[LOGO]
January 28, 1997
Xx. Xxxxxx Xxxxxxx
President and Chief Executive Officer
Incomnet, Inc.
00000 Xxxxxxx Xxxxxxxxx
Xxxxxxxx Xxxxx, XX 00000
Dear Xx. Xxxxxxx:
The following sets forth certain agreements reached between Incomnet, Inc.
("ICNT") and National Telephone & Communications, Inc. ("NTC"), subject only to
the approvals of the Board of Directors of ICNT and of NTC in the forms attached
hereto as Exhibits 1 and 2. When approved by the Boards of both Companies, this
Letter Agreement shall supersede and replace the Letter Agreements dated October
14, 1996 and February 6, 1996 regarding NTC becoming a public company.
All share numbers referred to herein are predicated upon NTC having ten
(10) million shares of common stock issued and outstanding. Prior to NTC
becoming a public company, NTC will reincorporate itself in the State of
Delaware. In connection with this reincorporation, the total issued and
outstanding shares of NTC common stock, $.01 par value per share (the "Common
Stock"), will be reduced to 10,000,000 shares, all of which will be owned by
ICNT. ICNT will transfer to NTC for cancellation all of its current shares of
NTC common stock, $.001 par value per share, in exchange for a new
certificate(s) representing 10,000,000 shares of Common Stock.
All revenue and profit numbers used herein shall be as defined by the NTC
Board and are subject to confirmation by NTC's independent accounting firm. All
public financial statements will be prepared in accordance with generally
accepted accounting principles.
I. ICNT SPIN-OFF
A. ICNT will spin-off to its shareholders one (1) million shares of NTC
Common Stock owned by ICNT (the "Spin-Off") as soon as practicable pursuant to a
"no-action" letter from the U.S. Securities and Exchange Commission or in such
other manner as may be necessary to expeditiously achieve such a spin-off. ICNT
promptly will request the no-action letter from the SEC and will work diligently
to complete the spin-off during 1997. ICNT shall not be deemed in default of
this provision if, through no fault of ICNT, the spin-off is not completed
during 1997 but is completed within a reasonable time thereafter.
B. Fractional shares of NTC Common Stock will not be distributed. Such
fractional shares will be aggregated and sold in the public market by the
Distribution Agent and the
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Page 2
aggregate net cash proceeds will be distributed ratably to those stockholders
entitled to fractional interests.
II. NTC PUBLIC OFFERING
As soon as practicable after it has obtained a commitment for a firm
commitment underwriting by a reputable regional or national investment banking
firm or firms, NTC will sell up to twenty (20) percent of its shares (after
taking into account the public offering) in a public offering (the "Public
Offering"). The actual number of shares sold will be determined by the
underwriter and NTC. ICNT will be permitted to sell shares in the offering
provided the underwriter agrees to such inclusion. Further, if the underwriter
requires, ICNT will sell shares representing up to an additional ten (10)
percent (1.25 Million Shares) of NTC's outstanding shares (after taking into
account the public offering), in addition to the twenty (20) percent block to be
sold by NTC. NTC will work diligently to complete this public offering prior to
December 31, 1997, and presently expects the offering to occur during the third
quarter of 1997.
III. DISTRIBUTION AND SALE LIMITATIONS
A. Notwithstanding any other provision of this Letter Agreement, without
NTC's prior written consent:
1. ICNT will not spin-off, sell, pledge, hypothecate or
otherwise dispose of more than twenty (20) percent of NTC's
then issued and outstanding shares prior to the earlier of
January 1, 1998 or the date of NTC's Public Offering under
Section II.
2. ICNT will not spin-off, sell, pledge, hypothecate or
otherwise dispose of more than ten (10) percent of NTC's
then issued and outstanding shares to any single person or
entity, or affiliated persons or entities, or persons or
entities controlling, controlled by or under common control
with any such person or entity, and ICNT will, upon no less
than thirty (30) days written notice, provide NTC first
right of refusal to acquire any such shares that ICNT
proposes to sell in excess of five (5) percent on the same
terms and conditions proposed for such sale by ICNT.
At such time as ICNT intends to sell more than five (5)
percent of NTC's then issued and outstanding shares to any
single person or entity, or affiliated persons or entities,
or persons controlling, controlled by or under common
control with any such person or entity, ICNT shall provide
written notice ("Notice") to the President of
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January 28, 1997
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NTC notifying and disclosing to NTC the identity of the
proposed purchaser
or purchasers and the terms and conditions of the proposed
sale. NTC shall have ten (10) days after receipt of such
written Notice to notify ICNT in writing that it elects to
purchase the shares being offered for sale by ICNT. If NTC
does not provide written notice within such ten (10) day
period to ICNT of its election to purchase such shares on
the same terms and conditions, NTC shall be deemed to have
elected not to exercise its right of first refusal to
purchase such shares. ICNT shall then have the right to
proceed with the sale to the person and on the terms and
conditions included in its Notice to NTC. If NTC provides
written notice to ICNT that it has elected to purchase the
shares proposed for sale in the Notice, NTC shall have
thirty (30) days after providing such notice to purchase
such shares on the same terms and conditions as set forth in
the Notice. If NTC does not pay the purchase price within
the thirty (30) day period, ICNT shall be entitled to
proceed with the sale of the shares to the person or persons
and on the terms and conditions set forth in its Notice to
NTC.
B. Subsequent to the Public Offering under Section II, ICNT will not
sell, pledge, hypothecate or otherwise dispose of more than one
(1) million shares of NTC stock in 1997 and one (1) million
shares in 1998, respectively, without the express written
permission of NTC. Further, through December 31, 1998, ICNT will
coordinate with NTC and NTC will coordinate with ICNT (but
neither shall require the approval of the other) with respect to
any sales, issuance or other disposition of NTC stock in excess
of five (5) percent of NTC's then issued and outstanding shares,
other than provided for in Sections I, II and IV of this Letter
Agreement, so as to assure the maintenance of an orderly market
and to minimize market disruptions with respect to the trading of
NTC stock.
IV. OPTION PLANS
NTC will create four separate plans, including three stock option plans and
one convertible debt plan (collectively, the "Plans"). Except as noted below,
the exercise price of all options issued under the option plans will be not less
than the fair-market value of NTC shares as of the date of grant, and the xxxxx
xxxxx of a convertible debt unit under the convertible debt plan will be not
less than the fair market value of a share of Common Stock on the date of grant.
To the extent feasible, options will be issued pursuant to qualified incentive
option plans. (If
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January 28, 1997
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necessary to qualify for favorable tax treatment, additional plans may be
created; all such plans will be consistent with the requirements set forth
herein). Shares issuable pursuant to the Plans will be registered under the
Securities Act of 1933, as amended (the "Securities Act") no later than the time
of NTC's Public Offering under Section II hereof. All terms and conditions of
the Plans not summarized below will be determined by NTC's Board of Directors.
Upon the creation of such Plans and the issuance of options and convertible debt
units thereunder to Jacobs and Xxxxxx, Jacobs will waive the right to the
remaining outstanding unexercised warrants and options under Jacobs' employment
agreement dated December 28, 1994.
1. KEY INDEPENDENT REPRESENTATIVE PLAN
Up to 2,884,615 shares will be reserved for issuance under this plan.
Beneficiaries will be key independent representatives of NTC who are Corporate
Team Members. Options to purchase 961,538 shares of Common Stock will be
granted to key independent respresentatives who are Corporate Team members.
Options to purchase 480,769 of such shares will vest on June 30, 1998, subject
to acceleration if the Public Offering pursuant to Section II occurs prior to
January 1, 1998. Options to purchase 480,769 of such shares will vest on June
30, 1999. Of the remaining 1,923,077 shares reserved for issuance under this
plan, the number of reserved shares set forth in the following table may be
issued under this plan to key independent representatives after each of June 30,
1997, December 31, 1997, June 30, 1998 and December 31, 1998 if NTC's gross
revenues for the three month period ending on each of such dates exceed NTC's
gross revenues for the three-month periods ending December 31, 1996, June 30,
1997, and December 31, 1997, respectively, by the percentage amounts set forth
in the following table:
Gross Revenues for Three Month
Period Exceed Gross Revenues for
Preceding Period By: Number of Shares to be Issued
-------------------- -----------------------------
30% 125,000
40% 250,000
50% 500,000
These options vest in four, equal annual installments on each anniversary of the
option grant date.
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January 28, 1997
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2. 1996 SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN
Up to 3,269,231 shares will be reserved for issuance upon conversion
of convertible debt units granted under this plan. Beneficiaries will be Xx
Xxxxxx ("Xxxxxx"), Xxxxx Xxxxxx ("Xxxxxx") and Xxxxx Xxxxxxx ("Xxxxxxx"), or
their affiliated entities through which consulting services are provided to NTC
and certain other senior executives and consultants. Jacobs and Xxxxxx
collectively will receive convertible debt units which may be converted into
3,069,231 shares of Common Stock, to be allocated between them as determined by
the NTC Board of Directors.
Xxxxxxx will receive convertible debt units which may be converted
into 100,000 shares of Common Stock. Xxxxxxx is also eligible to receive
additional convertible debt units which may be converted into 100,000 shares of
Common Stock upon satisfaction of incentive conditions to be determined by NTC's
Board of Directors. Any Xxxxxxx convertible debt units that do not vest may be
distributed to other beneficiaries of this plan in amounts determined by the NTC
Board of Directors.
An additional 576,924 shares will be reserved for issuance upon
conversion of convertible debt units granted under this plan in equal amounts to
Jacobs and Xxxxxx. These convertible debt units will be issued to Jacobs and
Xxxxxx but will vest on January 31, 2002. Vesting will accelerate in the
following amounts if NTC achieves revenues which exceed the following amounts
for any calendar quarter ending prior to January 1, 2000.
QUARTERLY REVENUES NUMBER OF SHARES VESTING
------------------ ------------------------
$ 100 million 192,308
$ 125 million 192,308
$ 180 million 192,308
3. 1996 STOCK OPTION PLAN
Up to 2,523,077 shares will be reserved for issuance under this plan.
Beneficiaries will be current and future NTC executives, employees and
consultants. Options representing one-third of the reserved shares will be
subject only to a time-in-service vesting requirement, but in no event will such
options vest prior to January 1, 1998. Options representing the remainder of
the reserved shares will vest in four, equal annual installments on each
anniversary of the
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January 28, 1997
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option grant date, subject to the acceleration of vesting in the event that NTC
achieves certain income targets in 1997.
No more than 480,770 shares issuable pursuant to options granted under
this plan may be issued to persons eligible to receive convertible debt units
under the Senior Executive and Consultant Convertible Debt Plan.
4. DIRECTORS STOCK OPTION PLAN.
Up to 300,000 shares will be reserved for issuance under this plan to
members of NTC's Board of Directors. Each Director will receive an option to
purchase 25,000 shares which will vest in four, equal annual installments on
each anniversary of the option grant date.
V. NTC CONTROL
NTC's day to day operations will continue to be controlled by its Chairman,
under the direction of its Board of Directors, subject to the following:
1. Four Independent Directors are to be selected at the time of
or in preparation for the Public Offering under Section II
to serve together with the current directors, including any
replacements thereof pursuant to Paragraph 5. below. These
independent directors initially will be selected from two
nominees of ICNT and two of the NTC Board of Directors. All
such candidates must be people of high stature who have been
unaffiliated with ICNT, its officers and directors or with
NTC and its officers and directors for a period of ten years
prior to their nomination to the Board of Directors of NTC.
To the extent feasible, the Independent Directors shall
consist of a former State Attorney General , a former
Commissioner or high ranking staff member of the Federal
Communications Commission or Federal Trade Commission, a
former Board member or high ranking executive of a major
telephone or cable (or related) company and a person with
investment banking or comparable experience. After the four
Independent Directors are added to the Board, the Board will
select the management slate of directors.
2. After the four Independent Directors referenced in Paragraph
1 are added to the NTC Board, no officer or director of ICNT
shall serve as a director of NTC.
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January 28, 1997
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3. After the four Independent Directors referenced in Paragraph
1 are added to the NTC Board, Independent Directors will
constitute the Audit and Compensation committees.
4. After the four Independent Directors referenced in Paragraph
1 are added to the NTC Board, all related party transactions
will be required to be approved by one of the committees
described in Paragraph 3 above, including, but not limited
to, salary and bonuses, loans to officers or directors, and
employment agreements.
5. Until the four Independent Directors referenced in Paragraph
1 are added to the NTC Board, the NTC Board of Directors
will remain as currently constituted (the "Current Board"),
except that a key independent representative and an
experienced current or former CEO of a financial rating
company may be added to the Board, and except for matters
previously approved by the NTC Board, unanimous Board of
Directors approval will be required for (i) related party
transactions, (ii) the issuance of NTC shares, options,
warrants or convertible securities (other than the options
and shares issuable thereunder pursuant to the Plans
described in Section IV), (iii) the selection of a successor
to Jacobs if he is no longer serving in any senior executive
capacity or as a director of NTC, and (iv) the terms of the
Public Offering referenced in Section II. Notwithstanding
the immediately preceding sentence, in the event of a
vacancy created by the death, resignation or removal, with
or without cause, of Jacobs or Xxxxxx (the "NTC Management
Directors") ICNT will vote its shares for the individual
nominated by the remaining NTC Management Director.
6. Until the four Independent Directors referenced in Paragraph
1 are added to the NTC Board, ICNT will vote its shares for
the NTC Management Directors, including any replacement
thereof or addition thereto pursuant to Paragraph 5 above,
and a representative of ICNT as members of the Board of
Directors of NTC. Thereafter and until such time that
Jacobs is no longer a member of the NTC board by reason of
his death, resignation or removal, with or without cause,
ICNT will vote its shares for the management slate of
nominees for NTC's Board of Directors.
7. In addition to the regular board of directors positions, a
key independent representative may be nominated and elected
to the board of directors on a rotating basis (a "Rotating
Director"), such that the same person cannot serve
consecutive terms.
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January 28, 1997
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VI. FLOW OF CASH BETWEEN NTC AND INCOMNET
A. NTC and ICNT acknowledge and agree that NTC has advanced $1,000,000 to
ICNT prior to October 14, 1996. Assuming that NTC has excess cash available to
it, NTC will advance to ICNT at periodic intervals and for specific identifiable
corporate purposes approved by NTC (together with the prior $1,000,000 in
advances, the "Advances") up to $100,000 per month between November 1, 1996 and
the date of the Public Offering under Section II. Any Advances in excess of
$2,200,000 (including the Advances made prior to October 14, 1996) shall be
evidenced by demand notes, bear interest at the prime rate as set forth in THE
WALL STREET JOURNAL plus 2%, and shall be fully collateralized with shares of
NTC stock owned by ICNT which shares shall be valued at Five (5) Dollars per
share for purposes of determining the number of shares required to collateralize
the Advances referenced above. NTC shall provide ICNT with no less than thirty
(30) days notice to pay off any or all such Advances before demanding payment,
and no payment shall be due prior to the date of the Public Offering under
Section II. ICNT shall have the option of paying off the Advances in cash or
with the shares of NTC stock used to secure the Advances to ICNT. Excess cash
means any cash available to NTC after taking into account all current and
projected obligations. Such projected obligations includes anticipated capital
expenditures required to achieve the revenue and earnings levels needed to meet
the contingencies for all the Plans. Notwithstanding anything herein to the
contrary, a total of $2,200,000 has been or will be advanced to ICNT by NTC no
later than December 31, 1997.
B. ICNT shall have no obligation to repay $2,200,000 of Advances referenced
in Section VI.A. Any Advances in excess of $2,200,000 will be repaid by ICNT in
accordance with Section VI.A.
C. All costs and expenses incurred or paid by NTC, on behalf of itself
and/or ICNT, in connection with the Spin-Off and the Public Offering under
Section II, including but not limited to, all legal fees and expenses,
registration and filing fees, investment banking and similar fees, accounting
fees and expenses and printing (the "Expenses") shall be considered Advances for
purposes of Section VI.A. only with respect to Advances in excess of $2,200,000.
D. ICNT and NTC agree that the accounting and tax treatment of the Advances
will be as follows: (i) up to $2,200,000 of the Advances will be treated as a
return of ICNT's previously invested capital in NTC rather than as a loan and
(ii) any Advances in excess of $2,200,000, including the Expenses in Section
VI.C., will be treated as an intercompany loan to ICNT by NTC, to be repaid in
accordance with Section VI.A. Any charge to earnings or taxable income
associated with any of the Advances will be incurred by ICNT, not NTC.
VII. MISCELLANEOUS
Any and all assets relating to NTC, owned, controlled, possessed, held or
applied for by ICNT shall be assigned to NTC, free and clear of all liens,
restrictions, leases, security interests,
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January 28, 1997
Page 9
claims, charges or encumbrances whatsoever, on or before December 31, 1996.
Such assets shall include, without limitation, all intellectual property
including without limitation any and all inventions, trademarks, trade names,
copyrights, applications therefor, patents thereon, registrations thereof and
licenses thereof, royalty rights, any and all goodwill associated with the NTC
business or represented by such assets, trade secrets, and confidential
information, know-how, and all similar property of any nature, tangible or
intangible.
VIII. APPROVALS
Upon the execution of this letter by ICNT, the same will be submitted for
approval by ICNT's and NTC's Boards of Directors, in the forms attached hereto
as Exhibits 1 and 2, within seven (7) days after such execution by ICNT. If
such Board approvals have not been obtained within such seven (7) day period,
this Letter Agreement may, at the option of either NTC or ICNT, be terminated.
Following such approvals, documentation of the transactions contemplated hereby
will be drafted under the direction of NTC's Board of Directors and will be
subject to further approval by ICNT only if the terms thereof are inconsistent
with the provisions of this Letter Agreement.
IX. FURTHER ASSURANCES
Each party agrees to take such further action as may be necessary or
desirable to implement the terms of this Letter Agreement.
X. ASSIGNMENT; SUCCESSORS AND ASSIGNS
This Letter Agreement may not be assigned by either party without the
prior written consent of the other party hereto and shall inure to the benefit
of and be binding upon the parties hereto and their respective affiliates,
successors and assigns.
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January 28, 1997
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If the foregoing accurately expresses our agreement, please so indicate by
signing and returning to the undersigned one copy of this Letter Agreement.
Very truly yours,
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ Xxxxxx X. Xxxxxx
-----------------------------------------
Xxxxxx X. Xxxxxx, President and
Chief Executive Officer
AGREED AND ACCEPTED:
INCOMNET, INC.
By: /s/ Xxxxxx Xxxxxxx
---------------------------------
Xxxxxx Xxxxxxx, President
and Chief Executive Officer
Dated: 1/28/97
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