UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-18484
INCOMNET, INC.
(Exact name of registrant as specified in its charter)
California 95-2871296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21031 Ventura Boulevard, Suite 1100
Woodland Hills, California 91364
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 887-3400
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO___
The registrant had 13,599,936 shares of common stock (no par value)
issued and outstanding as of
October 24, 1995.
Total sequentially numbered pages in this document: 24.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS*
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
September 30 December 31
1995 1994
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CURRENT ASSETS:
Cash and cash equivalents $ 4,737,575 $ 9,694,900
Accounts receivable (net) 12,888,415 8,603,577
Inventories 1,986,827 28,362
Prepaid expenses and other 707,830 94,247
-------------- -------------
Total current assets 20,320,647 18,421,086
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PLANT AND EQUIPMENT:
Computer hardware & software 5,503,878 3,513,433
Furniture and office equipment 1,707,698 666,839
Leasehold improvements 3,319,126 416,746
-------------- -------------
Total plant and equipment (gross) 10,530,702 4,597,018
Less accumulated depreciation (2,635,779) (1,994,553)
-------------- -------------
Total plant and equipment (net) 7,894,923 2,602,465
-------------- -------------
OTHER ASSETS:
Excess of purchase price over net assets of NTC (net) 4,612,159 4,667,704
Excess of purchase price over net assets of RCI (net) 20,283,459 --
Patents and other intangibles (net) 21,909,108 --
Investment in Lab Tech 130,725 --
Investment in marketable securities 373,414 337,500
Deposits and other 330,409 129,591
-------------- -------------
Total other assets 47,639,274 5,134,795
-------------- -------------
Total assets $ 75,854,844 $ 26,158,346
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<FN>
* See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
September 30 December 31
1995 1994
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CURRENT LIABILITIES:
Accounts payable $ 8,297,720 $ 5,813,813
Accrued expenses 3,178,955 1,700,213
Current portion of notes payable 500,050 21,494
Deferred income 2,489,543 2,086,773
-------------- -------------
Total current liabilities 14,466,268 9,622,293
-------------- -------------
LONG-TERM LIABILITIES:
Notes payable 1,398,590 --
Deposits & other 1,000 900
Deferred tax liability (net) 8,580,212 --
-------------- -------------
Total long-term liabilities 9,979,802 900
-------------- -------------
Total liabilities 24,446,070 9,623,193
-------------- -------------
MINORITY INTEREST 6,968,224 --
-------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares
authorized; issued and outstanding - 13,599,936
shares at September 30, 1995 and 10,482,854
shares at December 31, 1994 60,477,994 31,376,094
Treasury stock (5,441,845) (665,208)
Accumulated deficit (10,595,599) (14,175,733)
-------------- -------------
Total shareholders' equity 44,440,550 16,535,153
-------------- -------------
Total liabilities, minority interest & shareholders' equity $ 75,854,844 $ 26,158,346
============== =============
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
1995 1994
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SALES $22,660,377 $12,782,808
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OPERATING COSTS AND EXPENSES:
Cost of sales 15,733,118 8,835,057
General and administrative 4,953,698 2,509,442
Depreciation and amortization 475,023 115,227
Bad debt expense 636,166 257,634
Other (income)/expense 11,793 9,028
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 21,809,798 11,726,388
----------- -----------
ACQUISITION COSTS AND EXPENSES:
NTC acquisition - goodwill amortization 69,530 66,481
RCI acquisition - patent rights amortization 301,677 --
RCI acquisition - interest and legal 19,760 --
RCI acquisition -- equity in (profit)/loss of
unconsolidated subsidiary -- --
----------- -----------
TOTAL ACQUISITION COSTS AND EXPENSES 390,967 66,481
----------- -----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEMS & 459,612 989,939
MINORITY INTEREST
INCOME TAXES 77,408 --
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEMS & MINORITY INTEREST 382,204 989,939
EXTRAORDINARY ITEMS:
Gain/(loss) on settlement with creditors -- 68,346
MINORITY INTEREST 182,641 --
----------- -----------
NET INCOME $ 564,845 $ 1,058,285
=========== ===========
INCOME PER COMMON SHARE AND FOR 1995,
COMMON SHARE EQUIVALENTS $ .04 $ .11
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
FOR 1995, COMMON SHARE EQUIVALENTS OUTSTANDING 13,566,743 9,777,532
=========== ===========
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
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SALES $62,123,548 $30,694,077
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OPERATING COSTS AND EXPENSES:
Cost of sales 42,697,385 20,791,474
General and administrative 12,341,173 5,985,183
Depreciation and amortization 850,616 309,490
Bad debt expense 1,773,324 811,660
Other (income)/expense (46,534) 40,316
------------ -----------
TOTAL OPERATING COSTS AND EXPENSES 57,615,964 27,938,123
------------ -----------
ACQUISITION COSTS AND EXPENSES:
NTC acquisition - goodwill amortization 208,590 199,246
RCI acquisition - patent rights amortization 520,059 --
RCI acquisition - interest and legal 98,482 --
RCI acquisition -- equity in (profit)/loss of
unconsolidated subsidiary 107,841 --
------------ -----------
TOTAL ACQUISITION COSTS AND EXPENSES 934,972 199,246
------------ -----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEMS
& MINORITY INTEREST 3,572,612 2,556,708
INCOME TAXES 286,120 1,055
------------ -----------
INCOME BEFORE EXTRAORDINARY ITEMS & MINORITY INTEREST 3,286,492 2,555,653
EXTRAORDINARY ITEMS:
Gain/(loss) on settlement with creditors -- 72,006
MINORITY INTEREST 182,641 --
------------ -----------
NET INCOME $ 3,469,133 $ 2,627,659
============ ===========
INCOME PER COMMON SHARE AND FOR 1995,
COMMON SHARE EQUIVALENTS $ .28 $ .28
============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
FOR 1995, COMMON SHARE EQUIVALENTS OUTSTANDING 12,435,930 9,441,507
============ ===========
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
After tax profit $ 3,286,495 $ 2,627,659
Depreciation & amortization 1,579,265 508,736
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4,865,760 3,136,395
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CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS:
Accounts receivable (3,495,522) (4,323,199)
Inventories (740,872) (77,691)
Prepaid expense & other (510,417) (93,115)
Deposits & other (200,818) (124,200)
------------- ------------
(4,947,629) (4,618,205)
------------- ------------
CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES:
Accounts payable 2,085,019 2,029,523
Accrued expenses 1,326,349 536,192
Deferred income 402,770 447,111
------------- ------------
3,814,138 3,012,826
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Net cash inflow/(outflow) from operations 3,732,269 1,531,016
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CASH FLOWS FROM (INCREASE)/DECREASE IN INVESTING ACTIVITIES:
Acquisition of plant & equipment (6,507,819) (1,111,498)
Patents and other intangibles (65,393) --
Investment in Lab Tech (130,725) --
Investment in marketable securities (35,914) (193,022)
Goodwill from acquisition of NTC 69,530 110,175
Goodwill from acquisition of RCI (20,283,459) --
------------- ------------
(26,953,780) (1,304,520)
------------- ------------
CASH FLOWS FROM INCREASE/(DECREASE) IN FINANCING ACTIVITIES:
Bank overdraft (56,770) (86,197)
Loans from major shareholder -- (21,125)
Note payable to others 674,052 (217,175)
Minority Interest (7,252,641) --
Sale of common stock, net 29,101,901 2,340,151
Treasury stock (4,776,638) --
Paid in capital (40,000) 19,800
Prior period adjustment to retained earnings 96,004 200,862
Change in valuation allowance (189,086) --
------------- ------------
17,556,822 2,236,316
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NET CASH INFLOW/(OUTFLOW) FROM INVESTING & FINANCING (9,396,958) 931,796
------------- ------------
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS ($5,664,689) $ 2,462,812
============= ============
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1995
1. COMMENTS:
The consolidated financial statements for the three months and nine months
ended at September 30, 1995 and 1994 include the accounts of Incomnet, Inc.
and its wholly-owned subsidiaries, Incomnet Financial Services, Inc. and
National Telephone & Communications, Inc. (NTC), and its 51% owned subsidiary,
Rapid Cast, Inc.(RCI)(collectively, the "Company"). All significant
inter-company accounts and transactions have been eliminated in consolidation.
The financial statements include the Company's share of the revenues and
expenses of Rapid Cast, Inc., (RCI), of which the Company acquired 51% in
February 1995 (see " 7. Acquisition of Rapid Cast, Inc."). In the third
quarter ended September 30, 1995, RCI had a net loss of $372,736 on revenues
of $909,811. RCI commenced its operations on February 7, 1995 and had no
revenues in the first quarter ended March 31, 1995. In April 1995, RCI
commenced shipping its FastCast LenSystem and shipped 33 systems in the second
quarter ended June 30, 1995. RCI shipped 24 systems net of returns in the
third quarter ended September 30, 1995. At the end of September 1995, RCI had
an order backlog of 65 systems and an installed base of 57 systems. As a
company with a controlling interest in RCI, the Company is accounting for RCI
using the consolidation method of accounting. The Company shifted from the
equity method of accounting for RCI under FASB Statement No. 94 in the first
and second quarters of 1995 to the consolidation method because it controls
RCI and it is not certain when the Company will cease to hold a controlling
interest in RCI by virtue of a spin-off or otherwise.
The accompanying financial statements are unaudited, but in the opinion of
management of the Company contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position at
September 30, 1995, the results of operations for the three months and nine
months ended September 30, 1995 and 1994, and the changes in cash flows for
the nine months ended September 30, 1995 and 1994, respectively. Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements and notes are adequate to make the information presented therein
not misleading. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 as filed with the Securities and Exchange
Commission. The results of operations for the three months and nine months
ended September 30, 1995 are not necessarily indicative of the results of
operations to be expected for the full year ending December 31, 1995.
The accounting policy of the Company with respect to the revenues of NTC is to
separate telecommunications-related revenues from marketing-related revenues.
When the Company sells marketing-related programs to its representatives that
include prepaid telephone calling cards, the Company reserves a portion of the
proceeds to reflect the amount of expected prepaid telephone usage based on
historical results. All other proceeds derived from the sale of those
marketing-related kits are recorded as marketing revenues in the month of the
sale. The Company monitors the actual usage of telephone time used by the
prepaid telephone cards on a regular basis and adjusts its reserve based on
changes to the actual usage of the cards. The Company presently does not
reserve for potential refunds associated with telephone credit card usage or
payments of yearly fees from representatives who resign from the program
because these amounts are immaterial. The Company will review its policies
associated with these potential reserve items from time to time to determine
whether reserve accounts should be created.
2. REVENUES:
The Company's Autonetwork division and its wholly-owned subsidiary, NTC,
generate revenues from two sources: the sale of telecommunications-related
services and the sale of marketing-related services and materials.
Telecommunications-related revenues are derived from the use of the Company's
telecommunications services, including long distance telephone calls from
regular telephones, long distance telephone calls made using telephone calling
cards, and a computerized used auto parts trading network. Telecommunications
services are provided to customers on a month-to-month basis, with payments
for all services made based on invoices provided to customers, except for
services provided using pre-paid telephone calling cards, which are paid for
in advance. Prepaid telephone usage is recorded as deferred income on the
balance sheet until such time when the prepaid service is actually used. At
that point, it is recognized as a sale and the deferred income liability is
reduced. For the nine months ended September 30, 1995,
telecommunications-related revenues were $51,241,893.
Marketing-related revenues are derived from services and material sold to the
Company's base of independent sales representatives, including forms and
supplies, fees for representative and certified trainer renewals, and the
Company's Certified Trainer and Sales Rep Starter programs. The Company
requires that all such services and materials be paid at the time of purchase.
Revenues from marketing-related services and materials are booked as cash
sales when the revenues are received. For the nine months ended September 30,
1995, marketing-related revenues were $9,971,844.
The Company also generates revenues from sales made by its 51% owned
subsidiary, RCI. RCI generates revenues through the sales of its Rapid Cast
eyeglass lens manufacturing machines and the proprietary liquid monomer which
comprises the material for the lens.
3. NET INCOME PER SHARE:
For the nine months ended September 30, 1995, net income per share is
calculated by dividing net income by the weighted average number of common
shares and common share equivalents outstanding. All common share
equivalents, such as exercisable stock options and warrants or other
instruments that may be converted into the Company's common stock, and that
are exercisable at a price below the third quarter average market price per
share, are included on a weighted average basis in the earnings per share
calculation.
4. ACQUISITION OF NATIONAL TELEPHONE & COMMUNICATIONS, INCORPORATED:
Effective February 12, 1992, the Company entered into a Letter of Agreement
(the "Agreement") with National Telephone & Communications Inc., to acquire a
controlling interest in NTC. From February 12, 1992 to December 31, 1994, the
Company loaned NTC $5,094,810 collateralized by substantially all the assets
of NTC. These loans were converted to equity during December 1994. No
further loans to NTC have been made by the Company since December 1994. In
exchange for these loans, the Company received warrants and options to acquire
a controlling interest in NTC as follows:
(a) Warrants to purchase 10,000,000 shares of currently authorized but
unissued restricted common stock of NTC at an exercise price of $0.20 per
share, exercisable for a period of five years commencing May 5, 1992. These
warrants were cancelled when Incomnet completed the acquisition of NTC in
December 1994.
(b) Warrants to purchase approximately 2,500,000 shares of currently
authorized but unissued restricted common stock of NTC at an exercise price of
$0.01 per share, exercisable for a period of 30 days commencing May 5, 1992,
as an incentive for providing current and future loans to NTC. These warrants
were exercised on May 21, 1992.
(c) Options to purchase 1,100,000 shares of currently issued common stock
of NTC owned by NTC's President at the time of the agreement, at an exercise
price of $0.20 per share, exercisable for a period of five years commencing
May 5, 1992. These options were exercised on December 1, 1992.
(d) Warrants to purchase up to an additional 10,000,000 shares of
currently authorized but unissued restricted common stock of NTC at an
exercise price of $0.20 per share, exercisable for a period of five years
commencing January 29, 1992. The calculation of the amount of shares that the
Company may acquire pursuant to these warrants was based upon NTC's
requirement during the two years subsequent to May 5, 1992, for additional
funding in excess of $2,000,000. The Company had the right to receive warrants
to purchase five shares of NTC's common stock for each one dollar of such
funding. As of December 7, 1994, when Company loans to NTC ceased, the Company
had loaned NTC $3,094,810 in excess of $2,000,000 and had earned the right to
purchase an additional 20,000,000 shares of NTC's common stock at $0.20 per
share under the provisions of these warrants. These warrants were cancelled
when Incomnet completed the acquisition of NTC in December 1994.
(e) Certain of NTC's controlling shareholders agreed to exchange an
aggregate of 4,545,500 shares of NTC's common stock owned by them for shares
of the Company's unregistered common stock at a rate of ten shares of NTC's
common stock for one share of the Company's common stock. The transaction was
completed on December 1, 1992.
(f) In August 1993, the Company agreed to purchase 530,000 shares of NTC
stock from a major shareholder. These shares were purchased in two
transactions. In August 1993, the Company purchased 265,000 shares of NTC
common stock for $53,000 and, in December 1993, the Company purchased the
remaining 265,000 shares of NTC common stock for $53,000.
(g) Subsequent to the exchange of shares by certain NTC controlling
shareholders, the Company was approached by other NTC shareholders to exchange
shares of NTC stock for unregistered shares of the Company's common stock.
The Company exchanged 1,848,434 shares of NTC's common stock owned by NTC
shareholders for unregistered shares of the Company's common stock at a rate
of ten shares of NTC's common stock for one share of the Company's common
stock. These shares were exchanged in 10 separate transactions over a period
from June 1993 to March 1994.
(h) From June 1993 to May 1994, the Company purchased 260,600 shares of
NTC common stock on the open market on an unsolicited basis in eight separate
transactions at prices ranging from $0.18 to $0.34.
(i) On May 25, 1994, the Company's Board of Directors approved a
resolution to conclude the acquisition of NTC by exchanging shares of the
Company's common stock for all remaining outstanding shares of NTC's common
stock. The exchange rate was set at one share of the Company's common stock
for every 10 shares of NTC's common stock. Accordingly, the Company filed a
Registration Statement on Form S-4 with the Securities & Exchange Commission
(SEC) to register 312,297 shares of the Company's common stock to exchange for
3,122,970 outstanding shares of NTC common stock and warrants to purchase an
additional 800,000 shares of NTC common stock that the Company did not already
own. On October 27, 1994, the Company's Registration Statement was declared
effective and the Company either exchanged one share of its common stock for
10 shares of NTC's common stock or purchased NTC's common stock under the
Dissenter's Rights provision of the offering. The exchange of shares commenced
on November 7, 1994, and was completed on December 7, 1994. NTC's common stock
ceased being traded on public markets on that date, and all of the Company's
unexercised warrants to acquire stock in NTC were cancelled. On December 31,
1994, the outstanding loan of $5,094,810 was converted from a loan due from
NTC to a capital investment in NTC. Since January 2, 1995, the Company has
invested approximately $1,400,000 of additional funds into NTC as an equity
investment to increase its capacity to process customers and independent sales
representatives.
5. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES:
The Company's subsidiary, NTC, compensates its independent sales
representatives by an earned commission structure based upon signing up new
telephone customers and based upon the telephone usage generated by those
customers. In the nine months ended September 30, 1995, expenses associated
with commissions, bonuses and overrides paid out to NTC's independent
representatives were $10,629,748.
6. STOCK REPURCHASE:
On August 5, 1994, the Company announced that its Board of Directors
authorized the repurchase of up to 1,000,000 shares of its common stock from
time to time in the open market or in private transactions. The Company's
Chief Executive Officer has been given the discretion to decide when and if
the Company will repurchase shares and to effect such transactions. As of
September 30 1995, the Company has repurchased a net of 486,000 shares of
common stock with a value of $5,441,845 under the terms of the repurchase
authorization.
7. ACQUISITION OF RAPID CAST, INC.:
General. On February 8, 1995, Incomnet, Inc. (the "Company") acquired
10,200,000 shares representing 51% of the outstanding common stock of Rapid
Cast, Inc. ("RCI"), a private corporation headquartered in Louisville, KY, for
$15,000,000 cash paid to RCI, 750,000 shares of the Company's common stock
issued to RCI's current stockholders ("Founding Stockholders"), and an
additional 750,000 shares of the Company's common stock that could be earned
by RCI's Founding Stockholders based upon the earnings of RCI during its first
four full fiscal quarters. On June 30, 1995 the Company's purchase agreement
for RCI was amended to provide for the immediate issuance of 600,000 shares of
the Company's common stock to the Founding Shareholders in lieu of their right
to potentially earn up to 750,000 shares. See "Acquisition of Rapid Cast,
Inc.- Certain Transactions." As part of the acquisition, the Company has
agreed that after the end of the fiscal quarter in which RCI achieves
cumulative pre-tax earnings of $1,250,000, provided such earnings are achieved
during the first four quarters after the acquisition, it will spin off ("Spin
Off") RCI as a public company by registering RCI's shares with the Securities
and Exchange Commission and by providing to the Company's shareholders a
dividend of a minimum of 25% of the common stock of RCI now owned by the
Company. In such event, RCI has agreed to take all reasonable actions in order
to permit public trading of the Spin Off shares. RCI's fiscal year is the
calendar year.
RCI has used $14,000,000 of the funds it received to acquire all of the
outstanding capital stock of Q2100, Inc. ("Q2100"), a company that owns a
proprietary technology for manufacturing single focal and bifocal eyeglass
lenses ("Lensystem"), as well as 15 fully assembled and 66 partially assembled
production line machines which incorporate this technology and which are
suitable for installation in retail optical stores. The system is named the
FastCast LenSystem. Q2100 was previously owned by Pearle, Inc. ("Pearle"),
which entered into a stock purchase agreement for the sale of 100% of Q2100 to
RCI on October 28, 1994. The purchase price payable by RCI under the stock
purchase agreement with Pearle is $15,000,000 in cash (less certain expenses),
of which $1,000,000 was paid by RCI on October 28, 1994 as a deposit. As part
of the agreement, Pearle has assumed or discharged all liabilities of Q2100
prior to the acquisition closing, which took place on February 8, 1995. As
part of the agreement, RCI has also agreed that after the acquisition it will
make the technology available to Pearle and its affiliates on a most favored
nation basis. RCI is using the remaining $1,000,000 to fund its operations.
Financing. In order to pay the purchase price of the stock of RCI, the
Company provided $5,000,000 in cash and financed the balance by a private
placement of securities consisting of 10 Units. Each Unit consisted of one
convertible Note issued by the Company and one Warrant to purchase 100,000
shares of RCI common stock. Each Note is in the principal amount of $1,000,000
or fraction thereof, matures on January 31, 1996, and accrues interest at the
rate of 8% per annum. Interest is payable quarterly and at maturity or upon
conversion. Purchasers of seven of the Units, who are affiliates of RCI or
shareholders of the Company, waived interest accruals on the Notes included in
their Units.
On June 30, 1995, units representing $9,350,000 of the notes were converted at
a rate of $10 per share into 935,000 shares of the Company's common stock. An
additional $150,000 of the notes were converted at the rate of $10 per share
into 15,000 shares at the Company's common stock in July 1995. There are
remaining Notes for $500,000 that are convertible at or prior to maturity into
shares of the Company's common stock (the "ICNT Stock") at a conversion price
of $10 per share, provided that if conversion occurs prior to the 90th day
after the effectiveness of the Company's Registration Statement covering the
stock into which the Notes are convertible, the conversion price will be the
lesser of $10 or 80% of the market value of the Company's shares. "Market
value" for this purpose means the average low closing bid price of a share of
the Company's common stock during the 30 trading days prior to conversion of
such Note. The conversion price will be appropriately adjusted to reflect
stock splits and stock combinations. The Notes that remain outstanding are
secured by 350,000 shares of RCI common stock, which are pledged by the
Company to Solovay & Edlin, P.C., as agent on behalf of the Noteholders. The
Company has agreed that so long as the Notes are outstanding, it will not
grant any security interests in its assets or incur or be subject to other
indebtedness for borrowed money in excess of $5,000,000 at any time
outstanding.
The Warrants to purchase shares of RCI common stock are exercisable
commencing with the 35th business day (the "Start Date") on which securities
of RCI are first traded publicly, provided that the Start Date must occur on
or before December 31, 1998. The exercise price of the Warrants will be equal
to 50% of the average of the last reported sales price during the first 30
business days after the Start Date. Securities of RCI will become publicly
traded only if RCI is spun off as a public corporation as anticipated under
the terms of the acquisition, or if RCI in its discretion determines to
consummate a public offering of its securities. The Warrants will expire 180
days after the date, if any, on which they first become exercisable.
The Spin Off. The Company may distribute not less than 2,500,000 RCI shares
to the Company's shareholders as a stock dividend on a pro rata basis in
accordance with their relative holdings of the Company's shares at the time of
the Spin Off, if RCI's cumulative pre-tax earnings at the end of any of its
first four full fiscal quarters after the acquisition of RCI common stock are
not less than $1,250,000. The Spin Off will be taxable to the Company's
stockholders as a dividend to the extent of the Company's "earnings and
profits." Any excess will be applied to reduce the basis which the Company's
stockholders have in their shares. The balance, if any, will be taxed as
capital gains. The Company will be taxed on the amount, if any, by which the
value of the shares in the Spin Off exceeds the amount paid for the Spin-Off
shares by the Company.
RCI will make such filings under the securities laws as are required to
effectuate the Spin Off. In addition, prior to the Spin Off (or the date on
which a Spin Off would have been required were shares of RCI not traded
publicly already), RCI will file a registration statement on Form S-1 for the
public sale of the shares issuable on exercise of the Warrants (the "RCI
Registration Statement"). RCI will use reasonable efforts to cause the RCI
Registration Statement to become effective simultaneously with the Spin Off,
and to cause the RCI Registration Statement to remain effective for not less
than two years following initial effectiveness except for periods during which
the prospectus included in the RCI Registration Statement is required to be
amended or supplemented. The registration will be accompanied by blue sky
clearances in New York, New Jersey and in up to five additional states
selected by RCI. RCI will pay all expenses of such registration other than
underwriting discounts or the fees of personal counsel to the Warrant Holders.
RCI will supply to Warrant Holders a reasonable number of copies of all
registration materials and prospectuses.
Registration Rights. RCI has granted to the Company the right to demand
registration at RCI's cost of all of the Company's RCI shares which have not
been included in the Spin Off. The Company may demand this right only after
RCI's securities are publicly traded (whether as a result of the Spin Off or
otherwise) and only as to one-third of these shares in each of 1996, 1997 and
1998 on a cumulative basis. RCI has also granted to the Company piggyback
registration rights with respect to these shares after RCI's securities are
publicly traded.
In the event that the Noteholders obtain shares of RCI stock on foreclosure of
the collateral for the Notes, RCI will at RCI's cost use its best efforts to
file a registration statement for these shares (the "RCI Collateral
Registration Statement") 360 days after RCI's securities are publicly traded,
whether as a result of the Spin Off or otherwise. RCI will use its reasonable
efforts to cause the RCI Collateral Registration Statement to become effective
not later than 75 days after the date of filing, and to remain effective for
not less than two years following the initial effectiveness except for periods
during which the prospectus included in the RCI Collateral Registration
Statement is required to be amended or supplemented. The registration will be
accompanied by blue sky clearances in New York, New Jersey and in up to five
additional states selected by RCI. RCI will pay all expenses of the
registration other than underwriting discounts or the fees of personal counsel
to the Noteholders. RCI will supply to investors a reasonable number of
copies of all registration materials and prospectuses. Noteholders will also
be entitled to piggyback registration rights with respect to these shares
after RCI's securities are publicly traded.
Right to Designate Directors. The Company has the right to elect two of
RCI's five directors until the Spin Off, and one of RCI's five directors after
the Spin Off. Sam D. Schwartz and Joel W. Greenberg are the Company's two
designees on the Board of RCI.
Certain Transactions. The current stockholders of RCI (the "Founding
Stockholders") consist of persons related to Broad Capital Associates, Inc.
(the "Broad Group") who own 3,266,666 shares of RCI common stock, and Larry
Joel, Robert Cohen and persons related to them (the "CRJ Group") who own
6,533,334 of RCI common stock. The Founding Stockholders acquired these shares
at a purchase price of approximately $.03 per share. The Founding Stockholders
and their affiliates as of December 31, 1994 loaned approximately $1,348,982
to RCI, which amounts, together with any additional loans which are thereafter
made by them, will be payable July 31, 1996, together with interest at 7% per
annum. RCI may determine to prepay this indebtedness, whether from the
proceeds of the placement of the Units or otherwise. However, until RCI's
revenues from continuing operations aggregate at least $1,000,000 in any three
consecutive months, RCI may repay these loans only if the lenders receiving
repayment furnish or guaranty equivalent lines of credit for the period until
RCI achieves at least $1,000,000 in aggregate revenues over a period of three
consecutive months.
As part of the purchase price for the acquisition of 10,200,000 shares of RCI
common stock by the Company, the Company issued 750,000 shares of its common
stock to the Founding Stockholders on February 8, 1995. The Company also
agreed to issue to the Founding Stockholders a maximum of 750,000 additional
shares of the Company's common stock based on RCI's pre-tax earnings during
the first four full fiscal quarters after the acquisition closing, which
occurred on February 8, 1995. On June 30, 1995, the Company renegotiated the
terms of the Agreement and issued to RCI's Founding Stockholders 600,000
unregistered shares of its common stock to RCI's Founding Stockholders in lieu
of the maximum of 750,000 shares that were to be issued based upon performance
factors. The Company made this issuance because, in its opinion, it believed
that it was likely that RCI would meet its performance requirements and,
hence, attempted to reduce the potential dilution of the Company's stock by
150,000 shares. There is no assurance, however, that RCI's actual performance
during its first four fiscal quarters would have resulted in the issuance of
more than 600,000 shares of the Company's common stock under the original
formula.
The exact number of additional shares of the Company's common stock which
would have been issuable to the Founding Stockholders under the original terms
of the acquisition agreement was to be calculated on the last day of each of
RCI's first and fourth fiscal quarters following the acquisition closing as
follows: (i) for the first quarter, by multiplying $7.5 million by a
fraction, the numerator of which was the net pre-tax earnings generated by RCI
during such first full fiscal quarter, and the denominator of which is $4.5
million, and (ii) for the first four full fiscal quarters, by multiplying
$7.5 million by a fraction, the numerator of which was the aggregate net
pre-tax earnings generated by RCI during such four full fiscal quarters less
the net pre-tax earnings generated by RCI in the first full quarter, and the
denominator of which was $4.5 million. The products determined in (i) and
(ii) above were then to be divided by $12.50 per share to determine the number
of additional shares issuable to the Founding Stockholders, provided, that if
any time during the first four full fiscal quarters after February 8, 1995,
RCI earned more than $5.5 million in net pre-tax earnings, the value of each
additional share for calculation purposes would have been $10.00 rather than
$12.50. No additional shares will be issued.
8. PRIVATE PLACEMENT:
On June 30, 1995, the Company initiated a private placement of 900,000 shares
of the Company's restricted common stock at $12 per share and warrants to
purchase 900,000 additional shares of the Company's common stock at $14 per
share. The warrants are exercisable for a period of six months until December
31, 1995. The aggregate purchase price of the stock and warrants was paid
$1,890,000 in cash and subscription notes for a total of $8,910,000 payable
upon the registration of the shares and shares underlying the warrants with
the Securities and Exchange Commission. The Company is discussing an
amendment to the placement agreement with the subscribers pursuant to which
the subscription notes would be cancelled and the Company would issue only a
total of 157,500 shares in consideration for the contributions of cash made by
the investors. Under the proposed amendment, the Company would not register
the shares or shares underlying the warrants which are expected to expire
unexercised on December 31, 1995. The Company's balance sheet reflects the
issuance of 157,500 shares of the Company's common stock in exchange for
$1,890,000 in capital. The Company is using the proceeds of the private
placement to finance the growth requirements of its operating subsidiaries.
9. NONISSUER SALES OF STOCK PURSUANT TO REGULATION S:
Shareholders of the Company who had received shares of the Company's common
stock in private placements made in connection with the Company's acquisition
and financing of a controlling interest in Rapid Cast, Inc. (i.e. purchasers
of convertible notes and the founding shareholders of Rapid Cast, Inc.) sold
a substantial portion of such shares in offshore sales pursuant to Rule 904 of
Regulation S of the Securities Act of 1933, as amended. The Company estimates
that approximately 1,600,000 of such shares were sold pursuant to Rule 904 of
Regulations S. The Company's obligation to register those shares with the
Securities and Exchange Commission under the terms and conditions of the
convertible notes and purchase agreement for the controlling interest in Rapid
Cast, Inc. terminated when the shares were sold to the offshore buyers. See
"Acquisition of Rapid Cast, Inc." The Company did not sell any shares
pursuant to Regulation S.
10. PROMOTIONAL AGREEMENTS:
In June 1995, NTC entered into additional promotional agreements with a
publicly-traded, personal pager company and a privately-held Internet access
service provider. Under the terms of these agreements, (i) NTC will use
certain merchandise/services offered by these two companies to enhance NTC's
marketing of long distance services, and (ii) NTC will be compensated by the
two companies for each subscriber added to their respective services and for
development of certain promotional programs.
11. NEW CARRIER CONTRACT:
In September 1995, NTC entered into a new carrier contract with Wiltel, Inc.
of Tulsa, Oklahoma, a subsidiary of WorldCom, Inc., covering a potential
volume purchase of $600 million of long distance telephone time over a five
year period commencing in November 1995. The new tariff schedule enhances
NTC's potential profitability based on its commitment to purchase higher
volumes. As in the prior carrier contract with Wiltel, Inc., NTC commits to
purchase the designated volume of telephone time in accordance with a schedule
over the term of the contract.
12. RECENT DEVELOPMENTS:
Tender of Short Swing Profits. On August 18, 1995, the Company filed a
Form 8-K disclosing the tender of short swing profits to the Company by its
President and Chairman of the the Board of Directors pursuant to Section 16(b)
of the Securities Exchange Act of 1934, as amended. After adjustments and a
review of all purchases and sales of the Company's common stock through
September 1, 1995, the total amount of short swing profits was calculated to
be $972,870. Since September 1, 1995, the Company is not aware of any
purchases and sales of the Company's common stock which have resulted in short
swing profits under Section 16(b). On August 18, 1995 and, including
adjustments on September 1, 1995, the President tendered the short swing
profits by cancellation of all of his options to purchase 250,000 shares of
the Company's common stock.
Listing with NASDAQ. The Company's continued listing on the NASDAQ Small
Capital Market is under review. On October 26, 1995, the NASDAQ Listing
Qualification Committee determined that it is inadvisable to continue the
Company's listing on the Small Capital Market, but also advised that the
termination be delayed for a period of 45 days pending a review by the NASDAQ
Hearing Review Committee. The Board of Directors of Incomnet immediately took
action to address the concerns raised by the Qualifications Committee and
requested a reconsideration by the Qualifications Committee of its
determination. The Qualifications Committee agreed to a reconsideration of
its determination. As a result, the termination is currently stayed and the
panel's initial recommendation is being reviewed. In its discussions with the
NASDAQ, the Company has proposed to expand its Board of Directors to include
more outside members, and to establish a Compliance Committee consisting of
outside directors, which would oversee a range of issues including disclosure
policies and reporting. If the initial recommendation is not changed, the
Company's stock would cease trading on the NASDAQ Small Capital Market on or
about December 10, 1995, and would thereafter trade on the over-the-counter
Bulletin Board market. If the initial recommendation of the panel is changed,
then the Company's stock will continue to be traded on the Small Capital
Market.
Litigation. On October 17, 1995, the Company was served with an amended
complaint in the class action lawsuit entitled Sandra Gayles; Thomas Comiskey,
as Trustee FBO Thomas Comiskey, IRA; Charles Kowal; Arthur Kalter; Matthew G.
Hyde; Arthur Wirth; and Isabel Sperber, vs. Sam D. Schwartz and Incomnet,
Inc., Case No. CV95-0399 AWT (BQRx), filed in the United States District Court
for the Central District of California, Western Division, which was originally
filed in January 1995. The amended complaint retains the claim alleging that
the Company violated Sections (10)b and 20(a) of the Securities Exchange Act
of 1934, as amended, and Rule 10b-5 promulgated under Section 10(b) of the
Exchange Act, because it did not disclose the existence of the confidential
fact finding inquiry of the Company commenced by the Securities and Exchange
Commission in August 1994. The complaint adds claims that the Company and its
Chairman violated Sections 10, 16(a), 20(a) and 23(a) of the Exchange Act, and
Section 25400 of the California Corporations Code, because they did not
disclose until August 1995 purchases and sales of the Company's stock made in
the open market by an affiliate of the Chairman between September 1994 and
August 1995. The amended complaint asks for (i) certification of the class,
(ii) compensatory damages, (iii) damages pursuant to Section 25500 of the
California Corporations Code, (iv) interest and attorneys' fees and costs, and
(v) other extraordinary, equitable and injunctive relief as may be
appropriate. The Company and its Chairman believe that the purchases and
sales were made in substantial compliance with Rule 10b-18 promulgated under
Section 10(b) of the Exchange Act. The Company is scheduled to answer the
complaint by November 27, 1995.
In October the Company was served with a second class action lawsuit
entitled Herbert M. Schwartz, Joyce Hammand, et al vs. Incomnet, Inc., Sam D.
Schwartz and Kaliber Management Corporation, Case No. 95-CV-2337, filed in the
United States District Court in the Northern District of Georgia, filed on
September 15, 1995. This class action lawsuit alleges that the Company and
its Chairman violated Sections 10(b) and 16(a) of the Exchange Act and the
rules promulgated thereunder, and the Federal RICO Statutes, by failing to
timely disclose the purchases and sales of the Company's stock made by an
affiliate of the Chairman in the open market between September 1, 1994 and
August 31, 1995. The complaint also alleges the Company made material
misrepresentations of fact regarding its business prospects and, in
particular, the existence of the expanded $600 million contract between
National Telephone & Communication, Inc. and Wiltel, Inc. The complaint asks
for certification of the class, compensatory damages under the Federal RICO
Statutes, appropriate extraordinary, equitable or injunctive relief, and
attorneys' fees and costs. The Company does not believe that it made any
misrepresentations regarding its business prospects, particularly with respect
to its $600 million contract with Wiltel, Inc., and believes that all
purchases and sales of stock by the Chairman's affiliate were made in
substantial compliance with Rule 10(b)-18 of the Exchange Act. The Company is
scheduled to answer this complaint by November 20, 1995. The Company plans to
seek to consolidate the Georgia lawsuit with the complaint filed in
California.
In October 1995, the last remaining convertible noteholder in the
Company, who holds a convertible note in the principal amount of $500,000 due
January 31, 1996 (issued on February 8, 1995 as part of the financing for the
Company's acquisition of a controlling interest in Rapid Cast, Inc.), notified
the Company of his claim for damages caused by the Company's failure to
register the shares underlying his convertible note with the Securities and
Exchange Commission. The convertible noteholder alleges that the Company
covenanted to file a registration statement covering the underlying shares by
April 30, 1995 and to use its reasonable efforts to have the registration
declared effective within 75 days thereafter. The noteholder also claims that
the Company violated Section 10(b) and Rule 10b-5 of the Exchange Act by
misrepresenting its intention to file a registration statement for the
underlying shares. The noteholder has indicated that he intends to seek
$750,000 in compensatory damages. No complaint has yet been filed, and the
noteholder's counsel is waiting for the Company's response as to whether or
not it will enter into settlement discussions. The Company believes that,
among other things, the noteholder may have waived the registration rights and
that he would not prevail on his claims.
In July 1995 Rapid Cast, Inc. was served with a lawsuit entitled Ronald
D. Blum, O.D. vs. Rapid Cast, Inc., Case No. 95-CV5113, filed in the United
States District Court in the Southern District of New York. The complaint
alleges that Rapid Cast, Inc. has infringed on the plaintiff's patent for
curing plastic lenses by virtue of employing its technology in the FastCastTM
LenSystem. On July 28, 1995, Rapid Cast, Inc. filed an Answer and
Counterclaim for Declaratory Judgment denying the plaintiff's allegations,
asserting that the FastCastTM LenSystem does not infringe on the plaintiff's
patent, alleging that claims in the plaintiff's patent are invalid and
unenforceable, and requesting that plaintiff be enjoined from threatening or
commencing any litigation against Rapid Cast, Inc. or any of it suppliers,
customers or prospective customers. The litigation is presently in the
discovery phase.
RCI Acquisition of Lab Tech, Inc. In September 1995, RCI acquired the
assets of Lab Tech, Inc. for $75,000 in cash and a three year interest bearing
note for $50,000. The Lab Tech assets include proprietary technology which
accelerates the photochromatic process of tinting lenses in response to
changes in light. RCI intends to incorporate this technology into its lens
and monomer manufacturing system.
23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1994
Liquidity and Capital Resources - September 30, 1995:
The Company had a net working capital surplus (current assets less current
liabilities) of $5,854,379 at September 30, 1995, as compared to a net working
capital surplus of $8,798,793 at December 31, 1994 and a net working capital
surplus of $2,171,896 at September 30, 1994. The September, 1995 year-to-date
decrease of $2,944,414 in net working capital resulted primarily from a
$7,163,819 decrease in cash which was caused by the first quarter acquisition
of Rapid Cast, Inc. and by the first quarter repurchase of the Company's
common stock on the open market, and partially offset by a $1,867,784 increase
in net working capital resulting from the third quarter consolidation of Rapid
Cast, Inc.
For the nine months ended September 30, 1995, the Company generated a positive
cash flow of $3,732,269 from operations compared to a positive cash flow of
$1,531,016 for the same period in 1994. The most significant factors in the
year-to-year improvement in cash flows from operations were: (1) a $1,729,365
increase in profits (before depreciation) generated by continued sales growth,
and (2) an $827,677 reduction in the growth rate of accounts receivable caused
by improved collection procedures.
For the nine months ended September 30, 1995, the Company sustained negative
cash flows of $9,396,958 from investing and financing activities compared to
positive cash flows of $931,796 during the same period in 1994. The most
significant factors causing the negative cash flows in the first nine months
of 1995 from investing and financing are: (1) a net use of $20,283,459 paid in
excess of net assets to acquire the 51% interest in RCI, (2) a net use of
$4,776,638 to buy back the Company's stock for its treasury, and (3) a net use
of $6,507,819, most of which was used to expand and improve the NTC
headquarters building and to purchase office equipment, computer equipment,
and furniture in order to support the Company's continuing sales growth,
partially offset by (4) a net increase in cash of $29,101,901 generated by the
sale of common stock.
By the end of the second quarter of 1994, NTC was operating with a positive
cash flow, and has met its operating cash requirements in every quarter since
then. The Company expects NTC to meet its operating cash requirements in
future quarters. The Company's $1,400,000 investment in NTC in the second
quarter has funded a portion of NTC's capital infrastructure improvements,
which are expected to be nonrecurring costs. The Company is continuing to
evaluate its forthcoming consolidated cash requirements, and expects to fund
such requirements with its existing liquid assets and cash flow from
operations.
Consolidated Results of Operations - Three Months and Nine Months Ended
September 30, 1995 and 1994:
For the nine months ended September 30, 1995, the Company's total assets
increased to $75,854,844 from $26,158,346 on December 31, 1994. This increase
primarily resulted from the acquisition of Rapid Cast, Inc. (RCI). The
consolidation of $24,961,367 of RCI assets, coupled with $20,283,459 of
goodwill related to the RCI acquisition represent the majority of the
$49,696,498 increase in total company assets. During the same period, total
liabilities increased from $9,623,193 on December 31, 1994 to $24,446,070 on
September 30, 1995. This increase primarily resulted from the consolidation
of $10,740,502 of RCI liabilities which were acquired with the RCI
acquisition. The Company's current ratio decreased from a ratio of 1.9:1 on
December 31, 1994 to a ratio of 1.4:1 on September 30, 1995. This decline
primarily resulted from the decrease in cash used to acquire RCI.
Shareholders' equity increased from $16,535,153 on December 31, 1994 to
$44,440,550 on September 30, 1995. This increase primarily resulted from the
sale of $29,101,901 in stock during the first nine months of 1995.
Cash and cash equivalents decreased from $9,694,900 on December 31, 1994 to
$4,737,575 on September 30, 1995. This decrease is due to the acquisition of
Rapid Cast, Inc. and due to the repurchase of stock in the open market,
partially offset by increased cash balances at NTC resulting from NTC's
continuing profitability.
Accounts receivable has increased to $12,888,415 on September 30, 1995 from
$8,603,577 on December 31, 1994, an increase of 50%, which is primarily
attributable to the increase in new telephone customers generated by the
Company's base of independent sales representatives. The Company provides
telephone service to its customers in advance and renders a bill to the
customer, with payment expected within 30 days.
Accounts payable has increased from $5,813,813 on December 31, 1994 to
$8,297,720 on September 30, 1995, an increase of 43%, which primarily reflects
an increase in the amount that is owed to the Company's telecommunications
providers for telephone service. As a telephone reseller, the Company
purchases its communications services at wholesale prices and resells those
services to its customers at discounted retail rates. The increase in accounts
payable in 1995 also includes amounts owed which relate to the expansion of
facilities at NTC to handle rapid growth in telephone operations.
The Company generates revenues from three sources:
(1)telecommunication-related revenues, which represent the customers'
repetitive usage on a month-to-month basis of telecommunications services
provided by the Company, (2) marketing-related revenues, which primarily
reflect the one-time fees paid by new representatives for marketing-related
services and materials that prepare these new representatives to sell the
Company's telephone-related services over a long-term period of time, and (3)
eyeglass lens manufacturing machines and the proprietary liquid monomer
which comprises the material for the lens. The Company does not sign up
telephone customers directly. It is dependent upon its base of independent
sales representatives to bring in new telephone customers.
For the three months ended September 30, 1995, total revenues were $22,660,377
as compared to $12,782,808 in the same period in 1994, a gain of 77%. For the
nine months ended September 30, 1995, total revenues were $62,123,548 as
compared to $30,694,077 in the same period in 1994, a gain of 102%. The
growth in the Company's revenues during the three month and nine month periods
was primarily due to the combined growth of NTC's revenues from its
telecommunications-related services and from its network marketing program for
independent sales representatives. For the three months and nine months ended
September 30, 1995, the majority of the Company's revenues, $17,878,365, or
79% (for the three months) and $51,241,893 or 82% (for the nine months), was
derived from telecommunications-related services, including $368,963 and
$1,091,309, respectively, from the Company's AutoNETWORK interactive used
parts trading network. The consolidation of RCI in the third quarter of 1995
added $909,811 of optical product sales to the three months and nine months
ending September 30, 1995, or 4% and 2% of total Company sales, respectively.
The remaining revenues, $3,872,201 or 17% and $9,971,844 or 16%, respectively,
were from marketing-related products and services.
NTC uses a network marketing program of independent representatives to sell
its telecommunications-related services to retail customers. The growth in
NTC's telecommunications-related revenues is directly tied to its network
marketing program. NTC's independent representatives typically purchase
materials, training and support services from NTC to assist them in selling
new retail customers and enrolling other representatives in the NTC program.
NTC pays the independent representatives a residual monthly commission on the
telecommunications revenue. In addition, the network marketing program pays
various bonuses and overrides when and if new representatives obtain new
telephone customers, typically 10 or more, within a 30 to 60 day period. This
program has been designed to bring NTC new retail telephone customers even if
little or no growth occurs in the marketing program revenues itself; however,
the new telecommunications revenue generally lags the marketing program
revenues by up to six weeks. When the marketing program revenues increase, an
increase in NTC's telecommunications-related revenues are usually expected to
follow.
The marketing-related costs incurred by NTC to operate its network marketing
program for the nine months ended September 30, 1995 were $10,857,141. These
marketing-related costs include commissions paid to independent sales
representatives for acquiring new retail telephone customers, as well as the
cost of sales materials, salaries/wages of marketing department personnel and
other directly identifiable support costs, but do not include residual
commissions paid on continuing long distance telephone usage or the typical
indirect cost allocations, such as floor-space and supporting departments.
When the marketing-related costs are compared against marketing-related
revenues of $9,971,844 for the same period, the result is a net loss in
marketing-related activities of $885,297 or 8.9% of total marketing-related
revenues and 1.5% of total NTC revenues.
NTC's long distance telephone services and marketing programs bring the
Company under the regulatory control of the FCC and various state regulatory
agencies, including but not necessarily limited to state Public Utility
Commissions or equivalent, state attorney general offices, and state consumer
relations/protection offices. From time-to-time in the normal course of
business, NTC receives inquiries, requests and/or demands from such agencies
for information and/or action. Management does not believe any such inquiries,
requests and/or demands received by the Company to date have had, or are
reasonably likely to have in the future, any material impact on NTC's
business.
For the three months ended September 30, 1995, operating expenses, including
telecommunication and marketing costs, were $21,809,798 as compared to
$11,726,388 in the same period in 1994, an increase of 86%. For the nine
months ended September 30, 1995, operating expenses totaled $57,615,964 as
compared to $27,938,123 in the same period in 1994, an increase of 106%.
Expenses associated with commissions, bonuses and overrides paid to NTC's
independent representatives were $4,381,235 for the three months and
$10,629,748 for the nine months ended September 30, 1995 versus $2,461,206
and $5,735,556, respectively for the same period in 1994, representing
increases of 78% for the three months and 85% for the nine months.
For the three months ended September 30, 1995, selling, general and
administrative expenses were $4,953,698 as compared to $2,509,442 in the same
period in 1994, an increase of 97%. For the nine months ended September 30,
1995, selling, general and administrative expenses were $12,341,173 as
compared to $5,985,183 in the same period in 1994, an increase of 106%.
Selling, general and administrative expenses increased in the three month and
nine month periods of 1995 as compared to 1994 because of a major increase in
compensation and employee-related costs resulting from the increased hiring
necessary to support the growth in customers and independent representatives.
Selling, general and administrative expenses do not include any compensation
paid to the independent representatives.
For the three months and nine months ended September 30, 1995, depreciation
and amortization expenses related to operations were $475,023 and $850,616
respectively, as compared to $115,227 and $309,490 in the same periods in
1994, representing increases of 312% and 175% respectively. Depreciation and
amortization expenses have increased in the three month and nine month periods
of 1995 as compared to the same periods in 1994 because of the consolidation
of RCI in the third quarter of 1995, which added $211,503 of depreciation and
amortization expense from operations to the three-month and nine-month totals,
and because of the increased investment the Company has made in computer
equipment, leasehold improvements, and other fixed assets required to manage
the growth of NTC.
For the three months and nine months ended September 30, 1995, bad debt
expense was $636,166 and $1,773,324, respectively as compared to $257,634 and
$811,660 in the same periods in 1994, representing increases of 147% and 118%
respectively. These increases were primarily due to the substantial growth of
new NTC telephone customers.
For the three months ended September 30, 1995, net income was $564,845 as
compared to net income of $1,058,285 in the same period in 1994, a decrease of
47%. For the nine months ended September 30, 1995, net income was $3,469,133
as compared to net income of $2,627,659 in the same period in 1994, an
increase of 32%. The year-to-year decrease in third quarter net income
resulted primarily from the amortization of RCI acquisition costs and
operating losses sustained by RCI which did not exist in 1994, payment of
state corporation income taxes which was not required in 1994, non-recurring
increases in accrual and commission expenses, and provisioning for anticipated
increases in legal costs. The nine-month increase in net income was due to
improved gross margins resulting from increased volume discounts from long
distance carriers, coupled with improved operating efficiencies at NTC.
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 6 are not applicable for the nine months ended September
30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
INCOMNET, INC.
------------------------------------------
(Registrant)
<S> <C>
Date: November 14, 1995 By:
Sam Schwartz
President & CEO
Date: November 14, 1995 By:
Richard A. Marting
Director of Finance and Administration
(NTC)
</TABLE>
- 24-
PART II. OTHER INFORMATION
Items 1 through 6 are not applicable for the nine months ended September
30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
INCOMNET, INC.
---------------------------------------
(Registrant)
<S> <C>
Date: November 14, 1995 By /S/ Sam Schwartz
---------------------------------------
Sam Schwartz
President & CEO
Date: November 14, 1995 By: /S/ Richard A. Marting
---------------------------------------
Richard A. Marting
Director of Finance and Administration
(NTC)
</TABLE>
