.16
Rule 145.................................................. Section 6.9
SEC....................................................... Section 3.3(c)
Securities Act............................................ Section 3.4(a)
Stockholder Agreement..................................... Preamble
Subsidiary................................................ Section 3.1(b)
Superior Proposal......................................... Section 6.1(a)(A)(1)
Surviving Corporation..................................... Section 1.3
Tax Returns............................................... Section 3.7(a)
Taxes..................................................... Section 3.7(a)
TBCA...................................................... Section 1.1
Third Party............................................... Section 8.3(g)
Transitory Subsidiary..................................... Preamble
Year 2000 Compliant....................................... Section 3.20(d)
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 5,
1999 and as amended as of March 15, 2000, is by and among Prodigy
Communications Corporation, a Delaware corporation (the "Buyer"), PUCKnut
Corporation, a Delaware corporation and a wholly owned subsidiary of Buyer (the
"Transitory Subsidiary"), and FlashNet Communications, Inc., a Texas
corporation (the "Company").
WHEREAS, the Boards of Directors of the Buyer and the Company deem it
advisable and in the best interests of each corporation and its respective
stockholders that the Buyer and the Company combine in order to advance the
long-term business interests of the Buyer and the Company;
WHEREAS, the combination of the Buyer and the Company shall be effected by
the terms of this Agreement through a merger of the Transitory Subsidiary into
the Company, as a result of which the stockholders of the Company will become
stockholders of the Buyer (the "Merger");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the Buyer's willingness to enter into this
Agreement, the Company has entered into a Stock Option Agreement dated as of
the date of this Agreement and attached hereto as Exhibit A (the "Company Stock
Option Agreement"), pursuant to which the Company granted the Buyer an option
to purchase shares of common stock of the Company under certain circumstances;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the Buyer's willingness to enter into this
Agreement, the stockholders of the Company specified in Section 6.5(c) of this
Agreement have entered into a Stockholder Agreement dated as of the date of
this Agreement in the form attached as Exhibit B (the "Stockholder Agreement"),
pursuant to which such stockholders agreed to give the Buyer a proxy to vote
all of the shares of capital stock of the Company that such stockholders own;
and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
Buyer, the Transitory Subsidiary and the Company agree as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, prior to the Closing (as defined in Section 1.2), the Buyer shall
prepare, and on the Closing Date (as defined in Section 1.2) or as soon as
practicable thereafter the Buyer shall cause to be filed (i) with the Secretary
of State of the State of Delaware, a certificate of merger (the "Certificate of
Merger") in such form as is required by, and executed by the Surviving
Corporation (as defined in Section 1.3) in accordance with, the relevant
provisions of the Delaware General Corporation Law ("DGCL"), (ii) with the
Secretary of State of the State of Texas, articles of merger ("Articles of
Merger") in such form as required by, and executed by the Constituent
Corporations (as defined in Section 1.3) in accordance with the relevant
provisions of the Texas Business Corporation Act ("TBCA"), and shall make all
other filings or recordings required under the DGCL and TBCA. The Merger shall
become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and the Articles of Merger with the
Secretary of State of the State of Texas or at such later time as is
established by the Buyer and the Company and set forth in the Certificate of
Merger and Articles of Merger (the "Effective Time").
1.2 Closing. The closing of the Merger (the "Closing") shall take place at
10:00 a.m., Boston time, on a date to be specified by the Buyer and the Company
(the "Closing Date"), which shall be no later than the
1
<PAGE>
second business day after satisfaction or waiver of the conditions set forth in
Article VII (other than delivery of items to be delivered at the Closing), at
the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts,
unless another date, place or time is agreed to in writing by the Buyer and the
Company.
1.3 Effects of the Merger. At the Effective Time (i) the separate existence
of the Transitory Subsidiary shall cease and the Transitory Subsidiary shall be
merged with and into the Company (the Transitory Subsidiary and the Company are
sometimes referred to below as the "Constituent Corporations" and the Company
following the Merger is sometimes referred to below as the "Surviving
Corporation"), (ii) the Restated Articles of Incorporation of the Company shall
be amended so that the third paragarph of ARTICLE TWO of such Restated Articles
of Incorporation reads in its entirety as follows: "The total number of shares
of all classes of stock which the Corporation shall have authority to issue is
1,000, all of which shall consist of common stock, $.01 par value per share,"
and, as so amended, such Restated Articles of Incorporation shall be the
Restated Articles of Incorporation of the Surviving Corporation, and (iii) the
By-laws of the Company as of the date hereof, with such changes as are
specified by the Buyer prior to the Effective Time, shall be the By-laws of the
Surviving Corporation. The Merger shall have the effects set forth in Section
259 of the DGCL and Article 5.06 of the TBCA.
1.4 Directors and Officers. Except as specified in Section 1.4 of the Company
Disclosure Schedule, the directors and officers of the Transitory Subsidiary
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Restated Articles of Incorporation and By-laws of the Surviving
Corporation.
ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
capital stock of the Company or capital stock of the Transitory Subsidiary:
(a) Capital Stock of the Transitory Subsidiary. Each issued and
outstanding share of the capital stock of the Transitory Subsidiary shall
be converted into and become one fully paid and nonassessable share of
common stock, $.01 par value per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Buyer-Owned Stock. All shares of
common stock, no par value, of the Company ("Company Common Stock") that
are owned by the Company as treasury stock or by any wholly owned
Subsidiary (as defined in Section 3.1) of the Company and any shares of
Company Common Stock owned by the Buyer, the Transitory Subsidiary or any
other wholly owned Subsidiary of the Buyer shall be canceled and retired
and shall cease to exist and no stock of the Buyer or other consideration
shall be delivered in exchange therefor.
(c) Exchange Ratio for Company Common Stock. Subject to Section 2.2, each
share of Company Common Stock (other than shares to be canceled in
accordance with Section 2.1(b)) issued and outstanding immediately before
the Effective Time, and all rights in respect thereof, shall be
automatically converted into 0.35 share (the "Exchange Ratio ") of common
stock, $.01 par value per share, of the Buyer ("Buyer Common Stock"). As of
the Effective Time, all such shares of Company Common Stock shall no longer
be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such
shares of Company Common Stock shall cease to have any rights with respect
thereto, except the right to receive the shares of Buyer Common Stock and
any cash in lieu of fractional shares of Buyer Common Stock to be issued or
paid in consideration therefor upon surrender of such certificate in
accordance with Section 2.2, without interest.
2
<PAGE>
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible
into Buyer Common Stock or Company Common Stock), reorganization,
recapitalization or other like change with respect to Buyer Common Stock or
Company Common Stock occurring after the date hereof and prior to the
Effective Time.
(e) Unvested Stock. At the Effective Time, any unvested shares of Company
Common Stock awarded to employees, directors or consultants pursuant to any
of the Company's plans or arrangements and outstanding immediately prior to
the Effective Time shall be converted to unvested shares of Buyer Common
Stock in accordance with the Exchange Ratio and shall remain subject to the
same terms, restrictions and vesting schedule as in effect immediately
prior to the Effective Time, except to the extent by their terms such
unvested shares of Company Common Stock vest at the Effective Time. All
outstanding rights which the Company may hold immediately prior to the
Effective Time to repurchase unvested shares of Company Common Stock shall
be assigned to in the Merger and shall thereafter be exercisable by Buyer
by Buyer upon the same terms and conditions in effect immediately prior to
the Effective Time, except that the shares purchasable pursuant to such
rights and the purchase price payable per share shall be adjusted to
reflect the Exchange Ratio.
(f) Treatment of Company Options and Company Warrants. Outstanding
Company Options and Company Warrants (in each case as defined in Section
3.2(b)) shall be treated following the Effective Time in the manner set
forth in Section 6.11.
2.2 Exchange of Certificates. The procedures for exchanging outstanding
shares of Company Common Stock for Buyer Common Stock pursuant to the Merger
are as follows:
(a) Exchange Agent. As of the Effective Time, the Buyer shall deposit
with a bank or trust company designated by the Buyer (the "Exchange
Agent"), for the benefit of the holders of shares of the Company Common
Stock, for exchange in accordance with this Section 2.2, through the
Exchange Agent, (i) certificates representing the shares of Buyer Common
Stock (such shares of Buyer Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for
outstanding shares of the Company Common Stock, (ii) cash in an amount
sufficient to make payments required pursuant to Section 2.2(e), and (iii)
any dividends or distributions to which holders of Certificates (as defined
below) may be entitled pursuant to Section 2.2(c)
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of the Company Common Stock (the
"Certificates") whose shares were converted pursuant to Section 2.1 into
the right to receive shares of Buyer Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as the Buyer may reasonably specify) and (ii) instructions
for effecting the surrender of the Certificates in exchange for
certificates representing shares of Buyer Common Stock (plus cash in lieu
of fractional shares, if any, of Buyer Common Stock and any dividends or
distributions as provided below). Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by the Buyer, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares
of Buyer Common Stock which such holder has the right to receive pursuant
to the provisions of this Article II plus cash in lieu of fractional shares
pursuant to Section 2.2(e) and any dividends or distributions pursuant to
Section 2.2(c), and the Certificate so surrendered shall immediately be
canceled. In the event of a transfer of ownership of Company Common Stock
which is not registered in
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the transfer records of the Company, a certificate representing the proper
number of shares of Buyer Common Stock plus cash in lieu of fractional
shares pursuant to Section 2.2(e) and any dividends or distributions
pursuant to Section 2.2(c) may be issued and paid to a person other than
the person in whose name the Certificate so surrender is registered, if
such Certificate is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid. Until surrendered
as contemplated by this Section 2.2, each Certificate shall be deemed at
any time after the Effective Time to represent only the right to receive
upon such surrender the certificate representing shares of Buyer Common
Stock plus cash in lieu of fractional shares pursuant to Section 2.2(e) and
any dividends or distributions pursuant to Section 2.2(c) as contemplated
by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Buyer Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Buyer Common Stock represented thereby and no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to
Section 2.2(e) until the holder of record of such Certificate shall
surrender such Certificate. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be issued and paid
to the record holder of the Certificate, (i) certificates representing
whole shares of Buyer Common Stock issued in exchange therefor, without
interest, (ii) at the time of such surrender, the amount of any cash
payable in lieu of a fractional share of Buyer Common Stock to which such
holder is entitled pursuant to Section 2.2(e) and the amount of dividends
or other distributions with a record date after the Effective Time
previously paid with respect to such whole shares of Buyer Common Stock,
and (iii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect
to such whole shares of Buyer Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Buyer Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms hereof (including any cash or other
distributions paid pursuant to Sections 2.2(c) or 2.2(e)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock, and from and after the Effective Time there
shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Buyer Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any other rights of a stockholder
of the Buyer. Notwithstanding any other provision of this Agreement, each
holder of shares of Company Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
Buyer Common Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of Buyer Common Stock
multiplied by the average of the last reported sales prices of the Buyer
Common Stock on the Nasdaq National Market during the ten (10) consecutive
trading days ending on and including the last trading day prior to the
Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Common Stock for 180 days
after the Effective Time shall be delivered to the Buyer, upon demand, and
any holder of Company Common Stock who has not previously complied with
this Section 2.2 shall thereafter look only to the Buyer for payment of its
claim for Buyer Common Stock, any cash in lieu of fractional shares of
Buyer Common Stock and any dividends or distributions with respect to Buyer
Common Stock.
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(g) No Liability. To the extent permitted by applicable law, none of the
Buyer, the Transitory Subsidiary, the Company, the Surviving Corporation or
the Exchange Agent shall be liable to any holder of shares of Company
Common Stock or Buyer Common Stock, as the case may be, for such shares (or
dividends or distributions with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law. If any Certificate shall not have been surrendered prior to one year
after the Effective Time (or immediately prior to such earlier date on
which any shares of Buyer Common Stock, and any cash payable to the holder
of such Certificate pursuant to this Article II or any dividends or
distributions payable to the holder of such Certificate would otherwise
escheat to or become the property of any Governmental Entity (as defined in
Section 3.3(c))), any such shares of Buyer Common Stock or cash, dividends
or distributions in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(h) Withholding Rights. Each of the Buyer and the Surviving Corporation
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any other
applicable provision of law. To the extent that amounts are so withheld by
the Surviving Corporation or the Buyer, as the case may be, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by the Surviving Corporation
or the Buyer, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Buyer Common Stock and any
cash in lieu of fractional shares, and unpaid dividends and distributions
on shares of Buyer Common Stock deliverable in respect thereof pursuant to
this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer and the Transitory
Subsidiary that the statements contained in this Article III are true and
correct, except as set forth herein or in the disclosure schedule delivered by
the Company to the Buyer on or before the date of this Agreement (the "Company
Disclosure Schedule"). The Company Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article III and the disclosure in any paragraph shall qualify other
paragraphs in this Article III only to the extent that it is reasonably
apparent from a reading of such disclosure that it also qualifies or applies to
such other paragraphs.
3.1 Organization, Standing and Power; Subsidiaries.
(a) Each of the Company and its Subsidiaries (as defined below) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power and authority to own, lease and operate its properties and assets and
to carry on its business as now being conducted and as proposed to be
conducted, and is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the failure to be so
qualified, individually or in the aggregate, would be reasonably likely to
have a material adverse effect on the
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business, properties, financial condition, results of operations or
prospects of the Company and its Subsidiaries, taken as a whole, or to have
a material adverse effect on the ability of the Company to consummate the
transactions contemplated by this Agreement or the Company Stock Option
Agreement (a "Company Material Adverse Effect"); provided, however, that
"Company Material Adverse Effect" shall not include any adverse change,
effect or event that (i) is demonstrably shown to have been proximately
caused by the announcement or pendency of the Merger, (ii) is caused by any
breach of any representation, warranty or covenant by the Buyer or the
Transitory Subsidiary, or (iii) applies generally to any entity engaged in
the same business in which the Company is engaged.
(b) Except as set forth in the Company SEC Reports (as defined in Section
3.4) filed prior to the date of this Agreement, neither the Company nor any
of its Subsidiaries directly or indirectly owns any equity, membership,
partnership or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity, membership, partnership or
similar interest in, any corporation, partnership, joint venture, limited
liability company or other business association or entity, whether
incorporated or unincorporated. As used in this Agreement, the word
"Subsidiary" means, with respect to a party, any corporation, partnership,
joint venture, limited liability company or other business association or
entity, whether incorporated or unincorporated, of which (i) such party or
any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which held by such party
and/or one or more of its Subsidiaries do not have a majority of the voting
interest in such partnership), (ii) such party and/or one or more of its
Subsidiaries holds voting power to elect a majority of the board of
directors or other governing body performing similar functions, or (iii)
such party and/or one or more of its Subsidiaries, directly or indirectly,
owns or controls more than 50% of the equity, membership, partnership or
similar interests.
(c) The Company has delivered to the Buyer complete and accurate copies
of the Restated Articles of Incorporation and By-laws of the Company and of
the charter, by-laws or other organization documents of each Subsidiary of
the Company.
3.2 Capitalization.
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock and 5,000,000 shares of preferred stock,
$1.00 par value per share ("Company Preferred Stock"). As of the close of
business on the date immediately preceding the date of this Agreement, (i)
14,258,690 shares of Company Common Stock were issued and outstanding, (ii)
no shares of Company Common Stock were held in the treasury of the Company
or by Subsidiaries of the Company, and (iii) no shares of the Company
Preferred Stock were issued and outstanding.
(b) Section 3.2(b) of Company Disclosure Schedule lists the number of
shares of Company Common Stock reserved for future issuance pursuant to
stock options granted and outstanding as of the date of this Agreement and
the plans under which such options were granted (collectively, the "Company
Stock Plans") and sets forth a complete and accurate list of all holders of
outstanding options to purchase shares of Company Common Stock (such
outstanding options, the "Company Stock Options") under the Company Stock
Plans, indicating the number of shares of Company Common Stock subject to
each Company Stock Option, and the exercise price, the date of grant,
vesting schedule and the expiration date thereof. Section 3.2(b) of the
Company Disclosure Schedule shows the number of shares of Company Common
Stock reserved for future issuance pursuant to warrants or other
outstanding rights to purchase shares of Company Common Stock outstanding
as of the date of this Agreement (such outstanding warrants or other
rights, the "Company Warrants") and the agreement or other document under
which such Company Warrants were granted and sets forth a complete and
accurate list of all holders of Company Warrants indicating the number and
type of shares of Company Common Stock subject to each Company Warrant, and
the exercise price, the date of grant and the expiration date thereof.
Except (x) as
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set forth in this Section 3.2(b) of the Company Disclosure Schedule and (y)
as reserved for future grants under Company Stock Plans, (i) there are no
equity securities of any class of the Company or any of its Subsidiaries,
or any security exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding and (ii) there are
no options, warrants, equity securities, calls, rights, commitments or
agreements of any character to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound
obligating the Company or any of its Subsidiaries to issue, transfer,
deliver or sell, or cause to be issued, transferred, delivered or sold,
additional shares of capital stock of the Company or any of its
Subsidiaries or any security or rights convertible into or exchangeable or
exercisable for any such shares, or obligating the Company or any of its
Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify
or amend or enter into any such option, warrant, equity security, call,
right, commitment or agreement. Neither the Company nor any of its
Subsidiaries has issued and outstanding any stock appreciation rights,
phantom stock, performance based rights or similar rights or obligations.
To the knowledge of the Company, other than the Stockholders Agreements,
there are no agreements or understandings with respect to the voting
(including voting trusts and proxies) or sale or transfer (including
agreements imposing transfer restrictions) of any shares of capital stock
of the Company or any of its Subsidiaries.
(c) All outstanding shares of Company Common Stock are, and all shares of
Company Common Stock subject to issuance as specified above, upon issuance
on the terms and conditions specified in the instruments pursuant to which
they are issuable, will be, duly authorized, validly issued, fully paid and
nonassessable and not subject to or issued in violation of any purchase
option, call option, right of first refusal, preemptive right, subscription
right or any similar right under any provision of the TBCA, the Company's
Restated Articles of Incorporation or By-laws or any agreement to which the
Company is a party or is otherwise bound. There are no obligations,
contingent or otherwise, of Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of the Company Common
Stock or the capital stock of the Company or any of its Subsidiaries or to
provide funds to or make any material investment (in the form of a loan,
capital contribution or otherwise) in the Company or any Subsidiary of the
Company or any other entity, other than guarantees of bank obligations of
Subsidiaries of the Company entered into in the ordinary course of
business.
(d) All of the outstanding shares of capital stock of each of the
Company's Subsidiaries are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and all such shares are owned,
of record and beneficially, by the Company or another Subsidiary of the
Company free and clear of all security interests, liens, claims, pledges,
agreements, limitations in the Company's voting rights, charges or other
encumbrances of any nature.
(e) No consent of the holders of Company Stock Options is required in
connection with the conversion of such options contemplated by Section
6.11.
3.3 Authority; No Conflict; Required Filings and Consents.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and the Company Stock Option Agreement and to
consummate the transactions contemplated by this Agreement and the Company
Stock Option Agreement. The execution and delivery of this Agreement and
the Company Stock Option Agreement and the consummation of the transactions
contemplated by this Agreement and the Company Stock Option Agreement by
the Company have been duly authorized by all necessary corporate action on
the part of the Company, subject only to the approval of the Merger by the
Company's stockholders under the TBCA. This Agreement and the Company Stock
Option Agreement have been duly executed and delivered by the Company and
constitute the valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except as such enforceability may
be limited by principles of public policy and subject to bankruptcy,
insolvency and other laws relating to or affecting creditors' rights
generally and to general equitable principles.
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(b) The execution and delivery of this Agreement and the Company Stock
Option Agreement by the Company does not, and the consummation of the
transactions contemplated by this Agreement and the Company Stock Option
Agreement will not, (i) conflict with, or result in any violation or breach
of, any provision of the Restated Articles of Incorporation or By-laws of
the Company or the charter, by-laws, or other organizational document of
any Subsidiary of the Company, (ii) conflict with, or result in any
violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material
benefit) under, or require a consent or waiver under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract or other agreement, instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or
any of their properties or assets may be bound, or (iii) subject to
compliance with the requirements specified in clauses (i), (ii), (iii),
(iv) and (v) of Section 3.3(c), conflict with or violate any permit,
concession, franchise, license, judgment, injunction, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or
any of its Subsidiaries or any of its or their properties or assets, except
in the case of (ii) and (iii) for any such conflicts, violations, breaches,
defaults, terminations, cancellations or accelerations which, individually
or in the aggregate, are not reasonably likely to have a Company Material
Adverse Effect.
(c) No consent, approval, license, permit, order or authorization of, or,
registration, declaration, notice or filing with, any court, arbitrational
tribunal, administrative agency or commission or other governmental or
regulatory authority or agency (a "Governmental Entity") is required by or
with respect to the Company or any of its Subsidiaries in connection with
the execution and delivery of this Agreement and the Company Stock Option
Agreement by the Company or the consummation of the transactions
contemplated by this Agreement or the Company Stock Option Agreement,
except for (i) the filing of a pre-merger notification report under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing of the Certificate of Merger with the Secretary of
State of the States of Delaware and the filing of Articles of Merger with
the Secretary of State of the State of Texas, (iii) the filing of the Proxy
Statement (as defined in Section 3.16 below) with the Securities and
Exchange Commission (the "SEC") in accordance with the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (iv) the filing of such
reports or schedules under Section 13 of the Exchange Act as may be
required in connection with this Agreement and the transactions
contemplated hereby and (v) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable state securities laws.
(d) The affirmative vote of the holders of two-thirds of the outstanding
shares of Company Common Stock on the record date for the Company Meeting
(as defined below) is the only vote of the holders of any class or series
of the Company's capital stock or other securities necessary to approve the
Merger. There are no bonds, debentures, notes or other indebtedness of the
Company having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders
of the Company may vote.
3.4 SEC Filings; Financial Statements.
(a) The Company has filed and made available to the Buyer all forms,
reports and other documents required to be filed by the Company with the
SEC since December 18, 1998. All such required forms, reports and other
documents (including those that the Company may file after the date hereof
until the Closing) are referred to herein as the "Company SEC Reports." The
Company SEC Reports (i) were or will be filed on a timely basis, (ii) were
or will be prepared in compliance in all material respects with the
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Company SEC
Reports, and (iii) did not or will not at the time they were or are filed
contain any untrue statement of a material fact or omit to state a material
fact required to be stated in such Company SEC
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Reports or necessary in order to make the statements in such Company SEC
Reports, in the light of the circumstances under which they were made, not
misleading. No Subsidiary of the Company is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes and schedules) contained or to be contained in the
Company SEC Reports (i) complied or will comply as to form in all material
respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, (ii) were or will be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case
of unaudited statements, as permitted by the SEC on Form 10-Q under the
Exchange Act) and (iii) fairly presented or will fairly present the
consolidated financial position of Company and its Subsidiaries as of the
dates and the consolidated results of its operations and cash flows for the
periods indicated, consistent with the books and records of the Company and
its Subsidiaries, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were
not or are not expected to be material in amount. The unaudited balance
sheet of the Company as of September 30, 1999 is referred to herein as the
"Company Balance Sheet."
3.5 No Undisclosed Liabilities. Except as disclosed in the Company SEC
Reports filed prior to the date of this Agreement, and except for normal or
recurring liabilities incurred since the date of the Company Balance Sheet in
the ordinary course of business consistent with past practices, the Company and
its Subsidiaries do not have any liabilities, either accrued, contingent or
otherwise (whether or not required to be reflected in financial statements in
accordance with generally accepted accounting principles), and whether due or
to become due, which, individually or in the aggregate, are reasonably likely
to have a Company Material Adverse Effect.
3.6 Absence of Certain Changes or Events. Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement, since the date of the
Company Balance Sheet, the Company and its Subsidiaries have conducted their
respective businesses only in the ordinary course and in a manner consistent
with past practice and, since such date, there has not been (i) any event,
change or development in the business, properties, financial condition, results
of operations or prospects of the Company and its Subsidiaries, taken as a
whole, which, individually or in the aggregate, has had, or is reasonably
likely to have, a Company Material Adverse Effect; (ii) any damage, destruction
or loss (whether or not covered by insurance) with respect to the Company or
any of its Subsidiaries which, individually or in the aggregate, has had, or is
reasonably likely to have, a Company Material Adverse Effect; or (iii) any
other action or event that would have required the consent of the Buyer
pursuant to Section 5.1 of this Agreement had such action or event occurred
after the date of this Agreement.
3.7 Taxes.
(a) The Company and each of its Subsidiaries has filed all Tax Returns
(as defined below) that it was required to file, and all such Tax Returns
were correct and complete except for any errors or omissions which are not,
individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect. The Company and each of its Subsidiaries has paid
on a timely basis all Taxes (as defined below) that are shown to be due on
any such Tax Returns. The unpaid Taxes of the Company and its Subsidiaries
for Tax periods through the date of the Company Balance Sheet do not exceed
in any material respect the accruals and reserves for Taxes set forth on
the Company Balance Sheet exclusive of any accruals and reserves for
"deferred taxes" or similar items that reflect timing differences between
Tax and financial accounting principles. All Taxes that the Company or any
of its Subsidiaries 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. For purposes of this Agreement, (i)
"Taxes" means all taxes, charges, fees, levies or other similar assessments
or liabilities, including income, gross receipts, ad valorem, premium,
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value-added, excise, real property, personal property, sales, use,
services, transfer, withholding, employment, payroll 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 and (ii) "Tax
Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection
with Taxes.
(b) The Company has delivered or otherwise made available to the Buyer
correct and complete copies of all federal income Tax Returns, examination
reports and statements of deficiencies assessed against or agreed to by the
Company or any of its Subsidiaries since inception. The federal income Tax
Returns of the Company and each of its Subsidiaries have not been audited
by the Internal Revenue Service or are closed by the applicable statute of
limitations for all taxable years through the taxable year specified in
Section 3.7(b) of the Company Disclosure Schedule. The Company has made
available to the Buyer correct and complete copies of all other Tax Returns
of the Company and its Subsidiaries together with all related examination
reports and statements of deficiency for all periods from and after January
1, 1996. No examination or audit of any Tax Return of the Company or any of
its Subsidiaries by any Governmental Entity is currently in progress or, to
the knowledge of the Company, threatened or contemplated. Neither the
Company nor any of its Subsidiaries has been informed by any Governmental
Entity that the Governmental Entity believes that the Company or any of its
Subsidiaries was required to file any Tax Return that was not filed.
Neither the Company nor any of its Subsidiaries 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.
(c) Neither the Company nor any of its Subsidiaries: (i) is a "consenting
corporation" within the meaning of Section 341(f) of the Code, and none of
the assets of the Company or its Subsidiaries are subject to an election
under Section 341(f) of the Code; (ii) 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; (iii) 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; (iv) has any actual or potential liability for any Taxes of any
person (other than the Company and its Subsidiaries) under Treasury
Regulation Section 1.1502-6 (or any similar provision of law in any
jurisdiction), or as a transferee or successor, by contract, or otherwise;
or (v) 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).
(d) None of the assets of the Company or any of its Subsidiaries: (i) 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; (ii) is
"tax-exempt use property" within the meaning of Section 168(h) of the Code;
or (iii) directly or indirectly secures any debt the interest on which is
tax exempt under Section 103(a) of the Code.
(e) Neither the Company nor any of its Subsidiaries has undergone, or
will undergo as a result of the transactions contemplated by the Agreement,
a change in its method of accounting resulting in an adjustment to its
taxable income pursuant to Section 481(h) of the Code.
(f) No state or federal "net operating loss" of the Company determined as
of the Closing Date is 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.
(g) Neither the Company nor any of its Subsidiaries (i) 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
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Returns, other than a group of which only the Company and its Subsidiaries
are or were members or (ii) is a party to or bound by any Tax indemnity,
Tax sharing or Tax allocation agreement.
3.8 Owned and Leased Real Properties.
(a) The Company does not and has never owned any real property.
(b) The Company has provided or otherwise made available to the Buyer a
complete and accurate list of all real property leased by the Company or
its Subsidiaries (collectively "Company Leases") and the location of the
premises. The Company is not in default under any of the Company Leases.
Each of the Company Leases is in full force and effect and will not cease
to be in full force and effect as a result of the transactions contemplated
by this Agreement.
3.9 Intellectual Property.
(a) The Company and its Subsidiaries exclusively own, or are licensed or
otherwise possess legally enforceable rights to use on an exclusive basis,
without any obligation to make any fixed or contingent payments, including
any royalty payments, all patents, trademarks, trade names, domain names,
service marks and copyrights, any applications for and registrations of
such patents, trademarks, trade names, domain names, service marks and
copyrights, and all processes, formulae, methods, schematics, technology,
know-how, computer software programs or applications and tangible or
intangible proprietary information or material that are used or necessary
to conduct the business of the Company and its Subsidiaries as currently
conducted (the "Company Intellectual Property Rights").
(b) The execution and delivery of this Agreement and consummation of the
Merger will not result in the breach of, or create on behalf of any third
party the right to terminate or modify, any material license, sublicense or
other agreement relating to the Company Intellectual Property Rights, or
any license, sublicense and other agreement as to which the Company or any
of its Subsidiaries is a party and pursuant to which the Company or any of
its Subsidiaries is authorized to use any third party patents, trademarks,
copyrights or trade secrets (the "Company Third Party Intellectual Property
Rights"), including software that is used in the manufacture of,
incorporated in, or forms a part of any product or service sold by or
expected to be sold by a Company or any of its Subsidiaries.
(c) All patents, registered trademarks, service marks and copyrights
which are held by the Company or any of its Subsidiaries and which are
material to the business of the Company and its Subsidiaries, taken as a
whole, are valid and subsisting. The Company and its Subsidiaries have
taken commercially reasonable measures to protect the proprietary nature of
the Company Intellectual Property Rights that are material to the business
of the Company and its Subsidiaries, taken as a whole, and to maintain in
confidence all trade secrets and confidential information owned or used by
the Company or any of its Subsidiaries and that are material to the
business of the Company and its Subsidiaries, taken as a whole. To the
knowledge of the Company, no other person or entity is infringing,
violating or misappropriating any of the Company Intellectual Property
Rights. None of the activities or business previously or currently
conducted by the Company or any of the Subsidiaries infringes, violates or
constitutes a misappropriation of, any patents, trademarks, trade names,
service marks and copyrights, any applications for and registrations of
such patents, trademarks, trade names, service marks and copyrights, and
all processes, formulae, methods, schematics, technology, know-how,
computer software programs or applications and tangible or intangible
proprietary information or material of any other person or entity. Neither
the Company nor any of its Subsidiaries has received any complaint, claim
or notice alleging any such infringement, violation or misappropriation.
3.10 Agreements, Contracts and Commitments.
(a) There are no contracts or agreements that are material contracts (as
defined in Item 601(b)(10) of Regulation S-K) with respect to the Company
and its Subsidiaries (the "Company Material Contracts"),
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other than the Company Material Contracts identified on the exhibit indices
of the Company SEC Reports filed prior to the date of this Agreement. Each
Company Material Contract has not expired by its terms and is in full force
and effect. Neither the Company nor any of its Subsidiaries is in violation
of or in default under (nor does there exist any condition which, upon the
passage of time or the giving of notice or both, would cause such a
violation of or default under) any loan or credit agreement, note, bond,
mortgage, indenture, lease, permit, concession, franchise, license or other
contract, arrangement or understanding to which it is a party or by which
it or any of its properties or assets is bound, except for violations or
defaults which, individually or in the aggregate, have not resulted in, and
are not reasonably likely to result in, a Company Material Adverse Effect.
(b) Section 3.10(b) of the Company Disclosure Schedule sets forth a
complete list of each contract or agreement to which the Company or any of
its Subsidiaries is a party or bound with any Affiliate of the Company
(other than any Subsidiary which is a direct or indirect wholly owned
Subsidiary of the Company).
3.11 Litigation. Except as disclosed in the Company SEC Reports filed prior
to the date of this Agreement, there is no action, suit, proceeding, claim,
arbitration or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries which,
individually or in the aggregate, has had, or is reasonably likely to have, a
Company Material Adverse Effect. There are no judgments, orders or decrees
outstanding against the Company.
3.12 Environmental Matters.
(a) Except as disclosed in the Company SEC Reports filed prior to the
date of this Agreement and except for such matters which, individually or
in the aggregate, have not had, and are not reasonably likely to have a
Company Material Adverse Effect: (i) the Company and each of its
Subsidiaries has complied with, and is not in violation of, any applicable
Environmental Laws (as defined in Section 3.12(b)); (ii) the properties
currently owned or operated by the Company and its Subsidiaries (including
soils, groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances (as defined in Section 3.12(c));
(iii) the properties formerly owned or operated by the Company or any of
its Subsidiaries were not contaminated with Hazardous Substances prior to
or during the period of ownership or operation by the Company or any of its
Subsidiaries; (iv) neither the Company nor its Subsidiaries are subject to
liability for any Hazardous Substance disposal or contamination on the
property of any third party; (v) neither the Company nor any of its
Subsidiaries have released any Hazardous Substance to the environment; (vi)
neither the Company nor any of its Subsidiaries has received any notice,
demand, letter, claim or request for information alleging that the Company
or any of its Subsidiaries may be in violation of, liable under or have
obligations under any Environmental Law; (vii) neither the Company nor any
of its Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any Governmental Entity or is subject to any indemnity or
other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (viii) there are
no circumstances or conditions involving the Company or any of its
Subsidiaries that could reasonably be expected to result in any claims,
liability, obligations, investigations, costs or restrictions on the
ownership, use or transfer of any property of the Company or any of its
Subsidiaries pursuant to any Environmental Law.
(b) For purposes of this Agreement, "Environmental Law" means any law,
regulation, order, decree, permit, authorization, opinion, common law or
agency requirement of any jurisdiction relating to: (A) the protection,
investigation or restoration of the environment, human health and safety,
or natural resources, (B) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (C) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.
(c) For purposes of this Agreement, "Hazardous Substance" means any
substance that is: (A) listed, classified, regulated or which falls within
the definition of a "hazardous substance" or "hazardous
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material" pursuant to any Environmental Law; (B) any petroleum product or
by-product, asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or radon; or (C)
any other substance which is the subject of regulatory action by any
Governmental Entity pursuant to any Environmental Law.
(d) Section 3.12(d) of the Company Disclosure Schedule sets forth a
complete and accurate list of all documents (whether in hard copy or
electronic form) that contain any environmental reports, investigations and
audits relating to premises currently or previously owned or operated by
the Company or any of its Subsidiaries (whether conducted by or on behalf
of the Company or one of its Subsidiaries or a third party, and whether
done at the initiative of the Company or one of its Subsidiaries or
directed by a Governmental Entity or other third party) which were issued
or conducted during the past five years and which the Company has
possession of or access to. A complete and accurate copy of each such
document has been provided to the Buyer.
3.13 Employee Benefit Plans.
(a) Section 3.13(a) of the Company Disclosure Schedule sets forth a
complete and accurate list of all Employee Benefit Plans (as defined below)
maintained, or contributed to, by the Company, any Subsidiary of the
Company or any ERISA Affiliate (as defined below) (together, the "Company
Employee Plans"). For purposes of this Agreement, the following terms shall
have the following meanings: (i) "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 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; (ii) "ERISA" means the
Employee Retirement Income Security Act of 1974, as amended; and (iii)
"ERISA Affiliate" means any entity 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 the Company or a Subsidiary.
(b) With respect to each Company Employee Plan, the Company has furnished
or otherwise made available to the Buyer, a complete and accurate copy of
(i) such Company Employee Plan (or a written summary of any unwritten
plan), (ii) the most recent annual report (Form 5500) filed with the IRS,
(iii) each trust agreement, group annuity contract and summary plan
description, if any, relating to such Company Employee Plan and (iv) all
reports regarding the satisfaction of the nondiscrimination requirements of
Sections 410(b), 401(k) and 401(m) of the Code.
(c) Each Company Employee Plan has been administered in all material
respects in accordance with its terms and each of the Company, the
Company's Subsidiaries and their ERISA Affiliates has in all material
respects met its obligations with respect to such Company Employee Plan and
has made in all material respects all required contributions thereto. With
respect to the Company Employee Plans, no event has occurred, and to the
knowledge of the Company, there exists no condition or set of circumstances
in connection with which the Company or any of its Subsidiaries could be
subject to any liability under ERISA, the Code or any other applicable law
which, individually or in the aggregate, is reasonably likely to have a
Company Material Adverse Effect.
(d) With respect to the Company Employee Plans, there are no material
funded benefit obligations for which contributions have not been made or
properly accrued and there are no material unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly
footnoted in accordance with generally accepted accounting principles, on
the financial statements of the Company.
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(e) All the Company Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Company Benefit Plans are
qualified and the plans and 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 its qualification or materially increase its cost.
(f) Neither the Company, any Subsidiary of the Company nor any ERISA
Affiliate has (i) ever maintained a Company Employee Plan which was ever
subject to Section 412 of the Code or Title IV of ERISA or (ii) ever been
obligated to contribute to a "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA). No Company 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.
(g) Each Company Benefit Plan is amendable and terminable unilaterally by
the Company at any time without liability to the Company as a result
thereof and no Company Benefit Plan, plan documentation or agreement,
summary plan description or other written communication distributed
generally to employees by its terms prohibits the Company from amending or
terminating any such Company Benefit Plan.
(h) Except as disclosed in the Company SEC Reports filed prior to the
date of this Agreement, neither the Company nor any of its Subsidiaries is
a party to any oral or written (i) agreement with any stockholders,
director, executive officer or other key employee of the Company or any of
its Subsidiaries (A) the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction
involving the Company or any of its Subsidiaries of the nature of any of
the transactions contemplated by this Agreement, (B) providing any term of
employment or compensation guarantee or (C) providing severance benefits or
other benefits after the termination of employment of such director,
executive officer or key employee; (ii) agreement, plan or arrangement
under which any person may receive payments from the Company or any of its
Subsidiaries 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 (iii) agreement or plan binding the
Company or any of its Subsidiaries, including any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan or
severance benefit plan, any of the benefits of which will be 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.
3.14 Compliance With Laws. The Company and each of its Subsidiaries has
complied with, is not in violation of, and has not received any notice alleging
any violation with respect to, any applicable provisions of any statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its properties or assets, except for failures to comply or
violations which, individually or in the aggregate, have not had, and are not
reasonably likely to have, a Company Material Adverse Effect.
3.15 Permits. The Company and each of its Subsidiaries have all permits,
licenses and franchises from Governmental Entities required to conduct their
businesses as now being conducted or as presently contemplated to be conducted
(the "Company Permits"), except for such permits, licenses and franchises the
absence of which, individually or in the aggregate, have not resulted in, and
are not reasonably likely to result in, a Company Material Adverse Effect. The
Company and its Subsidiaries are in compliance with the terms of the Company
Permits, except for failures to comply which, individually or in the aggregate,
have not had and are not reasonably likely to have, a Company Material Adverse
Effect.
3.16 Registration Statement; Proxy Statement/Prospectus. The information to
be supplied by the Company for inclusion in the registration statement on Form
S-4 pursuant to which shares of Buyer Common Stock issued in the Merger will be
registered under the Securities Act (the "Registration Statement"), shall not
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at the time the Registration Statement is declared effective by the SEC contain
any untrue statement of a material fact or omit to state any material fact
required to be stated in the Registration Statement or necessary in order to
make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information to be
supplied by the Company for inclusion in the proxy statement/prospectus (the
"Proxy Statement") to be sent to the stockholders of the Company in connection
with the meeting of the Company's stockholders to consider this Agreement and
the Merger (the "Company Meeting") shall not, on the date the Proxy Statement
is first mailed to stockholders of the Company, at the time of the Company
Meeting and at the Effective Time, contain any statement which, at such time
and in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made in the Proxy Statement not
false or misleading; or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation of
proxies for the Company Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to the Company or any of
its Affiliates, officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform the Buyer.
3.17 Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization.
Neither the Company nor any of its Subsidiaries is the subject of any
proceeding asserting that the Company or any of its Subsidiaries has committed
an unfair labor practice or is seeking to compel it to bargain with any labor
union or labor organization, nor is there pending or, to the knowledge of the
Company, threatened, any labor strike, dispute, walkout, work stoppage, slow-
down or lockout involving the Company or any of its Subsidiaries.
3.18 Insurance. Each of the Company and its Subsidiaries maintains insurance
policies (the "Insurance Policies") with reputable insurance carriers against
all risks of a character and in such amounts as are usually insured against by
similarly situated companies in the same or similar businesses. Each Insurance
Policy is in full force and effect and is valid, outstanding and enforceable,
and all premiums due thereon have been paid in full. None of the Insurance
Policies will terminate or lapse (or be affected in any other materially
adverse manner) by reason of the transactions contemplated by this Agreement.
The Company and its Subsidiaries have complied in all material respects with
the provisions of each Insurance Policy under which it is the insured party. No
insurer under any Insurance Policy has canceled or generally disclaimed
liability under any such policy or indicated any intent to do so or not to
renew any such policy. All material claims under the Insurance Policies have
been filed in a timely fashion.
3.19 Business Activity Restrictions. There is no non-competition or other
similar agreement, commitment, judgment, injunction, order to create to which
the Company or any Subsidiary of the Company is a party or subject to that has
or could reasonably be expected to have the effect of prohibiting or impairing
the conduct of the business by the Company in any material respect. The Company
has not entered into any agreement under which it is restricted in any material
respect from selling, licensing or otherwise distributing any of its technology
or products, or providing services to, customers or potential customers or any
class of customers, in any geographic area, during any period of time or any
segment of the market or line of business.
3.20 Year 2000 Compliance.
(a) The Company has conducted "year 2000" audits with respect to (i) all
of the internal systems of the Company and each of its Subsidiaries used in
the business or operations of the Company or any of its Subsidiaries,
including, without limitation, computer hardware systems, software
applications, firmware, equipment firmware and other embedded systems, and
(ii) the software, hardware, firmware and other technology which constitute
part of the products and services marketed or sold by the Company or any of
its Subsidiaries or licensed by the Company or any of its Subsidiaries to
third parties. The Company has requested in writing "year 2000" compliance
certificates with respect to all material third-party systems used in
connection with the business or operations of the Company and its
Subsidiaries. Communications
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to date with the Company's major telecommunications, information systems
and software vendors indicate that these third parties expect, at this
time, to be compliant by the year 2000 based on their progress to date.
(b) All of (i) the material internal systems of the Company and each of
its Subsidiaries used in the business or operations of the Company or any
of its Subsidiaries, as the case may be, including, without limitation,
computer hardware systems, software applications, firmware, equipment
containing embedded microchips and other embedded systems (collectively,
the "Company Systems"), and (ii) the software, hardware, firmware and other
technology which constitute part of the products and services marketed or
sold by the Company or any of its Subsidiaries or licensed by the Company
or any of its Subsidiaries to third parties (collectively, the "Company
Products") will be Year 2000 Compliant by the end of November 1999.
(c) The Company has no knowledge of any failure to be Year 2000 Compliant
of any material third-party system used in connection with the business or
operations of the Company and its Subsidiaries.
(d) For purposes of this Agreement, "Year 2000 Compliant" means that the
applicable system or item:
(i) accurately receives, records, stores, provides, recognizes and
processes all date and time data from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all
leap years;
(ii) accurately performs all date-dependent calculations and
operations (including, without limitation, mathematical operations,
sorting, comparing and reporting) from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all
leap years; and
(iii) does not malfunction, cease to function or provide invalid or
incorrect results as a result of (x) the change of years from 1999 to
2000 or from 2000 to 2001, (y) date data, including date data which
represents or references different centuries, different dates during
1999 and 2000, or more than one century or (z) the occurrence of any
particular date;
in each case without human intervention, other than original data entry;
provided, in each case, that all applications, hardware and other systems
used in conjunction with such system or item which are not owned or
licensed by the Company or any of its Subsidiaries correctly exchange date
data with or provide data to such system or item.
(e) Neither the Company nor any of its Subsidiaries has provided any
guarantee or warranty for any product sold or licensed, or service
provided, by the Company or any Subsidiary to the effect that such product
or service (i) complies with or accounts for the fact of the arrival of the
year 2000, (ii) will not be adversely affected with respect to
functionality, interoperability, performance or volume capacity (including,
without limitation, the processing and reporting of data) by virtue of the
arrival of the year 2000 or (iii) is otherwise Year 2000 Compliant.
3.21 Assets. Each of the Company and its Subsidiaries owns or leases all
tangible assets necessary for the conduct of its businesses as presently
conducted. All of such tangible assets which are owned, are owned free and
clear of all mortgages, security interest, pledges, liens and encumbrances
("Liens") except for (i) Liens which are disclosed in the Company SEC Reports
filed prior to the date of this Agreement and (ii) other Liens which,
individually and in the aggregate, do not materially interfere with the ability
of the Company and its Subsidiaries to conduct their business as currently
conducted and have not resulted in, and are not reasonably likely to result in,
a Company Material Adverse Effect. The tangible assets of the Company and its
Subsidiaries, taken as a whole, are free from material defects, have been
maintained in accordance with normal industry practice, are in good operating
condition and repair (subject to normal wear and tear) and are suitable for the
purpose for which they are presently used.
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3.22 Subscribers. Section 3.22 of the Company Disclosure Schedule sets forth
the total number of the Company's subscribers as of October 31, 1999 who, as of
such date, had paid at least one monthly bill for the Company's services.
3.23 Accounts Receivable. All accounts receivable of the Company reflected on
the Company Balance Sheet are valid receivables, arose from bona fide sales of
goods and services in the ordinary course of business, and are not subject to
any material setoffs or counterclaims.
3.24 No Existing Discussions. As of the date of this Agreement, neither the
Company nor any of its Subsidiaries is engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to an Alternative
Transaction (as defined in Section 8.3(g)).
3.25 Opinion of Financial Advisor. The financial advisor of the Company,
Goldman, Sachs & Co., has delivered to the Company an opinion dated the date of
this Agreement to the effect, as of such date, that the Exchange Ratio is fair
to the holders of the Company Common Stock from a financial point of view, a
signed copy of which opinion will be delivered to the Buyer promptly after the
date hereof.
3.26 Part Thirteen of the TBCA Not Applicable. The Board of Directors of the
Company has taken all actions necessary so that the restrictions contained in
Part Thirteen of the TBCA applicable to a "business combination" (as defined
therein) will not apply to the execution, delivery or performance of this
Agreement, the Company Stock Option Agreement, the Stockholder Agreements or
the consummation of the Merger or the other transactions contemplated by this
Agreement, the Company Stock Option Agreement or the Stockholder Agreements.
3.27 Tax Matters. To the Company's knowledge, after consulting with its
independent auditors, neither the Company nor any of its Affiliates has taken
or agreed to take any action which would prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Code.
3.28 Transactions with Affiliates. Except as disclosed in the Company SEC
Reports filed prior to the date of this Agreement, neither the Company nor any
of its Subsidiaries has entered into any transaction with any director, officer
or other affiliate of the Company or any of its Subsidiaries or any transaction
that would be subject to proxy statement disclosure pursuant to Item 404 of
Regulation S-K.
3.29 Brokers; Schedule of Fees and Expenses.
(a) No agent, broker, investment banker, financial advisor or other firm
or person is or will be entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with any of the
transactions contemplated by this Agreement, except Goldman, Sachs & Co.,
whose fees and expense will be paid by the Company. The Company has
delivered to the Buyer a complete and accurate copy of all agreements
pursuant to which Goldman, Sachs & Co. is entitled to any fees and expenses
in connection with any of the transactions contemplated by this Agreement.
(b) Section 3.29(b) of the Company Disclosure Schedule sets forth a
complete and accurate list of the estimated fees and expenses incurred and
to be incurred by the Company and any of its Subsidiaries in connection
with this Agreement and the transactions contemplated by this Agreement
(including the fees and expenses of Goldman, Sachs & Co. and of the
Company's legal counsel and accountants).
3.30 Disclosure. No representation or warranty by the Company contained in
this Agreement, and no statement contained in the Company Disclosure Schedule
or any other document, certificate or other instrument delivered to or to be
delivered by or on behalf of the Company pursuant to this Agreement, contains
or will contain any untrue statement of a material fact or omits or will omit
to state any material fact necessary, in light of the circumstances under which
it was or will be made, in order to make the statements herein or therein not
misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND
THE TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary represent and warrant to the Company
that the statements contained in this Article IV are true and correct, except
as set forth herein or in the disclosure schedule delivered by the Buyer to the
Company on or before the date of this Agreement (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and the disclosure in any paragraph shall qualify other paragraphs in this
Article IV only to the extent that it is reasonably apparent from a reading of
such document that it also qualifies or applies to such other paragraphs.
4.1 Organization, Standing and Power. Each of the Buyer and the Transitory
Subsidiary and the Buyer's other Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the failure to be so qualified, individually or in the aggregate, would be
reasonably likely to have a material adverse effect on the business,
properties, financial condition, results of operations or prospects of the
Buyer and its Subsidiaries, taken as a whole, or to have a material adverse
effect on the ability of the Buyer to consummate the transactions contemplated
by this Agreement (a "Buyer Material Adverse Effect").
4.2 Capitalization. The authorized capital stock of the Buyer consists of
150,000,000 shares of Buyer Common Stock and 10,000,000 shares of preferred
stock, $.01 par value per share (the "Buyer Preferred Stock"). As of the close
of business on the date immediately preceding the date of this Agreement,
64,152,028 shares of Buyer Common Stock were issued and outstanding and no
shares of Buyer Preferred Stock were issued and outstanding. All outstanding
shares of Buyer Common Stock are, and all shares of Buyer Common Stock subject
to issuance as specified above, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, will be, duly
authorized, validly issued, fully paid and nonassessable. All of the shares of
Buyer Common Stock issuable pursuant to Section 2.1(c) in connection with the
Merger, when issued in accordance with this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable.
4.3 Authority; No Conflict; Required Filings and Consents.
(a) Each of the Buyer and the Transitory Subsidiary has all requisite
corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement by the Buyer and the Transitory Subsidiary
have been duly authorized by all necessary corporate action on the part of
each of the Buyer and the Transitory Subsidiary (including the approval of
the Merger by the Buyer as the sole stockholder of the Transitory
Subsidiary). This Agreement and has been duly executed and delivered by
each of the Buyer and the Transitory Subsidiary and constitutes the valid
and binding obligation of each of the Buyer and the Transitory Subsidiary,
enforceable in accordance with its terms.
(b) The execution and delivery of this Agreement by each of the Buyer and
the Transitory Subsidiary does not, and the consummation of the
transactions contemplated by this Agreement will not, (i) conflict with, or
result in any violation or breach of, any provision of the Certificate of
Incorporation or By-laws of the Buyer or the Transitory Subsidiary, (ii)
conflict with, or result in any violation or breach of, or constitute (with
or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or
loss of any material benefit) under, or require a consent or
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waiver under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, license, contract or other agreement,
instrument or obligation to which the Buyer or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be
bound, or (iii) subject to compliance with the requirements specified in
clause (i), (ii), (iii), (iv), (v) and (vi) of Section 4.3(c), conflict
with or violate any permit, concession, franchise, license, judgment,
injunction, order, decree, statute, law, ordinance, rule or regulation
applicable to the Buyer or any of its Subsidiaries or any of its or their
properties or assets, except in the case of (ii) and (iii) for any such
conflicts, violations, breaches, defaults, terminations, cancellations or
accelerations which, individually or in the aggregate, are not reasonably
likely to have a Buyer Material Adverse Effect.
(c) No consent, approval, license, permit, order or authorization of, or
registration, declaration, notice or filing with, any Governmental Entity
is required by or with respect to the Buyer or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by the Buyer
or the Transitory Subsidiary or the consummation of the transactions
contemplated by this Agreement, except for (i) the filing of a pre-merger
notification report under the HSR Act, (ii) the filing of the Certificate
of Merger with the Secretary of State of the States of Delaware and Texas,
(iii) the filing of the Registration Statement with the SEC in accordance
with the Securities Act, (iv) the filings of such reports or schedules
under Section 13 of the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated hereby, (v) such consents,
approvals, orders, authorizations, registrations, declarations and filings
as may be required under applicable state securities laws and (vi) the
filing with the Nasdaq National Market of a Notification Form for Listing
of Additional Shares with respect to the Buyer Common Stock issuable in
connection with the Merger.
4.4 SEC Filings; Financial Statements.
(a) The Buyer has filed and made available to the Company all forms,
reports and other documents required to be filed by the Buyer with the SEC
since September 25, 1998. All such required forms, reports and other
documents (including those that the Buyer may file after the date hereof
until the Closing) are referred to herein as the "Buyer SEC Reports." The
Buyer SEC Reports (i) were or will be filed on a timely basis, (ii) were or
will be prepared in compliance in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may
be, and the rules and regulations of the SEC thereunder applicable to such
Buyer SEC Reports, and (iii) did not or will not at the time they were or
are filed contain any untrue statement of a material fact or omit to state
a material fact required to be stated in such Buyer SEC Reports or
necessary in order to make the statements in such Buyer SEC Reports, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes and schedules) contained or to be contained in the
Buyer SEC Reports (i) complied or will comply as to form in all material
respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, (ii) were or will be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case
of unaudited statements, as permitted by the SEC on Form 10-Q under the
Exchange Act) and (iii) fairly presented or will fairly present the
consolidated financial position of the Buyer and its Subsidiaries as of the
dates and the consolidated results of its operations and cash flows for the
periods indicated, consistent with the books and records of the Buyer and
its Subsidiaries, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were
not or are not expected to be material in amount. The unaudited balance
sheet of the Buyer as of September 30, 1999 is referred to herein as the
"Buyer Balance Sheet."
4.5 Absence of Certain Changes or Events. Except as disclosed in the Buyer
SEC Reports filed prior to the date of this Agreement, since the date of the
Buyer Balance Sheet, there has not been any event, change or
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development in the business, properties, financial condition, results of
operations or prospects of the Buyer and its Subsidiaries, taken as a whole,
which has had, or is reasonably likely to have, a Buyer Material Adverse
Effect.
4.6 Tax Matters. To the Buyer's knowledge, after consulting with its
independent auditors, neither the Buyer nor any of its Affiliates has taken or
agreed to take any action which would prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Code.
4.7 Litigation. Except as disclosed in the Buyer SEC Reports filed prior to
the date of this Agreement, there is no action, suit, proceeding, claim,
arbitration or investigation pending or, to the knowledge of the Buyer,
threatened against or affecting the Buyer or any of its Subsidiaries which,
individually or in the aggregate, has had, or is reasonably likely to have, a
Buyer Material Adverse Effect. There are no judgments, orders or decrees
outstanding against the Buyer.
4.8 Compliance with Laws. Each of the Buyer and the Transitory Subsidiary has
complied with, is not in violation of, and has not received any notice alleging
any violation with respect to, any applicable provisions of any statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its properties or assets, except for failures to comply or
violations which, individually or in the aggregate, have not had, and would not
have, a Buyer Material Adverse Effect.
4.9 Registration Statement; Proxy Statement/Prospectus. The information in
the Registration Statement (except for information supplied by the Company for
inclusion in the Registration Statement, as to which the Buyer makes no
representation and which shall not constitute part of the Buyer SEC Report for
purposes of this Agreement) shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement, in light of the circumstances under which they were made, not
misleading. If at any time prior to the Effective Time any event relating to
the Buyer or any of its Affiliates, officers or directors should be discovered
by the Buyer which should be set forth in an amendment to the Registration
Statement, the Buyer shall promptly inform the Company.
4.10 Operations of the Transitory Subsidiary. The Transitory Subsidiary was
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement, has engaged in no other business activities and has conducted
its operations only as contemplated by this Agreement.
4.11 Brokers. The Buyer has not retained or incurred any liability to any
agent, broker, investment banker, financial advisor or similar firm or person
in connection with any of the transactions contemplated by this Agreement,
except Bear, Stearns & Co. Inc., whose fees and expenses will be paid by the
Buyer.
4.12 Disclosure. No representation or warranty by the Buyer contained in this
Agreement, and no statement contained in any document, certificate or other
instrument delivered to or to be delivered by or on behalf of the Buyer
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was or will be made, in order to make
the statements herein or therein not misleading.
ARTICLE V
CONDUCT OF BUSINESS
5.1 Covenants of the Company. Except as expressly provided herein or as
consented to in writing by the Buyer, from and after the date of this Agreement
until the earlier of the termination of this Agreement in accordance with its
terms or the Effective Time, the Company shall, and shall cause each of its
Subsidiaries to, act and carry on its business in the usual, regular and
ordinary course in substantially the same manner as
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previously conducted, pay its debts and Taxes and perform its other obligations
when due (subject to good faith disputes over such debts, Taxes or
obligations), and use all reasonable efforts, consistent with past practices,
to maintain and preserve its and each Subsidiary's business organization,
assets and properties, keep available the services of its present officers and
employees and preserve its advantageous business relationships with customers,
suppliers, distributors and others having business dealings with it to the end
that its goodwill and ongoing business shall be unimpaired at the Effective
Time. Without limiting the generality of the foregoing, from and after the date
of this Agreement until the earlier of the termination of this Agreement in
accordance with its terms or the Effective Time, the Company shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, do any of
the following without the prior written consent of the Buyer:
(a) (A) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, securities or other property) in respect
of, any of its capital stock (other than dividends and distributions by a
direct or indirect wholly owned subsidiary of the company to its parent);
(B) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution of shares of its capital stock; or (C) purchase, redeem or
otherwise acquire any shares of its capital stock or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(b) issue, deliver, sell, grant, pledge or otherwise dispose of or
encumber any shares of its capital stock, any other voting securities or
any securities convertible into or exchangeable for, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible or exchangeable securities (other than the issuance of shares
of Company Common Stock upon the exercise of Company Options or Company
Warrants outstanding on the date of this Agreement in accordance with their
present terms);
(c) amend its Restated Articles of Incorporation, by-laws or other
comparable charter or organizational documents, except as expressly
provided by this Agreement;
(d) except as permitted by Section 6.1, acquire (A) by merging or
consolidating with, or by purchasing a substantial portion of the assets or
any stock of, or by any other manner, any business or any corporation,
partnership, joint venture, limited liability company, association or other
business organization or division thereof or (B) any assets that are
material, in the aggregate, to the Company and the Subsidiaries, taken as a
whole, except purchases of inventory in the ordinary course of business
consistent with past practice;
(e) except in the ordinary course of business consistent with past
practice, sell, lease, license, pledge, or otherwise dispose of or encumber
any properties or assets of the Company or of any of its Subsidiaries;
(f) whether or not in the ordinary course of business or consistent with
past practice, sell or dispose of any assets material to the Company and
its Subsidiaries, taken as a whole (including any accounts, leases,
contracts or intellectual property or any assets or the stock of any
Subsidiaries, but excluding the sale of products in the ordinary course of
business consistent with past practice);
(g) adopt or implement any stockholder rights plan;
(h) except as permitted by Section 6.1, enter into an agreement with
respect to any merger, consolidation, liquidation or business combination,
or any acquisition or disposition of all or substantially all of the assets
or securities of the Company or any of its Subsidiaries;
(i) (A) incur or suffer to exist any indebtedness for borrowed money
other than such indebtedness which existed as of September 30, 1999 as
reflected on the Company Balance Sheet or guarantee any such indebtedness
of another person, (B) issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any of its
Subsidiaries, guarantee any debt securities of another
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person, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, or (C) make
any loans, advances (other than routine advances to employees of the
Company in the ordinary course of business consistent with past practice)
or capital contributions to, or investment in, any other person;
(j) make any capital expenditures or expenditures with respect to
property, plant or equipment in excess of $500,000 in the aggregate for the
Company and its Subsidiaries, taken as a whole;
(k) make any changes in accounting methods, principles or practices,
except insofar as may have been required by a change in generally accepted
accounting principles or, except as so required, change any assumption
underlying, or method of calculating, any bad debt, contingency or other
reserve;
(l) (A) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of the Company included in the Company SEC Reports filed
prior to the date of this Agreement (to the extent so reflected or reserved
against) or incurred thereafter in the ordinary course of business
consistent with past practice, or (B) waive any material benefits of any
confidentiality, standstill or similar agreements to which the Company or
any of its Subsidiaries is a party;
(m) modify, amend or terminate any material contract or agreement to
which the Company or any of its Subsidiaries is party, or knowingly waive,
release or assign any material rights or claims (including any write-off or
other compromise of any accounts receivable of the Company of any of its
Subsidiaries);
(n) except in the ordinary course of business consistent with past
practice (A) enter into any material contract or agreement or (B) license
any material intellectual property rights to or from any third party;
(o) except as required to comply with applicable law or agreements, plans
or arrangements existing on the date hereof or as otherwise disclosed in
Section 5.1(o) of the Company Disclosure Schedule, (A) adopt, enter into,
terminate or amend any employment, severance or similar agreement or
benefit plan for the benefit or welfare of any current or former director,
officer or employee or any collective bargaining agreement, (B) increase in
any material respect the compensation or fringe benefits of, or pay any
bonus to, any director, officer or key employee, (C) accelerate the
payment, right to payment or vesting of any compensation or benefits,
including any outstanding options or restricted stock awards, (D) pay any
material benefit not provided for as of the date of this Agreement under
any benefit plan, (E) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or benefit plan
(including the grant of stock options, stock appreciation rights, stock
based or stock related wards, performance units or restricted stock, or the
removal of existing restrictions in any benefit plans or agreements or
awards made thereunder), or (F) take any action other than in the ordinary
course of business consistent with past practice to fund or in any other
way secure the payment of compensation or benefits under any employee plan,
agreement, contract or arrangement or benefit plan;
(p) make or rescind any Tax election, settle or compromise any Tax
liability or amend any Tax return;
(q) initiate, compromise or settle any material litigation or arbitration
proceeding;
(r) close any facility or office;
(s) invest funds in debt securities or other instruments maturing more
than 90 days after the date of investment;
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(t) fail to pay accounts payable and other obligations in the ordinary
course of business consistent with past practice; or
(u) authorize any of, or commit or agree, in writing or otherwise, to
take any of, the foregoing actions or any action which would make any
representation or warranty in Artilce III untrue or incorrect in any
material respect, or would materially impair or prevent the occurrence of
any conditions Article VII hereof.
5.2 Cooperation. Subject to compliance with applicable law, from and after
the date of this Agreement and continuing until the earlier of the termination
of this Agreement in accordance with its terms of the Effective Time, the
Company and each of its Subsidiaries shall make its officers available to
confer on a regular and frequent basis with one or more representatives of the
Buyer to report on the general status of ongoing operations and shall promptly
provide the Buyer or its counsel with copies of all filings made by such party
with any Governmental Entity in connection with this Agreement, the Merger and
the transactions contemplated hereby.
5.3 Confidentiality. The parties acknowledge that the Buyer and the Company
have previously executed a Confidentiality Agreement, dated as of October 21,
1999 (the "Confidentiality Agreement"), which Confidentiality Agreement will
continue in full force and effect in accordance with its terms, except as
expressly modified herein.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement in accordance with its terms or the Effective
Time, the Company and its Subsidiaries shall not, directly or indirectly,
through any officer, director, employee, financial advisor, representative
or agent (i) solicit, initiate, or encourage any inquiries or proposals
that constitute, or could reasonably be expected to lead to, a proposal or
offer for an Alternative Transaction (as defined Section 8.3(g)), other
than the transactions contemplated by this Agreement, (ii) engage in
negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Alternative
Transaction, or (iii) agree to or recommend any Alternative Transaction;
provided, however, that, if the Company has not breached this Section 6.1,
nothing contained in this Agreement shall prevent the Company or its Board
of Directors, from:
(A) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection
with an unsolicited bona fide written Alternative Transaction by such
person or entity or recommending an unsolicited bona fide written
Alternative Transaction to the stockholders of the Company, if and only
to the extent that
(1) the Board of Directors of the Company believes in good faith
(after consultation with its financial advisor) that such
Alternative Transaction is reasonably capable of being completed on
the terms proposed and would, if consummated, result in a
transaction more favorable than the transaction contemplated by this
Agreement (any such more favorable Alternative Transaction being
referred to in this Agreement as a "Superior Proposal") and the
Company's Board of Directors determines in good faith after
consultation with outside legal counsel that such action is
necessary for such Board of Directors to comply with its fiduciary
duties to stockholders under applicable law,
(2) prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such person or
entity, such Board of Directors receives from such person or entity
an executed confidentiality agreement with terms no less favorable
to such party than those contained in the Confidentiality Agreement,
and
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(3) prior to recommending a Superior Proposal, the Company shall
provide the Buyer with at least five business days' prior notice of
its proposal to do so, during which time the Buyer may make, and in
such event the Company shall consider, a counterproposal to such
Superior Proposal, and the Company shall itself and shall cause its
financial and legal advisors to negotiate in good faith on its
behalf with the Buyer with respect to the terms and conditions of
such counterproposal; or
(B) complying with Rule 14d-9 and 14e-2 promulgated under the
Exchange Act with regard to an Alternative Transaction.
(b) The Company will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore of the
nature described in Section 6.1(a) and will use reasonable efforts to
obtain the return of any confidential information furnished to any such
parties.
(c) The Company shall notify the Buyer immediately (but in any event,
within 24 hours) after receipt by the Company (or its advisors) of any
Alternative Transaction or any request for nonpublic information in
connection with an Alternative Transaction or for access to the properties,
books or records of the Company by any person or entity that informs the
Company that it is considering making, or has made, an Alternative
Transaction. Such notice shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offer or and the terms
and conditions of such proposal, inquiry or contact. The Company shall
continue to keep the Buyer informed, on a current basis, of the status of
any such discussions or negotiations and the terms being discussed or
negotiated.
(d) Nothing in this Section 6.1 shall (i) permit the Company to terminate
this Agreement (except as specifically provided in Section 8.1 hereof),
(ii) permit the Company to enter into any agreement with respect to an
Alternative Transaction during the term of this Agreement (it being agreed
that during the term of this Agreement, the Company shall not enter into
any agreement with any person that provides for, or in any way facilitates,
an Alternative Transaction (other than a confidentiality agreement of the
type referred to in Section 6.1(a) above)) or (iii) affect any other
obligation of the Company under this Agreement.
6.2 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, the
Buyer and the Company shall prepare and the Company shall file with the SEC
the Proxy Statement, and the Buyer shall prepare and file with the SEC the
Registration Statement, in which the Proxy Statement will be included as a
prospectus, provided that the Buyer may delay the filing of the
Registration Statement until approval of the Proxy Statement by the SEC.
The Buyer and the Company shall use reasonable efforts to cause the
Registration Statement to become effective as soon after such filing as
practicable. Each of the Buyer and the Company will respond to any comments
of the SEC and will use its respective reasonable efforts to have the Proxy
Statement cleared by the SEC and the Registration Statement declared
effective under the Securities Act as promptly as practicable after such
filings and the Company will cause the Proxy Statement and the prospectus
contained within the Registration Statement to be mailed to its
stockholders at the earliest practicable time after both the Proxy
Statement is cleared by the SEC and the Registration Statement is declared
effective under the Securities Act. Each of the Buyer and the Company will
notify the other promptly upon the receipt of any comments from the SEC or
its staff or any other government officials and of any request by the SEC
or its staff or any other government officials for amendments or
supplements to the Registration Statement, the Proxy Statement or any
filing pursuant to Section 6.2(b) or for additional information and will
supply the other with copies of all correspondence between such party or
any of its representatives, on the one hand, and the SEC, or its staff or
any other government officials, on the other hand, with respect to the
Registration Statement, the Proxy Statement, the Merger or any filing
pursuant to Section 6.2(b). Each of the Buyer and the Company will cause
all documents that it is responsible for filing with the SEC or other
regulatory authorities under this Section 6.2 to comply in all
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material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Proxy
Statement, the Registration Statement or any filing pursuant to Section
6.2(b), the Buyer or the Company, as the case may be, will promptly inform
the other of such occurrence and cooperate in filing with the SEC or its
staff or any other government officials, and/or mailing to stockholders of
the Company, such amendment or supplement.
(b) The Company shall use its best efforts to cause to be delivered to
the Buyer two letters from Deloitte & Touche LLP and/or Ernst & Young LLP,
as appropriate, the Company's former and current independent accountants,
respectively, one letter dated a date within two business days before the
date on which the Registration Statement shall become effective and one
letter dated a date within two business days before the Closing Date, each
addressed to the Buyer, in form and substance reasonably satisfactory to
the Buyer and customary in scope and substance for comfort letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
(c) Each of the Buyer and the Company shall make all filings required of
it with respect to the Merger under the Securities Act, the Exchange Act,
applicable state blue sky laws and the rules and regulations thereunder.
6.3 Nasdaq Quotation. The Company agrees to continue the quotation of the
Company Common Stock on the Nasdaq National Market during the term of this
Agreement.
6.4 Access to Information. The Company shall (and shall cause each of its
Subsidiaries to) afford to the Buyer's officers, employees, accountants,
counsel and other representatives, reasonable access, during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments, personnel and records and, during such period,
the Company shall (and shall cause each of its Subsidiaries to) furnish
promptly to the Buyer (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties, assets and personnel as
the Buyer may reasonably request. Unless otherwise required by law, the Buyer
will hold any such information which is nonpublic in confidence in accordance
with the Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to this Section or otherwise shall affect or be deemed
to modify any representation or warranty contained in this Agreement or the
conditions to the obligations of the parties to consummate the Merger.
6.5 Stockholders Meeting.
(a) The Company, acting through its Board of Directors, shall, subject to
and according to applicable law and its Restated Articles of Incorporation
and Bylaws, promptly and duly call, give notice of, convene and hold as
soon as practicable following the date on which the Registration Statement
becomes effective the Company Meeting for the purpose of voting to approve
and adopt this Agreement and the Merger (the "Company Voting Proposal").
The Board of Directors of the Company shall (i) recommend approval and
adoption of the Company Voting Proposal by the stockholders of the Company
and include in the Proxy Statement such recommendation and (ii) take all
reasonable and lawful action to solicit and obtain such approval; provided,
however, that in response to an Alternative Transaction the Board of
Directors of the Company may withdraw such recommendation if (but only if)
(i) the Board of Directors of the Company has received a Superior Proposal,
(ii) such Board of Directors upon advice of its outside legal counsel
determines that it is required, in order to comply with its fiduciary
duties under applicable law, to recommend such Superior Proposal to the
stockholders of the Company and (iii) the Company has complied with the
provisions of Section 6.1.
(b) The Company shall call and hold the Company Meeting for the purpose
of voting upon the approval of this Agreement and the Merger regardless of
whether its Board of Directors at any time
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subsequent to the date hereof determines that this Agreement is no longer
advisable or recommends that the Company's stockholders reject it.
(c) Applied Telecommunications Technologies, Inc., James B. Francis, Jr.,
Global Undervalued Securities Fund, L.P., Andrew N. Jent, John B.
Kleinheinz, Kleinheinz Capital Partners, Inc., Michael Scott Leslie, Kevin
A. Stadtler, Albert Lee Thurburn and Russell A. Wiseman have each executed
and delivered a Stockholder Agreement to the Buyer concurrently with the
signing of this Agreement.
(d) Andrew N. Jent, Michael Scott Leslie and Russell A. Wiseman have each
executed and delivered to the Buyer a Non-Compete Agreement in a form
agreed upon by the Buyer and the Company.
6.6 Legal Conditions to the Merger.
(a) Subject to the terms hereof, the Company and the Buyer shall each use
its reasonable efforts to (i) take, or cause to be taken, all actions, and
do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective the transactions contemplated hereby as promptly as practicable,
(ii) obtain from any Governmental Entity or any other third party any
consents, licenses, permits, waivers, approvals, authorizations, or orders
required to be obtained or made by the Company or the Buyer or any of their
Subsidiaries in connection with the authorization, execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby, (iii) as promptly as practicable, make all necessary filings, and
thereafter make any other required submissions, with respect to this
Agreement and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities laws,
(B) the HSR Act and any related governmental request thereunder (provided
that the initial filings under the HSR Act shall be made on or after such
date as is designated by the Buyer), and (C) any other applicable law and
(iv) execute or deliver any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of,
this Agreement. The Company and the Buyer shall cooperate with each other
in connection with the making of all such filings, including providing
copies of all such documents to the non-filing party and its advisors prior
to filing and, if requested, to accept all reasonable additions, deletions
or changes suggested in connection therewith. The Company and the Buyer
shall use their respective reasonable efforts to furnish to each other all
information required for any application or other filing to be made
pursuant to the rules and regulations of any applicable law (including all
information required to be included in the Proxy Statement and the
Registration Statement) in connection with the transactions contemplated by
this Agreement.
(b) Subject to the terms hereof, the Buyer and the Company agree, and
shall cause each of their respective Subsidiaries, to cooperate and to use
their respective reasonable efforts to obtain any government clearances or
approvals required for Closing under the HSR Act, the Sherman Act, as
amended, the Clayton Act, as amended, the Federal Trade Commission Act, as
amended, and any other federal, state or foreign law or, regulation or
decree designed to prohibit, restrict or regulate actions for the purpose
or effect of monopolization or restraint of trade (collectively "Antitrust
Laws"), to respond to any government requests for information under any
Antitrust Law, and to contest and resist any action, including any
legislative, administrative or judicial action, and to have vacated,
lifted, reversed or overturned any decree, judgment, injunction or other
order (whether temporary, preliminary or permanent) (an "Antitrust Order")
that restricts, prevents or prohibits the consummation of the Merger or any
other transactions contemplated by this Agreement under any Antitrust Law.
The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments,
opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to any Antitrust
Law. The Buyer shall be entitled to direct any proceedings or negotiations
with any
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Governmental Entity relating to any of the foregoing, provided that it
shall afford the Company a reasonable opportunity to participate therein.
Notwithstanding anything to the contrary in this Section, neither the Buyer
nor any of its Subsidiaries shall be required to (i) divest any of their
respective businesses, product lines or assets, or to take or agree to take
any other action or agree to any limitation, that could reasonably be
expected to have a material adverse effect on the Buyer or on the Buyer
combined with the Company after the Effective Time or (ii) take any action
under this Section if the United States Department of Justice or the United
States Federal Trade Commission authorizes its staff to seek a preliminary
injunction or restraining order to enjoin consummation of the Merger.
(c) Each of the Company and the Buyer shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties, and use, and
cause their respective Subsidiaries to use, their reasonable efforts to
obtain any third party consents related to or required in connection with
the Merger that are (A) necessary to consummate the transactions
contemplated hereby, (B) disclosed or required to be disclosed in the
Company Disclosure Schedule or the Buyer Disclosure Schedule, as the case
may be, or (C) required to prevent a Company Material Adverse Effect or a
Buyer Material Adverse Effect from occurring prior to or after the
Effective Time.
6.7 Public Disclosure. The Buyer and the Company shall each use its
reasonable efforts to consult with the other before issuing any press release
or otherwise making any public statement with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement prior to using such efforts, except as may be required by law.
6.8 Tax-Free Reorganization. The Buyer and the Company shall each use its
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368(a) of the Code. The parties hereto hereby adopt this
Agreement as a plan of reorganization.
6.9 Affiliate Agreements. Upon the execution of this Agreement, the Company
will provide the Buyer with a list of those persons who are, in the Company's
reasonable judgment, "affiliates" of the Company, within the meaning of Rule
145 (each such person who is an "affiliate" of the Company within the meaning
of Rule 145 is referred to as an "Affiliate") promulgated under the Securities
Act ("Rule 145"). The Company shall provide to the Buyer such information and
documents as the Buyer shall reasonably request for purposes of reviewing such
list and shall notify the Buyer in writing regarding any change in the identity
of its Affiliates prior to the Closing Date. The Company shall use its
reasonable efforts to deliver or cause to be delivered to the Buyer by November
19, 1999 (and in any case prior to the mailing of the Proxy Statement) from
each of its Affiliates, an executed Company Affiliate Agreement, in
substantially the form appended hereto as Exhibit C (the "Affiliate
Agreement"). The Buyer shall be entitled to place appropriate legends on the
certificates evidencing any shares of Buyer Common Stock to be received by Rule
145 Affiliates of the Company pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the
Buyer Common Stock (provided that such legends or stop transfer instructions
shall be removed, two years after the Effective Date, upon the request of any
stockholder that is not then an Affiliate of the Buyer).
6.10 Nasdaq National Market Listing. The Buyer shall file with the Nasdaq
National Market a Notification Form for Listing of Additional Shares with
respect to the Buyer Common Stock issuable in connection with the Merger.
6.11 Company Stock Options, Warrants and Plans.
(a) At the Effective Time, the Buyer shall assume each outstanding
Company Stock Option under Company Stock Plans, whether vested or unvested,
shall be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under the Company Stock Option immediately
prior to
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the Effective Time, the same number of shares of Buyer Common Stock as the
holder of the Company Stock Option would have been entitled to receive
pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time (rounded down to the nearest whole
number), at a price per share (rounded up to the nearest whole cent) equal
to (y) the aggregate exercise price for the shares of Company Common Stock
purchasable pursuant to the Company Stock Option immediately prior to the
Effective Time divided by (z) the number of full shares of Buyer Common
Stock deemed purchasable pursuant to the Company Stock Option in accordance
with the foregoing.
(b) As soon as practicable after the Effective Time, the Buyer shall
deliver to the participants in the Company Stock Plans appropriate notice
setting forth such participants' rights pursuant thereto and the grants
pursuant to the Company Stock Plans shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section
after giving effect to the Merger).
(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery
under the Company Stock Plans assumed in accordance with this Section.
Prior to or as soon as practicable after the Effective Time, and in any
event within 10 business days after the Effective Time, the Buyer shall
file a registration statement on Form S-8 (or any successor form) or
another appropriate form with respect to the shares of Buyer Common Stock
subject to such options and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements
(and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding.
(d) The Board of Directors of the Company shall, prior to or as of the
Effective Time, take all necessary actions, pursuant to and in accordance
with the terms of Company Stock Plans and the instruments evidencing the
Company Stock Options, to provide for the conversion of the Company Stock
Options into options to acquire Buyer Common Stock in accordance with this
Section, and that no consent of the holders of the Company Stock Options is
required in connection with such conversion.
(e) As of or prior to the Effective Time, the Company shall terminate its
Employee Stock Discount Purchase Plan in accordance with its terms.
(f) As of the Effective Time, the Company shall terminate (with the
consent of the holders of the applicable Company Stock Options, if
necessary) all Company Stock Options with an exercise price equal to or
higher than the last reported sales price of the Company Common Stock on
the Nasdaq National Market on the trading day immediately prior to the
Effective Time.
(g) If requested by the Buyer in writing, the Company shall, immediately
prior to the Effective Time, terminate the Company's 401(k) Plan.
6.12 Stockholder Litigation. Until the earlier of the termination of this
Agreement in accordance with its terms or the Effective Time, the Company shall
give the Buyer the opportunity to participate in the defense or settlement of
any stockholder litigation against the Company or its Board of Directors
relating to this Agreement or any of the transactions contemplated by this
Agreement, and shall not settle any such litigation without the Buyer's prior
written consent, which will not be unreasonably withheld or delayed.
6.13 Indemnification. From and after the Effective Time, the Buyer shall, to
the fullest extent permitted by law, cause the Surviving Corporation, for a
period of six years from the Effective Time, to honor all of the Company's
obligations to indemnify and hold harmless, and to advance expenses with
respect to, each present and former director and officer of the Company (the
"Indemnified Parties"), against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities or amounts paid
in settlement incurred in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal,
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administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the extent that such
obligations to indemnify and hold harmless exist on the date of this Agreement
under the Company's Restated Articles of Incorporation, By-laws, the TBCA, any
agreement between such person and the Company listed on Section 6.13 of the
Company Disclosure Schedule, or otherwise; provided, further, that in the event
any claim or claims are asserted or made within such six year period, all
rights to indemnification in respect of any such claim or claims shall continue
until the disposition of any and all such claims.
6.14 Notification of Certain Matters. The Buyer will give prompt notice to
the Company, and the Company will give prompt notice to the Buyer, of the
occurrence, or failure to occur, of any event, which occurrence or failure to
occur would be reasonably likely to cause (a) (i) any representation or
warranty of such party contained in this Agreement that is qualified as to
materiality to be untrue or inaccurate in any respect or (ii) any other
representation or warranty of such party contained in this Agreement to be
untrue or inaccurate in any material respect, in each case at any time from and
after the date of this Agreement until the Effective Time, or (b) any material
failure of the Buyer and the Transitory Subsidiary or the Company, as the case
may be, or of any officer, director, employee or agent thereof, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. Notwithstanding the above, the delivery
of any notice pursuant to this Section will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice or the
conditions to such party's obligation to consummate the Merger.
ARTICLE VII
CONDITIONS TO MERGER
7.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. The Company Voting Proposal shall have been
approved and adopted at the Company Meeting, at which a quorum is present,
by the affirmative vote of the holders of two-thirds of the shares of the
Company Common Stock outstanding on the record date for the Company
Meeting.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Governmental Approvals. Other than the filings provided for by
Section 1.1, all authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by,
any Governmental Entity, the failure of which to file, obtain or occur is
reasonably likely to have a Buyer Material Adverse Effect or a Company
Material Adverse Effect shall have been filed, been obtained or occurred.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order and no similar proceeding in
respect of the Proxy Statement shall have been initiated or threatened by
the SEC.
(e) No Injunctions. No Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any order,
executive order, stay, decree, judgment or injunction (each an "Order") or
statute, rule or regulation which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger.
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7.2 Additional Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligations of the Buyer and the Transitory Subsidiary to
effect the Merger are subject to the satisfaction of each of the following
additional conditions, any of which may be waived in writing exclusively by the
Buyer and the Transitory Subsidiary:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct (i) as of
the date of this Agreement (except to the extent such representations and
warranties are specifically made as of a particular date, in which case
such representations and warranties shall be true and correct as of such
date) and (ii) as of the Closing Date as though made on and as of the
Closing Date (except (x) to the extent such representations and warranties
are specifically made as of a particular date, in which case such
representations and warranties shall be true and correct as of such date,
(y) for changes contemplated by this Agreement and (z) where the failures
to be true and correct (without regard to any materiality, Company Material
Adverse Effect or knowledge qualifications contained therein), individually
or in the aggregate, have not had, and are not reasonably likely to have, a
Company Material Adverse Effect); and the Buyer shall have received a
certificate signed on behalf of the Company by the chief executive officer
and the chief financial officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date; and the Buyer
shall have received a certificate signed on behalf of the Company by the
chief executive officer and the chief financial officer of the Company to
such effect.
(c) Tax Opinion. The Buyer shall have received a written opinion from
Hale and Dorr LLP, counsel to the Buyer, to the effect that the Merger will
be treated for federal income tax purposes as a tax-free reorganization
within the meaning of Section 368(a) of the Code; provided that if Hale and
Dorr LLP does not render such opinion, this condition shall nonetheless be
deemed satisfied if Brobeck, Phleger & Harrison LLP renders such opinion to
the Buyer (it being agreed that the Buyer and the Company shall each
provide reasonable cooperation, including making reasonable
representations, to Hale and Dorr LLP or Brobeck, Phleger & Harrison LLP,
as the case may be, to enable them to render such opinion).
(d) Third Party Consents. The Company shall have obtained (i) all
consents and approvals of third parties referred to in Section 3.3(b) of
the Company Disclosure Schedule and (ii) any other consent or approval of
any third party (other than a Governmental Entity) the failure of which to
obtain, individually or in the aggregate, is reasonably likely to have a
Company Material Adverse Effect.
(e) Resignations. The Buyer shall have received copies of the
resignations, effective as of the Effective Time, of each director and
officer of the Company and its Subsidiaries, except as listed on Section
7.2(e) of the Company Disclosure Schedule.
7.3 Additional Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is subject to the satisfaction of each of the
following additional conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and warranties of
the Buyer and the Transitory Subsidiary set forth in this Agreement shall
be true and correct (i) as of the date of this Agreement (except to the
extent such representations are specifically made as of a particular date,
in which case such representations and warranties shall be true and correct
as of such date) and (ii) as of the Closing Date as though made on and as
of the Closing Date (except (x) to the extent such representations and
warranties are specifically made as of a particular date, in which case
such representations and
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warranties shall be true and correct as of such date, (y) for changes
contemplated by this Agreement and (z) where the failures to be true and
correct (without regard to any materiality, Buyer Material Adverse Effect
or knowledge qualifications contained therein), individually or in the
aggregate, have not had, and are not reasonably likely to have, a Buyer
Material Adverse Effect); and the Company shall have received a certificate
signed on behalf of the Buyer by the chief executive officer or the chief
financial officer of the Buyer to such effect.
(b) Performance of Obligations of the Buyer and the Transitory
Subsidiary. The Buyer and Sub shall have performed in all material respects
all obligations required to be performed by them under this Agreement at or
prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of the Buyer by the chief executive officer or
the chief financial officer of the Buyer to such effect.
(c) Tax Opinion. The Company shall have received the opinion of Brobeck,
Phleger & Harrison LLP, counsel to the Company, to the effect that the
Merger will be treated for federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code; provided
that if Brobeck, Phleger & Harrison LLP does not render such opinion, this
condition shall nonetheless be deemed satisfied if Hale and Dorr LLP
renders such opinion to the Company (it being agreed that the Buyer and the
Company shall each provide reasonable cooperation, including making
reasonable representations, to Brobeck, Phleger & Harrison LLP or Hale and
Dorr LLP, as the case may be, to enable them to render such opinion).
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time (with respect to Sections 8.1(b) through 8.1(f), by written
notice by the terminating party to the other party), whether before or after
approval of the Merger by the stockholders of the Company:
(a) by mutual written consent of the Buyer and the Company; or
(b) by either the Buyer or the Company if the Merger shall not have been
consummated by May 31, 2000 (the "Outside Date") (provided that the right
to terminate this Agreement under this Section 8.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been a principal cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either the Buyer or the Company if a Governmental Entity of
competent jurisdiction shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger; or
(d) by either the Buyer or the Company if at the Company Meeting
(including any adjournment or postponement), the requisite vote of the
stockholders of the Company in favor of the Company Voting Proposal shall
not have been obtained (provided that the right to terminate this Agreement
under this Section 8.1(d) shall not be available to any party seeking
termination who at the time is in breach of or has failed to fulfill its
obligations under this Agreement); or
(e) by the Buyer, if: (i) the Board of Directors of the Company shall
have failed to recommend approval of the Company Voting Proposal in the
Proxy Statement or shall have withdrawn or modified its recommendation of
the Company Voting Proposal; (ii) the Board of Directors of the Company
fails to reconfirm its recommendation of this Agreement or the Merger
within five business days after the Buyer requests in writing that the
Board of Directors of the Company do so; (iii) the Board of Directors of
the Company shall have approved or recommended to the stockholders of the
Company an Alternative Transaction (as defined in Section 8.3(g)); or (iv)
a tender offer or exchange offer for outstanding shares of
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the Company Common Stock is commenced (other than by the Buyer or an
Affiliate of the Buyer) and the Board of Directors of the Company
recommends that the stockholders of the Company tender their shares in such
tender or exchange offer or, within 10 days after such tender or exchange
offer, fails to recommend against acceptance of such offer or takes no
position with respect to the acceptance thereof; or (v) for any reason the
Company fails to call and hold the Company Meeting by the date which is one
business day prior to the Outside Date; or
(f) by either the Buyer or the Company, if there has been a breach of, or
material inaccuracy or omission with respect to, any representation,
warranty, covenant or agreement on the part of the other party set forth in
this Agreement, which breach, inaccuracy or omission (i) causes the
conditions set forth in Section 7.2(a) or 7.2(b) (in the case of
termination by the Buyer) or Section 7.3(a) or 7.3(b) (in the case of
termination by the Company) not to be satisfied, and (ii) shall not have
been cured within 10 days following receipt by the breaching party of
written notice of such breach from the other party.
8.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall immediately become void and there
shall be no liability or obligation on the part of the Buyer, the Company, the
Transitory Subsidiary or their respective officers, directors, stockholders or
Affiliates, except as set forth in Sections 3.29, 5.3, 8.3 and Article IX;
provided that any such termination shall not relieve any party from liability
for any willful breach of this Agreement (which includes without limitation the
making of any representation or warranty by a party in this Agreement that the
party knew was not true and accurate when made) and the provisions of the
Company Stock Option Agreement, Sections 3.29, 5.3, 8.3 and Article IX of this
Agreement and the Confidentiality Agreement shall remain in full force and
effect and survive any termination of this Agreement.
8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such fees and
expenses, whether or not the Merger is consummated; provided however, that
the Company and the Buyer shall share equally all fees and expenses, other
than attorneys' fees, incurred with respect to the printing and filing of
the Proxy Statement (including any related preliminary materials) and the
Registration Statement and any amendments or supplements thereto.
(b) The Company shall pay the Buyer up to $500,000 as reimbursement for
expenses of the Buyer actually incurred relating to the transactions
contemplated by this Agreement prior to termination (including, but not
limited to, fees and expenses of the Buyer's counsel, accountants and
financial advisors, but excluding any discretionary fees paid to such
financial advisors), upon the termination of this Agreement by the Buyer
pursuant to (i) Section 8.1(b) as a result of the failure to satisfy the
condition set forth in Section 7.2(a); (ii) Section 8.1(e); or (iii)
Section 8.1(f) or by the Buyer or the Company pursuant to Section 8.1(d).
(c) The Company shall pay the Buyer a termination fee of $5,000,000 upon
the earliest to occur of the following events:
(i) the termination of this Agreement by the Buyer pursuant to
Section 8.1(e); or
(ii) the termination of this Agreement by the Buyer pursuant to
Section 8.1(f) after a breach by the Company of this Agreement; or
(iii) the termination of the Agreement by the Buyer or the Company
pursuant to Section 8.1(d) as a result of the failure to receive the
requisite vote for approval of the Company Voting Proposal by the
stockholders of the Company at the Company Meeting.
(d) The Buyer shall pay the Company up to $500,000 as reimbursement for
expenses of the Company actually incurred relating to the transactions
contemplated by this Agreement prior to
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termination (including, but not limited to, but excluding any discretionary
fees paid to such financial advisors), upon the termination of this
Agreement by the Company pursuant to (i) Section 8.1(b) as a result of the
failure to satisfy the condition set forth in Section 7.3(a) or (ii)
Section 8.1(f).
(e) The Buyer shall pay the Company a termination fee of $5,000,000 upon
the termination of this Agreement by the Company pursuant to Section 8.1(f)
after a breach by the Buyer of this Agreement.
(f) The expenses and fees, if applicable, payable pursuant to Section
8.3(b), 8.3(c), 8.3(d) and 8.3(e) shall be paid within one business day
after demand therefor following the first to occur of the events giving
rise to the payment obligation described in Section 8.3(b), 8.3(c)(i), (ii)
or (iii), 8.3(d) or 8.3(e). If one party fails to promptly pay to the other
any expense reimbursement or fee due hereunder, the defaulting party shall
pay the costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other
legal action, taken to collect payment, together with interest on the
amount of any unpaid fee at the publicly announced prime rate of Bank of
New York plus five percent per annum, compounded quarterly, from the date
such expense reimbursement or fee was required to be paid.
(g) As used in this Agreement, "Alternative Transaction" means either (i)
a transaction pursuant to which any person (or group of persons) other than
the Buyer or its affiliates (a "Third Party"), acquires more than 20% of
the outstanding shares of the Company Common Stock pursuant to a tender
offer or exchange offer or otherwise, (ii) a merger or other business
combination involving the Company pursuant to which any Third Party
acquires more than 20% of the outstanding shares of Company Common Stock or
of the entity surviving such merger or business combination, (iii) any
other transaction pursuant to which any Third Party acquires control of
assets (including for this purpose the outstanding equity securities of
Subsidiaries of the Company, and the entity surviving any merger or
business combination including any of them) of the Company having a fair
market value equal to more than 20% of the fair market value of all the
assets of the Company immediately prior to such transaction, or (iv) any
public announcement by a Third Party of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
8.4 Amendment. This Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time before
or after approval of the matters presented in connection with the Merger by the
stockholders of the Company, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders without
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors,
may, to the extent legally allowed, (i) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto and (iii) waive compliance with any of
the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
9.1 Nonsurvival of Representations and Warranties. The respective
representations and warranties of the Company, the Buyer and the Transitory
Subsidiary contained in this Agreement or in any instrument delivered pursuant
to this Agreement shall expire with, and be terminated and extinguished upon,
the Effective Time. No party hereto makes any representation or warranty to the
other party other than those expressly set forth herein.
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9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly delivered (i) four business days after being
sent by registered or certified mail, return receipt requested, postage
prepaid, or (ii) one business day after being sent for next business day
delivery, fees prepaid, via a reputable nationwide overnight courier service,
in each case to the intended recipient as set forth below:
(a) if to the Buyer or Transitory Subsidiary, to
Prodigy Communications Corporation
44 South Broadway
White Plains, New York 10601
Attn: General Counsel
Telecopy: (914) 448-8198
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attn: David A. Westenberg, Esq.
Telecopy: (617) 526-5000
(b) if to the Company, to
FlashNet Communications, Inc.
1812 North Forest Park Blvd.
Fort Worth, Texas 76102
Attn: President
Telecopy: (817) 870-0296
with a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78701
Attn: S. Michael Dunn, Esq.
Telecopy: (512) 477-5813
Any party may give any notice or other communication hereunder using any
other means (including personal delivery, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice or other communication
shall be deemed to have been duly given unless and until it actually is
received by the party for whom it is intended. Any party may change the address
to which notices and other communications hereunder are to be delivered by
giving the other parties notice in the manner herein set forth.
9.3 Entire Agreement. This Agreement (including the Schedules and Exhibits
hereto and the documents and instruments referred to herein that are to be
delivered at the Closing) constitutes the entire agreement among the parties
hereto and supersedes any prior understandings, agreements or representations
by or among the parties hereto, or any of them, written or oral, with respect
to the subject matter hereof; provided that the Confidentiality Agreement shall
remain in effect in accordance with its terms.
9.4 No Third Party Beneficiaries. Except as provided in Section 6.13, this
Agreement is not intended, and shall not be deemed, to confer any rights or
remedies upon any person other than the parties hereto and their respective
successors and permitted assigns, to create any agreement of employment with
any person or to otherwise create any third-party beneficiary hereto.
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9.5 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement may be assigned or delegated, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties, and any such assignment without
such prior written consent shall be null and void, except that the Buyer and/or
the Transitory Subsidiary may assign this Agreement to any direct or indirect
wholly owned Subsidiary of the Buyer without consent of the Company, provided
that the Buyer and/or the Transitory Subsidiary, as the case may be, shall
remain liable for all of its obligations under this Agreement. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns.
9.6 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties agree hereto that the court making such
determination shall have the power to limit the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified. In the event
such court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.
9.7 Counterparts and Signature. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties hereto and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. This Agreement may be executed and delivered by
facsimile transmission.
9.8 Interpretation. When reference is made in this Agreement to an Article or
a Section, such reference shall be to an Article or Section of this Agreement,
unless otherwise indicated. The table of contents, table of defined terms and
headings contained in this Agreement are for convenience of reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
The language used in this Agreement shall be deemed to be the language chosen
by the parties hereto to express their mutual intent, and no rule of strict
construction shall be applied against any party. Whenever the context may
require, any pronouns used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns and
pronouns shall include the plural, and vice versa. Any reference to any
federal, state, local or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context
requires otherwise. Whenever the words "include", "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation".
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without giving
effect to any choice or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would cause the application of laws
of any jurisdictions other than those of the State of New York.
9.10 Remedies. Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
35
<PAGE>
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof this being in addition to any
other remedy to which they are entitled at law or in equity.
9.11 Waiver of Jury Trial. EACH OF THE BUYER, THE TRANSITORY SUBSIDIARY AND
THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THE ACTIONS OF THE BUYER, THE TRANSITORY SUBSIDIARY OR
THE COMPANY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT.
[Signature Page to follow]
36
<PAGE>
IN WITNESS WHEREOF, the Buyer, the Transitory Subsidiary and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PRODIGY COMMUNICATIONS CORPORATION
/s/ Andrea S. Hirsch
By: _________________________________
Name: Andrea S. Hirsch
Title: Executive Vice President
and General Counsel
PUCKNUT CORPORATION
/s/ Andrea S. Hirsch
By: _________________________________
Name: Andrea S. Hirsch
Title: Vice President, General
Counsel and Secretary
FLASHNET COMMUNICATIONS, INC.
/s/ Michael Scott Leslie
By: _________________________________
Name: Michael Scott Leslie
Title: Chief Executive Officer
and President
37
<PAGE>
EXHIBIT 10.3
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 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,
3
<PAGE>
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.
4
<PAGE>
(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.
5
<PAGE>
Exhibit 10.6
Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omission.
AMENDED AND RESTATED
SPLITROCK FULL SERVICE AGREEMENT
BY AND BETWEEN
PRODIGY COMMUNICATIONS CORPORATION
AND
SPLITROCK SERVICES, INC.
DATED AS OF FEBRUARY 16, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
PART 1 -- GENERAL................................................... 4
1.1 Definitions.............................................. 4
1.2 Agreement Structure...................................... 5
1.3 Electronic Communications................................ 6
1.4 Prices................................................... 6
1.5 Payment and Taxes........................................ 7
1.6 Patents and Copyrights................................... 7
1.7 Limitation of Liability.................................. 8
1.8 Your Additional Rights................................... 9
1.9 Changes to and Termination of Services................... 9
1.10 Geographic Scope......................................... 9
1.11 Governing Law............................................ 10
1.12 Notice................................................... 10
1.13 Term..................................................... 10
1.14 Financial Covenants...................................... 10
1.15 Headings................................................. 12
PART 2 -- RESPONSIBILITIES OF THE PARTIES........................... 12
2.1 Mutual Responsibilities.................................. 12
2.2 Our Other Responsibilities............................... 13
2.3 Your Other Responsibilities.............................. 13
PART 3 -- WARRANTIES................................................ 15
3.1 Warranty for Service..................................... 15
3.2 Items Not Covered by Warranty............................ 16
PART 4 -- EQUIPMENT PROVIDED BY SPLITROCK........................... 16
PART 5 -- CONFIDENTIALITY........................................... 16
PART 6 -- SPLITROCK SERVICES........................................ 18
6.1 Description............................................. 18
6.1.1 Dial Access Network................................ 18
6.1.2 ATM Backbone Network............................... 20
<PAGE>
Page
----
6.1.3 Regional Servers............................... 21
6.1.4 Network Management and Proxy Servers........... 21
6.2 Service Level Objectives................................ 22
6.2.1 Site Dial Grade of Service (SDGS) Objective.... 22
6.2.2 Availability Objectives........................ 23
6.2.3 Transit Delay.................................. 25
6.3 Our Other Responsibilities.............................. 25
6.4 Your Other Responsibilities............................. 26
6.5 Charges................................................. 27
6.5.1 Monthly Usage Charges (SDGS) Objective......... 27
6.5.2 Other Monthly Charges.......................... 28
6.5.3 Payment Terms.................................. 28
6.5.4 Global Service Provider........................ 29
6.6 Forecasts............................................... 31
6.7 Changes and Default..................................... 32
6.7.1 Undesirable Conditions......................... 32
6.7.2 System Wide Failure............................ 33
6.7.3 Financial Related Defaults..................... 33
6.7.4 Default (other than for Sections 6.7.1,
6.7.2 or 6.7.3).............................. 34
6.8 Other Terms............................................. 35
6.9 Auditing Procedures..................................... 35
6.10 Primary Provider........................................ 35
6.11 Additional Services and Products........................ 36
6.12 Alternative Dispute Resolution.......................... 36
PART 7 -- MISCELLANEOUS........................................... 37
7.1 Publicity............................................... 37
7.2 Amendment............................................... 37
7.3 Counterparts............................................ 38
7.4 Entire Agreement........................................ 38
APPENDIX A-1....................................................... 39
<PAGE>
AMENDED AND RESTATED
SPLITROCK FULL SERVICE AGREEMENT
PREAMBLE
THIS AMENDED AND RESTATED SPLITROCK FULL SERVICE AGREEMENT, dated as of
February 16, 2000 (the "Agreement") is made by and between Prodigy
Communications Corporation ("Prodigy") and Splitrock Services, Inc.
("Splitrock"), a Delaware corporation, and shall become effective as of
January 1, 2000.
WHEREAS, pursuant to that certain Full Service Agreement, dated June 24,
1997, and thereafter amended May 18, 1999, by and between Prodigy and Splitrock,
as amended, the "Full Service Agreement", Splitrock acts as the primary provider
of network services to Prodigy on the terms and conditions set forth therein;
WHEREAS, Prodigy and Splitrock desire to amend and restate the Full Service
Agreement as set forth herein;
References throughout this Agreement to "you" and "your" mean Prodigy; and
references to "we", "us" and "our" mean Splitrock and its assignees. References
throughout this Agreement to "party" or "parties" mean either Prodigy or
Splitrock, as the context requires and unless otherwise defined except that
"third party" means anyone other than a "party". Reference is made to that
certain Definitive Agreement, dated as of June 24, 1997, and that certain
Transition Services Agreement between the parties dated June 24, 1997
("Transition Services Agreement") and that certain Sublease Agreement dated as
of June 24, 1997 ("Sublease Agreement") each by and between Prodigy and
Splitrock.
AGREEMENT
The parties hereto agree that the following provisions of this Agreement shall
be effective at 12:0l am (New York time) July 1, 1997: Part 1, Part 2, Part 5,
and Sections 6.5, 6.10, 6.11 and 6.12 and all other rights and obligations of
the Company and Provider herein shall only become effective as of the end of the
Transition Period (as hereinafter defined).
-3-
<PAGE>
PART 1 - GENERAL
- -------------------------------------------------------------------------------
1.1 DEFINITIONS
-----------
"Equipment" is a machine, including its features, conversions, upgrades,
elements, or accessories, or any combination of them. The term "Equipment"
includes Splitrock Equipment and any non-Splitrock Equipment we provide to
you, but excludes Programs.
"Materials" are work products (such as programs, program listings,
programming tools, documentation, reports, and drawings) that we may
deliver to you during a project. The term "Materials" does not include
Programs.
"Product" is a Program or Equipment.
"Program" is the following, including features and any whole or partial
copies:
1. machine-readable instructions;
2. a collection of machine-readable data, such as a data base; and
3. related licensed materials, including documentation and listings,
in any form.
The term "Program" includes a Splitrock Program and any non-Splitrock
Program that we may provide to you. The term does not include
licensed internal code or Materials.
"Services" as used herein describes the network services (not to include
satellite) we will provide, as more particularly described in Section 6.1.
In addition, any new service you request or additional service you request,
not already contemplated by this Agreement, and that we agree to provide is
not the subject of this Agreement until the terms, conditions and prices of
such service shall be confirmed in Transaction Documents. In addition,
Services provided to you hereunder shall include reports, surveys and
analysis reasonably required to fulfill the purposes of this Agreement, and
shall not be subject to any additional charge.
"Subscriber" is any user authorized to access basic Prodigy Classic or
basic Prodigy Internet (as they currently exist), regardless of whether
such user actually uses your services in any month or regardless of whether
or not you receive payment from that user.
"Subscriber Count" shall mean the total number of Subscribers, subject to
the limitations in this definitional paragraph. For Prodigy Classic,
multiple User Identifications
-4-
<PAGE>
associated with one Subscriber will count as one Subscriber in the
Subscriber Count. For Prodigy Internet, multiple User Identifications
associated with one Subscriber will count as one Subscriber in the
Subscriber Count, provided only one such User Identification per Subscriber
can access the Service at any one time. A Subscriber to both Prodigy
Classic and Prodigy Internet under the "Prodigy Combo Plan" will count as
one Subscriber in the Subscriber Count. Any Subscriber who is not capable
of accessing the Service shall not be counted in the Subscriber Count.
"System" is the Services and Products we provide together under this
Agreement that we identify to you as a System, which identification is in
writing.
"Transition Period" is the period from July 1, 1997 until the earlier of
(i) December 31, 1997 or (ii) on the effective date of a notice from
Provider stating that it intends to terminate the Transition Services
Agreement which effective date may only be the last day of a calendar
month.
"User Identification" is a code or codes which enable authorization or
access to programs, data or equipment through a Service.
1.2 AGREEMENT STRUCTURE
-------------------
Attachments
-----------
Some Services and Products have terms in addition to those we specify in
this Agreement. We will provide the additional terms in documents called
"Attachments," which are also part of this Agreement.
Transaction Documents
---------------------
For each business transaction, we will provide to you the appropriate
"Transaction Documents" before the transaction occurs that confirm the
details of the transaction, which Transaction Documents shall not be
effective against or in favor of either party, unless and until each party
agrees to each appropriate set of Transition Documents in writing.
Conflicting Terms
-----------------
If there is a conflict among the terms in the various documents, those of
an Attachment prevail over those of this Agreement. The terms of a
Transaction Document prevail over those of both the Attachments and this
Agreement.
Your Order
----------
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You may order a Service or Product in writing, including a request written
on paper and delivered to us and a request sent via facsimile to us.
Our Acceptance of Your Order
----------------------------
A Service or Product becomes subject to this Agreement when we accept your
order by sending you a Transaction Document which accepts expressly and
precisely the terms of the order.
Your Acceptance of Additional Terms
-----------------------------------
You accept the additional terms in an Attachment or Transaction Document by
signing it.
1.3 ELECTRONIC COMMUNICATIONS
-------------------------
You and we may communicate with the other by electronic means for
information purposes only, such as through electronic or Prodigy Mail. Any
electronic communication must be followed by written confirmation or
telecopied in order to be binding on either party. Documents which include
handwritten signatures may be transmitted by telecopier, and shall be
deemed binding without the need for original signatures. Nevertheless,
original signature copies are preferred.
1.4 PRICES
------
The following are the bases on which we may require the amount payable for
a Service or Product to be paid, with an example of each:
1. one-time (Service installation charges);
2. recurring (a periodic charge for Services);
3. a combination of both (an initial charge and a monthly license charge
for a Program); or
4. usage (network traffic charges).
We will specify the amount and basis for the particular Service or Product.
If additional Products or Services are added, the prices will be set forth
in a Transaction Document. Except as herein provided specifically, no
additional charges shall be imposed or incurred for Services which we are
obligated to provide under this Agreement.
-6-
<PAGE>
1.5 PAYMENT AND TAXES
-----------------
You shall pay:
1. usage and recurring charges according to Section 6.5.
2. all other charges when or after you incur them.
Amounts due are payable as we specify in the invoice which invoice shall be
consistent with the conflict hierarchy set forth in Section 1.2,
Conflicting Terms, or, with respect to dial up network services, as
provided in Section 6.5. You agree to pay accordingly. You agree to pay
any tax on the Services we provide to you. You are responsible for
personal property taxes for each Product that you purchase and each Program
that you license from the date we ship it to you or otherwise make it
available to you. "Taxes" as used in this Agreement shall not include any
FCC charges or other charges payable to any government organization other
than a taxing authority, all of which we shall pay.
1.6 PATENTS AND COPYRIGHTS
----------------------
For purposes of this Section only, the term "Product" includes Materials
alone or in combination with Products we provide to you as a System.
If a third party claims that a Product we provide to you infringes that
party's patent or copyright, we will defend you against that claim at our
expense and pay all costs, damages, and attorney's fees that a court
finally awards, provided that you:
1. promptly notify us in writing of the claim; and
2. allow us to control, and cooperate with us in, the defense and any
related settlement negotiations. At your option and at your cost, you
may retain counsel to advise you as you work with us.
If such a claim is made or appears likely to be made, we will take
reasonable steps, and you agree to permit us to do so, to enable you to
continue to use the Product, or to modify it, or replace it with one that
is at least functionally equivalent. If we determine that none of these
alternatives is reasonably available, you agree to return the Product to us
on our written request and we may terminate the affected Service at no
further charge to you, in which case we will refund to you the unused
prorata portion of any advance payments for the Service and/or the Product.
YOU AGREE THAT YOUR RIGHTS, AS PROVIDED BY THIS SECTION 1.6, REGARDING ANY
CLAIM OF INFRINGEMENT ARE LIMITED AND THE REMEDIES IN THIS SECTION WILL BE
YOUR SOLE AND EXCLUSIVE REMEDY FOR ANY SUCH CLAIM.
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Notice of Infringement
----------------------
All notices of patent or copyright infringement permitted or required by
this Agreement will be in writing and will take effect upon receipt.
Claims for Which We are Not Responsible
---------------------------------------
We have no obligation regarding any claim to the extent it is based on any
of the following:
1. your modification of a Product, or a Program's use with equipment and
programs other than the Equipment and Programs with which the Program
is designed to operate:
2. the combination, operation, or use of a Product with any product,
data, or apparatus that we did not provide unless we had written
notice and acknowledged in writing receipt of notice that the intended
use of the Product was for a use with a product, data, or apparatus we
did not provide; or
3. infringement by a non-Splitrock Product alone, as opposed to its
combination with Products we provide to you as a System.
1.7 LIMITATION OF LIABILITY
-----------------------
Circumstances may arise where, because of a default on our part or other
liability, you are entitled to recover damages from us. In each such
instance, regardless of the basis on which such party is entitled to claim
damages, we are liable only for:
1. payments referred to in our patent and copyright terms described
above;
2. bodily injury (including death), and damage to real property and
tangible personal property; and
3. the amount of any other actual loss or damage, in excess of $100,000
or the charges (if recurring or usage, 12 months' charges apply) for
the Service or Product that is the subject of the claim.
This limit also applies to any of our subcontractors, agents and
Program developers. It is the maximum for which we, our
subcontractors, agents and program developers are collectively
responsible.
-8-
<PAGE>
Items for Which Neither Party is Liable
---------------------------------------
Under no circumstances are either party or its subcontractors, agents or
Program developers liable for any of the following:
1. third-party claims against the other party for losses or damages
(other than those under the first two items listed in 1.7 above)
except for willful acts or acts of gross negligence;
2. loss of, or damage to, records or data except for any actual loss or
damage willfully and intentionally caused by the other party or caused
by gross negligence, subject to the limitation contained in Section
1.7(3) above; or
3. economic consequential damages (including lost profits or savings) or
incidental damages, even if either party is informed of their
possibility.
EACH PARTY AGREES THAT ITS RIGHTS ARE LIMITED BY THIS SECTION 1.7, THAT THE
LIMITATIONS PROVIDED HEREIN ARE FAIR AND EQUITABLE, AND EACH PARTY HEREBY
WAIVES ANY RIGHT OR REMEDY IT MAY HAVE FOR THE RECOVERY OF ANY OTHER
DAMAGES.
1.8 YOUR ADDITIONAL RIGHTS
----------------------
You may have additional rights under certain laws (such as consumer laws)
which do not allow the exclusion of implied warranties, or the exclusion or
limitation of certain damages. If these laws apply, our exclusions or
limitations may not apply to you.
1.9 CHANGES TO AND TERMINATION OF SERVICES
--------------------------------------
If a third party claims that a Product we provide as part of a Service
infringes a patent or copyright, we reserve the right to first substitute a
different Product, or alternatively to terminate the Service effective
immediately.
1.10 GEOGRAPHIC SCOPE
----------------
All of your rights, all our obligations, and all licenses are valid only in
the United States, including Hawaii and Alaska.
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1.11 GOVERNING LAW
-------------
This Agreement shall be governed by and interpreted under the laws of, any
action shall be brought in the state or federal courts located in, and any
arbitration proceeding shall be located in, the domicile of the party who
is an initial defendant or the party upon whom an initial demand for
arbitration is served.
1.12 NOTICE
------
All notices permitted or required by this Agreement will be sent to the
following address and will take effect upon receipt:
Prodigy Communications Corporation
44 S. Broadway
White Plains, New York 10601
Attention: President
Splitrock Services, Inc.
9012 New Trails Drive
The Woodlands, Texas 77381
Attention: President
1.13 TERM
----
The initial term of this Agreement shall be for a period of 54 months
("Initial Term") commencing on July 1, 1997 and continuing through December
31, 2001; provided, however, that the term of this Agreement shall be
automatically extended for one year on December 31, 2001 and on each
December 31 thereafter unless either party shall have given written notice
to the other at least one year prior thereto that the term of this
Agreement shall not be so extended.
1.14 FINANCIAL COVENANTS
-------------------
From the date hereof until June 30, 1999, we covenant and agree that we
will:
1. Financial and Other Information
(a) Annual Financial Reports. Furnish you not later than 90 days after
the close of each 1997 and 1998 calendar year a balance sheet as of
December 31, 1997 and December 31, 1998, statements of operations and
statements of cash flows for the period from inception through each
applicable period, and such other comments and financial details as are
usually included in similar financial statements. Such financial
statements
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shall be prepared in accordance with generally accepted accounting
principles and shall be audited by independent certified public accountants
of recognized standing selected by us and shall contain unqualified
opinions as to the fairness of the statements therein contained, shall be
unqualified in all other respects, and shall not contain any explanatory
language which makes reference to uncertainties such as: (i) going concern,
(ii) litigation or (iii) any other potential liabilities or impairment of
our assets.
(b) Quarterly Financial Statements. Furnish you not later than 45 days
after the close of each calendar quarter through June 30, 1999, beginning
with the quarter commencing July 1, 1997, financial statements containing
our balance sheet as of the end of such period and statements of operations
and cash flows up to the end of such period. These statements shall be
prepared on a basis consistent with our normal accounting practices and the
accuracy of the statements shall be certified as true by our chief
executive or financial officer.
(c) Payables. Furnish you not later than 45 days after the close of
each calendar quarter through June 30, 1999, beginning with the quarter
commencing July 1, 1997, a total of amounts which are due and payable and
have not been paid by their contractual due date, and a list of each
creditor to which payments over $25,000 are due.
(d) Taxes. Pay promptly and within the time that they can be paid
without interest or penalty, all taxes, assessments and similar imposts and
charges of every kind and nature lawfully levied, assessed or imposed upon
us, except to the extent being contested in good faith and furnish you
evidence of such payment on a quarterly basis within 45 days after the
close of each calendar quarter through June 30, 1999.
(e) Liens and Litigation. Through June 30, 1999, furnish you within
ten days of receipt of notice of any lien or lawsuit which is threatened or
pending against us and which involves a claim in excess of $100,000.
(f) Projections. Thirty days after we have received your forecasts
referenced in Section 6.6 hereof for each applicable quarter, we will
provide you with plans and projections for income, expenses, capital
receipt and expenditure, for the immediately succeeding fifteen (15) month
period. Included with the statements to be provided quarterly pursuant to
Section 1.14 (a)-(e) hereof, we shall also provide you with evidence of our
results as compared to past projections, which shall also be certified as
true by our chief executive or financial officer.
2. Insurance. Maintain valid and effective insurance policies that cover
our properties and risks of the business in such types and amounts as are
consistent with customary practices and standards of companies engaged in
businesses and operations similar to ours and furnish you not later than 45
days after the close of each calendar quarter through June 30, 1999,
beginning with the quarter commencing July 1, 1997, certificates evidencing
such insurance. After you receive such certificate, you may
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request that we obtain additional coverage, consistent with reasonable
business practices, which we shall obtain,.
3. [INTENTIONALLY DELETED]
4. Continuing Annual and Quarterly Reporting. The financial reporting
requirements of subsection 1.(a) and (b) hereof shall continue after June
30, 1999 if, at that time, our cash plus past due accounts receivable from
you less past due accounts payable less debt other than capital leases is
an amount less than $5,000,000.
1.15 HEADINGS The headings contained herein are inserted for convenience of
--------
reference only and are not intended to be part of or to affect the meaning
or interpretation of this Agreement.
PART 2 - RESPONSIBILITIES OF THE PARTIES
- -------------------------------------------------------------------------------
2.1 MUTUAL RESPONSIBILITIES
-----------------------
You and we agree that under this Agreement:
1. neither party grants the other the right to use its trademarks, trade
names, or other designation in any promotion or publication;
2. all information exchanged by both parties is nonconfidential unless
such information is conspicuously marked as confidential. Part 5 of
this Agreement describes confidentiality and our responsibilities for
handling data and information you transmit using the Services;
3. each party grants the other only the licenses specified. No other
licenses (including licenses under patents) are granted;
4. each party will promptly notify the other if it becomes aware of any
unsafe conditions or hazardous materials to which the other's
personnel would be exposed at any of its facilities;
5. NEITHER PARTY WILL BRING A LEGAL ACTION MORE THAN TWO YEARS AFTER THE
CAUSE OF ACTION AROSE UNLESS SUCH CLAIM IS AS A RESULT OF A THIRD
PARTY CLAIM, IN WHICH EVENT THE TWO YEAR PROVISION SHALL NOT APPLY;
and
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6. neither party is responsible for failure to fulfill its obligations
(other than payment obligations) due to causes beyond its reasonable
control, including without limitation, acts of God, war, riots,
blockades, insurrections, labor disputes, lockouts, earthquakes,
fires, storms, lightning, power failures, floods, natural disasters,
accidents, new or changed governmental regulations or laws, or other
similar events beyond the reasonable control of the party relying on
this provision of the Agreement ("Force Majeure").
2.2 OUR OTHER RESPONSIBILITIES
--------------------------
We will:
1. comply with all applicable laws regulations or conventions including
those related to data privacy, international communications, and
exportation of technical or personal data. You are responsible for
obtaining all necessary governmental regulatory or statutory approvals
for the offering of your services;
2. not assign, or otherwise transfer, this Agreement, or our rights or
obligations under it, or delegate our rights or your obligations,
other than to an affiliate, without your prior written consent which
consent will not be unreasonably withheld, provided, however, that we
will be able, without your consent, to assign any rights and delegate
any duties contained in this Agreement to any entity into which we may
be merged or consolidate or which purchases all or substantially all
of our assets.
3. obtain install and maintain suitable equipment as necessary to provide
the Services to you;
4. fulfill all regular activity and performance reporting and analysis,
including service disruption analysis, periodic audits, and attend and
participate actively in monthly status meetings which shall be held no
less frequently than monthly between the parties; and
5. be responsible for data, programs or other material that we provide
for use with the Service.
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2.3 YOUR OTHER RESPONSIBILITIES
---------------------------
You agree:
1. not to resell any Service, without our prior written consent, and any
attempt to do so is void. We expressly consent to your selling other
versions of your service at the retail level, but you may not
wholesale or resell our Service.
2. not to assign, or otherwise transfer, this Agreement or your rights
under it, or delegate your rights without our prior written consent,
which consent will not be unreasonably withheld, provided however,
that you will be able, without our consent, to assign this Agreement
or to assign any rights or delegate any duties contained in this
Agreement to Prodigy Communications Limited Partnership (an operating
limited partnership of Prodigy Communication Corporation and SBC
Communications, Inc.) an affiliate of yours.
3. to allow us to install mandatory engineering changes (such as those
required for safety) on Equipment.
4. that you are responsible for the results obtained from the use of the
Services and Products.
5. to provide us with sufficient, and safe access to your facilities for
us to fulfill our obligations during reasonable hours and under such
conditions as you may reasonably impose.
6. to control and be responsible for issuance of User Identifications and
their distribution to Subscribers.
7. to comply with all applicable laws, regulations or conventions
including those related to data privacy, international communications,
and exportation of technical or personal data. You are responsible
for obtaining all necessary governmental, regulatory, or statutory
approvals for your use of the Services.
8. to provide us terminal access to your network management system so
that we can determine the operating status of each modem and
component.
9. to be responsible for data, programs, or other material that you
provide for use with a Service.
10. that we have no liability to those whom you authorize to access a
Service.
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11. that we are not responsible for any data, or text, including the
content, and including its accuracy, which is received, routed or sent
as a result of the Services we provide hereunder.
12. that we are free to enter into any agreements with third parties that
are similar or dissimilar to this Agreement without your consent or
approval.
13. to take reasonably necessary actions to reduce network demand,
including without limitation, ensuring that all timed-out features are
fully effective and operating, performing routine and aggressive
audits of network services to eliminate "fraud", and encouraging
Subscribers to read and compose e-mail offline.
14. to terminate all Services related to Prodigy Classic no later than
December 31, 1998. Upon the termination of all such Services, any and
all provisions contained herein relating specifically to Prodigy
Classic, including but not limited to the definition of a Prodigy
Classic Subscriber and the operation and maintenance of Prodigy
Classic related equipment, shall terminate.
PART 3 - WARRANTIES
- --------------------------------------------------------------------------------
3.1 WARRANTY FOR SERVICES
---------------------
For each Service, we warrant that we will perform it:
1. in a workmanlike manner consistent with industry standards,
2. according to its current description contained in this Agreement, an
Attachment, or a Transaction Document, and
3. in a manner so that the Service and the network shall be compatible
with your equipment.
OTHER THAN AS EXPRESSLY PROVIDED HEREIN, WE DISCLAIM ALL WARRANTIES,
INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NON-INFRINGEMENT.
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3.2 ITEMS NOT COVERED BY WARRANTY
-----------------------------
We do not warrant uninterrupted or error-free operation of a Service or
Product.
We will specifically identify our Services and Products that have a
warranty, other than as described in this Part 3, and the terms of that
warranty.
Unless we specify otherwise, as set forth in this Agreement, including
Section 3.1, we provide Materials, non-Splitrock Services and non-Splitrock
Products on an "AS IS" basis without any warranty from us. However, non-
Splitrock manufacturers, suppliers, or publishers may provide their own
warranties to you.
PART 4 - EQUIPMENT PROVIDED BY SPLITROCK
- --------------------------------------------------------------------------------
We may provide Equipment to be installed on your premises for the purpose
of providing a Service. The Equipment is and will remain our asset or that
of our lessor, and will not become a fixture or realty.
Certain Equipment may contain licensed internal code. We will identify
this Equipment to you.
No right, title, or interest in or to the Equipment, or licensed internal
code associated with it, or any related planning information, is conveyed
to you. However, we will use such Equipment to provide Services to you.
PART 5 - CONFIDENTIALITY
- --------------------------------------------------------------------------------
We agree not to disclose your confidential information, including programs
and data transmitted using the Services and usage forecasts as described in
section 6.6, nor shall we disclose your customer's private information,
such as name, address, credit card or other information which may be
transmitted using the Service. However, we have no obligation of
confidentiality relating to your information which is not confidential or
which you do not conspicuously mark as confidential. We acknowledge that
all of your customer information, and information about your individual
customers is confidential. Information that is not confidential includes
information which is:
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1. either currently publicly available or becomes publicly available in
the future without our breach of any obligation or responsibility
described in this Agreement;
2. rightfully received by either you or us from a third party, where the
information was received without any obligation of confidentiality
associated with it;
3. already in our possession without an obligation of confidentiality;
4. independently developed by us;
5. approved for disclosure by you; or
6. treated by you as nonconfidential.
We also have no liability for any disclosure of information that occurs as
the result of our delivery of your information, at your direction and to a
recipient you designate, when the delivery is made in the normal course of
Service provision (for example, to an incorrect delivery address provided
by you to us). We may disclose information to the extent required by law,
but will give you as much advance notice of such potential disclosure as
reasonably possible.
Handling of your information
----------------------------
We will handle your information marked confidential in a confidential
manner, and you will not permit our confidentially marked information to be
disclosed.
You are responsible to develop and maintain procedures (apart from the
Services) to protect your information.
We will allow you to audit our security procedures to ensure that they are
reasonable and customary, and will notify you of any material security
breach that affects the Services. You agree that any information regarding
our security systems will be our confidential information.
For the purposes of operation and maintenance, we may use, copy, store, and
distribute internally your information but only to the extent necessary for
such operation and maintenance. We shall have no such rights with respect
to your customer information, or with respect to information about your
customers. We agree not to reverse assemble or reverse compile your
information. We will use reasonable procedures, but we do not guarantee
that these procedures will prevent the loss of, alteration of, or improper
access
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to, your information. You agree that access to your information will not
prohibit or prevent us from developing or marketing any Service or Product.
For transmission carried over interexchange carriers' and local exchange
carriers' facilities, we are not responsible for transmission errors, or
corruption or security of data.
PART 6 - SPLITROCK SERVICES
- --------------------------------------------------------------------------------
6.1 DESCRIPTION
-----------
We will provide you network services consisting of the following
components:
. Dial access network as described in Section 6.1.1
. ATM backbone network as described in Section 6.1.2
. Regional Servers connectivity as described in 6.1.3
. Network Management and Proxy Servers as described in Section 6.1.4
6.1.1 Dial Access Network
-------------------
We will provide to you dial access for data transport for your Subscribers
as described in this Agreement as a "Service". We will provide this
Service to you in all locations in which, on the effective date of this
Agreement, such dial access service already exists. You agree to provide
to us a list of current dial access locations, which list shall be Appendix
"A" to this Agreement. Effective March 15, 2000 or at such time within 60
days thereof as may be agreed upon, the Service provided at dial access
locations identified on Appendix "A-1" will be discontinued.
We may substitute a new site for an existing location upon 30 days prior
notice of change, with 60 days simultaneous usage. You may request new
sites to exceed an 80% coverage, by population, for local dial access; but
we will not be obligated to provide dial access Service in any new dial
access location with usage in any month of less than 5,000 dial hours
unless we review the location for the new site and approve the creation of
a new site at such location, in our sole discretion. We can modify the
site coverage only with your permission, unless the modification is for a
substitution of existing coverage, in which case we do not need your
permission. Any new sites added by us for Services will be available to
you if you choose to use them.
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The data traffic dial access Service shall include the receipt of inbound
data dial traffic from your Subscribers and the muting of such traffic to
another Subscriber, to a proxy server, to a regional server, to your data
center at Yorktown or to the selected Internet Network Access Points
("NAP"). We will not support initiating a call to another Subscriber's
telephone.
We shall, in our sole discretion, decide the number of dial ports we
provide to serve each site, as well as the method we use to provide Service
to each site provided the grades and standards of service as set forth in
this Agreement are met. Examples of methods we may use to provide this
Service include:
. a physical site presence with modem ports; or
. a virtual presence using call forwarding or a foreign exchange.
All new access equipment provided by us will have speed capacity with
respect to backbone access, and with respect to Subscriber access,
consistent with the service that can and will be provided from that site.
For example, we will not install equipment with a speed higher than the
existing line infrastructure can support, except we acknowledge that we
shall install 56K capable bps modems, although current FCC regulations
prohibit transmission at speeds in excess of 53K bps, and, other conditions
beyond our control may decrease the actual connection speed.
Specifically identified protocols to be supported include Serial Line
Internet protocol (SLIP), Prodigy Link Level Protocol (PLLP), and Point-to-
Point Protocol (PPP).
We shall be responsible for.
. inbound communication facilities (such as hunt groups, measured
business lines or DID trunks);
. modem hardware including ports and chassis; and
. network equipment and communications facilities to transport traffic
from our dial site to other sites, to your data center at Yorktown
and the seven NAPS.
We shall transport the dial data traffic to you via TCP/IP over ATM. We
will not change the terms or conditions of a Service without your approval,
which you agree will not be unreasonably withheld.
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6.1.2 ATM Backbone Network
--------------------
The Splitrock ATM backbone network will be operational on or before
December 31, 1997 and will be based on the Yurie LDR200/50 ATM switches or
similar ATM switches. This network is based on ATM switches, supporting
TCP/IP protocol for Prodigy Classic and Prodigy Internet services. Prodigy
Classic transmission which requires SNA will be encapsulated as TCP/IP.
Each dial access site will be upgraded with a LDR200, LDR50 or similar ATM
switch. A backbone transmission facility based on ATM protocol will
interconnect the dial access sites to Yorktown, New York. Since the Yurie
ATM switches use standard ATM protocol, the interconnections can be a
mixture of FT1, T1, T3 and OC-3 or publicly available switched ATM
services.
Effective July 1, 1997 but subject to the Transition Services Agreement, we
shall also provide, maintain and manage sufficient bandwith connections to
Yorktown, New York to support the Service Level Objectives in Section 6.2.
The transmission facilities may be DS-3, OC-3 or other appropriate
transmission services available at the time. The transmission facilities
will be terminated by a LDR200 and Centillion C100 combination or
equivalent provided by us at your Yorktown facility. The transmission
facilities will be diversely routed and fully separated and connect to you
via selected routers. The two Splitrock C100s will connect to existing
Prodigy 6611 or equivalent routers, which support the Prodigy internal LAN
at Yorktown.
The Equipment we provide at Yorktown will be installed on your premises
solely for our use in providing our Services. This Equipment is provided
under the terms specified in the Section "Equipment We Provide."
In addition, at locations selected by us agreed, we will provide
interconnection of the network to the Internet via DS3 to suitable NAPS.
This will provide bandwith between the NAP and Yorktown as well as between
the NAP and the dial up user. We will have the sole right to select the
choice of the NAP provider at each location. You will be responsible for
complying with all protocol requirements for layer 3 and above as set forth
by the NAP providers that we select.
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6.1.3 Regional Servers
----------------
You may provide, maintain and manage regional servers at sites determined
by you which are to be geographically dispersed and co-located at our
network hub sites; such equipment is limited to that which may only be
installed in one standard 19" rack per site ("Regional Servers"). You
shall provide, maintain and manage diagnostic equipment, connection
equipment that you may use to connect to us and associated analog phone
lines which you may use to manage your Regional Servers. In addition, you
shall provide the electric power cables and the equipment connection cables
for the equipment you provide, including those cables, required to connect
your equipment to our network equipment. You also agree to comply with all
safety requirements at each site. Each Regional Server will be EtherNet
connected to our network. Neither we nor any other customer of ours shall
use your Regional Servers for any purpose except to support Prodigy Classic
and Prodigy Internet. We shall provide you with access to our sites for
purposes of maintaining, upgrading and servicing these Regional Servers at
no additional cost to you.
You are responsible for separately procuring from us the upstream
connection from the Regional Server. The upstream connection is defined as
the network facilities used to transport traffic from the Regional Server
to locations other than the source dial node (such as Yorktown or the
Internet). Cost for such services will be as provided in Section 6.5.2
section 2 of this Agreement
The Regional Servers will not be included in the service level objectives,
as provided in Section 6.2.
6.1.4 Network Management and Proxy Servers
------------------------------------
Network Management
------------------
We will maintain TINA until we replace it with a new network management
system which encompasses all TINA functions. You will make available to us
the mainframe computer resources necessary to run TINA for the purpose of
managing the network at no cost to us. We will provide you read only
terminal access to TINA and any other network management system used by us
so that you can determine the operational status of any modem or network
component.
Proxy Servers
-------------
We will assume your existing Unix servers and all hardware and software
maintenance costs as they directly relate to proxy functions. These
servers will be placed at our hub and peering sites. We will also provide
for a fee additional new Unix based servers at
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hub sites when needed and requested by you. Unix based servers will not be
supported at all POP sites.
We intend to use Windows NT based servers for the POP sites and for future
hub sites for the proxy server functions.
6.2 SERVICE LEVEL OBJECTIVES
------------------------
We will have four service level objectives for both Prodigy Internet and
Prodigy Classic:
1. Site Dial Grade of Service (SDGS) objective of P.01 during the peak or
busiest hours of the day (We will use your algorithms in effect as of
June 23, 1997 for purposes of measuring the SDGS and Grade of Service);
2. Site System Availability (SSA) objective of 99.5%;
3. Overall System Availability (OSA) objective of 99.5%; and
4. Transit Delay (TD) objective average of 100 milliseconds or less 95%
of the time and 150 milliseconds or less 99% of the time, however, TD
objective average for Alaska and Hawaii is 300 milliseconds. (We will
use your algorithms in effect as of June 23, 1997 for purposes of
measuring the TD and Grade of Service)
NOTE: A P.01 Grade of Service means that no more than 1% of calls are
denied access during the peak busy hour of the weekly measured period. A
P.03 Grade of Service means that no more than 3% of calls are denied access
during the peak busy hour of the weekly measured period.
We shall measure each of the objectives, other than SDGS, on a monthly
basis and shall provide you with a report of such measured objectives by
the 10th business day of the following month, unless otherwise agreed
between the parties.
6.2.1 Site Dial Grade of Service (SDGS) Objective
-------------------------------------------
We shall measure and report the weekly Site Dial Grade of Service for each
site. If the SDGS, measured weekly, falls below P.03 for a site in two
consecutive weeks, we shall have four additional weeks to improve the
performance. If, during this four week period, the measured SDGS is not
improved above P.03 with the intent to meet the P.01 objective, then we
shall provide you a credit of $1,500.00 for each four week period
thereafter for that site until such time as the measured SDGS is improved
above P.03.
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Except for your right of termination as provided for in Section 6.7.1, this
is your sole remedy for our failure to meet the SDGS objective.
Grade of Service reductions which are caused by, related to or extended as
a result of your actions, or Force Majeure shall not be considered in the
estimation of the monthly SDGS.
Should you supply an invalid forecast (see Section "Forecasts"), then the
SDGS objective will not be applicable for that period.
6.2.2 Availability Objectives
-----------------------
The components of the availability objective calculations shall include the
components provided by us. The OSA rate and the SSA rate shall be
represented as a percentage of the time the components are actually
available, as compared to the scheduled time of availability.
The SSA shall be defined as the monthly availability of the Service
components for a single site including the modem and server components at
the site, and network connections from the site to Yorktown. We shall
measure and report the monthly site availability, and deliver such report
to you no later than the 10th business day after the month of testing.
We will measure and report site availability by sending a 56 byte message,
called a sample ping, to the modem chassis and to the servers from a
Splitrock network monitor in Yorktown on a periodic basis, but no less than
every 10 minutes. The ping sampling interval is subject to change over
time but in no event shall it be more than 30 minute intervals. If a
positive response is received to the ping, then the site is considered
available for that ping period. We will issue one retry (or effectively do
the retry using another function) if an initial negative response is
received. If a positive response is received on the retry then the site is
considered available for that ping period. If a negative response is
received from the initial ping and the retry, then the site is considered
unavailable for that ping period.
The SSA rate calculation shall be:
. the Total Scheduled Minutes of Availability for the site;
. minus the Total Unscheduled Outage Minutes for the site;
. divided by the Total Scheduled Minutes of Availability for the site.
(Total Scheduled Minutes of Availability)-(Total Unscheduled Outage Minutes)
- ----------------------------------------------------------------------------
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(Total Scheduled Minutes of Availability)
The Total Scheduled Minutes of Availability for a site is defined as
the total minutes in the measurement time period minus the total minutes of
outages which are not due to unscheduled outages during the measurement
time period.
Total Unscheduled Outage Minutes include outages due to
telecommunication facilities (carrier outages), loss of electrical power,
hardware, operations, software and design problems except for:
1. scheduled network maintenance and scheduled outages;
2. outages caused by, related to, or extended as a result of your
actions; and
3. outages due a Force Majeure event.
If the SSA rate for a specific site, measured monthly, falls below
98.5%, we shall take immediate and necessary action to improve the
performance. If the measured SSA rate for the site is not improved above
98.5% with the intent to meet the 99.5% objective within the next two
months, we shall provide you a credit of $1,500.00 for each month
thereafter for that site until such time as the measured SSA rate is
improved above 99.5%.
Except for your right of termination provided for in Section 6.7.1,
this is your sole remedy for our failure to meet the SSA objective.
The OSA objective is defined as the combined availability of the
Service components, including the modem and server components, and network
connections to Yorktown. The OSA rate shall be an average of all the SSA
rates. We shall measure and report the monthly OSA.
If the OSA rate, measured monthly, falls below 98.7%, we shall take
immediate and necessary action to improve the performance. If the measured
OSA rate is not improved above 98.7% with the intent to meet the 99.5%
objective within the next two months, we shall provide you a credit of
$25,000.00 for each month thereafter until such time as the measured OSA
rate is improved above 98.7%. Except for your right of termination
provided for in Section 6.7.1, this is your sole remedy for our failure to
meet the OSA objective.
We shall be allowed a system-wide weekly maintenance window. The
weekly maintenance window shall occur initially Sunday mornings from 3:15
to 4:45 Eastern time. This initial period may be changed upon your prior
written consent. Additionally, there shall be an allowance for scheduled
outages at each site for us to perform maintenance/upgrade work: allowing
each site two outages annually each up to three
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hours in duration. We shall provide you with advance notice of sites
scheduled for upgrade/maintenance activity, and we shall use reasonable
efforts to schedule such upgrade/maintenance activity for a time other than
5 pm to midnight, local site time.
We shall review anticipated changes in the network maintenance window
with you. You and we shall cooperate to accommodate a necessary change in
the network maintenance window and the business impact on you.
We shall not be precluded from performing unscheduled maintenance as
we may deem necessary. In such instances we will use reasonable efforts to
notify you at least 48 hours in advance. For purposes of the SSA and OSA
rate calculations, these will be considered unscheduled outages.
6.2.3 Transit Delay
-------------
The TD is represented as the actual time for a 56 byte message, called
a sample ping, to travel round trip between two specific routers in the
network under normal prime time conditions.
Using the sample ping referred to in Section 6.2.2, we will measure
the TD on a periodic basis, but no less than every 10 minutes. The ping
sampling interval is subject to change over time but in no event shall
exceed 30 minutes. We will average all the samples in a given month to
determine the overall average TD, and will report that to you.
If we fail to meet the monthly TD objectives, you will notify us in
writing. If we continue to fail to meet the TD objectives for two months,
then we shall provide you a credit of $25,000.00 for each month thereafter
until such time as the measured TD meets the objectives. Except for your
right of termination provided for in Section 6.7.1, this is your sole
remedy for our failure to meet the TD objectives.
In an instance where the monthly forecast for 20% of the sites is
invalid, then the TD objective shall not be applicable for that period.
6.3 OUR OTHER RESPONSIBILITIES
--------------------------
We will:
1. provide you with a number for your operations group or customer
service group to contact our help desk support, which shall be
available 24 hours a day, 7 days a week, and staffed adequately to
handle all inquiries within 60 seconds of receipt;
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2. provide you with standard monthly, or in the case of SDGS weekly,
reports that we produce that are related to the Services provided
under this Agreement, including reports describing the results of the
tests for each of SDGS, SSA, OSA and TD, and reports relative to
availability and traffic statistics within ten days of the end of the
immediately preceding month, which reports will show by site, the
total connect hours, time of peak busy hour per site, average peak
busy hour percentage and distribution of traffic by hour of day;
3. provide you with a monthly report detailing the status of network
upgrades and expansions within ten days of the end of the immediately
preceding month;
4. maintain the components, programs, equipment and materials we provide
under this Agreement; and
5. provide you with read only terminal access to our network management
system so you can verify operational status of all network modems and
components.
6.4 YOUR OTHER RESPONSIBILITIES
---------------------------
You agree:
1. to be responsible for supporting your Subscribers directly through
your help desk. Your operations group or customer service group will
contact our help desk in regard to any reported problems with the
Service being provided by us;
2. to be responsible for ensuring that your software can and will log-off
each Subscriber after no activity by each Subscriber for 30 minutes
("Time Out Function");
3. to be responsible for ensuring that for Prodigy Internet Services your
software will not allow multiple User Identifications associated with
any Prodigy Internet Subscriber to gain simultaneous access to the
Services ("Simultaneous Prohibition Function"); and
4. upon written request by us audit each of the Time Out Function and
Simultaneous Prohibition Function up to five audits per each 12 month
period. Within 15 days of receiving a written audit request you will
delivery a written audit report to us. If the audit shows
noncompliance with the Time Out Function or Simultaneous
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Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omission.
Prohibition Function, as the case may be, the Maximum Monthly Usage
Charge (as provided in Section 6.5.1) shall not be applicable to any
time period from the date of the last audit showing compliance until
the date you cure such noncompliance.
6.5 CHARGES
-------
6.5.1 Monthly Usage Charges
---------------------
With respect to usage, you agree to pay us for the Services based on the
total number of monthly connect hours of your Subscribers using the
Services times the applicable rate per hour in the following schedule (the
"Hourly Usage Charge"), subject to the Minimum Monthly Usage Charge (lower
limit) described below
Hourly Usage Charge Rate Schedule:
January 1, 2000 through December 31, 2001 [**] per hour
You will pay us the greater of the applicable Hourly Usage Charge or the
Minimum Monthly Usage Charge.
Minimum Monthly Usage Charge:
$4,000,000 per calendar month for the period from July 1, 1999 through June
30, 2000
$4,500,000 per calendar month for the period from July 1, 2000 through
December 31, 2001
In any month, if the Hourly Usage Charge is not equal to or greater than
the applicable Minimum Monthly Usage Charge, you agree to pay us the
applicable Minimum Monthly Usage Charge as set forth above.
For example (assumption: no other amounts were due)
Hourly Usage Charge:
[**] times Total Number of Hours
If in January 2000 your actual total connect hours were
15,000,000, the Hourly Usage Charge for July would be [**]
times 15,000,000 = [**]
Minimum Monthly Usage Charge:
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Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omission.
The Minimum Monthly Usage Charge you will be required to pay
for Subscriber connect services is set forth in the
paragraph above.
January 2000: $4,000,000.
For purposes of determining connect hours, the sequence of a call is as
follows: The dial port goes off hook, modem synchronization, protocol
management, call routed, Prodigy authentication, session live while user
performing tasks, user initiates end of session or the session otherwise
ends, eventually resulting in modem off-line and session termination
(carrier dropped). We will aggregate the total time of all calls, rounded
up by city to the nearest hour. The length of each individual call will be
calculated from the time the port goes off hook to session end (modem off-
line), rounded up to the nearest second.
6.5.2 Other Monthly Charges
---------------------
In addition to the charges provided in Section 6.5.1 above, you agree
to pay us each month for the following, which is dedicated for your
exclusive use and provided you approve of such use in writing:
1. for each NAP connection at a rate of [**] per month for each DS3
connection, at our choice of location, as are necessary for supporting
your Subscribers,
2. for all remote and proxy server connections at a rate of [**] per
month for each EtherNet connection at each remote and proxy server
location,
3. for servers which you require in addition to those installed as of the
date hereof, an amount for the acquisition, installation, operation
and maintenance of hardware and software for such server, at our total
cost plus 10% (including applicable sales tax).
4. If you ask usor no later than August 31, 1997 to assume or provide any
network related service obligations, not specifically disclosed in
this Agreement, including its Exhibit and Schedules ("Supplemental
Obligations"), we will assume such Supplemental Obligations in
consideration for payment to us of our total cost plus 10% (including
applicable sale tax); provided that, such cost plus 10% pricing shall
not, be applicable to any increase or variations in Supplemental
Obligations, and the parties shall mutually agree on pricing for any
such increase or variation.
6.5.3 Payment Terms
-------------
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Except as provided in the Transition Services Agreement while it is in
effect, you agree to pay us the applicable Minimum Monthly Usage Charge
(plus any other fixed charges) by the end of the calendar month that we
provide the Service, whether or not you receive an invoice for such
charges, and to make payments to us by wire funds transfer or other
mutually agreed to electronic means to an account specified by us. For all
other charges, we shall make reasonable efforts to provide invoices on or
before the tenth day of the month following the monthly period being
invoiced and you agree to pay such invoices within 30 days of the invoice
date. If you do not make payments to us by their applicable due dates, you
agree to pay us a service charge equal to the lesser of 1.5% per month or
the maximum allowable rate under applicable law on each unpaid amount. You
agree to pay charges for all Service usage you or Subscribers incur by any
means, including providing a User Identification to access a Service. You
are responsible for charges and damages resulting from misuse of User
Identifications.
Applicable taxes, such as sales, use or excise taxes are not included
in the above charges, and you will be invoiced for taxes payable by you but
required by law to be collected by us, but taxes shall not include line
access or similar telecommunications based charges. We shall be
responsible for payment of sales, use, property and other taxes on
machines, software, or goods and services used or furnished by us for our
own use in providing the Services to you. All taxes incurred in connection
with our upgrading of the network to ATM switching, or any other upgrade,
whether mandatory or voluntary, shall be our sole responsibility.
You shall be responsible for sales, use, property and other taxes on
machines, software, or goods and services provided by you.
All pricing for dial access covers speeds up to 56K bps. All pricing
of higher speed Service is subject to negotiation and agreement between the
parties.
6.5.4 Global Service Provider
-----------------------
1. Sixty days after receiving a written request from Prodigy that it
provide separated billing to satisfy regulatory requirements
implicated by Prodigy's merger with or acquisition by a company that
owns Bell Operating Companies, Splitrock will begin showing separate
line items on the bills that it conveys to Prodigy. The first line
item will be for inter-LATA information services and any underlying
inter-LATA telecommunications that Splitrock may be providing. The
second line item will be for all other services rendered to Prodigy
by Splitrock.
2. Splitrock will determine what proportion of its services are
attributable to inter-LATA information services and any underlying
telecommunications, and will
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Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omission.
communicate to Prodigy the formula that Splitrock uses in making that
determination so that Prodigy can reflect that allocation on bills
that Prodigy renders to Prodigy's end user customers.
3. Prodigy may direct Splitrock to offer its inter-LATA information and
underlying telecommunications for resale by a third-party global
service provider, with the understanding that this third-party global
service provider will then bill Prodigy's end users for its global
service provision through Prodigy's billing mechanism. Under this
billing method, the bills that Splitrock renders to the third-party
global service provider will be payable by the global service provider
within three days, and Splitrock may require Prodigy to purchase such
accounts receivables at full face value within four days after
Splitrock renders such bills to the third-party global service
provider.
4. Alternatively, if Prodigy and Splitrock mutually agree, Splitrock
may bill Prodigy's end users for inter-LATA information services and
any underlying telecommunications, using Prodigy as a billing agent
who will direct-bill its end users for such services and remit the
amounts billed to Splitrock. When using this billing method, Splitrock
may in its sole discretion direct Prodigy to purchase at face value
all accounts receivables that will be owed to Splitrock by Prodigy's
customers at the end of each current monthly billing cycle. Splitrock
may require Prodigy to purchase such accounts receivables within three
days after Splitrock renders its bill to Prodigy for such services.
Prodigy may list Splitrock's inter-LATA charges as a separate line
item on a combined monthly bill that Prodigy sends to end user
customers, and may identify Splitrock as a global service provider
providing inter-LATA information services and underlying
telecommunications.
5. Splitrock will independently determine the price for its provision of
inter-LATA information services and underlying telecommunications;
however, the overall amounts that Prodigy pays Splitrock every month
will be the greater of the following two amounts:
a. [**] multiplied by the number of hours of Splitrock's service
used by all Prodigy end user subscribers or Prodigy personnel or
agents of Prodigy, or
b. Four million dollars ($4,000,000.00) for each month ending after
the execution date of this agreement through the month ending on
June 30, 2000, and four and one-half million dollars
($4,500,000.00) for each month thereafter through the month
ending on December 31, 2001.
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Confidential materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omission.
5. The effects of these provisions are illustrated by the following
example:
18,695,652 Number of hours in hypothetical month
[**] Overall amount that Prodigy must pay to Splitrock [**] times
18,695,652.
[**] Amount ascribed by Splitrock to inter-LATA information services
and underlying telecommunications and billed as such to end
users, as a separate line item on bills rendered to end users by
Prodigy or a third-party global service provider (allocation may
vary in Splitrock's sole discretion)
[**] Amount collected by Prodigy or a third-party global service
provider from end users for inter-LATA information services and
underlying telecommunications (assumes that [**] of [**] is non-
collectible)
[**] Amount that Prodigy pays Splitrock for its accounts receivable
from end users or a third party global service provider (i.e.,
Prodigy absorbs cost of non-collectibles)
[**] Amount that Prodigy pays Splitrock for all services other than
inter-LATA informations services and underlying
telecommunications ([**] minus [**])
[**] Total amount that Prodigy pays Splitrock for this hypothetical
month's usage ([**] for inter-LATA information services and
underlying telecommunications plus [**] for other services)
6.6 FORECASTS
---------
At the beginning of each quarter, you shall supply us with a rolling 15-
month forecast consistent with your business model:
1. hours of traffic for each site for each month of the forecast,
2. time of peak busy hour for each site,
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3. average peak busy hour percentage for each site for each month of the
forecast,
4. distribution of traffic by hour of day across all sites, and
5. average session length across all sites.
We shall use this information to perform capacity planning for the Services
provided under this Agreement.
For purposes of determining if a forecast is valid or invalid, the fourth,
fifth and sixth month of a forecast shall be recorded and saved and then
compared against the actual. The forecast for the specified month compared
against the actual is valid if the actual peak hours are no more than 15%
greater than the forecasted peak hours. If the actual peak hours are more
than 15% greater than the forecasted peak hours, then the forecast for the
month is invalid and the SDGS objective does not apply for that month. For
any month in which a forecast is invalid, we shall not be responsible for
SDGS or TD objectives for the subject forecast period.
6.7 CHANGES AND DEFAULT
-------------------
6.7.1 Undesirable Conditions
----------------------
If any of the following undesirable events occurs for two consecutive
months or four months out of a twelve-month period, you may terminate this
Agreement upon 45 days written notice to us ("Notice of Termination"):
SDGS below P.05 for 30% or more of the sites
SSA below 95% for 30% or more of the sites
OSA below 95%
TD above 250 millisecond monthly average, and 500 milliseconds monthly
average for Alaska and Hawaii.
For SDGS and SSA undesirable condition calculations, a site is deemed
to be meeting its service level objective during any period of time when
the corresponding service level objective is not applicable. For OSA and
TD, an undesirable condition shall not apply during any period of time when
the corresponding service level objective is not applicable.
If you desire to terminate this Agreement because of any of the
foregoing undesirable conditions, you must give us a Notice of Termination
within 30 days of receiving the monthly report that gives rise to your
right of termination. If you do not exercise your right of termination
within such 30 day period and in the next month the applicable undesirable
condition no longer exists, then you waive any right of termination for the
applicable time period and this Agreement shall remain in full force and
effect.
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Upon Notification of Termination, we shall provide reasonable
transition assistance to you, for a period of up to six months, and no
termination adjustment charge or service level credits shall apply, nor
shall any Minimum Monthly Usage Charges apply after the effective date of
termination.
6.7.2 System Wide Failure
-------------------
If 50% of the point of presence sites are failing to provide access or
Services for forty eight consecutive hours, then you have the right to
enter our premises to operate our network assets and direct our employees,
as is necessary to cure such failure, and we shall reimburse you for any
reasonable expense you incur in doing so. We will cooperate with your
efforts in restoring service to the network. You shall also have the right
to terminate in accordance with the termination provisions within Section
6.7.1.
6.7.3 Financial Related Defaults
--------------------------
The occurrence of any of the following events shall constitute an Event of
Default (herein so called) hereunder:
1. If we shall fail to perform any of our obligations and covenants under
Section 1.14; or
2. If you, in good faith, after reviewing any document or report required
to be delivered under Section 1.14, believe that there has been a
material and adverse change in our business operations and conditions,
financial or otherwise, which in your reasonable opinion will have a
materially adverse effect upon the operations, business, property,
assets, financial condition or credit of us or you.
Remedies
--------
Upon the occurrence of an Event of Default in this Section 6.7.3, you shall
have the right, at your option, to initiate an alternative dispute
resolution by the procedures set forth in Section 6.12. If the dispute is
not resolved by mediation, the arbitrators will be instructed to determine
whether or not we, in their judgement, are capable of performing our
obligations under this Agreement. A decision shall be rendered within three
days of the conclusion of mediation or arbitration, as appropriate.
We will respond within three business days to any reasonable request for
information made by the arbitrators.
If the arbitrators' judgment is that we are not capable of performing our
obligations under this Agreement for the twelve month period after the
arbitrators render their decision, then you shall have the right, in your
sole discretion, to elect either (i) to terminate this
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Agreement, without penalty, and to be relieved of the Minimum Monthly Usage
Charges, or (ii) to enter our premises to operate our network assets and
direct our employees to the extent necessary to operate the network until
the end of the Initial Term of this Agreement, and we shall reimburse you
for any reasonable expenses you incur in doing so.
6.7.4 Default (other than for Sections 6.7.1, 6.7.2 or 6.7.3)
-------------------------------------------------------
This Section 6.7.4 applies to defaults, other than for the events
described in Sections 6.7.1, 6.7.2 and 6.7.3.
In the event that either party materially defaults in the performance
of any of its duties or obligations under this Agreement (other than your
failure to make timely payments due to us) and does not substantially cure
such default within 60 days after being given written notice specifying the
default, then the party not in default may, by giving written notice to the
defaulting party, terminate this Agreement (herein termination "for
cause").
In the event you do not make any payment of the Minimum Monthly Usage
Charge or Hourly Usage Charge due to us on the due date, then we may
terminate this Agreement 45 days after we give you written notice of such
default and provided that we did not receive good funds for such overdue
payment within the 45 day time period. In the event that you do not make
any other payment due to us within 30 days of your receipt of an invoice,
and such failure is not remedied within 60 days after we give you written
notice of nonpayment (the "Cure Period") then we may terminate this
Agreement upon the expiration of the Cure Period.
In the event that you are in default (for reasons other than failure
to make timely payments due to us) and we elect to terminate this
Agreement, then you may request an extension of this Agreement of up to six
months as a transition period, provided that we, in our discretion, agree
to provide such an extension.
In the event that you terminate this Agreement because we are in
material default for reasons other than as described in Section 6.7.1 then
we will provide reasonable transition assistance to you, for a period of up
to six months and no termination adjustment charges or service level
credits shall apply.
If you terminate this Agreement (except for cause), or if we terminate
this Agreement for cause, you shall pay us a termination adjustment charge
of $3,000,000 (in addition to the monthly charges through December 31, 2001
as provided in Section 6.5.1) if terminated during the Initial Term of the
Agreement. Payment is due and payable upon the date termination notice is
given and all other terms and conditions of this Agreement shall remain in
full force and effect until the end of the Initial Term, including without
limitation, section 6.5.1
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6.8 OTHER TERMS
-----------
You will not be allowed to test or repair our dial network, except as
provided in Section 6.7.2., and except to send your own sample pings
similar to that described in Section 6.2.3.
6.9 AUDITING PROCEDURES
-------------------
We shall maintain true and accurate accounting records, in accordance
with sound accounting practices, to support the dial connect charges
payable to us by you. We shall, upon 30 days' prior written request, during
normal business hours, but not more frequently than once each calendar
quarter, provide access to the connect hour accounting records associated
only with the provision of the Service for the immediately preceding one-
year period to an independent accounting firm chosen and compensated by you
for the purposes of auditing the accuracy of the calculation of the dial
connect charges. The accounting firm selected shall: be required to sign an
agreement with us protecting our confidential information, perform such
audit on our premises, and such other locations reasonably necessary to
conduct a proper audit, comply with our security procedures, and be
authorized by us to report only the results of such audit and provide us
with a copy of the report.
In the event that the audit shows you owe an amount to us, we will
invoice you for such amount within the next two monthly billing cycles.
In the event that the audit shows a credit due to you, we will process
such credit including the cost of the audit (but such costs shall not
exceed the credit), excluding travel and per diem charges, plus interest at
the prime rate on the entire amount until paid in full within the next two
monthly billing cycles, provided that we do not disagree with the audit
report. If we disagree with the audit report, we may select an independent
accounting firm, compensated by us, to perform an audit on the same
information provided to the firm selected by you. We shall provide you a
copy of the report commissioned by us. In the event that the audit reports
disagree on the credit due to you, the credit due to you will be determined
by averaging the results of the two audit reports.
6.10 PRIMARY PROVIDER
----------------
We shall be your Primary Provider of Services. You shall be free to
make agreements with third parties for Services, provided you shall not
seek or accept any bids for Services to replace our Services in their
totality.
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You shall negotiate with us in good faith for any new service which we
have the ability, capacity and interest to provide. You shall be free to
offer new, experimental and other access including without limitation,
ADSL, cable access, modified cable access including dial up, satellite
access, roaming (e.g. Aimquest), Web TV, access bundled with content of
other applications, agreements with regional bell operating companies or
long distance companies as marketing partners ("Other Business); provided
that, at least thirty days prior to your entering into any agreement or
arrangement for Other Business, you will use good faith efforts to deliver
to us on a confidential basis any business plan changes, projections, draft
agreements and other documents describing such Other Business, to the
extent available, and meet with us to discuss such Other Business.
You shall not offer Other Business that would result in a material
increase in our costs unless we both agree on the amount of increased
revenues which will bear a reasonable relationship to such increase in our
costs; provided that, if we cannot agree on the amount of such increased
revenues, we shall have no obligation to provide our Services required for
such Other Business.
6.11 ADDITIONAL SERVICES AND PRODUCTS
--------------------------------
You may request us to provide you services, products or enhancements
which are not the subject of this Agreement, which include services,
products or enhancements which we provide to other customers. If we
provide such services, products or enhancements, we agree that we will
offer you a price for such services or products which is no higher than the
price we charge any other party for the same services, products or
enhancements; provided, however, that you will not be entitled to receive
this price treatment with respect to any product, service or enhancement
which we have developed for another party, or which we consider to be
proprietary.
If you request us to develop a new product, service or enhancement for
your use and we agree to develop such product or service, then we will
charge you a price which will include a profit to us.
6.12 ALTERNATIVE DISPUTE RESOLUTION
------------------------------
In the event of a dispute between you and us arising out of or
relating to this Agreement, or the breach thereof, you and we shall submit
the dispute to nonbinding mediation and shall make a good-faith effort to
resolve the dispute through the mediation process. In the event the
dispute is not resolved through mediation within 30 days following written
notice by one party that it desires to enter into mediation, then such
dispute shall be resolved exclusively and finally by binding arbitration by
three arbitrators who will be appointed and will act as follows:
-36-
<PAGE>
The party requesting arbitration shall, simultaneously with such
request, appoint one arbitrator and shall notify the other of such
appointment together with such arbitrator's acceptance. Within 30 days
from the receipt of such notice, the other party shall appoint another
arbitrator and shall notify the requesting party of such appointment
together with the second arbitrators acceptance. The third arbitrator, who
shall act as chairman of the arbitration panel, shall be appointed by the
other two arbitrators within the following 30 days. In the event either
party fails to appoint an arbitrator or in the event no agreement is
reached between the two arbitrators as to the appointment of the chairman
of the arbitration panel in accordance with the foregoing provisions, such
arbitrator or arbitrators shall be appointed, upon application by the
interested party, by the American Arbitration Association (AAA).
The arbitrators shall apply the arbitration rules of the AAA.
The award of the arbitrators shall be final and shall not be subject
to any appeal or challenge whatsoever. The arbitrators will not be required
to file their award with any body or authority whatsoever. In the event
arbitration proceedings are initiated under this section, pending such
proceedings and until a final award is rendered pursuant thereto, any
subsequent controversy arising between the parties shall be exclusively
submitted for final decision by the arbitrators in the arbitration
proceedings already pending. The arbitrators shall be instructed by the
parties to include an award for reasonable attorneys' fees, arbitrators'
fees, expert witnesses, travel and other costs incurred.
If a dispute arises out of an alleged breach of this Agreement (other
than your failure to make timely payments due to us), then you and we agree
to continue to perform our respective obligations under this Agreement
until an agreement is reached through mediation or the arbitrators render a
decision, whichever is applicable.
PART 7 - MISCELLANEOUS
- -------------------------------------------------------------------------------
7.1 PUBLICITY
---------
Each party will (i) consult with the other party before issuing any public
statement with respect to this Amendment and (ii) give the other party a
reasonable opportunity to review and comment upon any such proposed public
statement before it is released.
7.2 AMENDMENT
---------
-37-
<PAGE>
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed
by Prodigy and Splitrock.
7.3 COUNTERPARTS
------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together
constitute one and the same Second Amendment.
7.4 ENTIRE AGREEMENT
----------------
This Restated and Amended Agreement constitutes the entire agreement and
understanding between the parties except for that certain Indemnity
Agreement dated February 13, 2000, which is incorporated herein by
reference. Any amendments to this Agreement must be in writing and executed
by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the date
first written above.
PRODIGY COMMUNICATION SPLITROCK SERVICES, INC.
CORPORATION
By: /s/ Andrea Hirsch By: /s/ William R. Wilson
-------------------------- ------------------------------
Name: Andrea Hirsch Name: William R. Wilson
Title: EVP General Counsel Title: President and Chief Executive
Officer
-38-
<PAGE>
APPENDIX A-1
<TABLE>
<CAPTION>
CITY ST OLD ATT Number
- -------------------------------------------------------------
<S> <C> <C>
Ames IA 515.239.3902
- -------------------------------------------------------------
Dubuque IA 319.557.5802
- -------------------------------------------------------------
Sioux City IA 712.274.6202
- -------------------------------------------------------------
Carbondale IL 618.351.4802
- -------------------------------------------------------------
Champaign/Urbana IL 217.351.1302
- -------------------------------------------------------------
Danville IL 217.431.9602
- -------------------------------------------------------------
Decatur IL 217.421.1502
- -------------------------------------------------------------
Freeport IL 815.266.7902
- -------------------------------------------------------------
Normal/Bloomington IL 309.888.2402
- -------------------------------------------------------------
Quincy IL 217.221.0602
- -------------------------------------------------------------
Springfield IL 217.793.7182
- -------------------------------------------------------------
Hibbing MN 218.262.7172
- -------------------------------------------------------------
Mankato MN 507.386.4602
- -------------------------------------------------------------
Butte MT 406.494.8612
- -------------------------------------------------------------
Helena MT 406.443.8102
- -------------------------------------------------------------
Missoula MT 406.542.6302
- -------------------------------------------------------------
Harrisonburg VA 540.574.7002
- -------------------------------------------------------------
Pullman WA 509.334.8202
- -------------------------------------------------------------
Laramie WY 307.721.0502
- -------------------------------------------------------------
(307)721-4970
- -------------------------------------------------------------
</TABLE>
-39-
<PAGE>
Exhibit 10.17
-------------
AMENDMENT NO. 1 TO
MICROSOFT WINDOWS 98 "GET CONNECTED" CO-MARKETING AGREEMENT
Document Version 4.1, July 24, 1998
This Amendment No. 1 to Microsoft Windows 98 "Get Connected" Co-Marketing
Agreement (this "Agreement") made and entered into this 1st day of October, 1998
("Effective Date"), by and between MICROSOFT CORPORATION, a Washington
corporation, One Microsoft Way, Redmond, WA 98052-6399 ("MS"), and Prodigy
Services Corporation, a Delaware corporation, including its majority owned
subsidiaries and affiliates (collectively, "COMPANY"), amends the Microsoft
Windows 98 "Get Connected" Co-Marketing Agreement dated the 2nd day of July,
1998, between MS and COMPANY (the "Agreement").
INTRODUCTION
The Agreement sets forth a framework under which COMPANY information is
displayed to end users in the "Internet Connection Wizard" as a means of
facilitating easy Internet sign-up by users of Microsoft Windows 98 software;
MS and COMPANY expect to enter into separate and independent agreements with
various original equipment manufacturers so that such manufacturers may make a
unique list of providers of Internet access services and related special offers
available to purchasers of their computer hardware who utilize the Internet
Connection Wizard; and
MS and COMPANY wish to amend the Agreement to alter the terms which apply when
such alternate information is presented to end users pursuant to the agreements
with original equipment manufacturers.
The parties agree as follows:
DEFINITIONS.
All capitalized terms not otherwise defined in this Amendment shall have the
meanings ascribed to such terms in the Agreement. The following terms, whenever
initially capitalized, shall have the following meanings for purposes of this
Amendment:
"OEM-Defined ISP List(s)" means an ISP Phone Book that lists the names of ISPs
and associated telephone numbers and other ISP information, including COMPANY
Information for one or more OEM-specific offers. The may be one or more OEM-
Defined ISP Lists for a given telephone area code, geographic region or Service
Area. The OEM-Defined ISP List(s) shall be hosted on one or more Referral
Server(s).
"OEM" means an original equipment manufacturer.
"OEM Get Connected Agreement" means the agreement between MS or COMPANY, as the
case may be, and an OEM whereby an OEM designates certain ISPs to be included in
its OEM-Defined ISP List(s) and terms related thereto.
<PAGE>
AMENDMENTS.
All provisions of the Agreement shall apply with respect to OEM-Defined ISP
List(s) subject to the following changes:
Inclusion of COMPANY Information in OEM-Defined ISP List(s) shall be dependent
- ------------------------------------------------------------------------------
in part on COMPANY's compliance with the terms of the applicable OEM Get
- ------------------------------------------------------------------------
Connected Agreement. Each OEM shall determine the order and placement of the
- -----------------------------------------------------------------------------
COMPANY Information with its respective OEM-Defined ISP List(s).
- ----------------------------------------------------------------
There shall be no payment or reporting obligations regarding OEM-Defined ISP
- ----------------------------------------------------------------------------
List(s) between MS and COMPANY. All payment and reporting obligations regarding
- --------------------------------------------------------------------------------
OEM-Defined ISP List(s) shall be determined by COMPANY and the relevant OEMs.
- -----------------------------------------------------------------------------
Accordingly, Sections 3.6 (third sentence), 4, 11 and 12.7 and Exhibits C and D
- -------------------------------------------------------------------------------
shall not apply to OEM-Defined ISP List(s). This Amendment shall not, however,
- -------------------------------------------------------------------------------
affect any payment and reporting obligations relating to lists which are not
- ----------------------------------------------------------------------------
OEM-Defined ISP List(s) as set forth in the Agreement.
- ------------------------------------------------------
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set
forth above. All signed copies of this Amendment shall be deemed originals.
MICROSOFT CORPORATION PRODIGY COMMUNICATIONS CORP.
------------------------------------
(COMPANY)
/s/ Mark E. Chestnut /s/ David R. Henkel
- ---------------------------------------- ------------------------------------
By (sign) By (sign)
Mark E. Chestnut David R. Henkel
- ---------------------------------------- ------------------------------------
Name (Print) Name (Print)
Director, ISP
Network Solutions Group Chief Financial Officer
- ---------------------------------------- ------------------------------------
Title Title
1/5/99 1/5/99
- ---------------------------------------- ------------------------------------
Date Date
<PAGE>
Exhibit 10.18
-------------
Confidential materials omitted and filed separately with the
Securities and Exchange Commission.
Asterisks denote omissions.
Microsoft Corporation Tel 425 882 8080
One Microsoft Way Fax 425 936 7329
Redmond, WA 98052-6399 http://www.microsoft.com/
June 1, 1999
Brian Vaccaro
Prodigy Communications Corporation
44 S. Broadway
White Plains, NY 10601
RENEWAL OF AND AMENDMENT TO THAT CERTAIN
MICROSOFT WINDOWS 98 "GET CONNECTED" CO-MARKETING AGREEMENT,
AGREEMENT #1711CU-8230A, AGREEMENT EFFECTIVE DATE JULY 2, 1998 ("AGREEMENT")
Dear Mr. Vaccaro:
The purpose of this letter ("Amendment") is to renew the Agreement for an
additional term of one (1) calendar year from the original Agreement Effective
Date, subject to the following amendments:
1. A new Section 1.22 is added, to read as follows:
ISP Service Offer shall mean an offer of ISP Services maintained on any COMPANY
- -------------------------------------------------------------------------------
Sign-up Server(s) that set forth COMPANY Information.
- -----------------------------------------------------
2. Section 3.3 is restated in its entirety, to read as follows (new text
appears in double underline):
COMPANY shall develop and maintain a Sign-up Server. The Sign-up Server
shall be operational on a 7X24 basis. Recognizing the importance of
convenient and high-qualify service in order to meet the objectives of
this Agreement, the parties agree that COMPANY's Sign-up Server [**] with
the [**] of other [**]. COMPANY shall [**] of its [**]. Specifically,
----------------------------------------------
but without limitation, in order to comply with the preceding sentence,
-----------------------------------------------------------------------
COMPANY (a) shall [**] on the [**] and (b) shall [**] in the event [**].
------------------------------------------------------------------------
All capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Agreement. The terms of this Amendment shall supersede
any inconsistent terms contained in the Agreement.
Please sign both originals of the letter and return them to your Account Manager
who will arrange for their execution on behalf of Microsoft and return one
original to you. Please contact your Account Manager if you have any questions.
<PAGE>
By signing below the parties indicate their agreement with the above terms. All
signed copies of this Amendment shall be deemed originals. This Amendment is
executed only in the English language.
AGREED: AGREED:
MICROSOFT CORPORATION
/s/ Mark Chestnut /s/ Andrea Hirsch
- -------------------------------- --------------------------------
By: Mark Chestnut By: Andrea Hirsch
Mark Chestnut Andrea Hirsch
- -------------------------------- --------------------------------
Name (Printed) Name (Printed)
Director, ISP
Network Solutions Group EVP General Counsel
- -------------------------------- --------------------------------
Title Title
1/28/00 January 19, 2000
- -------------------------------- --------------------------------
Date Date
cc: James Huse
Microsoft LCA Files
Microsoft OEM Finance
<PAGE>
Exhibit 10.19
Amendment #3 to that certain
Renewal of and Amendment to that certain
MICROSOFT WINDOWS 98 "GET CONNECTED" CO-MARKETING AGREEMENT,
Agreement #1711CU-8230A, Agreement Effective Date July 2, 1998 ("Agreement")
The purposes of this Amendment is to amend the Agreement to expand it to
include the Internet Connection Wizard for Microsoft Windows 20000 software.
1. All references in the Agreement to Microsoft Windows 98 software
whether the reference is to "Microsoft Windows 98", "Windows 98" or "Win98" are
hereby deemed to include Microsoft Windows 2000 software in addition to
Microsoft Windows 98 software.
2. Exhibit C (Quarterly Referral Fee Report) is hereby amended to be in
the form attached hereto.
All capitalized terms used but not defined shall have the meanings
ascribed to them in the Agreement. The terms of this Amendment shall supersede
any inconsistent terms contained in the Agreement.
Please sign both originals of this Amendment and return them to your
Account Manager who will arrange for their execution on behalf of Microsoft and
return one original to you. Please contact your Account Manager if you have any
questions.
By signing below the parties indicate their agreement with the above
terms. All signed copies of this Amendment shall be deemed originals. This
Amendment is executed only in the English language.
AGREED: AGREED:
MICROSOFT CORPORATION
/s/ Mark Chestnut /s/ Andrea Hirsch
- ----------------------------- -----------------------------
By: Mark Chestnut By: Andrea Hirsch
Mark Chestnut Andrea Hirsch
- ----------------------------- -----------------------------
Name (Printed) Name (Printed)
Director, ISP
Network Solutions Group EVP General Counsel
- ------------------------------ ------------------------------
Title Title
2/22/00 January 19, 2000
- ------------------------------ ------------------------------
Date Date
<PAGE>
EXHIBIT 10.29
February 28, 2000
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
At December 31, 1999, current liabilities of Prodigy Communications Corporation
("Prodigy") exceeded current assets by $117.8 million. Included in this amount
are loans payable to Banco Inbursa, S.A. which were arranged under the auspices
of Carso Global Telecom in the amount of $110.2 million.
This letter serves to confirm the following:
1. Telefonos de Mexico, S.A. de C.V. or any of its subsidiaries (TELMEX) will
provide additional funding up to $200.0 million, either through capital
and/or debt financing, to allow Prodigy to continue as a going concern for
one year from the date of this letter.
2. TELMEX has available capital and/or debt financing facilities necessary to
support Prodigy's funding requirements for one year from the date of this
letter.
Sincerely,
/s/ Adolfo Cerezo
Adolfo Cerezo
Chief Financial Officer
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Prodigy Biz Corporation, a Delaware corporation
Prodigy Transition Corporation, a Delaware corporation
PUCKnut Corporation, a Delaware corporation
Prodigy Communications Limited Partnership, a Delaware limited partnership
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-72179, No. 333-72181 and No. 333-72183) of
Prodigy Communications Corporation of our report dated March 3, 2000 relating to
the financial statements which appear in this Form 10-K.
PricewatershouseCoopers LLP
New York, New York
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,473
<SECURITIES> 0
<RECEIVABLES> 13,694
<ALLOWANCES> 3,380
<INVENTORY> 0
<CURRENT-ASSETS> 51,818
<PP&E> 47,041
<DEPRECIATION> 28,840
<TOTAL-ASSETS> 345,988
<CURRENT-LIABILITIES> 179,914
<BONDS> 0
0
0
<COMMON> 645
<OTHER-SE> 164,446
<TOTAL-LIABILITY-AND-EQUITY> 345,988
<SALES> 169,810
<TOTAL-REVENUES> 189,038
<CGS> 102,199
<TOTAL-COSTS> 277,286
<OTHER-EXPENSES> (10,619)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,859
<INCOME-PRETAX> (80,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (80,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,488)
<EPS-BASIC> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
