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EXHIBIT 1
INCOMNET, INC.
TERM SHEET
August 21, 1998
Set forth below are certain terms relating to the resignation of certain
directors of Incomnet, Inc. (the "Company"), the appointment of their successors
and certain other matters concerning corporate governance of the Company. The
terms set forth below are intended to reflect the mutual understanding of the
Company, its current Board of Directors (the "Current Board") and Xxxx X. Xxxxx
("Xxxxx"). This term sheet is not intended to be, and does not constitute, a
binding or enforceable agreement, but is merely an outline of intention to
facilitate the negotiation and preparation of a definitive agreement (the
"Agreement") and related documents.
Board Representation and Related
Matters .......................... Board Members. Messrs. Xxxxxxxx, Xxxxx,
Xxxxxxx, Xxxxxxxx and Xx. Xxxxxx will
agree to resign as directors of the
Company upon satisfaction of certain
conditions (the "Change of Board Control
Conditions"). Xx. Xxxxxxxxx will remain as
a director. Xx. Xxxxx, Xxxx Xxxx, Jr.
(Chief Financial Officer of Quince
Associates) and another person to be
designated by Xx. Xxxxx (the "Xxxxx Board
Designee") will be appointed as successors
to the resigning directors upon
satisfaction of the Change of Board
Control Conditions. The Xxxxx Board
Designee will be disclosed to the Current
Board after execution of the Agreement and
before filing the Information Statement
described below. The Current Board will
have the right to approve of the Xxxxx
Board Designee, such approval not to be
unreasonably withheld. Xx. Xxxxxxxxx, Xx.
Xxxxx, Xx. Xxxx and the Xxxxx Board
Designee are referred to herein as the
"New Board." The completion of the change
in the composition of the Company's Board
of Directors is sometimes referred to
herein as the "Change of Board Control."
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Board Committee Matters. The New Board
will have an Audit Committee, a
Compensation Committee and committee to
resolve any issues relating to
transactions involving Xx. Xxxxx (the
"Disinterested Director Committee"), each
of which will have at least three members.
Xx. Xxxxxxxxx will be one of the members
on each of these committees.
Reelection of Xx. Xxxxxxxxx. The Company
will nominate Xx. Xxxxxxxxx for reelection
to the Board of Directors at the next
annual meeting of shareholders of the
Company. There will be no obligation of
the Company to nominate Xx. Xxxxxxxxx for
reelection to the Board of Directors after
the next annual meeting of shareholders.
There will be no rights granted to any
party to designate the successor to Xx.
Xxxxxxxxx should he cease being a director
of the Company for any reason (whether
through voluntary resignation, removal for
cause, death or disability).
Change of Board Control
Conditions ....................... The Agreement will identify the following
Change of Board Control Conditions that
must be satisfied prior to the Change of
Board Control (the date on which the last
condition is satisfied or waived is
referred to herein as the "Change of Board
Control Date"): (i) a settlement agreement
must have been entered into among the
named parties to the class action lawsuit
(the "Class Action Lawsuit") pending
against the Company on terms reasonably
acceptable to Xxxxx (Xxxxx condition);
(ii) the Company must have in place
directors and officers insurance coverage
on terms acceptable to Xxxxx (Xxxxx
condition); (iii) the Autonomy Agreement
(described below) must have been rescinded
(Xxxxx condition); (iv) the Supermajority
Bylaw Provision (described below) must
have been rescinded (Xxxxx condition); (v)
the consent or agreement of the Xxxxx
Group (defined below) approving of the
increase in the authorized number of
shares of the Company's Common Stock must
have been obtained (Xxxxx and Company
Condition); (vi) the Xxxxx Board Designee
and any new executive officers identified
by the New Board
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to have positions with the Company or NTC
immediately following the Change of Board
Control (who must be identified in the
Information Statement referred to in item
(viii) below) must have been disclosed to,
and approved by, the Current Board, such
approval not to be unreasonably withheld
(Company condition); (vii) WorldCom must
have informed NTC in writing of WorldCom's
withdrawal of its notice of intent to
disconnect services and be on such terms
with NTC that are satisfactory to Xx.
Xxxxx (Xxxxx condition); (viii) the
ten-day waiting period following mailing
of an Information Statement (the
"Information Statement") pursuant to Rule
14f-1 under the Securities Exchange Act of
1934 must have lapsed (Xxxxx and Company
condition). The Agreement will provide for
a date that the conditions are anticipated
to be satisfied, after which the Company
or Xx. Xxxxx may elect to terminate the
Agreement.
New Incomnet Financing............ Xx. Xxxxx will agree to use commercially
reasonable efforts to secure additional
equity or debt financing for the Company
and cause the New Board to consider all
options available to the Company to
improve its liquidity consistent with its
needs.
Rescission of Autonomy Agreement .. The Company will agree to cause the
agreement dated January 28, 1997 (the
"Autonomy Agreement"), between the Company
and NTC to be terminated promptly and no
later than three days following the date
the Agreement is entered into among the
parties.
Rescission of Supermajority
Bylaw............................. On November 5, 1997, the Company's Board
of Directors adopted an amendment to the
Company's Bylaws (the "Supermajority Bylaw
Provision") requiring that all formal
resolutions, acts and decisions of the
Board of Directors must be approved by a
majority vote plus one director. The
Company will rescind the Supermajority
Bylaw Provision by adopting an amendment
to the Bylaws to eliminate the
Supermajority Bylaw Provision, such
rescission to
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be effective on or prior to the Change of
Board Control Date.
Assignment of Xxxxx Option by Xxxxx
to the Company ................... Xx. Xxxxx owns an option to purchase
1,598.211 shares of Company Preferred
Stock (the "Xxxxx Preferred") from the
Xxxxx Group (the "Xxxxx Option") for $2.3
million plus accrued dividends and
penalties (the "Xxxxx Exercise Price") on
or before October 13, 1998. If the Company
is financially able to purchase or redeem
the Xxxxx Preferred at the Xxxxx Exercise
Price prior to the termination of the
Xxxxx Option and the Xxxxx Group consents
to the assignment, Xx. Xxxxx will assign
the Xxxxx Option to the Company on
condition that the Company exercise the
Xxxxx Option and redeem the Xxxxx
Preferred at the Xxxxx Exercise Price. For
purposes of determining whether the
Company is financially able to redeem the
Xxxxx Preferred, the Company must have
cash on hand necessary to undertake such a
transaction taking into account its other
cash requirements and also meet all
requirements under applicable law,
including Section 500 et seq. of the
California General Corporation Law.
Increase in Authorized Number of
Common Shares..................... The Company will agree (and Xx. Xxxxx will
agree to use commercially reasonable
efforts) to cause a Proxy Statement to be
prepared and mailed to the Company's
shareholders soliciting their approval to
amend the Company's Articles of
Incorporation to increase the number of
authorized shares of Common Stock to 50
million shares (the "Amendment to
Articles").
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Exercise of Xxxxx Option by Xxxxx;
Redemption or Conversion of Xxxxx
Preferred ........................ If the Company is not financially able to
redeem the Xxxxx Preferred prior to the
termination of the Xxxxx Option (or the
Xxxxx Group does not consent to such
assignment), Xx. Xxxxx will be obligated
to exercise the Xxxxx Option prior to its
termination. For the one-year period
(beginning on the date the Xxxxx Option is
exercised by Xx. Xxxxx and ending on the
one-year anniversary of that exercise
date, the "Redemption Period"), Xx. Xxxxx
will be obligated to hold the Xxxxx
Preferred until the Company is financially
able to redeem the Xxxxx Preferred. At
such time as the Company is financially
able to redeem the Xxxxx Preferred, Xx.
Xxxxx will assign and transfer the Xxxxx
Preferred to the Company and, upon such
transfer, the Company will reimburse Xx.
Xxxxx for all of his reasonable costs and
expenses (including the Xxxxx Exercise
Price, the carrying costs of financing
such Exercise Price and reasonable
attorneys' fees) relating to the Xxxxx
Option and the exercise thereof.
In the event the Company is not
financially able to redeem the Xxxxx
Preferred before expiration of the
Redemption Period, as soon as practicable
after the later of the approval by
shareholders of the Amendment to Articles
or the expiration of the Redemption
Period, Xx. Xxxxx will tender the Xxxxx
Preferred for conversion and the Company
will convert the Xxxxx Preferred into that
number of Company common shares that the
holders of Xxxxx Preferred would have been
entitled to receive (based on an average
conversion price of approximately $0.19
per share) had the Company been able to
convert the Xxxxx Preferred when tendered
for conversion on June 10-11, 1998 (the
"Xxxxx Common"). The Agreement will
provide the actual number of common shares
that the holders of Xxxxx Preferred are
entitled to receive.
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Agreement to Conduct
Offering ......................... In the event the Xxxxx Preferred is not
redeemed by the Company before expiration
of the Redemption Period and the Xxxxx
Preferred is converted into shares of
Common Stock, Xx. Xxxxx will agree to
offer the Xxxxx Common on a pro rata basis
to the Company's shareholders (including
Xx. Xxxxx) as of a certain record date to
be announced by the Company ("Record
Holders"). The purchase price for the
Xxxxx Common will be the sum of (i) the
Exercise Price, (ii) Xx. Xxxxx'x actual
carrying costs for purchasing and
exercising the Xxxxx Option (approximately
18% interest rate from the date of each
payment) and (iii) Xx. Xxxxx'x reasonable
legal fees and costs attributable to the
purchase of the Xxxxx Preferred and the
offering of the Xxxxx Common. To the
extent that the Xxxxx Common is
undersubscribed for during the initial
round of the offering, Xx. Xxxxx will
agree to make a second round offer on a
pro rata basis to the subscribing Record
Holders. If the offering is not fully
subscribed after the second round, Xx.
Xxxxx will be entitled to offer the
balance of the Xxxxx Common to the parties
designated by him (including Xx. Xxxxx) in
his sole discretion.
Expenses.......................... In addition to the costs and expenses
related to the Xxxxx Preferred, the
Company agrees to reimburse Xx. Xxxxx for
any reasonable costs and expenses
(including reasonable attorneys' fees)
incurred by him in connection with (a) the
settlement of the Class Action Lawsuit,
(b) any filings made by the Company or Xx.
Xxxxx with the Securities and Exchange
Commission or any other regulatory agency
in connection with the Change of Board
Control, (c) the preparation of the
Information Statement, (d) obtaining
directors' and officers' insurance
coverage and (e) negotiating and preparing
this term sheet and the Agreement. Other
than the costs and expenses relating to
the Xxxxx Preferred and those matters
described in clauses (a) through (e)
above, (i) upon the approval of a majority
of the disinterested members of the New
Board (and without requiring
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approval of the Company's shareholders),
the Company may reimburse Xx. Xxxxx up to
$100,000 of costs and expenses incurred by
him on or after April 1, 1998 in
connection with due diligence concerning
the Company and its proposal to sell NTC
and the attempt to prevent such sale, the
Agreement and any related documentation
(collectively, the "Due Diligence Costs")
and (ii) upon the approval of the majority
of the disinterested members of the New
Board and the Company's disinterested
shareholders, the Company may reimburse
Xx. Xxxxx for Due Diligence Costs in
excess of $100,000.
Stand-Still by Incomnet
and NTC Pending Change of Board
Control........................... From the date of the Agreement until the
Change of Board Control Date (the "Stand
Still Period"), unless Xx. Xxxxx otherwise
consents, the Company will not prepare or
participate in any of the following or
permit any subsidiary (including NTC) to
do any of the following:
Organizational Documents. Amend any
organizational documents.
Extraordinary Transactions. Propose or
agree to enter into any extraordinary
corporate transaction (merger, sale of
assets, sale of securities or other
similar transaction, declaration of
dividend or adoption of shareholder rights
plan) or incur or agree to incur any
material liability (loans for borrowed
money or settlement of litigation).
Notwithstanding the foregoing, the Company
may (i) sell up to $2.5 million shares of
Rapid Cast, Inc. ("Rapid Cast") at no less
than $0.60 per share provided that the
Company retains at least 8.1 million
shares of Rapid Cast, (ii) enter into the
sublease at 2811 East Main under the terms
set forth in the term sheet dated July 17,
1998, and (iii) obtain debt financing on
terms substantially similar to those
previously proposed by a financial
institution in July 1998. In addition, if
the Company or any subsidiary proposes to
enter into short-term financing
arrangements while these standstill
provisions are in effect, Xx. Xxxxx has
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agreed that his consent permitting the
Company to do so will not be unreasonably
withheld.
Compensation. Increase or agree to
increase compensation payable to
directors, employees or consultants or
enter into severance or termination
arrangements affecting directors,
consultants or employees or amend any
employee plans or grant any options,
warrants or rights to purchase securities
of the Company or NTC.
Miscellaneous Covenants............. The Company will agree to use commercially
reasonable efforts to (i) provide
reasonable access to its insurance brokers
and carriers; (ii) provide access to its
accountants and legal counsel (including
counsel to NTC), (iii) make any necessary
filing with, and obtain any necessary
approvals of, the FCC; (iv) provide a copy
of a list of all shareholders of record as
of the date of the Agreement, such list to
be provided within three business days
after execution of the Agreement; (v)
provide copies of all documents relating
to the Company and its subsidiaries
reasonably requested by Xxxxx or his legal
counsel; and (vi) prepare and file the
Information Statement, Proxy Statement and
any other necessary regulatory filings.
Xxxxx will agree to use commercially
reasonable efforts to (a) obtain the
consent or approval of the Xxxxx Group to
the proposed increase in the number of
authorized shares of the Company's Common
Stock and (b) assist in the preparation of
the Information Statement, Proxy Statement
and any other necessary regulatory
filings.
Mutual Releases;
D&O Insurance....................... The parties will enter into mutual
releases relating to Change of Board
Control matters that are customary for
this type of agreement. The Company also
will agree to customary provisions
regarding the continuation of directors'
and officers' insurance coverage, subject
to customary limitations.
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