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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14D-9
RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 2)
------------------------
PRODIGY COMMUNICATIONS CORPORATION
(NAME OF SUBJECT COMPANY)
PRODIGY COMMUNICATIONS CORPORATION
(NAMES OF PERSONS FILING STATEMENT)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
CUSIP 74283 P107
(CUSIP NUMBER OF CLASS OF SECURITIES)
XXXXXX XXXXXXXX
PRODIGY COMMUNICATIONS CORPORATION
0000 XXXXX XXXXX XXXX.
XXXXXXXX XXX
XXXXXX, XX 00000
(000) 000-0000
(NAME, ADDRESS, AND TELEPHONE NUMBERS OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSONS FILING STATEMENT)
WITH COPIES TO:
XXXXXX X. XXXXX
XXXXXX & XXXXXX L.L.P.
ONE AMERICAN CENTER
000 XXXXXXXX XXXXXX
XXXXX 0000
XXXXXX, XX 00000-0000
(000) 000-0000
------------------------
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
This Amendment No. 2 amends and supplements the Schedule 14D-9 filed by
Prodigy Communications Corporation ("Prodigy"), a Delaware corporation, with the
Securities and Exchange Commission (the "SEC") on October 16, 2001, as amended
and supplemented by Amendment No. 1 filed with the SEC on October 18, 2001.
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ITEM 1. SUBJECT COMPANY INFORMATION
(a) The name of the subject company is Prodigy Communications Corporation,
a Delaware corporation. Prodigy's principal executive offices are
located at 0000 Xxxxx Xxxxx Xxxx., Xxxxxxxx XXX, Xxxxxx, XX 00000 and
its telephone number is (000) 000-0000.
(b) The class of securities to which this Amendment No. 2 relates is Class
A Common Stock. As of August 7, 2001, there were 70,480,750 shares of
Class A Common Stock outstanding and approximately 4,196,213 shares of
Class A Common Stock subject to issuance at $6.60 or less pursuant to
Prodigy's stock option and incentive plans.
(c) On February 10, 1999, Prodigy issued 11,200,000 shares of its Class A
Common Stock in an underwritten public offering registered pursuant to
the Securities Act of 1933 at a price of $15.00 per share. The
aggregate proceeds from the offering were $168,000,000.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON
(a) The filing person of this Amendment No. 2 is Prodigy Communications
Corporation, a Delaware corporation. The business address and business
telephone number of Prodigy are set forth in Item 1(a) above.
(b) This Amendment No. 2 relates to the tender offer by SBC Internet
Communications, Inc. ("SBC Internet"), an indirect wholly owned
subsidiary of SBC Communications Inc. ("SBC"), to purchase all of the
outstanding Class A Common Stock of Prodigy not currently owned by SBC
at a price of $6.60 per share on the terms and conditions set forth in
its Supplement to the Offer to Purchase dated October 2, 2001 which was
filed with the SEC on October 19, 2001 by SBC Internet as an exhibit to
Amendment No. 3 to Schedule TO (the "Amended Schedule TO") and related
Letter of Transmittal (together with the Supplement to the Offer to
Purchase, the "Amended Offer").
(c) Reference is made to Exhibit 8 to this Amendment No. 2 which contains
the information relating to Prodigy's Officers and Directors.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
(a) Prodigy's most recent Form 10-K filed with the SEC is incorporated
herein by reference. The information set forth under "SBC Transaction"
and "Certain Factors That May Affect Future Operating Results" discuss
SBC's relationship with Prodigy and the potential for conflicts of
interest.
(b) On October 2, 2001, SBC Internet commenced a tender offer to purchase
all of Prodigy's outstanding Class A Common Stock not currently owned
by SBC at a price of $5.45 per share on the terms and conditions set
forth in its Offer to Purchase dated October 2, 2001 which was filed
with the SEC on October 2, 2001 by SBC Internet as an exhibit to
Schedule TO (the "Initial Schedule TO") and related Letter of
Transmittal (together with the Offer to Purchase, the "Original
Offer").
On October 17, 2001, SBC, SBC Internet and Prodigy reached a definitive
agreement (the "Merger Agreement") which provides for, among other
things, (i) an increase in the price per share of Class A Common Stock
to be paid pursuant to the Amended Offer from $5.45 per share to $6.60
per share, net to the seller in cash, (ii) the amendment and
restatement of the conditions to the Amended Offer and (iii) the merger
of SBC Internet (or another direct or indirect wholly owned subsidiary
of SBC) with and into Prodigy (the "Merger") as promptly as is
practicable following the consummation of the Amended Offer. A copy of
the Merger Agreement is included as an exhibit to the Amended Schedule
TO. A copy of SBC's and Prodigy's joint press release announcing the
Merger Agreement is attached as Exhibit 6 to this Amendment No. 2.
(c) Prodigy and SBC have reached an understanding to amend the Internet
Service Resale Agreement ("Resale Agreement") to allow SBC to reduce
portal payments to Prodigy for DSL services for those DSL subscribers
who do not use and cancel the DSL service. The understanding was
approved
2
by an Independent Directors Committee of Prodigy's Board of Directors
(the "Committee") on September 26, 2001 but the amendment has not yet
been executed by Prodigy or SBC. The proposed amendment is attached as
Exhibit 1.
(d) Prodigy and SBC have reached an understanding to amend the Narrowband
Internet Sales Agency Agreement to allow Prodigy to delay the date on
which Prodigy incurs an obligation to make bounty payments to SBC for
the acquisition of dial-up subscribers who initially pay a discounted
promotional rate. The understanding would amend the Narrowband Internet
Sales Agency Agreement by delaying the incurrence of the obligation for
such bounty payments until the issuance of the third monthly xxxx for
Prodigy's service. The understanding was approved by the Committee on
September 26, 2001 but the amendment has not yet been executed by
Prodigy or SBC. The proposed amendment is attached as Exhibit 2.
(e) Prodigy and SBC have reached an understanding to amend the Resale
Agreement to provide that SBC will be the retailer of ISDN Internet
access service and that such subscribers will be treated as if they are
business dial-up subscribers. Under the amendment, SBC will pay Prodigy
the monthly business dial-up fee for such ISDN subscribers. The
understanding was approved by the Committee on September 26, 2001 but
the amendment has not yet been executed by Prodigy or SBC. The proposed
amendment is attached as Exhibit 3.
(f) SBC's shared voting power and ownership of Prodigy and Prodigy's common
stock are identified in Item 6, "Special Factors, Background of SBC's
Investment in Prodigy" and "Security Ownership of Certain Beneficial
Owners and Management" of SBC's Original Offer and Schedule TO filed
with the SEC on October 2, 2001 which is incorporated herein by
reference.
(g) See "Additional Information" in SBC's Amendment No. 1 to Schedule TO
filed with the SEC on October 15, 2001 which is incorporated herein by
reference.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) FOR THE REASONS SET FORTH BELOW, PRODIGY RECOMMENDS THAT ITS
STOCKHOLDERS ACCEPT THE AMENDED OFFER AND TENDER THEIR SHARES OF CLASS
A COMMON STOCK PURSUANT TO THE AMENDED OFFER AND APPROVE AND ADOPT THE
MERGER AGREEMENT AND THE MERGER.
(b) Due to SBC's significant ownership of Prodigy and the various business
relationships with Prodigy, Prodigy's Board of Directors recognized the
potential for a conflict of interest between SBC and Prodigy and formed
the Committee in December of 2000 to independently evaluate Prodigy and
SBC agreements. The Committee is comprised of three members of
Prodigy's Board of Directors who have no affiliation with SBC or any
other major stockholder. The Board delegated the authority to the
Committee to determine what recommendation Prodigy would make to its
stockholders with respect to SBC's tender offer.
(c) On October 15, 2001, the Committee unanimously determined that Prodigy
was unable to take a position at that time on a recommendation to its
stockholders. The reasons for that position were as follows:
- The possibility of an increase in the Original Offer price by SBC. On
October 15, 2001, SBC filed Amendment No. 1 to its Schedule TO which
describes the status of discussions between SBC and its
representatives with the Committee and its representatives.
- The possibility of a negotiated transaction between Prodigy and SBC
whereby Prodigy would be acquired by SBC.
Prodigy's original letter transmitting its position to its stockholders
is attached as Exhibit 4. Prodigy's press release dated October 16, 2001
announcing its position is attached as Exhibit 5.
3
(d) On October 17, 2001, the Committee unanimously determined that Prodigy
would recommend to its stockholders that they accept the Amended Offer
and tender their shares of Class A Common Stock pursuant to the Amended
Offer and recommended that Prodigy's Board of Directors approve and
adopt the Merger Agreement and the Merger. In making its determination
and recommendation, the Committee considered a number of factors,
including, without limitation, the following:
- The historical and current market prices of the Class A Common Stock
and the fact that the Amended Offer price represents a substantial
premium over the closing price of the Class A Common Stock of $3.54 on
September 21, 2001, the last trading day prior to the announcement of
Original Offer and over the 10, 20 and 30 day trading days average
prior to such announcement.
- The trading history of the Class A Common Stock and a comparison of
such trading history with the stock trading histories of other
companies in Prodigy's industry and of stock market indices that were
deemed relevant.
- Prodigy's business, financial condition, results of operation, assets,
liabilities, business strategy and prospects, as well as various
uncertainties associated with those prospects in light of the
unsettled general economic conditions and the unstable industry
conditions under which Prodigy is operating.
- The current and prospective conditions and trends in Prodigy's
industry and the anticipated effect of such conditions and trends on
Prodigy's business and its stockholders.
- The presentation of Deutsche Banc Alex. Xxxxx Inc. ("DBAB") to the
Committee at its meeting on October 17, 2001, as to various financial
and other matters relevant to the Committee's consideration, a copy of
which is attached as Exhibit 10.
- The opinion of DBAB as of October 17, 2001, to the effect that, based
upon and subject to certain factors and assumptions stated therein, as
of such date, the $6.60 per share in cash to be received by the
holders of Prodigy's Class A Common Stock, other than SBC and its
affiliates, in the Amended Offer and the Merger is fair, from
financial point of view, to such stockholders. The full text of DBAB's
Fairness Opinion is attached hereto as Exhibit 11.
- The fact that the Amended Offer and the Merger provide for a prompt
cash tender offer for all shares of Class A Common Stock to be
followed by the Merger for the same consideration, thereby enabling
Prodigy's stockholders, at the earliest possible time, to obtain the
benefits of the transaction in exchange for their shares of Class A
Common Stock.
- The likelihood of the consummation of the Amended Offer and the Merger
and the limited conditions to the consummation of the Amended Offer
and the Merger.
- The representation of SBC that it will have sufficient funds to
consummate the Amended Offer and the Merger and the fact that the
Amended Offer and the Merger are not subject to a financing condition.
- The availability of, and the comparative risks and benefits to
Prodigy's stockholders from pursuing, other strategic alternatives to
maximize stockholder value, including remaining independent and
executing Prodigy's long-term strategic plan.
- The judgment of the Committee, based on extensive arm's length
negotiations with SBC, that the Amended Offer price represented the
highest price that SBC would be willing to pay in the Amended Offer.
- The advice of Prodigy's legal advisors with respect to the terms of
the Merger Agreement, the Amended Offer and the Merger.
The Committee did not consider the relationship of the Amended Offer
price to Prodigy's liquidation value or net book value. The Committee
does not believe liquidation value is relevant because substantial value
results from continuing Prodigy as a going concern and any liquidation
would destroy that value. In addition, the Committee believes the
history of liquidations of Internet
4
related businesses demonstrates how little value is realizable on
liquidation of such businesses and does not believe Prodigy has
significant assets that could be liquidated. In addition, the Committee
does not believe that net book value has any meaningful relation to the
economic value of the Class A Common Stock, particularly because a
majority of Prodigy's assets are intangible assets. Out of approximately
$648 million in total assets at June 30, 2001, $487 million of Prodigy's
assets were goodwill and other intangibles that cannot readily be
monetized.
(e) Based on the recommendation of the Committee, Prodigy's Board of
Directors approved and adopted the Merger Agreement and Merger.
Prodigy's letter transmitting its position to its stockholders is
attached as Exhibit 12.
(f) To the best of Prodigy's knowledge, after making reasonable inquiry,
and except as restricted by Section 16(b) of the Securities Exchange
Act of 1934, all of Prodigy's executive officers and directors
currently intend to tender pursuant to the Amended Offer any shares
held of record or beneficially owned by them as of the date hereof.
(g) Opinion of Prodigy's Financial Advisor
DBAB has acted as financial advisor to the Committee in connection with
the Original Offer, the Amended Offer and the Merger. At the October
17, 2001 meeting of the Committee, DBAB delivered to the Committee its
oral opinion, subsequently confirmed in writing as of the same date, to
the effect that, as of the date of such opinion, based upon and subject
to the assumptions made, matters considered and limits of the review
undertaken by DBAB, the $6.60 per share cash consideration to be paid
in the Amended Offer and the Merger was fair, from a financial point of
view, to the holders of Class A Common Stock other than SBC and its
affiliates.
DBAB'S VALUATION METHODOLOGY IS SUMMARIZED BELOW AND THE FULL TEXT OF
DBAB'S WRITTEN OPINION, DATED OCTOBER 17, 2001, WHICH SETS FORTH AMONG
OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN BY DBAB IN CONNECTION WITH THE OPINION, IS
ATTACHED AS EXHIBIT 11 TO THIS AMENDMENT NO. 2 AND IS INCORPORATED
HEREIN BY REFERENCE. PRODIGY'S STOCKHOLDERS ARE URGED TO READ THE
OPINION IN ITS ENTIRETY. THE SUMMARY OF THE OPINION SET FORTH IN THIS
AMENDMENT NO. 2 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION.
In connection with DBAB's role as financial advisor to the Committee,
and in arriving at its opinion, DBAB has reviewed certain publicly
available financial and other information concerning Prodigy and SBC
and certain internal analyses and other information furnished to it by
management of Prodigy. DBAB has also held discussions with members of
the senior management of Prodigy regarding the business and prospects
of Prodigy. In addition, DBAB has (i) reviewed the historical reported
prices and trading activity for Class A Common Stock, (ii) compared
certain financial and stock market information for Prodigy with similar
information for certain companies whose securities are publicly traded,
(iii) reviewed the financial terms of certain recent business
combinations which it deemed relevant to its analyses, (iv) reviewed
the terms of the Initial Schedule TO and a draft of the Merger
Agreement dated October 13, 2001, (v) took into account the expected
terms of the Stockholder Voting Agreement (the "Stockholder Voting
Agreement") by and among SBC, Telefonos de Mexico, S.A. de C.V.
("Telmex"), Telmex Financial Ventures, LLC ("TFV") and Carso Global
Telecom, S.A. de C.V. ("CGT") pursuant to which Telmex, TFV and CGT
confirmed to SBC their willingness to tender (and not withdraw) all of
the shares of Class A Common Stock owned by them into the Amended
Offer, to vote in favor of the Merger and against any transaction or
other action that could interfere with the timely completion of the
Merger and to refrain from, prior to the effective time of the Merger,
in any way transferring or disposing of any shares of Class A Common
Stock owned by them except by tender into the Amended Offer, and (vi)
performed such other studies and analyses and considered such other
factors as it deemed
5
appropriate, including SBC's current ownership of Class A Common Stock
and discussions with Prodigy's management regarding SBC's contractual
relationship with Prodigy.
In preparing its opinion, DBAB did not assume responsibility for
independent verification of any information, whether publicly available
or furnished to it, concerning Prodigy, including, without limitation,
any financial information, forecasts or projections considered in
connection with the rendering of its opinion. Accordingly, for purposes
of its opinion, DBAB assumed and relied upon the accuracy and
completeness of all such information, and DBAB did not conduct a
physical inspection of any of the properties or assets and did not
prepare or obtain any independent evaluation or appraisal of any of the
assets or liabilities of Prodigy. With respect to management's
financial forecasts and projections made available to DBAB by Prodigy's
management and used in DBAB's analyses, DBAB assumed that they have
been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Prodigy, as to
the matters covered thereby. While Prodigy's management provided DBAB
with various alternative projections reflecting different possible
scenarios for Prodigy's business, DBAB relied for purposes of rendering
its opinion on the alternatives that Prodigy's management identified to
DBAB as the appropriate scenarios to use for the purposes of its
opinion, and therefore assumed that Prodigy's financial results will
correspond with the projections in such alternatives, but in any event
will fall between such alternatives. In rendering its opinion, DBAB
expresses no view as to the reasonableness of any such forecasts and
projections or the assumptions on which they are based. DBAB's opinion
is necessarily based upon economic, market and other conditions as in
effect on, and the information made available to it as of, the date
hereof.
For purposes of rendering its opinion, DBAB has assumed that, in all
respects material to its analysis, the representations and warranties
of Prodigy, SBC and SBC Internet contained in the Merger Agreement are
true and correct, each of the parties thereto will perform all of the
covenants and agreements to be performed by it under the Merger
Agreement and the Shareholder Voting Agreement, as the case may be, and
all conditions to the obligations of each of Prodigy, SBC and SBC
Internet to consummate the Amended Offer and Merger will be satisfied
without any waiver thereof. DBAB also assumed that the final form of
the Merger Agreement would be substantially similar to the last draft
reviewed by it, and the Merger Agreement and any amendment to the
Initial Schedule TO containing the terms and conditions of the final
offer would not contain any terms or provisions that would adversely
affect DBAB's analyses. DBAB further assumed that the Stockholder
Voting Agreement would contain the terms described to it by Prodigy and
would not contain any terms or provisions that adversely affect DBAB's
analyses.
In connection with DBAB's role as financial advisor to the Committee
and in arriving at its opinion, DBAB was not requested to, and did not,
solicit from any third party any indications of interest in acquiring
all or any part of Prodigy or investigate any alternative transactions,
and its opinion does not address the relative merits of the Amended
Offer and Merger as compared to any alternative business strategies
that might exist for Prodigy.
Set forth below is a brief summary of certain financial analyses
performed by DBAB in connection with its opinion and reviewed with the
Committee at its meeting on October 17, 2001.
HISTORICAL STOCK PERFORMANCE AND IMPLIED PREMIUM ANALYSIS. DBAB
reviewed and analyzed recent and historical market prices and trading
volume for Class A Common Stock and adjusted such market prices using
the performance of certain stock market indices and a certain peer's
stock during the same period. The peer company used for purposes of
this analysis was EarthLink, Inc. ("EarthLink").
DBAB noted the price of Class A Common Stock from: (i) May 17, 2001
through September 21, 2001 (the date of the announcement of the
Original Offer) and May 17, 2001 through September 10, 2001 (the day
prior to the terrorist attacks); (ii) June 25, 2001 through September
21, 2001 and June 25, 2001 through September 10, 2001; and (iii)
September 21, 2001 through October 15, 2001, and then calculated the
implied price of Class A Common Stock at each end date assuming
6
that Class A Common Stock's price performed the same as the relevant
indices. The following are the results of DBAB's analysis:
Class A Common Stock Price: adjusted from May 17, 2001
Adjusted Class A Common Stock Price Through the Announcement Date
CLASS A COMMON CLASS A COMMON
STOCK PRICE INDEX VALUE STOCK PRICE
5/17/01 9/21/01 9/21/01
-------------- ----------- --------------
Closing price...................... $2.11 * 167.77 = $3.54
Adjusted using EarthLink........... $2.11 * 96.57 = $2.04
Adjusted using NASDAQ.............. $2.11 * 64.88 = $1.37
Adjusted using S&P 500............. $2.11 * 74.96 = $1.58
Adjusted Class A Common Stock Price through 9/10/01
CLASS A COMMON CLASS A COMMON
STOCK PRICE INDEX VALUE STOCK PRICE
5/17/01 9/10/01 9/10/01
-------------- ----------- --------------
Closing price...................... $2.11 * 248.82 = $5.25
Adjusted using EarthLink........... $2.11 * 104.93 = $2.21
Adjusted using NASDAQ.............. $2.11 * 77.28 = $1.63
Adjusted using S&P 500............. $2.11 * 84.79 = $1.79
Class A Common Stock Price: adjusted from June 25, 2001
Adjusted Class A Common Stock Price Through the Announcement Date
CLASS A COMMON CLASS A COMMON
STOCK PRICE INDEX VALUE STOCK PRICE
6/25/01 9/21/01 9/21/01
-------------- ----------- --------------
Closing price...................... $3.92 * 90.31 = $3.54
Adjusted using EarthLink........... $3.92 * 105.46 = $4.13
Adjusted using NASDAQ.............. $3.92 * 69.39 = $2.72
Adjusted using S&P 500............. $3.92 * 79.25 = $3.11
]Adjusted Class A Common Stock Price Through 9/10/01
CLASS A COMMON CLASS A COMMON
STOCK PRICE INDEX VALUE STOCK PRICE
6/25/01 9/10/01 9/10/01
-------------- ----------- --------------
Closing price...................... $3.92 * 133.93 = $5.25
Adjusted using EarthLink........... $3.92 * 114.59 = $4.49
Adjusted using NASDAQ.............. $3.92 * 82.67 = $3.24
Adjusted using S&P 500............. $3.92 * 89.66 = $3.51
7
Class A Common Stock Price: adjusted from announcement to October 15, 2001
Adjusted Class A Common Stock Price Through 10/15/01
CLASS A COMMON CLASS A COMMON
STOCK PRICE INDEX VALUE STOCK PRICE
9/21/01 10/15/01 10/15/01
-------------- ----------- --------------
Closing price...................... $3.54 * 177.40 = $6.28
Adjusted using EarthLink........... $3.54 * 144.82 = $5.13
Adjusted using NASDAQ.............. $3.54 * 112.96 = $4.00
Adjusted using S&P 500............. $3.54 * 119.19 = $4.22
DBAB also calculated the implied premium or discount of the Original Offer price
of $5.45 and the Amended Offer price of $6.60 relative to: (i) the prices of
Class A Common Stock on each of September 21, 2001 and September 10, 2001; (ii)
various volume-weighted trading average prices calculated through each of
September 21, 2001 and September 10, 2001; and (iii) adjusted prices using the
relevant indices. The analysis resulted in the following implied premiums:
Premium Analysis
OFFER PRICE
PREMIUM
(DISCOUNT) TO
CLASS A
COMMON STOCK
PRICE
CLASS A COMMON --------------
STOCK PRICE CATEGORY CLASS A COMMON STOCK PRICE $5.45 $6.60
-------------------- -------------------------- ----- -----
ANNOUNCEMENT DATE (9/21)
Closing price on 9/21................. $3.54 54% 86%
10 trading days average (9/4)......... $4.36 25% 51%
20 trading days average (8/20)........ $4.80 14% 38%
30 trading days average (8/6)......... $5.00 9% 32%
Adjusted using EarthLink since 6/25... $4.13 32% 60%
Adjusted using NASDAQ since 6/25...... $2.72 100% 143%
Adjusted using S&P 500 since 6/25..... $3.11 75% 112%
Closing price on 6/25................. $3.92 39% 68%
Adjusted using EarthLink since 5/17... $2.04 167% 224%
Adjusted using NASDAQ since 5/17...... $1.37 298% 382%
Adjusted using S&P 500 since 5/17..... $1.58 245% 318%
Closing price on 5/17................. $2.11 158% 213%
52-week high (7/20)................... $7.25 (25%) (9%)
52-week low (12/19)................... $1.13 382% 484%
DAY PRIOR TO TERRORIST ATTACKS (9/10)
Closing price on 9/10................. $5.25 4% 26%
10 trading days average (8/27)........ $5.45 0% 21%
20 trading days average (8/13)........ $5.56 (2%) 19%
30 trading days average (7/30)........ $5.52 (1%) 20%
Adjusted using EarthLink since 6/25... $4.49 21% 47%
Adjusted using NASDAQ since 6/25...... $3.24 68% 104%
Adjusted using S&P 500 since 6/25..... $3.51 55% 88%
Closing price on 6/25................. $3.92 39% 68%
8
OFFER PRICE
PREMIUM
(DISCOUNT) TO
CLASS A
COMMON STOCK
PRICE
CLASS A COMMON --------------
STOCK PRICE CATEGORY CLASS A COMMON STOCK PRICE $5.45 $6.60
-------------------- -------------------------- ----- -----
Adjusted using EarthLink since 5/17... $2.21 147% 199%
Adjusted using NASDAQ since 5/17...... $1.63 234% 305%
Adjusted using S&P 500 since 5/17..... $1.79 204% 269%
Closing price on 5/17................. $2.11 158% 213%
52-week high (7/20)................... $7.25 (25%) (9%)
52-week low (12/19)................... $1.13 382% 484%
GOING-PRIVATE PREMIUM ANALYSIS. Using information from publicly available
sources, DBAB performed a premiums paid analysis based upon the review and
analysis of the range of premiums paid in going-private transactions since
January 1, 1998 involving (i) U.S. targets, (ii) interests not owned by the
acquiror representing 50-80 percent of the target's outstanding common stock,
(iii) transaction values exceeding $100 million and (iv) offers being funded
with cash only. The following were the transactions:
Going-Private Transactions Analysis -- Acquisition of Remaining Interest
DATE XXX. DATE EFF. ACQUIROR TARGET
--------- --------- -------- ------
1/25/01 6/21/01 Sodexho Alliance (Sodexho Sodexho Marriott Services
SA) Inc.
11/13/00 7/23/01 Xxxx Capital Partners LP CB Xxxxxxx Xxxxx Services
11/02/00 3/31/01 Developers Diversified American Industrial
Realty Properties
4/20/00 9/14/00 Investor Group Brookdale Living
Communities
3/30/00 9/07/00 Flexi-Van Leasing Inc. Castle & Xxxxx Inc.
11/22/99 2/02/00 GR Acquisition Corp. Garden Ridge Corp.
6/09/99 7/28/99 Merck E(Merck AG) VWR Scientific Products
Corp.
5/17/99 10/01/99 Allianz Life Ins. Co. Life USA Holding Inc.
(Allianz)
2/16/99 5/11/99 Delta Air Lines Inc. ASA Holdings Inc.
12/02/98 4/23/99 Pinault-Printemps Redoute Brylane Inc.
11/25/98 9/29/99 Investor Group Sbarro Inc.
5/11/98 12/07/98 Monsanto Co. DeKalb Genetics Corp.
Using the data developed in its Historical Stock Performance and Implied Premium
Analysis, DBAB compared the implied premium represented by the Original Offer
price of $5.45 and the Amended Offer price of $6.60 relative to the closing
price of Class A Common Stock on the announcement date and the volume-weighted
average of the closing prices of Class A Common Stock for the 10, 20, and 30
trading-day periods, respectively, through the announcement date. DBAB compared
such implied premiums to low, median and high values of the relevant range of
premiums paid in the precedent transactions relative to the prices of the target
companies' stock on the last trading day prior to the announcement date of the
precedent transaction and the average of the closing prices of the target
companies' stock for the 10, 20, and 30 trading-day periods, respectively, prior
to the announcement dates.
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The result of this analysis is as follows:
Going Private Premium Analysis
(announcement date)
OFFER PRICE PREMIUM
TO CLASS A COMMON STOCK PRECEDENT TRANSACTIONS
PRICE RELEVANT PREMIUM RANGE
---------------------------- ------------------------
CLASS A
CLASS A COMMON COMMON STOCK
STOCK PRICE CATEGORY PRICE $5.45 $6.60 LOW MEDIAN HIGH
-------------------- ------------ ----- ----- ---- ------- -----
Closing price on 9/21......... $3.54 54% 86% 25%(1) 31%(1) 37%(1)
10 trading days average....... $4.36 25% 51% 27% 34% 41%
20 trading days average....... $4.80 14% 38% 30% 38% 45%
30 trading days average....... $5.00 9% 32% 31% 39% 46%
---------------
(1) Premium to the closing price on the last trading day prior to the
announcement date.
DBAB also used the data developed in its Historical Stock Performance
and Implied Premium Analysis to compare the implied premium represented
by the Original Offer price of $5.45 and the Amended Offer price of
$6.60 relative to the closing price of Class A Common Stock on the day
prior to the terrorist attacks and the volume-weighted average of the
closing prices of Class A Common Stock for the 10, 20, and 30
trading-day periods, respectively, through the day prior to the
terrorist attacks. DBAB compared such implied premiums to low, median
and high values of the relevant range of premiums paid in the precedent
transactions relative to the prices of the target companies' stock on
the last trading day prior to the announcement date of the precedent
transaction and the average of the closing prices of the target
companies' stock for the 10, 20, and 30 trading-day periods,
respectively, prior to the announcement dates.
Going Private Premium Analysis
(9/10/01)
OFFER PRICE PREMIUM PRECEDENT TRANSACTIONS
TO CLASS A COMMON STOCK PRICE RELEVANT PREMIUM RANGE
------------------------------ ------------------------
CLASS A
CLASS A COMMON COMMON STOCK
STOCK PRICE CATEGORY PRICE $5.45 $6.60 LOW MEDIAN HIGH
-------------------- ------------- ------ ------ ---- ------- -----
Closing price on 9/10........ $5.25 4% 26% 25%(1) 31%(1) 37%(1)
10 trading days average...... $5.45 0% 21% 27% 34% 41%
20 trading days average...... $5.56 (2%) 19% 30% 38% 45%
30 trading days average...... $5.52 (1%) 20% 31% 39% 46%
---------------
(1) Premium to the closing price on the last trading day prior to the
announcement date.
DBAB believes that a comparison between the offer price premiums and
the relevant precedent transaction premium ranges is not simply
mathematical. Rather, it also involves complex considerations and
qualitative judgments, reflected in DBAB's analyses, concerning
circumstances surrounding the Original Offer, the Amended Offer and the
Merger.
DISCOUNTED CASH FLOW ANALYSIS. DBAB performed a discounted cash flow
analysis of Prodigy under a number of scenarios. For each scenario,
DBAB calculated the discounted cash flow value of Prodigy as a sum of
the net present value of (i) the estimated future unlevered free cash
flow of Prodigy for the fiscal years 2001 through 2010, and (ii) the
terminal value of Prodigy at the end of such period and derived the
implied equity value per share of Class A Common Stock. The estimated
future unlevered free cash flow was based on the financial projections
for the years
10
2001 through 2010 prepared by Prodigy's management. The terminal value
was calculated based on unlevered free cash flow projections for 2010
prepared by Prodigy's management and an assumed perpetual growth rate
beginning in 2020. Prodigy's management informed DBAB that the
scenarios assuming that, at the expiration of Prodigy's Strategic and
Marketing Agreement with SBC (the "SMA") at the end of 2009, Prodigy
and SBC would renegotiate the SMA at a reduced monthly wholesale fee of
$2.00 and $3.00 per subscriber are the most likely cases. DBAB used
these cases for purposes of rendering its opinion. DBAB used varying
weighted average costs of capital (between 18.5% and 22.5%) and
perpetuity growth rates (between 2% and 4%) to derive a high, mid and
low implied equity valuation for each case. This analysis resulted in
the following ranges of implied equity valuation per share of Class A
Common Stock:
RANGES OF IMPLIED EQUITY VALUE PER SHARE(1)
-----------------------------------------------
CASE LOW MID HIGH
---- ------- ------- -------
Base case assuming renegotiation of SMA
after 2009 @ $3.00.................... $5.84 -- $6.71 -- $7.89
Base case assuming renegotiation of SMA
after 2009 @ $2.00.................... $5.45 -- $6.20 -- $7.20
---------------
(1) Based on fully diluted shares outstanding of 125.0 million, which
includes options exercised given a price of $6.60, and net debt of
$104 million adjusting for proceeds from options exercised.
COMPARABLE COMPANY TRADING MULTIPLE ANALYSIS. DBAB compared certain
financial information and commonly used valuation measurements for
Prodigy to corresponding information and measurements for EarthLink, the
only Internet service provider that DBAB deemed potentially comparable to
Prodigy. Such financial information and valuation measurements for
EarthLink were based on public equity research estimates and for Prodigy
were based on Prodigy's public guidance and projections from Prodigy's
management. DBAB calculated Prodigy's implied total enterprise value
("TEV") at both the Original Offer price of $5.45 and the Amended Offer
price of $6.60 and the resulting TEV multiples of Prodigy's gross
revenues, adjusted EBITDA and subscribers. DBAB also calculated the
ratios of Prodigy's TEV multiples of gross revenues and adjusted EBITDA
to Prodigy's projected gross revenues and adjusted EBITDA growth rates,
respectively ("Growth Adjusted TEV Multiples"). DBAB compared Prodigy's
TEV multiples and Growth Adjusted TEV Multiples with EarthLink's
corresponding multiples, and noted that at the Amended Offer price of
$6.60 (i) Prodigy's implied TEV multiples and the Growth Adjusted TEV
Multiple of 2002 adjusted EBITDA were lower than EarthLink's
corresponding multiples, and (ii) Prodigy's other Growth Adjusted TEV
Multiples were higher than EarthLink's corresponding multiples. However,
DBAB believed that these calculations did not necessarily create a useful
comparison due to significant differences between EarthLink and Prodigy.
The foregoing summary describes the analyses and factors that DBAB deemed
material in its presentation to the Committee, but is not a comprehensive
description of all analyses performed and factors considered by DBAB in
connection with preparing its opinion. The preparation of a financial
advisor's fairness opinion is a complex process involving the application
of subjective business judgment in determining the most appropriate and
relevant methods of financial analysis and the application of those
methods to the particular circumstances and, therefore, is not readily
susceptible to summary description. DBAB believes that its analyses must
be considered as a whole and that considering any portion of such
analyses and of the factors considered without considering all analyses
and factors could create a misleading view of the process underlying the
opinion. In arriving at its opinion, DBAB did not assign specific weights
to any particular analyses.
In conducting its analyses and arriving at its opinion, DBAB utilized a
variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling DBAB to provide its opinion
to the Committee as to the fairness, from a financial point of view, of
the consideration to be paid in the Amended Offer and the Merger to the
holders of Class A Common Stock other than SBC and its affiliates, and do
not purport to be appraisals or necessarily reflect the prices at which
11
businesses or securities actually may be sold, which are inherently subject to
uncertainty. In connection with its analyses, DBAB made, and was provided by
Prodigy's management and the Committee with, numerous assumptions with respect
to industry performance, general business and economic conditions and
other matters, many of which are beyond Prodigy's control. Analyses
based on estimates or forecasts of future results are not necessarily
indicative of actual past or future values or results, which may be
significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based
upon numerous factors beyond the control of Prodigy or its advisors,
neither Prodigy, the Committee nor DBAB nor any other person assumes
responsibility if future results or actual values are materially
different from these forecasts or assumptions.
Although DBAB provided advice to the Committee relating to the Original Offer,
the Amended Offer and the Merger, the decision to recommend the Merger Agreement
to Prodigy's Board of Directors and recommend the Amended Offer to the
holders of Class A Common Stock other than SBC and its affiliates was
solely that of the Committee and Prodigy's Board of Directors. As
described above, the opinion and presentation of DBAB to the Committee
were only one of a number of factors taken into consideration by the
Committee and Prodigy's Board of Directors in making their determination
to approve the Merger Agreement and recommend the Amended Offer to the
holders of Class A Common Stock other than SBC and its affiliates.
DBAB's opinion was addressed to, and was rendered for the use and
benefit of, the Committee in considering the Amended Offer and the
Merger and was not a recommendation to the holders of Class A Common
Stock whether or not to tender their shares in the Amended Offer or vote
in favor of the Merger. DBAB has expressed no opinion as to the merits
of the underlying decision of the Committee to approve the Merger
Agreement or recommend the Amended Offer or the Merger to Prodigy's
stockholders.
The Committee selected DBAB as financial advisor in connection with the Original
Offer, the Amended Offer and the Merger based on DBAB's qualifications,
expertise, reputation and experience in mergers and acquisitions. The
Committee retained DBAB pursuant to a letter agreement dated September
24, 2001 (the "Engagement Letter"). As compensation for DBAB's services
in connection with the Original Offer, the Amended Offer and the Merger,
Prodigy has agreed to pay DBAB a cash fee of $3,000,000, regardless of
whether the Original Offer, the Amended Offer and the Merger are
consummated. Prodigy has also agreed to reimburse DBAB for reasonable
fees and disbursements of DBAB's counsel and all of DBAB's reasonable
travel and other out-of-pocket expenses incurred in connection with the
Original Offer, the Amended Offer and the Merger or otherwise arising
out of the retention of DBAB under the Engagement Letter. Prodigy has
also agreed to indemnify DBAB and certain related persons to the full
extent lawful against certain liabilities, including certain liabilities
under the federal securities laws arising out of its engagement or the
Original Offer, the Amended Offer or the Merger.
DBAB is an internationally recognized investment banking firm experienced in
providing advice in connection with mergers and acquisitions and related
transactions. DBAB is an affiliate of Deutsche Bank AG (together with
its affiliates, the "DB Group"). In the ordinary course of business,
members of the DB Group may actively trade in the securities and other
instruments and obligations of Prodigy for their own accounts and for
the accounts of their customers. Accordingly, members of the DB Group
may at any time hold a long or short position in such securities,
instruments and obligations.
(h) Prodigy has filed DBAB's Fairness Opinion as Exhibit 11 to this
Amendment No. 2 and included it in copies of this Amendment No. 2 which
are being mailed to Prodigy's stockholders. Prodigy will make DBAB's
Fairness Opinion available for inspection and copying at its principal
executive offices during its regular business hours by any interested
security holder of Prodigy or to a representative of such holder who
has been so designated in writing.
12
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED
(a) The Committee engaged DBAB to advise and assist the Committee in the
course of the Committee's consideration of the Original Offer, the
Amended Offer, the Merger, and their fairness. The engagement letter
between DBAB and Prodigy provides that Prodigy will indemnify and hold
harmless DBAB from any liability resulting from its engagement other
than liability resulting from DBAB's gross negligence. In the
engagement letter Prodigy also agreed to reimburse DBAB for its out of
pocket costs and expenses and to pay the fee described in Item 5(b) at
such time as DBAB renders its opinion to the Committee.
(b) Prodigy's Committee agreed that Prodigy would pay DBAB a fee of
$3,000,000 for its assistance and analysis. No portion of the fee is
contingent on the nature of DBAB's advice regarding the offer.
(c) No material business relationship has existed between DBAB and SBC in
the past two years. In December of 2000, DBAB was engaged by Prodigy,
on behalf of the Committee, to evaluate the fairness of certain
proposed amendments to the SMA. DBAB was paid a cash fee of $500,000,
the payment of which was not conditioned on the execution of the
amendments to the SMA or DBAB's advice with respect to the fairness of
the proposed amendments. Other than the aforementioned engagement, no
material business relationship has existed between DBAB and Prodigy in
the past two years.
(d) The Committee has engaged Fulbright & Xxxxxxxx L.L.P. as independent
legal counsel. The engagement provides that Fulbright & Xxxxxxxx will
be paid hourly rates for time incurred by its attorneys, plus expenses.
Prodigy estimates that total expenses for the services of Fulbright &
Xxxxxxxx will be approximately $75,000. Prodigy has engaged Xxxxxx &
Xxxxxx L.L.P. to provide securities counsel and advice during the
tender offer transaction. The engagement provides that Xxxxxx & Xxxxxx
will be paid hourly rates for time incurred by its attorneys, plus
expenses. Prodigy estimates that total expenses for the services of
Xxxxxx & Xxxxxx will be approximately $50,000. Prodigy has engaged a
financial printer to assist it in the filing of this document. Prodigy
estimates that the total expenses for printing services will be
approximately $15,000.
(e) Except as set forth above, neither Prodigy nor any person acting on its
behalf has employed, retained or compensated any other person to make
any solicitations or recommendations to stockholders on its behalf
concerning the Original Offer or Amended Offer.
(f) Prodigy is not aware of any officer, director or affiliate of Prodigy
who has made a recommendation either in support of or against the
Amended Offer.
13
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY
(a) The following table lists the aggregate number and percentage of shares
of Prodigy's Class A Common Stock that are beneficially owned by the
directors and officers of Prodigy as of the date of this Amendment No.
2.
NAME NUMBER OF SHARES PERCENTAGE
---- ---------------- ----------
Xxxxx X. Xxxxx.................................... 42,500 *
Xxxx Xxxxxxxxx.................................... -- *
Xxxxx X. Xxxxx.................................... 30,000 *
Xxxxx Xxxxxxx..................................... 60,000 *
Xxxxx Xxxxx....................................... 100,000 *
Xxxxxxx X. Xxxxxx................................. 90,000 *
Xxxxxx Xxxxxxxx................................... 100,000 *
Xxxxxx X. XxXxxxx................................. 35,000 *
Xxx X. XxXxxxxx................................... 30,000 *
Xxxxx Xxxxx Xxxxx................................. -- *
Xxxxxx X. Xxxxxxxxx............................... -- *
Xxxx X. Xxxx...................................... -- *
Xxxxxxx X. Xxxxxx................................. 93,800 *
Xxxxxxx X. Xxxxxxxx............................... 185,000 *
Xxxxxx Xxxxxxx del Xxxxxxx........................ 1,600 *
Xxxxxx Xxxxxx Fraser.............................. 85,000 *
-----------------------
* Less than 1%
(b) Neither Prodigy, nor, to the best of its knowledge, any of its
officers, directors, affiliates or subsidiaries has engaged in any
transactions in Class A Common Stock in the past 60 days.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS
(a) Except as described or referred to in this Amendment No. 2, no
negotiation is being undertaken or engaged in by Prodigy which relates
to or would result in: (i) a tender offer or other acquisition of the
shares by Prodigy; (ii) an extraordinary transaction, such as a merger,
reorganization, or liquidation, involving Prodigy; (iii) a purchase,
sale, or transfer of a material amount of assets by Prodigy; or (iv)
any material change in the present indebtedness or capitalization of
Prodigy.
(b) At a meeting of the Board of Directors of Prodigy held on October 15,
2001, the Board granted to the Committee the authority to consider a
draft of the Merger Agreement furnished by SBC to counsel for the
Committee and to make any recommendations with respect thereto. The
Committee recommended, and the Executive Steering Committee and the
Board of Directors approved, the Merger Agreement and the Merger on
October 17, 2001.
(c) As part of the Committee's investigations concerning the Original Offer
and Amended Offer, members of the Committee and its advisors engaged in
the discussions with SBC and its representatives, including discussions
regarding the adequacy of the price.
ITEM 8. ADDITIONAL INFORMATION
(a) On October 3, 2001, Telmex and CGT, collectively the largest
stockholder of Prodigy common stock, announced their determination that
the Original Offer was not adequately priced at $5.45 per share. Telmex
and CGT announced that they had informed the Committee that, although
they did not rule out a sale of Prodigy and would be prepared to give
thoughtful and measured consideration to an appropriate acquisition
proposal, they believed the $5.45 price contained in the Original Offer
failed to adequately take into account Prodigy's fundamental values. On
October 11, 2001, VarTec
14
Telecom Inc., the third largest stockholder of Prodigy's Class A Common
Stock, announced that it would refuse to tender its shares in the
Original Offer. However, on October 17, 2001, Telmex, CGT and TFV
entered into the Stockholder Voting Agreement with SBC. A copy of this
Stockholder Voting Agreement is filed as Exhibit 7 to this Amendment
No. 2.
(b) On October 17, 2001, SBC and Prodigy reached an agreement in principle
with plaintiffs to settle all pending stockholder litigation in
Delaware relating to SBC Internet's tender offer. The agreement is
subject to the approval of the Delaware Court of Chancery.
(c) On October 19, 2001, Prodigy issued a press release reporting its
financial performance for the third reporting period in 2001. A copy of
the press release is attached as Exhibit 13 to this Amendment No. 2.
ITEM 9. EXHIBITS
*1 Proposed Amendment No. 2 to Resale Agreement
*2 Proposed Amendment No. 1 to Internet Sales Agency Agreement
*3 Proposed Amendment No. 3 to Resale Agreement
*4 October 16, 2001 Shareholder Recommendation Letter
*5 October 16, 2001 Press Release
**6 October 18, 2001 Press Release
**7 Letter Agreement, dated October 17, 2001, between SBC and
each of Telefonos de Mexico, S.A. de C.V., Carso Global
Telecom, S.A. de C.V. and Telmex Financial Ventures, LLC.
(incorporated by reference to Exhibit (a)(1)(xi) to
Amendment No. 2 to Schedule TO filed by SBC and SBC Internet
on October 18, 2001)
***8 Schedule of Officers and Directors of Prodigy
***9 Agreement and Plan of Merger, dated as of October 17, 2001,
by and among SBC, SBC Internet and Prodigy (incorporated by
reference to Exhibit (d)(i) to Amendment No. 3 to Schedule
TO filed by SBC and SBC Internet on October 19, 2001)
***10 DBAB Presentation dated October 16, 2001
****11 DBAB Fairness Opinion
****12 October 19, 2001 Shareholder Recommendation Letter
***13 October 19, 2001 Press Release
---------------
* Previously filed with the SEC on October 16, 2001 as an exhibit to
Prodigy's Schedule 14D-9
** Previously filed with the SEC on October 18, 2001 as an exhibit to
Prodigy's Amendment No. 1 to Schedule 14D-9
*** Filed herewith
**** Filed herewith and included in copies of this Amendment No. 2 mailed to
Prodigy's stockholders.
15
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
PRODIGY COMMUNICATIONS
CORPORATION
By: /s/ XXXXXX XXXXXXXX
------------------------------------
Name: Xxxxxx Xxxxxxxx
Title: Senior Vice President, General
Counsel & Secretary
Date: October 19, 2001
16
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
*1 Proposed Amendment No. 2 to Resale Agreement
*2 Proposed Amendment No. 1 to Internet Sales Agency Agreement
*3 Proposed Amendment No. 3 to Resale Agreement
*4 October 16, 2001 Shareholder Recommendation Letter
*5 October 16, 2001 Press Release
**6 October 18, 2001 Press Release
**7 Letter Agreement, dated October 17, 2001, between SBC and
each of Telefonos de Mexico, S.A. de C.V., Carso Global
Telecom, S.A. de C.V. and Telmex Financial Ventures, LLC.
(incorporated by reference to Exhibit (a)(1)(xi) to
Amendment No. 2 to Schedule TO filed by SBC and SBC Internet
on October 18, 2001)
***8 Schedule of Officers and Directors of Prodigy
***9 Agreement and Plan of Merger, dated as of October 17, 2001,
by and among SBC, SBC Internet and Prodigy (incorporated by
reference to Exhibit (d)(i) to Amendment No. 3 to Schedule
TO filed by SBC and SBC Internet on October 19, 2001)
***10 DBAB Presentation dated October 16, 2001
****11 DBAB Fairness Opinion
****12 October 19, 2001 Shareholder Recommendation Letter
***13 October 19, 2001 Press Release
---------------
* Previously filed with the SEC on October 16, 2001 as an exhibit to
Prodigy's Schedule 14D-9
** Previously filed with the SEC on October 18, 2001 as an exhibit to
Prodigy's Amendment No. 1 to Schedule 14D-9
*** Filed herewith
**** Filed herewith and included in copies of this Amendment No. 2 mailed to
Prodigy's stockholders
EXHIBIT 8
The following persons are the executive officers and/or directors of
Prodigy as of the date of this Amendment No. 2. None of these persons has been
convicted in a criminal proceeding during the past five years (excluding traffic
violations or similar misdemeanors), nor has any of these persons been a party
to any judicial or administrative proceeding during the past five years that
resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state securities
laws or a finding of any violation of federal or state securities laws. Unless
otherwise specified, each person listed below is a citizen of the United States
and his or her address is care of Prodigy Communications Corporation, 0000 Xxxxx
Xxxxx Xxxx., Xxxxxxxx XXX, Xxxxxx, Xxxxx 00000-0000.
PRINCIPAL OCCUPATION/EMPLOYMENT
NAME OFFICE HISTORY
---- ------ -------
Xxxxxxx Xxxxxx - Chairman of Xx. Xxxxxx has served as the
the Board chairman of the board of Prodigy
- Director since December 2000 and was
Prodigy's president and chief
executive officer from December
2000 to March 2001. Xx. Xxxxxx has
served as group president of SBC
since September 2000 and from July
1995 to July 2000. From July 2000
to September 2000, Xx. Xxxxxx was
group president, national
operations of SBC.
Xxx Xxxxx - Director, Xx. Xxxxx was president of SBC
- Compensation from 1992 to 1995 and president of
Committee Chair Southwestern Xxxx Telephone
- Member, Audit Company, a subsidiary of SBC, from
Committee 1988 to 1992. He has served as a
director of Texas Instruments
incorporated since 1989 and as its
chairman of the board from 1996 to
1998. Xx. Xxxxx is also a director
of Inet Technologies, Inc., a
communications software solutions
provider.
Xxxxx Xxxxx - Director Since December 1999, Xx. Xxxxx has
- Audit served as vice president and chief
Committee Chair accounting officer of Temple
- Member, Inland, Inc., a manufacturer of
Independent corrugated packaging and building
Directors products with financial services
Committee operations in mortgage
and consumer banking. From 1963 to
September 1999, Xx.Xxxxx was a
partner of Ernst & Young LLP.
Xxx XxXxxxx - Director Xx. XxXxxxx has served as
- Member, Audit president of XxXxxxx Partners,
Committee LLC, a consulting and investment
- Member, services company, since 1997. From
Independent 1985 to 1997, Xx. XxXxxxx served
Directors as president of Cullen/Frost
Committee Bankers, Inc., a bank holding
company. From 1978 to 1985, Xx.
XxXxxxx was executive vice
president and secretary of
Cullen/Frost Bankers, Inc. Xx.
XxXxxxx is also a director of
Cullen/Frost Bankers, Inc. and
Frost National Bank.
Xxx X. XxXxxxxx - Director Xx. XxXxxxxx has served as
- Member, Audit chairman and chief executive
Committee officer of X.X. Xxxxxx Xxxxx Bank
- Member, -- San Antonio region, since 1987.
Compensation
Committee
Xxxx Xxxx - Director Xx. Xxxx has held various
- President & management positions within SBC or
CEO its subsidiaries for more than the
past five years.
Xxxxx Xxxxx Xxxxx - Director Xx. Xxxxx Xxxxx has served as
- Member, chief executive officer of Telmex
Executive since January 1995 and as vice
Steering chairman of Carso Global Telecom
Committee since October 1998. Xx. Xxxxx
Xxxxx is also a director of Grupo
Carso and Grupo Financiero
Inbursa, both of which are
affiliated with Carso Global
Telecom. He also serves as a
director of America Movil S.A. de
C.V., a provider of wireless
communication services that was
spun-off from Telmex in February
2001, and Honeywell International,
a diversified technology and
manufacturing company. Xx. Xxxxx
Xxxxx is a citizen of and his
principal place of business is in
Mexico.
Xxxxxx Xxxxxxx del - Director Xx. Xxxxxxx is the Vice President
Xxxxxxx - Member, of Corporate Development of
Executive Telmex. Xx. Xxxxxxx has held
Steering various management positions
Committee within Telmex or its subsidiaries
for more than five years. Xx.
Xxxxxxx is a citizen of and his
principal place of business is in
Mexico.
Xxx Xxxxxxxxx - Director Xx. Xxxxxxxxx has served as senior
- Member, vice president of corporate
Executive finance of SBC since October 2000.
Steering From December 1997 to October
Committee 2000, Xx. Xxxxxxxxx was employed
- Member, Audit by Pacific Xxxx Telephone Company,
Committee a subsidiary of SBC, serving as
- Member, senior vice president, finance,
Compensation from November 1999 to October 2000
Committee and chief financial officer from
December 1997 to November 1999.
From 1993 to December 1997, Xx.
Xxxxxxxxx was a partner of Ernst &
Young LLP.
Xxxx Xxxxxxxxx - Director Xx. Xxxxxxxxx has been group
- Member, president of SBC since July 2001.
Executive Xx. Xxxxxxxxx has held high-level
Steering managerial positions within SBC or
Committee its subsidiaries for more than
five years.
Xxxxxxx Xxxxxxxx - Executive Xx. Xxxxxxxx has served as
Vice President executive vice president and chief
and operating officer of Prodigy
Chief Operating since June 2000. From June 1995 to June
Officer 2000, he was vice president of
Wireless Systems of SBC's
Technology Resources Inc.'s
Wireless Communications
Laboratories. Xx. Xxxxxxxx also
serves on the boards of various
wireless industry associations,
including the Universal Wireless
Communications Consortium, the
Wireless Application Protocol
Forum LTD, the Messaging Protocol
Forum (SMPP Development Forum) and
the GSM Global Roaming Forum.
Xxxxx Xxxxx - Senior Vice Xx. Xxxxx joined Prodigy as senior
President of vice president of finance, chief
Finance, Chief financial officer and treasurer in
Financial March 2000 and also served as a
Officer & director from March 2000 to June
Treasurer 2000. He has been employed by SBC
since 1993, serving as director of
finance of SBC International from
March 1998 until March 2000,
director of corporate financial
planning from August 1996 to
February 1998, and manager of
financial planning from June 1993
to August 1996. Previously, Xx.
Xxxxx was manager of financial
planning at the Permea division of
Air Products from April 1990 to
May 1993, and a plant controller
for Monsanto from December 1986 to
March 1990.
Xxxxxx Xxxxxxxx - Senior Vice Xx. Xxxxxxxx joined Prodigy as
President, senior vice president, general
General counsel and secretary in June
Counsel & 2000. From 1999 to June 2000, Mr.
Secretary Xxxxxxxx was counsel for SBC
Directory Operations Law
Department. From 1993 to 1999, he
served as secretary and counsel
for Ameritech Advertising
Services. Xx. Xxxxxxxx'x previous
positions include acting general
counsel for DonTech, senior
attorney for Ameritech Services, Inc.
and senior attorney for Michigan Xxxx
Telephone Company.
Xxxxxxx Xxxxxx - Senior Vice Xx. Xxxxxx joined Prodigy as
President senior vice president of human
Human resources and administrative
Resources & operations in June 2000. From 1994
Administration to June 2000, Xx. Xxxxxx served as
the vice president--operations for
SBC Technology Resources, Inc.,
the research arm for SBC. Xx.
Xxxxxx began his career in
telecommunications with
Southwestern Xxxx in 1975. He held
numerous assignments in all
aspects of the communications
industry before transitioning to
Human Resources with SBC.
Xxxxxx Xxxxxx Fraser - Senior Vice Xx. Xxxxxx joined Prodigy as senior vice
President of president of advertising and communications
Advertising & in November 2000. From 1996 to November 2000,
Communication Xx. Xxxxxx was senior vice president and partner,
as well as general manager of the Austin office,
of Xxxxxxxxx Xxxxxxx International Communications.
From 1993 to 1996, Xx. Xxxxxx owned her own public
relations firm. Prior to that time, she worked for
10 years in the federal government and for various
public relations companies.
Xxxxx Xxxxxxx - Senior Vice As chief marketing officer of Prodigy, Xx. Xxxxxxx
President is responsible for defining the Prodigy customer
and Chief experience and growing Prodigy's Internet market
Marketing leadership. Prior to joining Prodigy, Xx. Xxxxxxx served
Officer as executive vice president of Internet marketing at Xxxxxxxx
McQueen, the Southwest's fourth largest advertising agency.
Previously, Xx. Xxxxxxx spent five years in the marketing
organizations of Pepsi and Texas Commerce Bank.
EXHIBIT 10
STRICTLY PRIVATE & CONFIDENTIAL
--------------------------------------------------------------------------------
PROJECT GALAXY
Presentation to the Independent Committee of Pluto's Board of Directors
October 16, 2001
Deutsche Banc Alex. Xxxxx represents the Investment Banking activities of
Deutsche Banc Alex. Xxxxx Inc. (US) and Deutsche Bank Securities Ltd. (Canada).
Deutsche Banc Alex. Xxxxx Inc. and Deutsche Bank Securities Ltd. are
subsidiaries of Deutsche Bank AG.
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
--------------------------------------------------------------------------------
The information contained in this presentation was obtained solely from the
management of Pluto and from public sources. Deutsche Banc Alex. Xxxxx Inc.
("Deutsche Banc Alex. Xxxxx") has used and relied upon such information in the
preparation of this presentation and does not assume responsibility for
independent verification of any such information, and makes no representation
or warranty in respect of the accuracy or completeness of such information.
This presentation has been prepared for internal use only, is confidential and
may not be disclosed or provided to any third parties without the written
consent of Deutsche Banc Alex. Xxxxx.
This presentation is prepared as of October 16, 2001 and reflects information
made available to us prior to such date. It does not include information
regarding all of the assessments made by Deutsche Banc Alex. Xxxxx in arriving
at its conclusions.
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
CONTENTS
Section
1 Situation overview 1
2 Pluto's stock price and volume analysis 8
3 Pluto summary valuation considerations 16
A Going-private premium analysis 17
B Pluto discounted cash flow analysis 22
C Comparable company trading multiple analysis 29
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SITUATION OVERVIEW SECTION 1
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SECTION 1
Situation overview
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SUMMARY SITUATION OVERVIEW
- On September 21, 2001 after the close of the market, Saturn announced a
tender offer for all of the outstanding shares of Pluto's common stock it
did not already own
- Saturn currently owns approximately 42% of Pluto's outstanding shares and
40% on a fully diluted basis
- Saturn offered $5.45 for each share of Pluto's Class A common stock
- represents a 54% premium over Pluto's closing stock price of $3.54 on the
announcement date
- Saturn commenced the tender offer on October 2, 2001
- the tender offer includes a condition that at least a majority of the
shares not owned by Saturn be tendered
- Since the announcement of the tender offer, Pluto has issued two significant
announcements:
- on October 1, Pluto increased the monthly rate for dial-up Internet
service from $19.95 per month to $21.95 per month
- on October 3, Pluto increased projections guidance for 2001 and 2002:
2001 GUIDANCE 2002 GUIDANCE
----------------------------- ----------------------------
(FIGURES IN MILLIONS) PREVIOUS NEW PREVIOUS NEW
--------------------------- ----------- ----------- ----------- -----------
Net revenues $355 - $365 $360 - $370 $426 - $438 $455 - $480
Reported EBITDA $40 - $42 $52 - $55 $60 - $63 $90 - $95
Subscribers 3.4 - 3.7 3.5 - 3.7 NA NA
Source: Pluto press release
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SUMMARY SITUATION OVERVIEW (continued)
- On October 4, 2001, Telmex and Carso Global Telecom, which own approximately
59% of the Pluto shares not owned by Saturn (56% on a fully diluted basis),
said that the "Saturn offer fails to adequately reflect Pluto's fundamental
value"
- On October 11, VarTec Telecom Inc., which owns approximately 1.9 million
Pluto shares, announced that it would refuse to tender its Pluto shares in
the offer
- On October 15, Saturn filed Amendment No. 1 to the Schedule TO and announced
that it is negotiating with the Independent Committee of Pluto's Board of
Directors regarding a possible increase in the offer price
- according to the filing, Saturn suggested to Xx. Xxxxxx XxXxxxx (the
Chairman of the Independent Committee) that it might be willing to
increase its offer to $6.00 - $6.25, while Xx. XxXxxxx informally
suggested that a price of $6.55 could get the support of the Independent
Committee
- On October 16, Pluto filed its Schedule 14D-9 in which it stated that it is
unable to take a position at that time on Saturn's $5.45 per share offer
given the possibility of an increased price or renegotiated transaction
- The Independent Committee has asked Deutsche Banc Alex. Xxxxx to consider a
price of $6.60 per share
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CHRONOLOGY OF SATURN/PLUTO RELATIONSHIP
- Pluto and Saturn sign an agreement to provide Saturn's high-speed DSL
service to Pluto consumer and business Internet customers in markets where Saturn
provides DSL service. 11/04/99
- Saturn and Pluto announce a 3-year strategic alliance in which Pluto agrees
to manage Saturn's Internet service customers. Saturn agrees to contribute
assets used in connection with its consumer and small business Internet
operations and its trademarks in exchange for 43 percent stake in Pluto and
offers Pluto's service to consumers and small businesses in its service
area. 11/22/99
- Saturn and Pluto complete the transaction announced in November 1999 to
combine their consumer and small business Internet operations, making Pluto
the nation's largest provider of retail DSL broadband Internet access to
consumers and small businesses. Saturn obtains right to appoint 3 directors to
the board of Pluto.
- Based on Pluto's closing stock price on the closing date, the value of Saturn's
interest in Pluto is approximately $560 million. 05/31/00
- Xxxxxxx Xxxxxx, group president of Saturn, is named to the board of directors for
Pluto. 09/15/00
- Xxxxxxx Xxxxxx is temporarily named president and CEO of Pluto while the company
conducts a search for a permanent replacement to former president and CEO,
Xxxxxxx Xxxxxxxxx, who resigned his post effective December 1, 2000. 12/06/00
- Saturn and Pluto enter into a credit agreement, pursuant to which Saturn
agrees to provide a $110 million credit line on January 19, 2001.
- Xxxxxxx Xxxxxxxxxx, a senior vice president of consumer marketing for Saturn
is announced as one of three new members of Pluto's board of directors. He
serves as a director on behalf of Saturn. 12/29/00
- Pluto and Saturn revise and renegotiate the strategic alliance into which they
originally entered in May 2000. As part of the renegotiated agreement, Pluto
and Saturn extend the term of their relationship from three to nine years
(through 2009), and Saturn increases its minimum subscriber commitment to
Pluto to approximately 3.75 million DSL and 375,000 dial-up subscribers over
the next nine years. 01/19/01
- Pluto names Xxxx Xxxx of Saturn as president and CEO, its third chief
executive in less than a year. Xxxx was a vice president for Saturn
subsidiary, Saturn Telecom. Xxxx replaces Xxxxxxx Xxxxxx, who remains as
chairman of the board. 02/28/01
-- Xxxxx Xxxxx, senior executive VP of Corporate Development of Saturn, and
Xxxxxx Xxxxxx, managing director of Corporate Development of Saturn, meet with
Xxxxx Xxxxx, CEO of Telmex, and Xxxxxx Xxxxxxx del Xxxxxxx, executive VP of
Corporate Development of Telmex, to discuss the consumer Internet industry and
potential partnering opportunities with third-party Internet service
providers, as well as the possibility of Saturn acquiring Pluto. 05/10/01
- Publicly available information
-- Information derived from Saturn's Schedule TO
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CHRONOLOGY OF SATURN/PLUTO RELATIONSHIP (continued)
- Xxxxxxx Xxxxxxxxxx of Saturn resigns as board member of Pluto, while Xxxx
Xxxxxxxxx III and Xxxx Xxxx are announced as new members of Pluto's board of
directors. Xxxxxxxxx is group president of Saturn. 06/07/01
-- Xxxxxx Xxxxxx and Xxxxx Xxxxx, VP and assistant General Counsel of Saturn,
call Xxxxxx Xxxxxxx to advise him that Saturn continues to consider acquiring
the remaining shares of Pluto. In addition, they also advise Xxxxxxx Xxxxxx
that Saturn might be making a proposal to enter into negotiations with Pluto's
Board. 06/21/01
-- Xxxxx Xxxxx speaks on the phone with Xxxxx Xxxxx, to advise him that Saturn
is considering making a proposal to acquire the remaining shares of Pluto, and
that Saturn hopes that the Telmex Affiliates would find the proposal attractive. 06/27/01
-- Saturn's Board authorizes management to proceed with an acquisition of the
minority interest of Pluto. During the week of June 25, however, the trading
price of the shares increases from $3.93 to $5.69, and Saturn management
decides that it is not in Saturn's interest to pursue the transaction with the
trading price at $5.69. 06/29/01
-- Xxxxxx Xxxxxxxx, chairman and CEO of Saturn, calls Xxxxxx Slim to advise him
that Saturn is again considering proceeding with the Pluto bid, that Saturn
intends to proceed using a tender offer at a price of $5.45 per share, and
that Saturn would like Telmex Affiliates to tender their shares. 09/19/01
- Saturn announces a tender offer for all of the outstanding shares of Pluto
common stock which it does not already own. The offer is set at $5.45. 09/21/01
-- Deutsche Banc Alex. Xxxxx contacts Xxxxx Xxxxx to advise him that it has been
retained by Pluto's independent directors to assist them in their evaluation
of Saturn's tender offer. 09/25/01
-- Representatives of the independent directors of Pluto meet with
representatives of Saturn. The representatives discuss how to proceed so that
Saturn and the independent directors can understand each others' positions
with respect to the offer. 10/01/01
- Saturn commences the tender offer, set to expire October 30. 10/02/01
- Saturn files Amendment No. 1 of the the Schedule TO and announces that it is
negotiating with Pluto's Independent Committee regarding a possible increase
in the offer price. 10/15/01
- Pluto files Schedule 14D-9 in which it states that it is unable to take a
position on Saturn's $5.45 per share offer given the possibility of an
increased price or renegotiated transaction. 10/16/01
- Publicly available information
-- Information derived from Saturn's Schedule TO
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CORPORATE GOVERNANCE PROVISIONS SUMMARY
On May 31, 2000, Pluto, as part of its strategic relationship with Saturn,
amended its certificate of incorporation and by-laws to include the following
corporate governance arrangements:
|X| Saturn has the right to appoint three of Pluto's ten directors
|X| Pluto's board established an executive steering committee
- consists of four members, of which two members are appointed by Saturn and
the other two members are appointed by Carso Global Telecom and Telmex
- must unanimously approve all major corporate actions, such as mergers,
acquisitions, and capital expenditures or borrowings in excess of $20
million, prior to their submission to the Board for consideration
Source: publicly available information
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SITUATION OVERVIEW SECTION 1
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SMA TERMINATION PROVISION SUMMARY
|X| The SMA may be terminated before December 31, 2009 by Saturn if (i) Pluto
Internet service fails to meet specified performance standards (as
described below) in any three or more consecutive quarters, or (ii) if any
designated competitor (as defined below) acquires 15% or more of Pluto (1)
SMA PERFORMANCE STANDARDS
|X| Pluto's portal must comply with the following performance standards measured
on a quarterly basis:
(i) non-subscriber revenue per subscriber must be substantially equivalent
to or exceed the non-subscriber revenue per subscriber of other
competitive ISPs generated from their portal, taking into account the
relative size of the subscriber base, access mix and other relative
factors
(ii) Pluto's portal must be accessible to subscribers at least 98% of the
time on average, excluding planned outages
DESIGNATED COMPETITORS
|X| Designated competitors include: AOL Time Warner, AT&T, WorldCom, Sprint,
Microsoft, BellSouth, Qwest and Verizon, and any other entity in which
these competitors own a 25% or greater equity interest
(1) The SMA may also be terminated by either party if the other party breaches
the SMA
Source: Publicly available information
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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SECTION 2
Pluto's stock price and volume analysis
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO PRICE / VOLUME PERFORMANCE
PLUTO'S STOCK PRICE WAS VOLATILE OVER THE PAST FIVE MONTHS
|X| INCREASED 83% (FROM $2.21 TO $4.05) DURING THE WEEK OF MAY 21 VERSUS 3% FOR
EARTHLINK
|X| INCREASED 55% (FROM $3.92 TO $6.06) IN FIVE TRADING DAYS AT THE END OF JUNE
VERSUS 19% FOR EARTHLINK
|X| DECLINED 37% (FROM $7.20 TO $4.57) BETWEEN JULY 26 AND AUGUST 6, VERSUS 4%
FOR EARTHLINK, AFTER PLUTO ANNOUNCED STRONG 2ND QUARTER RESULTS AND RAISED
ITS 2001 AND 2002 REVENUE AND EBITDA GUIDANCE
|X| DECLINED 33% (FROM $5.25 TO $3.54) BETWEEN SEPTEMBER 10 AND THE ANNOUNCEMENT
OF THE TENDER OFFER VERSUS 8% FOR EARTHLINK
DAILY: JANUARY 1, 2001 - YTD
--------------------------------------------------------------------------------
[GRAPHIC]
Source: Annotations are based on publicly available information
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO PRICE / VOLUME AND TRANSACTION BACKGROUND
DAILY: MAY 1, 2001 - YTD
--------------------------------------------------------------------------------
[GRAPHIC]
Source: Annotations are based on non-public events disclosed in Schedule TO by
Saturn on October 2, 2001 (see "Special Factors -- Background of the Offering")
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO TRADING VOLUME HISTORY
$ %
DAILY CHANGE CHANGE
DATE VOLUME IN PRICE IN PRICE
---- ------ -------- --------
5/01/01 127,900 ($0.14) (4.3%)
5/02/01 581,400 0.29 9.4
5/22/01 638,000 0.63 25.2
5/23/01 294,000 0.17 5.4
6/26/01 175,800 0.17 4.3
6/27/01 332,600 0.54 13.2
6/28/01 687,400 0.37 8.0
6/29/01 907,700 0.69 13.8
7/02/01 397,600 0.37 6.5
7/26/01 734,900 (0.95) (13.2)
7/30/01 575,100 (0.54) (8.9)
AVERAGE DAILY VOLUME
----------------------------------------------
2/01/01 - 9/10/01 145,725
5/01/01 - 9/10/01 181,990
9/17/01 - 9/21/01 242,420
DAILY: MAY 1, 2001 - SEPTEMBER 21, 2001
--------------------------------------------------------------------------------
[GRAPHIC]
(1) Excluding days with daily volume above 500,000, the average daily volume is
151,986.
Source: Publicly available information and non-public events disclosed in
Schedule TO by Saturn on October 2, 2001 (see "Special Factors - Background of
the Offering")
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO STOCK PRICE: ADJUSTED FROM MAY 17, 2001
ADJUSTED STOCK PRICE THROUGH THE ANNOUNCEMENT DATE
-----------------------------------------------------------------------------------------------------------
PLUTO PRICE 5/17/01 INDEX VALUE 9/21/01 PLUTO PRICE 9/21/01
----------------------- ----------------------- -----------------------
Closing price $2.11 x 167.77 = $3.54
Adjusted using EarthLink $2.11 x 96.57 = $2.04
Adjusted using NASDAQ $2.11 x 64.88 = $1.37
Adjusted using S&P 500 $2.11 x 74.96 = $1.58
ADJUSTED STOCK PRICE THROUGH 9/10/01
-----------------------------------------------------------------------------------------------------------
PLUTO PRICE 5/17/01 INDEX VALUE 9/10/01 PLUTO PRICE 9/10/01
----------------------- ----------------------- -----------------------
Closing price $2.11 x 248.82 = $5.25
Adjusted using EarthLink $2.11 x 104.93 = $2.21
Adjusted using NASDAQ $2.11 x 77.28 = $1.63
Adjusted using S&P 500 $2.11 x 84.79 = $1.79
[GRAPHIC]
Source: Publicly available information
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO STOCK PRICE: ADJUSTED FROM JUNE 25, 2001
ADJUSTED STOCK PRICE THROUGH THE ANNOUNCEMENT DATE
------------------------------------------------------------------------------------------------------------------------------------
PLUTO PRICE 6/25/01 INDEX VALUE 9/21/01 PLUTO PRICE 9/21/01
------------------- ------------------- -------------------
Closing price $3.92 x 90.31 = $3.54
Adjusted using EarthLink $3.92 x 105.46 = $4.13
Adjusted using NASDAQ $3.92 x 69.39 = $2.72
Adjusted using S&P 500 $3.92 x 79.25 = $3.11
ADJUSTED STOCK PRICE THROUGH 9/10/01
------------------------------------------------------------------------------------------------------------------------------------
PLUTO PRICE 6/25/01 INDEX VALUE 9/10/01 PLUTO PRICE 9/10/01
------------------- ------------------- -------------------
Closing price $3.92 x 133.93 = $5.25
Adjusted using EarthLink $3.92 x 114.59 = $4.49
Adjusted using NASDAQ $3.92 x 82.67 = $3.24
Adjusted using S&P 500 $3.92 x 89.66 = $3.51
[GRAPHIC OMITTED]
Source: Publicly available information
[GRAPHIC]
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO STOCK PRICE: ADJUSTED FROM ANNOUNCEMENT TO OCTOBER 15, 2001
ADJUSTED STOCK PRICE THROUGH THE ANNOUNCEMENT DATE (9/21/01 - 10/15/01)
-----------------------------------------------------------------------------------------------------------------------------------
PLUTO PRICE 9/21/01 INDEX VALUE 10/15/01 PLUTO PRICE 10/15/01
------------------- -------------------- --------------------
Closing price $3.54 x 177.40 = $6.28
Adjusted using EarthLink $3.54 x 144.82 = $5.13
Adjusted using NASDAQ $3.54 x 112.96 = $4.00
Adjusted using S&P 500 $3.54 x 119.19 = $4.22
[GRAPHIC]
Source: Publicly available information
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PLUTO'S STOCK PRICE AND VOLUME ANALYSIS SECTION 2
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PLUTO VOLUME AT PRICE
LAST 3 MONTHS THROUGH ANNOUNCEMENT DATE LAST 12 MONTHS THROUGH ANNOUNCEMENT DATE
11.1 million shares traded (40% of total float) 47.8 million shares traded (170% of total float)
----------------------------------------------------------------- -------------------------------------------------------------
[GRAPHIC] [GRAPHIC]
FROM ANNOUNCEMENT THROUGH NEW GUIDANCE (10/3) DAY AFTER NEW GUIDANCE THROUGH 10/15
9.2 million shares traded (33% of total float) 2.9 million shares traded (10% of total float)
----------------------------------------------------------------- -------------------------------------------------------------
[GRAPHIC] [GRAPHIC]
Source: Publicly available information
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
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SECTION 3
Pluto summary valuation considerations
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
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TAB A
Going-private premium analysis
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
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GOING-PRIVATE PREMIUM ANALYSIS (announcement date)
Precedent transaction relevant
Purchase price premium (discount) to Pluto stock price premium range (3)
------------------------------------------------------ -------------------------------
Stock price category (1) Pluto price (2) $5.45 $6.60 Low Median High
----------------------------------- --------------- ----- ----- --- ------ ----
Closing price on 9/21 $3.54 54% 86% 25% (4) 31% (4) 37% (4)
10 trading days average (9/4) 4.36 25% 51% 27% 34% 41%
20 trading days average (8/20) 4.80 14% 38% 30% 38% 45%
30 trading days average (8/6) 5.00 9% 32% 31% 39% 46%
Adjusted using Earthlink since 6/25 4.13 32% 60%
Adjusted using NASDAQ since 6/25 2.72 100% 143%
Adjusted using S&P 500 since 6/25 3.11 75% 112%
Closing price on 6/25 3.92 39% 68%
Adjusted using Earthlink since 5/17 2.04 167% 224%
Adjusted using NASDAQ since 5/17 1.37 298% 382%
Adjusted using S&P 500 since 5/17 1.58 245% 318%
Closing price on 5/17 2.11 158% 213%
52-week high (7/20) $7.25 (25%) (9%)
52-week low (12/19) 1.13 382% 484%
(1) Adjustments and averages are through the announcement date 9/21/01.
(2) Pluto average prices are based on volume-weighted closing price during the
respective periods.
(3) Median of precedent going-private transactions. Low and high range based on
0.8x and 1.2x of the median, respectively.
(4) Premium to the closing price on the last trading day prior to the
announcement date.
Source: Publicly available information
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
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GOING-PRIVATE PREMIUM ANALYSIS (9/10/01)
Precedent transaction relevant
Purchase price premium (discount) to Pluto stock price premium range (3)
------------------------------------------------------ -------------------------------
Stock price category (1) Pluto price (2) $5.45 $6.60 Low Median High
----------------------------------- --------------- ----- ----- --- ------ ----
Closing price on 9/10 $5.25 4% 26% 25% (4) 31% (4) 37% (4)
10 trading days average (8/27) 5.45 0% 21% 27% 34% 41%
20 trading days average (8/13) 5.56 (2%) 19% 30% 38% 45%
30 trading days average (7/30) 5.52 (1%) 20% 31% 39% 46%
Adjusted using Earthlink since 6/25 4.49 21% 47%
Adjusted using NASDAQ since 6/25 3.24 68% 104%
Adjusted using S&P 500 since 6/25 3.51 55% 88%
Closing price on 6/25 3.92 39% 68%
Adjusted using Earthlink since 5/17 2.21 147% 199%
Adjusted using NASDAQ since 5/17 1.63 234% 305%
Adjusted using S&P 500 since 5/17 1.79 204% 269%
Closing price on 5/17 2.11 158% 213%
52-week high (7/20) $7.25 (25%) (9%)
52-week low (12/19) 1.13 382% 484%
(1) Adjustments and averages are through 9/10/01.
(2) Pluto average prices are based on volume-weighted closing price during the
respective periods.
(3) Median of precedent going-private transactions. Low and high range based on
0.8x and 1.2x of the median, respectively.
(4) Premium to the closing price on the last trading day prior to the
announcement date.
Source: Publicly available information
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
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PREMIUMS PAID IN PRECEDENT GOING-PRIVATE TRANSACTIONS
- Precedent transactions were selected based on the following criteria:
- US target
- remaining interest represents 50 - 80 percent of target's outstanding
shares
- transaction value greater than $100 million
- transactions announced, but not terminated, since January 1, 1998
- cash consideration only
- In the precedent "going private" transactions, the targets' shareholders
predominately received at least 30 percent final premium to both the
target's closing share price one day prior to the initial offer date and to
the target's 10 trading-day, 20 trading-day and 30 trading-day volume
weighted average share price (1) prior to the initial offer date
Percentage of precedent transactions with a final offer price premium equal or higher than:
-------------------------------------------------------------------------------------------
5% 10% 20% 30% 40% 50% 60% 70% 80%
-- --- --- --- --- --- --- --- ---
One day prior 100% 83% 75% 50% 42% 25% 8% 8% 8%
10 trading days average (1) 100% 92% 83% 67% 42% 33% 25% 17% 17%
20 trading days average (1) 100% 92% 75% 58% 33% 25% 25% 17% 17%
30 trading days average (1) 100% 100% 83% 67% 50% 33% 25% 17% 8%
(1) Average prices are based on volume-weighted closing price during the
respective periods.
Source: SDC Platinum, Bloomberg and publicly available information
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PLUTO SUMMARY VALUATION CONSIDERATIONS SECTIONS 3
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PRECEDENT TRANSACTIONS ANALYSIS - ACQUISITION OF REMAINING INTEREST (50 - 80
PERCENT ACQUIRED)
AMENDED OFFER
-------------- FINAL OFFER'S
PREMIUM
TARGET XXXX. % INITIAL FINAL OVER INITIAL
DATE XXX. DATE EFF. ACQUIROR VALUE ACQUIRED OFFER OFFER OFFER
---------------------------------------------------------------------------------------------------------------------------
Sodexho Marriott Services Inc
01/25/01 06/21/01 Sodexho Alliance(Sodexho SA) $953 53 $27.00 $32.00 18.5%
CB Xxxxxxx Xxxxx Services
11/13/00 07/23/01 Xxxx Capital Partners LP 603 62 15.50 16.00 3.2
American Industrial Properties
11/02/00 03/31/01 Developers Diversified Realty 156 54 13.74 13.74 0.0
Brookdale Living Communities
04/20/00 09/14/00 Investor Group 149 60 15.25 15.25 0.0
Castle & Xxxxx Inc
03/30/00 09/07/00 Flexi-Van Leasing Inc 243 73 17.00 19.25 13.2
Garden Ridge Corp
11/22/99 02/02/00 GR Acquisition Corp 144 69 11.50 11.50 0.0
VWR Scientific Products Corp
06/09/99 07/28/99 Merck E(Merck AG) 581 51 37.00 37.00 0.0
Life USA Holding Inc
05/17/99 10/01/99 Allianz Life Ins Co(Allianz) 411 77 20.75 20.75 0.0
ASA Holdings Inc
02/16/99 05/11/99 Delta Air Lines Inc 718 73 34.00 34.00 0.0
Brylane Inc
12/02/98 04/23/99 Pinault-Printemps Redoute 231 51 20.00 24.50 22.5
Sbarro Inc
11/25/98 09/29/99 Investor Group 386 65 27.50 28.85 4.9
DeKalb Genetics Corp
05/11/98 12/07/98 Monsanto Co 2,263 60 100.00 100.00 0.0
VOLUME WEIGHTED AVERAGE PRICE OF TARGET
PRIOR TO INITIAL ANNOUNCEMENT (1)
---------------------------------------
10 20 30
TARGET TRADING TRADING TRADING
DATE XXX. DATE EFF. ACQUIROR 1 DAY DAYS DAYS DAYS
--------------------------------------------------------------------------------------------------
Sodexho Marriott Services Inc
01/25/01 06/21/01 Sodexho Alliance(Sodexho SA) $24.88 $24.61 $23.42 $22.83
CB Xxxxxxx Xxxxx Services
11/13/00 07/23/01 Xxxx Capital Partners LP 13.13 12.93 12.71 12.43
American Industrial Properties
11/02/00 03/31/01 Developers Diversified Realty 12.50 11.19 11.52 11.90
Brookdale Living Communities
04/20/00 09/14/00 Investor Group 10.75 10.76 10.95 11.13
Castle & Xxxxx Inc
03/30/00 09/07/00 Flexi-Van Leasing Inc 12.06 12.34 12.84 12.77
Garden Ridge Corp
11/22/99 02/02/00 GR Acquisition Corp 7.25 7.03 6.84 6.80
VWR Scientific Products Corp
06/09/99 07/28/99 Merck E(Merck AG) 27.94 28.37 28.98 28.02
Life USA Holding Inc
05/17/99 10/01/99 Allianz Life Ins Co(Allianz) 10.25 10.17 10.34 10.28
ASA Holdings Inc
02/16/99 05/11/99 Delta Air Lines Inc 31.94 31.62 31.24 30.85
Brylane Inc
12/02/98 04/23/99 Pinault-Printemps Redoute 16.88 12.89 13.57 14.21
Sbarro Inc
11/25/98 09/29/99 Investor Group 24.44 24.73 24.18 23.28
DeKalb Genetics Corp
05/11/98 12/07/98 Monsanto Co 77.00 72.48 71.70 70.96
FINAL OFFER'S PREMIUM OVER WEIGHTED AVG.
PRICE PRIOR TO INITIAL ANNOUNCEMENT (1)
-----------------------------------------
10 20 30
TARGET 1 TRADING TRADING TRADING
DATE XXX. DATE EFF. ACQUIROR DAY DAYS DAYS DAYS
----------------------------------------------------------------------------------------------------
Sodexho Marriott Services Inc
01/25/01 06/21/01 Sodexho Alliance(Sodexho SA) 28.6% 30.0% 36.7% 40.2%
CB Xxxxxxx Xxxxx Services
11/13/00 07/23/01 Xxxx Capital Partners LP 21.9 23.7 25.9 28.7
American Industrial Properties
11/02/00 03/31/01 Developers Diversified Realty 9.9 22.8 19.2 15.5
Brookdale Living Communities
04/20/00 09/14/00 Investor Group 41.9 41.8 39.2 37.0
Castle & Xxxxx Inc
03/30/00 09/07/00 Flexi-Van Leasing Inc 59.6 56.0 49.9 50.8
Garden Ridge Corp
11/22/99 02/02/00 GR Acquisition Corp 58.6 63.6 68.0 69.0
VWR Scientific Products Corp
06/09/99 07/28/99 Merck E(Merck AG) 32.4 30.4 27.7 32.1
Life USA Holding Inc
05/17/99 10/01/99 Allianz Life Ins Co(Allianz) 102.4 103.9 100.6 101.9
ASA Holdings Inc
02/16/99 05/11/99 Delta Air Lines Inc 6.5 7.5 8.8 10.2
Brylane Inc
12/02/98 04/23/99 Pinault-Printemps Redoute 45.2 90.1 80.5 72.4
Sbarro Inc
11/25/98 09/29/99 Investor Group 18.1 16.7 19.3 23.9
DeKalb Genetics Corp
05/11/98 12/07/98 Monsanto Co 29.9 38.0 39.5 40.9
MEAN: 37.9% 43.7% 43.0% 43.5%
MEDIAN: 31.2% 34.2% 37.9% 38.6%
(1) Average prices are based on volume-weighted closing price during the
respective periods.
Source: SDC Platinum, Bloomberg and publicly available information.
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
21
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
TAB B
Pluto discounted cash flow analysis
Deutsche Banc Alex. Xxxxx
Deutsche Bank [/]
22
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
FINANCIAL PROJECTIONS - KEY ASSUMPTIONS
|X| Five scenarios have been developed using 2001-2010 financial projections
based on the estimates provided by Pluto's management:
- base case, assuming continuation of the existing SMA under current terms
after 2009
- base case, assuming Saturn will renegotiate the SMA at the end of 2009
at a reduced monthly wholesale fee of $3.00 per subscriber
- base case, assuming Saturn will renegotiate the SMA at the end of 2009
at a reduced monthly wholesale fee of $2.00 per subscriber
- base case, assuming Saturn will terminate the SMA at the end of 2009
- conservative case, assuming Saturn will deliver the minimum commitment
(3.75 million DSL and 375,000 dial-up subscribers over the nine-year SMA
term) and then terminate the SMA
|X| Pluto's management has informed Deutsche Banc Alex. Xxxxx that the base case
scenarios assuming renegotiation of the SMA at the end of 2009 at a reduced
monthly wholesale fee of $2.00 to $3.00 per subscriber are the most likely
cases, and that the continuation of the existing SMA under current terms
after 2009 and the conservative case are not likely to occur
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
23
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
DISCOUNTED CASH FLOW IMPLIED VALUATION SUMMARY
PLUTO MANAGEMENT HAS INFORMED DEUTSCHE BANC ALEX. XXXXX THAT THE BASE CASE
SCENARIOS ASSUMING RENEGOTIATION OF THE SMA AT THE END OF 2009 AT A REDUCED
MONTHLY WHOLESALE FEE OF $2.00 TO $3.00 PER SUBSCRIBER ARE THE MOST LIKELY
CASES, AND THAT THE CONTINUATION OF THE EXISTING SMA UNDER CURRENT TERMS AFTER
2009 AND THE CONSERVATIVE CASE ARE NOT LIKELY TO OCCUR
CASE TEV(1) EQUITY VALUE PER SHARE(2)
------------------------------------------------ ------------------------------- ------------------------------
(US$mm, except per share values) LOW MID HIGH LOW MID HIGH
--- --- ---- --- --- ----
BASE CASE
Assuming continuation of SMA after 2009 $947 - $1,095 - $1,299 $6.75 - $7.93 - $9.56
Assuming renegotiation of SMA after 2009 @ $3.00 834 - 943 - 1,091 5.84 - 6.71 - 7.89
Assuming renegotiation of SMA after 2009 @ $2.00 785 - 879 - 1,004 5.45 - 6.20 - 7.20
Assuming termination of SMA after 2009 651 - 703 - 768 4.37 - 4.80 - 5.31
CONSERVATIVE CASE
Assuming termination of SMA after 2009 391 - 409 - 429 2.30 - 2.44 - 2.60
(1) Low, mid and high based on WACC of 22.5%, 20.5% and 18.5% and a perpetuity
growth rate of 2%, 3% and 4% respectively.
(2) Based on fully diluted shares of 125.0m, which includes options exercised
given a market price of $6.60, and net debt of $104m adjusting for
proceeds from options exercised.
Source: Based on Pluto Management Projections
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
24
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
DISCOUNTED CASH FLOW IMPLIED VALUATION DETAIL
BASE CASE
Assuming continuation of SMA after 2009
--------------------------------------------------------------------------------------------------------------------------------
TEV ($mm)(1) PER SHARE EQUITY VALUE(2)
--------------------------------------------------------------- -------------------------------------------------------
PERPETUITY GROWTH - YEAR 20 PERPETUITY GROWTH - YEAR 20
WACC 2.0% 2.5% 3.0% 3.5% 4.0% WACC 2.0% 2.5% 3.0% 3.5% 4.0%
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
22.5% $947 $952 $958 $963 $969 22.5% $6.75 $6.79 $6.83 $6.87 $6.92
21.5% 1,010 1,016 1,022 1,028 1,035 21.5% 7.24 7.29 7.34 7.39 7.45
20.5% 1,080 1,087 1,095 1,103 1,111 20.5% 7.81 7.86 7.93 7.99 8.06
19.5% 1,160 1,168 1,178 1,188 1,199 19.5% 8.44 8.52 8.59 8.67 8.76
18.5% 1,251 1,262 1,274 1,286 1,299 18.5% 9.17 9.26 9.36 9.46 9.56
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
BASE CASE
Assuming renegotiation of SMA after 2009 @ $3.00
-------------------------------------------------------------------------------------------------------------------------------
TEV ($mm)(1) PER SHARE EQUITY VALUE(2)
--------------------------------------------------------------- -------------------------------------------------------
PERPETUITY GROWTH - YEAR 20 PERPETUITY GROWTH - YEAR 20
WACC 2.0% 2.5% 3.0% 3.5% 4.0% WACC 2.0% 2.5% 3.0% 3.5% 4.0%
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
22.5% $834 $837 $840 $843 $846 22.5% $5.84 $5.86 $5.89 $5.91 $5.94
21.5% 881 885 889 892 897 21.5% 6.22 6.25 6.28 6.31 6.34
20.5% 934 939 943 948 953 20.5% 6.64 6.68 6.71 6.75 6.79
19.5% 994 999 1,005 1,011 1,017 19.5% 7.12 7.16 7.21 7.25 7.30
18.5% 1,061 1,068 1,075 1,083 1,091 18.5% 7.66 7.71 7.77 7.83 7.89
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
BASE CASE
Assuming renegotiation of SMA after 2009 @ $2.00
-------------------------------------------------------------------------------------------------------------------------------
TEV ($mm)(1) PER SHARE EQUITY VALUE(2)
--------------------------------------------------------------- -------------------------------------------------------
PERPETUITY GROWTH - YEAR 20 PERPETUITY GROWTH - YEAR 20
WACC 2.0% 2.5% 3.0% 3.5% 4.0% WACC 2.0% 2.5% 3.0% 3.5% 4.0%
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
22.5% $785 $787 $790 $792 $795 22.5% $5.45 $5.47 $5.49 $5.51 $5.53
21.5% 826 829 832 835 838 21.5% 5.78 5.80 5.82 5.85 5.87
20.5% 872 876 879 883 887 20.5% 6.15 6.17 6.20 6.23 6.26
19.5% 923 928 932 937 942 19.5% 6.55 6.59 6.62 6.66 6.70
18.5% 981 986 992 998 1,004 18.5% 7.02 7.06 7.10 7.15 7.20
--------- --------- ---------- -------- ---------- ---------- ---------- -------- -------- ------------
(1) Assumes cash flows are received at mid-year and 2010 unlevered free cash
flow growth rate is gradually (on a linear basis) stepped down to
perpetual growth over 10 years.
(2) Based on fully diluted shares of 125.0m, which includes options exercised
given a market price of $6.60, and net debt of $104m adjusting for proceeds
from options exercised.
Source: Based on Pluto Management Projections
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
25
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
DISCOUNTED CASH FLOW IMPLIED VALUATION DETAIL (continued)
BASE CASE
Assuming termination of SMA after 2009
------------------------------------------------------------------------------------------------------------------------------
TEV ($mm)(1) PER SHARE EQUITY VALUE(2)
------------------------------------------------------------- ---------------------------------------------------------------
PERPETUITY GROWTH - YEAR 20 PERPETUITY GROWTH - YEAR 20
WACC 2.0% 2.5% 3.0% 3.5% 4.0% WACC 2.0% 2.5% 3.0% 3.5% 4.0%
--------- --------- --------- -------- ---------- --------- -------- --------- -------- ------------
22.5% $651 $652 $653 $654 $655 22.5% $4.37 $4.38 $4.39 $4.40 $4.41
21.5% 675 676 677 679 680 21.5% 4.57 4.58 4.59 4.60 4.61
20.5% 700 702 703 705 707 20.5% 4.77 4.78 4.80 4.81 4.82
19.5% 728 730 732 734 736 19.5% 4.99 5.01 5.02 5.04 5.06
18.5% 758 760 763 765 768 18.5% 5.23 5.25 5.27 5.29 5.31
--------- --------- --------- -------- ---------- --------- -------- --------- -------- ------------
CONSERVATIVE CASE
Assuming termination of SMA after 2009
------------------------------------------------------------------------------------------------------------------------------
TEV ($mm)(1) PER SHARE EQUITY VALUE(2)
------------------------------------------------------------- ---------------------------------------------------------------
PERPETUITY GROWTH - YEAR 20 PERPETUITY GROWTH - YEAR 20
WACC 2.0% 2.5% 3.0% 3.5% 4.0% WACC 2.0% 2.5% 3.0% 3.5% 4.0%
--------- --------- --------- -------- ---------- --------- -------- --------- -------- ------------
22.5% $391 $391 $391 $391 $391 22.5% $2.30 $2.30 $2.30 $2.30 $2.30
21.5% 400 400 400 400 400 21.5% 2.37 2.37 2.37 2.37 2.37
20.5% 409 409 409 409 409 20.5% 2.44 2.44 2.44 2.44 2.44
19.5% 418 418 418 418 419 19.5% 2.51 2.52 2.52 2.52 2.52
18.5% 428 428 428 428 429 18.5% 2.59 2.59 2.60 2.60 2.60
--------- --------- --------- -------- ---------- --------- -------- --------- -------- ------------
(1) Assumes cash flows are received at mid-year and 2010 unlevered free cash
flow growth rate is gradually (on a linear basis) stepped down to
perpetual growth over 10 years.
(2) Based on fully diluted shares of 125.0m, which includes options exercised
given a market price of $6.60, and net debt of $104m adjusting for
proceeds from options exercised.
Source: Based on Pluto Management Projections
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
26
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
COST OF EQUITY WACC
------------------------------------------------ ----------------------------------------------------
Risk-free rate(1) 4.60% Mid-point CAPM 20.6%
Equity risk premium(2) 7.60% % Equity-to-total capitalization 100.0%
Selected Beta (Low) 2.05 After-tax cost of debt --
Selected Beta (High) 2.15 % Debt-to-total capitalization 0.0%
------------------------------------------------ ----------------------------------------------------
CAPM COST OF EQUITY (LOW) 20.2% WACC 20.6%
CAPM COST OF EQUITY (HIGH) 20.9%
------------------------------------------------ ----------------------------------------------------
WACC SENSITIVITY
-----------------------------------------
EQUITY RISK PREMIUM WACC
6.0% 17.2%
7.0 19.3%
8.0 21.4%
9.0 23.5%
(1) Based on a 10 year T-xxxx as of 10/15/01.
(2) Based on the mid-point of the historical long-term equity market risk
premiums of 8.1% for S&P500 and 7.1% for NYSE. Source: Ibbotson Associates.
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
27
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
--------------------------------------------------------------------------------
BETA COMPARISON ANALYSIS
BETA (1)
-------------
ISPs
Pluto 2.31
EarthLink 2.12
Internet America 2.05
United Online(2) 1.93
--------------------------------------------------------------------
MEAN 2.10
MEDIAN 2.09
--------------------------------------------------------------------
PORTALS
AOL/Time Warner 1.70
XxXx.xxx 2.45
Looksmart 1.94
Yahoo! 2.39
--------------------------------------------------------------------
MEAN 2.12
MEDIAN 2.17
--------------------------------------------------------------------
(1) Based on predicted betas. Source: BARRA
(2) Formerly Juno and NetZero
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/]
28
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
TAB C
Comparable company trading multiple analysis
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 29
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
EARTHLINK RELATIVE VALUATION CONSIDERATIONS
EARTHLINK IS THE ONLY INDEPENDENT PURE-PLAY ISP OF SCALE AND THEREFORE THE ONLY
POTENTIAL COMPARABLE TO PLUTO
HOWEVER, DEUTSCHE BANC ALEX. XXXXX BELIEVES THAT EARTHLINK IS NOT A PARTICULARLY
USEFUL COMPARABLE DUE TO VARIOUS DIFFERENCES BETWEEN THE TWO COMPANIES WHICH ARE
OUTLINED AS FOLLOWS:
|-| EarthLink is the sole remaining pure-play ISP of scale
- large subscriber base: 4.9 million subscribers versus 2.6 million Pluto
subscribers (1)
- owns the customer relationship and thus claims to future revenue streams
- over 4.3 million narrowband subscribers that can be upgraded to
broadband
- captures lifetime value of subscriber through sale of premium services
|-| EarthLink is financially and strategically well-situated to execute its
broadband subscriber acquisition and migration strategy
- no long term debt at 6/30/01
- approximately $600 million in cash and equivalents at 6/30/01
- RBOCs, cable companies, and other telcos possess incentive to support
EarthLink broadband offerings because they believe EarthLink competes
with AOL Time Warner and Microsoft's broadband dominance
|-| EarthLink is independent and considered a less-threatening partner of choice
- has multiple relationships with DSL and cable providers
(1) Pluto's subscribers exclude approximately 700,000 Telmex and web hosting
subscribers
Source: Publicly available information
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 30
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
EARTHLINK RELATIVE VALUATION CONSIDERATIONS (continued)
Pluto projections(1)
---------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E
----- ----- ----- ----- -----
Financial metrics ($mm)
Gross revenues $ 418.0 $ 515.5 $ 587.0 $ 619.2 $ 675.5
Revenue CAGR through 2005 12.7% 9.4% 7.3% 9.1%
Differential versus Pluto
Adj. EBITDA(3) $ 75.4 $ 100.0 $ 175.5 $ 194.4 $ 244.6
% margin 18.0% 19.4% 29.9% 31.4% 36.2%
Adj. EBITDA CAGR through 2005 34.2% 34.7% 18.1% 25.8%
Differential versus Pluto
Subscribers (000s)
Broadband 1,100 1,600 2,211 2,833 3,539
Narrowband 1,805 1,875 1,939 1,907 1,875
Web hosting 18 9 6 0 0
Telmex 784 1,039 1,295 0 0
---------------------------------------------------------------
Total subscribers 3,707 4,523 5,450 4,740 5,413
Subscriber CAGR through 2005 9.9% 6.2% (0.3%) 14.2% 7.2%
Owned subscribers(4) 1,753 1,775 1,804 1,763 1,731
Multiples
Monthly rev / sub $ 9.40 $ 9.50 $ 8.98 $ 10.89 $ 10.40
Monthly EBITDA / sub $ 1.70 $ 1.84 $ 2.68 $ 3.42 $ 3.77
Differential versus Pluto
EarthLink projections(2)
------------------------------------------------------------
2001E 2002E 2003E 2004E 2005E
----- ----- ----- ----- -----
Financial metrics ($mm)
Gross revenues $ 1,256.9 $ 1,506.7 $ 1,750.9 $ 1,969.2 $ 2,160.2
Revenue CAGR through 2005 14.5% 12.8% 11.1% 9.7%
Differential versus Pluto 13.7% 35.3% 52.4% 6.7%
Adj. EBITDA(3) ($ 24.5) $ 112.6 $ 252.9 $ 383.4 $ 507.2
% margin NM 7.5% 14.4% 19.5% 23.5%
Adj. EBITDA CAGR through 2005 NM 65.2% 41.6% 32.3%
Differential versus Pluto NM 87.6% 130.3% 25.2%
Subscribers (000s)
Broadband 500 850 1,250 1,600 1,900
Narrowband 4,325 4,370 4,420 4,470 4,520
Web hosting 175 180 185 190 195
Telmex 0 0 0 0 0
---------------------------------------------------------------
Total subscribers 5,000 5,400 5,855 6,260 6,615
Subscriber CAGR through 2005 7.0% 6.3% 5.7%
Owned subscribers(4) 5,000 5,400 5,855 6,260 6,615
Multiples
Monthly rev / sub $ 20.95 $ 3.25 $ 24.92 $ 26.21 $ 27.21
Differential versus Pluto 123.0% 144.8% 177.6% 140.8% 161.7%
Monthly EBITDA / sub ($ 0.41) $ 1.74 $ 3.60 $ 5.10 $ 6.39
Differential versus Pluto NM (5.7%) 34.2% 49.3% 69.7%
(1) Based on Company model unless otherwise noted; 2001 - 2002 Revenue and
EBITDA based on midpoint of guidance
(2) Public equity research
(3) Reported EBITDA plus bounty less cash bounty payments
(4) Pluto's owned subscribers exclude all Saturn subscribers (narrowband and
broadband) and Telmex subscribers; Earthlink's owned subscribers equals
total subscribers
Source: Publicly available information
Source: Publicly available information
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 31
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
EARTHLINK RELATIVE VALUATION CONSIDERATIONS (continued)
|-| EarthLink enjoys broader research coverage and greater liquidity than Pluto
- 12 analysts covering EarthLink (currently 11 buys and 1 hold) versus 2
(both holds) for Pluto
- EarthLink's float to shares outstanding is currently 68% versus 22% for
Pluto
|-| EarthLink is an attractive acquisition target
- fragmented share ownership (after Sprint liquidation which is in
process)
- no limiting strategic relationships
- superb cash flow growth expected
- national subscriber base and operating platform attractive to a broad
and diverse group of prospective acquirers
|-| EarthLink has higher projected growth rates and superior long-term EBITDA
per sub
Source: Publicly available information
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 32
Pluto summary valuation considerations Section 3
TRADING COMPARABLES - INTERNET SERVICE PROVIDERS
(Figures in Millions, Except Per Share Data)
Deutsche Banc Alex.
Xxxxx believes that
Internet America and
United Online are not
comparable to Pluto
due to differences in
scale and business
models
Price Equity
Company Ticker 10/15/2001 Value Debt Cash TEV
-------------------------------------------------------------------------------------------------------------
EarthLink, Inc. ELNK $18.74 $3,430 $24 $601 $2,853
Internet America, Inc. GEEK $0.25 $2 $0 $1 $2
United Online, Inc. UNTD $2.79 $112 $7 $175 ($56)
Pluto at announcement $3.54 $429 $135 $17 $548
Pluto at initial offer price $5.45 $667 $135 $17 $785
Pluto at $6.60 $6.60 $811 $135 $17 $929
Gross revenue Adj. EBITDA LQ sub
--------------------------------------------------------------------------------------------
Company LQA 2001 2002 2002 2003 all adj.
--------------------------------------------------------------------------------------------------------------------------
EarthLink, Inc. $1,215 $1,257 $1,507 $113 $253 4.9 4.9
Internet America, Inc. $35 $41 NA NA NA 0.1 0.1
United Online, Inc. $165 $166 NA NA NA 6.7 6.7
Pluto (1) $422 $418 $516 $100 $175 3.3 2.6
'01 - '05 '02 - '05 CAGR '03 - '05
CAGR ----------------------------- CAGR
Company Rev Rev EBITDA EBITDA
----------------------------------------------------------------------------------------
EarthLink, Inc. 14.5% 12.8% 65.2% 41.6%
Internet America, Inc. NA NA NA NA
United Online, Inc. NA NA NA NA
Pluto (1) 12.7% 9.4% 34.7% 18.1%
TEV as a multiple of:
-------------------------------------------------------------------------------------------------------------------------
Gross revenue Gross revenue / CAGR Adj. EBITDA
------------------------------------------------------------------------------------------
Company LQA 2001 2002 2001 2002 2002 2003
-------------------------------------------------------------------------------------------------------------------------
EarthLink, Inc. 2.3x 2.3x 1.9x 15.7x 14.8x 25.3x 11.3x
Internet America, Inc. 0.1x 0.0x NA NA NA NA NA
Pluto at announcement 1.3x 1.3x 1.1x 10.3x 11.3x 5.5x 3.1x
Pluto at initial offer price 1.9x 1.9x 1.5x 14.7x 16.2x 7.9x 4.5x
Pluto at $6.60 2.2x 2.2x 1.8x 17.4x 19.1x 9.3x 5.3x
TEV as a multiple of:
------------------------------------------------------------------------------------------
Adj. EBITDA / CAGR LQ sub
----------------------------- ---------------------------
Company 2002 2003 All Adj.
------------------------------------------------------------------------------------------
EarthLink, Inc. 38.9x 27.1x $582 $582
Internet America, Inc. NA NA $14 $14
Pluto at announcement 15.8x 17.3x $165 $209
Pluto at initial offer price 22.6x 24.8x $236 $299
Pluto at $6.60 26.7x 29.3x $280 $354
(1) Pluto projections based on mid-point of company guidance for
2001-2002 and Pluto management projections for 2003-2005
Source: Publicly available information
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 33
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
PLUTO IMPLIED TOTAL ENTERPRISE VALUE (TEV)
Assumed offer price
----------------------
($ in millions) $3.54(1) $5.45(2) $6.60
-----------------------------------
Shares outstanding 121.0 121.0 121.0
In-the-money options 1.0 3.9 4.0
Fully diluted shares outstanding (3) 122.0 124.9 125.0
Unadjusted equity value $ 432 $ 681 $ 825
less: options proceeds $ 3 $ 13 $ 14
-----------------------------------
Equity value $ 429 $ 667 $ 811
plus: debt $ 135 $ 135 $ 135
less: cash $ 17 $ 17 $ 17
-----------------------------------
Total enterprise value (TEV) $ 548 $ 785 $ 929
(1) Pluto's closing price on the announcement date.
(2) Saturn's initial offer price.
(3) Includes Saturn's units in operating partnership and in-the-money warrants
and options (based on Company's options schedule).
Source: Publicly available information and Pluto Management
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 34
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
OFFER PRICE ANALYSIS: IMPLIED TRADING MULTIPLES
Assumed offer price
-----------------------------
$ 3.54 $ 5.45 $ 6.60
---------------------------------------------
Total enterprise value (TEV) $ 548 $ 785 $ 929
ELNK
TEV / LQA gross revenue 1.3x 1.9x 2.2x
Premium (discount) to EarthLink 2.3x (44.7%) (20.7%) (6.2%)
TEV / 2001E gross revenue 1.3x 1.9x 2.2x
Premium (discount) to EarthLink 2.3x (43.1%) (18.3%) (3.4%)
TEV / 2002E gross revenue 1.1x 1.5x 1.8x
Premium (discount) to EarthLink 1.9x (43.9%) (19.5%) (4.8%)
TEV / 2002E adj. EBITDA 5.5x 7.9x 9.3x
Premium (discount) to EarthLink 25.3x (78.4%) (69.0%) (63.3%)
TEV / 2003E adj. EBITDA 3.1x 4.5x 5.3x
Premium (discount) to EarthLink 11.3x (72.3%) (60.3%) (53.1%)
TEV / LQ subscribers $ 165 $ 236 $ 280
Premium (discount) to EarthLink $ 582 (71.7%) (59.4%) (52.0%)
TEV / LQ adj. subscribers (1) $ 209 $ 299 $ 354
Premium (discount) to EarthLink $ 582 (64.1%) (48.6%) (39.2%)
(1) LQ adjusted subscribers data excludes approximately 700,000 Telmex and web
hosting subscribers as of 2Q2001.
Source: EarthLink information from publicly available data; Pluto projections
based on mid-point of company guidance for 2001-2002 and Pluto management
projections for 2003-2005
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 35
PLUTO SUMMARY VALUATION CONSIDERATIONS SECTION 3
OFFER PRICE ANALYSIS: IMPLIED GROWTH ADJUSTED MULTIPLES
Assumed offer price
----------------------------
$ 3.54 $ 5.45 $ 6.60
------------------------------------------
Total enterprise value (TEV) $ 548 $ 785 $ 929
ELNK
TEV / 2001E gross revenue / CAGR (1) 10.3x 14.7x 17.4x
Premium (discount) to EarthLink 15.7x (34.4%) (5.9%) 11.4%
TEV / 2002E gross revenue / CAGR (2) 11.3x 16.2x 19.1x
Premium (discount) to EarthLink 14.8x (24.1%) 8.9% 28.8%
TEV / 2002E adj. EBITDA / CAGR (3) 15.8x 22.6x 26 .7x
Premium (discount) to EarthLink 38.9x (59.5%) (41.9%) (31.2%)
TEV / 2003E adj. EBITDA / CAGR (4) 17.3x 24.8x 29 .3x
Premium (discount) to EarthLink 27.1x (36.3%) (8.6%) 8.1%
(1) Revenue CAGR for 2001-2005
(2) Revenue CAGR for 2002-2005
(3) EBITDA CAGR for 2002-2005
(4) EBITDA XXXX 0000-0000
Source: EarthLink information from publicly available data; Pluto projections
based on mid-point of company guidance for 2001-2002 and Pluto management
projections for 2003-2005
DEUTSCHE BANC ALEX. XXXXX
DEUTSCHE BANK [/] 36
EXHIBIT 11
[DEUTSCHE BANK LETTERHEAD]
October 17, 2001
The Independent Committee of the Board of Directors
Prodigy Communications Corporation
0000 Xxxxx Xxxxx Xxxxxxxxx, Xxxxxxxx XXX
Xxxxxx, Xxxxx 00000
Attention: Xx. Xxxxxx XxXxxxx
Chairman of the Independent Committee of the Board of Directors
Deutsche Banc Alex. Xxxxx Inc. ("DBAB") has acted as financial advisor to
the Independent Committee of the Board of Directors (the "Independent
Committee") of Prodigy Communications Corporation (the "Company") in connection
with a proposed tender offer by
SBC Communications Inc. ("SBC") and SBC Internet
Communications, Inc. ("SBC Internet"), an indirect, wholly-owned subsidiary of
SBC, to acquire all of the outstanding shares of Class A Common Stock, par value
$0.01 per share, of the Company (the "Shares") not currently owned by SBC or its
affiliates, and subsequent merger of SBC Internet with and into the Company (the
"Merger"). On October 2, 2001, SBC and SBC Internet filed a Schedule TO and
related documents, including the Offer to Purchase, subsequently amended by the
Amendment No. 1 to the Schedule TO, filed on October 15, 2001 (collectively, the
"Initial Schedule TO") with the Securities and Exchange Commission (the "SEC"),
in which SBC and SBC Internet launched a tender offer to acquire the Shares not
currently owned by SBC or its affiliates for $5.45 per Share in cash (the
"Original Offer"). Pursuant to an Agreement and Plan of Merger (the
"Agreement"), among the Company, SBC, and SBC Internet, SBC and SBC Internet
will amend the Original Offer to increase the price offered in the tender offer
(the "Revised Offer") to $6.60 per Share in cash (the "Consideration") and after
the consummation of the Revised Offer, SBC and SBC Internet will effect the
Merger in which any remaining holders of the Shares (other than shares held by
dissenting stockholders) will receive the Consideration. The Revised Offer and
the Merger are, collectively, referred to herein as the "Transaction". The
Company has informed us that Telefonos de Mexico, S.A. de C.V. ("Telmex"),
Telmex Financial Ventures, LLC and Carso Global Telecom, S.A. de C.V. and
certain other persons and entities associated with Telmex, which, together, own
approximately 59% of the Shares, will enter into a Stockholder Voting Agreement
with SBC and SBC Internet to tender all of the Shares owned by them in the Offer
and vote in favor of the Merger (the "Stockholder Voting Agreement").
You have requested DBAB's opinion, as investment bankers, as to the
fairness of the Consideration, from a financial point of view, to the holders of
the Shares other than SBC and its affiliates.
In connection with DBAB's role as financial advisor to the Independent
Committee, and in arriving at its opinion, DBAB has reviewed certain publicly
available financial and other information concerning the Company and SBC and
certain internal analyses and other information furnished to it by management of
the Company. DBAB has also held discussions with members of the senior
management of the Company regarding the business and prospects of the Company.
In addition, DBAB has (i) reviewed the historical reported prices and trading
activity for the Shares, (ii) compared certain financial and stock market
information for the Company with similar information for certain companies whose
securities are publicly traded, (iii) reviewed the financial terms of certain
recent business combinations which it deemed relevant to its analyses, (iv)
reviewed the terms of the Initial Schedule TO and a draft of the Agreement dated
October 13, 2001, (v) took into account the expected terms of the Stockholder
Voting Agreement, and (vi) performed such other studies and analyses and
considered such other factors as it deemed appropriate,
[DEUTSCHE BANK LETTERHEAD]
The Independent Committee of the Board of Directors
Prodigy Communications Corporation
October 17, 2001
Page 2
including SBC's current ownership of Shares and discussions with the Company's
management regarding SBC's contractual relationship with the Company.
DBAB has not assumed responsibility for independent verification of any
information, whether publicly available or furnished to it, concerning the
Company, including, without limitation, any financial information, forecasts or
projections considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, DBAB has assumed and relied upon the
accuracy and completeness of all such information and DBAB has not conducted a
physical inspection of any of the properties or assets, and has not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities, of the Company. With respect to management's financial forecasts
and projections made available to DBAB by the Company's management and used in
its analyses, DBAB has assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Company, as to the matters covered thereby. While the
Company's management has provided DBAB with various alternative projections
reflecting different possible scenarios for the Company's business, DBAB has
relied for purposes of rendering its opinion on the alternatives that the
Company's management has identified to DBAB as the appropriate scenarios to use
for the purposes of its opinion, and therefore assumed that the Company's
financial results will correspond with the projections in such alternatives, but
in any event will fall between such alternatives. In rendering its opinion, DBAB
expresses no view as to the reasonableness of any such forecasts and projections
or the assumptions on which they are based. DBAB's opinion is necessarily based
upon economic, market and other conditions as in effect on, and the information
made available to it as of, the date hereof. DBAB was not requested to, and did
not, solicit from any third party any indications of interest in acquiring all
or any part of the Company or investigate any alternative transactions, and its
opinion does not address the relative merits of the Transaction as compared to
any alternative business strategies that might exist for the Company.
For purposes of rendering its opinion, DBAB has assumed that, in all
respects material to its analysis, the representations and warranties of the
Company, SBC and SBC Internet contained in the Agreement are true and correct,
each of the parties thereto will perform all of the covenants and agreements to
be performed by it under the Agreement and the Shareholder Voting Agreement, as
the case may be, and all conditions to the obligations of each of the Company,
SBC and SBC Internet to consummate the Transaction will be satisfied without any
waiver thereof. DBAB has also assumed that the final form of the Agreement will
be substantially similar to the last draft reviewed by it, and the Agreement and
any amendment to the Initial Schedule TO containing the terms and conditions of
the Revised Offer will not contain any terms or provisions that will adversely
affect DBAB's analyses. DBAB has further assumed that the Stockholder Voting
Agreement will contain the terms described to it by the Company and will not
contain any terms or provisions that will adversely affect DBAB's analyses.
This opinion is addressed to, and is for the use and benefit of, the
Independent Committee in considering the Transaction and is not a recommendation
to the holders of the Shares whether or not to tender their shares or vote in
favor of the Transaction. This opinion is limited to the fairness of the
Consideration, from a financial point of view, to the holders of the Shares
other than SBC and its affiliates, and DBAB expresses no opinion as to the
merits of the underlying decision by the Independent Committee to approve the
Agreement or recommend the Transaction to the holders of the Shares.
DBAB will be paid a fee for its services as financial advisor to the
Independent Committee in connection with the Transaction. We are an affiliate of
Deutsche Bank AG (together with its affiliates, the "DB Group").
[DEUTSCHE BANK LETTERHEAD]
The Independent Committee of the Board of Directors
Prodigy Communications Corporation
October 17, 2001
Page 3
One or more members of the DB Group have, from time to time, provided, and in
the future may provide, for customary compensation, investment banking,
commercial banking and other financial services to the Company and SBC and their
respective affiliates. In the ordinary course of business, members of the DB
Group may actively trade in the securities and other instruments and obligations
of the Company and SBC for their own accounts and for the accounts of their
customers. Accordingly, the DB Group may at any time hold a long or short
position in such securities, instruments and obligations.
Based upon and subject to the foregoing, it is DBAB's opinion as investment
bankers that, as of the date hereof, the Consideration is fair, from a financial
point of view, to the holders of the Shares other than SBC and its affiliates.
Very truly yours,
/s/ Deutsche Bank Alex. Xxxxx Inc.
--------------------------------------
DEUTSCHE BANC ALEX. XXXXX INC.
EXHIBIT 12
[PRODIGY LOGO]
October 19, 2001
Dear Prodigy Shareholder:
Prodigy Communications Corporation has entered into a definitive agreement
with
SBC Communications Inc. pursuant to which SBC will acquire all of the
outstanding shares of Prodigy's Class A common stock through a revised tender
offer at $6.60 per share, leading to a subsequent merger. In addition to this
letter, SBC has included its revised tender offer materials reflecting the
increased offer price and other terms agreed with Prodigy.
When SBC commenced its tender offer at $5.45 per share, Prodigy's Board of
Directors delegated to an Independent Directors Committee the authority to
determine Prodigy's recommendation to stockholders. The committee is comprised
of those Directors who have no affiliation with SBC or any other major
shareholder. The committee engaged its own counsel and financial advisors. The
committee and its advisors began discussions with representatives of SBC
regarding a possible increase in the price being offered. As a result of these
discussions, SBC agreed to revise its tender offer, and the parties entered into
the definitive merger agreement. Telmex and Carso Global Telecom, the owners of
59.3 percent of Prodigy's Class A common stock (approximately 34 percent of the
total voting equity of the company), have agreed to accept the revised tender
offer.
The committee has determined that the merger agreement is fair to Prodigy's
stockholders, and based on that determination, Prodigy recommends that
stockholders accept SBC's amended tender offer and approve the merger. Prodigy
filed with the Securities Exchange Commission today Amendment No. 2 to Schedule
14D-9 which is attached hereto. SBC filed Amendment No. 3 to its Schedule TO,
including a Supplement to its Offer to Purchase that is being mailed to Prodigy
stockholders. These documents describe the merger agreement and the amended
offer in further detail.
In making its determination, the committee considered a number of factors,
including, without limitation, the following:
1. The historical and current market prices of the Class A common stock and
the fact that the revised offer price represents a substantial premium
over the closing price of the Class A common stock of $3.54 on September
21, 2001, the last trading day prior to the announcement of the original
tender offer and over the 10, 20 and 30 day trading days average prior
to such announcement.
2. The trading history of the Class A common stock and a comparison of such
trading history with the stock trading histories of other companies in
Prodigy's industry and of stock market indices that were deemed
relevant.
3. Prodigy's business, financial condition, results of operation, assets,
liabilities, business strategy and prospects, as well as various
uncertainties associated with those prospects in light of the unsettled
general economic conditions and the unstable industry conditions under
which Prodigy is operating.
4. The current and prospective conditions and trends in Prodigy's industry
and the anticipated effect of such conditions and trends on Prodigy's
business and its stockholders.
5. The presentation of Deutsche Banc to the committee at its meeting on
October 17, 2001, as to various financial and other matters relevant to
the committee's consideration, a copy of which is attached as Exhibit 10
to Prodigy's Amendment No. 2 to Schedule 14D-9.
Prodigy Shareholder
October 19, 2001
Page
6. The opinion of Deutsche Banc as of October 17, 2001, to the effect that,
based upon and subject to certain factors and assumptions stated
therein, as of such date, the $6.60 per share in cash to be received by
the stockholders of Prodigy, other than SBC and its affiliates, in the
offer and the merger is fair, from a financial point of view, to such
stockholders. The full text of Deutsche Banc's fairness opinion is
attached to this letter and as Exhibit 11 to the amended Schedule 14D-9.
7. The fact that the offer and the merger provide for a prompt cash tender
offer for all shares of Class A common stock to be followed by the
merger for the same consideration, thereby enabling Prodigy
stockholders, at the earliest possible time, to obtain the benefits of
the transaction in exchange for their shares of Class A common stock.
8. The likelihood of the consummation of the offer and the merger and the
limited conditions to the consummation of the offer and the merger.
9. The representation of SBC that it will have sufficient funds to
consummate the offer and the merger and the fact that the offer and the
merger are not subject to a financing condition.
10. The availability of, and the comparative risks and benefits to
Prodigy's stockholders from pursuing, other strategic alternatives to
maximize stockholder value, including remaining independent and
executing Prodigy's long-term strategic plan.
11. The judgment of the committee, based on extensive arm's length
negotiations with SBC, that the offer price represented the highest
price that SBC would be willing to pay in the offer.
12. The advice of Prodigy's legal advisors with respect to the terms of the
merger agreement, the offer and the merger.
Thank you for your careful consideration of this matter. We encourage you
to read Prodigy's amended Schedule 14D-9 and Prodigy's Form 10-K filed with the
SEC and incorporated into Prodigy's 2000 Annual Report -- especially those
portions entitled "SBC Transaction" and "Certain Factors That May Affect Future
Operating Results" -- for a more thorough discussion of SBC's relationship with
Prodigy and the potential for conflicts of interest.
Sincerely,
/s/ XXXXXXX XXXXXX, CHAIRMAN
--------------------------------------
Xxxxxxx Xxxxxx, Chairman
EXHIBIT 13
[PRODIGY LOGO]
CONTACTS: PRODIGY COMMUNICATIONS CORP.
MEDIA: Xxxx Xxxx
512.527.1126
INVESTORS: Xxxxxxx Xxxxxx
Xxxxx Xxxxxxxx & Co.
212.515.1985
PRODIGY ANNOUNCES STRONG THIRD-QUARTER RESULTS
REITERATES UPWARD EBITDA, REVENUE, SUBSCRIBER GUIDANCE FOR 2001, 0000
XXXXXX, XXXXX - October 19, 2001 - For the third consecutive reporting period in
2001, Prodigy Communications Corporation (NASDAQ: PRGY), a leading national
Internet service provider (ISP) serving the largest number of DSL Internet
subscribers, reported continued strong financial performance.
In the third quarter, EBITDA* increased by 36 percent compared to the
second quarter, and Prodigy management reiterated its 2001 EBITDA guidance, a 24
percent - 31 percent increase over the second-quarter forecast.
Prodigy reported $95.3 million in net revenue for the third quarter, up
from $91.6 million in the second quarter. Prodigy posted EBITDA of $18.3
million, up from $13.5 million in the second quarter. Net loss, including
minority interest, for the quarter was ($29.1 million), or ($0.41) per share
compared to a net loss of ($32.4 million) or ($0.46) in the second quarter,
representing an 11 percent improvement over the second quarter.
For the nine months ended September 30, net revenues were $279.2
million, EBITDA was $42.3 million and net loss for the first nine months of 2001
was $96.2 million or $1.37 per share.
Prodigy owned and managed subscribers topped 3.5 million, including
approximately 980,000 DSL subscribers, 1.8 million dial subscribers, and 740,000
managed Telmex subscribers. More than 120,000 DSL subscribers were added in the
third quarter.
Earlier this month, Prodigy announced it would raise the price of its
unlimited dial service from $19.95/month to $21.95/month, effective October 1
for new members and November 1 for current members. This is the first price
increase in the six years since Prodigy launched its Internet service in 1995.
(more)
PRODIGY Q3 EARNINGS RELEASE/P.2
Prodigy also announced it would launch its new Prodigy 7.0 in phases,
beginning with a completely redesigned website currently scheduled for
introduction on November 1. Enhanced, broadband-enabled software will follow
later in the year, delivering a completely new Internet experience for
consumers.
"Prodigy is a strong turnaround story," said Xxxxxxx Xxxxxx, chairman.
"We have dramatically improved our financial performance, controlled expenses,
added customers, and forecasted stronger-than-expected results for 2002."
In response to the just-announced merger agreement between Prodigy and
SBC, Xxxxxx said, "We at Prodigy see this opportunity as a new chapter in our
proud history of leadership and innovation in the development of the Internet,
and a greater opportunity to deliver better service to our customers and to
compete in today's ISP market."
YEAR-END GUIDANCE
On October 3, Prodigy revised upward its EBITDA, revenue and subscriber
projections for 2001, based largely on the better-than-expected performance
during the first three quarters of the current year. Prodigy expects 2001 total
revenue, to be in the range of $360 million to $370 million.
For the full year ending December 31, 2001, Prodigy reiterated that its
EBITDA estimate is in the range of $52 million to $55 million. Net loss for the
current year is expected to be between ($128) million and ($130) million. At
year-end, Prodigy expects to have between 3.5 million and 3.7 million owned and
managed subscribers, up from 3.4 million to 3.7 million previously estimated in
the second quarter.
2002 GUIDANCE
Prodigy reiterated its guidance for 2002, including net revenue to be
in the range of $455 million to $480 million, a more than 20 percent increase
over 2001, and EBITDA of $90 million to $95 million, a more than 60 percent
increase over 2001.
Prodigy Board Chairman Xxxxxxx Xxxxxx, Prodigy President Xxxx Xxxx and
Prodigy Chief Financial Officer Xxxxx Xxxxx will host a 10 a.m. EDT conference
call today to discuss third-quarter 2001 results. The call-in number is (719)
457-2638, conference code 407473. The call will be simultaneously broadcast over
the Internet. For more information on the Webcast, go to xxx.xxxxxxx.xxx and
click on "Investor Relations."
(more)
PRODIGY Q3 EARNINGS RELEASE/P.3
* EBITDA is defined as net income/loss plus minority interest, depreciation and
amortization, amortization of subscriber acquisition costs, and amortization of
subscriber incentives.
ABOUT PRODIGY COMMUNICATIONS CORPORATION (xxx.xxxxxxx.xxx): Prodigy
Communications Corporation (NASDAQ: PRGY) is one of the nation's largest
Internet service providers serving both owned and managed dial and DSL
subscribers. With its alliance with SBC Communications, Prodigy is the industry
leader in serving DSL subscribers. Prodigy delivers fast and reliable Internet
access and user-friendly Internet-based products, services and information via a
nationwide network covering more than 850 locations in all 50 states, allowing
more than 90 percent of the U.S. population to access Prodigy's dial service
with a local telephone call. Prodigy features superior content, e-mail and
e-mail attachment capabilities, Prodigy Instant Messaging(TM), Prodigy Chat(TM),
and Prodigy Online Communities, combined with the accessibility and freedom of
direct access to the World Wide Web for all users. ProdigyBiz offers a powerful
suite of specially designed Internet products and services for small business
owners. Prodigy(R) en Espanol(TM), is the nation's first-ever, fully bilingual
Spanish/English-language Internet service created especially for the U.S.
Spanish-speaking population.
# # #
This release contains forward-looking statements that involve a number of risks
and uncertainties. Among the important factors that could cause actual results
to differ materially from those indicated by such forward-looking statements are
the intense competition in Prodigy's industry, subscriber turnover, disruption
in Prodigy's network services or in other services provided by third parties,
the challenges of integrating the Internet businesses of Prodigy and
SBC
Communications Inc., the possible failure to achieve the anticipated benefits of
the agreements between Prodigy and SBC, the possible unavailability of
sufficient financing to Prodigy as needed, as well as the risk factors detailed
from time to time in Prodigy's periodic reports and registration statements
filed with the Securities and Exchange Commission. Prodigy's business and
operations are operated by a limited partnership, called Prodigy Communications
Limited Partnership, of which Prodigy is the general partner and owns an
approximate 57 percent interest and SBC Communications owns an approximate 43
percent interest.
PRODIGY COMMUNICATIONS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands except per share amounts)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
ASSETS:
Current assets:
Cash and cash equivalents $ 20,243 $ 23,042
Trade accounts receivable 4,468 7,683
Due from affiliates 22,062 2,642
Other current assets 5,194 4,256
--------- ---------
Total current assets 51,967 37,623
Property and equipment, net 19,423 30,005
Goodwill and other intangibles, net 441,617 596,350
Subscriber acquisition costs, net 69,353 129,815
Restricted cash and other 4,711 8,872
--------- ---------
Total assets $ 587,071 $ 802,665
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 42,997 $ 66,482
Accrued restructuring and other costs 12,441 20,724
Unearned revenue 22,902 28,580
Due to affiliate-short term 4,875 --
Notes payable to related parties-short term 104,190 --
Capital lease obligation-short term 2,903 6,879
--------- ---------
Total current liabilities 190,308 122,665
Capital lease obligation-long term 2,161 6,535
Due to affiliate-long term 9,749 --
Notes payable to related parties-long term 15,000 137,000
--------- ---------
Total liabilities 217,218 266,200
Minority interest 157,968 229,373
Stockholders' equity:
Class A common stock: $.01 par value; 70,497,245 and
70,212,598 shares issued and outstanding at September 30,
2001 and December 31, 2000, respectively 705 702
Class B common stock: $.01 par value; 1 share issued
and outstanding at September 30, 2001 and December 31,
2000, respectively -- --
Additional paid-in-capital-common stock 890,293 889,288
Accumulated deficit (679,113) (582,898)
--------- ---------
Total stockholders' equity 211,885 307,092
--------- ---------
Total liabilities and stockholders' equity $ 587,071 $ 802,665
========= =========
PRODIGY COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands except per share and subscriber amounts)
NINE MONTHS ENDED QUARTER ENDED
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Internet and online service revenues $ 245,658 $ 197,187 $ 87,171 $ 79,147
Amortization of subscriber incentives (39,498) (39,802) (12,877) (13,535)
----------- ----------- ----------- -----------
Internet and online service revenue, net of amortization 206,160 157,385 74,294 65,612
Subscriber management fees 57,910 70,193 17,059 47,776
Other 15,158 18,815 3,932 7,687
----------- ----------- ----------- -----------
Total revenues 279,228 246,393 95,285 121,075
Operating costs and expenses:
Cost of revenue 121,235 135,840 39,160 68,861
Sales and marketing 50,050 66,580 21,108 31,393
Product development 11,639 10,714 4,731 3,789
General and administrative (1) 93,383 89,762 24,797 40,727
Depreciation and amortization 149,633 108,442 48,917 70,305
Amortization of subscriber acquisition costs 8,976 8,629 2,991 3,412
Restructuring costs -- 18,523 -- 8,968
----------- ----------- ----------- -----------
Total operating costs and expenses 434,916 438,490 141,704 227,455
----------- ----------- ----------- -----------
Operating loss (155,688) (192,097) (46,419) (106,380)
Other:
Interest expense, net 11,816 8,439 4,192 3,117
Minority interest in net loss (71,405) (63,754) (21,567) (46,643)
Gain on asset/equity investments sale -- -- -- --
Other 116 (73) 19 (8)
----------- ----------- ----------- -----------
Net loss $ (96,215) $ (136,709) $ (29,063) $ (62,846)
=========== =========== =========== ===========
EPS basic $ (1.37) $ (2.04) $ (0.41) $ (0.90)
=========== =========== =========== ===========
Weighted average common shares outstanding 70,296 66,950 70,418 69,866
=========== =========== =========== ===========
Other data:
Internet subscribers owned and managed at period end 3,521,000 2,744,000 3,521,000 2,744,000
=========== =========== =========== ===========
EBITDA (2) $ 42,303 $ (35,151) $ 18,347 $ (19,120)
=========== =========== =========== ===========
EBITDA (2) less integration and restructuring costs $ 49,820 $ (7,294) $ 19,173 $ (6,487)
=========== =========== =========== ===========
(1) Includes SBC and Flashnet non-recurring integration costs of $7,517 and
$9,334 for the nine months ended September 30, 2001 and 2000, respectively
and $826 and $3,665 for the quarter ended September 30, 2001 and 2000,
respectively.
(2) EBITDA represents net loss plus interest expense, minority interest,
depreciation and amortization, amortization of subscriber acquisition costs
and amortization of contract subscriber ("rebate") programs. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with U.S. GAAP), as a measure of the Company's operating
performance, or as an alternative to cash flows from operating activities
(as determined in accordance with U.S. GAAP), or as a measure of the
Company's liquidity.
