Exhibit 10.3
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NOTE EXCHANGE AGREEMENT
NOTE EXCHANGE AGREEMENT (this "Agreement"), entered into on this 20th day
of October, 1997, among Prodigy, Inc., a Delaware corporation (the "Company"),
Prodigy Services Corporation, a Delaware corporation and an indirect wholly-
owned subsidiary of the Company formerly known as Prodigy Acquisition
Corporation ("PSC"), Sears, Xxxxxxx and Co., a New York corporation ("Sears"),
and International Business Machines Corporation, a New York corporation ("IBM")
(Sears and IBM are collectively or alternatively referred to herein as the
"Sellers").
WHEREAS, the Company (as assignee of International Wireless Incorporated),
Prodigy Services Company, a New York general partnership ("Old Prodigy"), and
the Sellers are parties to a Partnership Purchase Agreement dated as of May 12,
1996 and amended as of June 3, 1996 (as so amended, the "Purchase Agreement")
pursuant to which PSC purchased all of the partnership interests (the
"Partnership Interests") in Old Prodigy from the Sellers;
WHEREAS, simultaneously with the purchase of the Partnership Interests by
PSC, the Company issued to each Seller an 8% Contingent Convertible Promissory
Note dated June 17, 1996 in the face amount of $100,000,000 (individually, an
"Old Note" and collectively, the "Old Notes"); and
WHEREAS, the parties wish to modify the Old Notes and related arrangements;
NOW, THEREFORE, in consideration of the undertakings and commitments
contained herein and other good and valuable consideration, the sufficiency of
which is acknowledged, the parties agree as follows:
1. Exchange of Old Notes. At the Closing (as defined below), each Old
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Note shall be exchanged for (i) an 8% Contingent Convertible Promissory Note in
the face amount of $100,000,000 issued by PSC in the form of Exhibit A attached
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hereto (individually, a "New Note" and collectively, the "New Notes") and (ii) a
Contingent Common Stock Purchase Warrant granted by PSC in the form of Exhibit B
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attached hereto (individually, a "Warrant" and collectively, the "Warrants").
Effective as of the Closing, the Sellers hereby release the Company from all
obligations under the Old Notes.
2. Lease Arrangements.
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(a) Prepayment of Obligations. PSC shall terminate, not later than
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December 31, 1997, PSC's existing lease with Metropolitan Life Insurance Company
("Landlord") covering PSC's facility at 000 Xxxxxxxx Xxxxxx, Xxxxx Xxxxxx, Xxx
Xxxx (the "Lease"). PSC shall timely perform all of its obligations under the
Lease and vacate the premises covered by the Lease not later than December 31,
1997. Prior to Closing, Carso Global Telecom, S.A. de C.V. ("Carso") shall
prepay to the Landlord in full all rent due and to become due under the Lease
through December 31, 1997, together with the entire amount of the early
termination fee provided under the Lease, less any negotiated discount for
prepayment agreed to by the Landlord (the net amount of the foregoing, the
"Lease Amount"). At Closing, Carso shall deliver to the Sellers the Termination
Deposit (as defined in Section 2(b) below), together with evidence reasonably
satisfactory to Sellers that the Lease Amount has been fully paid to the
Landlord.
(b) Termination Deposit. Carso shall deliver at Closing to each
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Seller the sum of $500,000 (collectively, the "Termination Deposit"), which
shall be held by Sellers, subject to the provisions of this Section 2, as
collateral security for the obligations of PSC set forth in Section 2(a) above
and Section 2(d) below. PSC shall be entitled to return of the Termination
Deposit upon termination of the Lease on or prior to December 31, 1997 in
accordance with its terms and after
satisfaction (including but not limited to timely vacating the premises covered
by the Lease on or prior to December 31, 1997) of all of PSC's obligations under
the Lease ("Lease Termination"). PSC shall, as a condition precedent to its
right to return of the Termination Deposit based on Lease Termination, deliver
to Sellers a certificate, addressed to Sellers and signed by the chief financial
officer or chief executive officer of PSC, stating that, as of the date of such
certificate, PSC has (i) timely vacated the premises covered by the Lease as of
a date on or prior to December 31, 1997, (ii) timely performed all of its
obligations under the Lease and is not in default under the Lease, and (iii)
timely complied with all of the provisions of the Lease required to terminate,
and has terminated, the Lease as of a date on or prior to December 31, 1997.
(c) Investment of Termination Deposit. The Termination Deposit shall
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be invested by each Seller, in its own name, in a segregated, interest-bearing
bank money market account, mutual fund money market account or other form of
investment customarily used by such Seller for its own short-term cash
investments. Interest earned thereon shall be added to and become part of the
Termination Deposit.
(d) Indemnification. If Lease Termination does not occur on or prior
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to December 31, 1997, PSC shall indemnify and hold harmless each Seller from and
against all liabilities of whatsoever kind that such Seller may have to Landlord
under or in connection with the Lease, and pay and reimburse each Seller for its
costs and expenses (including reasonable attorneys' fees) incurred by such
Seller in respect of any claim made by the Landlord against Sellers, or either
of them, under or in connection with the Lease. PSC hereby grants each Seller a
senior lien and security interest in the Termination Deposit to secure
satisfaction of PSC's obligations set forth herein. Sellers shall be entitled
to apply the Termination Deposit to satisfy PSC's obligations as set forth
herein, which shall include, but not be limited to, the right to apply the
Termination Deposit to reimburse themselves for any sums that they have paid the
Landlord in respect of the Lease, whether paid pursuant to a judgment entered
against either Seller, a settlement with the Landlord, or otherwise.
3. Closing Conditions. The closing (the "Closing") of the transactions
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contemplated hereby shall occur as soon as possible after satisfaction of the
conditions set forth in this Section 3. If the conditions specified in this
Section 3 have not been satisfied by October 31, 1997, the Closing shall not
occur and this Agreement shall automatically terminate with no liability of any
party hereunder to any other party hereunder. If this Agreement terminates as
provided in the preceding sentence, the Old Notes shall not be modified and
shall continue in accordance with their terms. The conditions to Closing are as
follows:
(a) Lease Arrangements. Carso shall have fully paid the Lease Amount
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to the Landlord and delivered to Sellers evidence reasonably satisfactory to
Sellers that the Lease Amount has been fully paid to the Landlord. Carso shall
have delivered the Termination Deposit to the Sellers.
(b) Letter of Credit Arrangements. Carso shall have caused the
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execution and delivery to Sellers at Closing of a clean irrevocable letter of
credit issued or confirmed by a domestic bank in the United States or a branch
of a foreign bank, which branch is located in the United States, in each case
acceptable to Sellers (the "Xxxxx XX"). The Xxxxx XX shall be in form and
substance mutually agreed to by Sellers and Carso and shall be in the initial
face amount of $4,000,000 (with the face amount declining at the end of each
subsequent calendar quarter to an amount equal to $4,000,000 minus the greater
of (i) $333,333.33 multiplied by the number of full calendar quarters elapsed
since the Closing or (ii) the aggregate amount of all draws against the Xxxxx XX
since the Closing). The Xxxxx XX shall secure, and may be drawn against only
with respect to, the obligation of the Company under Section 10.2 of the
Purchase Agreement to indemnify Sellers against Covered Damages. "Covered
Damages" shall mean Damages (as defined in Section 10.2 of the Purchase
Agreement) arising from claims by third parties (i.e., parties other than either
Seller or any entity controlled by or
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affiliated with either Seller); provided, however, that Covered Damages shall
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include Damages arising from claims for taxes (as defined in Section 9.5 of the
Purchase Agreement) of Old Prodigy for Pre-Closing Taxable Periods (as defined
in Section 9.5 of the Purchase Agreement) only to the extent that PSC does not
comply with its obligations under Section 9 below. The Xxxxx XX shall be subject
to multiple draws, in each case upon presentation, at any time prior to
September 30, 2000, of a sight draft purporting to be signed by an officer of
either Seller accompanied by a certificate signed by an officer of the drawer,
in form and substance mutually agreed to by Sellers and Carso, stating that the
drawer has incurred Covered Damages for which the drawer is entitled to be
indemnified under Section 10.2 of the Purchase Agreement. Carso shall have the
right to control the defense and settlement (with counsel of its choosing
reasonably acceptable to Sellers) of all claims which may give rise to Covered
Damages and, if it does not do so within a reasonable period of time after being
notified of any such claims, Sellers shall be entitled to retain counsel of
their choosing (and reasonably acceptable to Carso) to provide such defense (in
which case the reasonable fees and expenses of one firm of outside counsel to
represent Sellers with respect to such claims shall also constitute Covered
Damages).
(c) Additional Agreements Regarding the Xxxxx XX. The Company hereby
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agrees that (i) any obligation to reimburse the issuing bank, Carso or any other
party in respect of draws on the Xxxxx XX shall not be secured by any assets of
a "Prodigy Entity" (as defined below) and shall not give rise to a claim against
a Prodigy Entity that does not have liability for Covered Damages under the
Purchase Agreement or give rise to a claim against a Prodigy Entity senior in
priority to the Sellers' claim for Covered Damages under the Purchase Agreement
(such prohibitions being hereinafter referred to as the "Prohibited
Attributes"); and (ii) in the event the Xxxxx XX is determined to possess
Prohibited Attributes, or if a stay, restraining order or injunction is in
effect that prevents either Seller from drawing on the Xxxxx XX based in whole
or in part upon an allegation that the Xxxxx XX possesses Prohibited Attributes,
then Carso shall provide a substitute Xxxxx XX that does not possess Prohibited
Attributes. The documentation and arrangements respecting the Xxxxx XX shall be
made available to Sellers for review prior to Closing and shall establish to
their satisfaction that the Xxxxx XX does not possess Prohibited Attributes. As
used herein, the term "Prodigy Entity" means and includes the Company and any
direct or indirect subsidiary of the Company, including but not limited to PSC.
4. The Closing. At the Closing:
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(a) PSC shall execute and deliver a New Note to each Seller.
(b) PSC shall execute and deliver a Warrant to each Seller.
(c) Each Seller shall return to the Company its Old Note, marked
"cancelled".
(d) Carso shall deliver the Termination Deposit to the Sellers.
(e) Carso shall make the payments to the Sellers contemplated by
Section 9.
5. Representations of the Sellers. Each Seller hereby represents and
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warrants as follows as to itself:
(a) Authorization. Seller has all necessary right, power and
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authority to enter into this Agreement. The execution, delivery and performance
by Seller of this Agreement has been duly authorized by all requisite corporate
action on the part of Seller. This Agreement constitutes the valid and legally
binding obligation of Seller, enforceable against Seller in accordance with its
terms.
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(b) Certain Tax Payments. Each Seller paid the State of New York
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$1,107,764 in January 1997 and $588,045 in October 1997 in respect of certain
sales and use taxes assessed against Old Prodigy for periods ending prior to
June 17, 1996. Each Seller also paid, after June 17, 1996, $4,796.50 to the
State of Illinois in respect of certain sales and use taxes assessed against Old
Prodigy for periods ending prior to June 17, 1996.
(c) Securities Representations. Seller has substantial knowledge and
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experience in making investment decisions of the type contemplated by the
exchange of an Old Note for a New Note and Warrant and is capable of evaluating
the merits and risks of such exchange. Seller has received and reviewed the
Company's Confidential Private Placement Memorandum dated October 31, 1997
(draft dated October 16, 1997) (the "Memorandum"). The Company has made
available to Seller all documents requested and has provided answers to all of
its questions relating to an investment in the Company or PSC. In evaluating
the exchange of its Old Note for a New Note and Warrant, Seller has not relied
upon any representations or other information (whether oral or written) other
than as set forth in the Memorandum. Seller has had an opportunity to discuss
such exchange with representatives of the Company and to ask questions of them.
Seller understands that an investment in the Company or PSC involves significant
risks, and Seller has reviewed and is aware of the risk factors described in the
Memorandum under the caption "Risk Factors". Seller is acquiring its New Note
and Warrant, the Common Stock (as defined in the New Notes) issuable upon
conversion of its New Note and the Common Stock (or other securities) issuable
upon exercise of its Warrant (collectively, the "Securities") for its own
account for investment, not for resale to any other person and not with a view
to or in connection with any resale or distribution. Seller understands that
the Securities have not been registered under the federal securities laws or the
securities laws of any other jurisdiction and cannot be transferred or resold
except as permitted pursuant to a valid registration statement or an applicable
exemption from registration. Seller acknowledges that neither the Company nor
PSC has made any representations with respect to registration of the Securities
under applicable securities laws (except as provided in Section 5 of the New
Notes), that no such registration is contemplated, that there can be no
assurance that there will be any market for the Securities in the foreseeable
future and that, as a result, Seller must be prepared to bear the economic risk
of its investment for an indefinite period of time. Seller understands that the
certificates or other instruments representing the Securities shall bear
restrictive legends under the Securities Act of 1933. Seller acknowledges that
no representations have been made to it concerning the size, valuation or timing
of an initial public offering or other financing by the Company or PSC.
6. Representations of the Company. The Company hereby represents and
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warrants as follows to the Sellers. The Company has all necessary right, power
and authority to enter into this Agreement. The execution, delivery and
performance by the Company of this Agreement has been duly authorized by all
requisite corporate action on the part of the Company. This Agreement
constitutes the valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its terms.
7. Representations of PSC. PSC hereby represents and warrants as follows
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to the Sellers:
(a) Authorization by PSC. PSC has all necessary right, power and
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authority to enter into this Agreement. The execution, delivery and performance
by PSC of this Agreement has been duly authorized by all requisite corporate
action on the part of PSC. This Agreement constitutes the valid and legally
binding obligation of PSC, enforceable against PSC in accordance with its terms.
(b) PSC's Issuance of Securities. Prior to the Closing, the issuance
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and delivery of the New Notes in accordance with this Agreement, the issuance
and delivery of the Warrants in accordance with this Agreement, the issuance and
delivery of the shares of Common Stock
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issuable upon conversion of the New Notes and the issuance and delivery of the
shares of Common Stock issuable by PSC upon exercise of the Warrants will be
duly authorized by all necessary corporate action on the part of PSC, and all
such shares will be duly reserved for issuance. The shares of Common Stock
issuable upon conversion of the New Notes, when so issued in accordance with the
provisions of the New Notes, and the shares of Common Stock issuable by PSC upon
exercise of the Warrants, when so issued against payment therefor in accordance
with the Warrants, will be duly and validly issued, fully paid and non-
assessable.
(c) Enforceablility. Upon their issuance as contemplated hereby, the
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New Notes and Warrants will constitute the valid and legally binding obligations
of PSC, enforceable against PSC in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, reorganization or similar laws
affecting generally the enforcement of creditors' rights and subject to a
court's discretionary authority with respect to the granting of a decree
ordering specific performance or other equitable remedies.
8. Representations of the Company and PSC. The Company and PSC hereby
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represent and warrant as follows to the Sellers:
(a) The Lease Amount paid pursuant to Section 2(a) above, the
Termination Deposit paid pursuant to Section 2(b) above and the tax settlement
payment to each Seller pursuant to Section 9 hereof (collectively, the "Carso
Funded Payments") have all been paid directly by Carso solely from funds
provided by Carso (the "Carso Funds") pursuant to that certain letter dated
October 20, 1997 addressed to the Company from Carso (the "Carso Letter").
(b) The Carso Funds shall be reimbursed to Carso only from the
proceeds of the Company's equity financings or through the issuance of equity
securities in the Company to Carso.
(c) Any payment of the Carso Funded Payments made by the Company or
any payments by Carso of the Carso Funded Payments on behalf of the Company
shall be on behalf of PSC and shall constitute an equity capital contribution by
the Company to PSC.
(d) The execution and delivery of this Agreement by the Sellers is a
condition precedent to Carso's willingness to provide the Carso Funds and is
also a condition precedent to the Company's issuance of new equity securities
and the securing of new and additional equity financing in the rights offering
contemplated by the Memorandum.
(e) The Company and PSC acknowledge that the Sellers have required
the payment of the Carso Funded Payments from the Carso Funds on the terms set
forth herein in exchange for their entry into this Agreement.
9. Tax Settlement. PSC and the Sellers agree that each of them shall be
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liable for one-third (1/3) of all taxes (as defined in Section 9.5 of the
Purchase Agreement) of Old Prodigy for Pre-Closing Taxable Periods (as defined
in Section 9.5 of the Purchase Agreement) which taxes were unpaid as of June 17,
1996, whether such taxes are assessed prior to or after the date hereof. Based
on the Sellers' representation contained in Section 5(b) above, Carso shall pay
$566,868.50 to each Seller at the Closing with respect to this Section 9. As of
the Closing, the parties agree that the Threshold Amount (as defined in Section
10.2 of the Purchase Agreement) shall be deemed satisfied.
10. Acquisition or IPO by the Company.
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(a) IPO by the Company. If, prior to an IPO (as defined in the New
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Notes) by PSC, the Company undertakes a transaction which would constitute an
IPO if undertaken by PSC (a "Company IPO"), then, simultaneously with and as a
condition to the Company IPO, the Company
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shall assume the New Notes and Warrants, provision shall be made so that the
Sellers shall be entitled to receive, upon conversion of the New Notes and
exercise of the Warrants, shares of stock or other securities or property of the
Company as described in the following sentence, and PSC shall be released from
the New Notes and Warrants. Upon a Company IPO, the Sellers shall be entitled to
receive upon conversion of the New Notes and exercise of the Warrants shares of
stock or other securities or property of the Company based on the ratio of the
Fair Market Value (as defined below) of PSC divided by the fair market value of
the Company (on a consolidated basis) immediately prior to the Company IPO.
"Fair Market Value" of PSC and the Company (on a consolidated basis) shall be
determined by an independent appraiser, jointly selected by the Company and the
Sellers, whose fees and expenses shall be shared in equal thirds by the Company
and the Sellers and whose determination of the Fair Market Value of PSC and the
Company (on a consolidated basis) shall be conclusive and binding on all parties
in the absence of fraud or manifest error.
(b) Acquisition of the Company. If, prior to an Acquisition
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Transaction (as defined in the New Notes) by PSC, the Company undertakes a
transaction which would constitute an Acquisition Transaction (a "Company
Acquisition") if undertaken by PSC, then, simultaneously with and as a condition
to the Company Acquisition, the Acquiror (as defined below) shall assume the New
Notes and Warrants, provision shall be made so that the Sellers shall be
entitled to receive, upon conversion of the New Notes and exercise of the
Warrants, shares of stock or other securities or property of the Acquiror as
described in the following sentence, and PSC shall be released from the New
Notes and Warrants. Upon a Company Acquisition, the Sellers shall be entitled
to receive upon conversion of the New Notes and exercise of the Warrants shares
of stock or other securities or property of the Acquiror based on the ratio of
the Fair Market Value of PSC divided by the Fair Market Value of the Company (on
a consolidated basis) immediately prior to the Company Acquisition. "Acquiror"
shall mean the Company or other entity, as applicable, surviving the Company
Acquisition.
11. Confidentiality. The Sellers shall treat the Memorandum as
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confidential, preserve the confidentiality thereof and not duplicate, use or
disclose the Memorandum, except to employees and advisors who have a need to
know in connection with the transactions contemplated hereby and except to the
extent that information in the Memorandum becomes publicly available other than
through a breach of this Section 11 by a Seller.
12. Notices. All notices required or permitted under this Agreement shall
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be given in accordance with Section 12.3 of the Purchase Agreement, except that
the address for the Company and PSC shall be 000 Xxxxxxxx Xxxxxx, Xxxxx Xxxxxx,
XX 00000 until December 31, 1997 and 00 Xxxxx Xxxxxxxx, Xxxxx Xxxxxx, XX 00000
thereafter, in each case to the attention of the President.
13. Entire Agreement. This Agreement constitutes the entire agreement
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between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
14. Amendment. This Agreement may be amended or modified only by a
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written instrument executed by all parties hereto.
15. Governing Law. This Agreement shall be construed, interpreted and
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enforced in accordance with the laws of the State of New York, without reference
to conflict of laws principles.
16. Successors and Assigns. This Agreement shall be binding upon and
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inure to the benefit of the parties and their respective successors and assigns.
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17. Miscellaneous.
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(a) No delay or omission by any party in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver
or consent given by any party on any one occasion shall be effective only in
that instance and shall not be construed as a bar or waiver of any right on any
other occasion.
(b) The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
(c) In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
(d) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which shall be one and
the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
PRODIGY, INC.
By: /s/
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Title:__________________________
PRODIGY SERVICES CORPORATION
By: /s/
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Title:__________________________
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SEARS, XXXXXXX AND CO.
/s/
By:-----------------------------
Title: _________________________
INTERNATIONAL BUSINESS MACHINES
CORPORATION
/s/
By:----------------------------
Title: ________________________
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AMENDMENT TO NOTE EXCHANGE AGREEMENT
Reference is made to the Note Exchange Agreement (the "Agreement") dated as
of October 20, 1997 among Prodigy, Inc., a Delaware corporation (the "Company"),
Prodigy Services Corporation, a Delaware corporation and an indirect wholly-
owned subsidiary of the Company ("PSC"), Sears, Xxxxxxx and Co., a New York
corporation ("Sears"), and International Business Machines Corporation, a New
York corporation ("IBM").
For good and valuable consideration, the sufficiency of which is
acknowledged, the parties hereby agree to amend the Agreement by changing the
date "October 31, 1997" in Section 3 to "November 5, 1997".
In all other respects, the Agreement is hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 31st day of October, 1997.
PRODIGY, INC.
/s/
By: --------------------------
Title:__________________________
PRODIGY SERVICES CORPORATION
/s/
By: --------------------------
Title:__________________________
SEARS, XXXXXXX AND CO.
/s/
By:----------------------------
Title: ________________________
INTERNATIONAL BUSINESS MACHINES
CORPORATION
/s/
By:----------------------------
Title: ________________________
