<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 333-
--------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
INCOMNET, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 7375 95-2871296
- ------------------- ---------------------------- ---------------------
(State or Other (Primary Standard Industrial (IRS Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
21031 VENTURA BOULEVARD, SUITE 1100
WOODLAND HILLS, CALIFORNIA 91364
(818) 887-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
MELVYN REZNICK, PRESIDENT
INCOMNET, INC.
21031 VENTURA BOULEVARD, SUITE 1100
WOODLAND HILLS, CALIFORNIA 91364
(818) 887-3400
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
MARK J. RICHARDSON, ESQ.
1299 OCEAN AVENUE, SUITE 900
SANTA MONICA, CALIFORNIA 90401
(310) 393-9992
-----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT RULE 415 UNDER THE SECURITIES ACT OF 1933,
CHECK THE FOLLOWING BOX: [X]
-----------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES REGISTERED(1) MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION FEE
TO BE REGISTERED PRICE PER SHARE PRICE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock . . . . 40,000 $ 3.00 $ 120,000 $ 41.38
- -------------------------------------------------------------------------------------------------
Common Stock Underlying
Convertible Preferred
Stock(1) . . . . . . 950,000 $ 3.00 $ 2,850,000 $ 982.76
------- ---- --------- --------
Total . . . . 990,000 - $ 2,970,000 $ 1,024.14
------- ------ ----------- ----------
------- ------ ----------- ----------
</TABLE>
- --------------------------------
(1) Pursuant to Rule 416, there are also being registered such additional
shares of Common Stock as may become issuable pursuant to the anti-dilution
provisions of the Series A Convertible Preferred Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1996
INCOMNET, INC.
990,000 SHARES OF COMMON STOCK
The shares covered by this Prospectus are comprised of (i) 950,000 shares
of the Common Stock of Incomenet, Inc., a California corporation (the
"Company") which may be issued upon the conversion of 2,075 shares of Series
A 2% Convertible Preferred Stock, ("Series A Preferred"), and (ii) 40,000
shares of the Common Stock of the Company (the "Outstanding Shares") which
were issued to two investors in a prior conversion of privately placed
convertible promissory notes. The shares of Common Stock issuable upon the
conversion of outstanding Series A Preferred are referred to herein as the
"Underlying Shares." The holders of the Underlying Shares, when issued, and
the Outstanding Shares are herein referred to as the "Shareholders." The
Outstanding and Underlying Shares are being offered for resale by the
Shareholders and not pursuant to an initial issuance of stock by the Company.
The Series A Preferred has not been separately registered and is not offered
by this Prospectus. The Outstanding Shares and Series A Preferred were
issued in private placements pursuant to Section 4(2) of the Securities Act
of 1933, as amended. See "DESCRIPTION OF CAPITAL STOCK" and "SELLING
SECURITY HOLDERS."
The Company's Common Stock is traded on the NASDAQ Small Capital Market
("NASDAQ/Small Cap") under the symbol "ICNT." The last reported sale price of
the Common Stock on the NASDAQ/Small Cap on November 20, 1996 was $3.00 per
share. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS."
----------
See "RISK FACTORS" for certain factors that should be considered by
prospective investors.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
PER UNDERLYING SHARE-SERIES A PREFERRED (2) . $ 4.44 $0 $2,075,000
TOTAL (3). . . . . . . . . . . . . . . . . . $ --- $--- $2,075,000
</TABLE>
- -------------------------------------------
(1) No underwriters will be involved in the conversion of Series A Preferred,
nor were any underwriters involved in the issuance of the Series A
Preferred. The Shareholders do not have any specific plan of
distribution with respect to the Underlying Shares. The sale of the
Underlying Shares may be made in the open market through broker-dealers
or in individual negotiated transactions.
<PAGE>
(2) The price per share for the Underlying Shares relating to the Series A
Preferred reflects the maximum average conversion price at which the
Series A Preferred is convertible. The conversion price may be less
depending on the average bid price for the Company's Common Stock on
the public trading market for the five trading days immediately preceding
the conversion date. See "THE COMPANY - Issuance of Convertible Preferred
Stock - Conversion." The Company received gross proceeds of $2,075,000 from
the issuance of the Series A Preferred covered by this Prospectus.
(3) The total proceeds to the Company equal the aggregate original issuance
price of the Series A Preferred. See "THE COMPANY - Issuance of Convertible
Preferred Stock." The Shareholders will receive all net proceeds from the
sale of their Underlying Shares and Outstanding Shares.
AVAILABLE INFORMATION
Incomnet, Inc. is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy
statements and other information can be obtained, upon payment of prescribed
fees, from the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. In addition, such reports, proxy statements and other
information can be inspected at the SEC's facilities referred to above and at
the SEC's Regional Office at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036-3648. The Company's Common Stock is reported on the National
Association of Securities Dealers Automated Quotation Small Capital System and
such reports, proxy statements and other information regarding Incomnet are
available for inspection and copying at 33 Whitehall, New York, New York 10004.
The Company has filed with the SEC a Registration Statement on Form S-3
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Underlying Shares. This Prospectus does not contain all the information set
forth in the Registration Statement. Such additional information may be obtained
from the SEC's principal office in Washington, D.C.
Statements contained in this Prospectus or in any document incorporated by
reference in this Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are incorporated in this
Prospectus by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 filed on April 8, 1996 (provided that the information referred
to in Item 402(a)(8) of Regulation S-K shall not be deemed to be specifically
incorporated herein).
-2-
<PAGE>
(b) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996 filed on May 12, 1996.
(c) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1996 filed on August 14, 1996.
(d) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 filed on November 14, 1996.
(e) The Company's Current Report on Form 8-K filed on July 25, 1995, its
Current Report on Form 8-K filed on August 18, 1995, its Current Report on Form
8-K filed on November 15, 1995, its Current Report on Form 8-K filed on
November 30, 1995, its Current Report on Form 8-K filed on February 9, 1996, its
Current Report on Form 8-K filed on April 29, 1996, its Current Report on Form
8-K filed on June 7, 1996, its Current Report on Form 8-K filed on August 8,
1996, its Current Report on Form 8-K filed on February 8, 1995, its Current
Report on Form 8-K filed on May 13, 1992 and amended on October 9, 1992, and its
Current Report on Form 8-K filed on January 12, 1994 and amended on February 14,
1994, July 22, 1994 and September 20, 1994 regarding the change of the Company's
Certifying Accountant.
(f) The Company's definitive Proxy Statement on Schedule 14A, dated July
29, 1996 and filed with the Securities and Exchange Commission on June 21, 1996.
(g) All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus.
Any statement contained in a document incorporated herein by reference will
be deemed to be modified or superseded for the purpose of this Prospectus to the
extent that a statement contained herein or in a subsequently filed document
modifies or supersedes such statement. Any such statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered with this Prospectus. Such documents relating to the Company
are available without charge upon request made to Incomnet, Inc., 21031 Ventura
Boulevard, Suite 1100, Woodland Hills, California 91364 (telephone (818) 887-
3400), attention: Melvyn Reznick, President.
No person is authorized to give any information or to make any
representations other than as contained herein and, if given or made, such
information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such an offer or solicitation is not qualified to
do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any distribution of
securities made hereunder shall under any circumstances create an implication
that there has been no change in the affairs of the Company since the date
hereof or that the information herein is correct as of any time subsequent to
the date of this Prospectus.
-3-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
THE COMPANY
Incomnet, Inc. (the "Company" or "Incomnet") and its two subsidiaries,
National Telephone Communications, Inc. ("NTC") and Rapid Cast, Inc. ("RCI"),
are engaged in three types of businesses: (i) interactive computer networking
products and services, (ii) discount long distance telephone communications
services to residential and commercial customers in the United States, and (iii)
manufacture and marketing of the Fast CastTM LenSystem that allows retail
optical stores and wholesale optical lens manufacturing laboratories to produce
single vision, flat-top bifocal and progressive multifocal lenses rapidly on
demand. NTC is a wholly-owned subsidiary of the Company and RCI is
approximately 50% owned by the Company.
Incomnet, Inc. was incorporated under the laws of the State of California
on January 31, 1974. The Company acquires and develops computer hardware and
software for interactive communications networks. It currently operates a
communications network under the tradename "AutoNETWORK" for several hundred
automobile dismantling companies in California, Colorado, Nevada, Arizona,
Oregon and Washington. The network permits the subscribers to share information
simultaneously and to communicate electronically on a real-time basis through
individual computer workstations linked by the Company's proprietary software,
central message switching computer and front-end network processor. The Company
is evaluating other business applications for its communications technology in
order to establish more subscriber-based communications networks. The Company's
principal executive office is located at 21031 Ventura Boulevard, Suite 1100,
Woodland Hills, California, 91364. Its telephone number is (818) 887-3400.
National Telephone Communications, Inc. was incorporated under the laws of
the State of Nevada on September 6, 1984. Since July 1989 NTC has operated as an
inter-exchange carrier and reseller of long distance telephone service,
providing nationwide long distance telephone access to its residential and
commercial customers. NTC purchases large blocks of time from long distance
national and regional telecommunications carriers at rates based upon high
volume usage. NTC resells the time to its customers at discounted
telecommunications retail rates. In general, NTC provides its customers with
rates that are 5% to 50% below the published retail rates of major national
carriers like AT&T and MCI with complete domestic and international coverage.
NTC's products include (i) fixed rate per minute services called Call$aver, (ii)
a prepaid calling card product, Sure$aver, which eliminates calling card
surcharges such as those imposed by AT&T, MCI and Sprint, (iii) a measured rate
Dial-1 service that is interconnected to local telephone companies throughout
the United States, and (iv) the Easy-1 service in which a single telephone bill
is provided to the customers for local and long distance telephone calls through
the local exchange carriers. NTC is licensed to provide telecommunication
services by the Public Utilities Commissions of numerous states. NTC markets its
services through referral marketing agents and affinity groups on a nationwide
basis. NTC's offices are located at 2801 North Main Street, Irvine, California,
92714. Its telephone number is (714) 251-8000.
Rapid Cast, Inc. was incorporated under the laws of the State of Delaware
February 12, 1994. RCI owns 100% of the issued and outstanding stock of Q2100,
Inc. ("Q2100"), which it acquired from Pearle, Inc. on February 8, 1995. The
Company acquired 51% of the issued and outstanding stock of RCI on February 8,
1995, as well. Q2100 owns certain domestic and
-4-
<PAGE>
foreign patents and patent applications relating to a new technology, commonly
known as Thick Film Radiation Cured Polymer Technology (the "Technology"), which
enables retail optical stores, small to mid-sized wholesale optical lens
manufacturing laboratories and other dispensers of prescription ophthalmic
lenses to produce lenses on site rapidly and at a cost generally lower than if
they were purchased from third party manufacturers and distributors. RCI is
currently manufacturing and marketing this technology through the sale of
casting machines and liquid monomer under the name Rapid Cast or the Fast Cast
Lensystem. RCI's principal executive office is located at 1500 Hempstead
Turnpike, East Meadow, New York 11554 and its telephone number is (516)
465-7312. RCI also has executive offices located at 4415 Poplar Level Road,
Louisville, Kentucky 40233, where its telephone number is (502) 458-5500.
THE OFFERING
Type of Security Registered. . . . . . . . . Common Stock, no par value
Number of Outstanding Shares.. . . . . . . . 40,000
Minimum Number of
Underlying Shares-Series A Preferred . . . . 467,385
Selling Security Holders. . . . . . . . . . . The Underlying Shares are
issuable upon the conversion
of 2,075 outstanding shares of
Series A Preferred issued by the
Company in October 1996. See
"SELLING SECURITY HOLDERS."
-5-
<PAGE>
Terms of the Series A Preferred. . . . . . . The Series A Preferred entitles
the holders to convert their
Preferred Stock into the
Company's Common Stock at any
time upon the earlier of (i) 60
days from the effective date of
the registration statement
covering the Underlying Shares,
or (ii) 90 days after the date
that the Series A Preferred is
issued. The conversion ratio is
equal to the lesser of (i) 80% of
the average bid price of the
Company's Common Stock on the
public trading market on the five
trading days immediately
preceding the conversion date,
divided by the original purchase
price of the Series A Preferred,
or (ii) the bid price of the
Company's Common Stock on the
date that the Series A Preferred
is issued, divided by the
original purchase price of the
Series A Preferred. The
cumulative 2% per annum dividend
is also payable on the conversion
date. The bid prices on
the dates of funding of the
Series A Preferred covered by
this Prospectus range from $4.00
to $4.75 per share. See "THE
COMPANY - Issuance of Convertible
Preferred Stock."
-6-
<PAGE>
Shares of Common Stock to be
Outstanding After Conversion of
Series A Preferred . . . . . . . . . . . . . 13,761,819
Voting Rights. . . . . . . . . . . . . . . . Each Underlying Share of Common
Stock will have one vote per
share, if and when issued. The
Series A Preferred does not
have any voting rights associated
with it.
Use of Proceeds. . . . . . . . . . . . . . . The Company has received net
proceeds of $1,990,000 from the
issuance of the Series A
Preferred covered by this
Prospectus. The Company will not
receive any proceeds from the
sale of the Underlying Shares or
the Outstanding Shares. The
Company is using the net proceeds
from the issuance of the Series
A Preferred for general working
capital purposes. See USE OF
PROCEEDS.
NASDAQ Symbol. . . . . . . . . . . . . . . . ICNT
-7-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
INCOMNET, INC., NATIONAL TELEPHONE COMMUNICATIONS, INC. AND RAPID CAST, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
------------------------------ ------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 (2) 1991
---- ---- ---- ---- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
REVENUES
Revenues $77,295,795 $62,123,598 $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071
Income (Loss) before
income taxes and
extraordinary items
and minority interest (11,202,321) 3,572,612 856,543 4,000,242 (1,606,844) (2,264,597) 397,631
Income (Loss)
before extraordinary
items & minority interest (10,522,741) 3,286,492 1,366,025 3,999,187 (1,606,844) (2,461,697) 1,322
Net Income
(Loss)(3) (8,614,808) 3,469,133 1,366,025 4,071,194 (948,769) (2,021,333) 1,322
PER COMMON SHARE DATA
Net Income (Loss) (0.65) 0.28 .11 .42 (.12) (.28) 0
Cash Dividends 0 0 0 0 0 0 0
Book Value 2.59 3.57 3.21 1.58 .48 .13 .20
Number of Shares 13,268,050 12,435,980 13,262,648 10,482,854 8,183,877 7,189,671 6,936,311
BALANCE SHEET DATA
Total Assets 69,564,043 74,105,629 74,105,629 26,158,346 8,665,839 6,744,994 2,174,428
Long-Term
Debt 8,708,181(1) 9,979,000 8,459,772(1) 900 20,000 176,000 83,334
Shareholders'
Equity 34,414,968 44,440,550 42,548,056 16,535,153 3,929,148 1,047,125 1,396,000
</TABLE>
- ----------------------------------------------------------------------
(1) Long term liabilities include approximately $8,800,000 of deferred tax
liability at September 30, 1995, $8,449,050 of deferred tax liability at
December 31, 1995 and $8,055,562 of deferred tax liability at September 30,
1996 arising from the nondeductibility of the RCI patent rights, which will
be eliminated in accordance with Statement of Financial Accounting Standards
No. 109, as the underlying patent rights are amortized to expense.
-8-
<PAGE>
FINANCIAL RATIOS AND OTHER DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Cash Flow ($7,301,142) $1,378,839 $3,083,887 ($1,237,225)
Capital Expenditures 5,158,842 7,389,419 1,693,534 636,266
Operating cash flow less capital
expenditures (12,459,984) ( 6,010,580) 1,390,353 (1,873,491)
Capital expenditures as
percentage of operating cash
flow (6) 536% 55% (5)
Operating cash flow to interest
expense, net of interest income (6) 896.3% (4) (5)
Operating cash flow less capital
expenditures to interest
expense, net of interest income (7) (7) (4) (5)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------
1. In 1991 the Company wrote-off its entire investment in Incomnet India
Limited. See footnote 12 to the Notes to Consolidated Financial Statements
of Incomnet in its 1994 Form 10-K for an explanation of the investment and
the write-off of the investment in Incomnet India Limited. See also "Item
14. Financial Statements" in the Company's 1994 Form 10-K.
2. The historical financial information of the Company is consolidated with
the financial information of NTC commencing in 1992 to reflect the
acquisition by the Company of a majority of the outstanding shares of NTC
in February 1992. See "Item 14. Financial Statements" in the Company's 1994
Form 10-K. No provision for minority interest is made in the consolidated
financial statements because NTC has a negative shareholders' equity.
3. After provision for income taxes.
4. The Company had no net interest expense during the year ended December 31,
1994.
5. During the twelve month period ended December 31, 1993, the Company had a
negative operating cash flow. Interest expense was $51,455 for the year
ended December 31, 1993.
6. During the nine month period ended September 30, 1996, the Company had a
negative operating cash flow.
7. During the twelve month period ended December 31, 1995 and the nine months
ended September 30, 1996, the Company had capital expenditures
substantially in excess of operating cash flow, as indicated in the table.
-9-
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before
purchasing the Shares, the Outstanding Shares or the Underlying Shares.
OVERVIEW - CAUTIONARY STATEMENTS
The following are cautionary statements made pursuant to the Private
Securities Litigation Reform Act of 1995 in order for the Company to avail
itself of the "safe harbor" provisions of the Reform Act. The discussions
and information in this Prospectus may contain both historical and
forward-looking statements. To the extent that the Prospectus contains
forward-looking statements regarding the financial condition, operating
results, business prospects or any other aspect of the Company and its
subsidiaries, please be advised that the Company and its subsidiaries' actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by the Company in forward-looking
statements. The differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition,
including intensification of price competition and entry of new competitors
and products, adverse federal, state and local government regulation,
inadequate capital, unexpected costs and operating deficits, increases in
general and administrative costs, lower sales and revenues than forecast,
loss of customers, disadvantageous currency exchange rates, termination of
contracts, loss of supplies, technological obsolescence of the Company's
products, price increases for supplies and components, inability to raise
prices, failure to obtain new customers, litigation and administrative
proceedings involving the Company, including the pending class action and
related lawsuits and SEC investigation, the possible acquisition of new
businesses that result in operating losses or that do not perform as
anticipated, resulting in unanticipated losses, the possible fluctuation and
volatility of the Company's operating results, financial condition and stock
price, losses incurred in litigating and settling cases, adverse publicity
and news coverage, inability to carry out marketing and sales plans,
challenges to the Company's patents, loss or retirement of key executives,
changes in interest rates, inflationary factors, and other specific risks
that may be alluded to in this Prospectus or in other reports issued by the
Company.
RISKS RELATING TO INCOMNET, INC. AND NTC
POSSIBLE DEFICIENCIES IN CARRIER SERVICE. The telecommunications business
is extremely competitive and its success depends upon several factors, including
high quality technology, effective marketing, accurate billing and responsive
customer service. As a "switchless" reseller of long distance telephone service
registered with the Federal Communications Commission and state public utility
commissions, the Company provides billing and customer service directly. The
Company is, however, dependent upon services provided to it and its customers by
telecommunications carriers. The Company has the right to provide long distance
telephone service to its customers through any telecommunications carriers that
it chooses. At present, the Company has contracts with several carriers. The
two main carriers which provide service to the Company are Wiltel, which handles
most calls in the mainland United States, and U.S. Sprint, which handles calls
from Hawaii to the United States. The Company is subject to the risk that its
carriers may not provide high quality telephone service to the Company's
customers, along with accurate, timely billing records of that service to the
Company.
RISK OF TERMINATION OF CARRIER SERVICE. The Company's newest contract with
Wiltel commenced on June 17, 1996 as an amendment to the contract entered into
on September 15, 1995 (service had been provided under a prior arrangement since
July 1992). The Wiltel Carrier Switched Services Agreement expires by its terms
on June 15, 2001. Wiltel may terminate its
-10-
<PAGE>
carrier agreement with the Company or modify the charges upon 60 days prior
written notice to the Company. The Company may not terminate the new Wiltel
contract without a cancellation charge (the cancellation charge would be 100% of
the minimum purchase requirement for the remaining term of the agreement) unless
Wiltel increases its rates under the agreement by an amount the effect of which
would be to cause total charges for the three months immediately preceding the
rate increase to be 5% greater than they were with the original discounts. The
Sprint contract commenced on April 7, 1993 and is terminable by either party
upon 30 days prior notice. The termination of the contracts with either of
these carriers or an increase in rates would have an adverse impact on the
Company's financial condition and operating results if the Company could not
replace either carrier with similar service at an equivalent price. The Company
could lose its carrier contracts for reasons beyond its control. While the
Company has the right to switch its customers to other carriers in its
discretion, there is no assurance that the Company could replace its carrier
contracts on substantially similar terms if its current contracts were
terminated or were not renewed upon their expiration. Should the Company lose
its contracts and not be able to replace them, it would have a significant
adverse impact on both the Company's telephone and marketing related revenues
because the Company would not be able to sign on new customers. There is also
no assurance that the Company will continue to have the capital available and
retain the qualified personnel that are required to maintain a satisfactory
level of services to its customers. See "THE COMPANY - Recent Developments" and
"Item 1. Business" in the Company's 1995 Form 10-K.
MINIMUM PURCHASE REQUIREMENT. Pursuant to its new Carrier Service
Agreement with Wiltel, the Company is obligated to purchase a minimum amount of
telephone time on a "take-or-pay" basis. If the Company is not able to use the
minimum amount of telephone time under the new agreement, then it must pay to
Wiltel the difference between the actual usage and the minimum usage requirement
in cash. The Company could experience operating losses as the result of the
minimum purchase requirement in the new carrier contract. The Company currently
relies on purchases by an unaffiliated party under the Wiltel agreement (at no
profit to the Company) in order to meet the minimum purchase requirement. If
the unaffiliated co-purchaser ceases to purchase telephone time under the
agreement, the Company could experience significant operating losses. See "Item
1. Business - Contract with Wiltel" in the Company's 1995 Form 10-K."
SEC INVESTIGATION AND RELATED LAWSUITS. In August 1994, the Company was
notified by the Pacific regional office of the Securities and Exchange
Commission that the Commission had initiated a confidential investigation of the
Company. In September 1994 the Commission issued a formal order of private
investigation. The Commission stated in its correspondence to the Company that
the investigation "should not be construed as an adverse reflection on any
person, entity or security, or as an indication by the Commission or its staff
that any violation of law has occurred." In August and September 1994, the
Company supplied copies of its books and records to the Commission, and the
Company's present and prior independent certified public accounting firms
submitted their working papers pursuant to the Commission's subpoena. In
February 1995, the Company provided to the Commission pursuant to its subpoena
additional documents associated with NTC's regulatory authorizations and with
the Company's recent acquisition of a controlling interest in RCI. The Company
continues to fully cooperate with the Commission. While the Company believes
that the outcome of the fact finding investigation will not have a material
adverse effect on the financial condition or operating results of the Company,
no assurance can be given on this matter until the investigation is concluded.
See "Item 3. Legal Proceedings - Securities and Exchange Commission
Investigation" in the Company's 1995 Form 10-K, as updated in the Company's Form
10-Q for the quarter ended September 30, 1996 under "Item 1. Legal Proceedings -
Securities and Exchange Commission Investigation."
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On January 20, 1995, a class action lawsuit was filed in the United
States District Court of the Central District of California against Incomnet,
Inc. and Sam D. Schwartz, known as ISABEL M. SPERBER VS. INCOMNET, INC AND
SAM D. SCHWARTZ, alleging violations of federal securities laws. In
particular, the suit alleges that the defendants violated Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by not
disclosing in August 1994 that the Securities and Exchange Commission had
initiated a confidential investigation of the Company. The suit also alleges
that the Company issued false and misleading press releases on January 17,
1995 and January 18, 1995. On October 17, 1995, the complaint was amended to
add claims that the Company and its former Chairman, Sam D. Schwartz,
violated federal and state securities laws because Mr. Schwartz did not
disclose purchases and sales of the Company's stock made in the open market
by him and his affiliates. Two additional civil lawsuits were filed in
federal district court in Georgia making similar claims and allegations, both
of which have been transferred to the same California court as the SPERBER
case. On July 22, 1996, the Company was served with a complaint in the
lawsuit CHARLES STEVENS VS. SAM D. SCHWARTZ AND INCOMNET, INC., Civil Action
No. 96-4906 RMT (VAPx), filed in the United States District Court for the
Central District of California, Western Division. The complaint alleges that
the Company and its former Chairman, Sam D. Schwartz, violated Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, and
Section 25400 of the California Corporations Code, as a result of false and
misleading statements made by defendants and undisclosed trading in the
Company's stock engaged in by Mr. Schwartz and his affiliates. The claims
are similar to those made in the pending class action lawsuit. In July 1996,
the Company became aware of a complaint in the lawsuit entitled SILVA RUN
WORLDWIDE LIMITED VS. INCOMNET, INC., SAM D. SCHWARTZ, BEAR STEARNS & CO.,
INC., LESLIE SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI
INVESTIMENTO ANTILLIANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G.
EMBIRICOS, AND JOS SCHUETZ, filed in the United States District Court for the
Southern District of New York. The complaint states that the plaintiff was a
purchaser of the Company's stock in July 1995. The complaint alleges that
the Company and its former Chairman violated Sections 10(b) and 20(a) and
Rule 10b-5 of the Securities Exchange Act of 1934, as amended, as a result of
false and misleading statements made by the defendants and undisclosed
trading in the Company's stock engaged in by Mr. Schwartz and his affiliate.
The plaintiff also alleges that Mr. Schwartz and his affiliate owed a
fiduciary duty to the plaintiff and breached it by their conduct, and that
these defendants committed common law fraud. The complaint also alleges
other causes of action against other unrelated defendants. The suits seek
recision and damages on behalf of the plaintiffs. Litigation has been
threatened by other potential claimants. There is no assurance that these
pending and threatened lawsuits will not have a material adverse effect on
the Company and its financial condition and operating results. See "Item 3.
Legal Proceedings" in the Company's 1995 Form 10-K, as updated under "Item 1.
Legal Proceedings - Class Action and Related Lawsuits" in the Company's Form
10-Q for the quarter ended September 30, 1996, and "RISK FACTORS -Risks
Relating to Incomnet and NTC - Status of Settlement Agreements."
RISKS INHERENT IN NETWORK MARKETING PROGRAMS. The Company sells its
telephone service through a network marketing program in which independent sales
representatives sign up both new independent sales representatives and
telecommunications customers. The independent sales representatives are
independent contractors, not employees of the Company, and pay all their own
expenses. New independent representatives purchase sales materials, training
and limited product inventories from the Company. As the representatives sign
up new representatives, who themselves also sign up new representatives, the
initial representative builds a "downline" of representatives that can reach
through multiple levels. The Company's marketing plan allows a representative to
build a network down to seven levels. Representatives do not receive commissions
for bringing in new representatives. Representatives only receive commissions,
overrides and bonuses based on bringing telephone customers and revenues to the
Company.
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While the development of a strong network marketing program can result in a
stable base of independent sales representatives who generate revenues from
signing up both new customers and new representatives, there are risks inherent
in network marketing. Because the representatives are structured in downlines,
there is a much higher risk associated with competitive programs designed to
attract the Company's existing base of representatives. If representatives
decide to leave the Company's program for a competitive program, there is a
strong incentive for those representatives to bring other representatives in
their downlines to the new program, all of whom will also try to move their
telephone customers to the new program. As the momentum of representatives
switching to new programs builds, the Company would experience a substantial
loss of both representatives and customers. As a result, a sales force based
upon network marketing has the inherent risk of eroding more rapidly than would
otherwise occur if the Company operated through a base of representatives who
worked directly for the Company. There are no assurances that the Company can
keep its marketing plan competitive against competitive plans. Consequently,
there is a risk that the Company's base of representatives and customers could
decline in a manner that would have a serious impact on the Company's revenues
and earnings.
LOSS OF INDEPENDENT SALES REPRESENTATIVES. In February 1994, a
group of approximately ten independent sales representatives in Northern
California left the Company to market a competitive telephone service using a
multi-level marketing approach. These representatives attempted to recruit other
representatives and telephone customers away from the Company to their
competitive program. The Company believes that these representatives took
proprietary lists of the Company's representatives and customers with the
intention of soliciting them to join their program, which was in direct
violation of contracts that these representatives signed when they joined the
Company's marketing program. As a result, the Company has filed suit against the
representatives for damages of $500,000 for the loss of customers who were
obtained through the taking of proprietary lists from the Company. The Company
also sought and received a temporary restraining order against the
representatives from continuing to use the Company's proprietary materials to
solicit customers from the Company. The Company estimates that it has lost
under 100 representatives and under 1,000 customers as a result of actions by
the former marketing representatives. The Company's request for a permanent
injunction was denied by the court on the grounds that the Company had not
sustained enough continuing damages to warrant a permanent injunction. There
are no assurances that the losses will remain at the current level. The
defendants have filed a cross-complaint against NTC and the Company claiming
that NTC failed to meet its contractual obligations to the defendants, and that
the actions taken by the defendants were legal. The cross-complaint seeks
compensatory and special damages, along with general and punitive damages.
There is no assurance that the Company will prevail in its lawsuit to recover
damages or that it may not lose more representatives and customers in the
future, or that the defendants will not be successful with their
cross-complaint. See "Item 3. Legal Proceedings - Legal Action Against Prior
Representatives" in the Company's 1995 Form 10-K, as updated under "Item 1.
Legal Proceedings - Legal Action Against Prior Representatives" in the Company's
Form 10-Q for the quarter ended September 30, 1996.
RISKS OF BILLING THROUGH LOCAL EXCHANGE CARRIERS. NTC is offering a long
distance telephone service called Easy-1 pursuant to which customers receive a
single bill from their local telephone company for both local and long distance
telephone service (NTC offers only long distance service). As a result, the
local exchange carriers handle NTC's long distance billings and collections.
Theoretically, billing through the local exchange carrier is supposed to enhance
collection rates and lower NTC's billing costs, while offering a convenience for
customers. The local exchange carriers charge a fee for their billing and
collection services. There is no assurance that the cost savings and
collections from the services provided by local exchange
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carriers will justify the charges being incurred by NTC for those services. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
QUALIFICATION OF PRIOR AUDIT REPORTS. The reports of the independent
certified public accountants with respect to the Company's financial statements
for the fiscal year ending December 31, 1995 include an explanatory paragraph
with respect to uncertainties related to the pending shareholders' class action
matter. The reports of the independent certified public accountants with
respect to the Company's financial statements for the fiscal years ending
December 31, 1992 and 1993 raised substantial doubts regarding the Company's
ability to continue as going concerns because the current liabilities of the
Company exceeded current assets by a significant margin. In addition, the scope
of Grant Thornton's audit report with respect to Incomnet for the fiscal year
ending December 31, 1990 was limited to the extent that it was not able to
verify certain amounts with respect to Incomnet's investment in Incomnet, India,
Ltd. In 1991 Incomnet wrote-off its entire investment in Incomnet India, Ltd.
POSSIBLE NEED FOR ADDITIONAL FINANCING - DILUTION OF OWNERSHIP IN RCI. The
Company may need additional capital in order to finance its anticipated growth,
especially the growth of its subsidiaries, NTC and RCI. NTC must purchase and
install more computer hardware and software to add capacity. Unforeseen events
such as the unexpected loss of customers or expenditures which were not budgeted
could also require the Company to seek additional capital. Since April 1996 the
Company, from the proceeds of loans made or arranged for it by Melvyn Reznick,
the President of the Company, and from advances made to it by NTC, has loaned
approximately $1,600,000 to RCI to fund its pro rata portion of loans being made
to RCI by its shareholders to finance its operations. In January 1996 the
Company also loaned $326,400 to RCI pursuant to a three year 8% convertible
note. There is no assurance that the Company's loans to RCI will be repaid or
that RCI will be able to raise additional capital. If RCI needs additional
financing and the Company does not have the funds available to make its pro rata
share of the advances, the Company's percentage ownership in RCI could be
significantly diluted. Furthermore, if RCI needs additional financing or
capital and cannot obtain it, its operations could be severely hampered,
resulting in a material adverse impact on the operating results and financial
condition of the Company. There is no assurance that the Company or its
subsidiaries can obtain additional capital or financing, if necessary, or obtain
it on acceptable terms. The shareholders of the Company may experience
substantial dilution in their ownership of the Company as a result of financings
or capitalizations done by the Company in order to obtain necessary funding.
See "RISK FACTORS - Adverse Effects of Issuance of Preferred Stock."
Furthermore, as a result of the issuance of stock options and warrants by RCI
since the acquisition of a controlling interest in it by the Company on
February 8, 1996, partially to raise capital, the Company's ownership interest
in RCI has been reduced to approximately 43.8% on a fully diluted basis, and
may be reduced further.
NO ASSURANCE OF PROFITABILITY - RECENT LOSSES. In the past the Company and
its wholly owned subsidiary, NTC, have incurred substantial operating losses
and have only recently achieved profitability. RCI and its wholly owned
subsidiary, Q2100, have only recently emerged from the development stage and
have incurred substantial operating losses since their inception. See "RISK
FACTORS - Risks Relating to RCI - Recent Emergence From Development Stage."
There is no assurance that the Company's consolidated revenues will continue to
grow or be earned at current levels, or that the Company will continue to be
profitable. For the fiscal year ending December 31, 1993 the Company had a net
loss of $948,769 on a consolidated basis and NTC had a net loss of $1,033,232,
although the Company had net income on a consolidated basis of $4,071,194 for
the year ended December 31, 1994. For the fiscal year ending December 31, 1995,
the Company had a net income on a consolidated basis of $1,366,025. As of
December 31, 1995, NTC had an accumulated shareholders' deficit of approximately
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$2,602,340 and RCI had an accumulated shareholders' deficit of
approximately $1,450,085. There is no assurance that RCI will ever be
profitable, or that NTC will continue to be profitable. There is no
assurance that the Company will not incur operating deficits in the future.
See "SELECTED CONSOLIDATED FINANCIAL INFORMATION", "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and "Item 14.
Financial Statements" in the Company's 1995 Form 10-K, and the Company's
Form 10-Q for the quarter ended September 30, 1996.
COMPETITION. The telephone and telecommunications industries are extremely
competitive, especially the provision of long distance telephone services. In
its long distance telephone business, the Company competes with several long
distance carriers such as AT&T, MCI, Sprint and others, which have substantially
greater financial, marketing and other resources than the Company. The Company
depends on independent marketing representatives in order to obtain customers
for its long distance telephone services. Several other network marketing firms
also utilize independent marketing representatives to sell long distance
telephone services, and may compete with the Company for marketing
representatives. Independent marketing representatives may leave the Company to
work for competitors from time to time, adversely affecting the Company's
business. The Company's network telecommunications business is also subject to
competition, and both business segments may experience competition from new
competitors in the future. Many of the Company's competitors have higher
national, regional and local recognition than the Company. There is no assurance
that the Company will be able to continue to successfully compete in the long
distance telephone or network telecommunications businesses. See "THE COMPANY"
and "Item 1. Business - Operations" in the Company's 1995 Form 10-K.
ADVERSE IMPACT OF GOVERNMENT REGULATION. The Company's businesses are
subject to government regulation in several respects which could cause
additional operating costs and which must be monitored for compliance. NTC, the
Company's wholly owned subsidiary, must comply with advertising and disclosure
rules relating to its sale of long distance telephone services to the public.
Its retail marketing program utilizing independent representatives to recruit
retail customers and additional representatives is subject to state laws
regulating public network marketing programs. NTC must be registered with the
public utility commissions of most states in order to provide telephone service
in those states. While NTC's registrations are effective in most of those
states, it continues to operate through agency contracts in certain states where
its registrations are pending. NTC anticipates that the balance of its pending
registrations will be approved.
NO DIVIDENDS ON COMMON STOCK. The Company has not paid dividends on its
Common Stock in the past and does not anticipate the payment of any cash
dividends in the near future. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS."
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CONTROL BY THE PRINCIPAL STOCKHOLDERS. The principal stockholders own in
the aggregate approximately 8% of the combined voting power of the Company's
Common Stock, not including those shares owned by its prior Chairman and
President, Sam D. Schwartz (who owns approximately 14.7% of the outstanding
shares). Accordingly, the principal stockholders are able to exercise
significant control of the vote on matters submitted to a vote of the Company's
stockholders. Such control by the principal stockholders may have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the holders of
Common Stock might otherwise receive a premium for their shares over then
current market prices. See "PRINCIPAL STOCKHOLDERS."
SHORT-SWING PROFITS PAYABLE TO THE COMPANY. As asserted in the pending
lawsuit filed against the Company and Sam D. Schwartz, the Company's prior
President, entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225, filed in January 1996 in the United States District Court in the
Southern District of New York, the Company is owed substantial short-swing
profits by Mr. Schwartz pursuant to Section 16(b) of the Securities Exchange Act
of 1934, as amended. The Company is conducting discovery to ascertain the
amount of short-swing profits. The payment of the short-swing profits may be
made by the redemption of a sufficient number of shares of the Company's Common
Stock owned by Mr. Schwartz to equal the amount of the short-swing profits plus
interest owed to the Company. See "Item 3. Legal Proceedings - Section 16(b)
Lawsuit" in the Company's 1995 Form 10-K, as updated in "Item 1. Legal
Proceedings - Section 16(b) Lawsuit" in the Company's Form 10-Q for the quarter
ended September 30, 1996. There is no assurance regarding if or when the
short-swing profits owed to the Company will be paid.
RISKS RELATING TO RCI
RECENT EMERGENCE FROM DEVELOPMENT STAGE. RCI recently emerged from its
development stage. RCI was incorporated in February 1994 and did not
commence marketing its products until after a controlling interest in it was
acquired by the Company on February 8, 1995. RCI has a limited operating
history and only began shipping its products in April 1995. RCI and Q2100
have incurred substantial operating losses since their inception. As of
December 31, 1995, they had a consolidated shareholders' deficiency
accumulated during their development stage of $1,450,085. The likelihood of
RCI's success must be considered in light of the foregoing facts, together
with the expenses, difficulties, uncertainties and delays frequently
encountered in connection with the early phases of a new business.
Unanticipated difficulties relating to marketing, manufacturing or
competition, for instance, could materially adversely affect RCI's ability to
achieve its business objectives. Certain of RCI's customers have experienced
technical and mechanical difficulties with the casting machines. RCI has had
to make service calls on those machines and is making design modifications to
its equipment and components. There is no assurance that design modifications
will solve problems that have arisen and may arise in the future. See "Item 1.
Business - Rapid Cast, Inc."
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RISK OF UNCERTAIN MARKET ACCEPTANCE; COST OF LENSYSTEM. RCI's success
depends substantially upon the acceptance of the LenSystem as an alternative to
traditional methods of purchasing and fabricating eyeglass lenses. Factors that
may adversely affect market acceptance include potential customers'
unfamiliarity with the Company's relatively new technology, lens making
processes, products, lens designs and materials, their reluctance to change
current methods of purchasing and fabricating lenses, and the initial capital
investment in purchasing the LenSystem. Furthermore, potential customers may be
reluctant to purchase the LenSystem because it cannot currently manufacture all
possible prescriptions and lens types. In addition, lens dispensers can obtain
single vision lenses (approximately 50% of the lens type dispensed) at prices
competitive with or lower than the cost of producing such lenses utilizing the
LenSystem. After LenSystems are purchased, there can be no assurance that
customers will continue to use their LenSystem to fabricate lenses.
Consequently, there can be no assurance that customers will accept RCI's
products as an alternative to traditional methods of purchasing and fabricating
optical lenses. Moreover, market acceptance of the LenSystem will depend, in
large part, upon its pricing (of both the LenSystem and the Rapid Cast Liquid
Monomer) and RCI's ability to demonstrate the advantages of the LenSystem over
competing products, technologies, and current distribution channels. See "Item
1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K.
OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF
ADDITIONAL FINANCING. RCI's operations to date have consumed substantial
amounts of capital, and RCI expects its capital and operating expenditures to
increase in the next few years. Such operating expenses are currently, and
may continue to, exceed RCI's revenues. RCI has not been profitable since
its inception. RCI has had to substantially slow its production schedule
because it does not have adequate capital to purchase supplies and
components. RCI is in default on certain of its payment obligations. There
is no assurance that RCI will be able to obtain additional financing or
capital from any source. RCI's need for additional financing will depend
upon numerous factors, including, but not limited to, the extent that and
duration of RCI's future operating losses, the level and timing of future
revenues and expenditures, market acceptance of new products, the results of
ongoing research and development projects, competing technologies, market
developments, and the ability of RCI to maintain and develop additional
collaborative arrangements and international distribution agreements. Except
for a credit line of up to $500,000 with Bank Leumi Trust, which is fully
drawn as of November 18, 1996, the Company currently has no committed
external source of funds. To the extent that existing resources are
insufficient to fund RCI's activities, RCI may seek to raise additional funds
through public or private financings. There can be no assurances that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing
equity securities, further dilution to the existing stockholders may result.
If adequate funds are not available, RCI's results of operation may be
adversely affected. See "Item 1. Business - Rapid Cast, Inc." in the
Company's 1995 Form 10-K.
LOANS FROM RCI FOUNDERS. As of October 10, 1996, RCI owed approximately
$1,463,334 to the founding stockholders of RCI, which does not include an
additional $3,966,927 loaned or to be loaned to RCI during the period from
January 1996 to November 14, 1996 (not including accrued interest) by its
existing shareholders and executives, including the Company, which loaned its
pro rata share of approximately $2,034,400 (not including accrued interest).
See "THE COMPANY - Loans to Rapid Cast, Inc." The $1,463,334 indebtedness to
the RCI founders accrues interest at the rate of 7% per annum and is due July
31, 1996, subject to certain conditions. With respect to the balance of the
debt, $648,000 of it is due on December 31, 1999 but is expected to be
converted into shares of RCI's Common Stock at a price of $.80 per share, and
the balance is due one year from the date of the loan. No funds are
presently available to repay the indebtedness. See "Item 1. Business -
Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K.
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COMPETITION. The vision care industry is subject to intense competition
from a variety of sources. RCI competes with conventional channels of
distribution, including lens manufacturers and wholesale lens laboratories and,
to a lesser extent, with manufacturers of point of sale lens fabrication
systems, manufacturers of contact lenses and providers of equipment related to
medical treatments to correct refractive disorders. Many of RCI's competitors
have significantly greater financial, technological, marketing and other
resources than RCI, which could enable such competitors to develop new processes
or products that could render RCI's products obsolete or less competitive. In
addition, many of RCI's competitors have significantly greater experience than
RCI in developing new lenses, lens materials and fabrication technologies, and
there can be no assurance that RCI will be able to compete effectively with such
competitors. The effects of such competition could have a material adverse
effect on RCI's financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. The potential market for the LenSystem is one
characterized by rapidly changing technology, and many of RCI's competitors have
substantially greater resources for the research and development of new
technologies than RCI will have for such purposes. There can be no assurance
that technologies or medical advances, including, without limitation, laser
vision correction, Radial Keratotomy (RK) and new ophthalmic drugs which could
obviate the need for prescription lenses, will not render the LenSystem
uncompetitive or obsolete. RCI's ability to anticipate changes in technology,
and then to improve the Technology or development or acquire new technologies in
response to such changes, will therefore be a critical factor affecting RCI's
ability to grow and become profitable. There accordingly can be no assurance
that the Technology will not be subject to the development or widespread
acceptance of any new processes or products that cause the Technology to become
noncompetitive, incompatible, or result in early product obsolescence, or that
RCI's business will not be materially adversely affected as a result.
Substantial research and development is being conducted by competitors and
others with respect to lens fabrication systems that could enable eyewear
dispensers to fabricate plastic eyeglass lenses at the point of sale. RCI
believes that this research and development will continue and may intensify and
accelerate. The development or widespread acceptance of any new process or
products, including new lens shapes, sizes, coatings and materials that cause
RCI's products to become obsolete, noncompetitive or incompatible, would have a
material adverse effect on RCI's financial condition and results of operations.
THE OPTICAL MARKETPLACE. RCI's success will depend, in significant part,
on its ability to anticipate trends and changes in the optical marketplace and
to develop or acquire technology capable of satisfying the demands of the
marketplace in connection with such trends and changes. Among the factors RCI
must be aware of are fashion, lens material, lens coatings and treatments. Some
or all of the changes required to be made in response to these factors may not
be adaptable to an onsite lens manufacturing environment and could have a
material adverse effect on RCI's financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS. In February 1995, RCI acquired all of the
capital stock of Q2100 and thus all of Q2100's issued patents and patent
applications that relate to the Technology. As of the date of this Prospectus,
five United States patents have issued, eight United States patent applications
are pending, and over 20 foreign applications are pending. RCI's success
depends, in significant part, on its ability to obtain patent protection for its
products, both in the United States and in other countries, to preserve its
intellectual property rights and to operate without infringing on the rights of
third parties. There can be no assurances that RCI will be able to protect its
intellectual property rights adequately, that competitors will not be able to
develop similar technology independently, that the claims allowed on any patents
held by RCI will be sufficiently broad to protect RCI's technology or that RCI's
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patents will provide a significant competitive advantage for its products.
Moreover, RCI believes that obtaining foreign patents may be more difficult
than obtaining domestic patents because of differences in patent laws. In
addition, the protection provided by foreign patents, once they are obtained,
may be weaker than the protection provided by United States patents. The
failure by RCI to protect adequately its intellectual property rights could
have a material adverse effect on RCI's financial condition and results of
operations. RCI has been the subject certain legal disputes involving the
intellectual property rights of others. See "Item 3. Legal Proceedings -
Patent Infringement Lawsuit" in the Company's 1995 Form 10-K, as updated in
"Item 1. Legal Proceedings - Patent Infringement Lawsuit" in the Company's
Form 10-Q for the quarter ended September 30, 1996. Any litigation in the
future to enforce patents issued to RCI, to protect trade secrets or know-how
possessed by RCI or to defend RCI against claimed infringement of the rights
of others would be time-consuming and costly, and could have a material
adverse effect on RCI's financial condition and results of operations.
Additionally, the manufacture and sale of products that RCI develops or
markets may involve the use of processes, products or information, the rights
to which may be held by others. There can be no assurance that RCI will be
able, for financial reasons or otherwise, to obtain ownership or license
rights with regard to the use of such processes, products or information or,
if obtained, that the use of such rights will be on terms favorable to RCI.
Failure to obtain such rights, if any, could have a material adverse effect
upon the financial condition and results of operations of RCI. RCI also
relies, and will continue to rely, on trade secrets and proprietary known-how
which it seeks to protect, in part, by secrecy agreements with its employees,
consultants, licensees, potential strategic partners and others. There can be
no assurance that any such agreements will not be breached, that RCI would
have adequate remedies for any such breach, or that RCI's trade secrets are
not already known to, or will not otherwise become known to, or be
independently developed by, RCI's competitors. To the extent that
consultants, licensees or other third parties (such as prospective joint
venture partners or subcontractors engaged to manufacture the LenSystem)
participate in RCI's projects, technological information independently
developed by them or by others may be the subject of disputes as to the
proprietary rights to such information, which disputes may not be resolved in
favor of RCI. The LenSystem uses as its raw material the Rapid Cast Liquid
Monomer, which is injected into a lens mold and then cured (i.e., hardened)
into a finished lens. The Rapid Cast Liquid Monomer is a proprietary trade
secret which is not protected by any issued patents nor the subject of any
patent applications. RCI does not currently intend to seek patent protection
for the Rapid Cast Liquid Monomer. See "Item 1. Business - Rapid Cast, Inc.
- - Technical Overview of the Rapid Cast LenSystem" in the Company's 1995 Form
10-K.
MANUFACTURING UNCERTAINTIES. RCI currently does not have the facilities to
manufacture the LenSystem's equipment components and raw materials (i.e., the
Rapid Cast Liquid Monomer) and has no plans to develop its own manufacturing
capabilities. RCI engages subcontractors and licensees to produce such
components and raw materials. RCI is at present substantially dependent upon
four suppliers from which it purchases different components and the Rapid Cast
Liquid Monomer. RCI believes that it could take in excess of six months to
secure alternatives for its suppliers in the event of the loss of RCI's current
suppliers. The glass molds utilized by the LenSystem to produce a specific
progressive multifocal design are available from only one supplier. Alternative
suppliers for those glass molds or any other component of the LenSystem may not
be available. RCI has certain of its components and tooling manufactured abroad
and may have additional components provided by foreign suppliers in the future.
The loss of a supplier for any material or component used by RCI or the
inability of a supplier to fulfill RCI's requirements might cause significant
delays in deliveries and the incurrence of additional costs. Such delays or
increased costs could have a material adverse effect on RCI's financial
condition and results of operations.
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MARKETING UNCERTAINTIES, DOMESTIC. RCI's marketing efforts in the United
States have relied primarily on trade journals, trade shows and conventions to
present its products to the marketplace. RCI has not expended significant funds
on direct or other marketing campaigns and has a dedicated sales and marketing
staff of four persons. There can be no assurance that the implementation of
RCI's future marketing plans will be effective or that RCI will not be required
to expend more than it currently anticipates in order to market its products.
MARKETING UNCERTAINTIES; INTERNATIONAL. RCI generally markets its
LenSystem internationally through exclusive local distributors and has entered
into several exclusive distribution agreements worldwide. There can be no
assurance that the purchase commitments and other obligations contained in these
agreements will be honored. Nor can there be any assurance that suitable
distributors for other countries to which RCI is not currently distributing will
be found. Laws and regulations imposed by foreign countries may also adversely
affect the marketing or commercial viability of the LenSystem and the Rapid Cast
Liquid Monomer. Additionally, significant fluctuations in the value of the
United States dollar could adversely affect future demand for the LenSystem in
foreign countries.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The manufacturing, marketing
and sale of prescription ophthalmic lenses entail the inherent risk of exposure
to product liability claims. These claims might be made by, among others,
consumers who purchase lenses manufactured by, or businesses that utilize, the
Lensystem. Currently, RCI maintains product liability insurance which provides
coverage of $6,000,000 per occurrence and $7,000,000 in the aggregate. There
can be no assurance that RCI will be able to maintain such insurance at
commercially reasonable rates, if at all, or that the coverage provided thereby
is sufficient to fully protect RCI against liability. RCI's inability or
failure to protect itself adequately against such liabilities could have a
material adverse effect upon its prospects, financial condition and results of
operations.
EQUIPMENT INSTALLATION AND SERVICE. RCI does not presently have any
contracts or arrangements with qualified companies to install and service the
LenSystem, currently relying on its staff of installers and technicians.
Furthermore, equipment malfunctions have caused and may in the future cause
RCI to incur unanticipated operating expenses that may not be covered by
component manufacturers' warranties. See "RISK FACTORS -- Risks Relating to
RCI -- Recent Emergence From Development Stage."
DEPENDENCE UPON KEY PERSONNEL. The success of RCI will be largely
dependent upon the continuing services and efforts of certain of its directors
and executive officers. The loss of the services of Jeffrey Rubin, Galen Powers
or Dr. Omar Buazza could have a material adverse effect upon RCI's ability to
achieve its business objectives. RCI has entered into employment agreements
with certain of its officers, including Jeffrey Rubin, Dr. Omar Buazza, Galen
Powers, Steve Luetke and Thomas Freedman. It has also entered into an
employment agreement with Dr. Larry Joel which is expected to be replaced by a
consulting agreement. RCI may enter into employment agreements with some of its
other existing officers. RCI expects that its ability to achieve its business
objectives will also depend in large part upon its ability to attract and retain
highly qualified management personnel in the future, including sales, marketing
and scientific staff. There can be no assurance that RCI will be able to
attract and retain personnel with the requisite skills and experience necessary
to successfully manage RCI's business and operations.
REGULATORY CONSIDERATIONS. The lenses produced by the LenSystem are
regarded by the United States Food and Drug Administration (the "FDA") as
medical "devices" within the meaning of the Federal Food, Drug, and Cosmetic Act
(the "Food and Drug Act"), but the lenses may be marketed without pre-market
notification, review, approval or clearance by the
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FDA. Other requirements, principally those concerning impact resistance,
current good manufacturing practices, labeling and reporting of certain
allegedly device-related adverse effects will apply. RCI believes that the
LenSystem, as manufacturing equipment, is itself not a "medical device" under
the Food and Drug Act. If the LenSystem is itself a medical device, RCI
believes that LenSystem may be marketed without premarket notification, review,
approval, or clearance by the FDA, although other requirements, principally
those concerning current good manufacturing practices, labeling, and reporting
of certain allegedly device-related adverse affects, and of device malfunctions
in certain circumstances, would apply. In any event, certain state and local
government authorities (such as the State of California) also regulate medical
device manufacturers. Depending upon where LenSystem equipment is manufactured,
RCI may be subject to such additional state regulations. Although there can be
no assurance in this regard, RCI does not anticipate that compliance with such
governmental regulation will have an adverse effect upon its business. Failure
to comply with FDA, and in some cases, the state requirements, could result in
civil sanctions, e.g., product seizure, injunction versus product manufacturing
or distribution, or criminal prosecution and conviction. In addition, certain
legal impediments and foreign regulatory restrictions may affect the sale and
exportation of the LenSystem to countries other than the United States.
PAYMENT OF ACQUISITION PRICE OF RCI. The Company issued 600,000 shares of
restricted Common Stock to the founding shareholders of RCI to complete the
payment of the purchase price of 51% of RCI in lieu of issuing up to 750,000
shares of performance based stock. RCI's financial performance during the
twelve month period ending March 31, 1996 indicates that the founding
shareholders of RCI would not have been issued any additional shares of the
Company's common stock under the original stock purchase agreement. See "Item
1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K.
NO ANTICIPATED DIVIDENDS. Since inception, RCI has not declared or paid
any cash dividends on its common stock and does not anticipate paying any cash
or other dividends on its common stock in the foreseeable future. The
declaration and payment of any cash dividends in the future will be determined
solely by the Board of Directors of RCI (which will, for the foreseeable future,
be elected by RCI's current stockholders, including the Company).
AUTHORIZATION OF ADDITIONAL SECURITIES. RCI's Certificate of Incorporation
authorizes the issuance of up to 30,000,000 shares of common stock. RCI's Board
of Directors has the power to issue any and all of such shares without
stockholder approval. RCI may issue a substantial number of additional shares
in the future. In this regard, RCI plans to make a private placement of its
securities in the near future to raise additional capital which would result in
a significant dilution of the Company's ownership in RCI. To the extent that
additional shares of common stock are issued, dilution of the interests of RCI's
stockholders, including the Company, will occur.
OPTION PLAN. Pursuant to its stock option plan, RCI may grant options to
purchase up to 2,750,000 shares of its common stock to directors, officers and
employees of, and consultants to, RCI. RCI has issued options to purchase
2,192,000 shares of common stock under the option plan. During the respective
exercise periods of the above-mentioned options, the holders thereof are given
an opportunity to profit from a rise in the market price of the common stock (if
RCI's stock becomes publicly traded), with a resultant dilution of the interests
of the then existing stockholders. As a result, the terms upon which RCI may
obtain additional equity financing during such periods could be adversely
affected. These holders may be expected to exercise their rights to acquire
common stock at a time when RCI would, in all likelihood, be able to obtain
needed capital through a new offering of securities on terms more favorable than
those provided by these options.
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GENERAL RISKS
BUSINESS DEPENDENT ON KEY PERSONNEL. The Company's business is partially
dependent upon the performance of certain key individuals, including its
President and Chief Executive Officer, certain executives of its wholly-owned
subsidiary, NTC, and certain executives of its 50% owned subsidiary, RCI. The
Company has entered into a four year employment agreement (i.e. expiring on
November 30, 1999) with Melvyn Reznick, its President and Chief Executive
Officer, a three year employment agreement with Edward R. Jacobs, the President
of NTC, and employment agreements with Larry Joel and Jeff Rubin, executive
officers of RCI. RCI is entering into long term employment agreements with four
other of its executives. The Company does not anticipate a termination of its
employment relationships with any of its key executives, other than Larry Joel,
who has indicated his intention to resign as an officer and director of RCI. The
loss of one or more key executives of the Company, NTC or RCI could have an
adverse impact on the Company's business. See "Item 1. Business - Employees" in
the Company's 1995 Form 10-K.
DILUTION CAUSED BY FUTURE SALES OF SHARES. As of November 14, 1996, the
Company has approximately 3,807,200 shares of Common Stock (not including the
Shares, the Underlying Shares or outstanding shares of Series A Preferred Stock
in addition to the ones covered by this Prospectus) issued and outstanding which
may be deemed "restricted securities" as that term is defined under Rule 144 of
the Securities Act of 1933, as amended (the "Securities Act"). The restricted
securities may be sold in the future in compliance with Rule 144 or Regulation S
of the Securities Act. Ordinarily, under Rule 144 a person who is an affiliate
of the Company (as that term is defined in Rule 144) and has beneficially owned
restricted securities for a period of two years may, every three months, sell in
brokerage transactions an amount that does not exceed the greater of (i) 1% of
the outstanding class of such securities or (ii) the average weekly trading
volume in such securities on all national exchanges or reported through the
automated quotation system of a registered securities association during the
four weeks prior to the filing of a notice of sale by a securities holder. A
person who is not an affiliate of the Company who beneficially owns restricted
securities is also subject to the foregoing volume limitations but may, after
the expiration of three years, sell unlimited amounts of such securities under
certain circumstances. Pursuant to Regulation S, foreign shareholders may
resell their shares without restriction after the expiration of 40 days from the
date of the sale of the stock to them. The Company can make no prediction as
to the effect, if any, that sales of shares of Common Stock, or the availability
of shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock
(including the Shares and the Underlying Shares) in the public market, or the
perception that such sales could occur, could depress prevailing market prices
for the Company's Common Stock. Such sales may also make it more difficult for
the Company to sell equity securities or equity-related securities in the future
at a time and price which it deems appropriate.
DILUTION CAUSED BY FUTURE ISSUANCES OF STOCK BY THE COMPANY. The
Company's Certificate of Incorporation, as amended, authorizes the issuance
of 20,000,000 shares of Common Stock and 100,000 shares of preferred stock.
The Company currently has 13,294,434 shares of Common Stock outstanding and
2,440 shares of the Series A Preferred Stock outstanding, 2,075 shares of
which are included in the Series A Preferred in this Prospectus. Assuming
the conversion of all of the Series A Preferred covered by this Prospectus
and the issuance of the Underlying Shares at an assumed price of $4.44 per
share, the Company would have 13,761,819 shares of its Common Stock
outstanding, not including the potential issuance of additional shares of
Common Stock issuable upon the conversion of other outstanding shares of
Series A Preferred Stock and outstanding options and warrants. The remaining
shares of Common Stock not issued or reserved for specific purposes may be
issued without any action or approval of the Company's stockholders. Although
there are no present plans, agreements or undertakings involving the issuance
of such shares, except as disclosed in this Prospectus, any such issuance
could be used as a method of discouraging, delaying or preventing a change in
control of the Company or could dilute the public ownership of the Company.
There can be no assurance that the Company will not undertake to issue such
shares if it deems it appropriate to do so. See "DESCRIPTION OF CAPITAL
STOCK."
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POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The
Company's Certificate of Incorporation, as amended, authorizes the issuance
of a maximum of 100,000 shares of Preferred Stock on terms that may be
established by the Company's Board of Directors without further stockholder
action. In September and October 1996 the Company issued $2,440,000 of
Series A 2% Convertible Preferred Stock (as of November 14, 1996), which is
convertible into the Company's Common Stock based on a price equal to the
lesser of the bid price of the Company's Common Stock on the date of funding
(i.e. ranging from $4.00 to $4.75 per share), or 80% of the average bid
price during the five trading days immediately preceding the date of the
conversion. Consequently, the Common Stockholders will experience dilution
from the conversion of the Preferred Stock. The dilution will be greater to
the extent that the bid price of the Company's Common Stock is lower at the
time of conversion, since more shares of Common Stock will be issued for each
share of outstanding Series A Preferred. Furthermore, while the Preferred
Stock remains outstanding, the Company is subject to certain restrictive
covenants. See "THE COMPANY - Issuance of Convertible Preferred Stock." The
terms of any other series of Preferred Stock, which may include priority
claims to assets and dividends and special voting rights, could also
adversely affect the rights of holders of the Common Stock. To date, no
Preferred Stock other than the Series A 2% Convertible Preferred Stock has
been issued by the Company, although the Company may issue more Series A 2%
Convertible Preferred Stock in the future. The issuance of Preferred Stock
could make the possible takeover of the Company or the removal of the
Company's management more difficult, or otherwise dilute the rights of
holders of Common Stock and the market price of the Common Stock. See
"DESCRIPTION OF CAPITAL STOCK - Preferred Stock."
THE COMPANY
GENERAL
The Company, its wholly-owned subsidiary, NTC, and its 51% owned
subsidiary, RCI, are engaged in three businesses: (i) interactive communications
networking services by the Company, (ii) the provision of long distance
telephone services by NTC, and (iii) the manufacture and marketing of the Fast
CastTM Lensystem that allows retail optical stores and wholesale optical lens
manufacturing laboratories to produce single vision, flat-top bifocal and
progressive bifocal and multifocal lenses rapidly on demand.
The Company provides interactive communications networking services using
its proprietary communications software, a central message switching computer
and front-end network processor. All subscribers to Incomnet's communications
network can simultaneously access the information on the system, can communicate
on the system on a real-time basis and can leave electronic messages. The
technology is particularly well suited to networks of buyers and sellers because
requests for quotes can be broadcast to all participants simultaneously, while
responses and subsequent negotiations associated with the quote can be done
privately.
The Company's major network is the Auto Dismantler Network, known under the
tradename "AutoNETWORK," which currently links several hundred licensed
automobile dismantlers in California, Colorado, Nevada, Arizona, Oregon and
Washington. AutoNETWORK is a monthly subscription service that automobile
dismantlers utilize to buy, sell and trade used parts that have been salvaged
from automobiles damaged in traffic collisions. The Company continually
evaluates other applications for its telecommunications networking technology,
including other industries where electronic broadcast and point-to-point
communications would add value to the conduct of their business. See "Item 1.
Business - AutoNETWORK" and "Item 1. Business - Network Services" in the
Company's 1995 Form 10-K.
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The Company was incorporated under the laws of the State of California in
1974. Its principal place of business is located at 21031 Ventura Boulevard,
Suite 1100, Woodland Hills, California 91364. Its telephone number is (818)
887-3400. Additional information about the Company is included in documents
incorporated by reference in this Prospectus. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The Company's wholly owned subsidiary, NTC, is an inter-exchange carrier
and reseller of long distance telephone services and provides nationwide long
distance telephone access to commercial and residential customers across the
United States. Customers of NTC purchase and pay for specific amounts of time
either through direct billing from NTC, billing from the customer's local
telephone company, or by prepaying for the use of NTC calling cards. NTC's
primary products are its Call $aver Calling Card, its Sure $aver Calling Card,
its Dial-1 Telephone Service and its Easy-1 Telephone Service. In order to
provide these NTC services, NTC purchases large amounts of long distance time
from national and regional carriers at rates based upon high volume usage. NTC
then resells this time to customers at discounted retail rates. Its calling
cards also eliminate the calling card surcharges generally imposed by AT&T, MCI
and Sprint. NTC utilizes a multi-level marketing network of independent sales
representatives to market its long distance telephone services to retail
customers. NTC was incorporated under the laws of the State of Nevada on
September 6, 1984. Its principal offices are located at 2801 North Main Street,
Irvine, California 92714 and its telephone number is (714) 251-8000. See "Item
1. Business - Acquisition of National Telephone Communications, Inc. -
Operations." See also "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
The Company's approximately 51% owned subsidiary, RCI, manufactures and
markets the Fast CastTM LenSystem that allows retail optical stores and
wholesale optical lens manufacturing laboratories to produce single vision,
flat-top bifocal and progressive bifocal lenses on demand, and in minutes.
The Fast CastTM LenSystem uses a series of high-accuracy prescription glass
molds that are filled with a proprietary liquid monomer (plastic). When
exposed to ultraviolet light within the system's curing chamber, the monomer
undergoes a chemical reaction that rapidly "cures" or hardens the lens in 15
minutes. RCI commenced assembling and marketing the Rapid Cast equipment,
molds and liquid monomer for the Fast CastTM LenSystem in February 1995, when
it acquired 100% of the outstanding stock of Q2100, Inc. from Pearle, Inc.,
and when the Company acquired its controlling interest in RCI. See "Item 1.
Business - Acquisition of Rapid Cast, Inc." and "Item 1. Business - Rapid
Cast, Inc." in the Company's 1995 Form 10-K.
AGREEMENTS WITH NTC AND ITS MANAGEMENT
In October 1996 the Company entered into a new management incentive
agreement with NTC purusant to which the Company agreed to spin-off 10% of
the shares it owns in NTC, to establish stock option programs for the senior
executives, employees and key independent sales representatives of NTC, and
to vote its shares for NTC management's slate of director nominees. The new
management incentive agreement entirely supercedes the incentive agreement
entered into by the Company with NTC in February 1996. See "Item 5. Other
Information - Agreement with NTC Management" in the Company's Form 10-Q for
the quarter ended September 30, 1996. The Company also entered into
settlement agreements with Edward Jacobs, the Chairman of the Board of
Directors and President of NTC, and Jerry Ballah, the Senior Vice President
and a director of NTC, pursuant to which mutual general releases were given.
The Company agreed to assume certain debt obligations of Mr. Jacobs and Mr.
Ballah to NTC, as well as to make a cash payment to them to cover their tax
liabilities from the debt forgiveness. See "Item 5. Other Information -
Settlement Agreement with NTC Directors" in the Company's Form 10-Q for the
quarter ended September 30, 1996.
SETTLEMENT WITH PRIOR NOTEHOLDERS
Commencing in January 1996 the Company entered into a series of
settlement agreements with certain prior holders of 8% convertible promissory
notes issued by the Company on February 8, 1995 to finance the acquisition of
51% of RCI. See "Item 1. Business - Acquisition of RCI" in the Company's 1995
Form 10-K. Settlement agreements have been executed by all seven of the prior
noteholders who held $825,000 of convertible notes. The registration statement
covering the prior noteholders' outstanding shares and newly issued
settlement shares issued pursuant to the settlement agreements was declared
effective by the Securities and Exchange Commission on October 31, 1996.
Pursuant to the settlement agreements, the Company issued 74,917 additional
shares of its Common Stock to these prior noteholders based on the average
quoted price of the Company's stock on the NASDAQ market during the five
trading days immediately preceding and, in one noteholder's case, following
the effective date of the registration statement, dated October 31, 1996.
See "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the
Company's Form 10-Q for the quarter ended September 30, 1996.
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See also "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the
Company's 1995 Form 10-K.
SETTLEMENT WITH PRICE INTERNATIONAL
In August 1996, the Company entered into a settlement agreement with
Price International pursuant to which the Company agreed to lower the
exercise price of Price International's 75,000 warrants from $11.25 per
share to $4.50 per share, and to extend the expiration date of the warrants
from November 15, 1997 until December 31, 1998. The Company also agreed to
register the 75,000 shares issuable upon the exercise of the warrants.
Those shares were registered by the Company in the registration statement
which was declared effective by the Securities and Exchange Commission on
October 31, 1996. In consideration for the modification to the terms and
conditions of the warrants, the Company proposed that (a) Price International
be required to exercise at least 25,000 of the warrants once the trading
price of the Company' stock averages $5.30 per share during any 30 day
period, and (b) that Price International releases and forever discharges
the Company from all claims it may have had against the Company for events
occurring prior to the date of the settlement agreement.
ISSUANCE OF CONVERTIBLE PREFERRED STOCK
From September 20, 1996 to October 25, 1996, the Company issued 2,440
shares of Series A 2% Convertible Preferred Stock to 12 accredited investors
in a private placement pursuant to Regulation D of the Securities Act of
1933, as amended. The shares of Series A 2% Convertible Preferred Stock were
purchased by four affiliated individuals, and eight unaffiliated investors.
The Company raised $2,440,000 in capital from the issuance of the Preferred
Stock, approximately 65% of which it utilized to repay advances made to it by
Melvyn Reznick, the Company's Chairman and Chief Executive Officer, who in
turn owed approximately $723,000 to a bank on a loan with a maturity date of
September 16, 1996. Mr. Reznick had borrowed these funds from the bank in
order to make a substantial portion of his loan to the Company, which enabled
the Company to make its pro rata share of loans to RCI. See "THE COMPANY -
Loans to RCI." The balance of the proceeds have been used for general
working capital and costs, and to make short-term advances to its subsidiary,
Rapid Cast, Inc., for its working capital purposes. The Company paid a
referral fee to Newport Capital Partners, an unaffiliated financial
consultant, equal to 5% of the capital raised through its referrals, which is
$1,700,000 dollars to date. The Company has therefore paid $85,000 of
referral fees to Newport Capital Partners to date. The basic terms and
conditions of the Series A 2% Convertible Preferred Stock are described in
the following paragraphs:
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VOTING. The Series A 2% Convertible Preferred Stock does not have voting
rights.
DIVIDEND. The Series A 2% Convertible Preferred Stock has a cumulative
noncompounded annual dividend of 2% payable in cash or stock at the Company's
option upon conversion of the Preferred Stock into Common Stock, and prior to
the payment of any dividends on the Common Stock.
LIQUIDATION PREFERENCE. The Series A 2% Convertible Preferred Stock has a
liquidation preference of $1,000 per share plus all cumulative unpaid dividends,
whether or not declared by the Company's Board of Directors. Upon any
liquidation or change of control of the Company (i.e. transfer of more than 50%
of its voting stock), the Preferred Stockholders are entitled to the first
priority in payment from the Company's assets, before any payments are made on
the Company's Common Stock, until the liquidation preference is paid in full.
CONVERSION. The Preferred Stockholders may convert each share of Series A
2% Convertible Preferred Stock into the number of shares of the Company's Common
Stock calculated as follows, at any time upon the earlier of (i) 90 days after
the issuance of the Preferred Stock, or (ii) 60 days after the shares of Common
Stock underlying the Preferred Stock are registered with the Securities and
Exchange Commission: The conversion price (the "Conversion Price") for each
share of Series A 2% Convertible Preferred Stock is equal to the LESSER of (a)
80% of the average bid price for the Company's Common Stock on the public
trading market for the five trading days immediately preceding the conversion
date, as specified by the Preferred Stockholder, or (b) the bid price of the
Company's Common Stock on the funding date (i.e. the issuance date of the
Preferred Stock). To calculate the number of shares of Common Stock issuable
upon the conversion of the Preferred Stock, the Conversion Price is multiplied
by a ratio, the numerator of which is the sum of 1,000 and the accrued but
unpaid dividends, and the denominator of which is the Conversion Price. If for
any reason a registration statement covering the shares of Common Stock issuable
upon the conversion of the Preferred Stock is not in effect with the Securities
and Exchange Commission at the time of a valid conversion by a Preferred
Stockholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late. The
Company has the right to cause a conversion of the Preferred Stock into Common
Stock on the same terms at any time after one year after the Preferred Stock is
issued.
REDEMPTION. The Company has the right to redeem the Preferred Stock for
its issuance price plus cumulative unpaid dividends if the Company's stock
trades at a price which averages $2.00 per share or less for any period of five
consecutive trading days after the Preferred Stock is issued.
REGISTRATION RIGHTS. Pursuant to a Registration Rights Agreement entered
into by the Company with each purchaser of the Series A 2% Convertible
Preferred Stock, the Company is obligated to file a registration statement
with the Securities and Exchange Commission covering the shares of Common
Stock underlying the Preferred Stock within 30 days after the Preferred Stock
is issued, and to have the registration statement declared effective within
75 days after it is filed. The Company's registration statement declared
effective by the Securities and Exchange Commission on October 31, 1996
covers the shares issuable upon the conversion of the first 365 shares of
Series A 2% Convertible Preferred Stock issued by the Company. The Underlying
Shares issuable upon the conversion of the remaining 2,075 shares of Series A
2% Convertible Preferred Stock are covered by this Prospectus.
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ANTIDILUTION PROVISION. The Certificate of Determination for the Series A
2% Convertible Preferred Stock contains comprehensive provisions for adjustments
to the Conversion Price and the conversion ratio of the Preferred Stock in the
event of stock dividends, asset distributions, reorganizations,
recapitalizations, mergers, stock splits or similar transactions by the Company,
in order to protect the Preferred Stock from dilution as a result of such
transactions.
RESTRICTIVE COVENANTS. During the first 90 days after the Series A 2%
Convertible Preferred Stock is issued, the Company is not permitted to issue any
other securities, except in limited circumstances, including pursuant to the
exercise of outstanding options or warrants or pursuant to existing settlement
agreements, without first notifying the Preferred Stockholders and giving them a
right of first refusal to purchase the securities themselves. While the Series
A 2% Convertible Preferred Stock is outstanding or until it is converted into
Common Stock, the Company is not permitted to engage in certain transactions,
such as the redemption or purchase of its own Common Stock (except in connection
with the collection of Section 16(b) short-swing profits), without the prior
consent of the Preferred Stockholders. Furthermore, the Company cannot take any
action which would modify the rights of the Preferred Stockholders under the
Certificate of Determination without the prior consent of the Preferred
Stockholder being affected by the modification.
LOANS TO RCI
In January 1996, most of the shareholders of RCI made their pro rata share
of a total loan of $648,000 to RCI to finance its operations. In consideration
for their loans, the RCI shareholders who made the advances received convertible
notes bearing simple interest at the rate of 8% per annum, payable quarterly,
with all principal and accrued but unpaid interest due in full on December 31,
1999. The notes are convertible into shares of RCI common stock at a conversion
price of $.80 per share at any time. The Company loaned $326,400 as its pro
rata share of the total loan made by the RCI stockholders.
In April, May, June and August 1996, the existing shareholders and
executives of RCI or their affiliates made or agreed to make one year loans
aggregating $2,838,683 to RCI to finance its operations. Incomnet, Inc.
loaned its pro rata share of the total advance by lending an additional
$1,607,996 to RCI. The loans bear simple interest at the rate of 10% per
annum, with interest payable monthly and principal payable in full upon the
earlier of (i) one year from the date of the advance, or (ii) upon RCI
receiving equity or debt financing from another source totalling $3,000,000
or more. As additional consideration for making the loans, the stockholders
of RCI were issued seven year warrants to purchase up to 1,853,683 additional
shares of RCI common stock for an exercise price of $2.25 per share with
respect to 1,838,683 of the warrants, and for an exercise price of $4.00 per
share with respect to the other 15,000 warrants. From September 1996 through
November 14, 1996, the RCI shareholders advanced an additional $1,128,244 to
RCI, $426,404 of which has been advanced by the Company (not including
accrued interest). The terms of these advances are essentially the same as
those made from April to August, except no warrants to purchase RCI Common
Stock were issued to the lenders. The warrantholders may have limited
piggyback registration rights with respect to the shares underlying these RCI
warrants. The Company made a substantial portion of its pro rata share of the
loan from the proceeds of an advance made to the Company by its President,
Melvyn Reznick, from a line of credit he obtained personally from a bank.
See "Certain Relationships and Related Transactions - Loans to the Company by
Melvyn Reznick" in the Company's Proxy Statement for the 1996 Annual Meeting
of the Shareholders. The loans by Mr. Reznick to the Company were repaid in
full from the proceeds of the issuance of the Series A 2% Convertible
Preferred Stock. See "THE COMPANY - Issuance of Convertible Preferred
Stock." The balance of the loans was made from the proceeds of cash
distributions made to the Company by NTC. See "THE COMPANY - Agreements With
NTC and its Management."
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RECENT DEVELOPMENTS
In May 1996, NTC entered into a new carrier contract with Wiltel, Inc. of
Tulsa, Oklahoma, a subsidiary of WorldCom, Inc., covering a potential volume
purchase of one billion dollars of long distance telephone time over a five year
period commencing in June 1996. 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. NTC currently relies
on the purchases of another unaffiliated long distance telephone service
provider to meet its volume purchase requirements under the new contract.
On September 3, 1996, the Company and Melvyn Reznick, the Chairman and
Chief Executive Officer of the Company, extended the term of Mr. Reznick's
employment agreement from November 30, 1997 until November 30, 1999.
DIRECTORS AND EXECUTIVE OFFICERS OF RCI
THE DIRECTORS AND EXECUTIVE OFFICERS OF RCI. The directors and executive
officers have held their positions with RCI since its inception, except for
Melvyn Reznick who became a director of RCI in November 1995, Henry Dachowitz,
who became an officer in March 1995, and Steve Luetke, Dr. Omar Buazza and Dr.
Shawn Zimberg, who became officers in April 1995. RCI's officers serve at the
discretion of its Board of Directors. See "Item 1. Business-Acquisition of
Rapid Cast, Inc." in the Company's 1995 Form 10-K, for the rights of the Company
to designate directors of RCI, and for the Company's designation of Melvyn
Reznick as a director of RCI. Mr. Joel Greenberg resigned as a director of RCI,
NTC and the Company effective May 9, 1996. See the Company's Proxy Statement
for the 1996 Annual Meeting of the Shareholders and the Company's Form 8-K,
filed on June 7, 1996, for additional information regarding Mr. Greenberg's
resignation and the related mutual settlement of claims.
NAME AGE POSITION WITH RCI
Larry Joel, O.D.(1) 50 Chairman of the Board of Directors, Chief
Executive Officer and President
Robert Cohen, O.D.(2) 53 Director
Alan Cohen, O.D. 45 Director
Melvyn Reznick(2) 53 Director
Jeffrey Rubin 29 Executive Vice President and Secretary
Omar Buazza, Ph.D. 44 Vice President of Research and Development
Henry Dachowitz 40 Chief Financial Officer and Treasurer
Thomas Freedman 43 Chief Operating Officer
Shawn Zimberg, M.D. 30 Vice President of Strategic Planning
Steve C. Luetke 42 Director of Products Development
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<PAGE>
- ------------------------
(1) Dr. Joel has indicated that he may resign as an officer and director of
RCI. In connection with his resignation, his employment agreement with RCI
may be replaced by a consulting agreement. RCI believes that it will be
able to hire a replacement for Dr. Joel. See "RISK FACTORS -General Risks
- Business Dependent on Key Personnel."
(2) These persons are the administrators of RCI's Amended and Restated Stock
Option Plan.
Robert Cohen and Alan Cohen are brothers. Jeffrey Rubin is married to
Robert Cohen's daughter. There are no other family relationships between any of
the directors or executive officers of RCI. RCI has obtained "key person" life
insurance in the amount of $1,000,000 on the lives of each of Jeffrey Rubin, Dr.
Omar Buazza and Steve Luetke.
LARRY JOEL, O.D. Since 1983, Dr. Joel has been Chairman of the Board of
Vision Centers of America, which is engaged in the retail optical business. Dr.
Joel was a founder and principal stockholder of ORGIC and has served as its
Chairman since 1989. Under his direction, ORGIC developed the Technology which
was sold to Q2100 (a subsidiary of Pearle) in 1991. Dr. Joel has also served as
President of Q2100 since 1991. In 1969, Dr. Joel received a Bachelor of Science
degree and a Doctor of Optometry degree from the Illinois College of Optometry.
ROBERT COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale
optical business since 1968. He has been the President, a director and a
significant stockholder of Cohen's Fashion Optical since its formation in 1970.
Cohen's Fashion Optical, an operator and franchisor of approximately 110 retail
optical stores, is one of the nation's top ten retailers of eyewear products, as
measured by 1992 sales. Since 1992, Dr. Cohen also has been the Chairman of the
Board, Chief Executive Officer and a significant shareholder of Sterling Vision.
Sterling Vision is an operator, franchisor and licensor of approximately 235
retail optical stores. Dr. Cohen additionally is a significant stockholder of
and a consultant to Neolens, Inc. which manufactures and markets polycarbonate
prescription ophthalmic lenses. In 1968, Dr. Cohen received a Bachelor of
Science Degree and a Doctor of Optometry degree from the Pennsylvania College of
Optometry.
ALAN COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale
optical business since 1974. He has been a director, Executive Vice President
and significant stockholder of Cohen's Fashion Optical since 1975. Since 1992,
Dr. Cohen has also been the Chief Operating Officer, a director and a
significant stockholder of Sterling Vision. Dr. Cohen is also a significant
stockholder of and a consultant to Neolens, Inc. In 1974, Dr. Cohen received a
Bachelor of Science degree and a Doctor of Optometry degree from the
Pennsylvania College of Optometry.
MELVYN REZNICK. Mr. Reznick was appointed President and Chief Executive
Officer of Incomnet, Inc. in November 1995 and Chairman of the Board of
Directors effective May 9, 1996. He has 30 years experience in engineering,
manufacturing, management, marketing, real estate and corporate development.
From 1977 to November 1995, Mr. Reznick served as President of Property Research
and Management Co., a Los Angeles-based company engaged in the business of real
estate syndication, development and management. He is a member of the National
Association of Corporate Directors (NACD). He received both his Bachelor of
Science and Master of Science degrees in Mechanical Engineering Science from the
Massachusetts Institute of Technology.
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<PAGE>
JEFFREY RUBIN. From 1989 to January 1994, Mr. Rubin served as a
Vice President of American European, Inc., an international import and export
firm. Since 1993, Mr. Rubin has been an Executive Vice-President and
significant stockholder of Lensco, a firm that provides consulting services to
the optical industry. Mr. Rubin has also been a significant stockholder of and
a consultant to Neolens since 1993. See "RISK FACTORS - Risks Relating to RCI -
Conflicts of Interest." He received a Bachelor of Arts degree in Political
Science from the University of Michigan, Ann Arbor, in 1989 and studied at the
London School of Economics.
OMAR BUAZZA, PH.D. From 1985 until he joined RCI in February 1995,
Dr. Buazza worked at the University of Louisville on developing methods for
photopolymerizing eyeglass lenses. Prior to joining RCI in February 1995, Dr.
Buazza was employed by ORGIC since its inception in 1988. Dr. Buazza received
his Ph.D. in Polymer Chemistry from the University of Louisville in 1987 and his
Master of Science in Chemistry from the same University in 1978. His
undergraduate work was completed at the University of Tripoli where he received
a Bachelor of Science degree in Chemistry.
HENRY M. DACHOWITZ. From 1992 until joining RCI in February 1995, Mr.
Dachowitz was Chief Financial Officer of Pharmos Corporation, a company engaged
in the business of developing pharmaceutical products. Prior to assuming his
position with Pharmos Corporation in 1992, Mr. Dachowitz was Director of
Financial Service Management Consulting for Richard A. Eisner & Company. From
1988 to 1992, Mr. Dachowitz was a Vice President at Bankers Trust. Mr.
Dachowitz is a Certified Public Accountant. He received his Bachelor of Science
in Accounting from Brooklyn College in 1977 and his Masters in Business
Administration from Harvard Business School in 1980.
THOMAS FREEDMAN. Prior to joining RCI in March 1996, Mr. Freedman was the
Vice-President of Operations at Travel Related Services, Inc., a subsidiary of
American Express, in its North Carolina Regional Operations Center from October
1993 until February 1996. Mr. Freedman was the Vice-President of Quality
Control and Vice-President of Operations and Engineering for Pearle Vision,
Inc., a subsidiary of Grand Metropolitan, PLC, from September 1991 until October
1993. Prior to his position with Pearle Vision, Inc., Mr. Freedman was a Plant
Operations Manager, Senior Industrial Engineer and Production Manager with
Frito-Lay, Inc., a subsidiary of Pepsico, Inc., from May 1982 until September
1991. Mr. Freedman has a Bachelors of Science in Industrial Engineering and
Operations Research which he received from Cornell University, College of
Engineering in 1974, and a Masters in Business Administration in Operations
Management from the University of Pittsburgh, Graduate School of Business, which
he received in 1975.
SHAWN ZIMBERG, M.D. Prior to joining RCI on a full time basis in March
1995, Dr. Zimberg had served as a consultant to RCI since its inception from
April 1994 to March 5, 1995. Dr. Zimberg also served as a consultant to
Integrated Financial Strategies, Inc., a company that invests in the equity
securities of small to middle sized capitalization companies in the medical,
bio-technology and computer industries. In 1986, he also was founder of DNA
Software, Inc., a vertical market software firm. Dr. Zimberg serves as a
consultant and Director of MediVisions, Inc., a medical instrument manufacturer.
Dr. Zimberg received his Bachelors of Science and M.D. from the University of
Michigan in 1991, and completed his specialty training in Radiation Oncology at
Memorial Sloan - Kettering Cancer Center.
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<PAGE>
STEVE C. LUETKE. From 1988 until he joined RCI in February 1995, Mr.
Luetke worked at ORGIC on the development of the LenSystem. He is named as an
inventor on three patent applications filed by ORGIC related to ultraviolet lens
curing technology. Mr. Luetke began his career as a Dispensing Optician and
then served as a District Manager for D&K Optical in Minnesota through the early
1980's. He was General Manager of Mobile Eye Care
Inc. from 1986 through 1988. Mr. Luetke holds a Bachelor of Science degree in
Business Administration from Butler University in Indianapolis.
All of RCI's current directors will hold office until the annual meeting of
stockholders to be held with respect to RCI's fiscal year ended March 31, 1996
(the "1996 Annual Meeting"), which is expected to be held in December 1996, and
until their successors are duly elected and qualified.
RCI DIRECTOR COMPENSATION
RCI reimburses its directors for reasonable travel and other expenses
incurred in connection with their activities on behalf of RCI, including
attendance at Board meetings, but does not pay its directors any fees for Board
participation (although it may do so in the future).
RCI EXECUTIVE COMPENSATION
For the fiscal year ended March 31, 1996, the President and four most
highly compensated executive officers of RCI in the aggregate were paid
approximately $497,250. The following table sets forth information concerning
the cash and other compensation paid by RCI during the fiscal year ended March
31, 1996, and being paid during the current fiscal year, to its President and
each of its four other most highly compensated executive officers. The
compensation being paid to the officers during the current fiscal year is
subject to change by resolution of the Board of Directors and concurrence by
RCI's Compensation Committee.
-31-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION LONG-TERM ALL OTHER
SALARY ($) BONUS ($) COMPENSATION- COMPENSATION
SECURITIES
UNDERLYING
OPTIONS(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Larry Joel, Chairman and $150,000 $- 0 - - 0 - $- 0 -
President
Thomas Freedman, Chief $5,000 $- 0 - - 0 - $- 0 -
Operating Officer(2)
Jeffrey Rubin, Executive $125,000 $- 0 - - 0 - $- 0 -
Vice-President & Secretary
Henry Dachowitz, Chief $108,750 $10,000 200,000 $- 0 -
Financial Officer &
Treasurer(4)
Shawn Zimberg, Vice- $90,000 $- 0 - 200,000 $8,500(3)
President of Strategic
Planning(5)
- -----------------------------------------------------------------------------------
</TABLE>
(1) Represents incentive stock options and nonqualified stock options granted
pursuant to RCI's 1994 Stock Option Plan. See the table immediately below
and "THE COMPANY - RCI 1994 Stock Option Plan."
(2) Mr. Freedman joined RCI in March 1996. Mr. Freedman's current salary is
$120,000 on an annualized basis.
(3) Mr. Rubin's current salary is $125,000 on an annualized basis.
(4) Mr. Dachowitz's current salary is $135,000 on an annualized basis.
(5) The other compensation for Dr. Zimberg reflects automobile and parking
allowances.
RCI OPTION GRANTS
The following table sets forth for each of the named executive officers
of RCI certain information concerning stock options granted by RCI through
November 1, 1996. The table does not include warrants to purchase RCI common
stock issued by RCI from January 1996 until August 1996. See "THE COMPANY -
Warrants Issued by RCI."
-32-
<PAGE>
<TABLE>
<CAPTION>
NAME NUMBER OF PERCENT OF TOTAL EXERCISE PRICE EXPIRATION
SECURITIES OPTIONS GRANTED TO PER SHARE(3) DATE(4)
UNDERLYING OPTIONS EMPLOYEES(2)
GRANTED(1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Larry Joel 0 0% 0 -
Thomas Freedman 200,000 9.1% $2.00 4/1/2006
Jeffrey Rubin 0 22.8% $2.25 7/15/2006
Henry Dachowitz 200,000 9.1% $2.00 11/15/2005
Shawn Zimberg 200,000 9.1% $2.00 11/15/2005
</TABLE>
- --------------------------------------
(1) These options include 50,000 incentive stock options each for Mr. Dachowitz
and Dr. Zimberg, and 150,000 nonqualified stock options for each of them
granted pursuant to RCI's 1994 Stock Option Plan. See "THE COMPANY - RCI
1994 Stock Option Plan."
(2) During the period from April 1, 1995 through October 10, 1996, RCI granted
options to purchase an aggregate of 2,192,000 shares of its Common Stock.
(3) In determining the fair market value of the RCI common stock, the Board of
Directors considered various factors, including RCI's financial condition
and results of operations, the book and tangible value of its assets, the
absence of a market for its Common Stock and the risks normally associated
with high technology companies.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee is terminated, or within a certain period of time
after the optionee's death or disability.
RCI COMMON STOCK UNDERLYING UNEXERCISED OPTIONS
The following table sets forth for each of the named officers of RCI the
number of shares of RCI common stock subject to both exercisable and
unexercisable stock options as of November 1, 1996. All of such options are
incentive stock options granted pursuant to RCI's 1994 Stock Option Plan. None
of the named officers has exercised any options to date, and none of the
exercisable or unexercisable stock options held by them as of that date
represented "in-the-money" options. See "THE COMPANY - RCI 1994 Stock Option
Plan."
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<PAGE>
NUMBER OF SHARES OF COMMON STOCK
UNDERLYING UNEXERCISED OPTIONS
AT NOVEMBER 1, 1996
-------------------
Name Exercisable Unexercisable
-----------------------------------------------------
Larry Joel 0 0
Thomas Freedman 200,000 0
Jeffrey Rubin 500,000 0
Henry Dachowitz 200,000 0
Shawn Zimberg 200,000 0
WARRANTS ISSUED BY RCI
During the period from April 1996 until August 1996, RCI issued warrants
to purchase 1,838,683 shares of RCI common stock at an exercise price of
$2.25 per share, and warrants to purchase 15,000 shares of RCI common stock
at an exercise price of $4.00 per share, which were issued to the RCI
stockholders in consideration for a total of $2,838,683 of loans made by them
during the period from January until August 1996 to finance RCI's operations
while it seeks additional equity financing. The warrants are exercisable at
any time during the seven year period after they are issued. The
warrantholders, including the Company, have certain limited registration
rights with respect to the warrants in the event that RCI becomes a publicly
traded company. See "Certain Relationships and Related Transactions - Loan
to Company By Melvyn Reznick" in the Company's Proxy Statement for the 1996
Annual Meeting of the Shareholders.
RCI EMPLOYMENT AGREEMENTS
LARRY JOEL. In February 1995, RCI entered into an employment agreement
with Dr. Larry Joel, its Chairman of the Board and President, which expires on
December 31, 1999. Under this agreement, Dr. Joel will generally be required to
devote his full time to RCI's affairs and is entitled to an annual salary of
$150,000. He is also entitled to participate in the option plan referred to
below and to receive such insurance, vacation, disability and other benefits as
will be made generally available to RCI's executive officers. The agreement
requires that all confidential information developed by or made known to Dr.
Joel during the course of his employment is to be kept confidential and not
disclosed to third parties, except in certain circumstances, and that all
inventions conceived by Dr. Joel during his employment relating to RCI's
business shall be its exclusive property. The agreement also provides that RCI
will be the exclusive owner of all information relating to the RCI Technology or
the LenSystem which was developed by or made known to Dr. Joel prior to the term
of his employment agreement. Under the agreement, Dr. Joel is also prohibited,
subject to certain terms and conditions, from engaging in business activities
competitive with RCI's business for a period of three years following the
expiration of the agreement. Dr. Joel has indicated that he may resign as an
officer and director of RCI. The terms of such a resignation, if it occurs,
have not yet been agreed upon by Dr. Joel and RCI.
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<PAGE>
JEFFREY RUBIN. In February 1995, RCI entered into an employment agreement
with Jeffrey Rubin, its Executive Vice President and Secretary, which will
expire on December 31, 1997. This agreement has terms and conditions
substantially identical to those of Dr. Joel's employment agreement, except that
Mr. Rubin's annual salary is established at $125,000.
RCI COMPENSATION COMMITTEE
From the formation of RCI in February 1994 until the election of Sam D.
Schwartz and Joel W. Greenberg as directors in February 1995, RCI's Board of
Directors did not have a separate Compensation Committee. Accordingly, each of
the members of the Board of Directors (then comprised of Dr. Larry Joel, Dr.
Robert Cohen, Dr. Alan Cohen and Jeffrey Rubin) participated during that period
in deliberations regarding compensation that would be payable including, in the
case of Dr. Joel and Mr. Rubin, deliberations regarding their own compensation.
In April 1995, the RCI Board established a Compensation Committee consisting
solely of nonemployee directors, namely Mr. Schwartz and Robert Cohen. Upon Mr.
Schwartz's resignation from the RCI Board of Directors in November 1995 and
Melvyn Reznick's appointment as his replacement, Mr. Reznick also replaced Mr.
Schwartz on the RCI Compensation Committee. The Compensation Committee makes
recommendations concerning salaries, benefits and incentive compensation
(including grants under RCI's Stock Option Plan) for directors, officers,
employees and consultants of RCI.
RCI STOCK OPTION PLAN
In February 1994, RCI's Board of Directors and its stockholders adopted
RCI's 1994 Stock Option Plan (the "Plan"). The purpose of the Plan is to
attract key employees, officers and directors and to encourage their
continued employment and their increased stock ownership in RCI. The Board
of Directors believes that the granting of stock options under the Plan will
promote continuity of management, and will result in increased incentives for
those who are or may become responsible for managing RCI. The Plan provides
for the grant of options to purchase up to 2,500,000 shares of RCI common
stock, which is being increased to 2,750,000. If any options expire or
terminate without having been exercised in full, the unpurchased shares will
again be available for issuance under the Plan. The Plan is administered by
a committee of at least two directors (the "Administrators") of RCI who are
disinterested with the meaning of Rule 16b-3(c)(2)(i) under the Securities
Exchange Act of 1934, as amended. To be disinterested, a director may not
have received options under any of RCI's stock option plans, except pursuant
to a formula, during the prior one-year period. Currently, Robert Cohen and
Melvyn Reznick are the Administrators of the Plan. Options which qualify as
Incentive Stock Options ("ISO's") under the Internal Revenue Code of 1986, as
amended (the "Code"), and non-qualifying options ("NQSO's") may be issued
under the Plan. The Plan provides for a two-prong method for calculating the
number of options to be granted based upon a formula and upon the discretion
of the Administrators. Formula grants of options to purchase that number of
shares of RCI common stock having a fair market value of $25,000 are made to
each of the Administrators once each calendar year following RCI's Annual
Meeting of Stockholders. The formula provisions of the Plan may be amended
not more than once every six months other than to comport with changes in IRS
and ERISA rules and regulations.
The purchase price of RCI common stock subject to each option issued under
the Plan will be determined by the Administrators, but in the case of an ISO (or
NQSO issued pursuant to a formula grant under the Plan) may not be less than (i)
the fair market value of the RCI common stock subject to the option on the date
of grant or (ii) in the case of an option granted to an employee who, at the
time the option is granted, owns (within the meaning of the Code) more than 10%
of the total combined voting power of all classes of stock of RCI, 110% of the
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<PAGE>
fair market value of the RCI common stock subject to the option on the date of
grant. Options under the Plan may be exercised in a manner and at such times
fixed by the Board of Directors, but may not be exercised for a term of more
than 10 years, or for a term of five years in the case of an employee who, at
the time an ISO is granted, owns (within the meaning of the Code) more than 10%
of the total combined voting power of all classes of stock of RCI. In no event
may ISO's which are exercisable for stock having an aggregate fair market value
of more than $100,000 (together with all ISO's granted under any other Plan) be
granted which first become exercisable in any one calendar year. Options are
not transferable except by will or intestacy on the death of the optionee. In
general, options granted under the Plan terminate when an optionee ceases to be
employed by RCI or within a specified period after the termination of employment
depending upon the reason for such termination. The Plan terminates and no
further options can be granted on February 16, 2004. During the fiscal year
ended March 31, 1995, no options were granted under the Plan. During the fiscal
year ended March 31, 1996, options were granted in respect of an aggregate of
1,142,000 shares of RCI common stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the
Delaware General Corporation Law (the "Delaware Law"), RCI's Certificate of
Incorporation includes a provision that eliminates, to the maximum extent
permitted by the Delaware Law, any director's personal liability to RCI or its
stockholders for monetary damages in respect of any breach by such director of
his fiduciary duty. The Delaware Law does not permit a director's personal
liability to be eliminated (i) for any breach of a director's duty of loyalty to
RCI or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions, as provided
in Section 174 of the Delaware Law, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, as permitted by
Section 145 of the Delaware Law, the By-Laws of RCI provide that RCI shall
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware Law, including those circumstances in which indemnification
would otherwise be discretionary, subject to certain exceptions. The By-Laws
also provide that RCI will advance expenses to directors and executive officers
incurred in connection with an action or proceeding as to which they may be
entitled to indemnification, subject to certain exceptions. RCI currently
carries director and officer liability insurance.
RCI has entered or will enter into indemnity agreements with each of its
directors and executive officers that provide the maximum indemnity allowed to
directors and executive officers by the Delaware Law and RCI's By-Laws, subject
to certain exceptions, as well as certain additional procedural protection. In
addition, the indemnity agreements provide generally that RCI will advance
expenses incurred by directors and executive officers in any action or
proceeding as to which they may be entitled to indemnification, subject to
certain exceptions.
RCI currently carries director and officer liability insurance.
PRINCIPAL STOCKHOLDERS OF RCI. The table below sets forth, as of
November 1, 1996, the number of shares of common stock beneficially owned
(which includes the number of warrants to purchase common stock) by (i) each
of the RCI directors and executive officers, (ii) each person known by RCI to
be the beneficial owner of five percent or more of its outstanding shares of
common stock and (iii) all directors and executive officers of RCI as a
group. Unless otherwise indicated, RCI believes that the beneficial owner
has sole voting power over such shares.
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<PAGE>
NAME AND ADDRESS OF BENEFICIAL NUMBER OF SHARES PERCENTAGE
OWNER(1) BENEFICIALLY OF SHARES
OWNED(2) OWNED(3)
- ----------------------------------------------------------------------------
Larry Joel(4) 3,266,667 16.1%
Jeffrey Rubin(5) 1,088,889 5.4%
Alan Cohen(6)(7) 1,088,889 5.4%
Robert Cohen(7) 1,088,889 5.4%
Melvyn Reznick(8) 10,200,000 50.4%
Incomnet, Inc.(9) 10,200,000 50.4%
Steve C. Luetke(10) 0 0.0%
Omar Buazza (10) 0 0.0%
Henry M. Dachowitz(10) 0 0.0%
Shawn H. Zimberg(10) 0 0.0%
Laura Huberfeld(11) 1,633,334 8.1%
Naomi Bodner(12) 1,633,334 8.1%
All directors and executive officers
as a group (10 persons) 16,733,332 82.6%
- ------------------------------
(1) The address for each named individual or entity is in care of Rapid Cast,
Inc., 1500 Hempstead Turnpike, East Meadow, New York 11554, except that (i)
Incomnet, Inc. and Melvyn Reznick have an address at Incomnet, Inc., 21031
Ventura Boulevard, Suite 1100, Woodland Hills, California 91364, and (ii)
Laura Huberfeld and Naomi Bodner have an address at 152 West 57th Street,
New York, New York 10019.
(2) Unless otherwise indicated, RCI believes that all persons and entities
named in the table have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them, except to the extent
authority is shared by spouses under applicable law. A person is deemed to
be the beneficial owner of securities that can be acquired by such person
within 60 days from the date of this Prospectus upon the exercise of
options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants or
convertible securities that are held by such person (but not those held by
any other person) and which are exercisable within 60 days of the date of
this Prospectus have been exercised and converted. The table does not
include any shares issuable (a) upon the exercise of RCI warrants issued on
February 8, 1995 in connection with the Company's issuance of 8%
convertible notes to finance the acquisition of a controlling interest in
RCI, or (b) upon the exercise of options granted under the 1994 RCI Stock
Option Plan, or (c) upon the conversion of 8% convertible notes issued by
RCI in January 1996 to RCI stockholders who made loans to RCI at that time,
or (d) upon the exercise of warrants issued to RCI stockholders who
participated in the loans to RCI during the period from April 1996 to
August 1996. See "THE COMPANY - Loans to RCI" and "THE COMPANY - Warrants
Issued by RCI."
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<PAGE>
(3) Assumes a total of 20,250,000 shares outstanding, not including any
stock options granted under the RCI 1994 Stock Option Plan, and not
including 1,000,000 shares which may be acquired pursuant to the
exercise of 1,000,000 outstanding warrants to purchase RCI common
stock at a price equal to 50% of the average of the last reported
sales price during the first 30 business days after the date RCI's
common stock first becomes publicly traded. See "THE COMPANY - RCI
Option Grants During the Fiscal Year Ended March 31, 1996" and "Item
1. Business - Acquisition of Rapid Cast, Inc. - Financing" in the
Company's 1995 Form 10-K. The total shares outstanding also do not
include any shares issuable upon the conversion of 8% convertible
notes issued by the Company in January 1996, or upon the exercise of
warrants issued by RCI in April, May, July and August 1996 in
connection with loans made to RCI by is shareholders during that
period. See "THE COMPANY - Loans to RCI."
(4) Dr. Joel has indicated that he may sell a portion of his shares if he
resigns as an officer and director of RCI. See "THE COMPANY -
Directors and Officers of RCI."
(5) Includes 290,370 shares of RCI common stock beneficially owned by a
trust the sole beneficiary of which is Mr. Rubin's wife, Stephanie
Cohen Rubin, as to which shares Mr. Rubin disclaims all beneficial
interest.
(6) Includes 435,555 shares of RCI common stock beneficially owned by each
of Alan Cohen's two minor children, Jacqueline Cohen and Gabrielle
Cohen, as to which shares Mr. Cohen disclaims all beneficial interest.
Does not include 70,000 shares of RCI Common Stock issuable upon the
exercise of RCI warrants issued on February 8, 1995.
(7) Does not include 60,000 shares owned by Broadway Partners, a
partnership comprised of the children of Alan Cohen and Robert Cohen,
as to which Robert Cohen disclaims all beneficial interest. Does not
include 70,000 shares of RCI Common Stock issuable upon the exercise
of RCI warrants issued on February 8, 1995.
(8) Consists of shares of RCI common stock beneficially owned by Incomnet
by virtue of Mr. Reznick's position as the President and Chief
Executive Officer of Incomnet. Does not include shares issuable upon
the conversion of 8% promissory notes issued by RCI in January 1996 or
warrants to purchase RCI common stock issued by RCI in April, May,
June and August 1996.
(9) Incomnet acquired 10,200,000 shares of RCI common stock as part of a
private placement of securities which was consummated in February
1995. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the
Company's 1995 Form 10-K. Does not include shares issuable upon the
conversion of 8% promissory notes issued by RCI in January 1996 or
warrants to purchase RCI common stock issued by RCI in April, May,
July and August 1996.
(10) Does not include 200,000 shares of RCI common stock issuable upon the
exercise of stock options granted under the RCI 1994 Stock Option
Plan.
(11) Includes 544,444 shares of RCI common stock beneficially owned by
each of Laura Huberfeld's two minor children, Jessica Huberfeld and
Rachel Huberfeld, as to which shares Mrs. Huberfeld disclaims all
beneficial interest. Laura Huberfeld is the wife of Murray Huberfeld,
a principal of Broad Capital Associates, Inc.
(12) Includes 163,333 shares of RCI common stock beneficially owned by
each of Naomi Bodner's eight minor children, Moshe Bodner, Aaron
Bodner, Elizar Bodner, Tzypporah Bodner, Mordechi Bodner, Yaakov
Bodner, Rachel Bodner, and Yissochar Bodner, as to which shares Mrs.
Bodner disclaims all beneficial interest. Naomi Bodner is the wife of
David Bodner, a principal of Broad Capital Associates, Inc.
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<PAGE>
SECURITIES OF RCI
RCI is authorized to issue 30,000,000 shares of common stock, par value
$.001 per share. As of November 1, 1996, 20,250,000 shares of RCI common
stock are issued and outstanding, warrants to purchase 1,853,683 shares of
RCI common stock are issued and outstanding pursuant to the issuance of
short-term notes by RCI in April, May, July and August 1996, convertible
notes convertible into 810,000 shares of RCI common stock are issued and
outstanding, and options to purchase 2,192,000 shares of common stock are
issued and outstanding. All issued and outstanding shares of common stock
are fully paid and nonassessable. Holders of shares of common stock, as such,
have no conversion, preemptive or other subscription rights. There are no
redemption provisions applicable to the common stock. The holders of common
stock are entitled to receive dividends when, as if declared by the Board of
Directors out of funds legally available therefor, subject to the prior
rights of holders of preferred stock, if any. In the event of liquidation,
dissolution or winding up of RCI, the holders of common stock are entitled to
share ratably in all assets remaining available for distribution to them
after payment of liabilities and after provision has been made for each class
of stock (if any) having preference over the common stock. The holders of
common stock are entitled to one vote for each share held of record on all
matters to be voted on by the stockholders. There is no cumulative voting
with respect to the election of directors, with the result that the holders
of more than 50% of the shares of common stock voting for the election of
directors can elect all of the directors then being elected.
RCI has outstanding warrants to purchase 1,000,000 shares of common stock
issued on February 8, 1995 (the "RCI Warrants"). The RCI Warrants are
exercisable to purchase shares of common stock commencing on the 35th business
day after any date before December 31, 1998 (the "Start Date") on which
securities of RCI are first traded publicly. The exercise price of the RCI
Warrants will be equal to 50% of the average of the last reported sales price on
the first 30 business days after the Start Date. The RCI Warrants will expire
180 days after the date, if any, on which they first become exercisable. See
"Item 1. Business - Financing of Acquisition of RCI" in the Company's 1995 Form
10-K. RCI has outstanding warrants to purchase an additional 1,853,683 shares
of common stock issued in April, May and July 1996 ("RCI Additional Warrants").
The RCI Additional Warrants confer on the holders the right to purchase a total
of 1,853,683 shares of RCI common stock at any time for a period of seven years
at a price of $2.25 per share. In August 1996, the shareholders loaned an
additional $1,000,000 to RCI to finance its operations. In consideration for
the additional $1,000,000 short-term loans to RCI, RCI issued 15,000 warrants to
purchase 15,000 additional shares of RCI common stock at any time for a period
of seven years at an exercise price of $4.00 per share. See "THE COMPANY -
Loans to RCI."
CERTAIN RCI TRANSACTIONS
RCI leases office space in two locations from companies owned by certain of
its stockholders. See "Item 1. Business - Rapid Cast, Inc. - Facilities" in the
Company's 1995 Form 10-K. Cohen's Fashion Optical, Sterling Vision and Vision
Centers of America are affiliates of certain of RCI's directors and executive
officers. See "THE COMPANY - Directors and Executive Officers of RCI." Retail
optical stores that are owned by those companies have purchased 37 LenSystems
and $229,116 of Rapid Cast Liquid Monomer and other ancillary supplies. RCI
anticipates that retail optical stores that are operated by or are franchisees
of those companies may seek to purchase or lease an undeterminable number of
additional LenSystems and Rapid Cast Liquid Monomer from RCI. None of such
companies or their
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<PAGE>
respective franchisees have made any commitments or executed any contracts to
purchase the LenSystem, and there can be no assurance that any additional sales
will be agreed upon or consummated. RCI will make the LenSystem available to
such users upon terms and conditions comparable to all other purchasers with
orders of similar size and nature.
The founding stockholders of RCI (not including Incomnet) own 9,800,000
shares of RCI common stock and acquired these shares at a purchase price of
approximately $.03 per share. The RCI founding stockholders and their
affiliates had, as of September 10, 1996, loaned approximately $1,463,334 to
RCI, not including loans made to RCI pursuant to rights offerings in January,
April, May, July and August, 1996. See "THE COMPANY - Loans to RCI." The loan,
together with any additional loans which are thereafter made by them (other than
the loans made in January, April, May, July and August 1996 in consideration for
convertible notes or warrants to purchase RCI common stock), are due and payable
on July 31, 1996, together with interest at 7% per annum, subject to the
following restrictions: 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 furnish or guaranty equivalent lines of credit.
In connection with a private placement of RCI units by Incomnet (each unit
consisting of one 8% convertible promissory note in the principal amount of
$1,000,000 and one RCI Warrant to purchase 100,000 shares of RCI common stock)
in February 1995, affiliates of Broad Capital Associates, Inc. purchased 3-1/3
units. In addition, Larry Joel and Robert and Alan Cohen and certain of their
affiliates purchased 2-1/2 units. Sam D. Schwartz, the former President and
Chairman of the Board of Incomnet, purchased 0.9 units. These purchasers waived
interest accrual on the notes included in their units. In connection with this
private placement, Incomnet also issued to the RCI founding stockholders 750,000
shares of Incomnet's Common Stock.
Incomnet originally agreed to issue to the RCI founding stockholders a
maximum of 750,000 additional shares of Incomnet's Common Stock depending on
RCI's pre-tax earnings during the first fiscal year after RCI's February 1995
acquisition of Q2100. On June 16, 1995, Incomnet agreed to issue 600,000
additional shares of its Common Stock to the RCI founding stockholders without
registration rights in exchange for their relinquishment of their rights to be
issued any of the 750,000 shares. See "Item 1. Business - Acquisition of Rapid
Cast, Inc. - Certain Transactions" in the Company's 1995 Form 10-K.
In January 1996 RCI raised $648,000 in additional capital pursuant to an
offering of convertible notes to its existing shareholders and an executive.
Incomnet, Inc. loaned $326,400 to RCI in January 1996 as its pro rata share of
the loan pursuant to which the Company has the right to convert the note into
408,000 shares of RCI common stock. In April, May, July and August 1996, RCI
raised and is in the process of raising $2,838,683 in additional capital
pursuant to the issuance of short-term notes and seven year warrants. Incomnet,
Inc. has loaned $1,607,996 to RCI as its pro rata share of the April, May, July
and August loans to RCI.
See "THE COMPANY - Directors and Officers of RCI" for information on
certain directors and officers of RCI who are also affiliated with potential
users of the LenSystem. SEE "Item 1. Business - Rapid Cast, Inc. - Development
of Technology" in the Company's 1995 Form 10-K for information on the
involvement of Dr. Larry Joel in the development of the Technology and in the
sale of the Technology to Pearle. See "THE COMPANY - Directors and Officers of
RCI" for information on the current employment of Dr. Joel as President of
Q2100.
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<PAGE>
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and thus subject to Section 203 of
the Delaware General Corporation Law ("Section 203"), which is generally viewed
as an anti-takeover statute. In general, Section 203 prohibits a Delaware
corporation from engaging in any "business combination" (as defined) with any
"interested stockholder" (as defined) for a period of three years following the
date that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
stockholders, and not by written consent, by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
In general, Section 203 defines a "business combination" to include: (i)
any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation; (iii)
(subject to certain exceptions) any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as (a) any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation or (b) any entity or person affiliated with or controlling or
controlled by such entity or person.
The existence of Section 203 would be expected to have the effect of
discouraging takeover attempts involving RCI, including attempts that might
result in a premium over the market price of RCI's common stock (if it is then
publicly traded).
USE OF PROCEEDS
The Company will not receive any net proceeds from the sale of the
Outstanding Shares or the Underlying Shares, if and when issued. The Company
has received net proceeds of $1,990,000 from the issuance of the Series A
Preferred covered by this Prospectus. The net proceeds received from the
sale of the Series A Preferred has been used by the Company to retire
indebtedness owed to the Company's Chief Executive Officer, to make loans to
Rapid Cast, Inc., and for general working capital purposes. See "DESCRIPTION
OF CAPITAL STOCK."
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is quoted on the NASDAQ Small Capital Market
System under the symbol "ICNT." The following table sets forth, for the
calendar quarters indicated, the actual high and low sale prices of the
Company's Common Stock as reported on the NASDAQ/Small Capital Market commencing
for the first quarter of 1994. The approximate number of record holders of
Common Stock on November 1, 1996 was 789.
HIGH LOW LAST SALE
---- --- ---------
1994
First Quarter 7.25 6.00 6.75
Second Quarter 11.12 6.37 9.75
Third Quarter 12.50 8.00 11.37
Fourth Quarter 14.62 9.94 13.25
1995
First Quarter 16.25 12.25 14.25
Second Quarter 15.87 11.25 15.25
Third Quarter 23.50 15.25 22.25
Fourth Quarter 11.25 2.50 4.56
1996
First Quarter 6.20 4.25 5.12
Second Quarter 6.25 4.37 4.75
Third Quarter 5.31 4.50 4.75
Fourth Quarter(a) 4.75 3.00 3.00
- ---------------------------
(a) Through November 20, 1996.
A recent closing sale price for the Common Stock as reported in
published financial sources is set forth on the cover page of this Prospectus.
There is no public trading market for the Warrants nor is one expected to
develop. The Company intends to retain future earnings for use in its business
and does not anticipate paying any dividends on shares of its Common Stock in
the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company at September 30, 1996 and the capitalization of the Company
reflecting (i) the net proceeds from the issuance of 467,385 Underlying
Shares pursuant to the conversion of 2,075 outstanding shares the Series A
Preferred, and (ii) the issuance of 88,500 additional underlying shares which
are not covered by this Prospectus, but which are issuable upon the conversion
of the other 365 outstanding shares of Series A Preferred covered by the
prior registration statement declared effective on October 31, 1996, 300 of
which are reflected as issued and outstanding on September 30, 1996.
September 30, 1996
------------------
Actual As Adjusted
------ -----------
Long-Term Debt:(1) $ 8,708,181 $ 8,708,181
Minority Interest $ 4,998,099 $ 4,998,099
Stockholders' Equity (Deficiency)
Preferred Stock, no par value; 100,000 shares
authorized, 300 shares issued and outstanding 300,000 2,055,000
(2,440 as adjusted)
Common Stock, no par value; 20,000,000 shares $61,019,979 $61,019,979
authorized, 13,294,434 shares issued and
outstanding (13,871,169 as adjusted)(2)
Retained earnings (accumulated deficit) (21,413,166) (21,413,166)
Treasury Stock (5,491,845) (5,491,845)
----------- -----------
Total stockholders' equity (deficiency) 34,414,968 36,169,968
------------ ------------
Total capitalization $69,564,043 $71,319,043
------------ -----------
------------ -----------
- -----------------------------
(1) Excludes current portion of long-term debt. See the Company's Balance Sheet
in its Form 10-Q for the fiscal quarter ended September 30, 1996, which is
incorporated in this Prospectus by reference. The long term debt includes
$8,055,562 of net deferred tax liability arising from the nondeductibility
of the RCI patent rights, which will be eliminated in accordance with
Statement of Financial Accounting Standards No. 109, as the underlying
patent rights are amortized to expense.
(2) Assumes a total of 467,385 Underlying Shares of the Company's
Common Stock is issued pursuant to the conversion of 2,075 shares of the
outstanding Series A Preferred (not including payment of the 2% cumulative
dividend in Common Stock), and assumes 88,500 shares of additional
underlying shares not covered by this Prospectus are issued pursuant to
the conversion of 365 other outstanding shares of Series A Preferred
which were issued by the Company in September and October 1996. The
adjusted shares of Common Stock assume that 2,075 shares of Series A
Preferred are converted into Common Stock at an average conversion price
of $4.44 per share, and that 365 shares of Series A Preferred are converted
into Common Stock at a conversion price of $4.125 per share. The
conversion price may be less, depending on the average bid price of the
Company's Common Stock prior to the conversion date. If the average
conversion price of the Series A Preferred is less than $4.44 and $4.125
per share, respectively, more dilution would be incurred by the existing
Common Stockholders. See "THE COMPANY -Issuance of Convertible Preferred
Stock" and "RISK FACTORS - Possible Adverse Effects of Issuance of
Preferred Stock."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information for the Company
presented under the captions "Statement of Operations Data" and "Balance
Sheet Data" for, and as of the end of, each of the years in the five-year
period ended December 31, 1995, and the nine months ended September 30, 1996,
is derived from the Company's Consolidated Financial Statements. The
Company's Consolidated Financial Statements as of December 31, 1993, 1994,
and 1995 and for each of the years in the three-year period ended December
31, 1995, and the report thereon, and as of September 30, 1996 and September
30, 1995 and for the nine months ended September 30, 1995 and September 30,
1996, have been incorporated in this Prospectus by reference. This selected
consolidated financial information should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto
included in the Company's 1995 Form 10-K and the Company's Form 10-Q for the
fiscal quarter ended September 30, 1996, incorporated herein by reference,
and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" in this Prospectus.
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<PAGE>
INCOMNET, INC.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $77,295,795 $62,123,548 $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071
Income (Loss) before
income taxes, extra-
ordinary items and
minority interest (11,202,321) 3,572,612 957,044 4,000,242 (1,606,844) (2,264,597) 397,631
Income (Loss)
before extra-
ordinary item and
minority interest (10,522,741) 3,286,492 856,543 3,999,187 (1,606,844) (2,461,697) 1,322
Minority Interest 781,273 182,641 509,482 - - - -
Net Income
(Loss) (9,262,761) 564,845 1,366,025 4,071,194 (948,769) (2,021,333) 1,322
Net Income (Loss)
per share before
extraordinary items (0.70) 0.04 0.11 0.42 (0.20) (0.34) 0
Net Income (Loss)
per share (0.70) 0.04 0.11 0.42 (0.12) (0.28) 0
Cash dividends per
common share 0 0 0 0 0 0 0
Weighted average
number of shares 13,244,674 13,566,743 12,706,401 9,593,207 8,183,877 7,189,671 6,936,316
BALANCE SHEET DATA:
At September 30 At December 31
--------------- ------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total assets $69,564,043 $74,105,629 $26,158,346 $8,665,839 $6,744,944 $2,174,428
Long-term obligations(1) 8,708,181 8,459,772 900 20,000 176,000 83,334
</TABLE>
- ----------------------------------
(1) The long term obligations include $8,055,562 at September 30, 1996 and
$8,449,050 at December 31, 1995 of net deferred tax liability arising from
the nondeductibility of the RCI patent rights, which will be eliminated in
accordance with Statement of Financial Accounting Standards No. 109, as the
underlying patent rights are amortized to expense.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
GENERAL
Gross revenues from NTC's operations have been increasing steadily since
the Company acquired a controlling interest and commenced advancing working
capital to NTC in early 1992. Upon acquiring control of NTC, the Company
implemented a new marketing plan for NTC pursuant to which compensation payments
to the independent marketing representatives were calculated and paid on a more
timely basis. 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 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 a
minimum number of new telephone customers, typically 10, 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. The new telecommunications revenue generally lags the marketing program
revenues by one to six weeks. When the marketing program revenues increase, an
increase in NTC's telecommunications-related revenues is expected to follow.
As part of NTC's new management program, the billing system was enhanced to
allow for multiple billing cycles each month. An arrangement has also been made
to use local exchange carriers with the goal of reducing billing costs,
improving collections and terminating telephone service more rapidly when
invoices are in arrears. See "RISK FACTORS - Risk of Billing Through Local
Exchange Carriers." NTC believes that the pre-paid calling card products now
offered by it significantly reduce losses due to uncollectible accounts
receivable.
NTC's long distance telephone services and marketing programs subject the
Company to the regulatory control of the Federal Communications Commission 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 and protection offices. From time-to-time in the
normal course of business, NTC receives inquiries, requests and demands from
such agencies for information and action. Management does not believe any such
inquiries, requests 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.
The Company's current emphasis with respect to NTC is to continue to ensure
that (i) processing capacity is maintained and increased to handle growing
sales, (ii) the independent marketing force continues to expand, resulting in a
growing base of telephone customers, and (iii) the business is operated
efficiently with reliable reporting. While the improved computer processing
system is expected to reduce operating expenses as a percentage of gross
revenues due in part to increased speed and decreased errors, on-going costs in
1996 for expansion of NTC's infrastructure and more emphasis on local exchange
carrier billing may result in expenses in 1996 which are comparable to or higher
than expenses in 1995 and 1994, as a percentage of gross revenues, depending
upon the rate of NTC's growth.
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<PAGE>
In addition to the focus on NTC, the Company anticipates that it will
receive more revenues and potential profits in the future from its acquisition
of Rapid Cast, Inc. on February 8, 1995. See "Item 1. Business - Acquisition of
Rapid Cast, Inc." and "Item 1. Business - Rapid Cast, Inc." in the Company's
1995 Form 10-K. The Company continues to seek more business for AutoNETWORK,
its interactive computer network and electronic bulletin board system. Although
no specific plans have been made, the Company may seek to make an acquisition of
a computer network or long distance telephone-related business in the future.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
SALES - Third quarter, 1996 sales of $27,591,284 increased 22% over the
third quarter, 1995 sales of $22,660,377. The majority of this increase was
attributable to NTC's sales increase to $25,790,559 from $21,381,603 in the
three months ending September 30, 1996 verses 1995, respectively. The
following table summarizes the Company's sales performance by subsidiary and
segment during the comparable third quarters in 1996 and 1995:
$ In Millions
----------------
Subsidiary Segment 1996 1995
- -------------- --------------------------------------- ------ ------
NTC Telephone (telecommunications services) $21.1 $17.5
NTC Telephone (marketing programs) 4.7 3.9
RCI Optical 1.4 0.9
AutoNETWORK Network 0.4 0.4
------- -------
Total Company Sales $ 27.6 $ 22.7
------- -------
------- -------
COST OF SALES - Total Company cost of sales increased to $17,777,193 or
64% of sales during the quarter ending September 30, 1996 verses $15,733,118
or 69% of sales during the comparable prior year quarter. The
quarter-to-quarter increase in cost of sales resulted largely from two
factors. The first factor in the increasing cost of sales was the increase in
carrier costs associated with increased telephone service sales by NTC. A
second factor was a rapid rise in RCI costs of sales. The improvement in
costs as a percent of sales was largely generated by improvements in NTC's
telecommunication service gross profits resulting from: 1) lower
long-distance transport costs from NTC's carriers and, 2) continuing
improvements in the mix of sales in the higher profit product lines.
The following table summarizes the Company's changes in three major cost
components for the third quarter:
$ in millions
-------------
1996 1995
------ ------
Commissions paid to NTC independent sales reps $ 5.0 $ 4.4
Carrier costs for NTC's long distance telephone service 11.0 10.3
All other costs of sales 1.8 1.0
------- -------
Total Company Cost of Sales $ 17.8 $ 15.7
------- -------
------- -------
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<PAGE>
NTC's total commission expense increased to $4,994,396 in the third
quarter of 1996 compared to $4,381,233 in the same quarter of 1995. NTC's
carrier costs to deliver long distance telephone service to its telephone
customers increased to $10,993,771 in the third quarter of 1996 compared to
$10,331,142 in the third quarter of 1995. This increase in carrier costs
reflects the year-to-year growth in telephone sales, although these costs
have grown at a slower pace than sales, thus reflecting improvements in
overall telephone gross profits.
The third cost component shown in the table above is "all other costs of
sales" which represents: (1) NTC's costs of producing sales materials for its
independent sales representatives, (2) RCI's costs of producing optical
systems and ancillary goods, and (3) AutoNETWORK costs of providing
communications network products and services.
GENERAL & ADMINISTRATIVE - Total general and administrative costs
increased to $8,253,785 or 30% of sales in the quarter ending September 30,
1996 compared to $4,953,698 or 22% of sales in the same prior year quarter.
General and administrative costs generally include the costs of employee
salaries, fringe benefits, supplies, and related support costs which are
required in order to provide such operating functions as customer service,
billing, marketing, product development, information systems, collections of
accounts receivable, and accounting.
NTC's general and administrative costs increased to 25% of sales in the
third quarter of 1996 from 19% of sales in the third quarter of 1995. This
increase was caused largely by: (1) increases in fees paid to local exchange
carriers (LEC's) to process NTC's billing and collection of its LEC-billed
long distance telephone service, and (2) increases in compensation and fringe
benefits expended as NTC continues to build infrastructure to support
anticipated future sales growth. RCI's general & administrative costs
increased to 92% of sales in the third quarter of 1996 from 76% of sales in
the third quarter of 1995, thus continuing to reflect the startup nature of
its operations.
DEPRECIATION & AMORTIZATION - Total Company depreciation and
amortization expense was $501,787 in the third quarter of 1996 verses
$475,023 in the third quarter of 1995. This increase was caused by continuing
investment by NTC in computer hardware and software, furniture and equipment,
and leasehold improvements required to support its anticipated expansion in
sales.
BAD DEBT EXPENSE- Total Company bad debt expense increased to
$1,291,763 in the third quarter of 1996 compared to $636,166 in the same
prior year quarter. The quarter-to-quarter increase in bad debt was caused
primarily by increased provisioning of NTC's LEC billed receivables.
OTHER INCOME & EXPENSE - The Company's other income and expense
deteriorated to net other expense of $10,051,243 in the third quarter of 1996
verses net other expense of $11,793 during the comparable prior year quarter.
This $10,039,450 net deterioration was primarily caused by: (1) an $8,000,000
reserve to devalue the Company's investment in RCI, and (2) a $2,000,000
reserve at the company's headquarters for settlement costs associated with
claims by officers.
ACQUISITION COSTS & EXPENSES - Acquisition costs increased to $645,572
during the third quarter of 1996 compared to $390,967 during the third
quarter of 1995. This increase was primarily
48
<PAGE>
caused by a reclassification of RCI's patent amortization which is
categorized in 1996 as an acquisition cost and was categorized in 1995 as
amortization from operations. If the 1995 third quarter acquisition costs and
expenses were restated to include RCI's patent amortization, the restated
total Company acquisition costs and expenses would equal $593,721, thus
reflecting a $51,851 increase in 1996 third quarter acquisition costs and
expenses verses prior year. This increase was caused by higher costs of
monthly patent amortization by RCI in 1996 than in 1995.
MINORITY INTEREST - Beginning on July 1, 1995, the Company converted
from the equity method to the consolidated method of accounting for its
approximately 51% ownership in RCI. As a result, 49% (the "minority
interest") of RCI's losses during the three months ending September 30, 1995
and during the three months and nine months ending September 30, 1996 has
been eliminated from the Company's "Consolidated Statements of Operations"
for 1996 and 1995. The increase in the minority interest elimination from
$182,641 to $781,273 during the third quarters of 1995 verses 1996,
respectively, reflects the same year-to-year percentage (49%) of RCI's
increase in losses.
NET INCOME - Total Company net income declined to a loss of $9,262,761
or 33.6% of sales in the third quarter of 1996 as compared to net income of
$564,845 or 2.5% of sales in the same quarter of 1995. The quarter-to-quarter
decline in net income resulted from: (1) higher losses from RCI in 1996
caused by significantly increased operating costs incurred to build
infrastructure for future potential sales growth, and (2) higher losses at
the Company's headquarters which were caused by the establishment of reserves
for devaluation of the Company's investment in RCI and the establishment of
reserves for settlement costs.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES. Total 1995 sales increased by 85% from $46.8 million in 1994 to
$86.6 million in 1995. The majority of this increase was attributable to NTC's
sales increase from $45.6 million in 1994 to $83.1 million in 1995. The
following table summarizes the Company's year-to-year sales performance by
subsidiary and segment:
SUBSIDIARY SEGMENT DOLLARS IN MILLIONS
1995 1994
---- ----
NTC Telephone (telecommunications services) $70.0 $34.2
NTC Telephone (marketing programs) 13.1 11.4
RCI Optical 2.0 ----
AutoNETWORK Network 1.5 1.2
----- ----
Total Company Sales $ 86.6 $ 46.8
------- -------
------- -------
NTC's sales increase was driven largely by continued expansion of the
customer base for its telecommunications services. As a result of this
continuing expansion, NTC's telecommunication service revenues represented 84%
of NTC's total 1995 revenues with the remaining 16% generated by sales of NTC's
marketing programs. This 1995 revenue mix compares to NTC's 1994 mix of 75%
from telecommunication services and 25% from marketing programs.
The consolidation of RCI in the third and fourth quarters of 1995 added
$2.0 million of optical product sales to the total year results.
COST OF SALES. Total Company cost of sales, which tends to vary directly
with sales, increased from $31.2 million or 67% of sales in 1994 to $57.9
million or 67% sales in 1995. The following table summarizes the Company's
year-to-year changes in two major cost components:
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DOLLARS IN MILLIONS
1995 1994
------- ------
Commissions paid to NTC independent sales representatives $ 14.2 $ 7.7
All other costs of sales 43.7 23.5
------- ------
Total Company Cost of Sales $ 57.9 $ 31.2
------- -------
------- -------
NTC's total commission expense increased from $7.7 million in 1994 to $14.2
million in 1995. The most significant single factor in this year-to-year change
was an annual increase of $3.0 million in residual monthly sales commissions
paid to independent sales representatives on NTC's expanding telecommunication
service revenues. The remainder of the year-to-year change was caused by
increases in various bonuses and overrides paid to sales representatives who
signed up new telephone service customers for NTC.
The second cost component shown in the table above is "all other costs of
sales" which represents (1) NTC's long distance carrier costs, (2) NTC's costs
of producing sales materials for its independent sales representatives, (3)
RCI's costs of producing optical systems and ancillary goods, and (4)
AutoNETWORK's costs of providing communications network products and services.
GENERAL AND ADMINISTRATIVE. Total general and administrative costs
increased from $9.4 million or 20% of sales in 1994 to $19.8 million or 23% of
sales in 1995. General and administrative costs generally include the costs of
employee salaries, fringe benefits, supplies, and related support costs which
are required in order to provide such operating functions as customer service,
billing, marketing, product development, information systems, collections of
accounts receivable, and accounting.
NTC's general and administrative costs increased during 1995 in order to:
(1) support its continuing sales growth in 1995 and, (2) build stronger
infrastructure to accommodate still greater sales growth and improved cost
efficiencies in the future. RCI incurred substantial general and administrative
costs in 1995 relating to its startup of operations.
DEPRECIATION AND AMORTIZATION. Total Company depreciation and amortization
expense increased from $0.4 million in 1994 to $1.0 million in 1995. This
increase was caused by greater investment by NTC in computer hardware and
software, furniture and equipment, and leasehold improvements required to
support its rapid expansion in sales.
BAD DEBT EXPENSE. Total Company bad debt expense increased from $1.8
million or 3.8% of sales in 1994 to $4.1 million or 4.8% of sales in 1995. The
year-to-year increase in bad debt was caused primarily by increased provisioning
of NTC's Dial-1 receivables and secondarily by the Company's establishment of a
bad debt reserve for a potentially uncollectible note receivable from a Company
shareholder.
OTHER INCOME AND EXPENSE. The Company's net income and expense declined
from net other income of $0.3 million in 1994 to net other expense of $1.0
million in 1995. This $1.3 million net decline was primarily caused by: (1) a
$382,500 settlement with convertible noteholders relating to the acquisition of
RCI, (2) a $244,010 settlement with a former Company officer, and (3) a $337,500
write-off of marketable securities by NTC.
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ACQUISITION COSTS AND EXPENSES. Acquisition costs increased from $0.3
million in 1994 to $1.7 million in 1995. This increase in costs was caused
almost entirely by the acquisition of RCI and includes (1) $1,228,206 of
amortization expense relating to the acquisition of RCI patent rights, (2)
$118,743 of interest expense on notes used to finance the RCI acquisition and
related legal costs, and (3) $107,841 of equity in RCI's losses from February
1995 (date of acquisition) through June, 1995 (the period during which the
Company's 51% ownership of RCI was recorded under the equity method of
accounting).
MINORITY INTEREST. Beginning on July 1, 1995, the Company converted from
the equity method to the consolidated method of accounting for its 51% ownership
in RCI. As a result, 49% of RCI's losses from July 1, 1995 through December 31,
1995 (the "minority interest") were eliminated from the Company's "Consolidated
Statements of Operations" for 1995.
NET INCOME. Total Company net income declined from $4.1 million or 8.7% of
sales in 1994 to $1.4 million or 1.6% of sales in 1995. Although NTC's year-to-
year net income increased substantially, those increases were more than offset
by losses sustained from the Company's internal operations and from RCI's
operations.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993.
In 1994, total revenues were $46,815,057 as compared to $11,298,972 in
1993, an increase of $35,516,085 or 314%. Telecommunications-related revenues
(including revenue for the Company's AutoNETWORK business) increased to
$35,397,830 in 1994 from $7,022,716 in 1993, an increase of $28,375,114 or 404%,
while marketing-related revenues increased to $11,417,227 from $4,260,942 in
1993, an increase of $7,156,285 or 167%. The growth of the Company's
telecommunications-related revenues was associated with the increase in the base
of marketing representatives, which results in the signing of new telephone
customers. The growth of the Company's marketing-related revenues was due to a
marketing program involving the sale of marketing programs and materials to
independent sales representatives.
Operating costs from communication products and services, including
commissions to independent sales representatives, increased to $31,220,780 in
1994 from $9,521,803 in 1993, an increase of $21,626,970 or 227%. Expenses
associated with commissions, bonuses and overrides paid to NTC's independent
representatives for 1994 were $7,658,904 versus $2,339,517 in 1993, an increase
of $5,319,389 or 227%.
Other increases in expenses were primarily attributable to the increased
costs of communication services from NTC's primary carriers and in the increased
investment being made in NTC's customer service, marketing support services,
billing and other related operations.
Selling, general and administrative costs were $9,437,851 in 1994 versus
$2,643,583 in 1993, an increase of $6,794,268 or 257%. This increase is
attributable to substantial growth in NTC's telecommunications and marketing
revenues, which has necessitated substantial increases in the Company's selling,
general and administrative operations. The increase in these operations,
however, is lower as a percentage increase than the increase in revenues,
reflecting an improved economy of scale in the Company's operations.
Depreciation and amortization increased to $709,857 in 1994 from $514,598
in 1993, an increase of $195,259 or 38%. This increase is due to the increased
investment in capital goods required to conduct and expand operations.
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Bad debt expense increased to $1,788,772 in 1994 from $174,377 in 1993, an
increase of $1,614,395 or 925%. The increase in bad debt was due to the rapid
growth in telecommunications revenues in 1994 versus 1993, although the rate of
growth of bad debt from 1993 to 1994 reflects an over-reserve for bad debt in
1992 of $1,078,428, which was applied against bad debt in 1993. The actual rate
of growth of bad debt in 1994 was commensurate with the rate of growth in
telecommunications revenues from 1993 to 1994.
Other (income) expense changed from an expense of $51,455 in 1993 to income
of $342,445 in 1994, a gain of $393,900, or 765%. The increase is due to the
decreased need for the Company to borrow funds in 1994 versus 1993, along with
the increase in the Company's cash position, which has resulted in interest
gains on funds held in cash accounts.
The Company experienced net profit of $4,071,194 in 1994 versus a loss of
$948,769 in 1993, an increase of $5,019,963 or 529%. The Company's net profit
reflects the improved and profitable operations at NTC in 1994.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992.
Total revenues for 1993 were $11,298,972 as compared to $5,534,874 in 1992,
an increase of $5,764,098 or 104%. Communications products and services revenues
increased to $7,022,716 from $4,702,521 in 1992, an increase of $2,320,195 or
49%. Marketing services revenues increased to $4,260,942 from $732,372 in 1992,
an increase of $3,528,570 or 481%. The increase in communications services
revenues reflects the growth in NTC's base of telephone service users, while the
increase in marketing services revenues reflects the growing success of NTC in
attracting independent representatives to market its products. The Company had
an extraordinary gain in 1993 of $658,075, attributable to a settlement with
creditors.
Communications products and services operating costs increased to
$9,521,803 in 1993 from $3,387,922 in 1992, an increase of $6,138,109 or 181%.
This increase was primarily attributable to the increased costs of communication
services from NTC's primary carriers and in the increased investment being made
in NTC's customer service, marketing support services, billing and other related
operations.
Research and development costs decreased to $69,966 in 1993 from $91,212 in
1992, a decrease of $21,246. This decrease was due to cost controls placed on
expenditures and to the Company's focus on improving the operation of existing
products.
Selling, general and administrative costs were $2,643,583 in 1993 versus
$2,762,746 in 1992, a decrease of $258,297 or 10%. This decrease is attributable
to improved cost controls in NTC's marketing operations, whose revenues
increased from $732,372 to $4,260,942 with no appreciable increase in costs
associated with sales.
Depreciation and amortization increased to $514,598 in 1993 from $392,230
in 1992, an increase of $122,368 or 31%. This increase is due to the increased
investment in capital goods required to conduct and expand operations. Bad debt
expense decreased to $174,377 in 1993 from $1,078,428 in 1992, a decrease of
$904,051 or 83%. The decrease in bad debt was due to improved customer service
and billing operations, particularly the process of submitting call records to
Local Exchange Carriers for billing when customers do not pay their telephone
bills promptly.
Interest expense increased to $211,835 in 1993 from $31,989 in 1992, an
increase of $179,846 or 562%. The increase is due to the increased amount of
funds loaned to NTC in 1993.
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The Company experienced a loss of $1,606,844 before extraordinary items in
1993 versus a loss of $2,461,697 before extraordinary items in 1992, a decrease
of $854,853 or 34%. While the loss reflects that NTC's operations were not
profitable for the 1993 calendar year, the decrease of the loss reflects
improvement in NTC's operations.
LIQUIDITY AND CAPITAL RESOURCES
Overall, the Company achieved slightly negative cash flows of $28,347
during the first nine months of 1996 resulting from negative cash flows from
operations ($5,746,789), which were almost entirely offset by positive cash
flows from investing of $2,966,797 and from financing activities of $2,751,145.
The Company generated $5,746,789 in negative cash flow from operations
during the first nine months of 1996, compared to $3,732,269 in positive cash
flow from operations during the prior year's comparable period. This
year-to-year decrease in cash flow from operations resulted primarily from:
(1) a $12,166,902 decrease in profits adjusted for non-cash expenses, (2) a
$3,123,178 increase in cash generated from the collection of accounts
receivable, (3) a $140,352 increase in cash from increased use of accounts
payable, (4) a $457,122 decrease in cash from a reduction in accrued
expenses, (5) a $360,300 decrease in cash generated by increased investment
in inventory, primarily at the Company's Rapid Cast subsidiary, and (6) a
$710,900 increase in cash generated from decreased investment in notes
receivable due from officers and shareholders.
The Company generated positive cash flows from investing activities of
$2,966,797 in the first nine months of 1996 and $26,953,780 in the first nine
months of 1995. The 1996 positive cash flow resulted primarily from an
$8,000,000 devaluation of the Company's investment in RCI which was partially
offset by continuing investment by NTC in plant and equipment to support its
continuing growth in sales. The 1995 negative cash flow resulted primarily
from the Company's purchase of a 51% ownership in RCI on February 8, 1995.
Positive cash flows from financing activities totaled $2,751,645 during
the first nine months of 1996 and $17,556,822 during the first nine months of
1995. The 1996 positive cash flow resulted primarily from RCI entering into
various loan agreements to finance the building of infrastructure to support
its anticipated future sales growth. In September 1996, the Company also
raised $365,000 from the sale of 365 shares of 2% convertible preferred
stock, and raised an additional $2,075,000 in October 1996 through the
placement of additional shares of 2% convertible preferred stock. The Company
paid aggregate referral fees equal to approximately 5% of the capital raised
from the placement of the 2% convertible preferred stock. The 1995 positive
cash flow was generated by a $29,101,901 sale of common stock, which was
partially offset by an outflow of $4,776,638 from the Company's purchase of
treasury stock.
For the year ended December 31, 1995, the Company had a net profit of
$1,366,025 and, at that date, current assets exceeded current liabilities by
$1,440,515. Since the Company acquired a controlling interest in NTC in early
1992, the Company's capital needs have primarily been satisfied from outside
sources such as the private placement of securities, the exercise of warrants
and options, and loans and bank credit lines guaranteed by its principal
shareholders. Cash flow from operations did not provide net working capital to
the Company during the period from February 1992 to May 1994. While cash flow
from operations on a consolidated basis has generally been positive since June
1994, the increasing capital needs of RCI and legal costs are likely to require
the Company to raise additional capital from outside sources in the third
quarter of 1996.
The Company had net working capital of $1,440,515 at December 31, 1995, as
compared to net working capital of $8,798,793 at December 31, 1994. During
1995, net cash flow from operations was $1,378,839 compared to net cash flow
from operations of $3,083,887 in 1994.
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<PAGE>
During 1995, the Company's cash requirements were met through a combination
of a cash flow from operations, exercise of warrants to purchase the Company's
common stock and private placements of its Common Stock. In 1995, the Company
raised $29,058,773 in either private placements or from the exercise of
warrants. The Company anticipates that it will continue to attain cash flow
sufficient to meet the Company's cash requirements in 1996 through a combination
of operations, bank borrowings, private placements of its common stock and the
exercise of warrants to purchase the Company's Common Stock. On February 5,
1996, Melvyn Reznick, the President and a director of the Company, personally
guaranteed and arranged for a $500,000 bank line of credit for the Company,
which may be expanded to a range of $750,000 to $1,000,000 in the near future.
As of April 30, 1996, the line had been drawn upon to the extent of $515,000 to
fund loans to RCI pursuant to a rights offering made to RCI's stockholders. See
"THE COMPANY - Loans to RCI." The Company anticipates that during 1996 it and
RCI will need financing in addition to their respective cash flows to fund
operations and, in the case of RCI, to finance the growth of its business.
The Company had no material commitments for capital expenditures at
December 31, 1995, but does expect to continue expanding the NTC headquarters
building and purchasing additional equipment commensurate with the requirements
of its customer base. During 1995, the Company had capital expenditures of
$7,389,419 for plant and equipment.
Effective February 12, 1992, the Company entered into a Letter of Agreement
(the "Agreement") with NTC to ultimately acquire a controlling interest in NTC.
The Company loaned NTC $2,850,000 during 1992, collateralized by substantially
all the assets of NTC, from its available working capital resources. In 1993,
the Company loaned an additional $1,935,961 to NTC, bringing the total to
$4,785,961. In 1994, the Company loaned NTC an additional $308,879, bringing
the total to $5,094,810. All loans to NTC were converted into an additional
equity investment in NTC at the end of 1994. No further loans were made to NTC
during 1995.
In May 1992, as settlement with a creditor on a past due accounts payable
of approximately $725,000, the Company entered into a non-interest bearing
credit facility of approximately $432,000, resulting in a gain of approximately
$293,000 ($.04 per common share). The contract was payable in monthly
installments of $12,000 for the first twelve months and monthly installments of
$16,000 thereafter through November 1994. Maturities of the contract were
$84,000 in 1992, $172,000 in 1993 and $176,000 in 1994. This obligation was
paid in full in 1994
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $16,800,000, which are expected to
be available to offset taxable income in future years. The Company and its
subsidiaries are engaged in legal proceedings where the ultimate outcome cannot
presently be determined. This information is described at "Item 3. Legal
Proceedings" in the Company's 1995 Form 10-K.
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock as of November 14, 1996. Persons and
groups named in the table represent (i) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director of
the Company or its NTC subsidiary, (iii) each executive officer of the Company
or its NTC subsidiary, and (iv) all directors and executive officers of the
Company and its NTC subsidiary as a group.
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NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF SHARES OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK OUTSTANDING(9)
- ------------------- ----------------------- ---------------------------
Melvyn Reznick 230,300(2) 1.68%
21031 Ventura Boulevard
Suite 1100
Woodland Hills, CA 91364
Sam D. Schwartz 1,998,500(3) 14.58%
21031 Ventura Boulevard
Suite 1100
Woodland Hills, CA 91364
Nancy Zivitz 669,300(4) 4.88%
7234 Silverbell Drive
Sarasota, Florida 34241
Albert Milstein 48,000(5) 0.35%
21031 Ventura Boulevard
Suite 1100
Woodland Hills, CA 91364
Edward R. Jacobs 30,000 0.22%
2801 Main Street
Irvine, CA 92715
Stephen A. Caswell
21031 Ventura Boulevard 20,000(6) 0.15%
Suite 1100
Woodland Hills, CA 91364
Jerry W. Ballah 0 0%
2801 Main Street
Irvine, California 92715
William D. Savage 51,000(7) 0.37%
2801 Main Street
Irvine, California 92715
Richard A. Marting 55,000(8) 0.4%
2801 Main Street
Irvine, California 92715
All directors and officers 1,103,600 8.03%
as a group (eight persons)
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- -------------------------------
(1) See the Company's Proxy Statement for the 1996 Annual Meeting of the
Shareholders for additional information regarding outstanding stock options
and warrants to purchase the Company's Common Stock.
(2) Includes stock options to purchase 25,000 shares at an exercise price of
$4.87 per share, exercisable at any time until February 28, 2001, stock
options to purchase 25,000 shares at an exercise price of $4.87 per share,
exercisable at any time until May 31, 2001, stock options to purchase
25,000 shares at an exercise price of $4.87 per share, exercisable at any
time until August 31, 2001, and stock options to purchase 100,000 shares at
an exercise price of $4.37 per share, exercisable at any time until April
5, 2001. Does not include stock options to purchase 200,000 shares at an
exercise price of $4.87 per share, which do not vest until RCI achieves
certain financial performance goals, stock options to purchase 50,000
shares at an exercise price of $4.37 per share, which do not vest until RCI
becomes a public company, and stock options to purchase an additional
75,000 shares at exercise prices ranging from $4.37 to $4.87 per share,
which do not vest until later dates in 1996 and 1997. See "Ratification of
1996 Stock Option Program for Directors, Officers and Key Consultants" in
the Company's Proxy Statement for its 1996 Annual Meeting of the
Shareholders.
(3) Excludes 90,000 shares owned by Rita L. Schwartz, which are her sole and
separate property, in which Mr. Schwartz disclaims any beneficial interest.
Includes 90,000 shares acquired upon the conversion of 8% convertible
promissory notes.
(4) Includes 644,300 shares owned by Clarence R. Zivitz, Nancy Zivitz' husband,
and stock options to purchase 25,000 shares owned by Nancy Zivitz, a member
of the Company's Board of Directors, at an exercise price of $4.37 per
share at any time until February 28, 2001.
(5) Includes stock options to purchase 25,000 shares at an exercise price of
$4.37 per share at any time until April 5, 2001.
(6) Does not include stock options to purchase 50,000 shares at an exercise
price of $4.37 per share, which do not vest until RCI achieves certain
financial performance goals.
(7) Includes warrants to purchase 50,000 shares at an exercise price of $8.50
per share, expiring on May 27, 1997.
(8) Includes warrants to purchase 50,000 shares at an exercise price of $8.50
per share, expiring on May 27, 1997.
(9) Assumes 13,741,024 shares outstanding, including 517,000 shares issuable
upon the exercise of stock options and warrants which have vested, but
which do not include any Shares or Underlying Shares.
Based upon the Company's review of Forms 3, 4 and 5 and any amendments
thereto furnished to the Company in compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, all of such Forms were filed on a timely basis
by such reporting persons, other than: (1) a report on Form 4 due from Joel W.
Greenberg, the Company's former Chairman of the Board on or before May 10, 1996
with respect to 25,000 stock options which vested on April 5, 1996, (2) certain
officers of National Telephone & Communications, Inc. were late in their Form 3
filings when they became executive officers in February 1996, and a director of
that subsidiary is late in Form 4 and Form 5 filings for 1995, but the Form 3
filings have been brought current, and (3) reports on Form 4 and Form 5 of
transactions occurring from January 1993 until July 1995 were reported late by
Sam D. Schwartz, the Company's former Chairman, President and Chief Executive
Officer. There may be additional transactions in the Company's stock by Mr.
Schwartz and his affiliates during that period and at other times that have not
been reported. The Company is currently conducting an investigation to
ascertain the scope of unreported transactions.
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DESCRIPTION OF CAPITAL STOCK
The following summaries of certain provisions of the Articles of
Incorporation, as amended, and Bylaws of the Company do not purport to be
complete and are qualified in their entirety by reference to such
instruments, each of which is incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part. See "AVAILABLE
INFORMATION."
GENERAL
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock and 100,000 shares of Preferred Stock, without par value. As of
November 14, 1996, there were 13,294,434 shares of the Company's Common Stock
outstanding, excluding any Underlying Shares issuable upon the conversion of
outstanding Series A Preferred. As of November 14, 1996, 2,440 shares of the
Company's Preferred Stock were issued and outstanding and no Common Stock or
Preferred Stock was held as treasury stock. See "THE COMPANY - Issuance of
Convertible Preferred Stock."
COMMON STOCK
DIVIDENDS. Subject to the rights of holders of the Company's Preferred
Stock, if any, to receive certain dividends prior to the declaration of
dividends on shares of the Company's Common Stock, when and as dividends are
declared by the Company's Board of Directors payable in cash, stock or other
property, the holders of the Company's Common Stock are entitled to share
ratably in such dividends.
VOTING RIGHTS. Each holder of the Company's Common Stock has one vote
for each share held on matters presented for consideration by the
shareholders.
PREEMPTIVE RIGHTS. The holders of the Company's Common Stock have no
preemptive rights to acquire any additional shares of the Company.
ISSUANCE OF STOCK. Under California law the Company's Board of Directors
generally may issue authorized shares of the Company's Common Stock or
Preferred Stock without shareholder approval.
LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, the holders of
the Company's Common Stock will be entitled to share ratably in any of its
assets or funds that are available for distribution to its shareholders after
the satisfaction of its liabilities (or after adequate provision is made
therefor) and after payment of the liquidation preferences of outstanding
Preferred Stock, if any.
PREFERRED STOCK
The Company's authorized Preferred Stock may be issued from time to time
as a class without series, or if so determined by the Board of Directors, in
one or more series. The voting rights, dividend rights, conversion rights,
redemption rights and liquidation preferences of any Preferred Stock, the
number of shares constituting any such series and the terms and conditions of
the issue of the Preferred Stock may be fixed by resolution of the Company's
Board of Directors. The Company's Preferred Stock, as, if and when issued,
has and will have a preference over the Company's Common Stock with respect
to the payment of dividends and the distribution of assets in the event of
the liquidation of the Company, and such other preferences as may be fixed by
the Board of Directors. See "THE COMPANY - Issuance of Convertible Preferred
Stock."
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WARRANTS AND OPTIONS
In November 1994, the Company approved the Incomnet 1994 Stock Option
Plan for the directors, employees and key outside consultants of the Company
and its subsidiaries, which provided for the issuance of stock options
covering up to 1,500,000 shares of the Company's Common Stock. In November
1994, options to purchase 1,200,000 shares of the Company's Common Stock were
granted at an exercise price of $10 per share provided, that the stock
options vest and become exercisable only upon NTC earning at least $15
million in pre-tax profits during any continuous four audited quarterly
periods until December 31, 1997. See footnote 6, "Shareholders' Equity -
Stock Options" in the Consolidated Financial Statements of the Company
included in "Item 8. Financial Statements" in the Company's 1995 Form 10-K.
On February 6, 1996, the Company entered into a Management Incentive
Agreement pursuant to which Edward R. Jacobs, the grantee of the 1,200,000
stock options issued under the 1994 Stock Option Plan, agreed to cancel all
of those options upon adoption of a new stock option plan for NTC, to be
effective once NTC becomes a publicly traded company. No additional stock
options are intended to be issued under the 1994 Stock Option Plan.
On November 30, 1995, the Company issued 300,000 stock options to Melvyn
Reznick, the President and Chief Executive Officer of the Company, pursuant
to the Employment Agreement entered into by the Company and Mr. Reznick on
that date. See "Item 1. Business -Employees, Officers and Directors -
Officers" in the Company's 1995 Form 10-K. On February 5, 1996, as modified
on March 13, 1996, April 25, 1996 and June 11, 1996, the Company's Board of
Directors adopted the Incomnet 1996 Stock Option Plan for the directors,
officers and key outside consultants of the Company pursuant to which an
aggregate of 1,500,000 stock options are authorized to be granted, 780,000 of
which have been granted (365,000 of which are vested and 415,000 of which are
not yet vested), including the 300,000 stock options issued pursuant to Mr.
Reznick's Employment Agreement. The Company's 1996 Stock Option Plan was
ratified by the Company's Shareholders at their annual meeting on July 29,
1996 See "Ratification of 1996 Stock Option Program for Directors, Officers
and Key Consultants" in the Company's Proxy Statement for the 1996 Annual
Meeting of the Shareholders.
In July 1995, ten year stock options held by Sam D. Schwartz (250,000),
Rita Schwartz (35,000), Joel Greenberg (35,000) and Stephen A. Caswell
(25,000) were converted into three year warrants expiring on August 29, 1997.
Mr. Schwartz' 250,000 warrants were cancelled on August 18, 1995 and
September 1, 1995 as part of his tender of short-swing profits pursuant to
Section 16(b) of the Securities and Exchange Act of 1934, as amended. See
"Item 3. Legal Proceedings -Section 16(b) Lawsuit" in the Company's 1995 Form
10-K. On April 8, 1996, Stephen A. Caswell and the Company agreed to cancel
his 25,000 warrants exercisable at $4.87 per share in consideration for the
issuance of an additional 20,000 stock options under the Incomnet 1996 Stock
Option Plan. Stock options and warrants for the purchase of an additional
107,000 shares of the Company's Common Stock (i.e. 50,000 held by Richard
Marting, 50,000 held by William Savage and 7,000 held by four other
employees), other than stock options recently granted pursuant to Incomnet's
1996 Stock Option Plan and the performance-based stock options issued under
its 1994 Stock Option Plan (which may be cancelled in the future pursuant to
the Management Incentive Agreement entered into by the Company with NTC on
February 6, 1996, as amended and restated on November 14, 1996), remain
outstanding with different exercise prices and expiration dates. See
footnote 6, "Shareholders' Equity - Warrants" to the Company's Consolidated
Financial Statements included in "Item 8. Financial Statements" of the
Company's 1995 Form 10-K.
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<PAGE>
The holders of warrants and options do not have any voting rights until
they exercise the warrants or options and receive voting shares of Common
Stock pursuant to such exercise. The number of shares of Common Stock which
can be purchased upon the exercise of the warrants and options and the
exercise price are subject to adjustment in certain events, such as a stock
split, reverse stock split, stock dividend or similar event, in order to
prevent dilution to the warrant and option holders under those circumstances.
SIZE OF BOARD OF DIRECTORS
The Company's Bylaws provide that the Company's Board of Directors will
consist of no fewer than four and no more than nine members. The Company's
Board of Directors presently has three directors and there is one vacancy.
CUMULATIVE VOTING
Pursuant to the Company's Bylaws and in accordance with the California
Corporations Code, each shareholder is entitled to one vote for each share of
the Company's Common Stock held, and such holders may be entitled to
cumulative voting rights in the election of directors. Under the California
Corporations Code, cumulative voting is not required unless, at the annual
meeting and prior to the voting, at least one shareholder gives notice of his
intention to cumulate his votes. If one shareholder give notice of an
intention to cumulate votes, then all shareholders have cumulative voting
rights in the election of directors. If no such notice is given, voting for
directors is noncumulative, which means that a simple majority of the shares
voting may elect all of the directors. Under cumulative voting, each
shareholder entitled to vote has the right to give one candidate a number of
votes equal to the number of authorized directors multiplied by the number of
votes to which his shares are entitled, or to distribute his votes on the
same principle among as many candidates as he desires. As a result, each
share of the Company's Common Stock has a number of votes equal to the number
of authorized directors. The California cumulative voting law applies only to
the election of directors and not to any other matters as to which
shareholders may vote.
DIRECTOR'S LIABILITY
The California Corporations Code and the Company's Bylaws provide that a
director of the Company will have no personal liability to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director
except (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the corporation or
its shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard
for the director's duty to the corporation or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the corporation or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the corporation or its shareholders, or (vi) for an
unlawful dividend, distribution, stock repurchase or redemption. This
provision would generally absolve directors of personal liability for
negligence in the performance of duties, including gross negligence.
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<PAGE>
INDEMNIFICATION
The Company's Bylaws and Sections 204 and 317 of the California
Corporations Code contain comprehensive provisions for indemnification of
directors, officers and agents of California corporations against expenses,
judgments, fines and settlements in connection with litigation. Under the
California Corporations Code, other than an action brought by or in the right
of the Company, such indemnification is available if it is determined that
the proposed indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and,
with respect to any criminal action or proceeding, has no reasonable cause to
believe his conduct was unlawful. In actions brought by or in the right of
the Company, such indemnification is limited to expenses (including
attorneys' fees) actually and reasonably incurred if the indemnitee acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company. No indemnification may be made, however,
in respect of any claim, issue or matter as to which such person is adjudged
to be liable to the Company unless and only to the extent that the court in
which the action was brought determines that in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper. To the extent that the proposed
indemnitee has been successful in defense of any action, suit or proceeding,
he must be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the action. The Company's
Articles of Incorporation, as amended, provide for indemnification of the
directors and officers of the Company against liabilities to the maximum
extent provided by California law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Under the California Corporations Code, a corporation's certificate of
incorporation can be amended by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote, and a majority of the
outstanding stock of each class entitled to vote as a class, unless the
certificate requires the vote of a larger portion of the stock. The Company's
Articles of Incorporation, as amended, do not require a larger percentage
affirmative vote. As is permitted by the California Corporations Code, the
Company's Bylaws give its Board of Directors the power to adopt, amend or
repeal the Company's Bylaws. The Company's shareholders entitled to vote have
concurrent power to adopt, amend or repeal the Company's Bylaws.
DIVIDENDS
The California Corporations Code provides that, subject to any
restrictions in the corporation's articles of incorporation, dividends may be
declared from the corporation's surplus or, if there is no surplus, from its
net profits for the fiscal year in which the dividend is declared and the
preceding fiscal year. Dividends may not be declared, however, if the
corporation's capital has been diminished to an amount less than the
aggregate amount of all capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets.
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<PAGE>
TRANSFER AGENT
The Transfer Agent and Registrar for the capital stock of the Company is
American Stock Transfer Company.
SELLING SECURITY HOLDERS
THE PRIOR NOTEHOLDERS. The selling security holders include two persons
who previously held an aggregate of $400,000 of 8% convertible promissory
notes issued by the Company on February 8, 1995 to finance the acquisition of
51% of RCI which are covered by this Prospectus. These prior noteholders
converted their notes into shares of the Company's Common Stock at the rate
of one share for every $10 of outstanding original principal amount of notes.
The Outstanding Shares relating to the notes are therefore being offered for
resale by the prior noteholders and not pursuant to an initial issuance of
stock by the Company. The following table lists the selling security holders
who are prior noteholders, the original amount of notes purchased by them,
and their position with respect to the Company. See "Item 1. Business -
Acquisition of Rapid Cast, Inc. - Financing of Acquisition" in the Company's
1995 Form 10-K.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
ORIGINAL AMOUNT OF
8% CONVERTIBLE NOTES NUMBER OF
NAME OF NOTEHOLDER OUTSTANDING SHARES
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Alan Cohen (1)* 200,000 20,000
- ------------------------------------------------------------------------------------------
Robert Cohen (1)* 200,000 20,000
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
-61-
<PAGE>
(1) Alan Cohen and Robert Cohen are brothers and directors and founding
shareholders of RCI. They also own optical stores which have placed
orders for RCI's LenSystem.
THE SERIES A PREFERRED HOLDERS. The selling security holders include
five individuals and four entities which purchased a total of 2,075 shares of
Series A Preferred in October 1996. The following table sets forth the name
of each Series A Preferred holder, the number of shares of Series A Preferred
owned by him, the amount of their investment, and the number of shares of the
Company's Common Stock into which the Series A Preferred is convertible
assuming that the average bid price of the Company's Common Stock for the five
trading days immediately preceding the conversion date for each holder is at
least 20% higher than the bid price on the date of the issuance of the Series
A Preferred (i.e. the highest possible conversion price resulting in the
minimum number of shares of Common Stock issuable upon the conversion of the
Series A Preferred). If the average bid price prior to the conversion date
is less than that amount, then more shares of the Company's Common Stock
would be issued upon the conversion of the Series A Preferred, causing more
dilution to the Company's Common Stockholders. See "RISK FACTORS - General
Risks - Possible Adverse Effects of Issuance of Preferred Stock."
Minimum Number of
Number of Shares of Common
Name of Series A Series A Preferred Amount of Stock Issuable
Preferred Holder Shares Investment Upon Conversion
- ---------------- ------------------ ----------- -----------------
David and Susan
Wilstein 100 $ 100,000 25,000
Charles Shapiro 25 $ 25,000 5,882
Buchanan Partners 500 $ 500,000 112,676
Buchanan Fund Ltd. 500 $ 500,000 112,676
Wood Gundy 500 $ 500,000 105,263
Robert Cohen (1) 125 $ 125,000 30,303
Lenore Katz 25 $ 25,000 6,060
Leonard Wilstein 100 $ 100,000 23,175
Faisal Financial 200 $ 200,000 46,350
------ ---------- -------
Total 2,075 $2,075,000 467,385
- -------------------------------------------------------------------------
(1) Robert Cohen is a director of Rapid Cast, Inc., a subsidiary of the
Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of November 14, 1996, the Company has approximately 3,807,200 shares
of its Common Stock (not including the Shares or the Underlying Shares
issuable upon the exercise of the Warrants or the Series A Preferred covered
by this Prospectus, but including all other shares of the Company's Common
Stock which can be acquired pursuant to the exercise of other vested
outstanding warrants and options) issued and outstanding which may be deemed
to be "restricted securities" as that term is defined in Rule 144 of the
Securities Act. These restricted securities may be sold in the future in
compliance with Rule 144 or Regulation S of the Securities Act. The Company
can make no prediction as to the effect, if any, that sales of shares of
Common Stock, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or options) in the public market, or the perception that
such sales could occur, could depress the prevailing market price for the
Common Stock. Such sales may also make it more difficult for the Company to
sell equity securities or equity-related securities in the future at a time
and price which it deems appropriate. See "RISK FACTORS -General Risks -
Dilution Caused by Future Sales of Shares."
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<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock covered by this
Prospectus will be passed upon for the Company by Mark J. Richardson, Esq.,
Counsel to the Company, 1299 Ocean Avenue, Suite 900, Santa Monica, California,
90401. In consideration for certain legal services, the Company has issued to
Mr. Richardson options to purchase 30,000 shares of the Company's Common Stock
at a purchase price of $4.37 per share, 15,000 of which have vested and are
exercisable at any time until April 5, 2001, and 15,000 of which vest on
January 1, 1997 and are exercisable at any time until January 1, 2002. Mr.
Richardson also purchased 25 shares of the Company's Series A 2% Convertible
Preferred Stock for $25,000 in cash on the same terms and conditions as the
other purchasers of the Preferred Stock. See "THE COMPANY - Issuance of
Convertible Preferred Stock."
EXPERTS
The financial statements of the Company, included and incorporated by
reference from the Company's Annual Report (Form 10-K) for the years ended
December 31, 1995, 1994 and 1993, have been audited by Stonefield Josephson,
independent auditors, as set forth in their reports thereon and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
__________
TABLE OF CONTENTS
Available Information 2
Incorporation of Certain Documents
by Reference 2
Prospectus Summary 4
Risk Factors 10
The Company 23
Use of Proceeds 41
Price Range of Common Stock and Dividends 42
Capitalization 43
Selected Consolidated Financial Information 44
Management's Discussion and Analysis of
Financial Condition and Results of Operations 46
Principal Stockholders 54
Description of Capital Stock 57
Selling Security Holders 61
Shares Eligible for Future Sale 63
Legal Matters 64
Experts 64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
990,000 Shares
INCOMNET, INC.
Common Stock
__________
PROSPECTUS
November 22, 1996
__________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
offering described in this Registration Statement. All amounts are estimated
except the registration fees.
Registration Fee $ 1,024.14
------------
Printing Costs for Registration Statement,
Prospectus and related documents $ 5,000.00
Accounting Fees and Expenses $ 5,000.00
Legal Fees and Expenses $ 20,000.00
Blue Sky Fees and Expenses $ 5,000.00
------------
Total $ 36,024.14
------------
------------
__________
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See "DESCRIPTION OF CAPITAL STOCK - Indemnification" in the Prospectus.
ITEM 16. EXHIBITS.
Exhibit
No. Description
- --- -----------
3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A)
3.2 The Bylaws of Incomnet, Inc. (A)
3.3 Certificate of Determination for Series A 2% Convertible Preferred
Stock. (K)
4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17,
1994. (C)
4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27, 1994.
(D)
4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E)
4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. (I)
4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with
Registration Rights Agreement, dated April 19, 1996. (I)
4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. (I)
5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with
respect to securities being registered.
II - 1
<PAGE>
10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated February 14, 1994. (C)
10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated May 10, 1994. (C)
10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National
Telephone Communications, Inc., dated May 12, 1994. (B)
10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and
Incomnet, Inc., dated January 17, 1994. (C)
10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated August 17, 1994. (C)
10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September
30, 1993. (B)(1)
10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B)
10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15,
1994. (D)(1)
10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January
18, 1995. (F)
10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated October
29, 1994. (F)
10.11 Stock Pledge Agreement, dated February 8, 1995. (F)
10.12 Form of 8% Convertible Secured Promissory Note, dated February 8,
1995. (F)
10.13 Agreement for Promotion of Pagers between NTC and Page Prompt.(I)
10.14 Carrier Switched Services Agreement Wiltel, Inc, dated September 15,
1995. (I)(1)
10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid
Cast, Inc., Dated June 15, 1995. (I)
10.16 Agreement for Promotion of Internet Access Services Between NTC and
EarthLink Network. (I)
10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated
November 30, 1995. (G)
10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated
November 30, 1995. (G)
10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet,
Inc. and National Telephone Communications, Inc. (H)
10.20 Settlement Agreements and Proposed Settlement Agreements With Prior
Noteholders. (I)
II - 2
<PAGE>
10.21 Form of 8% Convertible Note Issued By RCI in January 1996. (I)
10.22 Form of Short-Term 10% Note Issued By RCI in April 1996. (I)
10.23 Amended Carrier Switched Services Agreement with Wiltel, Inc., dated June
17, 1996.(K)(1)
10.24 Settlement Agreement Between Joel Greenberg and Incomnet, Inc., dated as
of May 9, 1996 and executed on June 6, 1996. (J)
10.25 Form of Registration Rights Agreement Between Incomnet, Inc. and
Purchasers of Series A Convertible Preferred Stock. (K)
10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred
Stock. (K)
10.27 Management Incentive Agreement With NTC, dated October 14, 1996.
10.28 Settlement Agreements With Edward Jacobs and Jerry Ballah, dated
November 14, 1996.
13.1 The Annual Report on Form 10-K for the fiscal year ending December 31,
1995 for Incomnet, Inc.(I)
13.2 The Quarterly Report on Form 10-Q for the fiscal quarter ending March 31,
1996 for Incomnet, Inc. (K)
13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30,
1996 for Incomnet, Inc. (K)
13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's
Shareholders, dated July 29, 1996. (K)
13.5 The Quarterly Report on Form 10-Q for the fiscal quarter ending
September 30, 1996 for Incomnet, Inc. (L)
16. Letter re Change in Certifying Accountant. (B)
21. Subsidiaries of the Registrant. (A)
23.1 Consent of Stonefield Josephson, independent Certified Public
Accountants, relating to the financial statements.
23.2 Consent of Mark J. Richardson, Esq. is included in his opinion.
24. Power of Attorney is included on the signature page of this Registration
Statement.
- ------------------------
(1) Certain information has been deleted from this agreement pursuant to a
request for confidential treatment under Rule 406.
(A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form
10-K for the year ending December 31, 1994.
(B) Incorporated by reference from Incomnet Inc.'s Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on May 12,
1994, and declared effective on October 27, 1994.
(C) Incorporated by reference from the Registration Statement on Form S-3
filed with the Securities and Exchange Commission on June 17, 1994 and
declared effective on October 27, 1994.
II - 3
<PAGE>
(D) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on December 12,
1994 and declared effective on December 22, 1994.
(E) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on January 5, 1995
and declared effective on January 9, 1995.
(F) Incorporated by reference from the Company's Report on Form 8-K, dated
February 8, 1995, relating to the Company's acquisition of a
controlling interest in RCI.
(G) Incorporated by reference from the Company's Report on Form 8-K dated
November 30, 1995, relating to the resignation of Sam D. Schwartz and
employment of Melvyn Reznick.
(H) Incorporated by reference from the Company's Report on Form 8-K, dated
February 9, 1996, relating to the management incentive agreement between
Incomnet and NTC.
(I) Incorporated by reference from the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on May 10,
1996.
(J) Incorporated by reference from the Company's Report on Form 8-K, dated
June 7, 1996, relating to the settlement agreement with Joel W. Greenberg
and his resignation as a director of the Company.
(K) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on May 10, 1996 and
declared effective on October 31, 1996, or incorporated by reference
from the Company's filings with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
(L) Incorporated by reference from the filing of the Form 10-Q for the
fiscal quarter ending September 30, 1996, as filed with the Securities
and Exchange Commission on November 14, 1996.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provision described in Item 15 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
RULE 430A UNDERTAKINGS. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II - 4
<PAGE>
RULE 415 UNDERTAKINGS. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(i) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(ii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, the President of the
Registrant duly thereunto authorized, in the City of Woodland Hills, State of
California, on the 19th day of November 1996.
INCOMNET, INC.
Registrant
By:/s/ Melvyn Reznick
-------------------------------------
Melvyn Reznick, President
and Chief Executive Officer
II - 5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark J. Richardson his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents of each of them, or their or his substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on the 19th day of November 1996, by the
following persons in the capacities indicated.
Signatures Title
- ---------- -----
/s/ Melvyn Reznick President, Chief Executive
- ------------------------------ Officer and Director
Melvyn Reznick (Chief Executive Officer and
Principal Financial Officer)
/s/ Stephen A. Caswell Vice President of Information
- ------------------------------ Systems, Secretary (Principal
Stephen A. Caswell Accounting Officer)
/s/ Albert Milstein Director
- ------------------------------
Albert Milstein
/s/ Nancy Zivitz Director
- ------------------------------
Nancy Zivitz
II - 6
<PAGE>
INDEX TO THE EXHIBIT VOLUME TO
REGISTRATION STATEMENT ON FORM S-3
3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A)
3.2 The Bylaws of Incomnet, Inc. (A)
3.3 Certificate of Determination for Series A 2% Convertible Preferred
Stock. (K)
4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17,
1994. (C)
4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27,
1994. (D)
4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E)
4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. (I)
4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with
Registration Rights Agreement, dated April 19, 1996. (I)
4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. (I)
5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with
respect to securities being registered.
10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated February 14, 1994. (C)
10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated May 10, 1994. (C)
10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National
Telephone Communications, Inc., dated May 12, 1994. (B)
10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and
Incomnet, Inc., dated January 17, 1994. (C)
10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet,
Inc., dated August 17, 1994. (C)
10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September
30, 1993. (B)(1)
10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B)
10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15,
1994. (D)(1)
10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January
18, 1995. (F)
10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated
October 28, 1994. (F)
10.11 Stock Pledge Agreement, dated February 8, 1995. (F)
10.12 Form of 8% Convertible Secured Promissory Note, dated February 8, 1995.
(F)
10.13 Agreement for Promotion of Pagers between NTC and Page Prompt. (I)
<PAGE>
10.14 Carrier Switched Services Agreement with Wiltel, Inc, dated September 15,
1995. (I)(1)
10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid
Cast, Inc., Dated June 15, 1996. (I)
10.16 Agreement for Promotion of Internet Access Services Between NTC and
EarthLink Network. (I)
10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated
November 30, 1995. (G)
10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated
November 30, 1995. (G)
10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet,
Inc. and National Telephone Communications, Inc. (H)
10.20 Settlement Agreements and Proposed Settlement Agreements With Prior
Noteholders. (I)
10.21 Form of 8% Convertible Note Issued By RCI in January 1996. (I)
10.22 Form of Short-Term 10% Note Issued By RCI in April 1996. (I)
10.23 Amended Carrier Switched Services Agreement with Wiltel, Inc. dated June
17, 1996.(1)
10.24 Settlement Agreement Between Joel w. Greenberg and Incomnet, Inc. dated
as of May 9, 1996 and executed on June 6, 1996. (J)
10.25 Form of Registration Rights Agreement Between Incomnet, Inc. and
Purchasers of Series A Convertible Preferred Stock. (K)
10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred
Stock. (K)
10.27 Management Incentive Agreement With NTC, dated October 14, 1996.
10.28 Settlement Agreements With Edward Jacobs and Jerry Ballah, dated
November 14, 1996.
13.1 The Annual Report on Form 10-K for the fiscal year ending December 31,
1995 for Incomnet, Inc. (I)
13.2 The Quarterly Report on Form 10-Q for the fiscal quarter ending March 31,
1996 for Incomnet, Inc. (K)
13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30,
1996 for Incomnet, Inc. (K)
13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's
Shareholders, dated July 29, 1996. (K)
13.5 The Quarterly Report on Form 10-Q for the fiscal quarter ending
September 30, 1996 for Incomnet, Inc. (L)
16. Letter re Change in Certifying Accountant. (B)
21. Subsidiaries of the Registrant. (A)
23.1 Consent of Stonefield Josephson, independent Certified Public
Accountants, relating to the financial statements.
23.2 Consent of Mark J. Richardson, Esq. is included in his opinion.
24. Power of Attorney is included on the signature page of this Registration
Statement.
<PAGE>
- ------------------------
(1) Certain information has been deleted from this agreement pursuant to a
request for confidential treatment pursuant to Rule 406.
(A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form
10-K for the year ending December 31, 1994.
(B) Incorporated by reference from Incomnet Inc.'s Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on May 12,
1994, and declared effective on October 27, 1994.
(C) Incorporated by reference from the Registration Statement on Form S-3
filed with the Securities and Exchange Commission on June 17, 1994 and
declared effective on October 27, 1994.
(D) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on December 12,
1994 and declared effective on December 22, 1994.
(E) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on January 5, 1995
and declared effective on January 9, 1995.
(F) Incorporated by reference from the Company's Report on Form 8-K, dated
February 8, 1995, relating to the Company's acquisition of a controlling
interest in RCI.
(G) Incorporated by reference from the Company's Report on Form 8-K, dated
November 30, 1995, relating to the resignation of Sam D. Schwartz and
employment of Melvyn Reznick.
(H) Incorporated by reference from the Company's Report on Form 8-K, dated
February 9, 1996, relating to the management incentive agreement between
Incomnet and NTC.
(I) Incorporated by reference from the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on May 10,
1996.
(J) Incorporated by reference from the Company's Report on Form 8-K, dated
June 7, 1996, relating to the settlement agreement with Joel W. Greenberg
and his resignation as a director of the Company.
(K) Incorporated by reference from Incomnet's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on May 10, 1996 and
declared effective on October 31, 1996, or incorporated by reference
from the Company's filings with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
(L) Incorporated by reference from the filing of the Form 10-Q for the
fiscal quarter ending September 30, 1996, as filed with the Securities
and Exchange Commission on November 14, 1996.
<PAGE>
EXHIBIT 5.1
LEGAL OPINION AND CONSENT OF MARK J. RICHARDSON, ESQ.
WITH RESPECT TO SECURITIES BEING REGISTERED
<PAGE>
LAW OFFICES OF
MARK J. RICHARDSON
WILSHIRE PALISADES BUILDING
1299 OCEAN AVENUE
SUITE 900
SANTA MONICA, CALIFORNIA 90401
TELEPHONE (310) 393-9992
FACSIMILE (310) 393-2004
November ___, 1996
Incomnet, Inc.
21031 Ventura Boulevard, Suite 1100
Woodland Hills, California 91364
RE: INCOMNET, INC. - VALIDITY OF ISSUANCE OF SHARES
Ladies and Gentlemen:
We have acted as special counsel to you in connection with the registration
on Form S-3 (File No. _______ under the Securities Act of 1933, as amended
("Registration Statement"), of a total of 990,000 shares of the Common Stock
of Incomnet, Inc., no par value, comprised of (i) 950,000 shares (the
"Underlying Shares") issuable upon the conversion of 2,075 shares of Series A
2% Convertible Preferred Stock and (ii) 40,000 outstanding shares (the
"Outstanding Shares") issued upon the conversion of 8% convertible promissory
notes previously issued by the Company in private placements pursuant to
Section 4(2) of the Securities Act of 1933, as amended. You have requested
our opinion in connection with the registration of the Underlying Shares and
the Outstanding Shares covered by the Prospectus, dated November 22, 1996
(the "Prospectus"). In connection with our acting as counsel, we have
examined the laws of the State of California together with the Certificate of
Determination for Series A 2% Convertible Preferred Stock attached as Exhibit
3.3 to the Registration Statement, the Prospectus, and certain other
documents and instruments prepared on behalf of Incomnet, Inc. as we have
deemed necessary and relevant in the preparation of our opinion as
hereinafter set forth.
In our examination, we have assumed the genuineness of all signatures on
original documents and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified, conformed or photostatic copies of originals, the authenticity of
such latter documents, and the proper execution, delivery and filing of the
documents referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Outstanding Shares
and the Underlying Shares issued and to be issued by Incomnet, Inc. pursuant
to the conversion of the Series A 2% Convertible Preferred Stock and the
terms of the Prospectus have been and will be duly created and have been and
will be validly issued shares of the Common Stock, no par value, of Incomnet,
Inc. Upon
<PAGE>
full compliance with all of the terms and conditions relating to the issuance
of the Underlying Shares and the sale of the Outstanding Shares set forth in
the Prospectus and in the documents governing the Series A 2% Convertible
Preferred Stock, the Outstanding Shares and the Underlying Shares will be
fully paid and nonassessable.
For the purposes of this opinion we are assuming the proper execution of the
Certificate of Determination for the Series A 2% Convertible Preferred Stock,
the Registration Rights Agreement, the Purchase Agreement for the Series A 2%
Convertible Preferred Stock, subscription agreements and conversion
agreements, and that the appropriate certificates are duly filed and recorded
in every jurisdiction in which such filing and recordation is required in
accordance with the laws of such jurisdictions. We express no opinion as to
the laws of any state or jurisdiction other than California.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and we further consent to the use of our name in the Registration
Statement and the Prospectus which is a part of said Registration Statement.
Respectfully submitted,
Mark J. Richardson, Esq.
<PAGE>
EXHIBIT 10.27
MANAGEMENT INCENTIVE AGREEMENT
WITH NTC, DATED OCTOBER 14, 1996
<PAGE>
October 14, 1996
Mr. Melvyn Reznick
President and Chief Executive Officer
Incomnet, Inc.
21031 Ventura Boulevard
Woodland Hills, CA 91364
Dear Mr. Reznick:
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
Agreement shall supersede and replace the Agreement dated 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. Pursuant to the
ICNT Board Resolution dated July 29, 1996, ICNT, on or before October 31, 1996,
will transfer to NTC for cancellation all NTC shares in excess of ten (10)
million shares that ICNT owns, controls, possesses or has hypothecated. On the
date of such transfer, the shares of NTC common stock owned, controlled,
possessed, or hypothecated by ICNT will equal ten (10) million shares and NTC
will record ICNT's stock ownership at ten (10) million shares on its books.
Thereafter, should ICNT receive additional shares of NTC common stock pursuant
to the December 1994 Exchange Offer, ICNT shall promptly transfer such shares to
NTC for cancellation.
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
ICNT will spin-off to its shareholders one (1) million shares of NTC common
stock owned
<PAGE>
by ICNT 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 the month of January, 1997. ICNT shall not be deemed in default of this
provision if, through no fault of ICNT, the spin-off is not completed during
January, 1997 but is completed within a reasonable time thereafter.
<PAGE>
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 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 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 a 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 NTC notifying and disclosing to NTC the
<PAGE>
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 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 three separate stock option plans. Except as noted below,
the exercise price of all options issued under such plans will be the fair-
market appraisal value of NTC shares as of the date of grant. The options will
be exercisable only if NTC has become a public company. No option may be
exercised if the recipient is an employee of or consultant to NTC at the time of
the grant but is not an employee of or consultant to NTC at the time of NTC's
public offering pursuant to Section II of this Agreement. To the extent
feasible, options will be issued pursuant to qualified incentive option plans.
(If necessary to qualify for favorable tax treatment, additional plans may be
created; all such plans will be consistent with the requirements set forth
herein). The option plans and the shares
<PAGE>
issuable thereunder will be registered at the time of NTC's Public Offering
under Section II hereof. All terms and conditions of the option plans not
summarized below will be determined by NTC's Board of Directors. Upon the
creation of such plans and the issuance of options thereunder to Jacobs and
Ballah, 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. One-third of the
reserved shares may be issued only if NTC achieves revenues in excess of $28
million in any calendar quarter ending prior to January 1, 1997. The remaining
two-thirds of the reserved shares (the "Remaining Shares") may be issued only if
NTC achieves revenues in excess of $150 million in any calendar quarter ending
prior to January 1, 1999. If such threshold is not achieved, but revenues for
any quarter prior to January 1, 1999 exceed the following amounts, then options
for a percentage of the Remaining Shares will be issuable as follows:
Quarterly Revenues Percentage of Remaining Shares
------------------ ------------------------------
$125 Million 60%
$100 Million 30%
$ 75 Million 10%
The exercise price for these options will be (a) the fair market appraisal value
of NTC shares as of the date of adoption of this plan for those persons who are
key independent representatives as of the date of adoption of the Plan, and (b)
no less than the fair market appraisal value of NTC shares as of the date of
eligibility for those persons who become key independent representatives after
the date of adoption of the Plan.
2. SENIOR EXECUTIVE/CONSULTANT PLAN
Up to 3,269,231 shares will be reserved for issuance under this plan for
immediate vesting. Beneficiaries will be Ed Jacobs, Jerry Ballah and Chris
Mancuso. Jacobs and Ballah collectively will receive options for 2,629,231
shares, to be allocated between them as determined by the NTC Board of
Directors, and Mancuso will receive options for up to 640,000 shares. Each will
receive up to ten-year options. Options issued to Mancuso will be vested only
upon satisfaction of incentive conditions to be determined by NTC's Board of
Directors. Any Mancuso shares that do not vest shall be fully distributed to
NTC executives in amounts determined by the NTC Board of Directors.
<PAGE>
An additional 576,924 shares will be reserved for issuance under this plan
in equal amounts to Jacobs and Ballah. These options will be issued to Jacobs
and Ballah but will vest in the following amounts only 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. EMPLOYEE STOCK OPTION PLAN
Up to 1,923,077 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. Options representing the
remaining two-thirds of the reserved shares will be contingent only upon NTC
achieving a total of $10 million in cumulative pre-tax profits in any four
consecutive calendar quarters ending prior to January 1, 1998. No more than 25%
of shares issuable pursuant to options granted under this plan may be issued to
persons eligible to receive options under the Senior Executive/Consultant Plan.
V. NTC CONTROL
NTC's day to day operations will continue to be controlled by its
President, 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. 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.
<PAGE>
2. After the four Independent Directors referenced in Paragraph 1
are added to the NTC Board, no officer of director of ICNT shall
serve as a director of NTC.
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, 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.
6. Until the four Independent Directors referenced in Paragraph 1
are added to the NTC Board, ICNT will vote its shares for Jacobs,
Ballah, a key independent representative, an experienced current
or former CEO of a financial rating company and a representative
of ICNT as members of the Board of Directors of NTC. Thereafter,
ICNT will vote its shares for the management slate of nominees
for NTC's Board of Directors.
VI. FLOW OF CASH BETWEEN NTC AND INCOMNET
A. 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 up to $50,000 per
month between November 1, 1996 and
<PAGE>
the date of the Public Offering under Section II. All such
advances in excess of $500,000 ("Advances") 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 stock option plans. Notwithstanding
anything herein to the contrary, a total of $500,000 will be
advanced to ICNT by NTC no later than December 31, 1997.
B. The $1 million (plus accrued interest thereon) lent by NTC
to ICNT through October 14, 1996 and the first $500,000 of
advances referenced in Section VI. A. will be treated as a return
of ICNT's previously invested capital in NTC rather than as a
loan and ICNT shall have no obligation to repay such $1.5 million
to 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, 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
<PAGE>
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.
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:
----------------------------------------
Edward R. Jacobs, President and
Chief Executive Officer
AGREED AND ACCEPTED:
INCOMNET, INC.
By:
-----------------------------------
Melvyn Reznick, President
and Chief Executive Officer
Dated:
--------------------------------
<PAGE>
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
INCOMNET, INC.
The undersigned, being all of the directors of Incomnet, Inc., a California
Corporation ("Company"), hereby adopt the following resolutions by unanimous
written consent in lieu of a meeting pursuant to their authority to do so in the
Bylaws of the Company and Section 307 of the California Corporations Code.
RESOLVED, that the agreement between the Company and National Telephone &
Communications, Inc., dated October __, 1996, (the "Agreement"), a copy of which
is attached to this Unanimous Written Consent of the Board of Directors as
Exhibit A, is hereby authorized, ratified, adopted and approved. The execution
of the Agreement by Melvyn Reznick as the President and Chief Executive Officer
of the Company on behalf of the Company is hereby ratified and approved.
RESOLVED, that the officers and directors of the Company be, and they hereby
are, authorized, empowered and directed to do and perform all such acts and
things and to sign all such documents, certificates, directions, instruments and
statements, whether under the corporate seal of the Company or otherwise, and to
take all such other steps as such officer, officers, director or directors shall
determine to be necessary and advisable to effectuate the matters set forth in
the foregoing resolution, any such determination to be conclusively evidenced by
the taking or causing to be taken of such action or the execution and delivery
of any such document, certificate, direction, instrument or statement by any
such officer, officers, director or directors.
IN WITNESS WHEREOF, this Unanimous Written Consent of the Board of Directors of
the Company has been executed on and is effective as of October __, 1996.
<PAGE>
- ------------------------------ ------------------------------
Melvyn Reznick, Albert Milstein, Director
Chairman of the Board of Directors
- ------------------------------
Nancy Zivitz, Director
<PAGE>
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
The undersigned, being all of the directors of National Telephone &
Communications, Inc., a Nevada Corporation ("Company"), hereby adopt the
following resolutions by unanimous written consent in lieu of a meeting pursuant
to their authority to do so in the Bylaws of the Company and the laws of the
State of Nevada.
RESOLVED, that the agreement between the Company and Incomnet, Inc., dated
October __, 1996, (the "Agreement"), a copy of which is attached to this
Unanimous Written Consent of the Board of Directors as Exhibit A, is hereby
authorized, ratified, adopted and approved. The execution of the Agreement by
Edward R. Jacobs as the President and Chief Executive Officer of the Company on
behalf of the Company is hereby ratified and approved.
RESOLVED, that the officers of the Company be, and they hereby are, authorized,
empowered and directed to do and perform all such acts and things and to sign
all such documents, certificates, directions, instruments and statements,
whether under the corporate seal of the Company or otherwise, and to take all
such other steps as such officer or officers shall determine to be necessary and
advisable to effectuate the matters set forth in the foregoing resolution, any
such determination to be conclusively evidenced by the taking or causing to be
taken of such action or the execution and delivery of any such document,
certificate, direction, instrument or statement by any such officer or officers.
IN WITNESS WHEREOF, this Unanimous Written Consent of the Board of Directors of
the Company has been executed on and is effective as of October __, 1996.
<PAGE>
- ------------------------------ ------------------------------
Edward R. Jacobs, Director Jerry Ballah, Director
- ------------------------------
Melvyn Reznick, Director
<PAGE>
EXHIBIT 10.28
SETTLEMENT AGREEMENTS WITH EDWARD JACOBS
AND JERRY BALLAH, DATED NOVEMBER 14, 1996.
<PAGE>
SETTLEMENT AGREEMENT, MUTUAL RELEASE, ASSIGNMENT OF CLAIMS AND COVENANT NOT TO
SUE BY AND BETWEEN EDWARD R. JACOBS AND INCOMNET, INC.
This Settlement Agreement, Mutual Release, Assignment of Claims and
Covenant Not to Sue ("Settlement Agreement") is made as of this 13th day of
November, 1996, by and between Edward R. Jacobs, a resident of Orange County,
California ("Jacobs"), and Incomnet, Inc., a California corporation
("Incomnet").
WHEREAS, Jacobs is currently employed as President and Chief Executive
Officer of National Telephone & Communications, Inc. ("NTC"), a wholly owned
subsidiary of Incomnet;
WHEREAS, Jerry Ballah ("Ballah") is currently employed as Executive
Vice President of NTC;
WHEREAS, Jacobs entered into certain loan agreements with NTC for the
principal amount of $547,240, plus interest, in accordance with the
authorization and direction of a unanimously approved resolution of NTC's Board
of Directors dated October 12, 1995 ("Jacobs Loan Agreements");
WHEREAS, Ballah entered into certain loan agreements with NTC for the
principal amount of $465,000, plus interest, in accordance with the
authorization and
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direction of a unanimously approved resolution of NTC's Board of Directors dated
October 12, 1995 ("Ballah Loan Agreements");
WHEREAS, Jacobs and Ballah obtained such loans for purposes related to
the exercise of certain options ("options") to purchase stock in Incomnet ("ICNT
stock");
WHEREAS, Jacobs and Ballah entered into such loans and exercised such
options on margin, which, they allege, resulted in certain losses to Jacobs and
Ballah because of activities of Sam D. Schwartz ("Schwartz"), former President
and Chief Executive Officer of Incomnet;
WHEREAS, Jacobs has advised Incomnet that he has certain legal claims
against Incomnet, including (i) breach of Jacobs' employment contract and fraud
in the inducement, relating, in part, to the failure of Schwartz to provide
freely tradable stock pursuant to an agreement between Jacobs and Schwartz; (ii)
fraud in the inducement relating to Jacob's exercising the options and margining
the ICNT stock; and (iii) certain claims against Incomnet and its former
officers and directors and those acting in concert with such persons, related to
alleged violations of state and federal law, including those based upon
activities by Schwartz;
WHEREAS, Ballah has advised Incomnet that he has certain legal claims
against Incomnet and its former officers and directors and those acting in
concert with
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such persons, related to alleged violations of state and federal law, including
those based upon certain activities by Schwartz; and
WHEREAS, Incomnet and Jacobs agree that it is in their best interest
to effect a settlement of any and all claims Jacobs and Ballah may have against
Incomnet and any former officers or directors of Incomnet and others and to
resolve all outstanding claims and differences between them relating to any such
claims, including, but not limited to, alleged violations of state and federal
securities laws, upon the terms and in the manner hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter set forth, it is agreed that:
1. To compensate Jacobs for his losses caused by the activities of
Schwartz, Incomnet will assume any and all obligations owed by Jacobs pursuant
to the Jacobs Loan Agreements, including any and all obligations of Jacobs to
repay principal, interest or penalties with respect to such loans, and Incomnet
will take any and all necessary steps to have Jacobs released from any and all
obligations with respect to such loans effective the first day after the first
trade of NTC stock pursuant to the spin-off agreement between Incomnet and NTC
dated October 14, 1996. At such time, Incomnet shall execute a formal
assumption of this debt by executing the document attached hereto as Exhibit A
and NTC shall execute a formal release in the form
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attached hereto as Exhibit B. The Release executed by NTC and related matters
shall be approved by NTC's Board of Directors, in the form attached hereto as
Exhibit C.
2. To compensate Ballah for his losses caused by the activities of
Schwartz, Incomnet will assume any and all obligations owed by Ballah pursuant
to the Ballah Loan Agreements, including any and all obligations of Ballah to
repay principal, interest or penalties with respect to such loans, and Incomnet
will take any and all necessary steps to have Ballah released from any and all
obligations with respect to such loans effective the first day after the first
trade of NTC stock pursuant to the spin-off agreement between Incomnet and NTC
dated October 14, 1996, if, and only if, Ballah executes a release, covenant not
to sue and assignment of claims in the form attached hereto as Exhibit D
("Ballah Settlement") on or prior to January 2, 1998. At such time, Incomnet
shall execute a formal assumption of this debt by executing the document
attached hereto as Exhibit E and NTC shall execute a formal release by executing
the document attached hereto as Exhibit F. The release executed by NTC and
related matters shall be approved by NTC's Board of Directors, in the form
attached hereto as Exhibit G.
3. To compensate Jacobs for his losses caused by the activities of
Schwartz, Incomnet shall pay Jacobs a sum to be calculated by subtracting (a)
the aggregate outstanding amount of the principal and accrued interest of the
Jacobs and
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Ballah Loan Agreements (presently estimated to be $1,012,240) actually assumed
by Incomnet pursuant to paragraphs 1 and 2 above from (b) $2,000,000 (Two
Million Dollars) on the earlier of (a) the day of the first public offering of
stock pursuant to Section II of the spin-off agreement between Incomnet and NTC
dated October 14, 1996, or (b) January 2, 1998, provided that on or before such
date Ballah executes the Ballah Settlement attached as Exhibit D. Such payment
shall be made by certified check or by electronic or wire transfer to a bank or
location to be designated by Jacobs. Incomnet's obligation to pay Jacobs the
aforesaid sum shall be fully collateralized with 200,000 shares of NTC stock.
Incomnet shall turn over to Jacobs or to a mutually acceptable third party the
NTC stock as collateral within fifteen (15) days after approval of this
Settlement Agreement by Incomnet's Board of Directors. Jacobs or such mutually
acceptable third party shall hold the NTC stock until the aforesaid payment to
Jacobs by Incomnet is made, at which time such stock shall be promptly returned
to Incomnet.
4. Upon satisfaction of the conditions stated in paragraphs 1 and 3
above, Jacobs agrees for himself, his successors, assigns, heirs, executors and
administrators, to assign to Incomnet any rights, benefits, demands, causes of
action or remedies Jacobs may have relating to any alleged violations of state
or federal securities or other laws, including, but not limited to, fraud in the
inducement with respect to Jacobs' exercise of warrants or options, or Jacobs'
employment agreement and the breach thereof, which may have been committed by
any current or former officer,
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director, shareholder, employee, attorney, accountant, agent, or independent
contractor of Incomnet, or any person or entity acting in concert with any such
person or entity, prior to the date of execution of this Settlement Agreement.
Jacobs further agrees to cooperate in the prosecution of any negotiation or
litigation relating to such assigned claims which may be pursued or filed by
Incomnet against any current or former officer, director, shareholder, employee,
attorney, accountant, agent, or independent contractor of Incomnet, or any
person or entity acting in concert with any such person or entity. The purpose
of this assignment is to preserve for Incomnet any and all claims otherwise
possessed by Jacobs and is not intended to limit any right of contribution which
Incomnet may have.
5. Upon satisfaction of the conditions stated in paragraphs 1 and 3,
Jacobs further covenants for himself, his successors, assigns, heirs, executors
and administrators, not to sue Incomnet or Incomnet's current or former
officers, directors, shareholders, employees, attorneys, accountants, agents,
independent contractors, or subsidiaries, including any officers or directors
thereof, or any person or entity acting in concert with any such person or
entity, for any and all claims, demands, causes of action, controversies,
agreements, promises, damages, suits, liabilities, obligations, defenses or
remedies of any nature whatsoever relating to any alleged violations of state or
federal securities or other laws, including, but not limited to, fraud in the
inducement with respect to Jacobs' exercise of warrants or options, or Jacobs'
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employment agreement and the breach thereof, or any other matter with respect to
Incomnet, whether known or unknown, up to and including the date of execution of
this Settlement Agreement, provided however, that nothing contained herein shall
operate or be construed in any way to affect or diminish the obligations
incurred pursuant to the terms and conditions of this Settlement Agreement or
arising subsequent to the date of execution of this Settlement Agreement.
6. Upon satisfaction of the conditions stated in paragraphs 1 and 3,
Jacobs, for himself, his successors, assigns, heirs, executors and
administrators, hereby releases, acquits, disclaims and forever discharges any
and all claims, demands, causes of action, controversies, agreements, promises,
damages, suits, liabilities, obligations, defenses or remedies each or all of
them have or may have of any nature whatsoever, whether known or unknown, from
the beginning of time up to and including the date of execution of this
Settlement Agreement, against Incomnet, its current and former officers and
directors (with the specific exception of Schwartz), its attorneys, accountants,
shareholders and employees and each of its successors, representatives,
attorneys, subsidiaries and their current officers and directors and assigns,
provided, however, that nothing contained herein shall operate or be construed
in any way to affect or diminish the obligations incurred pursuant to the terms
and conditions of this Settlement Agreement or arising subsequent to the
effective date of execution of this Settlement Agreement. The foregoing release
of Incomnet is not intended to affect or
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impair the assignment by Jacobs of any and all claims assigned to Incomnet
pursuant to Paragraph 4, or to limit any right of contribution Incomnet may
have.
7. Effective upon the signing of this Settlement agreement, Incomnet and
its predecessors, successors and assigns hereby release, acquit, disclaim and
forever discharge any and all claims, demands, causes of action, controversies,
agreements, promises, damages, suits, liabilities, obligations, defenses or
remedies each or all of them have or may have of any nature whatsoever, whether
known or unknown, from the beginning of time up to and including the date of
execution of this Settlement Agreement, against Jacobs, and each of his
representatives, attorneys, and assigns, provided, however, that nothing
contained herein shall operate or be construed in any way to affect or diminish
the obligations incurred pursuant to the terms and conditions of this Settlement
Agreement or arising subsequent to the date of execution of this Settlement
Agreement.
8. Effective upon the execution by Ballah of the Release, covenant not to
sue and assignment of claims in the form attached hereto as Exhibit D and
delivery of such executed document to Incomnet, Incomnet and its predecessors,
successors and assigns hereby release, acquit, disclaim and forever discharge
any and all claims, demands, causes of action, controversies, agreements,
promises, damages, suits, liabilities, obligations, defenses or remedies each or
all of them have or may have of any
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nature whatsoever, whether known or unknown, from the beginning of time up to
and including the date of execution of this Settlement Agreement, against
Ballah, and each of his representatives, attorneys, and assigns, provided,
however, that nothing contained herein shall operate or be construed in any way
to affect or diminish the obligations incurred pursuant to the terms and
conditions of this Settlement Agreement or arising subsequent to the effective
date of execution of this Settlement Agreement.
9. Each signatory to this Settlement Agreement warrants and represents
that he is authorized to sign on behalf of and to bind the party on whose behalf
he signed. Upon the execution of this Settlement Agreement by Incomnet, the
same will be submitted for approval by Incomnet's Board of Directors, in the
form attached hereto as Exhibit H, within seven (7) days after such execution by
Incomnet. If such Board approval has not been obtained within such seven (7)
day period, this Settlement Agreement may, at the option of either Jacobs or
Incomnet, be terminated.
10. Subject to and consistent with the intent and the provisions of this
Settlement Agreement, the parties hereto agree to execute such documents and
take such actions as may be necessary to carry out the intent and provisions of
the Settlement Agreement.
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11. This Settlement Agreement may be executed by the parties listed below
in multiple original counterparts, each of which shall be deemed an original,
but all of which together shall constitute a single agreement.
12. This Settlement Agreement and the Exhibits attached hereto shall
constitute the entire agreement between the parties hereto, shall be binding
upon the predecessors, successors or assigns of each, and shall not be modified
except upon written agreement of the parties.
13. This Settlement Agreement is a product of informed negotiations and
involves compromises of the parties' previously stated and disputed legal
positions. It shall not be construed as an admission of liability by any party
to this Settlement Agreement.
14. The terms of this Settlement Agreement shall be and shall remain
confidential between the parties hereto and shall not be disclosed to any person
or entity, other than (i) the officers, directors, accountants, auditors,
insurers, or reinsurers, of a party; (ii) in filings with governmental agencies
as may be necessary to fulfill specific and necessary filing obligations; (iii)
by order of a court of competent jurisdiction; (iv) by any party to its legal
counsel; (v) by any party in an action to enforce the terms of this Settlement
Agreement (in which event the party seeking enforcement shall have such action
filed and proceed under seal unless and until otherwise ordered
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by the relevant court); and/or (vi) by written consent of the other party
hereto. The parties agree to notify each other promptly in the event any of
them receives any request, discovery request, subpoena or court order calling or
potentially calling for production or disclosure of this Settlement Agreement,
and to use their best efforts to obtain a protective order preventing the
disclosure of same. The parties further agree to notify each other promptly in
the event any of them determines it may be necessary to disclose this Settlement
Agreement to any government agency.
15. Any party which obtains judicial relief as the result of a material
breach of the terms and conditions of this Settlement Agreement by the other
party to this Settlement Agreement shall be entitled to recover its reasonable
attorneys' fees and costs in such proceeding from the breaching party.
16. Any notice required to be submitted pursuant to this Settlement
Agreement shall be provided to Melvyn Reznick, President and Chief Executive
Officer of
Incomnet Inc. (or his successor) on behalf of Incomnet and to Edward R. Jacobs,
personally, at the corporate offices of NTC or any other address which he
designates.
17. This Settlement Agreement shall be interpreted in accordance with and
governed by the laws of the State of California.
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18. It is expressly understood and agreed that each party expressly and
voluntarily waives and relinquishes all rights and benefits under Section 1542
of the California Civil Code as well as all of the provisions of all comparable
similar statutes of any State of the United States and/or principles of common
law, if in any way applicable to this Settlement Agreement. The parties
acknowledge that this waiver and relinquishment is an essential and material
term of this Settlement Agreement without which the consideration described
herein would not have been given and delivered and without which the parties
subject hereto would not have executed and delivered this Settlement Agreement.
Section 1542 of the California Civil Code provides as follows:
"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
A. The parties acknowledge that the effect and import of this Settlement
Agreement and of the waivers contained in Paragraphs 6-8 above and this
Paragraph have been explained to them by their own legal counsel, or that they
have had the opportunity but have chosen not to retain legal counsel,
particularly in regard to the above releases. With this knowledge and
understanding, the parties each elect to, and do, waive the provisions of
Section 1542 of the California Civil Code and of any similar case or statutory
law of other states that may be applicable, and relinquish any rights
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which they may otherwise have thereunder, to the fullest extent permitted by
law, with regard to the above releases, and agree that the above releases shall
remain in full force and effect notwithstanding any discovery or existence of
any additional or different facts.
B. The parties acknowledge that should their representatives hereafter
discover facts different from, or in addition to, those their representatives
now know or believe to be true, including without limitation, facts concerning
the matters covered in the recitals above, said parties agree that this
Settlement Agreement shall be in, and remain in, full force and effect in all
respects, notwithstanding (a) any discovery by them or their representative of
such different or additional facts; or (b) the present knowledge, if any, of the
parties, or any other person; or (c) whether full disclosure has been made by
the parties, or any other person, of all facts presently known to such person.
It is the intention of the parties to hereby fully, finally and forever settle
and release as against each other all claims referred to in Paragraphs 6-8 above
("Released Claims") and any and all items relative to the Released Claims that
now exist, or heretofore have existed between them as set forth herein. In
furtherance of such intention, this Settlement Agreement shall be and remain in
effect as a full and complete release of all matters covered hereby,
notwithstanding the discovery by any of the parties, or their representatives,
of the existence of any additional or different claims or the facts relative
thereto.
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C. Each of the parties represents and warrants that he or she has had
this Settlement Agreement reviewed by legal counsel or other advisors of his or
her own choosing and has received independent legal advice from legal counsel
and other advisers with respect to the advisability of making this settlement
and with respect to the execution of this Settlement Agreement, or has had the
opportunity to do so and has freely and voluntarily determined not to do so, and
that he or she is executing this Settlement Agreement freely and willingly
following such consultation.
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Dated: November , 1996 Dated: November 13, 1996
------
Incomnet: Jacobs:
Incomnet, Inc. Edward R. Jacobs, personally
By: By:
------------------------------ ------------------------------
Melvyn Reznick, President and Edward R. Jacobs
Chief Executive Officer
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EXHIBIT A
INCOMNET ASSUMPTION OF DEBT OF JACOBS
This Assumption of Debt Agreement ("Agreement") is made as of this
______ day of ________________________________________ by Incomnet, Inc., a
California corporation ("Incomnet"), pursuant to a Settlement Agreement, Mutual
Release, Assignment of Claims and Covenant Not to Sue executed by and between
Edward R. Jacobs, a resident of Orange County, California ("Jacobs"), and
Incomnet dated November 13, 1996 ("Settlement Agreement").
WHEREAS, Jacobs entered into certain loan agreements with National
Telephone & Communications, Inc. ("NTC") for the principal amount of $547,240,
plus interest, in accordance with the authorization and direction of a
unanimously approved resolution of NTC's Board of Directors dated October 12,
1995 ("Jacobs Loan Agreements"); and
WHEREAS, Incomnet has agreed to assume any and all obligations of
Jacobs pursuant to the Jacobs Loan Agreements and the Settlement Agreement.
NOW, THEREFORE, in accordance with the Settlement Agreement:
1. Incomnet hereby assumes all obligations owed by Jacobs pursuant
to the Jacobs Loan Agreements, including any and all obligations of Jacobs to
repay principal, interest or penalties with respect to such loans.
2. Incomnet will take any and all necessary steps to have NTC
release Jacobs from any and all obligations with respect to the Jacobs Loan
Agreements.
Dated:
---------------------------
Incomnet, Inc.
By:
------------------------------
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Melvyn Reznick, President and
Chief Executive Officer
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EXHIBIT B
RELEASE OF EDWARD R. JACOBS
BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
This Release is executed on ________________________, by National
Telephone and Communications, Inc. ("NTC"), a Nevada Corporation, in favor of
Edward R. Jacobs, a resident of Orange County, California ("Jacobs").
WHEREAS, Edward R. Jacobs is currently employed by NTC as President
and Chief Executive Officer of NTC, a wholly owned subsidiary of Incomnet, Inc.
("Incomnet");
WHEREAS, Jacobs entered into certain loan agreements with NTC for the
principal amount of $547,240, plus interest, in accordance with the
authorization and direction of a unanimously approved resolution of NTC's Board
of Directors dated October 12, 1995 ("Jacobs Loan Agreements"); and
WHEREAS, Incomnet has assumed all obligations owed by Jacobs pursuant
to the Jacobs Loan Agreements pursuant to a Settlement Agreement, Mutual
Release, Assignment of Claims and Covenant Not to Sue executed by and between
Jacobs and Incomnet dated November 13, 1996 ("Settlement Agreement").
NOW, THEREFORE, in consideration of the assumption by Incomnet of all
obligations owed by Jacobs pursuant to the Jacobs Loan Agreements:
1. NTC, for itself, its predecessors, successors and assigns, hereby
releases, acquits, disclaims and forever discharges Jacobs from any and all
debts, liabilities, obligations, promises, covenants, contracts, endorsements,
bonds, controversies, actions, causes of action, judgments, damages, expenses,
claims and demands whatsoever, in law or in equity, which NTC now has against
Jacobs, or hereafter can, shall or may have, for, or by reason of or related to,
the Jacobs Loan Agreements (the "Release").
2. It is expressly understood and agreed that NTC expressly and
voluntarily waives and relinquishes all rights and benefits under Section 1542
of the California Civil Code as well as all of the provisions of all comparable
similar statutes of any State of the United States and/or principles of common
law, if in any way applicable to this Release. The parties acknowledge that
this waiver and relinquishment is an essential and material term of this Release
without which the
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consideration described herein would not have been given and delivered and
without which NTC would not have executed and delivered this Release. Section
1542 of the California Civil Code provides as follows:
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"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
A. NTC acknowledges that the effect and import of this Release and
of the waivers contained in Paragraph 1 above and this Paragraph have been
explained to it by its own legal counsel, or that it has had the opportunity but
has chosen not to retain legal counsel, particularly in regard to the above
releases. With this knowledge and understanding, NTC elects to, and does, waive
the provisions of Section 1542 of the California Civil Code and of any similar
case or statutory law of other states that may be applicable, and relinquishes
any rights which it may otherwise have thereunder, to the fullest extent
permitted by law, with regard to the above releases, and agrees that the above
releases shall remain in full force and effect notwithstanding any discovery or
existence of any additional or different facts.
B. NTC acknowledges that should its representatives hereafter
discover facts different from, or in addition to, those its representatives now
know or believe to be true, including without limitation, facts concerning the
matters covered in the recitals above, NTC agrees that this Release shall be in,
and remain in, full force and effect in all respects, notwithstanding (a) any
discovery by it or its representative of such different or additional facts; or
(b) the present knowledge, if any, of the parties, or any other person; or (c)
whether full disclosure has been made by the parties, or any other person, of
all facts presently known to such person. It is the intention of NTC to hereby
fully, finally and forever settle and release as against Jacobs all claims
referred to in the Release ("Released Claims") and any and all items relative to
the Released Claims that now exist, or heretofore have existed between Jacobs
and NTC as set forth herein. In furtherance of such intention, this Release
shall be and remain in effect as a full and complete release of all matters
covered hereby, notwithstanding the discovery by NTC, or its representatives, of
the existence of any additional or different claims or the facts relative
thereto.
C. NTC represents and warrants that it has had this Release reviewed
by legal counsel or other advisors of its own choosing and has received
independent legal advice from legal counsel and other advisers with respect to
the advisability of the execution of this Release, or has had the opportunity to
do so and has freely and voluntarily
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determined not to do so, and that it is executing this Release freely and
willingly following such consultation.
Dated:
------------------------------
National Telephone & Communications, Inc.
By:
------------------------------
Edward R. Jacobs, President and Chief Executive Officer
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EXHIBIT C
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
The undersigned, being all of the directors of National Telephone &
Communications, Inc., a Nevada Corporation ("Company"), hereby adopt the
following resolutions by unanimous written consent in lieu of a meeting pursuant
to their authority to do so in the Bylaws of the Company and the laws of the
State of Nevada.
RESOLVED, that the release of Edward R. Jacobs by the Company dated ___________
and the Assumption of Debt executed by Incomnet (the "Agreements"), copies of
which are attached to this Unanimous Written Consent of the Board of Directors
as Exhibits 1 and 2, respectively, are hereby authorized, ratified, adopted and
approved. The execution of the Release by Edward R. Jacobs, as the President
and Chief Executive Officer of the Company on behalf of the Company is hereby
ratified and approved.
RESOLVED, that the Company hereby releases Incomnet, in the form attached as
Exhibit 3, from its obligation to pay to the Company the Jacobs' debt
obligations assumed by Incomnet, provided that in the opinion of NTC's
independent accounting firm such release and the failure of Incomnet to pay such
debt obligations to NTC shall not require NTC to record or reflect the Jacobs
debt obligations assumed by Incomnet as a charge to NTC's earnings.
RESOLVED, that the officers and directors of the Company be, and they hereby
are, authorized, empowered and directed to do and perform all such acts and
things and to sign all such documents, certificates, directions, instruments and
statements, whether under the corporate seal of the Company or otherwise, and to
take all such other steps as such officer, officers, director or directors shall
determine to be necessary and advisable to effectuate the matters set forth in
the foregoing resolution, any such determination to be conclusively evidenced by
the taking or causing to be taken of such action or the execution and delivery
of any such document, certificate, direction, instrument or statement by any
such officer, officers, director or directors.
IN WITNESS WHEREOF, this Unanimous Written Consent of the Board of Directors of
the Company has been executed on and is effective as of ______________________.
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- ------------------------------ ------------------------------
Edward R. Jacobs Jerry Ballah, Director
Director
- ------------------------------
Melvyn Reznick, Director
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EXHIBIT D
RELEASE, COVENANT NOT TO SUE AND ASSIGNMENT OF CLAIMS
1. Upon satisfaction of the conditions stated in paragraphs 2 and 3
of the Settlement Agreement, Mutual Release, Assignment of Claims and Covenant
Not To Sue executed by and between Edward R. Jacobs and Incomnet dated November
13, 1996 ("Settlement Agreement"), I, Jerry Ballah, agree for myself, my
successors, assigns, heirs, executors and administrators, to assign to Incomnet,
Inc. ("Incomnet") any rights, benefits, demands, causes of action or remedies I
may have relating to any alleged violations of state or federal securities or
other laws which may have been committed by any current or former officer,
director, shareholder, employee, attorney, accountant, agent, or independent
contractor of Incomnet and its subsidiaries, or any person or entity acting in
concert with any such person or entity, prior to the date of execution of the
Settlement Agreement. I further agree to cooperate in the prosecution of any
negotiation or litigation relating to such assigned claims which may be pursued
or filed by Incomnet against any current or former officer, director,
shareholder, employee, attorney, accountant, agent, or independent contractor of
Incomnet, or any person or entity acting in concert with any such person or
entity and any other claims which I may have against Incomnet or any current or
former officer, director, shareholder, employee, attorney, accountant, agent or
independent contractor of Incomnet. The purpose of this assignment is to
preserve for Incomnet any and all claims otherwise possessed by me and is not
intended to limit any right of contribution which Incomnet may have.
2. Upon satisfaction of the conditions expressly assumed by Incomnet
in the Settlement Agreement, I further covenant for myself, my successors,
assigns, heirs, executors and administrators, not to sue Incomnet's current or
former officers, directors, shareholders, employees, attorneys, accountants,
agents, independent contractors, or subsidiaries, including any officers or
directors thereof, or any person or entity acting in concert with any such
person or entity, for any and all claims, demands, causes of action,
controversies, agreements, promises, damages, suits, liabilities, obligations,
defenses or remedies of any nature whatsoever relating to any alleged violations
of state or federal securities or other laws, or any other matter with respect
to Incomnet, whether known or unknown, up to and including the date of execution
of the Settlement Agreement, provided however, that nothing contained herein
shall operate or be construed in any way to affect or diminish the obligations
incurred pursuant to the terms and conditions of the Settlement Agreement or
arising subsequent to the date of execution of the Settlement Agreement.
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3. Upon satisfaction of the conditions stated in paragraphs 2 and 3
of the Settlement Agreement, I, for myself, my successors, assigns, heirs,
executors and administrators, hereby release, acquit, disclaim and forever
discharge any and all claims, demands, causes of action, controversies,
agreements, promises, damages, suits, liabilities, obligations, defenses or
remedies each or all of them have or may have of any nature whatsoever, whether
known or unknown, from the beginning of time up to and including the date of
execution of the Settlement Agreement, against Incomnet, its current and former
officers and directors (with the specific exception of Schwartz), its attorneys,
accountants, shareholders and employees and each of its successors,
representatives, attorneys, subsidiaries and their current officers and
directors , and assigns, provided, however, that nothing contained herein shall
operate or be construed in any way to affect or diminish the obligations
incurred pursuant to the terms and conditions of the Settlement Agreement or
arising subsequent to the effective date of execution of the Settlement
Agreement. The foregoing release of Incomnet is not intended to affect or
impair my assignment of any and all claims to Incomnet pursuant to Paragraph 1
or to limit any right of contribution Incomnet may have.
4. It is expressly understood and agreed that each party (Ballah and
Incomnet) expressly and voluntarily waives and relinquishes all rights and
benefits under Section 1542 of the California Civil Code as well as all of the
provisions of all comparable similar statutes of any State of the United States
and/or principles of common law, if in any way applicable to this Agreement.
The parties acknowledge that this waiver and relinquishment is an essential and
material term of this Agreement without which the consideration described herein
would not have been given and delivered and without which the parties subject
hereto would not have executed and delivered this Agreement. Section 1542 of
the California Civil Code provides as follows:
"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
A. The parties acknowledge that the effect and import of this
Agreement and of the waivers contained in Paragraph 3 above, and Paragraph 8 of
the Settlement Agreement and this Paragraph have been explained to them by their
own legal counsel, or that they have had the opportunity but have chosen not to
retain legal
25
<PAGE>
counsel, particularly in regard to the above releases. With this knowledge and
understanding, the parties each elect to, and do, waive the provisions of
Section 1542 of the California Civil Code and of any similar case or statutory
law of other states that may be applicable, and relinquish any rights which they
may otherwise have thereunder, to the fullest extent permitted by law, with
regard to the above releases, and agree that the above releases shall remain in
full force and effect notwithstanding any discovery or existence of any
additional or different facts.
B. The parties acknowledge that should their representatives
hereafter discover facts different from, or in addition to, those their
representatives now know or believe to be true, including without limitation,
facts concerning the matters covered in the recitals above, said parties agree
that this Agreement shall be in, and remain in, full force and effect in all
respects, notwithstanding (a) any discovery by them or their representative of
such different or additional facts; or (b) the present knowledge, if any, of the
parties, or any other person; or (c) whether full disclosure has been made by
the parties, or any other person, of all facts presently known to such person.
It is the intention of the parties to hereby fully, finally and forever settle
and release as against each other all claims referred to in Paragraph 3 above
and Paragraph 8 of the Settlement Agreement ("Released Claims") and any and all
items relative to the Released Claims that now exist, or heretofore have existed
between them as set forth herein. In furtherance of such intention, this
Agreement shall be and remain in effect as a full and complete release of all
matters covered hereby, notwithstanding the discovery by any of the parties, or
their representatives, of the existence of any additional or different claims or
the facts relative thereto.
C. Each of the parties represents and warrants that he or she has
had this Agreement reviewed by legal counsel or other advisors of his or her own
choosing and has received independent legal advice from legal counsel and other
advisers with respect to the advisability of making this settlement and with
respect to the execution of this Agreement, or has had the opportunity to do so
and has freely and voluntarily determined not to do so, and that he or she is
executing this Agreement freely and willingly following such consultation.
Dated: By:
------------------------------ ------------------------------
Jerry Ballah
Dated: Incomnet, Inc.
------------------------------
26
<PAGE>
By:
------------------------------
Melvyn Reznick, President and Chief Executive Officer
27
<PAGE>
EXHIBIT E
INCOMNET ASSUMPTION OF DEBT OF BALLAH
This Assumption of Debt Agreement ("Agreement") is made as of this __
day of __________________________ by Incomnet, Inc., a California corporation
("Incomnet"), pursuant to a Settlement Agreement, Mutual Release, Assignment of
Claims and Covenant Not to Sue executed by and between Edward R. Jacobs, a
resident of Orange County, California, and Incomnet dated November 13, 1996
("Settlement Agreement").
WHEREAS, Jerry Ballah ("Ballah") entered into certain loan agreements
with National Telephone & Communications, Inc. ("NTC") for the principal amount
of $465,000, plus interest, in accordance with the authorization and direction
of a unanimously approved resolution of NTC's Board of Directors dated October
12, 1995 ("Ballah Loan Agreements");
WHEREAS, Incomnet has agreed to assume any and all obligations of
Ballah pursuant to the Ballah Loan Agreements and the Settlement Agreement,
provided that Ballah executes a Release, Covenant Not To Sue And Assignment of
Claims ("Agreement") with Incomnet; and
WHEREAS, Ballah executed the Agreement with Incomnet on -
______________.
NOW, THEREFORE, in accordance with the Settlement Agreement and the
Agreement:
1. Incomnet hereby assumes all obligations owed by Ballah pursuant
to the Ballah Loan Agreements, including any and all obligations of Ballah to
repay principal, interest or penalties with respect to such loans.
2. Incomnet will take any and all necessary steps to have NTC
release Ballah from any and all obligations with respect to the Ballah Loan
Agreements.
Dated:
------------------------------
Incomnet, Inc.
28
<PAGE>
By:
------------------------------
Melvyn Reznick, President and
Chief Executive Officer
29
<PAGE>
EXHIBIT F
RELEASE OF JERRY BALLAH
BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
This Release is executed on ____________________________, by National
Telephone and Communications, Inc. ("NTC"), a Nevada Corporation, in favor of
Jerry Ballah ("Ballah"), a resident of Orange County, California.
WHEREAS, Ballah is currently employed by NTC as Executive Vice
President of NTC, a wholly owned subsidiary of Incomnet, Inc. ("Incomnet");
WHEREAS, Ballah entered into certain loan agreements with NTC for the
principal amount of $465,000, plus interest, in accordance with the
authorization and direction of a unanimously approved resolution of NTC's Board
of Directors dated October 12, 1995 ("Ballah Loan Agreements"); and
WHEREAS, Incomnet has assumed all obligations owed by Ballah pursuant
to the Ballah Loan Agreements pursuant to a Settlement Agreement, Mutual
Release, Assignment of Claims and Covenant Not to Sue executed by and between
Jacobs and Incomnet dated November 13, 1996 ("Settlement Agreement").
NOW, THEREFORE, in consideration of the assumption by Incomnet of all
obligations owed by Ballah pursuant to the Ballah Loan Agreements:
1. NTC, for itself, its predecessors, successors and assigns, hereby
releases, acquits, disclaims and forever discharges Ballah from any and all
debts, liabilities, obligations, promises, covenants, contracts, endorsements,
bonds, controversies, actions, causes of action, judgments, damages, expenses,
claims and demands whatsoever, in law or in equity, which NTC now has against
Ballah, or hereafter can, shall or may have, for, or by reason of or related to,
the Ballah Loan Agreements (the "Release").
2. It is expressly understood and agreed that NTC expressly and
voluntarily waives and relinquishes all rights and benefits under Section 1542
of the California Civil Code as well as all of the provisions of all comparable
similar statutes of any State of the United States and/or principles of common
law, if in any way applicable to this Release. The parties acknowledge that
this waiver and relinquishment is an essential and material term of this Release
without which the consideration described herein would not have been given and
delivered and without
30
<PAGE>
which NTC would not have executed and delivered this Release. Section 1542 of
the California Civil Code provides as follows:
31
<PAGE>
"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
A. NTC acknowledges that the effect and import of this Release
and of the waivers contained in Paragraph 1 above and this Paragraph have been
explained to it by its own legal counsel, or that it has had the opportunity but
has chosen not to retain legal counsel, particularly in regard to the above
releases. With this knowledge and understanding, NTC elects to, and does, waive
the provisions of Section 1542 of the California Civil Code and of any similar
case or statutory law of other states that may be applicable, and relinquishes
any rights which it may otherwise have thereunder, to the fullest extent
permitted by law, with regard to the above releases, and agrees that the above
releases shall remain in full force and effect notwithstanding any discovery or
existence of any additional or different facts.
B. NTC acknowledges that should its representatives hereafter
discover facts different from, or in addition to, those its representatives now
know or believe to be true, including without limitation, facts concerning the
matters covered in the recitals above, NTC agrees that this Release shall be in,
and remain in, full force and effect in all respects, notwithstanding (a) any
discovery by it or its representative of such different or additional facts; or
(b) the present knowledge, if any, of the parties, or any other person; or (c)
whether full disclosure has been made by the parties, or any other person, of
all facts presently known to such person. It is the intention of NTC to hereby
fully, finally and forever settle and release as against Ballah all claims
referred to in the Release ("Released Claims") and any and all items relative to
the Released Claims that now exist, or heretofore have existed between Ballah
and NTC as set forth herein. In furtherance of such intention, this Release
shall be and remain in effect as a full and complete release of all matters
covered hereby, notwithstanding the discovery by NTC, or its representatives, of
the existence of any additional or different claims or the facts relative
thereto.
C. NTC represents and warrants that it has had this Release reviewed
by legal counsel or other advisors of its own choosing and has received
independent legal advice from legal counsel and other advisers with respect to
the advisability of the execution of this Release, or has had the opportunity to
do so and has freely and voluntarily
32
<PAGE>
determined not to do so, and that it is executing this Release freely and
willingly following such consultation.
Dated:
------------------------------
National Telephone & Communications, Inc.
By:
------------------------------
Edward R. Jacobs, President and Chief Executive Officer
33
<PAGE>
EXHIBIT G
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
The undersigned, being all of the directors of National Telephone &
Communications, Inc., a Nevada Corporation ("Company"), hereby adopt the
following resolutions by unanimous written consent in lieu of a meeting pursuant
to their authority to do so in the Bylaws of the Company and the laws of the
State of Nevada.
RESOLVED, that the Release of Jerry Ballah by the Company dated ______________
and the Assumption of Debt executed by Incomnet (the "Agreements"), copies of
which are attached to this Unanimous Written Consent of the Board of Directors
as Exhibits 1 and 2, respectively, are hereby authorized, ratified, adopted and
approved. The execution of the Release by Edward R. Jacobs, as the President
and Chief Executive Officer of the Company on behalf of the Company is hereby
ratified and approved.
RESOLVED, that the Company hereby releases Incomnet, in the form attached as
Exhibit 3, from its obligation to pay to the Company the Ballah debt obligations
assumed by Incomnet, provided that in the opinion of NTC's independent
accounting firm such release and the failure of Incomnet to pay such debt
obligations to NTC shall not require NTC to record or reflect the Ballah debt
obligations assumed by Incomnet as a charge to NTC's earnings.
RESOLVED, that the officers and directors of the Company be, and they hereby
are, authorized, empowered and directed to do and perform all such acts and
things and to sign all such documents, certificates, directions, instruments and
statements, whether under the corporate seal of the Company or otherwise, and to
take all such other steps as such officer, officers, director or directors shall
determine to be necessary and advisable to effectuate the matters set forth in
the foregoing resolution, any such determination to be conclusively evidenced by
the taking or causing to be taken of such action or the execution and delivery
of any such document, certificate, direction, instrument or statement by any
such officer, officers, director or directors.
IN WITNESS WHEREOF, this Unanimous Written Consent of the Board of Directors of
the Company has been executed on and is effective as of ______________________.
34
<PAGE>
- ------------------------------ ------------------------------
Edward R. Jacobs Jerry Ballah, Director
Director
- ------------------------------
Melvyn Reznick, Director
EXHIBIT H
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
INCOMNET, INC.
The undersigned, being all of the directors of Incomnet, Inc., a California
Corporation ("Company"), hereby adopt the following resolutions by unanimous
written consent in lieu of a meeting pursuant to their authority to do so in the
Bylaws of the Company and Section 307 of the California Corporations Code.
RESOLVED, that the Settlement Agreement, Mutual Release, Assignment of Claims
and Covenant Not To Sue between the Company and Edward R. Jacobs, dated November
13, 1996 (the "Agreement"), a copy of which is attached to this Unanimous
Written Consent of the Board of Directors as Exhibit 1, is hereby authorized,
ratified, adopted and approved. The execution of the Agreement by Melvyn
Reznick as the President and Chief Executive Officer of the Company on behalf of
the Company is hereby ratified and approved.
RESOLVED, that the officers and directors of the Company be, and they hereby
are, authorized, empowered and directed to do and perform all such acts and
things and to sign all such documents, certificates, directions, instruments and
statements, whether under the corporate seal of the Company or otherwise, and to
take all such other steps as such officer, officers, director or directors shall
determine to be necessary and advisable to effectuate the matters set forth in
the foregoing resolution, any such determination to be conclusively evidenced by
the taking or causing to be taken of such action or the execution and delivery
of any such document, certificate, direction, instrument or statement by any
such officer, officers, director or directors, including without limitation
thereto, the authority to execute all documents specifically required to be
executed as indicated in the Agreement and attachments thereto.
IN WITNESS WHEREOF, this Unanimous Written Consent of the Board of Directors of
the Company has been executed on and is effective as of _______________________.
35
<PAGE>
- ------------------------------ ------------------------------
Melvyn Reznick, Albert Milstein, Director
Chairman of the Board of Directors
- ------------------------------
Nancy Zivitz, Director
36
<PAGE>
EXHIBIT 3 TO EXHIBIT C
RELEASE OF INCOMNET, INC.
BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
This Release is executed on _______________________________, by
National Telephone and Communications, Inc. ("NTC"), a Nevada Corporation, in
favor of Incomnet, Inc. ("Incomnet"), a California corporation.
WHEREAS, Edward R. Jacobs is currently employed by NTC as President
and Chief Executive Officer of NTC, a wholly owned subsidiary of Incomnet, Inc.
("Incomnet");
WHEREAS, Jacobs entered into certain loan agreements with NTC for the
principal amount of $547,240, plus interest, in accordance with the
authorization and direction of a unanimously approved resolution of NTC's Board
of Directors dated October 12, 1995 ("Jacobs Loan Agreements"); and
WHEREAS, Incomnet has assumed all obligations owed by Jacobs pursuant
to the Jacobs Loan Agreements pursuant to a Settlement Agreement, Mutual
Release, Assignment of Claims and Covenant Not to Sue executed by and between
Jacobs and Incomnet dated November 13, 1996 ("Settlement Agreement").
NOW, THEREFORE, in consideration of the above:
1. NTC, for itself, its predecessors, successors and assigns, hereby
releases, acquits, disclaims and forever discharges Incomnet from any and all
debts, liabilities, obligations, promises, covenants, contracts, endorsements,
bonds, controversies, actions, causes of action, judgments, damages, expenses,
claims and demands whatsoever, in law or in equity, which NTC now has against
Incomnet, or hereafter can, shall or may have, for, or by reason of or related
to, the Jacobs Loan Agreements (the "Release").
2. It is expressly understood and agreed that NTC expressly and
voluntarily waives and relinquishes all rights and benefits under Section 1542
of the California Civil Code as well as all of the provisions of all comparable
similar statutes of any State of the United States and/or principles of common
law, if in any way applicable to this Release. The parties acknowledge that
this waiver and relinquishment is an essential and material term of this Release
without which the consideration described herein would not have been given and
delivered and without
37
<PAGE>
which NTC would not have executed and delivered this Release. Section 1542 of
the California Civil Code provides as follows:
38
<PAGE>
"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
A. NTC acknowledges that the effect and import of this Release
and of the waivers contained in Paragraph 1 above and this Paragraph have been
explained to it by its own legal counsel, or that it has had the opportunity but
has chosen not to retain legal counsel, particularly in regard to the above
releases. With this knowledge and understanding, NTC elects to, and does, waive
the provisions of Section 1542 of the California Civil Code and of any similar
case or statutory law of other states that may be applicable, and relinquishes
any rights which it may otherwise have thereunder, to the fullest extent
permitted by law, with regard to the above releases, and agrees that the above
releases shall remain in full force and effect notwithstanding any discovery or
existence of any additional or different facts.
B. NTC acknowledges that should its representatives hereafter
discover facts different from, or in addition to, those its representatives now
know or believe to be true, including without limitation, facts concerning the
matters covered in the recitals above, NTC agrees that this Release shall be in,
and remain in, full force and effect in all respects, notwithstanding (a) any
discovery by it or its representative of such different or additional facts; or
(b) the present knowledge, if any, of the parties, or any other person; or (c)
whether full disclosure has been made by the parties, or any other person, of
all facts presently known to such person. It is the intention of NTC to hereby
fully, finally and forever settle and release as against Incomnet all claims
referred to in the Release ("Released Claims") and any and all items relative to
the Released Claims that now exist, or heretofore have existed between Incomnet
and NTC as set forth herein. In furtherance of such intention, this Release
shall be and remain in effect as a full and complete release of all matters
covered hereby, notwithstanding the discovery by NTC, or its representatives, of
the existence of any additional or different claims or the facts relative
thereto.
C. NTC represents and warrants that it has had this Release
reviewed by legal counsel or other advisors of its own choosing and has received
independent legal advice from legal counsel and other advisers with respect to
the advisability of the execution of this Release, or has had the opportunity to
do so and has freely and voluntarily
39
<PAGE>
determined not to do so, and that it is executing this Release freely and
willingly following such consultation.
Dated:
------------------------------
National Telephone & Communications, Inc.
By:
------------------------------
Edward R. Jacobs, President and Chief Executive Officer
40
<PAGE>
EXHIBIT 3 TO EXHIBIT G
RELEASE OF INCOMNET, INC.
BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
This Release is executed on ___________________________, by National
Telephone and Communications, Inc. ("NTC"), a Nevada Corporation, in favor of
Incomnet, Inc. ("Incomnet"), a California corporation.
WHEREAS, Ballah is currently employed by NTC as Executive Vice
President of NTC, a wholly owned subsidiary of Incomnet, Inc. ("Incomnet");
WHEREAS, Ballah entered into certain loan agreements with NTC for the
principal amount of $465,000, plus interest, in accordance with the
authorization and direction of a unanimously approved resolution of NTC's Board
of Directors dated October 12, 1995 ("Ballah Loan Agreements"); and
WHEREAS, Incomnet has assumed all obligations owed by Ballah pursuant
to the Ballah Loan Agreements pursuant to a Settlement Agreement, Mutual
Release, Assignment of Claims and Covenant Not to Sue executed by and between
Jacobs and Incomnet dated November 13, 1996 ("Settlement Agreement").
NOW, THEREFORE, in consideration of the above:
1. NTC, for itself, its predecessors, successors and assigns, hereby
releases, acquits, disclaims and forever discharges Incomnet from any and all
debts, liabilities, obligations, promises, covenants, contracts, endorsements,
bonds, controversies, actions, causes of action, judgments, damages, expenses,
claims and demands whatsoever, in law or in equity, which NTC now has against
Incomnet, or hereafter can, shall or may have, for, or by reason of or related
to, the Ballah Loan Agreements (the "Release").
2. It is expressly understood and agreed that NTC expressly and
voluntarily waives and relinquishes all rights and benefits under Section 1542
of the California Civil Code as well as all of the provisions of all comparable
similar statutes of any State of the United States and/or principles of common
law, if in any way applicable to this Release. The parties acknowledge that
this waiver and relinquishment is an essential and material term of this Release
without which the consideration described herein would not have been given and
delivered and without
41
<PAGE>
which NTC would not have executed and delivered this Release. Section 1542 of
the California Civil Code provides as follows:
42
<PAGE>
"GENERAL RELEASE - CLAIMS EXTINGUISHED:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
A. NTC acknowledges that the effect and import of this Release
and of the waivers contained in Paragraph 1 above and this Paragraph have been
explained to it by its own legal counsel, or that it has had the opportunity but
has chosen not to retain legal counsel, particularly in regard to the above
releases. With this knowledge and understanding, NTC elects to, and does, waive
the provisions of Section 1542 of the California Civil Code and of any similar
case or statutory law of other states that may be applicable, and relinquishes
any rights which it may otherwise have thereunder, to the fullest extent
permitted by law, with regard to the above releases, and agrees that the above
releases shall remain in full force and effect notwithstanding any discovery or
existence of any additional or different facts.
B. NTC acknowledges that should its representatives hereafter
discover facts different from, or in addition to, those its representatives now
know or believe to be true, including without limitation, facts concerning the
matters covered in the recitals above, NTC agrees that this Release shall be in,
and remain in, full force and effect in all respects, notwithstanding (a) any
discovery by it or its representative of such different or additional facts; or
(b) the present knowledge, if any, of the parties, or any other person; or (c)
whether full disclosure has been made by the parties, or any other person, of
all facts presently known to such person. It is the intention of NTC to hereby
fully, finally and forever settle and release as against Incomnet all claims
referred to in the Release ("Released Claims") and any and all items relative to
the Released Claims that now exist, or heretofore have existed between Incomnet
and NTC as set forth herein. In furtherance of such intention, this Release
shall be and remain in effect as a full and complete release of all matters
covered hereby, notwithstanding the discovery by NTC, or its representatives, of
the existence of any additional or different claims or the facts relative
thereto.
C. NTC represents and warrants that it has had this Release
reviewed by legal counsel or other advisors of its own choosing and has received
independent legal advice from legal counsel and other advisers with respect to
the advisability of the execution of this Release, or has had the opportunity to
do so and has freely and voluntarily
43
<PAGE>
determined not to do so, and that it is executing this Release freely and
willingly following such consultation.
Dated:
------------------------------
National Telephone & Communications, Inc.
By:
------------------------------
Edward R. Jacobs, President and Chief Executive Officer
44
<PAGE>
EXHIBIT 23.1
CONSENT OF STONEFIELD JOSEPHSON,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS,
RELATING TO THE FINANCIAL STATEMENTS
<PAGE>
EXHIBIT 23.1
CONSENT OF STONEFIELD JOSEPHSON
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The undersigned independent certified public accounting firm hereby consents to
the inclusion of its report on the financial statements of Incomnet, Inc. for
the years ending December 31, 1995, 1994 and 1993, and to the reference to it as
experts in accounting and auditing relating to said financial statements, in the
Registration Statement for Incomnet, Inc., dated October 18, 1996.
/s/ Stonefield Josephson Accountancy Corporation
- ---------------------------------------------------
STONEFIELD JOSEPHSON ACCOUNTANCY CORPORATION
Santa Monica, California
November 22, 1996
