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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-12386
INCOMNET, INC.
A California IRS Employer No.
Corporation 95-2871296
21031 Ventura Blvd., Suite 1100
Woodland Hills, California 91364
Telephone no. (818) 887-3400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE ACT:................................................................None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:..........................................Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
that the registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days. YES X NO__
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting common stock held by
non-affiliates of the registrant (based upon the
average of the closing bid and ask prices of $2 13/16
and $2 15/16 respectively, as reported by the NASDAQ
System on March 21, 1997) $30,958,080
Number of shares of registrant's common stock outstanding
as of March 21, 1997.................................................13,520,669
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's proxy statements
relating to registrant's 1997 annual meeting of shareholders have been
incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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INTRODUCTORY NOTE 7
PART I
ITEM 1 - BUSINESS
General 7
Telephone Services 7
Optical Systems 7
Network Products and Services 8
National Telephone & Communications, Inc. (NTC) 8
Products 8
Network Marketing Program 8
Disclosure of Independent Representative Organizations
Related to NTC Executives 9
Wiltel Contract 9
Management Incentive Agreement 9
Reincorporation of NTC in Delaware 11
Rapid Cast, Inc. (RCI) 11
General 11
The Optical Marketplace 11
The Production and Dispensing of Prescription
Eyeglass Lenses 12
The Fast Cast LenSystem 13
Technical Overview of the Rapid Cast LenSystem 13
Marketing and Pricing Strategy 14
Manufacturing Strategy 14
Research and Development Strategy 14
Maintenance, Warranty and Insurance 14
Competition 15
Patents and Proprietary Rights 15
Governmental Regulation 16
Recent Capitalization of Rapid Cast, Inc. (RCI) 16
Issuance of Convertible Preferred Stock 20
Agreement with Price International, Inc. 22
Network Services 22
Employees, Officers and Directors 22
Employees 22
Directors and Officers 23
Appointment of New Director by the Company 24
Appointment of Committee Members 24
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TABLE OF CONTENTS (CONT'D)
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ITEM 2 - PROPERTIES 24
ITEM 3 - LEGAL PROCEEDINGS 25
Class Action and Related Lawsuits 25
Settlement with RCI Parties 26
Settlement of Stevens Lawsuit 26
Settlement of the Atlanta Lawsuits 26
Section 16 (b) Lawsuit 26
Settlement of Patent Infringement Lawsuit 27
Legal Action Against Prior Representatives 27
Settlement With Prior Noteholders 27
Settlement with Price International 28
Potential Lawsuits 28
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS 29
Market Information 29
Dividends 29
ITEM 6 - SELECTED FINANCIAL DATA 29
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 30
Liquidity and Capital Resources 30
Results of Operations 31
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 33
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT 33
ITEM 11 - EXECUTIVE COMPENSATION 33
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 34
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K 34
Index to Financial Statements 34
Index to Exhibits 34
Signatures 37
Report of Independent Auditors 38
Consolidated Balance Sheet 39
Consolidated Statement of Operations 40
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TABLE OF CONTENTS (CONT'D)
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Consolidated Statement of Cash Flows 41
Consolidated Statement of Shareholders' Equity 42
Notes to Consolidated Financial Statements 43
Note 1 - Summary of Significant Accounting Policies 43
Note 2 - Funding of Marketing Commissions and
Deferred Income 45
Note 3 - Related Party Transactions 45
Note 4 - Acquisition of Rapid Cast, Inc. 45
Note 5 - Property, Plant and Equipment 46
Note 6 - Patent Rights from Acquisition of RCI 46
Note 7 - Investments, Notes Receivable and Other Assets 46
Note 8 - Notes Payable 46
Note 9 - Income Taxes 47
Note 10 - Shareholders' Equity 48
Note 11 - Commitments, Contingencies and Other 51
Note 12 - Network Marketing Costs 53
Note 13 - Compensation of Independent Sales
Representatives 53
Note 14 - Segment Information 53
Note 15 - Fourth Quarter Adjustments 55
Note 16 - Changes in Accounting 55
Note 17 - Subsequent Events 55
Schedule II - Valuation and Qualifying Accounts 56
Exhibit 3.1 - Certificate of Determination for Series A 2%
Convertible Preferred Stock. (Incorporated
by reference from Incomnet, Inc.'s Registration
Statement on Form S-3 filed with the Securities
and Exchange Commission on November 22, 1996.)
Exhibit 4.1 - Form of Warrant to Purchase 75,000 Shares
of Incomnet, Inc. (Incorporated by reference
from the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996.)
Exhibit 4.2 - Form of Warrant to Purchase 510,000 Shares
of RCI Common Stock with Registration Rights
Agreement, dated April 19, 1996. (Incorporated
by reference from the Company's Registration
Statement on Form S-3 filed with the Securities
and Exchange Commission on May 10, 1996.)
Exhibit 4.3 - Form of Warrant to Purchase RCI Common Stock,
dated February 8, 1995. (Incorporated by reference
from the Company's Registration Statement on
Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996.)
Exhibit 4.4 - Form of Warrant to Purchase 360,000 Shares
of Incomnet, Inc. (Incorporated by reference
from Incomnet, Inc.'s Pre-Effective Amendment
Number One to the Registration Statement on
Form S-3 filed with the Securities and Exchange
Commission on March 24, 1997.)
Exhibit 4.5 - Form of Warrant to Purchase 12,500 Shares of
Incomnet, Inc. (Incorporated by reference from
Incomnet, Inc.'s Pre-Effective Amendment Number
One to the Registration Statement on Form S-3
filed with the Securities and Exchange Commission
on March 24, 1997.)
Exhibit 10.1 - Employment Agreement with James Quandt, dated
January 6,
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1997. (Incorporated by reference from Incomnet,
Inc.'s Pre-Effective Amendment Number One to the
Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on March 24,
1997.)
Exhibit 10.2 - Amended and Restated Management Incentive
Agreement Between NTC and Incomnet, Inc., dated
January 28, 1997. (Incorporated by reference
from Incomnet, Inc.'s Pre-Effective Amendment
Number One to the Registration Statement on
Form S-3 filed with the Securities and Exchange
Commission on March 24, 1997.)
Exhibit 10.3 - Settlement Agreements With Prior Noteholders.
(Incorporated by reference from the Company's
Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on May 10, 1996.)
Exhibit 10.4 - Form of 8% Convertible Note Issued by RCI in
January 1996. (Incorporated by reference from
the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission
on May 10, 1996.)
Exhibit 10.5 - Form of Short-Term 10% Note Issued by RCI in
April 1996. (Incorporated by reference from the
Company's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on
May 10, 1996.)
Exhibit 10.6 - Amended Carrier Switched Services Agreement with
Wiltel, Inc. dated June 17, 1996. (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. Certain
information has been deleted from this agreement
pursuant to a request for confidential treatment
pursuant to Rule 406.)
Exhibit 10.7 - Settlement Agreement Between Joel W. Greenberg
and Incomnet, Inc. (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.)
Exhibit 10.8 - Form of Registration Rights Agreement Between
Incomnet, Inc. and Purchasers of Series A
Convertible Preferred Stock. (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.)
Exhibit 10.9 - Form of Purchase Agreement for the Series A 2%
Convertible Preferred Stock. (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.)
Exhibit 10.10 -Management Incentive Agreement with NTC, dated
October 14, 1996. (Incorporated by reference from
Incomnet, Inc.'s Registration Statement on Form S-3
filed with the Securities and Exchange Commission
on November 22, 1996.)
Exhibit 10.11 -Settlement Agreements With Edward Jacobs and
Jerry Ballah, dated November 14, 1996.
(Incorporated by reference from
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Incomnet, Inc.'s Registration Statement on Form S-3
filed with the Securities and Exchange Commission on
November 22, 1996.)
Exhibit 10.12 - Shareholders Agreement for Rapid Cast, Inc.,
dated January 16, 1997. (Incorporated by reference
from Incomnet, Inc.'s Pre-Effective Amendment Number
One to the Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on
March 24, 1997.)
Exhibit 10.13 - Registration Rights Agreement for Rapid Cast,
Inc., dated January 16, 1997. (Incorporated by
reference from Incomnet, Inc.'s Pre-Effective
Amendment Number One to the Registration Statement
on Form S-3 filed with the Securities and Exchange
Commission on March 24, 1997.)
Exhibit 10.14 - Settlement Agreement and Mutual Release Between
Incomnet, Inc. and the RCI Parties, dated
January 9, 1996. (Incorporated by reference from
Incomnet, Inc.'s Pre-Effective Amendment Number One
to the Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on
March 24, 1997.)
Exhibit 10.15 - Lease Agreement By NTC for space in Honolulu,
Hawaii.
Exhibit 10.16 - Credit Agreement dated March 27, 1997 between
National Telephone & Communication, Inc. and
First Bank & Trust, Irvine Regional office.
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 27 - Financial Data Schedule
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INTRODUCTORY NOTE
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The Company intends that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly,
to the extent that this Annual Report 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, customer returns of
products sold to them by the Company or its subsidiaries, disadvantageous
currency exchange rates, termination of contracts, loss of supplies,
technological obsolescence of the Company's products, technical problems with
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, dilution in the
Company's ownership of its subsidiaries and businesses, 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 Annual Report or in other reports issued by the Company.
In addition, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in the
forward-looking statements. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
PART I
ITEM 1. BUSINESS
GENERAL:
Incomnet, Inc. (the "Company") was incorporated under the laws of the State of
California on January 31, 1974. The Company is engaged in the following
businesses:
TELEPHONE SERVICES- The Company, through its wholly-owned subsidiary,
National Telephone & Communications,-Registered Trademark- Inc. (NTC),
markets long distance telecommunications services to commercial and
residential customers in the United States. Service is provided by procuring
long distance telecommunications transmission services from long distance
communication carriers at high volume wholesale rates and reselling those
services at retail rates. 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 pay an annual fee for certain materials, training
and services from NTC which are used by the independent representatives to
sell new retail customers and enroll 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
representatives obtain a minimum number of new telephone customers within a
specific 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. The new telecommunications revenues generally lag
the new marketing program revenues by one to three months. Sales from this
segment accounted for 94.2% of the Company's total 1996 sales.
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OPTICAL SYSTEMS- The Company, through its 35%-owned subsidiary Rapid Cast, Inc.
(RCI), acquired in February 1995, manufactures and markets the FastCast-TM-
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, in approximately 30 minutes. The
FastCast-TM- 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. Sales from this
segment accounted for 4.4% of the Company's total 1996 sales. Rapid Cast's
operating results are included in the accompanying financial statements.
NETWORK PRODUCTS AND SERVICES- The Company acquires and/or develops hardware
and software, primarily for interactive data communications networks. In this
regard, the Company operates a communications network known under the tradename
"AutoNETWORK" that services the automotive dismantling industry in California,
Nevada, Arizona, Oregon and Washington. Sales from this segment accounted for
1.4% of the Company's total 1996 sales.
NATIONAL TELEPHONE & COMMUNICATIONS, INC. (NTC):
PRODUCTS - NTC is an inter-exchange carrier and reseller of long distance
telephone services to residential and small business customers throughout the
United States. NTC's primary product is its Dial-1 Telephone Service. Its other
long distance telephone products are 800-Number Services and Calling Card
Services, which include the Flag Card, Sure$aver Card, Sure$aver Gold Card,
Global$aver Card, and Call$aver Card.
In order to provide these products, NTC generally contracts to purchase long
distance telephone time from national carriers at wholesale rates based upon
high volume usage. NTC then resells this time to its customers at its own
discounted retail rates which are generally 10% to 30% or more below AT&T's
published, tariffed MTS rates. NTC's Dial-1 Service is transparent to its
customers once a customer's long distance service has been converted to NTC.
NTC's calling card products operate similarly to the calling card products
offered by the major carriers. NTC's customers pay for their long distance
calling usage either through direct billing from NTC , through billing from
the customer's local exchange carrier ("LEC"), through direct billing by NTC
of the customer's major credit card, or by prepaying for long distance time
in the case of certain NTC calling card products. In certain states, NTC has
an agency agreement with an unaffiliated company which bills customers' local
intrastate calls through the local telephone company. Commencing in the
second quarter of 1996, NTC increased its use of LECs to bill and collect
telephone service accounts receivable. The increase in the use of LECs has
increased the amount of time that it takes for NTC to receive payment on its
accounts receivable.
NETWORK MARKETING PROGRAM - NTC markets its products on a nationwide basis
through a multi-level, network marketing program of independent sales
representatives. NTC authorizes and trains the independent representatives
to resell its services to residential and small business customers, and
allows the individual representatives to build up their own "downline" sales
force of other independent representatives. NTC currently has in excess of
40,000 independent representatives in its network marketing program. Once an
independent representative has signed up a long distance telephone customer
on one or more of NTC's services/products, the customer becomes an NTC
customer. NTC takes over the servicing and billing of the customers as well
as the collection of monies owed by the customers for their use of the NTC
telephone services/products. NTC pays each independent representative a
commission on the telephone usage monies billed to those retail telephone
customers who are directly sourced by that representative. NTC also pays
override commissions to each independent representative on the monies billed
to those telephone customers sourced by the representative's downline as well
as a bonus percentage of all telephone monies billed by NTC from the retail
telephone customers collectively sourced by all independent representatives,
if certain minimums of retail telephone business are personally achieved by
the representative. In addition, NTC pays sales quota bonuses to independent
representatives for assisting other representatives to obtain certain minimum
quotas of new retail long distance telephone business. NTC does not pay any
monies to independent representatives simply for recruiting other
representatives into NTC's network marketing program. NTC generally
maintains communications with its independent representatives through (1)
NTC's proprietary communications systems, (2) NTC's internal personnel
dedicated to the support of the independent representatives, (3) various NTC
manuals, newsletters and other publications that are periodically and
continually sent to the independent representatives, (4) NTC's network
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of senior independent representatives, and (5) various training programs offered
by NTC and its senior independent representatives throughout the United States.
NTC believes it is in compliance with all State and Federal regulations
governing multi-level marketing companies. However, to ensure the Company has
objective and knowledgeable outside legal opinion in this area, NTC has formed a
Regulatory Compliance Committee consisting of four former States Attorney
General that periodically reviews NTC's marketing programs for such compliance.
DISCLOSURE OF INDEPENDENT REPRESENTATIVE ORGANIZATIONS RELATED TO NTC EXECUTIVES
- - In order to eliminate potential conflicts of interest, at the end of 1992, NTC
implemented its current policy that no senior, decision-making NTC executive or
officer may have a downline organization of independent representatives involved
with the selling of NTC's long distance telephone services and/or marketing
programs ("Executive Downlines"). Violation of this policy subjects such an NTC
officer/executive to immediate termination and forfeiture of all past and future
commissions from such disallowed Executive Downlines. To the best of the
Company's knowledge, none of NTC's senior officers/executives have an Executive
Downline, including Ed Jacobs (Chairman of the Board), James R. Quandt
(President), Victor C. Streufert (Vice President of Finance and Administration
and Chief Financial Officer), Debra Chuckas (Vice President-Marketing Support),
Louis W. Cheng (Vice President-Information Services), and Michael A. Keebaugh
(Vice President of Operations).
In addition, NTC's current policy requires full disclosure by all senior NTC
officers and executives of any NTC downline organizations headed by an immediate
family member of such senior officer or executive as well as disclosure of the
personal involvement of an immediate family member in the sale of NTC's long
distance telephone services to retail customers ("Immediate Family
Customers/Downlines"). To the best of the Company's knowledge, none of NTC's
senior officers or executives have Immediate Family Customers/Downlines.
WILTEL CONTRACT - In September 1995, NTC entered into a new carrier contract
with Wiltel, Inc. of Tulsa, Oklahoma, a subsidiary of WorldCom, Inc., covering a
potential volume purchase of $600 million of long distance telephone time over a
five year period commencing in November 1995. Effective February 1996, NTC
entered into a revised multiple-year $1.0 billion contract with Wiltel, Inc.,
which has a fixed term expiring January 2002. As in the prior carrier contract
with Wiltel, Inc., NTC has committed to purchase the designated volume of
telephone time in accordance with a schedule over the term of the contract. NTC
currently relies in part on the purchases of another unaffiliated long distance
telephone service provider to meet its volume purchase requirements under the
new contract.
MANAGEMENT INCENTIVE AGREEMENT - On January 28, 1997 the Company entered into
an amended and restated management incentive agreement with NTC pursuant 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 supersedes the incentive agreements entered into by the
Company with NTC in February and November 1996. See "Item 5. Other
Information - Agreement with NTC Management" in the Company's Form 10-Q for
the quarter ended September 30, 1996. In November 1996 the Company also
entered into settlement agreements with Edward Jacobs and Jerry Ballah (the
former Executive Vice President and director of NTC, who is now the Executive
Director, Global Marketing of NTC's network marketing program as a consultant
to 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. With respect to a potential spin-off of NTC shares
by the Company, there is no assurance as to if or when a spin-off will occur,
or whether or not NTC will make a public offering of its stock.
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The amended and restated management incentive agreement essentially contains the
same terms and conditions as the agreement entered into in November 1996, except
as follows: The Company and NTC agree that the Company, as the owner of 100% of
the total issued and outstanding stock of NTC, owns ten million shares of NTC.
The three NTC stock option plans previously agreed to have been revised. The
Company and NTC have now agreed that there will be three stock option plans and
one convertible debt plan. The exercise price of all stock options issued under
the option plans will not be less than the fair market value of NTC common stock
on the date of the grant, and the conversion price of the convertible debt
issued under the convertible debt plan will not be less than the fair market
value of NTC common stock on the date of the issuance of the convertible
debenture. Shares issuable pursuant to the plans are expected to be registered
with the Securities and Exchange Commission no later than at the time of NTC's
planned public offering. Upon the creation of the plans and first grant of
options and convertible debt units pursuant to the plans, Edward Jacobs will
waive his rights to all remaining outstanding unexercised warrants and options
issued to him by the Company pursuant to his employment agreement, dated
December 28, 1994.
The first stock option plan is the one for key independent sales
representatives. A total of 2,884,615 shares are reserved for issuance under
this plan. Options to purchase 961,538 shares of NTC common stock have been
granted to key independent sales representatives who are Corporate Team
members, 480,769 of which will vest on June 30, 1998, subject to acceleration
if NTC's public offering occurs prior to January 1, 1998. Options to
purchase the other 480,769 shares will vest on June 30, 1999. The remaining
1,923,077 shares reserved for issuance pursuant to stock options granted
under this plan may be granted to key independent sales representatives after
each of June 30, 1997, December 31, 1997, June 30, 1998 and December 31, 1998
if NTC's gross revenues for the three month periods ending on each of such
dates exceed NTC's gross revenues for the corresponding three month periods
ending December 31, 1996, June 30, 1997, December 31, 1997 and June 30, 1998,
by the percentage amounts indicated on the following table:
<TABLE>
<CAPTION>
Percentage Increase in NTC Gross Revenues In Number of Options Available For Grant At End
Comparative Three Month Period of Each Period(1)
------------------------------ -----------------
<S> <C>
30% 125,000
40% 250,000
50% 500,000(1)
</TABLE>
- --------------------
(1) Stock options in the amount indicated may be granted at the end of each of
the four comparative three month periods. If the percentage increase for all
four of the comparative periods is 50% or more, then the total stock options
available for grant in the fourth period would be 423,077 instead of 500,000
because there are 1,923,077 (not 2,000,000) options available for grant under
this portion of the key independent sales representatives' stock option plan.
These stock options, once granted, will vest in four equal annual installments
on each anniversary date after the stock option grant date. The NTC Board of
Directors will determine when and to whom these stock options will be granted.
The second stock option plan is the one for NTC executives, employees and key
consultants. A total of 3,705,001 shares are reserved for issuance under
this plan. Options representing 1,446,076 of these reserved shares will be
subject only to a time-in-service vesting requirement, but in no event will
such options vest prior to January 1, 1998. Options representing 1,682,051
of the reserved shares will vest in four equal annual installments on each
anniversary date of the option grant date, subject to the acceleration of
vesting in the event that NTC achieves certain income targets in 1997, to be
determined by the NTC Board of Directors. No more than 480,770 shares
issuable pursuant to options granted under this plan may be issued to persons
eligible to receive convertible debt units under the Senior Executive and
Consultant Convertible Debt Plan described below in this section. The NTC
Board of Directors will determine when and to whom these stock options will
be granted.
Options representing 576,924 shares will be reserved under this plan for
issuance to persons eligible to receive convertible debt units under the
Senior Executive and Consultant Convertible Debt Plan described below in this
section in equal amounts. These options will be granted upon the creation of
the plan but will not vest until January 31, 2002, except that the vesting of
these options will accelerate in the following amounts if NTC achieves
revenues which exceed the following amounts for any calendar quarter ending
prior to January 1, 2000.
QUARTERLY REVENUES NUMBER OF SHARES VESTING
------------------ ------------------------
$100 million 192,308
$125 million 192,308
$180 million 192,308
The third stock option plan is the one for members of NTC's Board of
Directors. A total of 300,000 shares are reserved for issuance under this
plan. Each director of NTC will receive an option to purchase 25,000 shares
of NTC common stock which will vest in four equal annual installments on each
anniversary date of the option grant date.
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The fourth option plan is the Senior Executive and Consultant Convertible
Debt Plan for Edward Jacobs and Jerry Ballah. A total of 2,664,231 shares are
reserved for issuance under this plan to be allocated between Mr. Jacobs and
Mr. Ballah as determined by the NTC Board of Directors. These units will
vest upon grant. A portion of the convertible debt units granted under this
plan may be assignable.
The amended and restated NTC management incentive agreement provides that,
until four additional independent directors are appointed to the NTC Board of
Directors, if a vacancy is created on the NTC Board of Directors by reason of
the death, resignation or removal, with or without cause, of Mr. Jacobs or
Mr. Ballah, then the Company has agreed to vote its shares for the individual
nominated by the remaining NTC management director. In addition to the
regular members of the NTC Board of Directors, a key independent sales
representative may be nominated and elected to the NTC Board of Directors on
a rotating basis, such that the same sales representative cannot serve
consecutive terms. NTC has agreed to make total cash payments to the Company
on or before December 31, 1997 equal to $2,200,000, of which $1,200,000 of
payments have already been made as of March 17, 1997. The cash payments of
up to $2,200,000 by NTC to Incomnet, Inc. will be treated as a return of
capital to the Company. NTC may make advances to Incomnet, Inc. in excess of
its cash payment obligation of $2,200,000, subject to the limitations of its
credit agreement, which Incomnet, Inc. will be obligated to repay with
interest upon demand. Any charge to earnings or taxable income associated
with advances made by NTC to Incomnet, Inc. or costs incurred in the spin-off
of NTC shares will be incurred by Incomnet, Inc. for financial reporting
purposes rather than by NTC.
REINCORPORATION OF NTC IN DELAWARE
Effective March 21, 1997, NTC, previously a Nevada corporation,
reincorporated under the laws of the State of Delaware. Pursuant to its new
Articles of Incorporation, NTC has authorized 100 million shares of common
stock, par value $.01 per share, of which 10 million shares are issued and
outstanding, all of which are held by Incomnet Inc., and 1.5 million shares
of preferred stock, none of which are issued or outstanding.
RAPID CAST, INC. (RCI):
GENERAL - RCI is a Delaware corporation formed in February 1994 which acquired
100% of the outstanding capital stock of Q2100, Inc. ("Q2100") from Pearle,
Inc., an unaffiliated subsidiary of Grand Metropolitan, Ltd., a United Kingdom
conglomerate. Q2100 owns certain domestic and 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 and wholesale optical lens manufacturing laboratories to produce
many prescription ophthalmic lenses on site at a cost generally lower than if
they were purchased from third party manufacturers or distributors. RCI is
marketing the Technology under the name Fast Cast-TM- LenSystem.
THE OPTICAL MARKETPLACE - Nearly 60% of the United States population
(approximately 151 million people) required some form of vision correction in
1992, according to CENSUS INTERNATIONAL '93: THE OPTICAL INDUSTRY FACT BOOK
("Census93"). It is estimated that, by the year 2000, the United States
prescription eyewear population will rise to approximately 164 million people
and that, in the following decade, over 180 million people will use prescription
eyewear products. Census93 reports that, in the approximately $11.9 billion
United States retail optical market in 1992, the average optical retailer's
breakdown of dollar revenue by product category was: (a) approximately 47% (or
nearly $5.6 billion) from the sale of eyeglass lenses and lens treatments (e.g.,
the application of scratch-resistant and ultraviolet
11
<PAGE>
coatings), (b) approximately 38% from the sale of eyeglass frames and
sunglasses, and (c) approximately 15% from the sale of contact lenses.
Census93 reports that, out of the approximately 80 million pairs of
prescription eyeglass lenses sold in the United States in 1992, an estimated
55% to 60% were single vision lenses, while an estimated 40% to 45% were
multifocal lenses (i.e., bifocal, trifocal and cataract lenses). According
to Census93, bifocal lenses currently constitute the substantial majority of
consumer purchases of multifocal lenses, representing an estimated average of
approximately 84% of all multifocal lenses purchased in the years 1987, 1989
and 1991. Multifocal lenses are produced as either "flat-top" or
"progressive" lenses. Progressive lenses are distinguished from flat-top
lens by the absence of visible horizontal lines separating the different
corrective prescription areas. Census93 reports that, by the end of 1992,
flat-top bifocal and trifocal lenses held approximately 79% of the multifocal
market, while approximately 21% of this market consisted of progressive
lenses. The LenSystem is capable of producing single vision, flat-top
bifocal and progressive bifocal lenses. Although no assurance can be given
in this regard, RCI believes that the market for progressive bifocal lenses
offers particularly great opportunities, both because of the potential to
convert persons currently wearing flat-top bifocals to the "no-line" option
offered by progressive lenses, and because the bulk of the baby boomer
generation (ages 30 to 49 in 1994) has not yet reached their early 40s, when
people typically first experience the presbyopia that requires correction by
bifocals.
Single vision and multifocal prescription eyeglass lenses are currently
manufactured using one of three basic types of materials. According to Census93,
the two conventional materials, glass and hard-resin plastic, accounted
respectively for approximately 13% and 64% of 1993 United States prescription
lens sales, while the newer premium materials such as polycarbonates, high index
plastic and high index glass, accounted for approximately 23% of such sales.
Within the categories of single vision and multifocal lenses, there are many
types of premium lenses (generally designed to be especially thin, strong,
and light) that the LenSystem currently cannot manufacture: (a) high index
plastic and high index glass lenses, which generally are very thin,
lightweight lenses used to reduce the thickness of very high strength
prescription lenses; (b) polycarbonate lenses, which are made from a material
with superior impact resistance and are typically used for sports and other
eye-safety purposes; and (c) aspheric lenses, which are made to have flatter
curves than conventional spherical lenses, thereby improving visual acuity
and the appearance of the eyes through the lenses. Census93 estimates that
aspheric lenses represented about 1% of 1992 United States sales of
prescription lenses. RCI anticipates that sales of high index lenses will
continue to grow steadily over the next several years.
During the years 1990 through 1992, the United States market of contact lens
wearers remained basically flat, according to Census93, at approximately 25
million users. There can be no assurance, however, that technological
developments, medical advances, changes in consumer tastes or other factors will
not cause the use of contact lenses to grow significantly in the future at the
expense of prescription eyeglass lenses. Census93 reports that, despite the
recent flat rate of overall contact lens use, a Bausch & Lomb study has found
that first-time usage of disposable contact lenses grew at a compounded annual
growth rate of 47% from 1989 through 1992.
THE PRODUCTION AND DISPENSING OF PRESCRIPTION EYEGLASS LENSES - As previously
noted, approximately 77% of all conventional single vision and multifocal
prescription eyeglass lenses are currently manufactured from glass or hard-resin
plastic. According to Census93, during the years 1991 through 1993 hard-resin
plastic was used in the manufacturing of approximately 82% of all prescription
lenses made from conventional materials. Although there can be no assurance in
this regard, RCI anticipates that the use of glass in manufacturing conventional
lenses will decrease over time due to a variety of factors, including its
relatively greater weight and inferior impact resistance.
After being prescribed for an individual by his or her medical doctor
(ophthalmologist) or optometrist, prescription eyeglass lenses reach the
consumer through three traditional channels: independent dispensers (consisting
of thousands of private sector optometrists, opticians and ophthalmologists),
retail optical chain stores (i.e., retailers having at least four stores,
including so-called "superoptical" stores or "superstores", mass merchandisers
and warehouse membership clubs), and miscellaneous third party and other
dispensers. Census93 estimates that independent dispensers accounted for
approximately 62% of 1992 United States optical sales, retail optical chain
stores accounted for approximately 33% of such sales, and third party and other
dispensers accounted for approximately 5% of such sales.
12
<PAGE>
The substantial majority of glass and hard-resin plastic prescription lenses
purchased in the United States are currently obtained from lens dispensers (such
as independent optometrists, opticians, ophthalmologists and retail chain
stores) who do not manufacture the lenses on-site. They instead obtain lenses
from third party manufacturers and distributors, including hundreds of large
factories and large, mid-sized and small wholesale manufacturing laboratories.
These manufacturers and distributors have invested in the space and equipment
required to grind glass or plastic lenses into a specific prescription and then
to finish (i.e., polish) the lenses in order to provide clarity. In the case of
plastic lenses, these manufacturers additionally possess the molds and other
machinery required in order to form and then "cure" (i.e., harden) such lenses.
Conventional curing processes utilize heat-driven reactions to harden the
plastic. Heat-curing processes are relatively time-consuming, generally
requiring between approximately six and 16 hours, depending upon the specific
type of plastic involved.
In most cases, a retail lens dispenser who obtains finished lenses from third
party manufacturers and distributors cannot offer consumers "same day" service
unless that retailer maintains a relatively large, mostly idle and generally
expensive inventory of lens blanks. This inventory generally has consisted
principally of single vision and flat-top bifocal lenses, due to the
historically greater demand for such lenses. Even a retailer who maintains a
very extensive inventory of lens blanks typically must place special orders for
the majority of lenses required to fill more complex prescriptions and for most
premium lenses. Filling any such order generally takes one or more days.
Largely as a result of these limitations in the ability of retail lens
dispensers to provide consumers with same day service for certain lenses,
full service eyeglass lens manufacturing began to move into retail optical
outlets in the form of the so-called "superoptical store". Many of these
superstores are operated by the large retail optical chain stores, such as
LensCrafters, Opti-World and Pearle Express. A "superoptical store" is
generally understood in the United States optical industry to be a retail
store with the on-site equipment necessary to produce the great majority of
finished prescription lenses in about one hour. The required equipment
generally consists of a surfacing (or grinding) laboratory and a finishing
machine. According to Census93, superoptical stores rarely fall below 1,900
square feet in total area. In addition to an investment in equipment and
space, a superoptical store typically requires the maintenance of a largely
idle inventory of semi-finished lens blanks.
THE FAST CAST LENSYSTEM - The LenSystem incorporates a new technology called
Thick Film Radiation Cured Polymer Technology, which uses ultraviolet light
instead of heat to initiate the chemical reaction that hardens the Fast Cast
Liquid Monomer into a plastic lens. The Technology resulted from a research
program that was initially begun in 1985 by the University of Louisville. In
1988, Dr. Larry Joel, one of the RCI founding shareholders, and others formed
ORGIC, which contracted with the University of Kentucky to sponsor and continue
that research program in return for the ownership of all resulting patents and
discoveries. By 1990, ORGIC (then majority-owned by Dr. Joel and the
predecessor of Q2100) had developed and tested a new liquid monomer, an
ultraviolet curing unit and a lens casting machine. ORGIC believed that
equipment utilizing the Technology could permit on-site production of
prescription eyeglass lenses at a low cost and in a very short amount of time.
ORGIC also believed that, in order to commercialize the use of such equipment
and effectively bring it to the marketplace, financial and other resources would
be required that ORGIC did not possess. In 1991, ORGIC, with the Technology
(together with all related issued patents and patent applications), was sold to
Pearle and subsequently renamed Q2100, Inc. On February 8, 1995, RCI purchased
100% of Q2100 from Pearle, and the Company purchased 51% of RCI. See "Item 1.
Business - Acquisition of Rapid Cast, Inc." in the Company's Form 10-K for the
fiscal year ending December 31, 1995.
TECHNICAL OVERVIEW OF THE FAST CAST LENSYSTEM - The Rapid Cast LenSystem
consists of three primary components: The Fast Cast Mold and Gasket Library,
the Fast Cast Liquid Monomer (the "Monomer"), and the Fast Cast Ultraviolet
Curing Unit (the "Curing Unit"). The Fast Cast Mold and Gasket Library is used
to create the actual mold assembly from which a lens will be made. Once the
type of lens (i.e., single vision, flat-top bifocal or progressive bifocal) and
prescription to be produced are known, a front mold and a back mold are selected
from an easy to read wall chart. A gasket is used to hold the front and back
molds in place, creating a mold assembly consisting of a hollow cavity. This
cavity is then filled with the Fast Cast Liquid Monomer.
The Fast Cast Liquid Monomer is a proprietary monomer that is injected in liquid
form into the mold assembly using a standard squeeze bottle. This Monomer is a
"thick film" monomer, meaning that its thickness is best measured in parts of
centimeters (as opposed to thin film monomers, which are measured in parts of
millimeters). The Fast Cast Liquid Monomer is chemically inert and, because it
is cured by ultraviolet light, does not require the addition of a separate
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<PAGE>
chemical initiator for the hardening process. As a result of its chemical
stability, the Fast Cast Liquid Monomer has a shelf-life of many years and
does not require special shipping and storage precautions. These advantages
are not generally realized by conventional lens manufacturing processes which
use hard-resin monomers to produce plastic lenses. These conventional
monomers (such as the CR-39 Monomer, which has long been the substance most
commonly used in manufacturing plastic lenses) require the addition of
chemical initiators prior to being cured, and those initiators are in some
cases flammable or explosive prior to being mixed with the monomer.
Temperature-controlled shipping and storage arrangements must accordingly be
made, and cold storage facilities must be utilized even after the monomer and
initiator are mixed, since the resulting substance hardens and becomes
useless when exposed for an extended period to temperatures above
approximately 25 degrees fahrenheit.
The Curing Unit controls the chemical reaction that occurs when the Fast Cast
Liquid Monomer is exposed to ultraviolet light. It monitors the exact
temperature of the lens during this reaction, utilizing multiple cold air jets
to control the temperature of each sector of a lens. The Curing Unit also
continuously monitors the energy output of the ultraviolet light in order to
maintain a constant output, even with fluctuations in electrical current. RCI
currently intends to utilize two versions of the Curing Unit, which differ only
in the quantity of the lenses that can be produced at one time. The Premier
Curing Unit will cure two pairs of lenses within approximately 30 minutes. The
smaller Deluxe Curing Unit will cure one pair of lenses in the same amount of
time. In addition, the front mold assembly may be coated with a scratch
resistant coating and then cured with high intensity UV light onto the mold
surface. This coating then adheres to the lens during the curing process.
A lens produced by the LenSystem can be subjected to the application of various
additional treatments (such as scratch resistant, anti-reflective and
ultraviolet coatings) using the same materials and process now employed to apply
such coatings to conventional plastic lenses. Scratch resistant and ultraviolet
coatings can generally be applied on site in under ten minutes, whereas the
application of an anti-reflective coating requires that the lens be sent out to
a third party service company. If inadequacies appear in the LenSystem during
day to day operation, there is no assurance that any such inadequacies can be
corrected at commercially acceptable cost, or at all.
Certain RCI customers have experienced technical problems with the LenSystem,
including the calibration of the molds, the generation of heat by the Curing
Unit, and related problems. As a result, machine orders have declined
significantly while RCI works on corrective measures. While RCI management
believes that the design and functional problems can be corrected, there is
no assurance that these problems will be resolved or that new problems will
not arise. There is no assurance that the rate of machine orders received by
RCI will stabilize or increase in the future.
MARKETING AND PRICING STRATEGY - RCI expects that initially the bulk of RCI's
revenues will be derived from sales of equipment and that as the installed
base of equipment stabilizes, an increasing share of revenues will be derived
from Monomer sales. RCI is initially seeking to market the LenSystem
principally to operators of retail optical stores and small to mid-sized
wholesale lens manufacturing laboratories, both inside and outside the United
States. Currently the sale price for a single LenSystem with one set of molds
is approximately $37,000 for a smaller unit and $43,000 for a larger unit.
Operators may be able to lease RCI equipment from third party lessors for
approximately $750 to $950 per month at current interest rates over a 60
month period. RCI expects that each purchaser or lessee of a LenSystem will
at least initially use RCI's Fast Cast Liquid Monomer.
RCI does not believe that, in the short term, marketing of the LenSystem will
require the purchase of significant print, television, radio or other
advertising. RCI instead anticipates that the LenSystem will receive a large
amount of nonpaid publicity within trade magazines that regularly report on
technological changes in the optical industry. RCI may nonetheless utilize
limited print advertising in optical industry trade magazines for the purpose
of highlighting the LenSystem's perceived advantages. RCI currently intends
to focus its marketing resources in the short term on the introduction and
demonstration of the LenSystem at one or more optical industry conventions
and trade shows. RCI believes that such conventions will provide an
attractive forum for exhibiting the LenSystem's limited space requirements,
ease of use and high quality output.
MANUFACTURING STRATEGY - RCI currently does not have the facilities or the
experience to manufacture the components of the LenSystem and has no plans to
develop its own manufacturing capabilities. RCI currently has such
components manufactured through subcontractors.
RESEARCH AND DEVELOPMENT STRATEGY - RCI anticipates that its research and
development efforts will emphasize the further development and enhancement of
the Technology and the LenSystem, generally in response to potential future
changes in technologies, customer preferences and optical industry standards.
Should RCI be unable to anticipate these changes (whether because of a lack
of adequate research and development funding or otherwise) or fail to improve
the LenSystem or develop new technologies in response to these changes, RCI's
ability to grow and become profitable could be materially adversely affected.
RCI has experienced several customer requests for service and replacement
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<PAGE>
parts due to problems with the design and functioning of certain aspects of the
Fast Cast LenSystem. As a result, RCI is making design modifications and
servicing these customers, which have resulted in increased costs and slower
sales than anticipated. RCI believes that it will be able to satisfy these
customers and make the necessary design modifications to solve the problems.
There is no assurance, however, that RCI's design modifications will solve the
current problems with the Fast Cast LenSystem or that future design and
operating problems may not occur.
More specifically, RCI believes that, in addition to single vision, flat-top
bifocal and progressive bifocal lenses, the Technology could be enhanced to
enable it to produce other existing types of prescription lenses as well as
new lens designs that may be developed in the future. If and to the extent
funds become available, RCI accordingly expects that it might seek to improve
the LenSystem so as to broaden the range of low cost, high quality lenses it
can produce. There can be no assurance, however, that RCI will in fact ever
undertake to develop any such improvements or that any effort to do so would
be successful or commercially viable. RCI does not currently anticipate that
it will conduct future research and development relating to technologies or
products that are not related to the on-site production of prescription
eyeglass lenses. There can be no assurance that, if conducted in the future,
any of RCI's research and development efforts will be successful, be
completed in a timely manner, improve RCI's profitability, or enable it to
respond effectively to technological or medical advances or new product
developments by competitors.
MAINTENANCE, WARRANTY AND INSURANCE - Initial sales of LenSystems are supported
by sales and technical representatives who provide installation and training
services. RCI provides its customers with a complete operations manual and
training videos. RCI currently offers the LenSystem with a one year warranty
for parts and labor. RCI currently 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 the coverage provided by those policies is
sufficient to 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.
COMPETITION - The prescription ophthalmic lens industry is intensely
competitive. Numerous manufacturers and distributors currently supply United
States lens dispensers, including such dispensers as retail optical stores and
small to mid-sized wholesale optical lens manufacturing laboratories. These are
the customers to whom RCI initially intends to market the LenSystem. Many of
these manufacturers and distributors are currently capable of supplying lenses
to a lens dispenser within 24 hours after receipt of the dispenser's order, and,
in many cases they can do so at prices competitive with the cost of producing
such lenses utilizing the LenSystem. Innotech Corporation is one competitor of
RCI which uses plastic to produce lenses. RCI believes that the LenSystem has
superior quality (i.e. better durability) and equivalent pricing to other
manufacturers of single vision lenses, and both superior quality and lower
pricing with respect to flat-top bifocal and progressive bifocal lenses.
If RCI is successful in marketing the LenSystem, it anticipates that other
companies or entities will attempt to develop competitive lens casting systems
capable of being placed in retail optical store locations. Potential
competitors may include companies that own large optical lens manufacturing
factories, owners of chains of retail optical stores, large wholesale optical
lens manufacturing laboratories, mass merchandisers and warehouse membership
clubs that have entered or may enter the retail optical industry, companies in
the optical instrument business, companies in the contact lens industry,
pharmaceutical and chemical companies that have entered or may enter the retail
optical industry or the optical lens manufacturing industry, and universities
and public research organizations. Many of these competitors have substantially
greater financial, technological, research, product development, manufacturing,
sales, marketing and human resources than RCI.
There can be no assurance that one or more of these competitors will not
develop a system for on-site production of prescription ophthalmic lenses
which is competitive with or superior to the LenSystem, or that RCI will have
the technological, marketing or financial resources or flexibility to respond
to any such development. The development of such a system would, in all
likelihood, exert adverse price pressures on the LenSystem and could render
it obsolete and unmarketable.
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. RCI is not aware that any party, in
the United States or elsewhere, has challenged the validity or enforceability of
the issued patents relating to the
15
<PAGE>
Technology, other than the patent dispute with Ronald D. Blum O.D., which was
settled in January 1997. See "Item 3. Legal Proceedings - Settlement of Patent
Infringement Lawsuit."
The status of pending patent applications involves complex legal and factual
questions, and the scope and breadth of claims to be allowed is uncertain.
Accordingly, there can be no assurance that pending patent applications, or
patent applications that may be filed by RCI in the future, will result in
patents being issued, or that any patents that may be issued in the future will
afford protection against competitors with similar technology. Patent
applications in the United States are maintained in secrecy until patents are
issued and, since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months or even
years, there can be no assurance with respect to pending patent applications
that the covered inventions were not first created by other parties, or that
such applications were the first to be filed on such inventions. In addition,
patents relating to the Technology that have been or may be issued in some
foreign countries may not afford the same protection to RCI as is provided under
the patent laws of the United States.
No assurance can be given that the issued patents relating to the Technology
will afford protection against competitors with similar technology, or that
any fo such patents will not be infringed, designed around by others or
invalidated. Applications of the Technology (or future technologies RCI may
develop) may infringe patents or proprietary rights of others. If any
licenses are found to be required in order for RCI to use the Technology or
other processes or products, such licenses may not be available on acceptable
terms, if at all. Furthermore, there can be no assurance that challenges will
not be instituted against the validity or enforceability of any patent owned
by RCI or, if instituted, that such challenges will not be successful. The
cost of litigation to uphold the validity and prevent infringement of a
patent can be substantial and could have a material adverse effect upon RCI's
financial condition and results of operations.
In addition to potential patent protection, RCI will rely upon the laws of
unfair competition and trade secrets to protect its proprietary rights. RCI
currently intends to seek to protect its trade secrets and other proprietary
information in part by entering into appropriate confidentiality and
nondisclosure agreements with its future employees, consultants, suppliers,
joint venturers, subcontractors, licensees, scientific collaborators, sponsored
researchers and others. These agreements will generally provide that all
confidential information developed by or made known to the other party during
the course of the relationship with RCI is to be kept confidential and not
disclosed to third parties, except in certain circumstances. In the case of
employees, consultants, scientific collaborators and sponsored researchers, the
agreements will generally provide that all inventions conceived by them relating
to the business of RCI will be the exclusive property of RCI. There can be no
assurance, however, that any such agreements will provide meaningful protection
for RCI's trade secrets in the event of unauthorized use or disclosure of such
information.
Although RCI intends to protect its rights vigorously, there can be no
assurance that trade secrets will be established or maintained, that secrecy,
confidentiality or nondisclosure agreements will be honored, or that others
will not independently develop similar or superior technologies. To the
extent that employees, consultants or other third parties (such as
prospective joint venturers or subcontractors) apply technological
information to RCI's projects which has been independently developed by them
or others, disputes may arise as to the proprietary rights to such
information, which disputes may not be resolved in favor of RCI. RCI
currently utilizes the tradenames and marks "Fast Cast," "Rapidcast," and
"LenSystem." None of these marks have been federally registered.
GOVERNMENTAL REGULATION - The lens produced by the LenSystem may be medical
"devices" within the meaning of the Federal Food, Drug and Cosmetic Act (the
"Food and Drug Act"), but management believes that the lenses may be marketed
without pre-market notification, review, approval or clearance by the Federal
Food and Drug Administration ("FDA"). Other requirements, principally those
concerning impact resistance, good manufacturing practices, labeling and
reporting of certain alleged adverse effects, apply to RCI's business.
Although the FDA may disagree, RCI also believes that the LenSystem is itself
not a "medical device" under the Food and Drug Act. Certain state and local
governmental 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 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.
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<PAGE>
RECENT CAPITALIZATION OF RCI:
On January 16, 1997, Rapid Cast, Inc., a minority owned subsidiary of the
Company, issued 8,000,000 shares of Series A and Series B 7% Convertible
Preferred Stock to institutional investors in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended. The investors
contributed $12,000,000 in capital in consideration for the issuance of
7,275,000 shares of voting Series A 7% Convertible Preferred Stock and
725,000 shares of nonvoting Series B 7% Convertible Preferred Stock. The
investors also have the option to purchase up to an additional 6,666,666
shares of voting or nonvoting 7% Convertible Preferred Stock from RCI for a
purchase price $1.50 per share, exercisable with respect to 3,333,333 of the
shares upon the sooner to occur of (i) the appointment of a permanent Chief
Executive Officer of RCI, or (ii) July 15, 1997, or the option relating to
those shares will expire unexercised. The option with respect to the
remaining 3,333,333 shares must be exercised on or before July 16, 1998, or
the option with respect to those shares will expire unexercised. Frank Pipp,
the new Chairman of the Board of Directors of RCI, also has an option to
purchase up to 1,333,333 shares of Series A 7% Preferred Stock at any time
until July 15, 1998 for a price of $1.50 per share. The Company's ownership
of RCI will be diluted to the extent that those investors or Mr. Pipp
exercise their options to purchase additional shares of Series A 7% Preferred
Stock.
The proceeds of the issuance of the Series A and Series B 7% Convertible
Preferred Stock were utilized by RCI (i) to repay short-term bridge loans made
to RCI by its shareholders, including Incomnet, Inc., in the approximate total
amount of $3,705,430; (ii) to repurchase 1,200,000 shares of RCI common stock
from Dr. Larry Joel for a redemption price of $1.28 per share; (iii) to make the
final settlement payment and license new technology for $325,000 on the patent
infringement lawsuit known as RONALD BLUM, O.D. VS. RAPID CAST, INC., ET AL.,
which has been dismissed; (iv) to repay the bank line of credit with Bank Leumi
in the approximate outstanding amount of $500,000 plus interest; (v) to pay
placement costs of approximately $700,000; (vi) to pay all overdue trade
payables in the approximate outstanding amount of $1,700,000, and (vii) the
balance for working capital. The outstanding RCI founder loans in the
approximate outstanding principal balance of $1,205,000 on the date of the
closing, the other RCI shareholder bridge loans which were not repaid from the
proceeds of the private placement of the Series A and Series B 7% Convertible
Preferred Stock, and the outstanding 8% convertible notes in the approximate
outstanding balance of $648,000 (which were convertible into RCI common stock at
a price of $.80 per share), were all converted into newly issued RCI common
stock and Series C 7% Convertible Preferred Stock as follows:
<TABLE>
<CAPTION>
No. of Shares of
Series C No. of Shares
Name of RCI Shareholder Preferred Stock(1) of Common Stock (2)
- ----------------------- ------------------ -------------------
<S> <C> <C>
Robert Cohen 121,543 260,708(3)
Alan Cohen 120,194 260,708(5)
Jeff Rubin 122,260 45,752
Dr. Shawn Zimberg 111,781 135,252
Dr. Larry Joel(6) 0 255,099
Huberfeld Bodner Partnership 0 543,390
Martin Price 27,485 52,628
Incomnet, Inc. 0 428,570
</TABLE>
- --------------------
(1) Issued at a price of $1.50 per share.
(2) Issued at a price of $.80 per share with respect to the conversion of the
outstanding principal balance of the 8% convertible promissory notes, and
$1.28 with respect to the conversion of the RCI founder loans, the accrued
but unpaid interest on the 8% convertible promissory notes, the unpaid
bridge notes and accrued interest.
(3) Includes 36,603 shares issued in the name of Robert Cohen's children.
(4) Includes 120,194 shares issued in the name of Alan Cohen's children.
(5) Includes 36,602 shares issued in the name of Alan Cohen's children.
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(6) In September 1996 Dr. Joel surrendered 142,222 shares of RCI common stock
to RCI as the settlement payment for $448,000 of liabilities owed by Dr.
Joel to RCI.
From the proceeds of the capitalization of RCI on January 15, 1997, Incomnet,
Inc. was repaid $2,647,348 of principal and accrued interest on its short term
bridge loans which it made to RCI during the period from April 1996 through
January 1997. RCI also issued 428,570 shares of its common stock to Incomnet,
Inc. in exchange for the conversion by Incomnet, Inc. of $326,400 of 8%
convertible promissory notes purchased by it from RCI in January 1996.
Incomnet, Inc. now owns 10,628,570 shares of RCI common stock. Melvyn Reznick
was repaid $80,000 plus interest at the rate of 10% per annum for the loan he
made to RCI in late December 1996, and Stephen Caswell was repaid $12,500 plus
interest at the rate of 10% per annum for the loan he made to RCI in early
January 1997.
Pursuant to its Amended and Restated Certificate of Incorporation filed on
January 15, 1997, RCI is authorized to issue a total of 60,000,000 shares of
common stock, 22,000,000 shares of which are nonvoting common stock, and
42,500,000 shares of preferred stock, all having a par value of $.001 per
share. As of March 17, 1997, RCI has a total of 22,233,335 shares of common
stock issued and 20,891,113 outstanding, 10,628,570 of which are owned by
Incomnet, Inc., 7,275,000 shares of voting Series A 7% Convertible Preferred
Stock, 725,000 shares of nonvoting Series B 7% Convertible Preferred Stock,
and 503,264 voting Series C 7% Convertible Preferred Stock. Incomnet, Inc.
does not own any outstanding RCI preferred stock. Each share of issued and
outstanding Series A, Series B and Series C Preferred Stock is convertible
into one share of RCI common stock (subject to adjustment) at any time at the
option of the preferred shareholder, and automatically upon the occurrence of
a "qualified public offering" by RCI, as that term is defined in the
Certificate of Determination of Rights, References and Privileges for all
outstanding series of RCI preferred stock. The terms of conversion and other
rights of the outstanding RCI preferred stock are all subject to customary
adjustments and antidilution provisions in the event of stock splits, certain
stock dividends, stock combinations, reorganizations, recapitalizations and
similar events. A "qualified public offering" by RCI occurs when RCI makes a
public offering of its securities having gross proceeds of at least
$20,000,000 and an offering price of at least $1.90 per share if it occurs on
or prior to December 31, 1997, $2.14 per share if it occurs on or prior to
June 30, 1998, $2.40 per share if it occurs on or prior to December 31, 1998,
$2.69 per share if it occurs on or prior to June 30, 1999, $3.02 per share if
it occurs on or prior to December 31, 1999, $3.40 per share it occurs on or
prior to June 30, 2000, $3.81 per share if it occurs on or prior to December
31, 2000, $4.29 per share if it occurs on or prior to June 30, 2001, $4.82
per share if it occurs on or prior to December 31, 2001, $5.41 per share it
if occurs on or prior to June 30, 2002, and $6.08 per share if it occurs
after June 30, 2002, in each case as adjusted for stock splits, certain stock
dividends, stock combinations and similar events.
The Series A, Series B and Series C 7% Convertible Preferred Stock have a
liquidation preference of $1.50 per share. All outstanding RCI preferred stock
have a cumulative noncompounded dividend of 7% per annum which must be declared
and paid in full before any dividends may be declared or paid on the RCI common
stock. All dividends on outstanding RCI preferred stock, regardless of whether
Series A, Series B or Series C, must be declared and paid ratably on all such
outstanding preferred stock. Each holder of outstanding RCI preferred stock has
the right to be paid the 7% dividend, when declared, either in cash, in shares
of Series A, Series B or Series C Preferred Stock (at a price of $1.50 per
preferred share, subject to adjustment), or in a combination of cash and
preferred stock. The cumulative unpaid dividend on the outstanding RCI
preferred stock must be paid in full in shares of RCI common stock (at a price
of $1.50 per common share, subject to adjustment) or in cash, at the option of
the preferred shareholder, upon the conversion of the preferred stock into
common stock. The preferred shareholder may require RCI to redeem the
outstanding preferred stock beginning after January 1, 2003 if the preferred
stock has not otherwise been converted. The redemption price would equal the
original issue price plus cumulative unpaid dividends. The Certificate of
Determination for the outstanding RCI preferred stock contains numerous
restrictive covenants applicable to RCI with respect to the incurrence of debt,
sale of assets, issuance of shares, mergers, reorganizations, recapitalizations,
affiliate transactions, and similar transactions by RCI.
In connection with the issuance of the preferred stock by RCI, RCI and its
shareholders entered into a Registration Rights Agreement, a Shareholders
Agreement and related agreements governing the outstanding RCI shares and the
management of RCI.
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Pursuant to the Registration Rights Agreements, the Series A and Series B
Preferred Shareholders have priority demand and piggyback registration rights
with respect to the shares of RCI common stock issuable upon the conversion of
the preferred stock, and issuable upon the exercise of warrants held by them.
The Series A and Series B Preferred Shareholders are the only RCI shareholders
with demand registration rights, of which they have three for less than
$5,000,000 of proposed sales and an unlimited number of proposed sales in excess
of $5,000,000. With respect to piggyback registration rights, the holders of
Series A and Series B Preferred Stock are entitled to 80% of the available
registration of shares for selling security holders on a pro rata basis, and the
other existing RCI shareholders are entitled to 20% of the available share
registration for selling security holders on a pro rata basis, subject to other
conditions and limitations.
Pursuant to the RCI Shareholders Agreement, the RCI shareholders and RCI are
granted certain first rights of refusal to purchase RCI stock proposed for sale
by other RCI shareholders. The RCI Shareholders Agreement imposes certain other
restrictions on the transferability of RCI shares, except for Rule 144 sales, a
sale of shares in a public offering pursuant to the Registration Rights
Agreement, and a transfer to RCI. The RCI shareholders also agree to vote their
shares so that (i) the RCI Board of Directors will consist of nine members, (ii)
subject to certain conditions, the RCI Board of Directors will consist of two
members designated by J.P.Morgan Investment Corporation and its related
investors, two members designated by Clipper Capital Associates, L.P. and its
related investors, one member designated by Incomnet, Inc., provided, that if
Incomnet, Inc. undergoes a "change of control" (defined as the cessation of
Melvyn Reznick's service on the RCI Board of Directors for any reason or certain
other changes in the Incomnet, Inc. Board of Directors or the stock ownership of
Incomnet, Inc.), then the Incomnet designee must be approved by a majority of
the other members of the RCI Board of Directors, one member designated by Jeff
Rubin, one member designated by Robert Cohen, one member (initially Frank Pipp)
designated by a majority of the RCI Board of Directors who qualify as outside
directors and approved by a majority of the RCI shareholders, and one member who
is the interim or permanent Chief Executive Officer of RCI. RCI has established
Executive, Audit and Compensation Committees.
The following persons are the current members of the RCI Board of Directors and
its Committees:
I. BOARD OF DIRECTORS(1)
Molly F., Ashby (J.P. Morgan Designee)
Robert Cohen
Patrick H. Garrett (J.P. Morgan Designee)
Kevin A. Macdonald (Clipper Designee)
Frank Pipp (Chairman and Interim Chief Executive Officer)(2)
Melvyn Reznick (Incomnet Designee)
Jeff Rubin
II. EXECUTIVE COMMITTEE
Molly F., Ashby (Chairman)
Kevin A. Macdonald
Frank Pipp
III. COMPENSATION COMMITTEE
Patrick H. Garrett (Chairman)
Kevin A. Macdonald
Frank Pipp
Melvyn Reznick
IV. AUDIT COMMITTEE
Melvyn Reznick (Chairman)
Patrick H. Garrett
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Kevin A. Macdonald
- --------------------
(1) The Board of Directors currently has one vacancy which is reserved for
the permanent Chief Executive Officer when he is hired.
(2) John L. Vidovich is currently a consultant and acting co-Chief Executive
Officer of RCI with Frank Pipp. Mr. Vidovich may become the permanent
Chief Executive Officer of RCI. The permanent Chief Executive Officer of
RCI is expected to join the RCI Board of Directors and may join one or
more of its Committees.
Upon the completion of a "qualified public offering" by RCI, as that term is
defined in the Certificate of Determination for the outstanding RCI preferred
stock and as described above, the voting and transferability restrictions in the
RCI Shareholders Agreement generally terminate, except that the RCI shareholders
agree to vote for one director designee each for J.P. Morgan and Clipper after
the "qualified public offering" as long as their investors hold a specified
minimum number of shares of RCI. The RCI Shareholders Agreement grants the RCI
shareholders pro rata preemptive rights to purchase new securities proposed to
be issued by RCI, except in circumstances such as when RCI makes a public
offering, issues stock to acquire another company in a purchase, merger or other
reorganization, issues stock pursuant to outstanding conversion rights, options
or warrants, issues up to 120,000 shares to John L. Vidovich or 450,000 shares
to Frank Pipp, implements a stock split or stock dividend, or issues stock after
a "qualified public offering" by RCI.
In connection with the short term bridge loans made to RCI from April 1996 to
January 1997 and the issuance of the preferred stock by RCI on January 16,
1997, RCI issued options and warrants to purchase its common stock, and
amended and restated its 1994 Stock Option Plan. The RCI 1994 Stock Option
Plan was amended to authorize and reserve up to 4,514,732 shares of its
common stock for issuance upon the exercise of stock options granted and
which may be granted by the RCI Board of Directors in the future. Under the
RCI 1994 Stock Option Plan, a total of 3,260,000 stock options have been
granted to various officers, directors, employees and key consultants of RCI.
The exercise price of 1,408,000 of the stock options is $2.25 per share and
the exercise price of 1,342,000 of the stock options is $2.00 per share.
These stock options have vested (subject to continued employment) and are
exercisable at any time from the date of grant until dates ranging from
November 1, 2005 until July 31, 2006. Melvyn Reznick was granted 100,000 of
these options by RCI, having an exercise price of $2.25 per share and
exercisable at any time until July 31, 2006. Frank Pipp was granted 450,000
of these stock options to purchase a total of 450,000 shares of RCI common
stock at any time until January 20, 2007, 225,000 to which may be purchased
at an exercise price of $1.28 per share and 225,000 of which may be purchased
at an exercise price of $4.00 per share. RCI also granted to John L.
Vidovich 60,000 of these stock options to purchase 60,000 common stock at any
time until January 20, 2007 at an exercise price of $1.28 per share.
RCI issued to the purchasers of the Series A and Series B Preferred Stock
warrants to purchase 1,400,000 shares of RCI common stock at an exercise
price of $1.74 per share, exercisable at any time until January 16, 2004.
The holders of these warrants have certain registration rights under the
Registration Rights Agreement described above, and customary adjustment and
antidilution protection.
In connection with short term bridge loans made to RCI by its shareholders and
others during the period from April 1996 until early January 1997, RCI issued a
total of 4,441,933 warrants to purchase 4,441,933 shares of RCI common stock at
any time until dates ranging from September 30, 2003 to December 31, 2003. The
exercise price of 1,853,683 of the warrants is $2.25 per share, the exercise
price of 302,500 of the warrants is $1.28 per share, and the exercise price of
2,285,750 of the warrants is $.75 per share. Incomnet, Inc. holds 841,416 of
these warrants to purchase 841,416 shares of RCI common stock at an exercise
price of $2.25 per share at any time until September 30, 2003, 480,000 of these
warrants to purchase 480,000 shares of RCI common stock at an exercise price of
$.75 per share at any time until December 30, 2003, 150,000 of these warrants to
purchase 150,000 shares of RCI common stock at an exercise price of $1.28 per
share at any time until December 31, 2003, and 1,090,000 of these warrants to
purchase 1,090,000 shares of RCI common stock at an exercise price of $.75 per
share at any time until November 30, 2003. In consideration for personal loans
and loan guarantees, Melvyn Reznick holds 175,000 of these warrants to purchase
175,000 shares of RCI common stock at an exercise price of $2.25 per share at
any time
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until September 30, 2003, and 160,000 of these warrants to purchase 160,000
shares of RCI common stock at an exercise price of $.75 per share at any time
until December 31, 2003. In consideration for personal loans to RCI, Albert
Milstein was issued 25,000 warrants to purchase 25,000 shares of RCI common
stock at an exercise price of $1.28 per share at any time until December 31,
2003. In consideration for personal loans to RCI, Steve Caswell was issued
12,500 of these warrants to purchase 12,500 shares of RCI common stock at an
exercise price of $1.28 per share at any time until December 31, 2003.
RCI also has a total of 1,000,000 additional warrants outstanding which entitle
their holders to purchase a total of 1,000,000 shares of RCI common stock at an
exercise price equal to 50% of the average of the last reported sales price of
RCI shares during the first 30 business days after the shares of RCI first
become publicly traded, provided that they become publicly traded on or before
December 31, 1998. If RCI becomes publicly traded on or before December 31,
1998, these warrants are then exercisable for a period of 180 days after the
public trading commencement date. These 1,000,000 RCI warrants were issued on
February 8, 1995 in connection with the issuance of 8% convertible promissory
notes by Incomnet, Inc. on that date to finance its acquisition of a controlling
interest in RCI. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in
the Company's Form 10-K for the fiscal year ending December 31, 1995.
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, a portion 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 "Item 5. Other Information - Loan to Company By Melvyn
Reznick" in the Company's Form 10-Q for the fiscal quarter ending September 30,
1996. The balance of the proceeds is being utilized and is expected to be
utilized for general working capital and to pay the costs of settling pending
litigation. 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 was $1,700,000. The Company has therefore paid $85,000 of
referral fees to Newport Capital Partners. The basic terms and conditions of
the Series A 2% Convertible Preferred Stock are described in the following
paragraphs:
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 Shareholders 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 Shareholders 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 Shareholder, 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
Shareholder,
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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 Underlying Shares issuable upon the conversion of the
first 365 shares of Series A 2% Convertible Preferred Stock were covered by a
prior registration statement declared effective by the Securities and Exchange
Commission on October 31, 1996. The balance of the shares of Common Stock
issuable upon the conversion of outstanding Series A 2% Convertible Preferred
Stock are covered by this Prospectus.
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 Shareholders 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 Shareholders. Furthermore, the Company is not
permitted to pay cash dividends on its Common Stock unless all cumulative unpaid
dividends on the Series A 2% Convertible Preferred Stock is paid. The Company
cannot take any action which would modify the rights of the Preferred
Shareholders under the Certificate of Determination without the prior consent of
the Preferred Shareholder being affected by the modification.
AGREEMENT WITH PRICE INTERNATIONAL, INC.:
On October 27, 1994, the Company entered into an exclusive agreement with
Price International, Inc. ("PRI") of Boca Raton, FL, to provide production,
management and marketing services for sports-oriented private label and
collectible telephone calling cards. In June 1996, the license with the NHLPA
expired and was not renewed. PRI and Incomnet also agreed to end their
relationship in providing telephone calling cards. Incomnet has also decided,
at this point in time, not to issue additional cards to the ones issued under
the agreement. In August 1996, the Company entered into a settlement
agreement with PRI pursuant to which the Company agreed to lower the exercise
price of PRI's 75,000 warrants from $11.25 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 registered the 75,000 shares issuable upon the
exercise of the warrants in a registration statement with the Securities &
Exchange Commission declared effective on October 31, 1996 (see Item 3. Legal
Proceedings - "Settlement With Price International, Inc.").
NETWORK SERVICES:
The Company's major network service is the Auto Dismantler Network (known under
the tradename "AutoNETWORK") that currently links several hundred licensed
automobile dismantlers in California, Nevada, Arizona, Utah, Oregon and
Washington. AutoNETWORK is a monthly subscription service that auto dismantlers
utilize to buy, sell and trade used parts that have been salvaged from
automobiles damaged in traffic collisions.
The Company evaluates on a continual basis other applications that could use the
Company's broadcast and point-to-point business communications technologies.
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AutoNETWORK allows automobile dismantlers to buy, sell and trade used automobile
parts. By entering a parts request into a personal computer, the request is
transmitted to the communications message switching system, which in turn
broadcasts the request within seconds to every dismantler on the network or to a
selected local or regional subgroup of dismantlers. Those dismantlers who have
the requested part in stock and wish to sell it then transmit private messages
and enter into private negotiations to sell the part. Generally, a dismantler
using AutoNETWORK can locate a part, if available, within minutes of entering
his request. The majority of dismantlers on the network generate substantially
increased parts sales per month using the network.
During September 1989, the Company agreed to a joint venture with Dismantlers
Exchange, a privately-owned, Fairfield, California-based operator of voice
telephone hotlines used by more than 200 auto dismantlers to locate auto parts
throughout Central and Northern California, Oregon and Washington. Under the
joint venture agreement, Dismantlers Exchange markets its own version of the
Company's computerized parts locator network in its marketing area under the
tradename "DX PC Network". Although both companies operate their networks
separately, customers of each network are able to receive appropriate parts
requests and send private messages to each other. Dismantlers Exchange also
operates a central clearinghouse so that customers of either network can search
for parts on each network as required. In February 1997, the Company agreed
with Dismantlers Exchange to end the joint venture. Incomnet has taken over the
customer base serviced by Dismantler's Exchange.
In 1997, the Company intends to invest approximately $5,000 into the
AutoNETWORK business to enhance the services provided to the automobile
dismantlers in the network.
EMPLOYEES, OFFICERS AND DIRECTORS:
EMPLOYEES - As of December 31, 1996, the Company, including its subsidiaries,
NTC and RCI, employed 288 full-time people, consisting of 73 general and
administrative, 46 marketing and sales, and 169 operations and customer service
personnel.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company has not experienced any slow-downs, strikes or work
stoppages due to labor difficulties. The Company considers its employee
relations to be satisfactory.
DIRECTORS AND OFFICERS - The success of the Company is heavily dependent on
the Company's President and Chief Executive Officer, Melvyn Reznick, and the
Chief Executive Officer and President of the Company's NTC subsidiary, Edward
R. Jacobs and James R. Quandt, respectively.
The Company has a three-year employment contract with Mr. Jacobs that expires on
July 25, 1997. Should Mr. Jacobs become unavailable or incapable of performing
his duties and functions, the Company could suffer material adverse
consequences. There can be no assurance that the Company would be able to
attract a competent replacement on a timely basis should the Company find it
necessary to replace Mr. Jacobs.
On January 6, 1997, NTC entered into an employment agreement with James R.
Quandt pursuant to which Mr. Quandt is serving as NTC's President and is a
member of NTC's Board of Directors. The employment agreement contemplates that
Mr. Quandt will eventually become the Chief Executive Officer of NTC upon the
retirement of Edward Jacobs, the current Chief Executive Officer, which is
presently scheduled for January 1, 1999. Mr. Quandt's employment agreement
commenced on January 6, 1997 and has a term of three years. The employment
agreement recites that Mr. Jacobs also contemplates retiring as the Chairman of
the Board of Directors of NTC on July 25, 1999, although such retirement is not
contractually mandated. The employment agreement contemplates that Mr. Quandt
may be nominated to become the Chairman of the Board of Directors of NTC upon
Mr. Jacobs' retirement from that position.
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Pursuant to the employment agreement, Mr. Quandt is entitled to the following
compensation: (1) A base salary of $40,000 per month, (2) an incentive bonus
equal to one and one-half (1.5%) of the quarterly net profit earned by NTC,
provided that the quarterly net profit is at least $1,250,000, and the
payment of the bonus does not cause the quarterly net profit of NTC to be
less than $1,250,000, and NTC's pretax profit for the succeeding calendar
quarter is reasonably expected to exceed the minimum quarterly net profit of
$1,250,000, and (3) nonqualified stock options to purchase 600,000 shares of
the common stock of NTC. The stock options will have an exercise price
determined by the Board of Directors of NTC in accordance with the NTC Stock
Options Plan, but in no event greater than the higher of $5.00 per share or
the fair market value of NTC's stock at the time of the grant. See "THE
COMPANY - Amendment to NTC management Incentive Agreement." The stock
options will have an exercise period of five years from the date of grant.
The stock options will vest as follows: (1) 300,000 stock options will vest
upon Mr. Quandt completing 15 months of employment for NTC under the
employment agreement, and (2) 350,000 stock options will vest only in the
event NTC achieves certain pretax profits goals prior to January 1, 1998 or
prior to January 1, 1999 whichever first occurs.
In addition to the base salary, regular bonus and stock options, Mr. Quandt will
earn a hiring bonus equal to $225,000, payable if NTC's quarterly net profits
exceed $1,250,000, but in any event no later than December 31, 1997 with respect
to $150,000 of the guaranteed hiring bonus, and the balance by no later than
June 30, 1998. The hiring bonus will be paid at the rate of 1.5% of quarterly
pre-tax profits of NTC in excess of $1,250,000, and if not earned in that
manner, will be paid in full in two installments as follows: $150,000 by
December 31, 1997 and the balance by June 30, 1998. To the extent that the
regular bonus and guaranteed hiring bonuses are paid to Mr. Quandt pursuant to
his employment agreement, Mr. Jacobs has agreed to waive any remaining portion
of the quarterly incentive bonus payable by NTC to Mr. Jacobs (i.e. 1.5% of the
pre-tax net profits in excess of $1,250,000 of net profits of NTC per calendar
quarter) pursuant to Mr. Jacobs' current employment agreement with NTC.
Under the employment agreement, Mr. Quandt is entitled to a significant
severance payment if his employment terminates prior to the agreement's
termination date because of his death, disability, or for a reason other than
cause, or because of a voluntary resignation by Mr. Quandt for "good cause", as
defined in the employment agreement. Mr. Quandt has agreed not to compete with
NTC during the term of his employment agreement and for a period of one year
after the agreement terminates for any reason.
Prior to assuming his executive position with NTC, Mr. Quandt was the Chairman
of the Board of Directors of Global Financial Information Corporation, a
privately held group of companies in the financial information and technology
industry. Global Financial Information corporation operates from a base of 27
offices internationally, with a staff of approximately 840 professionals. From
1991 to 1995, Mr. Quandt was the President and Chief Executive Officer of
Standard & Poors Financial Information Services, a subsidiary of McGraw Hill
Corporation in New York, New York. At Standard & Poors, Mr. Quandt was
responsible for all executive, administrative and operational functions of nine
domestic and international companies that comprised the Standard & Poors Group.
From 1980 to 1991, Mr. Quandt was an executive officer in various capacities
with Security Pacific Bank in Los Angeles, California. Mr. Quandt was the
Senior Vice President and Group Division Head of Security Pacific Bank's
Financial Management & Trust Services Group from 1988 to 1991. From 1983 to
1990, Mr. Quandt was the President and Chief Executive Officer of Security
Pacific Brokerage, Inc., a subsidiary of Security Pacific Bank.
Effective April 8, 1997, James R. Quandt was elected to be a member of the
Board of Directors of NTC to replace Jerry Ballah, who resigned as a director
and as an officer of NTC. Mr. Ballah is now a marketing consultant to NTC.
Effective January 17, 1997, the Company entered into an Amendment to the
Employment Agreement with Melvyn Reznick pursuant to which the term of Mr.
Reznick's Employment Agreement has been extended for two additional years,
until November 30, 1999. Mr. Reznick is also a director and a member of
several committees of the Board of Directors of RCI, as well as being a
director of NTC.
APPOINTMENT OF NEW DIRECTOR BY THE COMPANY - On January 20, 1997, the Company's
Board of Directors appointed Dr. Howard Silverman to fill a vacancy and become a
member of the Board of Directors. Since March 1996, Dr. Silverman has been
consulting for various companies in the optical and financial areas, including
Andrew, Alexander, Wise & Company in New York, and Rapid Cast, Inc. From August
1995 to March 1996, Dr. Silverman served as a Vice President of Corporate
Finance for Rickel & Associates, an investment banking firm. From 1991 until he
joined Rickel & Associates in 1995, Dr. Silverman was an independent business
consultant specializing in early stage and mid-size operating companies. From
1985 to 1991, Dr. Silverman was the founder and Chairman of the Board of
Directors of Vision Sciences, Inc., a company that developed, manufactured and
sold in-office lens casting systems, which enabled the optical retailer to cast
his own finished plastic optical lenses. Dr. Silverman was a member of the
Board of Directors and the director of business development for Staar Surgical
Co., Inc., a publicly owned company, from 1984 to 1990. He was the co-founder
and Chief Operating Officer of Hydro-Optics, Inc., a manufacturer of hydrophilic
contact lens, from 1974 until 1984. Dr. Silverman has also been the Vice
President and Chief Operating Officer of Diversified Health Industries, Inc. and
the President and Chief Executive Officer of Precision Contact Lens, Inc. Dr.
Silverman had a private optometric practice in New York City from 1968 to 1972,
specializing in contact lenses. Dr. Silverman earned a Bachelor of Science in
Chemical Engineering from the College of the City of New York in 1965 and a
Doctor of Optometry form Illinois College of Optometry in 1968. See the
Company's Report on Form 8-K, dated January 20, 1997.
24
<PAGE>
APPOINTMENT OF COMMITTEE MEMBERS - The current members of the Audit Committee of
the Company's Board of Directors are Albert Milstein, Nancy Zivitz and Dr.
Howard Silverman. The current members of the Compliance Committee of the
Company's Board of Directors are Melvyn Reznick, Mark Richardson, Albert
Milstein and Nancy Zivitz. The current members of the Compensation Committee of
the Company's Board of Directors are Albert Milstein, Nancy Zivitz, Stephen
Caswell and Dr. Howard Silverman.
ITEM 2. PROPERTIES
The Company does not own any real estate. The Company leases approximately
6,224 square feet of office facilities at 21031 Ventura Boulevard, Suite 1100,
Woodland Hills, California 91364. The Company has been obligated to make lease
payments at the rate of $8,713 per month from May 1995 through July 1998.
The Company's subsidiary, NTC, currently leases approximately 64,000 square
feet of office space in Irvine, California at a rate of approximately $52,000
per month. NTC has entered into an agreement to extend the lease on its
headquarters building at 2801 Main Street, Irvine, California. According to
the terms of this agreement, NTC would be obligated to pay formula based
monthly lease payments estimated to be approximately $57,000 per month during
1997 and increasing to approximately $72,000 per month for the remainder of
the initial five year lease term. In addition, in February 1997, NTC entered
into a ten year lease for office space in Honolulu, Hawaii, with the lease
expiring in 2007. The monthly payments on the lease in Honolulu, Hawaii
commence at $36,698 per month in 1997 and 1998, and increase on a bi-annual
basis through the term of the lease to $43,536 per month in 2006 and 2007.
The Company's other subsidiary, Rapid Cast, Inc., has entered into a lease on
approximately 12,250 square feet of office, research and development space
for its facilities in Louisville, Kentucky, expiring on May 30, 2000. RCI is
obligated to make lease payments at the rate of $8,167 per month through
December 31, 1997, $8,322 per month in 1998, and $8,433 per month from
January 1999 through May 2000. RCI also leases approximately 2,850 square
feet of office space in East Meadow, New York, for $2,417 per month with
annual escalations.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
In August 1994, the Company was notified by the Pacific Regional Office of
the Securities and Exchange Commission that the Commission had initiated an
informal inquiry 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."
CLASS ACTION AND RELATED LAWSUITS:
On October 17, 1995, the Company was served with an amended complaint in the
class action lawsuit entitled SANDRA GAYLES; THOMAS COMISKEY, AS TRUSTEE FBO
THOMAS COMISKEY, IRA; CHARLES KOWAL; ARTHUR KALTER; MATTHEW G. HYDE; ARTHUR
WIRTH; AND ISABEL SPERBER, VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case No.
CV95-0399 AWT (BQRx), filed in the United States District Court for the Central
District of California, Western Division, which was originally filed in January
1995. The amended complaint retains the claim alleging that the Company
violated Sections (10)b and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated under Section 10(b) of the Exchange Act,
because it did not disclose and falsely denied the existence of the non-public
investigation of the Company commenced by the Securities and Exchange Commission
in August 1994. The complaint adds claims that the Company and its former
Chairman, Sam D. Schwartz, violated Sections 10, 16(a),
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<PAGE>
20(a) and 23(a) of the Exchange Act, and Section 25400 of the California
Corporations Code, because they did not disclose until August 1995 purchases and
sales of the Company's stock made in the open market by an affiliate of Mr.
Schwartz between September 1994 and August 1995. The amended complaint seeks
(i) certification of the class, (ii) compensatory damages, (iii) damages
pursuant to Section 25500 of the California Corporations Code, (iv) interest and
attorneys' fees and costs, and (v) other extraordinary, equitable and injunctive
relief as may be appropriate. On January 11, 1996, the case was certified as a
class action pursuant to the parties' stipulation. The Company has answered the
complaint and the lawsuit is currently in the discovery phase.
The plaintiffs in the class action lawsuit SAUNDRA GAYLES VS. INCOMNET, INC.
AND SAM D. SCHWARTZ have conducted written discovery and taken the deposition
of the Company's custodian of records. The discovery phase of the case is
currently scheduled to close on May 31, 1997. A hearing is expected to be
held on May 5, 1997 to determine whether a specific group of investors who
filed a motion to elect not to be part of the class will be entitled to
opt-out of the class action lawsuit and commence their own lawsuit. The
plaintiffs and the Company have filed motions opposing the request for
opt-out status by those investors, who filed their election forms after the
deadline established for such elections. Several other parties have timely
filed elections to be separate from the class, but none have filed separate
lawsuits to date. The Company is not certain whether any of those potential
plaintiffs will file separate lawsuits against the Company or any of the
other defendants. The Company and the class plaintiffs have and continue to
engage in settlement discussions. No assurance can be given that a settlement
will be reached, or the terms of such settlement, if any.
The Company has been served with 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 it's former Chairman, Sam D. Schwartz, violated Sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as
amended, and committed common law fraud, 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 that was breached by their conduct. The complaint also alleges
other causes of action against other unrelated defendants. The Company
answered the complaint in November 1996 and moved to have it transferred to
California. In March 1997, the claims relating to the Company and Sam
Schwartz was ordered severed and transferred from the court in New York to
the same court in California which is hearing the pending class action
lawsuit. See "Part II, Item 1. Legal Proceedings - Class Action and Related
Lawsuits" in the company's Form 10-Q for the fiscal quarter ending September
30, 1996.
SETTLEMENT WITH RCI PARTIES
As of December 9, 1996, the Company entered into a Settlement and Mutual Release
Agreement with Robert Cohen, Alan Cohen, Jeff Rubin, Jeff Cohen, Broadway
Partners, a partnership comprised of the children of Alan and Robert Cohen, and
Lenore Katz (the "RCI Parties"). Robert Cohen is a director and shareholder of
Rapid Cast, Inc. and Jeff Rubin is a director, shareholder and executive officer
of Rapid Cast, Inc. Jeff Cohen is the son-in-law of Robert Cohen. Pursuant to
the settlement agreement, the RCI Parties purchased 360,000 Warrants entitling
them to purchase 360,000 shares of the Common Stock of the Company for an
exercise price of $3.75 per share at any time until December 9, 1999. The RCI
Parties paid a total of $36,000 in cash to the Company for the warrants.
Certain of the RCI Parties also purchased a total of 33,000 shares of the Common
Stock of the Company for an aggregate purchase price of $100,000. The Company
is registering those shares and the shares issuable upon the exercise of the
warrants pursuant to a registration statement pending with the Securities and
Exchange Commission in accordance with its agreement to do so in the Settlement
and Mutual Release Agreement. The Company and the RCI Parties also mutually
released each other from all claims, if any, which they may have had against
each other, and the RCI Parties assigned all of the claims which they may have
against Sam and Rita Schwartz, prior directors of the Company, to the Company.
SETTLEMENT OF THE STEVENS LAWSUIT
In January 1997, the Company entered into a Settlement Agreement and Mutual
Release of all claims in the pending lawsuit entitled CHARLES STEVENS VS. SAM D.
SCHWARTZ AND INCOMNET, INC. Pursuant to the settlement, the Company paid $7,500
in cash to the plaintiff and issued 12,500 warrants to purchase 12,500 shares of
the Company's Common Stock at an exercise price of $2.94 per share, exercisable
at any time until December 16, 2001. The Company agreed to register the shares
underlying the 12,500 warrants issued to Mr. Stevens and his legal counsel. In
consideration for the
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<PAGE>
issuance of warrants and payment of cash, the plaintiff released the Company
from all claims and dismissed the lawsuit against the Company with prejudice.
The settlement did not include Sam D. Schwartz.
SETTLEMENT OF THE ATLANTA LAWSUITS
In February 1997, the Company entered into a settlement and release agreement
with the plaintiffs in the lawsuits entitled HERBERT M. SCHWARTZ ET AL. VS.
INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORP. and BRENT ABRAHM
ET AL. VS. INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORP.
pursuant to which the lawsuit against the Company were dismissed and an order
was entered barring indemnification or contribution between the Company and
Sam D. Schwartz. In consideration for the payment of $400,000 in cash and
the issuance of a note in the principal amount of $400,000 to the plaintiffs,
the plaintiffs released the Company from all claims and dismissed their
lawsuits against the Company with prejudice. The $400,000 note was issued as
of January 1, 1997 and bears interest at the rate of 12% per annum from
January 1, 1997 to January 22, 1997, and 8% per annum thereafter until
December 31, 1997, when the note is due and payable in full. The note is
secured by a certificate of deposit in the amount of $415,000 purchased by
the Company, which the Company has the right to replace with a number of
registered shares of its Common Stock equivalent in value to the certificate
of deposit as collateral for the note.
SECTION 16(b) LAWSUIT:
In January 1996, the Company was served with a derivative shareholders
lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225 in the United States District Court for the Southern District of
New York, alleging violations of Section 16(b) of the Securities Exchange Act
of 1934, as amended, and demanding that the Company assert claims against Mr.
Schwartz for the payment of short-swing profits plus interest. Mr. Schwartz
has retained separate counsel for this action. In early July 1996, Mr.
Schwartz deposited 800,000 shares of his Incomnet, Inc. Common Stock into a
court-approved escrow account with the Company's New York counsel as security
for his obligation to pay short swing profits. In early February 1997,
plaintiff's counsel prepared a motion for summary judgment in the case
seeking $5,050,000 in short swing profits from Mr. Schwartz plus pre-judgment
interest. On February 21, 1997, the plaintiffs and Sam Schwartz entered into
a stipulated settlement pursuant to which Mr. Schwartz agreed to pay
$4,250,000 to the Company as full payment of his short swing profit
obligation to the Company. The plaintiff's lawyer indicated that he would
request a fee of $850,000 plus reimbursement of $65,000 of expenses, to be
paid by the Company from the proceeds of the recovery. Under the stipulated
settlement, the disgorgement of short-swing profits would be payable $600,000
in cash and the balance by tender to the Company of shares of the Company's
Common Stock owned by Mr. Schwartz, based on 90% of the average between the
bid and the asked price of the Company's Common Stock on the NASDAQ market
during the 30 calendar days immediately preceding the date that the court
enters an order approving the settlement. Pursuant to the agreement, Mr.
Schwartz has deposited $600,000 in cash and has agreed to deposit additional
shares of the Company's common stock into a separate escrow account from the
one which already contains 800,000 shares of the Company's stock owned by him
or his affiliates. The Company intends to oppose the amount of plaintiff's
attorney's fees sought. The Company does not otherwise intend to oppose the
proposed settlement. On April 11, 1997, a revised stipulation was filed
containing the same economic terms. Notice of the settlement is to be given
to the shareholders by April 21, 1997. Any opposition to the settlement is
due by May 16, 1997, and a hearing to approve the settlement is to be held on
May 30, 1997. There is no assurance that the Company will recover the
short-swing profits from Mr. Schwartz.
SETTLEMENT OF PATENT INFRINGEMENT LAWSUIT:
In July 1995 Rapid Cast, Inc. was served with a lawsuit entitled RONALD D. BLUM,
O.D. VS. RAPID CAST, INC., Case No. 95-CV5113, filed in the United States
District Court in the Southern District of New York. The complaint alleges that
Rapid Cast, Inc. has infringed on the plaintiff's patent for curing plastic
lenses by virtue of employing its technology in the FastCastTM LenSystem. On
January 16, 1997, RCI settled the lawsuit and the lawsuit has been dismissed.
In consideration for a total cash payment of $525,000 in cash to Dr. Blum and
the release by RCI of all claims which it may have had against Dr. Blum, RCI
received a release of all claims by Dr. Blum. See "Item 1. Legal Proceedings -
Patent Infringement Lawsuit" in the Company's Form 10-Q for the fiscal quarter
ending September 30, 1996.
LEGAL ACTION AGAINST PRIOR REPRESENTATIVES:
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<PAGE>
On July 28, 1994, NTC filed a lawsuit against six prior independent marketing
representatives who terminated their relationship with NTC on March 31, 1994.
The lawsuit alleges that the defendants breached their agreements with NTC after
terminating their representative status by (i) soliciting NTC's customers to
leave NTC and sign up with a competitor, (ii) soliciting NTC's other independent
marketing representatives to leave NTC and work for a competitor, (iii)
misappropriating and failing to return the NTC customer and independent sales
representative lists, (iv) disclosing NTC's customers, representatives and other
trade secrets to a competitor and (v) willfully and maliciously conspiring to
injure NTC's business in order to improve their own business. The causes of
action against the defendants are breach of contract, misappropriation of trade
secrets and intentional interference with NTC's economic relationships. NTC
sought injunctive relief and is seeking monetary damages of at least $500,000,
as well as punitive damages in an unspecified amount. On August 31, 1994, the
court awarded NTC a temporary injunction against the defendants, enjoining them
from disclosing or utilizing any of NTC's trade secrets, including its list of
customers and independent sales representatives. A permanent injunction was
subsequently denied by the court on the basis that NTC had failed to demonstrate
irreparable harm. All of the defendants were located in Northern California. The
Company believes that as a result of the defendants' wrongful actions, NTC lost
independent marketing representatives in Northern California and retail
customers. While these actions slowed the growth rate of NTC's customers and
marketing representatives in the spring of 1994, growth is continuing. The rate
at which NTC is signing new representatives, especially from other parts of the
United States, is also increasing, which may result in an increased rate of
growth in the customer base in the future. On August 30, 1994, the defendants
filed a cross-complaint against NTC and the Company, claiming that NTC failed to
meet its contractual obligations to the defendants and that actions taken by the
defendants as a result were proper and legal. The cross complainants are
seeking compensatory and special damages, along with general and punitive
damages. Management cannot predict the ultimate resolution of the lawsuit or
its impact on the Company at this time.
SETTLEMENT WITH PRIOR NOTEHOLDERS:
In January 1996 a civil action was filed against the Company and Sam D.
Schwartz in the United States District Court for the Eastern District of New
York, entitled JULES NORDLICHT VS. INCOMNET, INC. AND SAM D. SCHWARTZ, Case
No. CV 95-5134, alleging breach of contract and material misrepresentations
and nondisclosures in connection with the issuance and conversion of
promissory notes by the Company in a private placement. The complaint sought
damages of $750,000. In early February 1996 the Company entered into a
settlement agreement with Mr. Nordlicht pursuant to which the Company agreed
to issue to Mr. Nordlicht and register 31,000 shares of the Company's common
stock, repay the outstanding balance of his note (i.e. $500,000 plus
interest), and issue him 5,000 additional warrants to purchase shares of
Rapid Cast, Inc. (if and when it goes public) which the Company had received
pursuant to the redemption of another convertible promissory note previously
issued by the Company. The settlement agreement has been filed with the
court and the case has been dismissed with prejudice. Commencing in March
1996 the Company entered into a series of settlement agreements with six
other prior holders of a total of $325,000 in principal amount 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. Pursuant to the settlement
agreements with Mr. Nordlicht and the six other noteholders, the Company
issued a total of 74,917 new shares and registered a total of 138,417
outstanding and newly issued shares, including the 74,917 newly issued
settlement shares. 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. See also "Item 3.
Legal Proceedings - Claims by Prior Noteholders" in the Company's 1995 Form
10-K and "Part II, Item 1. Legal Proceedings - Claims By Prior Noteholders"
in the Company's Form 10-Q for the fiscal quarter ended September 30, 1996.
SETTLEMENT WITH PRICE INTERNATIONAL:
Price International, Inc. (PRI) asserted a claim for breach of contract and
federal securities laws violations in connection with the exercise of 25,000
warrants at $11.25 per share by it allegedly based on statements made to it by
the Company (See Agreement with Price International, Inc.). PRI asserted this
claim in a letter written to the Company by its counsel in October 1995. 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, Price
International agreed that (a) it would be required to exercise at least 25,000
of the warrants once the trading price
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<PAGE>
of the Company's stock averages $5.30 per share during any 30 day period, and
(b) it 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. Price International has not yet exercised any of the warrants issued
to it in its settlement agreement with the Company.
POTENTIAL LAWSUITS:
There is no assurance that claims similar to those asserted in the pending class
action and related lawsuits, or other claims, will not be asserted against the
Company by new parties in the future. In this regard, potential plaintiffs have
from time to time orally asserted claims against the Company and its prior
directors. Several members of the class in the pending class action lawsuit
against the Company have opted out, and certain other class members are
attempting to opt out even though they did not file their elections in a timely
manner. See "Legal Proceedings - Class Action and Related Lawsuits." Sam
Schwartz may file claims against the Company for indemnification and payments
under his Severance Agreement with the Company. See "Item 1. Business -
Employees, Officers and Directors - Officers" in the Company's 1995 Form 10-K.
If such claims are filed as legal complaints, the Company will seek to have them
consolidated with other pending lawsuits, if appropriate, or will defend them
separately. From time to time, the Company is also involved in litigation
arising from the ordinary course of business, the ultimate resolution of which
management believes will not have a material adverse effect on the financial
condition or results of operations of the Company. See "Part II, Item 1. Legal
Proceedings - Potential Lawsuits" in the Company's Form 10-Q for the fiscal
quarter ended September 30, 1996.
From time to time, the Company is involved in litigation arising from the
ordinary course of business, the ultimate resolution of which management
believes will not have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION:
The Company's common stock trades on the NASDAQ Small-Cap Market under the
symbol "ICNT". The following table sets forth the range of bid prices for the
common stock during the periods indicated. Prices represent the actual high and
low sale prices of the Company's stock as provided by NASDAQ real-time pricing
information.
YEAR ENDED DECEMBER 31, 1996:
Quarter High Low Last Sale
------- ---- --- ---------
4 5 2 7/8 2 31/32
3 5 5/16 4 3/16 4 5/16
2 6 1/4 4 3/8 4 3/4
1 6 3/16 4 3/8 5 3/8
YEAR ENDED DECEMBER 31, 1995:
Quarter High Low Last Sale
------- ---- --- ---------
4 11 1/4 2 1/2 4 9/16
29
<PAGE>
3 24 1/2 9 11
2 16 3/8 10 7/8 15
1 14 5/8 8 1/4 14 3/8
On March 21, 1997, the last sales price per share of the Company's common stock,
as reported by the NASDAQ Stock Market, was $2 15/16.
On March 21, 1997, the Company's 13,520,669 shares of common stock outstanding
were held by approximately 797 shareholders of record.
DIVIDENDS:
The Company has not paid cash dividends on its common stock since inception.
Payment of dividends is within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company.
Furthermore, the payment of dividends on the Company's common stock is subject
to the payment in full of all accrued but unpaid dividends on its outstanding
Series A 2% Convertible Preferred Stock. See "Item 1. Business - Issuance of
Convertible Preferred Stock." At the present time, the Company's anticipated
working capital requirements are such that it intends to follow a policy of
retaining earnings in order to finance the development of its business. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.")
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for the five years ended December 31, 1996,
1995, 1994, 1993, and 1992, is presented below, and should be read in
conjunction with the audited consolidated financial statements for the years
ended December 31, 1996, 1995 and 1994 at "Item 8. Financial Statements and
Supplementary Data." Segment information is presented at "Item 1. Business
segment information" (In thousands, except per share amounts).
<TABLE>
<CAPTION>
FOR THE YEAR: 1996(2) 1995(2) 1994(2) 1993(1,2) 1992(2)
------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Sales $106,905 $86,565 $46,815 $11,299 $5,535
Income (loss) before
income taxes,
minority interest and
extraordinary items (51,517) 957 4,000 (1,607) (2,265)
Income (loss) before
minority interest and
extraordinary items (43,705) 857 3,999 (1,607) (2,462)
Net Income (37,676) 1,366 4,071 (949) (2,021)
PER SHARE:
Net income (loss) before
extraordinary items (2.75) 0.11 0.42 (0.20) (0.34)
Net income (loss) (2.82) 0.11 0.42 (0.12) (0.28)
AT YEAR END:
Total assets $40,587 $74,106 $26,158 $8,666 $6,745
Long-term obligations 1,040 8,460 1 20 176
</TABLE>
- -------------------------
(1) In 1992, the Company acquired a controlling interest in National Telephone
& Communications, Inc. This information is described in "Item 1. Business -
Acquisition of National Telephone & Communications, Inc. (NTC)" in the
Company's 1995 Form 10-K.
(2) The Company is engaged in legal proceedings where the ultimate outcome
cannot presently be determined. This information is described at "Item 3.
Legal Proceedings."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW:
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<PAGE>
The following is management's discussion and analysis of certain significant
factors which have affected the results of operations and financial condition
of the Company during the period included in the accompanying financial
statements. This discussion should be read in conjunction with the financial
statements and associated notes. The discussion herein is qualified by
reference to the Introductory Note.
LIQUIDITY AND CAPITAL RESOURCES:
GENERAL - Overall, the Company achieved slightly positive cash flows of $0.6
million during 1996 resulting from positive cash flows from operating
activities ($3.0 million) and from financing activities ($5.2 million), which
were almost entirely offset by negative cash flows from investing activities
($7.6 million). The Company may need to raise additional capital in 1997 to
fund settlement costs relating to pending litigation or to make a business
acquisition, although specific needs have not yet been identified. Pursuant
to its management incentive agreement with NTC, the Company receives cash
distributions from NTC on a periodic basis, which are scheduled to be made
until December 31, 1997. See "Item 1. Business - National Telephone &
Communications, Inc. - Management Incentive Agreement." The Company does not
expect to have to make loans to RCI in 1997, and RCI's capital needs in the
short-term have been met through its private placement of preferred stock and
warrants in January 1997. See "Item 1. Business - The Recent Capitalization
of RCI." NTC is expected to have sufficient capital and financing to fund
its requirements in 1997, including funds required for the establishment of
its branch marketing offices, one of which is currently being built on leased
premises in Honolulu, Hawaii. There is no assurance that the cash
distributions by NTC to the Company or the cash flow from AutoNETWORK will be
sufficient to meet the Company's future funding requirements, or that RCI or
NTC will have sufficient capital or financing to meet their needs.
CASH FLOW FROM OPERATIONS - Net cash provided by operating activities of $3.0
million in 1996 was primarily attributable to the operating loss for 1996 ($37.7
million) and non-cash items principally from a devaluation of the Company's
investment in RCI ($39.1 million), depreciation and amortization ($4.3 million),
and changes in operating assets and liabilities ($11.7 million).
With regard to the collection of accounts receivable, the Company increased
its allowance for doubtful accounts to 13.2% of gross receivables as of
December 31, 1996 compared to 8.0% of gross receivables as of December 31,
1995. This increased provisioning reflects NTC's reserves for all
direct-billed Dial-one receivables which have been submitted to collection
agencies for collection and a modest improvement in collection rates for
LEC-billed and calling card products.
CASH FLOW FROM INVESTING - Net cash used in investing activities of $7.6 million
in 1996 was attributable principally to the Company's additions to property,
plant and equipment ($7.2 million) and additions to patents ($0.7 million).
CASH FLOW FROM FINANCING - Net cash provided by financing activities of $5.2
million in 1996 was attributable principally to changes in short-term debt ($2.9
million), proceeds from the issuance of preferred stock ($2.3 million) and
additions to long-term debt ($1.3 million), partially offset by reduction of
long-term debt ($1.8 million). In addition, 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 $0.4 million from the sale of 365 shares of Series
A 2% Convertible Preferred Stock, and raised an additional $2.1 million in
October 1996 through the placement of additional shares of Series A 2%
Convertible Preferred Stock. The Company paid aggregate referral fees equal to
approximately 5% of the capital raised from the placement of the Series A 2%
Convertible Preferred Stock. Cash paid to reduce debt totaled $1.2 million,
$0.0 million and $0.3 million during 1996, 1995 and 1994, respectively.
The Company had material commitments for capital expenditures of $1.5 million
in tenant improvements for its Honolulu, Hawaii office space at December 31,
1996, and expects to continue making improvements to the NTC headquarters
building and purchasing additional equipment commensurate with the expansion
of its business. During 1996, the Company had capital expenditures of $7.2
million for plant and equipment.
31
<PAGE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $22.6 million, which are expected
to be available to offset taxable income for the next several years.
LITIGATION - The Company is subject to pending litigation and an investigation
by the Securities and Exchange Commission. Management is not yet able to
predict the impact of the pending litigation on its financial condition and
results of operations. Management does not believe that the investigation by
the Securities and Exchange Commission will result in a material impact on the
Company's financial condition or results of operations. See "Item 3. Legal
Proceedings."
RESULTS OF OPERATIONS:
FINANCIAL ANALYSIS-
SALES - For 1996, 1995 and 1994, the Company's net sales totaled
approximately $106.9 million, $86.6 million and $46.8 million, respectively.
The increases in sales in 1996 compared with 1995 and 1995 compared with
1994, were attributable principally to increases sales at NTC. The following
table summarizes the Company's year-to-year sales performance by subsidiary
and segment:
<TABLE>
<CAPTION>
$ in millions
-----------------------------------
Subsidiary Segment 1996 1995 1994
- ---------- ------- -----------------------------------
<S> <C> <C> <C>
NTC Telephone (telecommunications services) $83.7 $ 70.0 $ 34.2
NTC Telephone (marketing programs) 17.1 13.1 11.4
RCI Optical 4.7 2.0 --
AutoNETWORK Network 1.4 1.5 1.2
-----------------------------------
Total Company Net Sales $106.9 $ 86.6 $ 46.8
-----------------------------------
-----------------------------------
</TABLE>
NTC's net sales increase was driven largely by continued expansion of the
customer base for its telecommunication services. As a result of this
continuing expansion, NTC's telecommunication service revenues represented
83.0%, 84.2% and 75.0% of NTC's total revenues for 1996, 1995 and 1994,
respectively, with the remaining 17.0%, 15.8% and 25.0% generated by sales of
NTC's marketing programs for 1996, 1995 and 1994, respectively. Revenues from
the optical segment may decline in 1997 because the Company's percentage
ownership in RCI is lower than in 1995 and 1996, and machine orders at RCI
have declined while RCI implements design modifications and improvements. See
"Item 1. Business--Rapid Cast, Inc.--Technical Overview of the Rapid Cast
LenSystem."
COST OF SALES - Total Company cost of sales for 1996, 1995 and 1994, were
approximately $68.6 million, $57.9 million and $31.2 million, respectively.
The increases in cost of sales were attributed principally to the increase in
carrier costs associated with increased telephone service sales by NTC and a
volume related rise in RCI cost of sales. Gross margin when stated as a
percentage of net sales was 35.9%, 33.1% and 33.3% for 1996, 1995 and 1994,
respectively. The increase in gross margin in 1996 was attributable
principally to reductions in NTC's telecommunication service cost of sales
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 year-to-year
changes in three major cost components:
<TABLE>
<CAPTION>
$ in millions
-----------------------------------
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Carrier costs for NTC's long distance telephone service $44.7 $ 40.4 $ 21.3
Commissions paid to NTC independent sales reps 18.0 14.2 7.7
All other costs of sales 5.9 3.3 2.2
-----------------------------------
Total Company Cost of Sales $68.6 $ 57.9 $ 31.2
-----------------------------------
-----------------------------------
</TABLE>
32
<PAGE>
NTC's total commission expenses for 1996, 1995 and 1994, were $18.0 million,
$14.2 million and $7.7 million, respectively. The increases were attributed
principally to the residual monthly sales commissions and various bonuses and
overrides paid to sales representatives on increased marketing and telephone
service revenues.
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 AND ADMINISTRATIVE - Total general and administrative costs for 1996,
1995 and 1994, were approximately $36.9 million, $19.8 million and $9.4
million, respectively. General and administrative expenses represented
34.57%, 22.9% and 20.2% of net sales in 1996, 1995 and 1994, respectively.
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 24.5% of sales in 1996 from
20.3% of sales in 1995. This increase was due principally to: (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 and
administrative costs continue to reflect the startup nature of its operations.
DEPRECIATION AND AMORTIZATION - The Company's depreciation and amortization
expense totaled $2.0 million, $1.0 million and $0.4 million for 1996, 1995 and
1994, respectively. These increases were caused by the continuing 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 - The Company's bad debt expense totaled $6.1 million, $4.1
million and $1.8 million for 1996, 1995 and 1994, respectively. Bad debt
expense represented 5.7%, 4.8% and 3.8% of net sales in 1996, 1995 and 1994,
respectively. The increase in bad debt was caused primarily by increased
provisioning of NTC's LEC billed receivables which currently carry a higher
than estimated bad debt provision and direct billed collection agency
write-offs.
OTHER (INCOME) AND EXPENSE - The Company's other (income) and expense totaled
$3.4 million, $1.0 million and $(0.3) million for 1996, 1995 and 1994,
respectively. The increase in 1996 was attributable in large part to
settlement costs of $2.0 million associated with claims by officers against
the Company. The increase in 1995 was attributed principally to: (1) a $0.4
million settlement with convertible noteholders relating to the acquisition
of RCI, (2) a $0.2 million settlement with a former Company officer, and (3)
a $0.3 million write-off of marketable securities by NTC.
CHARGE FOR ASSET IMPAIRMENT - The charge for asset impairment totaled $39.1
million for 1996 for the devaluation of the Company's investment in RCI. There
was no impairment in 1995 and 1994.
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 through December 31, 1995
(the "minority interest") were eliminated from the Company's "Consolidated
Statements of Operations" for 1995.
NET INCOME (LOSS) - The Company's net income (loss) totaled $(37.7) million,
$1.4 million and $4.1 million for 1996, 1995 and 1994, respectively. Net income
(loss) represented (35.2)%, 1.6% and 8.7% of net sales for 1996, 1995 and 1994,
respectively. The decreases were attributed principally to: (1) higher losses
at RCI in 1996 due to the devaluation of patent rights and 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 for settlement costs.
EMPLOYMENT - Employment of the Company totaled 288 at December 31, 1996, not
including independent sales representatives, who are classified as independent
sales representatives and not employees of the Company.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial information
which are required to be filed under this item are presented under "Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 10-K" in this
document, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A by May 31,
1997, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A by May 31,
1997, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A by May 31,
1997, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A by May 31,
1997, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
INDEX TO FINANCIAL STATEMENTS:
Page
----
Report of Independent Auditors..............................................37
Consolidated balance sheet at December 31, 1996 and 1995....................38
Consolidated statement of operations for the years ended December 31,
1996, 1995 and 1994.........................................................39
Consolidated statement of cash flows for the years ended December 31,
1996, 1995 and 1994.........................................................40
Consolidated statement of shareholders' equity for the years ended
December 31, 1996, 1995 and 1994............................................41
34
<PAGE>
Notes to consolidated financial statements..................................42
Schedule II - Valuation and qualifying accounts at December 31, 1996
and 1995....................................................................55
All other schedules are omitted as the required information is not present or is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or notes thereto.
INDEX TO EXHIBITS:
Exhibits designated by the symbol ** are management contracts or compensatory
plans or arrangements that are required to be filed with this report pursuant to
this Item 14.
The Company undertakes to furnish to any shareholder so requesting a copy of any
of the following exhibits upon payment to the Company of the reasonable costs
incurred by the Company in furnishing any such exhibit.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Determination for Series A 2% Convertible Preferred
Stock. (Incorporated by reference from Incomnet, Inc.'s
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on November 22, 1996).
4.1 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc.
(Incorporated by reference from the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996).
4.2 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with
Registration Rights Agreement, dated April 19, 1996. (Incorporated
by reference from the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on May 10, 1996).
4.3 Form of Warrant to Purchase RCI Common Stock, dated February 8,
1995. (Incorporated by reference from the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996).
4.4 Form of Warrant to Purchase 360,000 Shares of Incomnet, Inc.
(Incorporated by reference from Incomnet, Inc.'s Pre-Effective
Amendment Number One to the Registration Statement on Form S-3
filed with the Securities and Exchange Commission on March 24,
1997).
4.5 Form of Warrant to Purchase 12,500 Shares of Incomnet, Inc.
(Incorporated by reference from Incomnet, Inc.'s Pre-Effective
Amendment Number One to the Registration Statement on Form S-3
filed with the Securities and Exchange Commission on
March 24, 1997).
10.1 Employment Agreement with James Quandt, dated January 6, 1997.
(Incorporated by reference from Incomnet, Inc.'s Pre-Effective
Amendment Number One to the Registration Statement on Form S-3
filed with the Securities and Exchange Commission on March 24,
1997).
10.2 Amended and Restated Management Incentive Agreement Between NTC and
Incomnet, Inc., dated January 28, 1997. (Incorporated by reference
from Incomnet, Inc.'s Pre-Effective Amendment Number One to the
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on March 24, 1997).
10.3 Settlement Agreements With Prior Noteholders. (Incorporated by
reference from the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on May 10, 1996).
35
<PAGE>
10.4 Form of 8% Convertible Note Issued by RCI in January 1996.
(Incorporated by reference from the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996).
10.5 Form of Short-Term 10% Note Issued by RCI in April 1996.
(Incorporated by reference from the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on May 10, 1996).
10.6 Amended Carrier Switched Services Agreement with Wiltel, Inc. dated
June 17, 1996. (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. Certain information
has been deleted from this agreement pursuant to a request for
confidential treatment pursuant to Rule 406).
10.7 Settlement Agreement Between Joel W. Greenberg and Incomnet, Inc.
(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).
10.8 Form of Registration Rights Agreement Between Incomnet, Inc. and
Purchasers of Series A Convertible Preferred Stock. (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).
10.9 Form of Purchase Agreement for the Series A 2% Convertible
Preferred Stock. (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).
10.10 Management Incentive Agreement with NTC, dated October 14, 1996.
(Incorporated by reference from Incomnet, Inc.'s Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on November 22, 1996).
10.11 Settlement Agreements With Edward Jacobs and Jerry Ballah, dated
November 14, 1996. (Incorporated by reference from Incomnet, Inc.'s
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on November 22, 1996).
10.12 Shareholders Agreement for Rapid Cast, Inc., dated January 16,
1997. (Incorporated by reference from Incomnet, Inc.'s
Pre-Effective Amendment Number One to the Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
24, 1997).
10.13 Registration Rights Agreement for Rapid Cast, Inc., dated January
16, 1997. (Incorporated by reference from Incomnet, Inc.'s
Pre-Effective Amendment Number One to the Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
24, 1997).
10.14 Settlement Agreement and Mutual Release Between Incomnet, Inc. and
the RCI Parties, dated January 9, 1996. (Incorporated by reference
from Incomnet, Inc.'s Pre-Effective Amendment Number One to the
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on March 24, 1997).
10.15 Lease Agreement By NTC for space in Honolulu, Hawaii.
10.16 Credit Agreement dated March 27, 1997 between National Telephone
& Communication, Inc. and First Bank & Trust, Irvine Regional
office.
21 Subsidiaries of the Registrant
36
<PAGE>
23 Consent of independent auditors
27 Financial data schedule (Article 5 of regulations S-X)
REPORTS ON FORM 8-K, FILED IN 1996
20.1 Report on Form 8-K - Agreement with National Telephone &
Communications, Inc. (NTC) for incentive stock option program and
for a public offering of NTC's stock dated February 6, 1996 and
filed on February 9, 1996.
20.2 Report on Form 8-K - Settlement Agreement with Joel W. Greenberg.
20.3 Report on Form 8-K - Gerald Katell's Resignation from the Board of
Directors dated August 8, 1996 and filed on August 15, 1996.
20.4 Report on Form 8-K - Appointment of Dr. Howard Silverman as
director dated January 20, 1997 and filed on January 28, 1997.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 11, 1997
INCOMNET, INC.
(Registrant)
By: /s/ MELVYN REZNICK
------------------
MELVYN REZNICK
President and Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ MELVYN REZNICK President, Chief Executive Officer,
- ------------------ and Chairman of the Board of Directors April 11, 1997
MELVYN REZNICK
/s/ ALBERT MILSTEIN Director April 11, 1997
- -------------------
ALBERT MILSTEIN
/s/ Dr. HOWARD SILVERMAN Director April 11, 1997
- ------------------------
Dr. HOWARD SILVERMAN
/s/ NANCY ZIVITZ Director April 11, 1997
- ----------------
NANCY ZIVITZ
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Incomnet, Inc.
We have audited the consolidated balance sheet of Incomnet, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity and cash flow for each of the
three years in the period ended December 31, 1996, and the schedule listed in
Item 14. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Incomnet, Inc. at December 31, 1996 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 11 to the financial statements, the Company is a party to a
class action matter, claiming losses arising from alleged securities violations
based upon the denial and non-disclosure of a pending investigation by the
Securities and Exchange Commission and on alleged undisclosed securities
transactions by its former President. Legal counsel to the Company has advised
that the ultimate outcome of this matter and a range of potential loss cannot
presently be determined. Accordingly, no provision for any liability that may
result upon adjudication has been made in the accompanying financial statements.
/s/ Stonefield Josephson
ACCOUNTANCY CORPORATION
Santa Monica, California
March 27, 1997
39
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 2,214 $ 1,645
Accounts receivable, including $267 and $542 due from related
party at December 31, 1996 and 1995 and less allowance for
doubtful accounts of $1,993 at December 31, 1996 and $1,063
at December 31, 1995 13,137 12,177
Notes receivable - current portion 323 103
Notes receivable from officers & shareholders, net of reserves
of $209 438 863
Inventories 2,760 1,647
Other current assets 1,332 1,197
---------- ----------
Total current assets 20,204 17,632
Property, plant and equipment, at cost, net 14,357 9,146
Patent rights, net 1,241 41,689
Goodwill, net 4,542 4,839
Investments, notes receivable and other assets 243 800
---------- ----------
Total assets $40,587 $74,106
---------- ----------
---------- ----------
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,746 $ 8,784
Accrued expenses 8,217 3,687
Current portion of notes payable 3,918 2,531
Deferred income 4,040 1,190
---------- ----------
Total current liabilities 30,921 16,192
Deferred tax liability, net -- 8,449
Other long-term liabilities 1,040 11
Commitments (Note 12) -- --
Minority Interest -- 6,906
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; 13,369,681 shares issued and outstanding
at December 31, 1996 and 13,262,648 shares at
December 31, 1995 61,320 60,884
Preferred stock, no par value; 100,000 shares authorized;
2,440 shares issued and outstanding at December 31, 1996 2,355 --
Treasury stock (5,492) (5,492)
Accumulated deficit (49,557) (12,844)
---------- ----------
Total shareholders' equity 8,626 42,548
---------- ----------
Total liabilities, minority interest & shareholders' equity $ 40,587 $ 74,106
40
<PAGE>
---------- ----------
---------- ----------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
41
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET SALES $106,905 $86,565 $46,815
---------- ---------- ----------
OPERATING COSTS & EXPENSES:
Cost of sales 68,562 57,948 31,221
General & administrative 36,886 19,793 9,438
Depreciation & amortization 2,013 1,007 444
Bad debt expense 6,051 4,125 1,789
Total acquisition costs & expenses 2,334 1,625 265
Charge for asset impairment 39,147 -- --
Other (income) expense 3,429 1,002 (342)
---------- ---------- ----------
Total operating costs and expenses 158,422 85,500 42,815
---------- ---------- ----------
Operating income (loss) (51,517) 1,065 4,000
INCOME TAXES (BENEFIT) (7,812) 111 1
---------- ---------- ----------
Income (loss) before minority interest
and extraordinary items (43,705) 954 3,999
RCI acquisition - equity in profit (loss) of
unconsolidated subsidiary, net of tax -- (97) --
MINORITY INTEREST 6,906 509 --
EXTRAORDINARY ITEMS:
Cumulative effect of accounting change on years
prior to 1996, net of tax of $10 (Note 16) (877) -- --
Gain (loss) on settlement with creditors -- -- 72
---------- ---------- ----------
Net income (loss) $ (37,676) $ 1,366 $ 4,071
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Net income (loss) before extraordinary items $ (2.75) $ 0.11 $ 0.42
Cumulative effect of accounting change (0.07) -- --
---------- ---------- ----------
Net income (loss) per share $ (2.82) $ 0.11 $ 0.42
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES FOR
1996 AND COMMON SHARE AND COMMON SHARE
EQUIVALENTS OUTSTANDING FOR 1995 13,370 12,706 9,593
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
42
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
After tax profit (loss) $(37,676) $ 1,366 $ 4,071
Depreciation & amortization - operations 2,013 1,413 444
Depreciation & amortization - acquisitions 2,334 651 121
Write-off of patent rights 39,147 -- --
Deferred income taxes (8,449) -- --
Minority interest (6,906) (8,227) --
Other non-cash (income) loss 877 358 (54)
Changes in operating assets and liabilities:
Accounts receivable (960) (2,784) (6,718)
Notes receivable - current portion (220) (103) --
Notes receivable - due from officers and shareholders 425 (863) --
Inventories (1,113) (401) 42
Other current assets 171 (1,000) (82)
Accounts payable 5,962 2,571 3,316
Accrued expenses 4,540 1,834 150
Deferred income 2,848 (896) 1,649
---------- ---------- ----------
Net cash provided (used) by operating activities 2,993 (6,081) 2,939
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,224) (7,389) (1,694)
Additions to patents (717) (21,002) --
(Increase) decrease in investments 281 16 (263)
---------- ---------- ----------
Net cash used in investing activities (7,660) (28,375) (1,957)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 2,904 1,306 (265)
Additions to long-term debt 1,274 -- --
Reduction of long-term debt (1,763) -- --
Sale of preferred stock, net 2,355 -- --
Issuance of common stock, net 436 29,508 8,069
Treasury stock -- (4,827) 465
Other, net 30 419 39
---------- ---------- ----------
Net cash provided by financing activities 5,236 26,406 8,308
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 569 (8,050) 9,290
Cash and cash equivalents at beginning of year 1,645 9,695 405
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,214 $ 1,645 $ 9,695
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 181 $ 153 $ 1
Income taxes 635 574 1
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
43
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT
SHARES DATA)
<TABLE>
<CAPTION>
Common Stock Common Stock Preferred Treasury Accumulated
Shares Amount Stock Stock Deficit Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 9,061,382 $22,176 -- -- $(18,247) $3,929
Common stock issued upon
exercise of warrants 1,308,833 8,545 -- -- -- 8,545
Common stock issued under
private placement 100,000 500 -- -- -- 500
Common stock issued in exchange
for NTC shares 82,639 155 -- -- -- 155
Repurchase of treasury shares (70,000) -- -- (665) -- (665)
Net income -- -- -- -- 4,071 4,071
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 10,482,854 $31,376 -- $ (665) $(14,176) $16,535
Common stock issued upon
exercise of warrants 489,582 4,343 -- -- -- 4,343
Common stock issued under
private placement 157,500 1,890 -- -- -- 1,890
Common stock issued upon
conversion of note 2,300,000 22,664 -- -- -- 22,664
Common stock issued in exchange
for NTC shares 253,712 507 -- -- -- 507
Repurchase of treasury shares (451,000) -- (5,085) -- (5,085)
Treasury shares sold 30,000 -- 362 -- 362
Change in valuation of
marketable securities -- -- -- -- (34) (34)
Other -- 104 -- (104) -- --
Net income -- -- -- -- 1,366 1,366
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 13,262,648 $60,884 -- $(5,492) $(12,844) $42,548
Common stock issued upon
settlement of litigation 107,033 436 -- -- -- 436
Issuance of preferred stock, net
(2,440 shares issued) -- -- 2,355 -- -- 2,355
Cumulative effect -- -- -- -- 877 877
Change in valuation of marketable
securities 86 86
Net loss -- -- -- -- (37,676) (37,676)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 13,369,681 $61,320 $2,355 $(5,492) $(49,557) $8,626
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
44
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiary National Telephone &
Communications-Registered Trademark-, Inc. (NTC), and its 51%-owned subsidiary
Rapid Cast, Inc. (RCI). As a company with a controlling interest in RCI, the
Company is accounting for RCI using the consolidation method of accounting. The
Company shifted from the equity method of accounting for RCI under FASB
Statement No. 94 in the first and second quarters of 1995 to the consolidation
method when control became other than temporary. In the first quarter of 1997,
outside equity investments in RCI (see Note 17) reduced Incomnet's ownership
interest to less than 50%, thereby requiring the equity method of accounting for
RCI in 1997. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
year amounts to conform to current year presentation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Significant estimates made in preparing the consolidated financial
statements include the allowance for doubtful accounts, deferred marketing
reserve, income tax valuation allowance, investment reserves, litigation
settlement costs and future undiscounted cash flows used in the analysis of
the impairment of long-lived assets.
REVENUE RECOGNITION - The Company recognizes revenue during the month in which
services or products are delivered, as follows:
(1) NTC's long distance telecommunications service revenues are generated when
customers make long distance telephone calls from their business or residential
telephones or by using any of NTC's telephone calling cards. Proceeds from
prepaid telephone calling cards are recorded as deferred income when the cash is
received, and recognized as income as the telephone service is utilized.
Deferred income is carried on the balance sheet as an accrued liability. Total
1996 long distance telephone service sales totaled $83.7 million.
(2) NTC's marketing-related revenues are derived from programs and material
sold to the Company's base of independent sales representatives, including forms
and supplies, fees for representative and certified trainer renewals, and the
Company's Certified Trainer, Independent Representative and Long Distance
University programs. The Company requires that all such services and materials
be paid at the time of purchase. Revenues from marketing-related materials, net
of amounts deferred for future services to be provided to the representatives,
are booked as cash sales when the revenues are received. A portion of the
revenues from marketing-related programs and materials are deferred and
recognized over a twelve month period, to accrue its obligation to provide
customer support to its independent sales representatives. For the fiscal year
ended December 31, 1996, marketing sales totaled $17.1 million.
(3) RCI's optical-related revenues are derived from the sale of the
Company's optical lens manufacturing system and related supplies. Revenues
from optical-related systems and supplies are recognized as sales at the time
the products are shipped to the customer. Based on historical experience of
immaterial returns, RCI does not establish a reserve for returns at the time
of sale. All items returned to RCI are placed back into inventory at the
lower of cost or fair market value. For the fiscal year ended December 31,
1996, optical product sales totaled $4.7 million.
(4) The Company's network service revenues are recognized as sales as the
service is delivered. Total 1996 network service sales totaled $1.4 million.
CONCENTRATION OF CREDIT RISK - The Company sells its telephone and network
services to individuals and small businesses throughout the United States and
does not require collateral. It sells its optical products both domestically
and internationally. Reserves for uncollectible amounts are provided, which
management believes are sufficient.
INCOME TAXES - The Company recognizes the amount of current and deferred taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of enacted laws. Deferred income taxes result from temporary
differences in the basis of assets and liabilities reported for financial
statement and income tax purposes.
45
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware,
furniture and office equipment are stated at cost. Depreciation is provided
by the straight-line method over estimated useful lives ranging from five to
ten years.
COMPUTER SOFTWARE - The Company capitalizes the costs associated with
purchasing, developing and enhancing its computer software. All software
costs are amortized using the straight-line method over estimated useful
lives ranging from three to ten years.
LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and are
amortized using the straight-line method over the expected lease term.
NET INCOME (LOSS) PER SHARE - Net income (loss) per common share is based on
the weighted average number of common shares for 1996 and common shares and
common share equivalents for 1995. Common share equivalents have been
excluded in 1994 because their effect was immaterial. The Financial
Accounting Standards Board has issued a new statement recently which requires
companies to report "basic" earnings per share, which will exclude options,
warrants and other convertible securities. The accounting and disclosure
requirements of this statement are effective for financial statements for
fiscal years beginning after December 15, 1997, with earlier adoption
encouraged. Management does not believe that the adoption of this
pronouncement will have a material impact on the financial statements.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash-on-hand
and short-term certificates of deposit.
FAIR VALUES OF FINANCIAL INSTRUMENTS - Unless otherwise indicated, the fair
values of all reported assets and liabilities which represent financial
instruments (none of which are held for trading purposes) approximate the
carrying values of such amounts.
INVENTORIES - Inventory primarily consists of completed optical machines at
the RCI subsidiary and is valued at the lower of cost (weighted average
method) or market.
INVESTMENTS - Marketable securities are considered available-for-sale and are
stated at fair market value. The excess of fair market value over cost would be
included as a separate component of Shareholders' Equity. During the fourth
quarter of 1996, the Company deemed these investments permanently impaired and
recorded a loss of $0.3 million to their estimated realizable value.
INTANGIBLE ASSETS - Goodwill, representing the excess of purchase price over the
fair value of the net assets of NTC, is amortized on a straight-line method
basis over its estimated useful life of twenty years. Accumulated amortization
at December 31, 1996 and 1995 was $1.2 million and $0.9 million, respectively.
Patent rights are stated at cost since the date of acquisition of RCI, and are
amortized on a straight-line basis over seventeen years (see below).
Accumulated amortization at December 31, 1996 and 1995 was $9.9 million and
$0.04 million, respectively.
LONG-LIVED ASSETS - The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No.
121), in March 1995. In accordance with SFAS No. 121, the Company reviewed
its long-lived assets and certain identifiable intangibles for impairment.
Patent rights obtained in the February 1995 acquisition of a controlling
interest in RCI were evaluated by management and deemed to have been
impaired. There was a significant decrease in market value of RCI as
evidenced by an outside equity investment in January of 1997, the change in
the market acceptance of products which were based on those patent rights,
and actual and forecasted operating losses and cash flow losses which were
significantly greater than originally anticipated. Accordingly, management
estimated the fair value of the patent rights acquired in the RCI
acquisition, based upon, among other valuation techniques, the present value
of estimated expected cash flows.
The carrying value of the patent rights exceeded management's estimates of the
discounted present value of net cash flows to be derived therefrom, and a
writedown of approximately $39.1 million and elimination of a related deferred
tax liability of $8.5 million.
46
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
STOCK OPTION PLANS - The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related Interpretations in accounting for the employee stock options, rather
than adopt the alternative fair value accounting provided under The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
2. FUNDING OF MARKETING COMMISSIONS AND DEFERRED INCOME:
The Company's subsidiary, NTC, maintains a separate bank account for the payment
of marketing commissions. Funding of this account is adjusted regularly to
provide for management's estimates of required reserve balances. NTC estimates
the total commissions owed to active independent representatives ("IR Earned
Compensation") each week for all monies collected that week due to the efforts
of those active independent representatives. All IR Earned Compensation is then
paid to the independent representatives, when due, directly out of the separate
bank account.
3. RELATED PARTY TRANSACTIONS:
Notes receivable from officers and shareholders arise from aggregate loans of
$0.6 million made to three individuals in connection with the exercise of their
options to purchase the Company's common stock. The notes are non-interest
bearing and due on demand, and are partially secured by the stock acquired upon
the exercise of the options. For one of the officer loans, the Company agreed
to look only to the shares held by the officer as a source of loan repayment.
Accordingly, a reserve of $208,800 was provided in the fourth quarter of 1995,
representing the difference between the market value of the shares held by the
officer and the amount of the loan.
Included in accounts receivable is approximately $0.3 million and $0.5 million
at December 31, 1996 and 1995, respectively, due from companies controlled by an
individual who is an Incomnet shareholder and a founding shareholder of RCI.
On August 15, 1996, RCI and one of its shareholders/officers entered into an
agreement whereby (1) certain contributed property received from the
shareholder/officer valued at $250,000 reduced the amount of indebtedness to
RCI relating to the purchase of equipment and supplies by the
shareholder/officer and certain other entities controlled by the
shareholder/officer from RCI approximating $445,000, with a remaining balance
due RCI of approximately $195,000, (2) the remaining balance due to RCI
described in (1) will be used to reduce the amount of indebtedness to the
shareholder/officer by the Company of approximately $513,000 (including
accrued interest through the date of the agreement), with a remaining balance
due to the shareholder/officer of approximately $318,000 as of the date of
the agreement, and (3) in connection with RCI terminating a "Purchase
Commitment Agreement" with the shareholder/officer and certain other entities
controlled by the shareholder/officer, the shareholder/officer surrendered
142,222 shares of common stock (representing approximately 4% of the
shareholder/officer's holdings in RCI) with an estimated fair value of
$448,000.
4. ACQUISITION OF RAPID CAST, INC.:
On February 8, 1995, the Company acquired a 51% ownership in Rapid Cast, Inc.
for $28,164,000 in a transaction accounted for using the purchase method of
accounting. The acquisition resulted in the recognition of intangible patent
assets of approximately $42.0 million, $8.0 million of which was written off
in the third quarter ending September 30, 1996, and the remaining balance of
$31.1 million of which was written off in the fourth quarter ending December
31, 1996. The remaining balance is being amortized over 17 years.
The following summary, prepared on a pro forma basis, combines the consolidated
results of operations as if RCI had been acquired as of the beginning of the
periods presented, after including the impact of certain adjustments, such as
minority interest, equity in loss of unconsolidated subsidiary and patent
amortization. (Dollars in thousands, except per share amounts).
1995 1994
---- ----
Sales $87,860 $46,815
47
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Net income $ 1,080 $ 4,071
Net income per share $ .08 $ 0.42
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the entire periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergy that might be achieved from combined operations.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, including capitalized lease assets,
consist of the following:
(IN THOUSANDS) December 31,
------------------------
1996 1995
---- ----
Computer hardware and software $ 7,100 $ 5,113
Furniture and office equipment 3,456 1,878
Leasehold improvements 7,595 4,134
------ -----
18,151 11,125
Less accumulated depreciation 3,794 1,979
------ -----
$14,357 $9,146
------ -----
------ -----
6. PATENT RIGHTS FROM ACQUISITION OF RCI
During the third and fourth quarters of 1996, the Company evaluated the carrying
value of its patent rights in comparison with management's estimates of
discounted net present values of cash flows from those patents, and provided
impairment losses of approximately $8.0 million and $31.1 million, respectively.
7. INVESTMENTS, NOTES RECEIVABLE AND OTHER ASSETS
Investments, notes receivable and other assets consist of the following:
(IN THOUSANDS) December 31,
-------------------------
1996 1995
---- ----
Marketable securities available-for-sale $ 35 $321
Notes receivable -- 155
Other assets 208 324
--- ---
$243 $800
--- ---
--- ---
Marketable securities available-for-sale consist of shares of common stocks
of publicly traded companies. During the fourth quarter of 1996, the Company
deemed these investments permanently impaired and recorded a loss of $0.3
million to their estimated realizable value.
Notes receivable are carried at lower of amortized cost or net realizable
value. Other assets consist primarily of deposits.
8. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Current Portion of Notes Payable:
Notes payable to founding shareholders of RCI,
interest at 7%, due in July 1996, $1,091 of which was
exchanged for RCI shares in January 1997, balance repaid $1,205 $1,518
Notes payable to certain shareholders, officers and director
</TABLE>
48
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
of RCI, interest at 10%, $543 repaid in January 1997 from the
proceeds of private placement (see Note 17) balances exchanged
for equity shares of RCI 1,587 --
Revolving line of credit of RCI, interest at bank reference
rate (approximately 10% at December 31, 1996 and 1995)
repaid in January 1997 from the proceeds of private placement 500 490
Convertible notes payable to certain shareholders and officers
of RCI, interest at 8%, exchanged for equity shares of RCI
in January of 1997 322 --
Capitalized lease obligations, payable in varying installments
to 2000 288 --
Note payable in connection with financing of RCI
acquisition, interest at 8%, repaid in January 1996 -- 500
Miscellaneous 16 23
-------- -------
Total current portion of notes payable $3,918 $2,531
-------- -------
Long Term Portion of Notes Payable:
Capitalized lease obligations, payable in varying installments
to 2000 $1,002 $ --
Miscellaneous 38 11
-------- -------
Total long term portion of notes payable $1,040 $ 11
-------- -------
Total notes payable $4,958 $2,542
-------- -------
-------- -------
</TABLE>
Interest paid for 1996 and 1995 was approximately $0.2 million in each year and
none in 1994. Interest resulted primarily from interest paid on Notes used to
acquire RCI and from interest paid by RCI on its bank revolving line of credit.
9. INCOME TAXES:
On February 15, 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes". Effective January 1, 1993, the Company adopted SFAS No, 109, the effect
of which was immaterial to the Company's financial statements in 1994 and
resulted in a deferred tax liability in 1995.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
deferred income tax assets and liabilities are as follows:
(IN THOUSANDS)
December 31,
------------------------
1996 1995
-------- ---------
Deferred tax assets
Allowance for doubtful accounts $ 3,205 $ 1,360
Nondeductible reserves 67 --
Net operating loss carryforwards 11,526 7,503
Other -- 113
49
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
-------- --------
Subtotal 14,798 8,976
-------- --------
Deferred tax liabilities
Property and equipment, principally
due to differences in depreciation 1,847 676
Patent rights -- 8,449
-------- --------
Subtotal 1,847 9,125
-------- --------
Total 12,951 (149)
Less valuation allowance (12,951) (8,300)
-------- --------
Net deferred tax liability $ -- $ 8,449
-------- --------
-------- --------
The deferred taxes at December 31, 1995 are presented in the accompanying
balance sheet as deferred tax assets-current (included in prepaid expenses and
other) of $0.4 million and deferred tax liability-noncurrent of $8.4 million.
The following is a reconciliation of the federal statutory tax rate and the
effective tax rate:
1996 1995
---- ----
Federal statutory tax rate (34.0)% 34.0%
Goodwill 0.6 9.9
Loss producing no current tax benefit 17.0 --
State taxes, net of federal benefits -- 38.2
Benefit from net operating loss carryforward -- (71.5)
Other, net 1.2 --
-------- --------
Effective tax rate (15.2)% 10.6%
-------- --------
-------- --------
Income tax benefits are recognized only when their realization is assured.
Accordingly, potential future income tax benefits resulting from net operating
losses incurred to date are not reflected in the consolidated financial
statements.
At December 31, 1996, Incomnet had available net operating loss carryforwards
for federal income tax purposes of approximately $22,600,000, expiring in
various years between 2000 and 2011, and Rapid Cast had a carryforward of
approximately $6,028,000 expiring through 2012. The company files combined
income tax returns for Incomnet and NTC and separate returns for RCI.
Accordingly, the respective federal net operating loss carryforwards of each
corporation are available to offset taxable income only of each separate
corporation.
10. SHAREHOLDERS' EQUITY:
STOCK OPTIONS - In July 1996, the Company's shareholders adopted a stock option
plan that replaced a previous plan adopted by shareholders in 1994. The plan is
for executives at the Company's parent company level. The plan allows for the
issuance of up to 1,500,000 shares at an exercise price equal to the price of
the last sale of the Company's common stock on the date of issuance. The
Company's subsidiaries have adopted their own separate stock option plans to be
implemented when those companies become publicly traded. To date, the Company
has issued 685,000 stock options that are now vested and can be exercised at
prices from $4.25 to $4.87 up to May 31, 2002. The Company has also issued
300,000 stock options at prices from $4.37 to $4.85 that will vest when the
Company's RCI subsidiary reaches certain financial goals. These options have not
yet vested.
In November 1994, the Company approved the 1994 Plan for directors, employees,
and key outside consultants of the Company that provided for the issuance of up
to 1,500,000 shares of common stock. The plan requires that the option price
must be at least 100% of the fair market value of the shares on the date the
option is granted. In November 1994, options to purchase 1,200,000 shares of the
Company's common stock were granted at exercise
50
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
prices of $10 per share. These options will be vested based upon a performance
requirement in which National Telephone & Communications, Inc. must earn at
least $15.0 million in pre-tax profits during any continuous four audited
quarterly periods until December 31, 1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed
under SFAS 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
(IN THOUSANDS)
1996
----
Net loss - reported $(37,676)
------
Net loss - pro forma $(37,940)
------
Loss per share - reported $ (2.82)
----
Loss per share - pro forma $ (2.83)
----
The fair value of each option grant in 1996 and 1995 was estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: divided yield of 0.0%; expected annual volatility
of 66.1%; risk-free interest rate of 6.0% and expected lives of 3 years for
options. The weighted average per share fair value of options granted in 1996
was approximately $2.50. The pro forma amounts shown for the impact of SFAS 123
are not necessarily indicative of future results because of the phase in rules
and differences in number of grants, stock price and assumptions for future
years.
WARRANTS - Since 1994, the Company has issued warrants to purchase the Company's
common stock to key employees, directors or other individuals or organizations
as follows:
51
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Dollar Canceled or
Issued Number Price Exercised Amount Expired Expiration
------ ------ ----- --------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1-17-94 500,000 $ 7.00 500,000 $3,500,000
5/27/94 500,000 10.00 500,000 5,000,000
5/27/94 100,000 8.50 100,000 850,000
5/27/94 100,000 8.50 100,000 850,000
5/27/94 50,000 8.50 5/27/97
5/27/94 50,000 8.50 5/27/97
8/14/94 10,000 8.50 10,000 85,000
11/15/94 100,000 11.25 25,000 281,250
11/15/94 10,000 11.25 10,000 112,500
1/10/95 500,000 10.25 500,000
1/10/95 500,000 11.25 500,000
6/30/95 900,000 14.00 900,000
8/29/95 250,000 11.00 250,000
8/29/95 35,000 4.875 (1) 8/29/97
8/29/95 35,000 4.875 (1) 8/29/97
8/29/95 25,000 4.875 (1) 25,000
12/20/95 2,000 5.125 (1) 2,000
12/20/95 3,000 5.125 (1) 3,000
12/20/95 1,000 5.125 (1) 1,000
12/20/95 1,000 5.125 (1) 1,000
5/9/96 100,000 6.00 (2) 5/9/01
5/9/96 50,000 7.00 (2) 5/9/01
5/9/96 75,000 5.37 (2) 12/31/98
12/9/96 360,000 3.75 (2) 12/9/99
12/17/96 12,500 2.94 (2) 12/17/01
--------- --------- ----------- ---------
4,269,500 1,245,000 $10,678,750 2,182,000
</TABLE>
(1) The exercise price on these warrants was adjusted pursuant to a redemption
of old stock options and a reissuance of an equivalent number of new stock
options with the same expiration date.
(2) These warrants were issued pursuant to legal settlements in 1996.
Since 1994, the Company has issued warrants to purchase a total of 4,269,500
shares of the Company's common stock. At March 21, 1997, warrants to purchase
1,245,000 of those shares have been exercised bringing the Company $10,678,750;
warrants to purchase 2,182,000 shares have been canceled or have expired; and
warrants remain outstanding to purchase 767,500 shares of the Company's common
stock at prices ranging from $2.94 to $8.50.
COMMON STOCK - On August 5, 1994, the Company announced that its Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock from time to time on the open market or in private transactions. The
Company's Chief Executive Officer was given the discretion to decide when and if
the Company would repurchase shares and to effect such transactions. As of March
27, 1997, the Company has repurchased a net of 486,000 shares of common stock
with a value of $5,491,845 under the terms of the repurchase authorization as
follows:
Years ended Shares
December 31, Repurchased Cost (IN THOUSANDS)
-------------- --------------- ---------------------
1994 70,000 $ 665
1995 416,000 4,827
--------------- ---------------------
486,000 $5,492
--------------- ---------------------
--------------- ---------------------
PRIVATE PLACEMENT - On June 30, 1995, the Company initiated a private placement
of 900,000 shares of the Company's restricted common stock at $12 per share for
a total of $10,800,000 and warrants to purchase 900,000 additional shares of the
Company's common stock at $14 per share. The warrants were exercisable for a
period of
52
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
six months until December 31, 1995. The Company received $1,890,000 in cash
from subscribers to the private placement, which was the effective purchase
of 157,500 shares and warrants to purchase an additional 157,500 shares for
$14 per share. The Company also received subscription notes for $8,910,000
payable upon the registration of the shares and shares underlying the
warrants with the Securities and Exchange Commission. These notes were for
the purchase of 742,500 shares of the Company's common stock and warrants to
purchase an additional 742,500 shares for a purchase price of $14 per share.
As the Company did not register the shares, the notes for $8,910,000 were
canceled on December 31, 1995 by mutual consent with the investors. As a
result, the investors were no longer obligated to pay the notes to the
Company and the Company was no longer obligated to issue additional shares or
warrants to the investors. Since the warrants to purchase 157,500 additional
shares were not exercised, these warrants expired on December 31, 1995. As a
result, the Company issued a total of 157,500 shares in consideration for the
$1,890,000 in cash paid by the investors. The Company's balance sheet
reflects the issuance of 157,500 shares of the Company's common stock in
exchange for $1,890,000 in capital.
SHORT SWING PROFITS - In January 1996, the Company was served with a
derivative shareholders lawsuit entitled RICHARD MORALES VS. INCOMNET, INC.
AND SAM D. SCHWARTZ, 96 Civil 0225 in the United States District Court for
the Southern District of New York, alleging violations of Section 16(b) of
the Securities Exchange Act of 1934, as amended, and demanding that the
Company assert claims against Mr. Schwartz for the payment of short-swing
profits plus interest. Mr. Schwartz has retained separate counsel for this
action. In early July 1996, Mr. Schwartz deposited 800,000 shares of his
Incomnet, Inc. Common Stock into a court-approved escrow account with the
Company's New York counsel as security for his obligation to pay short swing
profits. In early February 1997, plaintiff's counsel prepared a motion for
summary judgment in the case seeking $5,050,000 in short swing profits from
Mr. Schwartz plus pre-judgment interest. On February 21, 1997, the plaintiffs
and Sam Schwartz, entered into a stipulated settlement pursuant to which Mr.
Schwartz agreed to pay $4,250,000 to the Company as full payment of his short
swing profit obligation to the Company. The plaintiff's lawyer indicated that
he would request a fee of $850,000 plus reimbursement of $65,000 of expenses,
to be paid by the Company from the proceeds of the recovery. Under the
stipulated settlement, the disgorgement of short-swing profits would be
payable $600,000 in cash and the balance by tender to the Company of shares
of the Company's Common Stock owned by Mr. Schwartz, based on 90% of the
average between the bid and the asked price of the Company's Common Stock on
the NASDAQ market during the 30 calendar days immediately preceding the date
that the court enters an order approving the settlement. Pursuant to the
agreement, Mr. Schwartz has deposited $600,000 in cash and has agreed to
deposit additional shares of the Company's common stock into a separate
escrow account from the one which already contains 800,000 shares of the
Company's stock owned by him or his affiliates. The Company intends to oppose
the amount of plaintiff's attorney's fees sought. The Company does not
otherwise intend to oppose the proposed settlement. On April 11, 1997, a
revised stipulation was filed containing the same economic terms. Notice of
the settlement is to be given to the shareholders by April 21, 1997. Any
opposition to the settlement is due by May 16, 1997, and a hearing to approve
the settlement is to be held on May 30, 1997. There is no assurance that the
Company will recover the short-swing profits from Mr. Schwartz.
11. COMMITMENTS, CONTINGENCIES AND OTHER:
LITIGATION - The Company is a defendant in a class action matter alleging
securities violation with respect to alleged false denial and non-disclosure
of a Securities and Exchange Commission investigation and alleged
non-disclosure of purchases and sales of the Company's stock by an affiliate
of the former Chairman of the Board. Counsel for the company is unable to
estimate the ultimate outcome of this matter and is unable to predict a range
of potential loss. Accordingly, no amounts have been provided for the class
action lawsuit in the accompanying financial statements.
The Company is under investigation by the Securities and Exchange Commission
under a non-public "formal order of private investigation." Management has
furnished all information requested by the Commission and does not believe
that the matter will have a material adverse impact on its financial position
or results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The total Company allowance for doubtful
accounts totaled $2.0 million or 13.2% of gross accounts receivable at
December 31, 1996 and $1.1 million or 8.0% of gross accounts receivable at
December 31, 1995. The following table summarizes the Company's year-to-year
reserve balances by subsidiary and segment:
$ IN THOUSANDS December 31,
---------------------
Subsidiary Segment 1996 1995
- ------------ ---------- ---------------------
53
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NTC Telephone $1,908 $1,063
RCI Optical 85 --
AutoNETWORK Network -- --
---------------------
Total Company $1,993 $1,063
---------------------
---------------------
% of Gross Accounts Receivables 13.2% 8.0%
---------------------
---------------------
Reserves for NTC's telecommunications service accounts receivable relate
primarily to its direct billed and LEC billed long distance telephone services.
Delinquent direct billed receivables are collected by a combination of NTC's
internal collection department and by external collection agencies. Delinquent
LEC billed receivables are collected by the LEC's. The estimated percentage of
accounts which will become uncollectible is reviewed periodically by management
and is adjusted in accordance with historical experience.
Reserves for NTC's marketing program accounts receivable are provided at 100% of
the expected bad debt. These receivables result from payments for marketing
programs which have been denied due to returned checks and rejected credit card
payments.
BUILDING LEASES - Rent expense for the years ended December 31, 1996, 1995 and
1994 was $0.8 million, $0.8 million, and $0.3 million, respectively.
The Company leases its office and operating facilities, equipment and
automobiles under noncancellable operating leases. The aggregate future minimum
annual rental payments required under these leases are as follows (IN
THOUSANDS):
For years ending
December 31,
-------------
1997 $2,146
1998 2,176
1999 1,643
2000 1,455
2001 1,361
Thereafter 2,602
In addition, effective February 1996, NTC entered into a revised multiple-year
$1.0 billion contract with Wiltel, Inc., which has a fixed term expiring January
2002. 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 in part, on the purchases
of another unaffiliated long distance telephone service provider to meet its
volume purchase requirements under the new contract.
12. NETWORK MARKETING COSTS:
NTC's net cost to operate its network marketing program consist of the
following:
(IN $ MILLIONS)
1996 1995
--------------------
Sales $17.4 $13.1
Cost of sales 13.7 11.2
Operating expenses for support services 4.3 3.8
--------------------
Total marketing-related costs 18.0 15.0
--------------------
Net marketing cost $ 0.6 $ 1.9
--------------------
--------------------
54
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
% of total NTC (long distance & marketing) sales 0.6% 2.3%
Marketing sales are generated by the sale of materials, training and support
services to assist NTC independent sales representatives in selling new retail
customers and enrolling other representatives in the NTC program. Beginning in
January 1996, NTC began to accrue its obligation to provide customer support to
its representatives (see Note 16). These reserved marketing revenues are
reflected as deferred income on the Company's balance sheet and are amortized
over the succeeding twelve months. The marketing-related costs include
commissions paid to independent sales representatives for acquiring new retail
telephone customers, as well as the cost of sales materials, salaries and wages
of marketing department personnel, services required to support the independent
sales representatives, and other directly identifiable support costs, but do not
include residual commissions paid on continuing long distance telephone usage or
the typical indirect cost allocations, such as floor-space and supporting
departments. Marketing-related costs for 1996 and 1995, of $18.0 million and
$15.0 million, respectively, are compared against marketing-related revenues for
1996 and 1995 of $17.4 million and $13.1 million, respectively. The results are
a net loss in marketing-related activities for 1996 and 1995 of $0.6 million and
$1.9 million, or 0.6% and 2.3%, respectively, of total NTC sales.
13. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES:
The Company's subsidiary, NTC, compensates its independent sales representatives
by an earned commission structure based upon signing up new telephone customers
and based upon the telephone usage generated by those customers. Expenses
associated with commissions, bonuses and overrides paid out to NTC's independent
sales representatives for 1996 and 1995 were $18.0 million and $14.2 million,
respectively.
14. SEGMENT INFORMATION:
In 1994, the Company conducted its business operations in two industry segments,
including Network Services and Telephone Services. In 1995 and 1996, because of
the acquisition of RCI, the Company conducted business in three segments,
including Network Services, Telephone Services and Optical Systems. No one
customer accounted for as much as 10% of the revenues of any segment in 1996,
1995 or 1994.
55
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS)
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1996 Services Systems Services Corporate Consolidated
- ---------------------------- --------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales $100,811 $ 4,660 $1,426 $ 8 $106,905
-------- -------- ------ -------- --------
Operating income (loss) 3,735 (26,495) 475 (29,232) (51,517)
Income taxes 374 (8,449) 263 -- (7,812)
-------- -------- ------ -------- --------
Income (loss) before minority interest and extraordinary items $ 3,361 $(18,046) $ 212 $(29,232) $(43,705)
-------- -------- ------ -------- --------
-------- -------- ------ -------- --------
Identifiable assets $ 32,987 $ 5,951 $1,562 $ 87 $ 40,587
Depreciation and amortization 1,630 118 265 $ 2,334 4,347
Capital expenditures 6,412 669 143 -- 7,224
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated
- ---------------------------- --------- -------- -------- --------- ------------
Sales $ 83,127 $ 1,993 $1,370 $ 75 $ 86,565
-------- -------- ------ -------- --------
Operating income (loss) 5,060 (1,040) 369 (3,324) 1.065
Income taxes 365 -- (102) $ (152) 111
-------- -------- ------ -------- --------
Income (loss) before minority interest and extraordinary items $ 4,695 $ (1,040) $ 471 $ (3,172) $ 954
-------- -------- ------ -------- --------
-------- -------- ------ -------- --------
Identifiable assets $ 21,758 $ 25,345 $1,569 $ 25,434 $ 74,106
Depreciation and amortization 705 429 279 $ 1,100 2,513
Capital expenditures 6,681 199 509 -- 7,389
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1994 Services Systems Services Corporate Consolidated
- ---------------------------- --------- -------- -------- --------- ------------
Sales $ 45,609 $ -- $1,206 $ -- $ 46,815
-------- -------- ------ -------- --------
Operating income (loss) 3,742 -- 154 104 4,000
Income taxes -- -- 1 -- 1
-------- -------- ------ -------- --------
Income (loss) before extraordinary items $ 3,742 $ -- $ 153 $ 104 $ 3,999
-------- -------- ------ -------- --------
-------- -------- ------ -------- --------
Identifiable assets $ 12,830 $ -- $4,271 $ 9,057 $ 26,158
Depreciation and amortization 221 -- 489 -- 710
Capital expenditures 1,547 -- 147 -- 1,694
</TABLE>
56
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
15. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1995, the Company recorded adjustments having
the effect of reducing net income by approximately $3.1 million or $ 0.24 per
share. These adjustments resulted primarily from reserve provisioning related
to settlements with shareholders and with the Company's former Chairman,
revisions of management's estimates regarding the collectibility of accounts
receivable, write-off of marketable securities and inventory, and reserve
provisioning for estimated legal fees.
16. CHANGE IN ACCOUNTING:
Effective January 1, 1996, the Company changed its accounting procedures to
defer a portion of marketing revenues, which had previously been recognized upon
receipt. The Company believes that the change is preferable because it provides
a better matching of revenues with services provided to the marketing
representatives. The cumulative effect of this change and certain other changes
for the periods prior to January 1, 1996 of approximately $0.9 million is shown
as a cumulative effect adjustment. The effect of the changes on 1996 is to
increase income before cumulative effect adjustment by $0.03 per share.
17. SUBSEQUENT EVENTS:
On January 15, 1997, RCI completed a Convertible Preferred Stock and Warrants
Purchase Agreement with two institutional investors whereby they issued (i)
7,275,000 shares of newly created Series A Convertible Preferred Stock, par
value $.001 per share, (ii) 725,000 shares of newly created Series B
Non-Voting Convertible Preferred Stock, par value $.001 per share, and (iii)
1,400,000 warrants (expiring five years from the date of issuance) with each
warrant entitling the holder thereof to purchase one share of common stock at
an exercise price of $1.74 per share, for aggregate gross proceeds of
$12,000,000. The proceeds were used to (i) repay $500,000 of principal, plus
accrued and unpaid interest, under RCI's existing note payable to bank, (ii)
repay $2,765,339 of existing bridge financing owing to Incomnet, including
accrued and unpaid interest thereon, (iii) repay $940,091 of additional
existing bridge financing owing to certain shareholders including accrued and
unpaid interest thereon, (iv) to repurchase 1,200,000 shares of common stock
from one of RCI's shareholders/officers for a purchase price of $1,536,000,
(v) to make a $325,000 partial settlement payment to complete the settlement
of the RCI patent infringement case, which has been dismissed, (vi) to pay
fees and expenses incurred by the institutional investors estimated to be
approximately $500,000, and (vii) the balance is for general working capital
purposes including the immediate repayment of overdue accounts payable of
approximately $1,800,000. The two institutional investors retain an option
to invest an additional $5,000,000 by July 15, 1997 and an additional
$5,000,000 by July 15, 1998 with substantially the same terms as previously
described.
This transaction reduced the Company's outstanding interest to less than 50% of
the voting control of RCI. Accordingly, commencing in the first quarter of
1997, RCI will be accounted for using the equity method of accounting.
In addition, on March 26, 1997, NTC entered into a credit agreement with a bank
for a $5.0 million accounts receivable line of credit to support NTC's
operations and establishment of additional branch marketing offices. This new
agreement provides for interest at prime plus 1.0% and is secured generally by
NTC's accounts receivable. As of March 31, 1997, there are no borrowings
against this line of credit. Under the terms of the agreement, NTC is required
to comply with various covenants, including covenants requiring NTC to maintain
specified ratios and levels of tangible net worth and net income, and limiting
the ability of NTC to pledge assets or incur liens on assets.
57
<PAGE>
Schedule II
INCOMNET, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(IN THOUSANDS)
Balance at Amounts Balance
beginning charged to costs at end
Classification of period and expenses Write-offs (1) of period
- -------------------- ---------- ---------------- -------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Deducted from asset accounts:
Accounts receivable reserve $1,063 $9,517 $ (8,587) $1,993
Patent reserves 2,019 7,916 (9,891) 44
Goodwill reserves 942 296 -- 1,238
Notes receivable reserve 209 1,472 (1,472) 209
Inventory reserves 100 70 170
Reserve for marketable securities 34 225 (34) 225
------ ------- -------- ------
Total $4,367 $19,496 $(19,984) $3,879
------ ------- -------- ------
------ ------- -------- ------
Year ended December 31, 1995
Deducted from asset accounts:
Accounts receivable reserve $ 991 $ 7,590 $ (7,518) $1,063
Patent reserves 0 2,019 -- 2,019
Goodwill reserves 664 278 -- 942
Notes receivable reserve 0 209 -- 209
Inventory reserves 0 100 -- 100
Reserve for marketable securities 2,000 -- (1,966) 34
------ ------- -------- ------
Total $3,655 $10,196 $ (9,484) $4,367
------ ------- -------- ------
------ ------- -------- ------
Year ended December 31, 1994
Deducted from asset accounts:
Accounts receivable reserve $ 356 $ 4,576 $ (3,941) $ 991
Goodwill reserves 0 664 -- 664
Reserve for marketable securities 2,845 -- (845) 2,000
------ ------- -------- ------
Total $3,201 $ 5,240 $ (4,786) $3,655
------ ------- -------- ------
------ ------- -------- ------
</TABLE>
(1) Amounts are net of recoveries.
58
<PAGE>
AIRPORT TRADE CENTER
550 PAIEA STREET, HONOLULU, HAWAII 96819
-------------------------------
REVISED STANDARD LEASE
-------------------------------
TENANT: NATIONAL TELEPHONE & COMMUNICATIONS, INC.
PREMISES: L-1 AND L-2
PREMISES TYPE: FIRST FLOOR RETAIL
DATE: NOVEMBER 20, 1996
<PAGE>
AIRPORT TRADE CENTER
TABLE OF CONTENTS
ARTICLE 1 - SPECIAL PROVISIONS AND EXHIBITS . . . . . . . . . . . . . . . . . 1
1.01 SPECIFIC PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.03 [INTENTIONALLY OMITTED]. . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2 - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.01 BUILDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.02 BUILDING AREAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.03 COMMON AREAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.04 IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.05 LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.06 LEASE MONTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.07 NET RENTABLE AREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.08 NET USABLE AREA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.09 OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 OPERATING EXPENSE PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 PROJECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.13 PREMISES TYPE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.15 TENANT'S EMPLOYEES AND LANDLORD'S EMPLOYEES. . . . . . . . . . . . . . . 4
2.16 TENANT'S PROPORTIONATE SHARE . . . . . . . . . . . . . . . . . . . . . . 4
2.17 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3 - RENT, SECURITY DEPOSIT AND OTHER TENANT CHARGES . . . . . . . . . 4
3.01 BASE RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.02 OPERATING EXPENSE PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 4
3.03 REIMBURSEMENT FOR REPAIRS. . . . . . . . . . . . . . . . . . . . . . . . 5
3.04 LATE PAYMENT CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.05 TAX ON RENT AND OTHER PAYMENTS . . . . . . . . . . . . . . . . . . . . . 5
3.06 CONVEYANCE TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.07 TAXES ON TENANT'S BUSINESS AND PERSONAL PROPERTY . . . . . . . . . . . . 6
3.08 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.09 CHARGE FOR PROVIDING ELECTRICAL POWER AND EXTRAORDINARY PROPERTY AND
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.10 APPARATUS REQUIRING EXCESSIVE UTILITIES USAGE. . . . . . . . . . . . . . 7
3.11 LANDLORD'S RIGHT TO MAKE TENANT'S REPAIRS. . . . . . . . . . . . . . . . 6
3.12 OPTION TO PERFORM LEASE COVENANTS. . . . . . . . . . . . . . . . . . . . 7
3.13 INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.14 TENANT'S COST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.15 CASHIER'S OR CERTIFIED CHECKS. . . . . . . . . . . . . . . . . . . . . . 7
3.16 ADDITIONAL RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 4 - CONDITION, USE AND OCCUPANCY OF PREMISES. . . . . . . . . . . . . 7
4.01 TENANT'S INSPECTION AND ACCEPTANCE OF THE PREMISES . . . . . . . . . . . 7
4.02 PERMITTED USE OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . 8
4.03 LEGAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.04 PROHIBITED USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . 8
4.05 RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.06 PARKING AND AUTOMOBILES. . . . . . . . . . . . . . . . . . . . . . . . . 9
4.07 COMMON AREAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.08 ADVERTISING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.09 CARE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.10 SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.11 [INTENTIONALLY OMITTED]. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.12 QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.13 INSPECTION OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.14 [INTENTIONALLY OMITTED]. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.15 CHANGE OF BUILDING NAME. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.16 [INTENTIONALLY OMMITED]. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.17 [INTENTIONALLY OMITTED]. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.18 OTHER TENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.19 NO SIGNS ON STATE PROPERTY . . . . . . . . . . . . . . . . . . . . . . . 10
4.20 CONDUCT OF TENANT'S EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . 10
4.21 CONSUMPTION OF ALCOHOLIC BEVERAGES . . . . . . . . . . . . . . . . . . . 10
4.22 SMOKING AND EATING IN COMMON AREAS . . . . . . . . . . . . . . . . . . . 10
ARTICLE 5 - SERVICES PROVIDED BY LANDLORD . . . . . . . . . . . . . . . . . . 11
5.01 STANDARD SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.02 LIMITATION ON LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 11
5.03 SERVICE CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-i-
<PAGE>
ARTICLE 6 - TENANT IMPROVEMENTS, ALTERATIONS, REPAIRS AND RENOVATIONS . . . . 11
6.01 CONSENT REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.02 LIEN PROTECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.03 OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.04 LEGALLY REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.05 REPAIRS BY TENANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.06 IMPROVEMENT OF THE PREMISES. . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 7 - IMPROVEMENTS AND REPAIRS BY LANDLORD. . . . . . . . . . . . . . . 12
7.01 ALTERATIONS, ADDITIONS OR CAPITAL IMPROVEMENTS BY LANDLORD . . . . . . . 12
7.02 REPAIR OF STRUCTURAL ELEMENTS. . . . . . . . . . . . . . . . . . . . . . 12
7.03 REPLACEMENT OF CEILING, ETC. . . . . . . . . . . . . . . . . . . . . . . 13
7.04 IMPROVEMENTS TO THE PREMISES . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 8 - TENANT ASSIGNMENT, SUBLETTING AND MORTGAGING. . . . . . . . . . . 13
8.01 CONSENT REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.02 ADDITIONAL CONDITIONS TO ASSIGNMENT OR SUBLEASE. . . . . . . . . . . . . 13
8.03 MORTGAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.04 CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 9 - SUBORDINATION, ATTORNMENT AND MORTGAGE REQUIREMENTS . . . . . . . 14
9.01 SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.02 REQUIREMENTS OF LANDLORD'S MORTGAGEE AND GROUND LESSOR . . . . . . . . . 14
9.03 ESTOPPEL CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.04 LEASE AMENDMENT, FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . 15
ARTICLE 10 - SALE OF LANDLORD'S INTEREST. . . . . . . . . . . . . . . . . . . 15
10.01 SALE OF LANDLORD'S INTEREST . . . . . . . . . . . . . . . . . . . . . . 15
10.02 TENANT ATTORNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.03 SALE OR ASSIGNMENT BY LANDLORD. . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 11 - INDEMNITY AND RISK OF INJURY, LOSS AND DAMAGE. . . . . . . . . . 15
11.01 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.02 NON-LIABILITY OF LANDLORD . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 12 - INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12.01 PUBLIC LIABILITY AND PROPERTY DAMAGE. . . . . . . . . . . . . . . . . . 16
12.02 INSURANCE ON PERSONAL PROPERTY, IMPROVEMENTS AND BUSINESS
INTERRUPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12.03 NOTICE TO LANDLORD. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.04 RECIPROCAL WAIVERS OF SUBROGATION . . . . . . . . . . . . . . . . . . . 17
12.05 OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.06 BLANKET INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 13 - DAMAGE AND RESTORATION . . . . . . . . . . . . . . . . . . . . . 17
13.01 REPAIRS BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.02 CONTINUATION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . 18
13.03 REPAIRS BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
13.04 ABATEMENT OF RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 14 - CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . 18
14.01 TERMINATION OF LEASE AS TO PORTION TAKEN. . . . . . . . . . . . . . . . 18
14.02 LANDLORD'S OPTION TO TERMINATE. . . . . . . . . . . . . . . . . . . . . 18
14.03 TENANT'S OPINION TO TERMINATE . . . . . . . . . . . . . . . . . . . . . 18
14.04 REDUCTION OF RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
14.05 RIGHT TO COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . 18
14.06 TAKING FOR A LIMITED PERIOD . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 15 - DEFAULT BY TENANT. . . . . . . . . . . . . . . . . . . . . . . . 19
15.01 DEFINITION OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 19
15.02 LANDLORD'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.03 REMEDIES ARE CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 16 - TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.01 SURRENDER OF THE PREMISES . . . . . . . . . . . . . . . . . . . . . . . 21
16.02 HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 17 - GROUND LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . 21
17.01 GROUND LEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 18 - LANDLORD'S LIABILITY . . . . . . . . . . . . . . . . . . . . . . 22
18.01 LANDLORD'S FAILURE TO PERFORM . . . . . . . . . . . . . . . . . . . . . 22
18.02 NOTICE TO LANDLORD'S MORTGAGEES . . . . . . . . . . . . . . . . . . . . 22
18.03 LIMITATION ON LIABILITY OF LANDLORD AND MORTGAGEE . . . . . . . . . . . 22
ARTICLE 19 - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 22
19.01 NO LIGHT, VIEW OR AIR EASEMENT. . . . . . . . . . . . . . . . . . . . . 22
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19.02 TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
19.03 BROKERAGE COMMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . 22
19.04 EXECUTION BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . 22
19.05 RENEWAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
19.06 COST AND ATTORNEY'S FEES. . . . . . . . . . . . . . . . . . . . . . . . 23
19.07 LANDLORD'S CONSENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19.08 NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19.09 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19.10 WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19.11 SUCCESSORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19.12 JOINT AND SEVERAL OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . 24
19.13 CHOICE OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
19.14 ARTICLE AND SECTION HEADINGS. . . . . . . . . . . . . . . . . . . . . . 24
19.15 SHORT-FORM LEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
19.16 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
19.17 HAZARDOUS MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
19.18 PERIODIC FINANCIAL STATEMENTS TO LANDLORD . . . . . . . . . . . . . . . 27
19.19 ACKNOWLEDGMENT OF WAVIER OF JURY TRIAL. . . . . . . . . . . . . . . . . 27
19.20 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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<PAGE>
AIRPORT TRADE CENTER
550 PAIEA STREET, HONOLULU, HAWAII
REVISED STANDARD LEASE
THIS LEASE is made as of November 20, 1996, by and between PAIEA
PROPERTIES, a Hawaii limited partnership ("Landlord"), whose principal place of
business and post office address is 550 Paiea Street, Suite 102, Honolulu,
Hawaii 96819 and NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Nevada corporation
("Tenant"), whose principal place of business is 2801 Main Street, Irvine,
California 92714.
WITNESSETH:
Landlord leases to Tenant, and Tenant leases from Landlord, the Premises
described below, located in the Project now known as "Airport Trade Center", for
the Term and subject to and upon consideration of the terms, duties,
obligations, covenants, conditions, rules and regulations, and special
conditions set forth in this Lease.
ARTICLE 1
SPECIAL PROVISIONS AND EXHIBITS
1.01 SPECIFIC PROVISIONS. The following constitute specific
provisions of this Lease:
(a) Premises: AIRPORT TRADE CENTER as shown on Exhibit A
attached, to include area "L-1 and L-2", the exact size of which shall be
measured by Landlord's architect in accordance with BOMA standards following
construction of all demising walls.
Net Usable Area [approximate]:
Retail - L-1.................... 7,912 Sq.Ft.
Retail - L-2.................... 695 Sq.Ft.
Total...................... 8,607 Sq.Ft.
Premises Type:.................. FIRST FLOOR RETAIL
(b) Net Rentable Area [approximate]:
Retail - L-1.................... 9,110 Sq.Ft.
Retail - L-2.................... 800 Sq.Ft.
Total...................... 9,910 Sq.Ft.
(c) Term:........................... 120 Lease Months.
Commencement Date:.............. The earlier to occur of (i) February
1, 1997, or (ii) the date upon which Tenant substantially completes its
improvements and takes occupancy of the Premises.
Termination Date:............... 120 Lease Months following the
Commencement Date.
(d) Initial Monthly Operating
Expense Payment Estimate:....... $3,765.80
(e) Security Deposit:............... $36,697.68
(f) Use:............................ General offices, meeting
facilities, retail sales of support collateral materials exclusive to Tenant's
business operations and other lawful uses pertaining to Tenant's business
subject to the prior written approval of Landlord.
Maximum Occupancy:.............. As determined by the City and
County of Honolulu fire and building codes.
(g) Number of unassigned parking spaces:. 50; see Exhibit E for
additional parking requirements of Tenant for restricted time period use.
Initial monthly fee per space subject to adjustment per Exhibit C
(Rules and Regulations):
Unassigned $60.00 Tandem $90.00 Reserved $85.00
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(h) [Intentionally Omitted]
1.02 EXHIBITS. The following are attached as Exhibits and by this
reference incorporated in the Lease:
Exhibit A: Location of Premises and Floor Plan
Exhibit B: Land Description
Exhibit C: Rules and Regulations
Exhibit D: Base Rent and Summary of First Payment
Exhibit E: Special Conditions
Exhibit F: Improvement Specifications and Construction Plans-
By Tenant
By Landlord
Exhibit G: Allocations of Operating Expenses and Tenant's
Proportionate Share
Exhibit H: Location of Parking Area
1.03 [Intentionally Omitted]
ARTICLE 2
DEFINITIONS
Unless the context otherwise specifies or requires, the following
terms shall have the meanings hereinafter specified:
2.01 "BUILDING" shall mean the present building located upon the Land.
2.02 "BUILDING AREAS" shall mean the areas identified on Exhibit A as
Building Area 1, Building Area 2, Roof Top Area and Open Area, and shall at all
times include that Area of the Building which contains the Premises.
2.03 "COMMON AREAS" shall mean those portions of and facilities in the
Building and the Project designated by Landlord for the nonexclusive use of
Tenant in common with other authorized users, subject to the Rules and
Regulations Landlord shall promulgate.
2.04 "IMPROVEMENTS" shall include all improvements existing at the
commencement of the Term or at any time thereafter built, installed or finished
by anyone in the Premises, including, without limitation, all walls and
partitions which are not load-bearing; the interior decorated or finished
surfaces of all perimeter and load-bearing walls and floors; all ceilings and
ceiling light fixtures (including those furnished by Landlord); all interior
windows, entrance doors, mechanical and electrical conduits, wiring fixtures and
equipment; all floor tile, carpeting and wall coverings; all ceiling sprinkler
systems, air-conditioning equipment, other fixtures of all kinds; and water,
electric, telephone and other utility lines, ducts, conduits and facilities
serving other portions of the Building which may pass through the Premises.
2.05 "LAND" shall mean the real property described in Exhibit B,
subject to reduction in area as provided in Section 7.01.
2.06 "LEASE MONTH" shall mean a full calendar month. The number of
Lease Months comprising the term is specified in Section 1.01 (c). The first
Lease Month shall begin on the Commencement Date set forth in Section 1.01 (c)
if such date is the first day of the calendar month. If such Commencement Date
shall not fall on the first day of a calendar month, the first Lease Month shall
begin on the first day of the calendar month immediately following the month in
which commencement occurs. In any event, Tenant shall be liable for Base Rent,
any other payments required and performance of all other obligations of Tenant
under this Lease from the Commencement Date. "Lease Year" shall mean twelve
(12) full Lease Months, beginning the first Lease Month under this Lease.
2.07 "NET RENTABLE AREA" shall mean the Net Usable Area of the
Premises plus Tenant's pro rata share of the Building and Project common areas
calculated in accordance with Exhibit G.
2.08 "NET USABLE AREA"" shall mean:
(a) For Building Area 1:
(i) In the case of a Tenant leasing a full floor, the area
measured from the finished inside surface of the outer Building wall, or from
the inside surface of the Building glass line if more than fifty percent (50%)
of the Building wall is glass, to the inside surface of the opposite Building
wall, or glass line, specifically including the area of the restrooms, and
electrical, mechanical and
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janitorial rooms but less the area (measured from the midpoint of the enclosing
walls) of all elevator shafts and stairs located on such floor. No deductions
shall be made for columns and projections necessary to the Building.
(ii) In the case of a Tenant leasing less than a full floor, the
area measured from the finished inside surface of the outer Building wall, or
from the inside surface of the Building glass line if more than fifty percent
(50%) of the Building wall is glass, to the mid-point of partitions that
separate the Premises from adjoining premises not leased by Tenant and to the
finished inside surface of partitions that separate the Premises from the
corridors, and to the inside finished surface of other permanent walls. All
measurements to the inside of corridor walls shall be to the general line of the
corridor wall, as shown on Exhibit A, without reduction for recessed Tenant
entry areas. No deductions shall be made for columns and projections necessary
to the Building.
(b) For Building Area 2: [Intentionally Omitted]
(c) For Roof Top and Open Area Premises: [Intentionally Omitted]
2.09 "OPERATING EXPENSES" shall mean all expenses which shall be
incurred, accrued or paid due to the ownership, operation, maintenance or repair
of the Project including the Common Areas. Without in any way limiting the
generality of the foregoing, such expenses shall include the wages, salaries and
payroll burden of employees; Project administration costs and property
management fees; janitorial, maintenance, guard and other services; electricity,
water, waste disposal and other utilities for the Project, including the Common
Areas; materials and supplies (including janitorial); maintenance and repairs to
all equipment and all interior and exterior (including roofing and structural
members) areas of the Project; cleaning and replacement of all carpets and other
floor coverings; pest control costs; all interior and exterior painting;
replacement of light bulbs and fluorescent tubes, and lighting fixtures; all
interior and exterior window cleaning; all costs of utilities, labor, material
and supplies for the operation, repair, maintenance, renovation and replacement
of the air conditioning equipment and system, which may include costs otherwise
considered as capital costs or capital improvements; paving, sealing and
stripping the parking and driveway areas; all insurance, including liability,
worker's compensation, Temporary Disability, fire and casualty, and business
(rental) interruption; any additions to or modifications of the Building or
Project required by governmental authority or Landlord's insurance carrier; the
cost of guest parking spaces at the rate Landlord is charging tenants for
comparable parking spaces; all costs of exterior lighting; cost, deprecation or
rental of tools and equipment; accounting, legal and other professional fees and
costs; costs of landscaping the Project and maintenance thereof; the fair rental
value of areas used in the operation, management, leasing and maintenance of the
Project; all taxes, assessments and other charges by governmental authorities,
present or future, excluding income taxes and any taxes already recovered under
other provisions of this Lease but specifically including real property taxes
and any substitute charges; depreciation or amortization (with interest) on
capital improvements made to reduce operating or energy expenses or required by
present or future governmental regulation, over the shorter of their useful life
or the remaining useful life of the Project and at the interest rate provided in
Section 3.13; and the amount of any increase in the lease rent and other charges
payable under the Ground Lease described in Article 17 after March 15, 1994.
The Operating Expenses shall not include capital expenditures (except the costs
of capital improvements mentioned above), depreciation of improvements in the
Project, interest on any indebtedness related to the Project or any expenses
specifically charged to particular tenants or reimbursed by insurance.
Notwithstanding the foregoing to the contrary, Operating Expenses shall
specifically excluded the following:
a. The cost (inclusive of legal and other professional fees) of
negotiating leases, collecting rents, evicting tenants or costs incurred to
enforce the provisions of any lease;
b. Repairs, general maintenance, legal fees or professional fees
paid by proceeds from any tenant or subject to reimbursement by other third
parties;
c. Inheritance or estate taxes imposed upon or assessed against the
interest of any person in the Building or any part thereof or interest therein
and taxes computed upon the basis of the net income of the owners of the
Building or any part thereof or interest therein;
d. The cost of providing tenant improvements to any tenant of the
Building or Project;
e. Franchise or transfer taxes imposed upon or assessed against the
Building or Project for a change of ownership of any interest therein (except
the conveyance of the leasehold interest under the Lease to Tenant); and
f. Any compensation or expense whatsoever paid to any real estate
broker, salesperson or agent in connection with the leasing or sale of the
Building or Project.
2.10 "OPERATING EXPENSE PAYMENT" shall mean the portion of the
Operating Expenses which is payable by Tenant as provided in Article 3
hereinbelow.
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<PAGE>
2.11 "PROJECT" shall mean the Land and all Improvements located
thereon, including without limitation, the Building, parking facilities and
Common Areas commonly referred to as 550 Paiea Street.
2.12 "PREMISES" shall mean the space leased hereunder and all
Improvements therein. The space leased shall consist of the area highlighted or
otherwise marked on Exhibit A.
2.13 "PREMISES TYPE" shall mean the type of use for which the Premises
are maintained and leased to Tenant as indicated in Section 1.01 (a). The
Project has six (6) different Premises Types: Retail, Office, Lower Floor Flex,
Highcube Warehouse, Roof Top and Open Area. The use to be made of the Premises
by Tenant is restricted by Section 1.01 (f).
The Retail, Office and Lower Floor Flex premises are located in
Building Area 1, the Highcube Warehouse premises are located in Building Area
2, the Roof Top is located on the top of the Building, and the Open Area
premises includes any portion of the unbuilt ground surface area outside the
Building leased to a tenant.
2.14 "RULES AND REGULATIONS" shall be those established by Landlord
from time-to-time as provided in this Lease. The initial Rules and Regulations
are attached as Exhibit C.
2.15 "TENANT'S EMPLOYEES" shall mean, collectively, Tenant's
directors, officers, partners, trustees, employees, agents, licensees,
contractors and invitees. "LANDLORD'S EMPLOYEES" shall mean, collectively,
Landlord's directors, officers, partners, trustees, employees, agents,
licensees, contractors and invitees.
2.16 "TENANT'S PROPORTIONATE SHARE" shall mean Tenant's share of
Operating Expenses which benefit the Premises, calculated in accordance with
Exhibit G. If for any reason Tenant's Net Rentable Area or the Net Rentable Area
of the Project shall change or be corrected, both as reasonably determined by
Landlord, Tenant's Proportionate Share shall be adjusted accordingly. Tenant
agrees that all allocations to tenants by Landlord of Operating Expenses based
on the same general concepts as were used in Exhibit G shall be final and not
subject to dispute by Tenant. The initial allocation of Operating Expenses to
the various portions of the Project is set forth in Exhibit G.
2.17 "TERM" shall mean the period set forth in Section 1.01 (c),
beginning on the Commencement Date and ending upon the expiration of the last
Lease Month, unless sooner terminated as provided in this Lease.
ARTICLE 3
RENT, SECURITY DEPOSIT AND OTHER TENANT CHARGES
3.01 BASE RENT. Tenant shall pay to Landlord on the first day of each
month, in advance and without the necessity of notice to Tenant by Landlord,
throughout the Term, the amount specified in Exhibit D as "Base Rent" for the
Premises, in United States currency, over and above all other charges herein
described and without any set-off or counterclaim. Base Rent payable for any
period less than a full calendar month shall be a pro rata share of that payable
for the full calendar month as reasonably calculated by Landlord.
3.02 OPERATING EXPENSE PAYMENT.
(a) OPERATING EXPENSE PAYMENT. In addition to Base Rent, Tenant
shall pay, as additional rent, a share of Operating Expenses on the first day of
each month, in advance and without the necessity of notice to Tenant by
Landlord, throughout the Term. The estimated initial monthly Operating Expense
Payment is specified in Section 1.01 (d). The intent of such Operating Expense
Payment is to create a true net lease whereby tenants are responsible for the
payment of all Operating Expenses according to their proportionate share, so
that the amount retained by Landlord from total receipts, after payment of all
expenses of the Project, is the total of all tenant base rents.
(b) BASIS FOR DETERMINING OPERATING EXPENSE PAYMENT. The
Operating Expense Payment shall be the dollar amount obtained by (i) multiplying
Tenant's Proportionate Share by (ii) Landlord's estimate of Operating Expenses
for each period January I to December 31, and (iii) dividing the resulting
product by 12. Landlord shall provide Tenant notice of Tenant's Operating
Expense Payment for each such period by the preceding December 15.
(c) ANNUAL ADJUSTMENT FOR ACTUAL OPERATING EXPENSES. After each
December 31 during the Term, Landlord shall compute Tenant's Proportionate Share
of the actual Operating Expenses for the preceding twelve (12) calendar months
and notify Tenant of any correction from Tenant's Operating Expense Payments for
such period. Within thirty (30) days after the giving of notice that Tenant's
Proportionate Share of actual Operating Expenses was greater than Tenant's
Operating Expense Payments, Tenant shall pay to Landlord an amount equal to the
excess of Tenant's Proportionate Share of
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<PAGE>
actual Operating Expenses over Tenant's Operating Expense Payments for such
period. Should it be determined that Tenant's Proportionate Share of actual
Operating Expenses was less than Tenant's Operating Expense Payments for such
period, Tenant shall be entitled to a credit against future Operating Expense
Payments in an amount equal to the difference between Tenant's Proportionate
Share of actual Operating Expenses and Tenant's Operating Expense Payments for
such period. (If this Lease terminates during such a period, Tenant shall pay or
be refunded any deficiency or excess, respectively, between estimated and actual
Operating Expenses on a pro rata basis as if Operating Expenses accrued
uniformly during the period.)
(d) NORMALIZATION. If any part of the Project is not fully
occupied and used during any twelve (12) month period preceding a December 31,
the calculations of Operating Expenses, both estimated and actual, shall be
adjusted by adding amounts and items of Operating Expenses which would normally
have been incurred if the Project had been fully occupied and used during such
period, and by deducting any abnormal start-up or other costs incurred, all as
estimated by Landlord; PROVIDED, HOWEVER, for this Section 3.02 (d), ground rent
increases, insurance and real property taxes shall be excluded in the
calculation of Operating Expenses for normalization.
(e) STATEMENT OF OPERATING EXPENSES. Landlord shall have available
for inspection by Tenant during normal business hours a written statement
showing in reasonable detail Landlord's actual Operating Expenses for the
previous twelve (12) month period which shall be retained for a period of
twenty-four (24) months after the calendar year in question pursuant to which
the notice referred to in Section 3.02 (c) has been given. Landlord agrees that
Tenant, its accountants and authorized representatives at Tenant's expense shall
have the right within two (2) years after the close of each calendar year to
audit all of the books and records of Landlord relating to Operating Expenses
for the calendar year in question. Any such audit shall be performed in
Landlord's office during Landlord's normal business hours. If such audit shows
that Operating Expenses attributable to Tenant for the calendar year were
overstated by more than five percent (5%), then Landlord shall reimburse Tenant
for its Proportionate Share of such overstated amount and the reasonable costs
of the audit. If the overstatement is five percent (5%) or less, Landlord
shall reimburse Tenant for its Proportionate Share of such overstated amount.
3.03 REIMBURSEMENT FOR REPAIRS. Unless the same is promptly repaired
by Tenant if such damage is of an emergency or safety related nature or unless
the repair is promptly commenced by Tenant and the same is diligently pursued to
completion in accordance with Landlord's written requirements, Tenant shall
reimburse Landlord for all expenses incurred by Landlord in repairing damage to
the Project, including damage to structural elements, which is attributable to
the conduct of Tenant or Tenant's Employees. Upon demand Tenant shall reimburse
Landlord therefor, together with a surcharge of twenty percent (20%) of such
expenses.
3.04 LATE PAYMENT CHARGES. It is agreed that since collection of any
amount past due imposes an administrative cost on Landlord, in addition to any
fees of collection agents or attorneys or other out-of-pocket costs, Tenant will
pay to Landlord a sum equal to five cents ($.05) for every dollar not paid
within five (5) days of when due.
3.05 TAX ON RENT AND OTHER PAYMENTS. In addition to Base Rent, the
Operating Expense Payment and any other payment to Landlord provided in this
Lease, Tenant shall also pay to Landlord with each payment, an amount equal to
the State of Hawaii general excise or gross income tax assessed against Landlord
and attributable to the total payment, including the amount paid by Tenant to
Landlord under this Section. For example, the amount of such tax is presently
four percent (4%), resulting in a figure of 1.04167 to be multiplied by said
Base Rent, Operating Expense Payment or other payment in order to calculate the
total payment due from Tenant. Tenant shall pay any and all increases in said
taxes made from time-to-time and any and all other taxes or duties levied or
assessed by the federal government, State of Hawaii, the City and County of
Honolulu, or any other political subdivision of the State of Hawaii now or
hereafter having power to levy taxes or duties which are attributable to any
payments made by Tenant under the terms of the Lease. It is the intent of this
Section and of the other provisions of this Lease to insure that the rent and
other sums to be paid to Landlord by Tenant will be received by Landlord without
diminution by any tax, assessment, charge or levy of any nature whatever, except
United States and State of Hawaii net income taxes, and the terms and conditions
of this Lease shall be liberally construed to effect such purpose.
3.06 CONVEYANCE TAX. Any conveyance tax imposed by law due to this
Lease shall be paid by Tenant. Landlord shall inform Tenant of the amount of
such tax, if any, and it shall be thereupon due and payable by Tenant. At the
request of Landlord, Tenant shall promptly execute such documents as may be
necessary in connection with such tax.
3.07 TAXES ON TENANT'S BUSINESS AND PERSONAL PROPERTY. Tenant shall be
responsible for and shall pay before delinquency all City and County of Honolulu
and State of Hawaii taxes assessed during the Term against Tenant by reason of
the conduct of its business in the Premises, Improvements to the Premises and
with respect to personal property of any kind owned by or placed in, upon or
about the Premises by or at the expense of Tenant.
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<PAGE>
3.08 SECURITY DEPOSIT.
(a) DEPOSIT. Upon execution of this Lease, Tenant shall deposit
the sum specified in Section 1.01(e) (the "Security Deposit") as security for
Tenant's performance under this Lease. The Security Deposit may be commingled
by Landlord with other funds of Landlord, and Tenant shall not be entitled to
interest on the Security Deposit.
(b) INCREASE. The Security Deposit shall be increased from
time-to-time, as necessary so that the amount thereof is always equal to the
Base Rent plus estimated Operating Expense Payments. Upon written notice of
such increase from Landlord, Tenant shall deposit with Landlord the increased
amount within thirty (30) days of such notice.
(c) USE. If Tenant shall be in default under this Lease,
Landlord may apply the whole or any part of the Security Deposit to the payment
of any sum in default or any other sum which Landlord may be required to spend
by reason of Tenant's default. In the event Landlord should so apply all or any
part of the Security Deposit Tenant shall pay to Landlord, within fifteen (15)
days after receipt of notice from Landlord, an amount equal to the sum so
expended in order to replenish the Security Deposit. Failure to do so shall be
a default under this Lease.
(d) REFUND. If Tenant complies with all of the terms and
conditions of this Lease, the Security Deposit or any balance thereof shall be
returned to Tenant within thirty (30) business days of the expiration of the
Term.
(e) ASSIGNMENT. Landlord may assign and deliver the Security
Deposit to any purchaser of Landlord's interest in this Lease or the Premises or
the Project without Tenant's approval, and Landlord shall thereupon be released
and discharged from any and all obligations and liabilities related to the
Security Deposit. After such transfer, Tenant shall look only to such purchaser
for any recovery of the Security Deposit to which Tenant is entitled. In the
event of any valid assignment of this Lease by Tenant, Landlord shall not be
required to return the Security Deposit to Tenant, but only to Tenant's valid
assignee.
3.09 CHARGE FOR PROVIDING UTILITY AND EXTRAORDINARY PROPERTY AND
SERVICES.
(a) SEPARATELY SUBMETERED UTILITY SERVICE. Unless otherwise set
forth herein, all premises in the Project are separately submetered by Landlord
to measure the consumption of electrical power, natural gas and domestic water
usage therein. Tenant shall pay for such utility charges directly to Landlord
(or to the utility company if so directed by Landlord), within ten (10) days of
receipt by Tenant at the Premises of the bill for same. Tenant's failure to so
pay shall be a default under this Lease. Tenant shall have the right, at any
time that the local utility will allow, to have a separate meter installed to
directly measure Tenant's usage and to directly bill Tenant. All costs
associated with installing such separate meter shall be borne by Tenant.
(b) EXTRAORDINARY SERVICE. Any property or services, other than
those Landlord has agreed to provide Tenant under this Lease, provided by
Landlord to or for the benefit of Tenant shall be at Tenant's expense, including
a surcharge of five percent (5%) to cover Landlord's administrative costs.
Landlord shall advise Tenant in writing of the estimated cost to furnish such
property or service. If the same is approved in writing by Tenant, Landlord
shall furnish such property or service and thereafter notify Tenant of the
amount due and Tenant shall make such payment on or before ten (10) days
following the date such notice is given. Such extraordinary property and
services shall include, without limitation, providing extraordinary janitorial
services (those not normally provided for Office and Retail tenants as
reasonably determined by Landlord).
3.10 APPARATUS REQUIRING EXCESSIVE UTILITIES USAGE. Tenant shall not,
without the prior written consent of Landlord, connect to any utility service,
including, but not limited to, electrical, water, sewer or natural gas,
requiring amounts of such utility service in excess of that required for the
equipment listed in Tenant's Construction Plans as set forth on Exhibit F as
approved in writing by Landlord. If Tenant shall install in the Premises any
equipment requiring utilities in excess of the approved equipment list in
Tenant's Construction Plans, Tenant shall pay for such excessive utilities
usage. Tenant agrees to pay Landlord promptly upon demand (but not more
frequently than monthly), for all excess utilities consumed, at the rates
charged for such utilities by the public utility or governmental or
quasi-governmental department furnishing the same, plus any additional expense
incurred by Landlord in keeping accounts of the utilities consumed.
3.11 LANDLORD'S RIGHT TO MAKE TENANT'S REPAIRS. If Tenant does not
make, within thirty (30) days after written notice from Landlord, proper repairs
or alterations in accordance with Section 6.04 and 6.05 or, if the nature of the
repair or alternation is such that more than thirty (30) days are required for
its performance and Tenant does not diligently continue the cure to completion,
Landlord may make such repairs or alterations without liability to Tenant for
any loss or damage which may accrue to Tenant's property, Improvements or
business by reason thereof. Upon completion of such repairs or
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alterations, Landlord shall notify Tenant of the cost of any such repair or
alteration expenses, and Tenant shall reimburse Landlord therefore pursuant to
and in accordance with the provisions of Section 3.02.
3.12 OPTION TO PERFORM LEASE COVENANTS. If Tenant shall fail to pay
any sum of money, other than monies required to be paid to Landlord hereunder,
or shall fail to perform any other act on its part to be performed hereunder,
Landlord may, without waiving or releasing Tenant from any obligations of Tenant
and upon prior written notice to Tenant, make any such payment and perform any
other such act. All sums so paid by Landlord and all costs incurred in
performing such acts (including reasonable attorney's fees), together with
interest thereon at the rate provided in Section 3.13, shall be payable by
Tenant upon demand, and Tenant hereby covenants to pay any and all such sums.
3.13 INTEREST. Interest shall be charged to Tenant on late payments of
Base Rent, Operating Expense Payment and other sums due under this Lease from
the date such payment is due until received by Landlord, at the greater of (a)
one and one-half percent (1 1/2%) per month or (b) at a floating rate equal to
five (5) percentage points over the base rate then being charged by Bank of
Hawaii, but not to exceed the maximum rate of interest allowed by law.
3.14 TENANT'S COST. All covenants and agreements to be performed by
Tenant under any of the terms of this Lease shall be performed by Tenant at
Tenant's sole cost and expense.
3.15 CASHIER'S OR CERTIFIED CHECKS. If for any reason Tenant's check
for Base Rent and/or Operating Expense Payment is returned unpaid by Tenant's
bank to Landlord more than one (1) time in any twelve (12) month period, then,
for the remainder of the Term, Landlord, in its sole discretion, may require
Tenant to pay Base Rent and Operating Expense Payment by cashier's or certified
check.
3.16 ADDITIONAL RENT. All amounts required to be paid by Tenant to
Landlord hereunder, exclusive of Base Rent, but specifically including Operating
Expense Payments, shall be deemed to be additional rent.
ARTICLE 4
CONDITION, USE AND OCCUPANCY OF PREMISES
4.01 TENANT'S INSPECTION AND ACCEPTANCE OF THE PREMISES.
Notwithstanding anything contained herein to the contrary, Tenant understands
and agrees that the Premises, Building and Project are "AS IS, WHERE IS AND WITH
ALL FAULTS", and Landlord has not made and does not make any warranties or
representations of any kind, expressed or implied, as to the condition, zoning,
merchantability or state of repair or fitness of the Premises, Building or the
Project for any particular purpose, the availability of utilities to the
Premises, Building or Project, the likelihood of appreciation in value of the
Premises, Building or Project, the existence of violations of building setbacks
or building restrictions, or as to the compliance of the Premises, Building or
Project with any applicable county, state or federal statute, ordinance, rule or
regulation or as to any other matter whatsoever pertaining to the Premises,
Building or Project. Tenant accepts all risks of any defects or deficiencies in
the Premises, Building or Project, whether known or unknown, and Tenant
acknowledges that Landlord makes no expressed warranties of any kind except as
specifically set forth in this Section 4.01(c) below, and hereby disclaims all
implied warranties of any nature whatsoever pertaining to the Premises, Building
or Project.
(a) [Intentionally Omitted]
(b) EXISTING PREMISES. As to all other Premises, Tenant, by
Tenant's execution of this Lease, represents and agrees that Tenant has
inspected the Premises, or has been provided an opportunity to inspect the
Premises which Tenant has declined, and, excluding any Improvements yet to be
completed by Landlord as specified in Exhibit F, if any, Tenant accepts the
Premises in its current condition or has provided Landlord with a written
statement listing all damage and defects. Tenant agrees the Term of this Lease
shall commence even if there are defects or damage to the Premises, if the
Premises are occupiable as reasonably determined by Landlord.
(c) REPRESENTATIONS OF LANDLORD AS OF THE COMMENCEMENT DATE:
Notwithstanding this Section 4.01 to the contrary, Landlord represents and
warrants that as of the execution date of this Lease:
(i) all Improvements installed by Landlord as specified in
Exhibit F are and/or will be of new and good quality and free from defects and
in full compliance with all relevant regulatory requirements;
(ii) to the best of Landlord's knowledge the Building, of
which the Premises is a part, is structurally sound and the roof of over the
Premises is free of leaks; and
(iii) to the best of Landlord's knowledge no Hazardous
Material in violation of applicable laws are located on the Premises.
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4.02 PERMITTED USE OF PREMISES. The Premises may be used only for the
purpose set forth in Section 1.01 (f) and for no other purposes, and may be
occupied by no more than the number of persons set forth in Section 1.01 (f),
except as consented to in writing by Landlord. Notwithstanding the foregoing to
the contrary, Landlord acknowledges that from time to time Tenant will have
meetings, sessions or conferences in the Premises and Tenant represents and
warrants to Landlord that any such meetings, sessions or conferences (i) will be
held in accordance with the terms of this Lease and all applicable local laws,
ordinances and codes, and (ii) will not interfere with the rights and quiet
enjoyment of any other tenant in the Project. Tenant acknowledges that neither
Landlord nor any agent or employee of Landlord has made any representation or
warranty with respect to the Premises or Project or with respect to the
suitability of the Premises or Project for Tenant's intended use, except as may
be expressly set forth in this Lease.
4.03 LEGAL COMPLIANCE. Tenant will comply, at its own expense, with
all laws and ordinances and governmental rules and regulations applicable to the
Premises and Landlord will comply at its own expense, with all laws and
ordinances and governmental rules and regulations applicable to the portions of
the Project other than tenant premises. Landlord agrees to cooperate with and
assist Tenant in obtaining, processing or receiving any and all permits
necessary to install Tenant's Improvements previously approved by Landlord.
Such cooperation and assistance shall not involve any cost to Landlord.
4.04 PROHIBITED USE OF PREMISES. No use shall be made of the Premises,
nor act done in or about the Premises, which will increase the existing rate of
any insurance upon the Building or Project, nor shall any use be made of the
Premises which would cause Landlord to be in default under the Ground Lease,
mortgage or other lien on Landlord's estate. Any deficiencies found in a fire
inspection by any governmental authority or Landlord's insurance carrier shall
be immediately corrected by Tenant, at Tenant's sole cost and expense. Tenant
shall not commit or allow to be committed any waste upon the Premises, or any
public or private nuisance or other act or thing which disturbs the quiet
enjoyment of any other tenant in the Project, nor shall Tenant use any
apparatus, machinery or device in or about the Premises which shall cause any
substantial noise or vibration, or which shall overload the floor of the
Premises. If any of Tenant's machines or equipment should disturb the quiet
enjoyment of any other tenant in the Project, then Tenant shall provide adequate
insulation, or take such other action as may be necessary or required by
Landlord to eliminate such disturbance.
4.05 RULES AND REGULATIONS. Landlord, for the proper maintenance,
safety, order, cleanliness and efficient operation of the Building and the
Project, may from time-to-time make, amend and enforce rules and regulations
applicable to tenants of the Building or Project (the "Rules and Regulations").
Such Rules and Regulations may be applicable to all tenants of the Project or,
because of the differing uses of the Project, may be only applicable to tenants
of a certain Premises Type. The Rules and Regulations in force at the date
hereof are those set forth in Exhibit C. Tenant shall observe and comply with
all Rules and Regulations of which Tenant receives written notice. Any failure
to so observe and comply shall constitute a default under this Lease. Landlord
shall not be liable or responsible to Tenant for the violation of any Rules or
Regulations by any other tenant or occupant of the Building or Project.
4.06 PARKING AND AUTOMOBILES.
(a) NON-PREMISES PARKING FACILITIES. Tenant shall have use of
the number of parking spaces in the Project parking facilities outside the area
of the Premises, on an unassigned, tandem or reserved basis, as shown in Section
1.01 (g), if any. The fee charged for Tenant's use of such non-Premises parking
spaces shall be established by Landlord from time-to-time in accordance with the
prevailing market rate; however, in no event shall the amount charged for said
spaces be less than the initial monthly fee shown in Section 1.01 (g). Tenant
shall not sublease or otherwise rent to others any of Tenant's parking spaces in
the Project. The location of the non-Premises parking spaces shall be determined
by Landlord and may from time to time be relocated within the Project parking
facilities, all in the sole discretion of Landlord. Tenant and Tenant's
Employees shall enter into such parking agreements (herein called "Parking
Agreements") that Landlord or any operator of the Project parking facilities may
request from time-to-time. Failure by Tenant or Tenant's Employees to execute,
or to perform or comply with any provision of, the Parking Agreement shall
constitute an event of default under this Lease. In the event Landlord becomes
unable to provide the number of parking spaces agreed upon above by reason of
government regulation, condemnation or damage, then such inability shall not
constitute a breach of this Lease on the part of Landlord.
(b) VALIDATED PARKING. If Landlord at any time concludes, in its
sole judgment, that validated parking for the Project would be advisable,
Landlord shall have the right to enforce validated parking in the parking
facilities of the Project by controlled entrances or otherwise and upon such
terms and conditions as Landlord shall, at its sole discretion, stipulate from
time-to-time. In such event, the revenues derived from such validated parking
program shall belong to Landlord; PROVIDED, HOWEVER, all Tenant parking referred
to in Section 1.01(g) and Exhibit E shall be at no additional cost to Tenant
under any such validated parking program.
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(c) MISCELLANEOUS. Tenant and Tenant's Employees shall not store
vehicles in parking spaces or otherwise within the Project, bring upon the
Project any junk vehicles, make repairs to any vehicles while within the
Project, drive or park any vehicle on landscaped areas or on sidewalks, exceed
the speed limits posted upon the Project, allow any vehicle with an oil or anti-
freeze leak to remain on the Project, or post, place or otherwise display any
sign, picture, placard, poster or sandwich board in, on or attached to any
vehicle parked in or upon the Project. Tenant and Tenant's Employees shall
observe all rules for guest parking established by Landlord. Landlord shall not
be responsible for any loss of or damage to any vehicle while upon the Project.
(d) VALET PARKING BY TENANT. Subject to the same being provided
in accordance with the provisions of this Lease and the Rules and Regulations,
Tenant from time to time may provide valet parking services for Tenant's
clients, agents and invitees. Tenant shall enter into a written agreement with
such valet parking service provider, the terms of which shall be subject to the
prior written approval of Landlord.
4.07 COMMON AREAS. in addition to the Premises, Tenant shall, as an
appurtenance thereto, have full right of access to the Premises over and across
the Common Areas and the non-exclusive right to use the Common Areas in
connection with Tenant's use of the Premises; subject, however, to the rights of
other tenants and to the Rules and Regulations.
4.08 ADVERTISING.
(a) SIGNS. Tenant shall not inscribe any inscription or post,
place or in any manner display any sign, notice, picture, placard or poster, or
any advertising matter whatsoever, anywhere in or about the Premises, at places
visible (either directly or indirectly as an outline or shadow on a glass pane)
from anywhere outside the Premises, or in or about the Building or the Project
except as permitted under the Rules and Regulations.
(b) LIMITATION ON DISTRIBUTION OF ADVERTISING. Tenant shall not
distribute to any of the other tenants in the Project or to their employees,
customers, clients or invitees, affix to vehicles parked in the parking area of
the Project, or place or cause to be placed in any of the suites of the Building
or any other area of the Project, any notices, advertisements or written
solicitations, or solicit or originate, or attempt to originate, any business
whatsoever by distributing handbills or literature from any part of the Project,
except within the Premises.
4.09 CARE OF PREMISES. Tenant shall keep and maintain the Premises,
including all Improvements, clean and in good condition and repair. All
furniture, fixtures and equipment installed or placed in the Premises shall be
of first class quality.
4.10 SECURITY. Tenant shall be solely responsible for providing
security for the Premises and Landlord shall have no responsibility therefor.
4.11 [Intentionally Omitted]
4.12 QUIET ENJOYMENT. Upon Tenant's payment of the Base Rent and
additional rent herein provided and Tenant's observance and performance of the
covenants herein contained on the part of Tenant to be observed and performed,
Tenant shall peaceably hold and enjoy the Premises without disturbance from
Landlord and Landlord's Employees for the Term; subject, however, to the terms
and provisions of the Lease, the Ground Lease described in Article 17 (as
presently existing or as amended in the future), or any mortgage of Landlord's
estate or interest in the Lease, Premises, Building, or Project.
4.13 INSPECTION OF PREMISES. Landlord and Landlord's Employees shall
have a passkey to the Premises. Tenant will permit Landlord, and Landlord's
agents, at all reasonable times during the Term of this Lease (upon not less
than twenty-four (24) hours notice), and during any emergency, to enter the
Premises to examine the state of repair and condition of the Premises, to make
repairs or Improvements and for the purpose of exhibiting the Premises to
potential mortgagees, purchasers of the Project and tenants. Landlord also
reserves the right to enter the Premises after the Commencement Date to complete
Landlord's construction obligation under Exhibit F.
4.14 [Intentionally Omitted]
4.15 CHANGE OF BUILDING NAME. Landlord may, in its sole judgment,
change the name of the Building or the Project at any time and in any manner.
4.16 [Intentionally Omitted]
4.17 [Intentionally Omitted]
4.18 OTHER TENANTS. Landlord reserves the right to enter into other
leases in the Project, in Landlord's sole discretion, without restriction as to
the tenants thereunder; and Tenant acknowledges that
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no representations have been made by Landlord, or Landlord's agents or
employees, regarding Landlord's intent or ability to lease or not lease to any
specific tenant or class of tenant and that Tenant is not relying, in entering
into the Lease, on any specific tenant, class of tenant or number of tenants
leasing or not leasing a portion of the Project during the Term of this Lease.
4.19 NO SIGNS ON STATE PROPERTY. On the Paiea Street side of the
Project, between the curb of the street and the beginning of the Land, there is
a strip of land owned by the State of Hawaii ("State land"). Tenant shall not
place or post any sign, notice, picture, placard or poster upon or within the
boundaries of the State Land. Any such item placed upon or therein may be
removed and destroyed or otherwise disposed of by Landlord without notice at the
sole cost and expense of Tenant.
4.20 CONDUCT OF TENANT'S EMPLOYEES. Tenant shall be responsible for
the conduct of Tenant's Employees when upon or within the Project. If any of
Tenant's Employees shall fail to observe the Rules and Regulations, or otherwise
shall fail to conduct themselves in a responsible manner, Tenant shall promptly,
but in not event later than fourteen (14) days following written notice from
Landlord, remove and bar such Tenant Employee from the Premises and Project.
Landlord's written notice shall provide reasonable detail as to the infraction.
Failure of Tenant to comply with this Section shall be a default under the
Lease. Notwithstanding anything contained in this Section 4.20 to the contrary,
Tenant shall be required to comply with this provision to the extent such is not
in violation of a union agreement or applicable federal, state or local law.
4.21 CONSUMPTION OF ALCOHOLIC BEVERAGES. Consumption of alcoholic
beverages shall be allowed only within the Premises. It shall be within the sole
discretion of Tenant whether to allow such consumption. In no circumstances
shall Tenant or Tenant's Employees consume, or carry open containers of,
alcoholic beverages outside of the Premises.
4.22 SMOKING AND EATING IN COMMON AREAS. Smoking, and consumption of
beverages and food is not allowed in the interior Common Areas of the Building.
ARTICLE 5
SERVICES PROVIDED BY LANDLORD
5.01 STANDARD SERVICES.
(a) UTILITIES AND JANITORIAL SERVICE. Provided that Tenant
shall not be in monetary default hereunder, the following services shall be
provided by Landlord in Common Areas of the Project and, if applicable, portions
of the Premises within the Building: Landlord agrees to furnish Tenant with
unheated water to public restrooms, electricity for lighting and other normal
use (but in no event more than the Premises' pro rata share of electricity
available for the Project) and restroom facilities and supplies. Landlord shall
also furnish customary janitorial and cleaning services to the Office premises,
as reasonably determined by Landlord, within the Premises on the basis of five
(5) days per week, at reasonable intervals shall wash both sides of the exterior
windows of the Building. Within the Premises, Building standard light bulbs
shall be replaced by Landlord's maintenance staff at Tenant's expense. Tenant
shall be responsible for all janitorial and cleaning not provided by Landlord.
All such services will be rendered in accordance with the Rules and Regulations.
(b) AIR CONDITIONING. For Office type premises, provided Tenant
shall not be in monetary default hereunder, Landlord shall provide as part of
such Premises, routine air conditioning system maintenance which system shall be
separately submetered for electrical consumption and charges pursuant to the
provisions of Section 3.09 (a) hereof. Landlord may install an air conditioning
system timing or other energy saving device in the Premises which Tenant agrees
to operate in accordance with instructions received from Landlord. Landlord will
be responsible for the routine maintenance of the air conditioning system within
the Premises, the cost of which will be included in Operating Expenses.
(c) COMMON AREA MAINTENANCE. Except as otherwise herein
provided, Landlord will use best efforts to maintain the public and Common Areas
of the Project, such as stairs, lobbies, corridors and restrooms, in good order,
condition and repair.
(d) KEYS. Landlord shall provide to Tenant up to four (4)
outside door keys or cards for access to the Building. Tenant shall be
responsible for the cost of additional keys or cards. Landlord may at any time
change the lock or reprogram card access in Landlord's sole discretion and shall
immediately thereafter provide Tenant with four (4) new outside door keys or
cards. Tenant shall collect keys and cards from any of Tenant's Employees who
terminate employment with Tenant.
5.02 LIMITATION ON LIABILITY. Unless caused by Landlord's failure to
make payment for such utilities or services after receipt by Landlord of
Tenant's payment for its full share of same or except to the extent that gross
negligence of Landlord or Landlord's Employees is the proximate cause of such
damage, Landlord shall not be liable for any damages caused by the utilities and
services described under Section 5.01, or for the interruption, malfunction or
curtailment of any of said utilities and services
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caused by maintenance, labor disturbances or labor disputes (whether caused by
Landlord or otherwise), accidents, repairs, wars, riots, termination of
electrical power by Landlord pursuant to Section 3.09 (a) or other causes, nor
shall Landlord be liable, except as provided in Section 11.01 hereinbelow, for
loss of or injury to persons or property, however occurring, through or in
connection with or incidental to the furnishing of any of the foregoing. No such
interruption, malfunction, termination or curtailment shall relieve Tenant from
any of its obligations under this Lease or constitute or be construed as a
constructive or other eviction of Tenant or disturbance of Tenant's use and
possession of the Premises or breach by Landlord of any of its obligations
hereunder.
5.03 SERVICE CONTRACTS. Any service which Landlord may or is required
to furnish pursuant to the provisions of this Lease may, at Landlord's option,
be furnished from time-to-time in whole or in part by employees of Landlord or
by the managing agent of the Project or by one or more third persons.
ARTICLE 6
TENANT IMPROVEMENTS, ALTERATIONS, REPAIRS AND RENOVATIONS
6.01 CONSENT REQUIRED. Tenant shall make no alterations, additions or
improvements in or to the Premises without Landlord's prior written consent
which shall not be unreasonably withheld or delayed, and then only upon such
conditions as Landlord may reasonably impose. All such work shall be done at
such times and in such manner as Landlord designates and in full compliance with
all requirements of governmental authorities having jurisdiction, including
obtaining a valid building permit prior to commencement of work. Tenant shall
reimburse Landlord for all reasonable costs and expenses incurred by Landlord in
connection with Tenant's work including, but not limited to, the review of all
Construction Plans, any future plans and construction observation by Landlord's
representatives. Landlord shall provide a written estimate of such expenses
upon Tenant's request.
6.02 LIEN PROTECTION. Before commencing any work, Tenant shall
reasonably satisfy Landlord that Tenant has sufficient resources to pay for such
work or if requested by the Ground Lessor or any mortgagee of Landlord shall
secure, at Tenant's sole cost and expense, a completion and lien indemnity bond,
satisfactory to Ground Lessor or any mortgagee of Landlord, for said work. Any
mechanic's lien application filed against the Premises, Building or Project for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, shall be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof.
6.03 OWNERSHIP. All alterations, additions, or improvements to the
Premises, whether temporary or permanent, made either by Landlord or Tenant,
shall be for the benefit of and owned by Landlord, shall not be removed unless
otherwise provided for in this Lease or consented to in writing by Landlord, and
shall be an integral part of the Premises. Notwithstanding anything contained
in this Section 6.03 to the contrary and Tenant not being in default of this
Lease, this provision shall not apply to the trade fixtures, machinery and
movable equipment of Tenant, and the same may be removed from the Premises by
Tenant at any time without Landlord's consent provided that Tenant shall repair
all damage to the Premises and any remaining Improvements caused by or resulting
from such removal and shall leave the Premises in a clean and orderly condition.
6.04 LEGALLY REQUIRED. Except as may be otherwise provided in Section
4.01 of this Lease, if, during the Term, any change, alteration, addition or
correction shall be required by any governmental authority to be made in or to
the Premises or any portion thereof, Landlord shall first give its written
consent thereto and such change, alteration, addition or correction shall then
be made by, and at the sole expense of, Tenant.
6.05 REPAIRS BY TENANT. Tenant will promptly make all repairs to the
Premises necessary to meet Tenant's obligation under Section 4.09. Within thirty
(30) days after written notice from Landlord to do so, Tenant shall repair and
make good all defects which this Lease requires. Tenant hereby waives any right
to make repairs at Landlord's expense or to deduct the cost thereof from the
Base Rent or any other sums to be paid hereunder by Tenant. Tenant shall not
make changes to locks on doors or add, disturb or in any way change any
plumbing, electrical, mechanical or air-conditioning system without first
obtaining the written consent of Landlord which shall not be unreasonably
withheld or delayed unless such changes affect the capacity of the electrical,
plumbing or mechanical systems of the Project in which event the consent of
Landlord shall be at its absolute discretion. Tenant shall give Landlord prompt
written notice of any damage to, or defect in, any water or other pipes or
plumbing, electric light or other fixtures, equipment or appurtenances of the
Premises. All damage or injury done to the Premises by Tenant or by any persons
who may be in or upon the Premises shall be promptly repaired by Tenant, in
quality and style not less than as originally installed by Landlord or Tenant,
to the reasonable satisfaction of Landlord. All repairs to the structure of the
Buildings shall be done by or under the direction of Landlord as provided in
Section 7.02 hereinbelow. Except as otherwise provided in this Lease, Landlord
shall have no obligation to repair the interior of the Premises or any
improvements therein; PROVIDED, HOWEVER, Landlord may, at its option, cure
Tenant's default under this Section as provided in Section 3.11.
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6.06 IMPROVEMENT OF THE PREMISES. Tenant, at Tenant's sole cost and
subject to the requirements of this Article and Exhibit F, shall make all
improvements to the Premises necessary for Tenant's occupancy and use thereof.
ARTICLE 7
IMPROVEMENTS AND REPAIRS BY LANDLORD
7.01 ALTERATIONS, ADDITIONS OR CAPITAL IMPROVEMENTS BY LANDLORD.
Landlord may make any alterations, additions or improvements which Landlord may
deem necessary or desirable for the preservation, safety, improvement, or
efficient operation of the Premises, or Project, or to comply with any laws,
codes, regulations or ordinances now or hereafter in effect, or for the purpose
of reducing operating expenses or energy requirements of the Building or
Project, provided that Landlord shall not materially interfere with Tenant's use
of the Premises (including Tenant's parking stalls) except in an emergency.
Landlord reserves the right to make further improvements, alterations, additions
or renovations to the Premises, Buildings and Project in Landlord's sole
discretion. Landlord also reserves the right to reduce the area of the Land upon
which the Building and Project are located, and to use the portion of the Land
removed from the Project for any purpose whatsoever; PROVIDED, HOWEVER, any such
reduction of the area of the Land shall not reduce Landlord's ability to provide
Tenant with such parking as set forth herein.
7.02 REPAIR OF STRUCTURAL ELEMENTS. Landlord shall repair the
structural elements of the Building, including, without limitation, those within
the Premises, and restore the same to the condition existing immediately prior
to such damage, provided that Landlord shall not materially interfere with
Tenant's use of the Premises except in an emergency. Landlord shall commence to
make repairs under this Section within thirty (30) days following receipt of a
written notice from Tenant of the need for such repairs. In no event shall rent
be abated nor shall Landlord have any liability for the interruption of or
interference with Tenant's business, due to Landlord's making, or failure to
make, repairs pursuant to this Section. The obligation of Landlord to repair
hereunder shall be subject to the operation of Article 13 of this Lease. Except
as otherwise set forth in this Lease to the contrary, Tenant shall have no
obligation to repair any structural element of the Building unless such repair
is occasioned by Tenant's negligence or willful misconduct.
7.03 REPLACEMENT OF CEILING, ETC.. Landlord reserves and shall have
the right to install, repair, replace, maintain and remove, at its sole
discretion, any ceiling, ceiling light fixtures or ceiling sprinkler system;
air-conditioning equipment; water, electric, telephone and other utility lines;
and all types of ducts, conduits and other facilities serving other portions of
the Building, or other buildings, which may pass through the Premises, provided
that Landlord shall not materially interfere with Tenant's use of the Premises
except in an emergency.
7.04 IMPROVEMENTS TO THE PREMISES. Except as set forth in Exhibit F,
Landlord shall not be obligated to make any improvements to the Premises prior
to the Commencement Date hereof.
ARTICLE 8
TENANT ASSIGNMENT, SUBLETTING AND MORTGAGING
8.01 CONSENT REQUIRED. Tenant shall not, without the prior written
consent of Landlord which shall not be unreasonably withheld or delayed, assign,
mortgage, pledge, encumber or otherwise transfer this Lease or any interest
herein, or sublet or abandon the Premises, or any part thereof, or any parking
space or other area used by Tenant within the Project. The term "sublet" shall
include, without limitation, any permitted use of the Premises by any party
other than Tenant, but shall exclude the permitted use of the Premises by
"independent representatives" as that term is used as of the date hereof by
Tenant in it business operations. Any of the foregoing acts, without such
consent shall be void and constitute a default under this Lease. Notwithstanding
the above and Tenant not otherwise being in default of this Lease, Landlord's
approval shall not be required for an assignment or sublease of the Premises to
a person or entity controlling, controlled by or under common control with
Tenant, or into or with which Tenant merges, or to which Tenant sells
substantially all of its assets provided that in all cases such person or entity
has financial net worth equal to or greater than Ten Million Dollars
($10,000,000). Any such consent by Landlord shall not release Tenant from any
of Tenant's obligations hereunder, or be deemed to be a consent to any
subsequent assignment, mortgage, pledge, encumbrance, transfer or subletting.
No assignment, subletting, mortgaging, pledge, encumbrance or transfer may be
made by Tenant if there is any default by Tenant under the terms of this Lease.
8.02 ADDITIONAL CONDITIONS TO ASSIGNMENT OR SUBLEASE.
(a) Tenant shall give Landlord at least sixty (60) days written
notice of Tenant's desire to assign or sublease, accompanied by a description of
the terms thereof, an identification of the proposed assignee or sublessee and
proof of their financial responsibility.
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(b) Tenant shall pay Landlord all costs and expenses incurred by
Landlord in connection with any assignment or sublease, including, but not
limited to preparation of the consent document, review by and consultation with
Landlord's legal counsel, securing credit reports, administrative overhead and
the like.
(c) The proposed assignee or sublessee shall execute an
agreement pursuant to which it shall agree to perform and be bound by all of the
terms, covenants, conditions, provisions and agreements of this Lease.
(d) An executed copy of the assignment or sublease and the
agreement described in Section 8.02 (c), shall be delivered to Landlord prior to
the assignee or sublessee taking possession of the Premises.
(e) Seventy-five percent (75%) of any monies or the value of
other economic consideration received by Tenant from such assignment or
subletting (except that attributable to the amortization over the Lease Term of
Improvements made to sublet a portion of the Premises and that attributable to
the amounts payable by Tenant as to the sublet portion of the Premises, which
costs shall be subject to audit by Landlord) shall be payable to Landlord
without reducing any other Tenant obligation under this Lease.
(f) If Tenant provides Landlord such notice pursuant to Section
8.02(a), Landlord may by thirty (30) days written notice to Tenant elect to
terminate the Lease. Such termination shall not be effective before the date of
the proposed assignment or sublease as specified by Tenant's notice under
Section 8.02 (a).
8.03 MORTGAGE. Tenant shall not have the right to mortgage or
otherwise encumber its leasehold interest in the Premises, but may only encumber
its interest in fixtures, equipment, installations and Improvements that are not
attached to, built into or considered part of the Premises.
8.04 CHANGE OF CONTROL. If at any time during the Term, the ownership
of Tenant shall be changed as a result of sale of assets, transfer of stock,
transfer of partnership interest, merger, consolidation or otherwise so as to
result in a change of the controlling interest in Tenant, Tenant shall give
immediate notice thereof to Landlord. Unless Tenant shall furnish reasonable
adequate assurance that there has been no reduction in the financial
responsibility of Tenant as a result of any such change, Landlord may terminate
this Lease at any time after receipt of such notice, or if such notice shall not
be given, after discovery by Landlord of such change of controlling interest by
giving Tenant sixty (60) days written notice of such termination. A "reduction
in the financial responsibility of Tenant" shall occur if (a) there is a
material diminution in the tangible net worth of Tenant, or (b) the debt equity
ratio of Tenant is materially increased from that in effect as at the
Commencement Date. For the purposes of this Section 8.04, "controlling
interest" shall mean such person or entity with more than 66 2/3% of the
beneficial interest in Tenant. A transfer of stock or a partnership interest in
Tenant shall not be deemed to effect a change of control if the transferor
controls, is controlled by or is under common control with Tenant.
ARTICLE 9
SUBORDINATION, ATTORNMENT AND MORTGAGE REQUIREMENTS
9.01 SUBORDINATION. This Lease shall be subject to and subordinate at
all times to the Ground Lease, and to such mortgages, liens and encumbrances as
are now on or as Landlord may hereafter impose on the Project, Building or
Premises, and on Landlord's interest or estate herein without the necessity of
any further instrument or act on the part of Tenant to effectuate such
subordination. Said liens shall include, without limitation, the lien of a
mortgage executed in part to secure a loan to pay for the construction of
Improvements upon the Land or in the Project. In confirmation of such
subordination, Tenant agrees to promptly execute and deliver any instrument that
the Ground Lessor or lien holder may require to evidence such subordination, and
Tenant hereby irrevocably appoints Landlord its attorney-in-fact to execute and
deliver such instruments on behalf of Tenant should Tenant refuse or fail to do
so within ten (10) days after a request is made therefor. Said appointment of
Landlord as Tenant's attorney-in-fact is coupled with an interest and
irrevocable. Tenant shall not be required to effectuate such subordination to
any mortgage, nor shall Landlord be authorized to effect such subordination on
behalf of Tenant, unless the mortgagee named in such mortgage shall first agree
in writing for the benefit of Tenant, that so long as Tenant is not in default
under any of the provisions, covenants or conditions of this Lease, that neither
this Lease nor the rights of Tenant hereunder shall be terminated or modified or
be subject to termination or modification, nor shall Tenant's possession of the
Premises be disturbed or interfered with, by any action or proceeding to
foreclose said mortgage.
9.02 REQUIREMENTS OF LANDLORD'S MORTGAGEE AND GROUND LESSOR. In the
event any mortgagee of Landlord shall elect to have this Lease, in whole or in
part, as a lien prior to its mortgage, then, upon such mortgagee notifying
Tenant in writing to that effect, this Lease shall have priority over the lien
of such mortgage to the same extent as if the same had been placed on record
prior to such mortgage. In the event any proceedings are brought for the
foreclosure of, or in the event of the exercise
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of the power of sale under, any mortgage, whether or not this Lease is
terminated by such foreclosure or sale, Tenant agrees that it will, upon request
by the purchaser, attorn to the purchaser upon any foreclosure or sale and
recognize such purchaser as Landlord under this Lease, and agrees to execute on
request a non-disturbance and attornment agreement with any such purchaser, it
being the intent hereof that if this Lease should be terminated by such
foreclosure or sale, it shall, upon request by such purchaser, be reinstated as
a lease between such purchaser and Tenant. In the event that any mortgagee of
Landlord's interest hereunder shall take possession of the Premises prior to or
pending foreclosure pursuant to the terms of such mortgage, Tenant agrees upon
request of such mortgagee to attorn to such mortgagee as provided in the
immediately preceding sentence. If the Ground Lessor shall require, Tenant shall
attorn to it and this Lease shall then continue in effect in the event of
termination of the Ground Lease. Tenant, upon request of any party in interest,
shall execute upon presentation such instrument or instruments as shall be
requested to carry out the requirements of this Section.
9.03 ESTOPPEL CERTIFICATES. Tenant shall, at any time and from
time-to-time, upon not more than ten (10) days following receipt of written
notice from Landlord, execute, acknowledge and deliver to Landlord a statement
in writing certifying that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and certifying that
this Lease, as so modified, is in full force and effect), the dates to which the
rental and other charges, if any, have been paid in advance and the amount of
Tenant's Security Deposit, if any, and acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, and
that there are no events or conditions, then in existence which, with the
passage of time or notice or both, would constitute a default on the part of
Landlord hereunder, or specifying such defaults, events or conditions, if any
are claimed, and addressing other items required by Landlord. It is expressly
understood and agreed that any such statement may be relied upon by any
prospective purchaser or encumbrancer of all or any portion of the Premises,
Building or Project. Tenant's failure to deliver such statement within such time
shall, at the option of Landlord, constitute a default under this Lease and, in
any event, shall be conclusive evidence that this Lease is in full force and
effect without modification except as may be represented by Landlord in any such
certificate prepared by Landlord and delivered to Tenant for execution.
9.04 LEASE AMENDMENT, FINANCIAL INFORMATION. Should a prospective
mortgagee or purchaser of the Project require financial statements relating to
Tenant, Tenant shall provide the requested balance sheets and income statements
upon the understanding that such information shall be kept confidential.
ARTICLE 10
SALE OF LANDLORD'S INTEREST
10.01 SALE OF LANDLORD'S INTEREST. Landlord shall have the right to
sell, convey, transfer or assign all or any part of its interest in the
Premises, Building or Project, or all or any of its rights and obligations under
this Lease, without prior notice to or the consent of Tenant.
10.02 TENANT ATTORNMENT. Tenant shall attorn to any purchaser or
assignee under Section 10.01.
10.03 SALE OR ASSIGNMENT BY LANDLORD. Landlord shall be automatically
freed and relieved from all liability respecting the performance of any
covenants or obligations on the part of Landlord contained in this Lease upon a
sale, conveyance or assignment of its interest in the Premises, Building or
Protect except as to the obligations already accrued. Upon any such sale,
conveyance or assignment, the buyer, grantee or assignee shall become
responsible for all of the covenants and conditions herein contained and on the
part of Landlord to be observed or performed after the time of such sale or
conveyance.
ARTICLE 11
INDEMNITY AND RISK OF INJURY, LOSS AND DAMAGE
11.01 INDEMNITY. Tenant, as a material part of the consideration to
Landlord for this Lease, will and does hereby assume all risk of bodily injury,
wrongful death and/or property damage occasioned by any accident or nuisance
made or suffered in the Premises, except where such injury, death or damage is
caused by the gross negligence or willful misconduct of Landlord or Landlord's
Employees, or resulting from any failure on the part of Tenant to maintain the
Premises in a safe condition. Tenant hereby waives all claims in respect thereof
against Landlord and Landlord's Employees, and acknowledges that this assumption
of risk by Tenant has been bargained for in determining rent and other
obligations of Tenant under this Lease. Tenant hereby agrees to indemnify and
save harmless Landlord and Landlord's Employees from and against any and all
claims, loss, cost and liability for bodily injury, wrongful death and/or
property damage by any persons (including, without limitation, Tenant's
Employees and Landlord's Employees) arising out of, caused or occasioned by, or
resulting from any accident, fire or nuisance in the Premises, or failure to
maintain the Premises, except where such injury, death or damage is caused by
the gross negligence or willful misconduct of Landlord or Landlord's
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Employees or the failure of Landlord, after reasonable written notice, to repair
any structural defect, in which cases Landlord hereby agrees to indemnify and
defend Tenant from and against any and all such claims, loss, cost and
liability. Without limitation, Tenant will indemnify and save harmless Landlord
and Landlord's Employees against and from any and all claims by or on behalf of
any person or persons, firm or firms, corporation or corporations, arising from
the conduct or management of any work or thing whatsoever done by Tenant or
Tenant's Employees in or about the Project, or from transactions of Tenant
concerning the Premises, and will further indemnify and save Landlord and
Landlord's Employees harmless against and from any and all claims arising from
any breach or default on the part of Tenant in the performance of any covenant
or agreement on the part of Tenant to be performed pursuant to the terms of this
Lease, or arising from any act or negligence of Tenant or Tenant's Employees,
and shall reimburse Landlord the costs, attorneys' fees, expenses and
liabilities incurred in connection with any such claim or any action or
proceeding brought thereon. Tenant and Landlord further agrees that in case of
any claim, demand, proceeding, action or cause of action, threatened or actual,
against Landlord relating to a matter which Landlord shall be entitled to
indemnification hereunder, upon Landlord's written request, Tenant shall defend
Landlord at Tenant's expense by counsel mutually satisfactory to Landlord,
Tenant and their respective insurance carriers. If Landlord does not request
such defense or Tenant does not provide such defense, then Tenant will reimburse
Landlord as aforesaid, and agrees to cooperate with Landlord in such defense,
including, but not limited to, the providing of affidavits and testimony upon
request of Landlord.
11.02 NON-LIABILITY OF LANDLORD. Tenant, as a material part of the
consideration to Landlord for this Lease, will and hereby does assume all risk
of loss or damage to furniture, fixtures, supplies, merchandise, and other
property, by whomsoever owned, stored or placed in, upon or about the Premises,
and does hereby agree that Landlord will not be responsible for loss or damage
to any such property, unless caused by the gross negligence or willful
misconduct of Landlord or Landlord's Employees, and waives all claims in respect
thereof against Landlord and Landlord's Employees and acknowledges that this
assumption of risk by Tenant has been bargained for in determining rent and
other obligations of Tenant under this Lease. Tenant hereby agrees to indemnify
and save harmless Landlord from and against any and all claims for such loss or
damage, other than damage caused by the gross negligence or willful misconduct
of Landlord or arising out of a defect which Landlord is required hereunder to
repair and has failed to remedy within a reasonable time after having been given
written notice. Without prejudice to the generality of the foregoing, Landlord
shall not be liable for any damage to any property entrusted Landlord or
Landlord's Employees, nor for damage to any property at any time stored or kept
in the Premises or any other part of the Building or Project, arising from rain
or from any other water which may leak, issue or flow from any part of the
Project, or from the pipes or plumbing from the same or any other place or
quarter, nor for any damage to property in the Project caused by theft or
accident involving elevators, or for damage of any character arising out of
defects of construction of the Project, the Premises or any machinery,
equipment, electrical wiring or facility therein or failure or breakdown
thereof, or from lack of repair or proper operation of the same, or from any
other cause unless the cause be a defect which Landlord is required hereunder to
repair and Landlord shall have failed to remedy such defect within a reasonable
time after written notice.
ARTICLE 12
INSURANCE
12.01 PUBLIC LIABILITY AND PROPERTY DAMAGE. Tenant shall procure at
Tenant's expense and keep in force during the Term and any extension thereof,
commercial general liability insurance insuring Landlord, Tenant, any mortgagee
of Landlord's and/or Tenant's interest in this Lease, and such other parties as
Landlord may specify, against any liability arising out of the use, occupancy or
maintenance of the Premises and all areas appurtenant thereto by Tenant and
Tenant's Employees. Such insurance shall be written by a company reasonably
acceptable to Landlord and have reasonable minimum limits set by Landlord from
time-to-time, but not less frequently than every three (3) years during the
Term, based on acceptable minimum limits used for similar properties at the time
of such setting. Initially, such limits shall not be less than Five Hundred
Thousand Dollars ($500,000.00) for property damage against claims for property
damage per single occurrence with an aggregate of One Million Dollars
($1,000,000), and One Million Dollars ($1,000,000.00) for bodily injuries
including death of persons per single occurrence with an aggregate of Three
Million Dollars ($3,000,000). Such insurance shall be primary and shall insure
performance by Tenant of the provisions of Section 11.01; PROVIDED, HOWEVER,
that the limits of such insurance shall not limit the liability of Tenant under
Section 11.01.
12.02 INSURANCE ON PERSONAL PROPERTY, IMPROVEMENTS AND BUSINESS
INTERRUPTION. Tenant shall procure at its own expense and will keep in force
during the Term and any extension thereof, insurance on all Improvements and
Tenant's trade fixtures, merchandise and personal property in the Premises, with
fire, extended coverage, vandalism, malicious mischief and ceiling sprinkler
leakage protection, with a responsible insurance company authorized to do
business in the State of Hawaii and otherwise reasonably acceptable to Landlord,
in an amount as near as practicable to the full replacement cost of such
Improvements, trade fixtures, merchandise and personal property, in the joint
names of Landlord, Tenant, any mortgagee of Landlord's and/or Tenant's interest
in this Lease, and such other parties as Landlord may specify, as their
interests may appear. All proceeds shall be payable in case of
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loss to Tenant, and Tenant will pay all premiums on such insurance when due.
Notwithstanding anything in Section 13.01 hereinbelow to the contrary, in every
case of loss or damage to such Improvements, trade fixtures, merchandise and
personal property, Tenant, with all reasonable speed, will use all proceeds of
such insurance for rebuilding, repairing or otherwise reinstating the
Improvements, trade fixtures, merchandise and personal property, in a good and
substantial manner and Tenant will make up from its own funds any deficiency in
such insurance proceeds. Landlord may elect to maintain such insurance, which
would insure against loss of the Improvements, and in such event, upon written
notice to Tenant from Landlord, Tenant will be relieved of the requirement of
this Section of the Lease but only as to Improvements. The cost of any such
insurance shall be an Operating Expenses as provided in Section 2.09. The
foregoing provisions shall not affect the requirement of business interruption
insurance which Tenant must carry and Tenant may keep the proceeds thereof for
its own account. The amount of business interruption insurance shall be
sufficient for Tenant to make all payments required under this Lease as well as
all other continuing obligations of Tenant respecting its operations in the
Premises for a period of twelve (12) months.
12.03 NOTICE TO LANDLORD. Each insurance policy required under the
provisions of this Article 12 shall provide that it cannot be canceled without
not less than thirty (30) days prior written notice to Landlord and any such
mortgagees and, if obtainable, shall provide for notice to Landlord and any such
mortgagees if not renewed at the expiration thereof. A current certificate that
each such policy is in effect and, if required by Landlord, a true copy of each
such policy shall be deposited with Landlord and any such mortgagees by Tenant
at the commencement of the Term and renewed thereafter so as to be kept current
at all times.
12.04 RECIPROCAL WAIVERS OF SUBROGATION. Landlord hereby waives on
behalf of itself and on behalf of its insurance carrier, if any, any claim which
Landlord might otherwise have against Tenant or Tenant's Employees arising out
of any loss or damage, including consequential loss or damage, to any property
of Landlord within the Premises, Building or Project from any risk required to
be insured against by Landlord. Tenant hereby waives, on its behalf and on
behalf of its insurance carrier, if any, any claim which Tenant might otherwise
have against Landlord or Landlord's Employees arising out of loss or damage,
including consequential loss or damage, to any property of Tenant within the
Premises, Building or Project from any risk required to be insured against by
Tenant.
12.05 OTHER PROVISIONS. Each policy of insurance required to be
maintained by Tenant hereunder shall contain such further provisions and be with
such insurance carriers as the Ground Lessor and any mortgagee holding an
interest in the Premises, Building or Project may require.
12.06 BLANKET INSURANCE. Tenant may fulfill its obligations under this
Article by maintaining a "blanket" policy or policies of insurance covering
other properties besides the Premises; provided that by specific endorsement
thereto coverage of the Premises is maintained at or above the level required
hereunder.
ARTICLE 13
DAMAGE AND RESTORATION
13.01 REPAIRS BY LANDLORD.
(a) If the Premises, not including Improvements, or any portion
of the Building shall be damaged or destroyed during the Term by any casualty
insurable under standard fire and extended coverage policies, or if the Building
shall be damaged by any other type of casualty to an extent which is less than
twenty-five percent (25%) of what had been the assessed value of the Building
for real property tax purposes immediately prior to such other type of casualty,
Landlord shall, except as otherwise provided in this Lease and subject to any
delay or inability from causes beyond its control, repair and rebuild the same
substantially to its condition immediately prior to such damage or destruction.
If Landlord elects under Section 12.02 to insure Improvements to the Premises,
Landlord shall also repair and rebuild the Improvements hereunder.
(b) If the Building shall be totally destroyed or damaged to the
extent of twenty-five percent (25%) or more of what had been its assessed value
for real property tax purposes immediately prior to the casualty and such
casualty shall not have been insurable under standard fire and extended coverage
policies, then Landlord may, at its option, either terminate this Lease or elect
to repair such damage or rebuild the Building. If Landlord elects to repair or
rebuild the Building, it shall perform such repair or rebuilding as provided in
Section 13.01 (a), and rent shall be abated proportionately as provided in
Section 13.04. Within thirty (30) days after any such casualty Landlord shall
notify Tenant whether Landlord intends to repair or rebuild the Building. If
Landlord elects not to repair or rebuild, this Lease shall terminate without
further notice, Tenant shall immediately vacate the Premises and all further
obligations of both parties hereunder shall cease (other than those which shall
theretofore have accrued), effective as of the date on which Tenant vacate or
ceases doing business in the Premises. If such damage or destruction occurs and
the Lease is not terminated by Landlord, this Lease shall remain in full force
and effect, and Landlord and Tenant waive the provisions of any law to the
contrary.
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(c) Landlord's obligation under this Section shall in no event
exceed the scope of the work done by Landlord in the original construction of
the Building and Premises, nor the scope of the work done in the construction of
the Improvements (if Landlord shall be obligated to repair or rebuild the
Improvements hereunder).
13.02 CONTINUATION OF BUSINESS. During any period of reconstruction or
repair of the Premises and/or the Building, Tenant shall continue the operation
of Tenant's business in the Premises to the extent reasonably practicable from
the standpoint of good business practice.
13.03 REPAIRS BY TENANT. Notwithstanding anything contained in Section
13.01 to the contrary (except any obligation of Landlord to repair or rebuild
the Improvements), in the event of any damage or destruction affecting the
Premises, Tenant shall, unless this Lease is terminated pursuant to Section
13.01 (b), forthwith replace or fully repair all Improvements, exterior signs,
trade fixtures, equipment, display cases and other property originally installed
by Tenant in the Premises.
13.04 ABATEMENT OF RENT. During any period in which, by reason of any
damage or destruction to the Premises and/or Building, there is substantial
interference with the operation of Tenant's business in the Premises, Base Rent
shall be abated proportionately according to the extent to which Tenant may be
required to discontinue Tenant's business in the Premises. Such abatement shall
continue for the period commencing with such destruction or damage and ending
with the completion by Landlord of such repair or rebuilding work as Landlord is
obligated to perform pursuant to this Lease.
ARTICLE 14
CONDEMNATION
14.01 TERMINATION OF LEASE AS TO PORTION TAKEN. If the Premises or any
part thereof or interest therein (including Landlord's ability to provide Tenant
with parking as set forth herein) is taken by condemnation (other than a
temporary taking, which is provided for in Section 14.06), this Lease shall
terminate as to the part so taken upon the earlier of the time possession or
title thereof vests in the condemnor.
14.02 LANDLORD'S OPTION TO TERMINATE. If (a) any part of or interest in
the Premises is taken by condemnation or (b) a substantial portion of the
Building or Project is taken by condemnation and Landlord shall decide to
discontinue the use or operation of the Building or to demolish, alter or
rebuild the same as a result of such taking, then Landlord shall have the right
to terminate this Lease by giving Tenant written notice of termination within
sixty (60) days after such taking. Any such termination shall be effective as of
the last day of the calendar month next following the month in which such notice
is given.
14.03 TENANT'S OPTION TO TERMINATE. If more than twenty-five percent
(25%) of the Premises is taken by condemnation and the remaining part is thereby
rendered reasonably unfit for Tenant's use, Tenant may terminate this Lease by
giving Landlord written notice of termination within fifteen (15) days after
possession is lost or title passes, whichever shall first occur unless Landlord
is able to relocate Tenant as provided in Section 4.14 or is able to replace the
portion of the Premises so taken within thirty (30) days of the effective date
of the termination of the Lease. Any such termination shall be effective as of
the last day of the calendar month next following the month in which such notice
is given.
14.04 REDUCTION OF RENT. If part of the Premises is taken by
condemnation (other than a temporary taking which is provided for in Section
14.06 hereinbelow) and neither Landlord nor Tenant shall terminate this Lease as
provided herein, then this Lease shall continue as to the part of the Premises
not taken and the Base Rent shall be reduced in the same proportion as the Net
Rentable Area of the Premises shall have been reduced as a result of such
taking, and Tenant's Proportionate Share shall be recalculated.
14.05 RIGHT TO COMPENSATION. In the event of any taking described in
Sections 14.01, 14.02 or 14.03, all compensation and damages payable or to be
paid for or by reason of such taking shall be payable to and be the sole
property of Landlord without any apportionment to Tenant, and Tenant hereby
assigns to Landlord any right to compensation or damages for its leasehold
interest in the Premises condemned; PROVIDED, HOWEVER, that Tenant shall not be
prevented hereby from filing any claim against the condemning authority for the
taking of any Improvements, equipment or fixtures owned by Tenant and for moving
expenses. Termination of this Lease by Landlord pursuant to Section 14.02 or by
Tenant pursuant to Section 14.03 shall not affect the respective rights of
Landlord and Tenant to compensation and damages.
14.06 TAKING FOR A LIMITED PERIOD. If the Premises or any part thereof
shall be temporarily taken by condemnation for a limited period, this Lease
shall not terminate. Tenant shall continue to pay in full all amounts provided
for herein, in the manner and at the times herein specified, and, except only to
the extent that Tenant is prevented from so doing by reason of any order of the
condemning authority,
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Tenant shall continue to perform and observe all of the other covenants,
agreements, terms and provisions of this Lease as though such taking had not
occurred. In the event of any such taking, Tenant shall be entitled to the
entire amount paid by governmental authority with respect to governmental
occupancy of the Premises during the Term (whether paid by the authority as
damages, rent or otherwise), and in the event any such governmental occupancy
extends beyond the date of termination of this Lease, all such amounts paid by
governmental authority shall be prorated as of the date of termination of this
Lease. Landlord shall have a lien on all amounts payable to Tenant and may
require Tenant to assign the same to Landlord to be held without interest as
security for the payment of rent and other sums that shall be payable by Tenant
during such period. Tenant covenants that at the termination of any such
limited taking prior to the expiration or earlier termination of this Lease,
Tenant will restore the Premises and Improvements therein as near as reasonably
possible to the condition that the same were in prior to such taking.
ARTICLE 15
DEFAULT BY TENANT
15.01 DEFINITION OF DEFAULT. Tenant will be in default under this
Lease if any of the following events occur:
(a) Tenant shall fail to pay Base Rent, Operating Expense
Payment or any other amount on the date the same becomes due and such failure
continues for five (5) days following Tenant's receipt of Landlord's written
notice thereof.
(b) Tenant shall fail to increase the Security Deposit as
provided in Section 3.08(b) or to replenish the Security Deposit as provided in
Section 3.08(c).
(c) Tenant shall fail to make repairs as provided in Section
6.05.
(d) Tenant shall fail to observe and comply with the Rules and
Regulations.
(e) Tenant or Tenant's Employees shall fail to perform or comply
with any provision of the Parking Agreements to which they are a party.
(f) Tenant shall fail to remove and bar a Tenant Employee as
provided in Section 4.20.
(g) Tenant shall fail to pay when due any billing for utility
consumption under Section 3.09(a) and such failure continues for five (5) days
following Tenant's receipt of Landlord's written notice thereof.
(h) Tenant shall, or shall attempt to, assign, mortgage, pledge,
encumber, transfer or sublet the Premises without Landlord's required consent.
(i) Tenant shall fail to timely deliver an Estoppel Certificate
as required by Section 9.03.
(j) Tenant shall fail to observe or perform any of the other
covenants in the Lease which are Tenant's responsibility, and such default shall
continue for ten (10) days after written notice thereof is given to Tenant, or,
if such default cannot reasonably be cured within said 10-day period, such
longer time as may be required, provided that Tenant shall within said period
commence such cure and then continue it to completion.
(k) Tenant shall become bankrupt, or file any debtor
proceedings, or any case or proceeding, voluntary or involuntary, shall be filed
by or against Tenant as debtor under any provision of the Federal Bankruptcy
code or any State statute governing any debtor-creditor rights, which seeks to
have an order or decree rendered against Tenant directing any readjustment,
arrangement, composition or reduction of Tenant's debts, liabilities or
obligations, or making any assignment for the benefit of creditors and such
proceedings are not dismissed within ninety (90) days.
(l) Tenant shall vacate or abandon the Premises, or shall fail
to take occupancy of the Premise on the Commencement Date.
(m) Tenant shall fail to procure insurance and keep such
insurance in force as provided in Section 12.01.
(n) This Lease or any interest of Tenant hereunder shall become
subject to any attachment or judgment, or to any lien, charge or encumbrance not
consented to by Landlord pursuant to the provisions of this Lease.
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(o) Any guarantor of this Lease shall default under any guaranty
of this Lease, or shall repudiate or revoke such guaranty or any obligation
under such guaranty.
15.02 LANDLORD'S REMEDIES. In the event of any default described in
Section 15.01 or if otherwise provided in this Lease, the following shall be
Landlord's remedies:
(a) RIGHT OF RE-ENTRY. Landlord may at once re-enter and take
possession of the Premises without notice and without being deemed guilty of any
trespass or becoming liable for any loss or damage occasioned thereby.
(b) SUMMARY POSSESSION. Landlord may bring an action for summary
possession and, in any such action, service of prior notice of default and
intent to terminate the Lease or demand for payment are hereby expressly waived.
(c) REMOVAL OF PERSONS AND PROPERTY. In the event of Landlord's
resumption of possession whether by summary proceedings or by any other means,
Landlord, or any receiver appointed by a court having jurisdiction, may
dispossess and remove all persons and property from the Premises, and any
property so removed may be stored in any public warehouse or elsewhere at the
cost of and for the account of Tenant, and Landlord shall not be responsible for
the care of safekeeping thereof, and Tenant hereby waives any and all claims for
loss, destruction, damages or injury which may be occasioned thereby. All
property removed from the Premises and not claimed, including payment of all
charges incurred by Landlord in the removal and storage of such property, within
forty-five (45) days of removal shall be considered abandoned. All abandoned
property may be destroyed or disposed of by Landlord in any manner in its sole
discretion, including by public or private sale. All proceeds from such sale
shall be applied, in order, to expenses of sale, to cost of removal and storage,
to all amounts owed by Tenant to Landlord and, lastly, any balance shall be paid
over to Tenant.
(d) DAMAGES, ATTORNEYS' FEES AND COSTS. Landlord may recover
from Tenant all damages, attorneys' fees and costs which may be incurred by
Landlord as a result of any default of Tenant hereunder, including the expense
of recovering possession.
(e) ELECTION TO TERMINATE LEASE. Landlord may terminate the
Lease. No re-entry or taking of possession of the Premises by Landlord shall be
construed as an election on Landlord's part to terminate this Lease, unless a
written notice that this Lease is terminated is given by Landlord to Tenant, or
a judicial order is secured stating that this Lease is terminated. The effective
date of a termination of this Lease shall be as of the date set forth or
provided in the notice or order.
(f) RELETTING OF PREMISES. Landlord may, without terminating
this Lease, relet for the account of Tenant the Premises or any part thereof,
for all or any portion of the remainder of the Term, to a tenant or tenants
satisfactory to Landlord, and at such rental or rentals as may, in the exercise
of reasonable effort, be obtained, with the right to Landlord to put the
Premises in good order and condition and to make reasonable alterations and
repairs to facilitate such reletting at Tenant's expense, and Landlord shall
receive such rentals and apply them, first to the payment of the expense of
recovering possession of the Premises and the re-renting thereof, including
without limitation, all attorneys' fees and brokers' commissions, together with
such expenses as Landlord may have incurred in putting the Premises in good
order and condition or in making such alterations and repairs, and then to the
payment of rent and to the fulfillment of the covenants of Tenant, the balance,
if any, to be paid over to Tenant; PROVIDED, HOWEVER, that Tenant shall remain
liable for any deficiency, which deficiency Tenant agrees to pay monthly as the
same may accrue. Notwithstanding any such reletting without termination,
Landlord may at any time thereafter elect to terminate this Lease for such
previous breach.
(g) LIQUIDATED DAMAGES. If the Lease is terminated by Landlord
by reason of Tenant's default, Landlord shall be entitled to recover from Tenant
liquidated damages in an amount equal to the excess, if any, of the then cash
value of rent payable by Tenant for the balance of the Term, over the reasonable
rental value of the Premises at the time of such termination, for the same
period and on the same terms, except as to rent. The cause of action for such
damage shall accrue upon such termination.
(h) USE OF SECURITY DEPOSIT. Landlord may apply the Security
Deposit to the cure of Tenant's default as provided in Section 3.08(c).
(i) RIGHT TO CURE. Landlord may, at Tenant's cost and expense,
cure a default of Tenant as provided in Section 3.12.
(j) RIGHT TO MAKE REPAIRS. Landlord may, at Tenant's cost and
expense, pursuant to Section 3.11, make repairs Tenant has failed to make.
(k) TERMINATION OF ELECTRICAL POWER. Upon a failure to pay for
electrical power under Section 3.09(a), Landlord may cease providing electrical
service to the Premises without further notice.
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(l) SEPARATE SUITS. Landlord shall have the right to divide its
causes of action hereunder so as to permit separate suits for summary possession
of the Premises, and for Base Rent and additional rent under the Lease, and no
institution of a suit or entry of judgment thereunder shall bar Landlord from a
subsequent suit or be deemed an election of remedies by Landlord.
15.03 REMEDIES ARE CUMULATIVE. Each and all of the remedies given to
Landlord hereunder are cumulative and the exercise of one remedy by Landlord
shall not impair Landlord's right to any other remedy.
ARTICLE 16
TERMINATION
16.01 SURRENDER OF THE PREMISES. At the expiration or sooner
termination of this Lease, Tenant will surrender and deliver to Landlord
possession of the Premises, including all Improvements, in good condition and
repair, ordinary use and wear excepted. If there shall be no default on the part
of Tenant at the expiration or termination of this Lease, Tenant may, or if
Landlord shall so require will, remove all signs and trade fixtures (including
all audio/visual equipment) erected or placed upon the Premises and, on
Landlord's requirement only, shall also remove any Improvements made or placed
in the Premises by Tenant to the extent specified in Section 6.03 and otherwise
specified by Landlord on the Construction Plans set forth on Exhibit F
contemporaneously with Landlord's approval of same. Tenant shall repair all
damage to the Premises and remaining Improvements caused by or resulting from
such removal and leave the Premises in a clean and orderly condition, ordinary
wear and tear excepted. In the event Tenant shall fail to perform such removal
and restoration, Landlord may do so and Tenant, upon demand, will pay to
Landlord the cost thereof, plus interest as provided in Section 3.13. This
obligation shall survive the expiration or termination of this Lease. Any
property left upon the Premises by Tenant at the expiration or earlier
termination of this Lease may, at the option of Landlord, be (a) removed and
stored by Landlord, at Tenant's cost, or (b) be deemed by Landlord to have been
abandoned by Tenant, in which case Landlord may appropriate, destroy or dispose
of the same without liability or accountability to Tenant.
16.02 HOLDING OVER. If Tenant shall remain in possession after the
expiration or sooner termination of this Lease, all the terms, covenants and
agreements hereof shall continue to apply and bind Tenant so long as Tenant
shall remain in possession, insofar as the same are applicable; except, that, if
Tenant remains in possession without Landlord's written consent, the Base Rent
shall be two (2) times the Base Rent for the last Lease Month of the Term,
prorated on a daily basis for each day that Tenant remains in possession, and
Tenant shall also be liable to Landlord for any damages resulting from failure
to surrender possession. If Tenant remains in possession with Landlord's written
consent, such tenancy shall be month-to-month, terminable by either party by not
less than twenty-five (25) days written notice prior to the end of a Lease
Month.
ARTICLE 17
GROUND LEASE
17.01 GROUND LEASE. The Land described in Exhibit B is owned in fee by
Loyalty Development Company, Ltd., a Hawaii corporation. The Land is leased to
Landlord under ground lease dated April 14, 1981, filed with the Office of the
Assistant Registrar of the Land Court of the State of Hawaii as Document No.
1063148, as amended and restated by instrument dated November 22,1985, filed as
aforesaid as Document No. 1344011 and as may be further amended from time to
time (the "Ground Lease").
ARTICLE 18
LANDLORD'S LIABILITY
18.01 LANDLORD'S FAILURE TO PERFORM. Landlord shall not be deemed to be
in default in the performance of any obligation required by this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after
written notice by Tenant to Landlord. The notice shall specify what obligation
Landlord has failed to perform. If the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, Landlord shall
not be in default if Landlord within thirty (30) day period commences to cure
the default and then continues the cure to completion. No such default by
Landlord shall constitute grounds for canceling this Lease. If Landlord does not
perform any such obligations within said thirty (30) day period or, if the
nature of the obligation is such that more than thirty (30) days are required
for its performance and Landlord does not reasonably continue the cure to
completion, Tenant may, after a ten (10) day written notice of its intent to
cure such default and failure of Landlord to cure or commence such cure within
such ten (10) day period, perform such obligation and bill Landlord for the
reasonable cost of same. Landlord shall promptly pay Tenant for all such
reasonable costs incurred and upon Landlord's failure to reimburse Tenant within
sixty (60) days following
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Landlord's receipt of Tenant's bill, Tenant shall have the right to offset such
amount against Base Rent notwithstanding any other provision of this Lease to
the contrary.
18.02 NOTICE TO LANDLORD'S MORTGAGEES. Tenant agrees to give all
mortgagees, under mortgages of any interest of Landlord in the Premises,
Building or Project, by registered mail, a copy of any notice of failure to
perform served upon Landlord; provided that prior to such notice Tenant has been
notified, in writing, of the address of any such mortgagee. Tenant further
agrees that, if Landlord shall fail to cure such failure to perform within the
time provided for in this Lease, before Tenant pursues its other remedies any
such mortgagee shall have an additional sixty (60) days within which to cure the
default, or if such default cannot be cured within that time, then such
additional time as may be necessary, provided that such mortgagee has commenced
and is diligently pursuing the remedies necessary to cure such default within
such sixty (60) days.
18.03 LIMITATION ON LIABILITY OF LANDLORD AND MORTGAGEE. In the event
Landlord is a trust or partnership, if Landlord fails to perform any covenant or
obligation on the part of Landlord contained in this Lease, Tenant may proceed
only against the trust or partnership and may recover only from the assets of
the trust or partnership. Tenant shall have no right to proceed against or
recover from any trustee or partner of Landlord, individually or collectively,
or Landlord's Employees, except to the extent provided in the preceding
sentence. The liability of any mortgagee who succeeds to the interest of
Landlord under this Lease by foreclosure, deed in lieu of foreclosure or
otherwise shall be limited to such mortgagee's interest in the Project.
ARTICLE 19
MISCELLANEOUS
19.01 NO LIGHT, VIEW OR AIR EASEMENT. Any diminution or shutting off of
light, view or air by any structure which may be erected on the Land or on land
adjacent to or in the vicinity of the Premises (including any structure erected
on any portion of the Land removed from the Project) shall in no way affect this
Lease, abate rent or otherwise impose any liability on Landlord.
19.02 TIME OF ESSENCE. Time is of the essence of this Lease.
19.03 BROKERAGE COMMISSIONS. Unless stated otherwise in Exhibit E -
Special Conditions, Landlord and Tenant represents that they have dealt directly
with each other in connection with this Lease and that no brokers negotiated, or
are entitled to any commission in connection with, this Lease. Landlord and
Tenant agree to indemnify each other against, and hold each other harmless from,
all liabilities and costs (including, without limitation, attorneys' fees
incurred by Landlord) arising from the claims of any broker based upon acts of
the indemnifying party.
19.04 EXECUTION BY LANDLORD. The submission of this Lease for
examination does not constitute a reservation of or option to lease the
Premises, and this Lease shall become effective as a lease only upon execution
and delivery by both Tenant and Landlord.
19.05 RENEWAL. Unless otherwise stated in Exhibit E - Special
Conditions, Landlord shall have no obligation to extend or renew this Lease, or
to enter into another lease of the Premises with Tenant upon expiration of this
Lease. Upon expiration of this Lease, Landlord may lease the Premises to
whomever it chooses for the operation therein of a business that is the same as
or different from that operated by Tenant in the Premises.
19.06 COST AND ATTORNEY'S FEES. In the event of any action or
proceeding brought by either party against the other based upon or arising out
of any breach of the terms and conditions hereof, the prevailing party shall be
entitled to recover all reasonable costs, including reasonable attorneys' fees,
from the other. Tenant also agrees to pay all cost and reasonable attorneys'
fees which may be incurred or paid by Landlord in enforcing without litigation
any of the covenants, conditions or agreements contained in this Lease, and all
such amounts shall be deemed payable upon demand. If Landlord becomes involved
in any action, threatened or actual, by or against anyone not a party to this
Lease, but arising by reason of or related to any act or omission of Tenant or
Tenant's Employees, Tenant agrees to pay Landlord's reasonable attorneys' fees
and other reasonable costs incurred in connection with such action.
19.07 LANDLORD'S CONSENT. If Landlord's approval or consent is
required in this Lease, unless otherwise specifically provided to the contrary,
such approval or consent may be granted or denied by Landlord at its sole
discretion and Landlord shall not be required to provide Tenant with an
explanation for the denial of any approval or consent.
19.08 NOTICE. All notices required or permitted hereunder shall be in
writing and may be delivered for all purposes by being (a) sent as registered or
certified mail, postage prepaid, return receipt requested, nationally recognized
overnight express service or by telecopy addressed to Tenant at its post office
address hereinbelow set forth, or to Landlord at its post office address
hereinbelow set forth or at such other post office address as Landlord may from
time-to-time designate in writing by notice to
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Tenant, or (b) delivered personally to Tenant (if Tenant is an individual), to a
general partner of Tenant (if Tenant is a partnership), or to an officer or
director of Tenant (if Tenant is a corporation). Any such notice shall be
conclusively deemed to have been delivered upon the earlier of (a) actual
receipt of mail or telecopy, or (b) two (2) days after the date of such mailing.
If there is more than one Tenant, delivery of notice to any one thereof shall be
construed as notice to all Tenants. All notices shall be made to:
IF TO TENANT: Ed Jacobs, President
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Fax: 714-251-8085
With copy to: National Telephone & Communications, Inc.
Legal & Regulatory Department
Attn: Dale R. DeForge
2801 Main Street
Irvine, California 92614
Fax: 714-224-7751
IF TO LANDLORD: Paiea Properties
550 Paiea Street, Suite 102
Honolulu, Hawaii 96819
Attn: Property Management
Fax: 808-833-3046
19.09 SEVERABILITY. If for any reason any of the provisions of this
Lease shall be unenforceable or ineffective, all of the other provisions shall
remain in full force and effect.
19.10 WAIVER. Landlord's failure to take advantage of any default or
breach of covenant on the part of Tenant shall not be construed as a waiver
thereof, nor shall any custom or practice which may grow up between Landlord and
Tenant in the course of administering this Lease be construed to waive or to
lessen the right of Landlord to insist upon the performance by Tenant of any
term, covenant or condition hereof, or to waive or lessen the right of Landlord
to exercise any remedies given Landlord due to any default by Tenant. A waiver
by Landlord of a particular breach or default shall not be deemed to be a waiver
of the same or any other subsequent breach or default. The acceptance of Base
Rent or any other sum due hereunder shall not be, or be construed to be, a
waiver of any breach of any term, covenant or condition of this Lease, whether
or not Landlord has knowledge of such breach at the time of such acceptance.
19.11 SUCCESSORS. Except as otherwise provided, all of the covenants,
agreements, terms and conditions contained in this Lease shall be for the
benefit of and binding upon Landlord and Tenant and their respective heirs,
personal representatives, successors and permitted assigns.
19.12 JOINT AND SEVERAL OBLIGATIONS. In any case where this Lease is
signed by more than one Tenant, the obligations hereunder shall be joint and
several.
19.13 CHOICE OF LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of Hawaii.
19.14 ARTICLE AND SECTION HEADINGS. The article and section headings
herein are for convenience of reference, and shall in no way define, limit or
describe the scope or intent of any provisions of this Lease.
19.15 SHORT-FORM LEASE. This Lease shall not be recorded by either
Landlord or Tenant; PROVIDED, HOWEVER, that upon request by Landlord, Tenant
will execute and deliver a recordable short-form of this Lease, stating the
names of the parties, the Term, the description of the Premises, and the nature
of any options for renewal. Landlord will supply the short-form Lease and Tenant
will pay to Landlord a reasonable fee for the preparation and recordation of
such short-form Lease including, without limitation, reasonable attorneys' fees.
Tenant shall pay the amount of the State of Hawaii conveyance tax as a result of
this Lease, if any.
19.16 FORCE MAJEURE. Unless otherwise specifically provided herein, if
either Landlord or Tenant shall be delayed or hindered in or prevented from the
performance of any act required hereunder by reason of strikes, lockouts, labor
disputes or disturbances, inability to produce materials, failure of power,
restrictive governmental laws or regulations, riots, insurrection, war or any
other reason of a like nature not the fault of the party delayed in performing
work or doing acts required by this Lease, then performance of such act shall be
excused for the period of the delay, and the period for the performance of such
act shall be extended for a period equivalent to the period of such delay;
PROVIDED,
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HOWEVER, that this Section shall not operate to excuse Tenant from the prompt
payment of Base Rent, Operating Expense Payment or other sums required by this
Lease to be paid by Tenant.
19.17 HAZARDOUS MATERIALS.
(a) DEFINITIONS.
(i) As used in this Lease, the term "Hazardous Materials
Laws" means and includes all federal, state or local laws, ordinances or
regulations, now or hereafter in effect, relating to environmental conditions,
industrial hygiene or Hazardous Materials on, within, under or about the
Project.
(ii) As used in this Lease, the term "Hazardous Materials"
means and includes all radioactive materials, asbestos, organic compounds known
as polychlorinated biphenyls, chemicals known to cause cancer or reproductive
toxicity, pollutants, contaminants, hazardous wastes, toxic substances, and any
and all other substances or materials defined as or included in the definition
of "hazardous substances," "hazardous wastes," "hazardous materials," or "toxic
substances" under, or for the purposes of, the Hazardous Materials Laws.
(iii) As used in this Lease, the term "Hazardous Discharge''
means any event involving the use, deposit, disposal, spill, release or
discharge of any Hazardous Material on, within or under the Project.
(iv) As used in this Lease, the term "Hazardous Materials
Claims" means and includes (1) any and all enforcement, clean-up, removal,
mitigation or other governmental or regulatory actions instituted, or to the
best of Tenant's knowledge contemplated or threatened, in respect of the Project
pursuant to any Hazardous Materials Laws, and (2) any and all claims made or to
the best of Tenant's knowledge contemplated or threatened, by any third party
against Tenant or any other person or entity seeking damages, contribution, cost
recovery, compensation, injunctive relief or similar relief resulting from any
Hazardous Discharge or from the existence of any Hazardous Material on, within
or under the Project.
(v) As used in this Lease, the term "Hazardous Material
Contamination" means the contamination (whether presently existing or hereafter
occurring) of the Improvements, facilities, soil, groundwater, air or other
elements on or of the Premises by Hazardous Material, or the contamination of
the buildings, facilities, soil, groundwater, air or other elements on or of any
other property as a result of Hazardous Material at any time emanating from the
Premises.
(vi) As used in this Lease, the term "Release" means any
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing into the environment (including, but
not limited to the abandonment or discarding of barrels, containers, and other
receptacles containing any Hazardous Material).
(vii) As used in this Lease, the term "Reportable Quantity"
means that quantity of a material as set forth in 40 C.F.R. Part 302.
(viii) As used in this Lease, the term "Adverse Environmental
Impact" means (i) Release of a Hazardous Material in a Reportable Quantity or
(ii) any material adverse impact on human health or the quality of any property.
(b) REPRESENTATIONS OF LANDLORD REGARDING PREMISES.
(i) Notwithstanding any other provision in this Lease to
the contrary, Landlord hereby warrants, covenants and represents to Tenant that,
with respect to the Premises, except as disclosed in the Environmental
Assessment Dated May 16, 1994 performed by RERC Environmental, Inc. (the "Phase
I Report"):
(1) to Landlord's best knowledge and belief, it is in
material compliance, without exception, with Hazardous Materials Laws;
(2) Landlord has no present knowledge, directly or
indirectly, of the issuance or threat of issuance by a Governmental Agency of
any notice or violation of the Hazardous Materials Laws by the Landlord or a co-
tenant;
(3) to Landlord's best knowledge and belief, no
Hazardous Material in violation of applicable laws are located on the Premises
in such a manner or condition that results or could reasonably be expected to
result in any Adverse Environmental Impact;
(4) to Landlord's best knowledge and belief, no part
of the Premises has ever been used for the disposal, storage, treatment,
processing, manufacturing or other handling of Hazardous Material in such a
manner as to result in any Adverse Environmental Impact, nor has any part of the
Premises been affected by any Hazardous Materials contamination;
(5) Landlord has not obtained and is not required to
obtain any licenses, permits or authorizations pursuant to any Hazardous
Materials Laws in order to construct, occupy,
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operate or use any building, improvements, fixture or equipment constituting any
part of the Premises; and
(6) no investigation, administrative order, consent
order and agreement, litigation or settlement with respect to Hazardous Material
or Hazardous Material Contamination is proposed, threatened, anticipated or in
existence.
(c) REPRESENTATIONS OF TENANT REGARDING PREMISES.
(i) For the purpose of inducing Landlord to lease to Tenant
the Premises, Tenant does hereby represent to and agree with Landlord as
follows:
(1) Tenant covenants to Landlord that Tenant and Tenant's
Employees on, within, under or about the Project will not use, generate,
manufacture, treat, handle, refine, produce, process, store, discharge, release,
dispose of or allow to exist on, within, under or about the Project, any
Hazardous Material, except in full compliance with all applicable Hazardous
Materials Laws.
(2) If Tenant at any time becomes aware of any Hazardous
Discharge, of any Hazardous Materials Claim or any inquiry, test or
investigation with respect to the Premises, Tenant will immediately advise
Landlord thereof, in writing, and provide to Landlord such detailed reports
thereof as may be in Tenant's possession. Landlord shall have the right to join
and participate in, as a party if it so elects, any settlements, remedial
actions, legal proceedings or actions initiated in respect of any Hazardous
Materials Claims.
(3) In the event any investigation or monitoring of site
conditions or any clean-up, containment, restoration, removal or other remedial
work (collectively, the "Remedial Work") is required under any applicable
federal, state or local law, by any judicial order, or by any governmental
entity as the result of operations or activities upon, or any use or occupancy
of any portion of the Premises by Tenant, Tenant shall perform or cause to be
performed the Remedial Work in compliance with such law or order. All Remedial
Work shall be performed by one or more contractors, selected by Tenant and
approved in advance in writing by Landlord, and under the supervision of a
consulting engineer, selected by Tenant and approved in advance in writing by
Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant,
including, without limitation, the charges of such contractor(s), the consulting
engineer and Landlord's reasonable attorneys' fees and costs incurred in
connection with monitoring or review of such Remedial Work. Notwithstanding
such payment by Tenant, Tenant shall be entitled to file a claim for
reimbursement under any state or local trust or clean-up fund provided by state
or any local governmental entity.
(d) INDEMNIFICATION. Each party will indemnify such other party
against and hold harmless from all reasonable expenses (including reasonable
fees of legal counsel), losses, damages (including foreseeable or unforeseeable
consequential damages) and liabilities incurred by such other party which may
arise out of or may be directly or indirectly attributable to (i) the use,
generation, manufacture, treatment, handling, refining, production, processing,
storage, Release, discharge, disposal or presence in violation of Hazardous
Materials Laws of any Hazardous Materials on, within, under or about the
Premises, caused by such party or such party's employees, (ii) such other
party's investigation and handling (including the defense) of any Hazardous
Materials Claims, whether or not any lawsuit or other formal legal proceeding
shall have been commenced in respect thereof, and (iii) such other party's
enforcement of this Lease, whether or not suit is brought therefor. The
provisions of this paragraph shall survive the expiration, termination,
assignment or cancellation of this Lease.
Landlord will also indemnify and hold harmless Tenant from all
reasonable expenses (including reasonable fees of legal counsel), losses,
damages (including foreseeable or unforeseeable consequential damages) and
liability incurred by Tenant which may arise out of or may be directly or
indirectly attributable to the use, generation, manufacture, treatment,
handling, refining, production, processing, storage, Release, discharge,
disposal or presence of any Hazardous Materials in violation of Hazardous
Materials Laws prior to Tenant's lease period.
(e) SURVIVAL. Each of the covenants, agreements and indemnities
of Tenant set forth in this Section shall survive the expiration or earlier
termination of this Lease.
(f) TRANSFER. It shall not be unreasonable for Landlord to
withhold its consent to any proposed transfer, assignment or subletting of the
Premises if (i) the proposed transferee's anticipated use of the Premises
involves the use, handling, storage, generation, treatment or disposal of
Hazardous Materials; (ii) the proposed transferee has been required by any prior
landlord, lender or governmental authority to take any remedial action in
connection with Hazardous Materials contaminating a property if the
contamination resulted from such transferee's actions or use of the property in
question and transferee has failed to timely comply, or (iii) the proposed
transferee is subject to and has failed to comply with an enforcement order
issued by any governmental authority in connection with the use, handling,
storage, generation, treatment or disposal of Hazardous Materials.
(g) LANDLORD INSPECTIONS AND TESTS. Landlord and its employees,
representatives and agents shall have access to the Premises and the Land during
reasonable hours and upon reasonable notice to Tenant in order to conduct
environmental inspections and tests of Hazardous Materials
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contamination of the Premises and Land or for such other reasons as Landlord
deems necessary. Such testing shall be at Tenant's expense if Landlord has a
reasonable belief that such contamination exists.
(h) ENVIRONMENTAL CLAIMS. Notwithstanding anything to the
contrary hereinabove provided in this Section 19.17, the following shall apply:
(i) Whenever Landlord learns of a claim (including but not
limited to a governmental notice of violation of any Hazardous Materials Laws)
which, if allowed, would or might give rise to a right of indemnification from
Tenant (the "Claim"), then before paying the same or making any commitment to
pay the same, and within ten (10) days of learning of such claim, Landlord shall
give Tenant written notice of the Claim. Tenant shall notify Landlord in
writing within (10) days of the giving of notice of the Claim whether Tenant
agrees to the merits of the Claim or disputes the same. Failure by Tenant to
give notice of dispute shall be deemed an agreement to the merits of the Claim.
Any Claim as to which timely notice of dispute is given is referred to
hereinafter as a "Disputed Claim".
(ii) If Tenant disputes a Claim, Tenant at its sole cost and
expense, shall promptly take all steps necessary to defend Landlord against the
Claim, and Tenant shall pay any final judgment, award or fine that is entered in
connection with the Claim. Landlord shall have the right to participate in any
proceedings in connection with the Claim, but so long as Tenant is diligently
defending against the Claim, such participation by Landlord shall be solely at
its own cost and expense. If Tenant fails to diligently defend against the
Claim at its sole cost, Landlord may defend against the Claim as it shall see
fit, and Tenant shall be liable to Landlord pursuant to its indemnity
obligations as provided above in this Section 19.17.
(iii) In the event of any Claim to which Tenant's
indemnification obligations apply, Landlord will provide Tenant with reasonable
access to such of Landlord's records and such of Landlord's Employees and agents
as may be reasonably necessary to enable Tenant to evaluate the Claim, to
effectively defend against the Claim, and to otherwise effectively perform its
indemnification obligations. In addition, Landlord will use its best efforts to
cause such employees and agents to cooperate with Tenant in connection with its
investigation and/or defense of the Claim.
(iv) If (i) notice of the Claim shall not be given to Tenant
or (ii) a Disputed Claim is paid or settled without the consent of Tenant, then
no liability shall be imposed on Tenant with regard to that Claim.
(v) Nothing in this Section 19.17 shall be construed to
make Tenant liable hereunder for any Hazardous Discharge or the presence of any
Hazardous Materials affecting the Property except to the extent such Hazardous
Discharge or presence was a result of Tenant's own actions or the action of
Tenant's Employees, agents, contractors, licensees or invitees.
19.18 PERIODIC FINANCIAL STATEMENTS TO LANDLORD. As a material
inducement to Landlord to execute this Lease, Tenant at all times represents
that all financial data and other information provided to Landlord is accurate
and discloses fully the financial condition of Tenant in accordance with
generally accepted accounting principles. Tenant agrees to provide its annual
financial statements to Landlord (i) within ninety (90) days of Tenant's year-
end, and (ii) within thirty (30) days following Landlord's written request for
same at any time during the Term of this Lease. If Tenant's annual financial
statements are not audited and certified as to accuracy by a Certified Public
Accountant, then Tenant, in addition to providing the annual financial
statements, agrees to provide Landlord with its federal income tax returns for
each year contemporaneously with the filing of same.
19.19 ACKNOWLEDGMENT OF WAVIER OF JURY TRIAL. Landlord and Tenant
agree that to the extent permitted by law, each shall and does waive trial by
jury in any action, proceeding or counterclaim brought by either against the
other on any matter whatsoever arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises or any emergency or statutory remedy.
Tenant's initials EJ
-----------
19.20 ENTIRE AGREEMENT. The provisions of this Lease constitute, and
are intended to constitute, the entire agreement of Landlord and Tenant
regarding the Lease. No terms, conditions, warranties, promises or undertakings
of any nature whatever, express or implied, exist between Landlord and Tenant
except as expressly set forth in this Lease. Any amendment or modification of
this Lease must be in writing and signed by both Landlord and tenant.
-25-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
LANDLORD:
PAIEA PROPERTIES, a Hawaii limited partnership
By: NIMITZ-PAIEA, INC., its general partner
By: /s/ T. Gregory Kemp
-------------------------------------------
T. Gregory Kemp
Its Vice President
TENANT:
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Nevada corporation
By: /s/ Ed Jacobs
-------------------------------------------
Its President
----------------------------------------
By:
-------------------------------------------
Its
----------------------------------------
-26-
<PAGE>
STATE OF HAWAII )
) SS.
COUNTY OF HONOLULU )
On this 22nd day of November, 1996, before me, Sheila A. Tomei, Notary
Public, State of Hawaii, duly licensed and sworn, personally appeared T. Gregory
Kemp, proved to me on the basis of satisfactory evidence to be the person who
executed the within instrument as Vice President of NIMITZ-PAIEA, INC., a Hawaii
corporation, which corporation is the sole general partner of PAIEA PROPERTIES,
a Hawaii registered limited partnership, and acknowledged that said instrument
was signed in behalf of said corporation by authority of its Board of Directors,
and the said officer acknowledged said instrument to be the free act and deed of
the corporation and the partnership.
WITNESS my hand and official seal.
/s/ Sheila A. Tomei
-----------------------------------------
Notary Public, in and for said State and
County
My Commission Expires: 8-4-98
-------------------
-27-
<PAGE>
STATE OF California )
) SS.
COUNTY OF Orange )
On this 20 day of November, 1996, before me, Debra A. Checka, Notary
Public, State of California, duly licensed and sworn, personally appeared E.R.
Jacobs and _____________________________, proved to me on the basis of
satisfactory evidence to be the persons who executed the within instrument as
President and Chief Executive Officer of NATIONAL TELEPHONE & COMMUNICATIONS,
INC., a Nevada corporation, and acknowledged that said instrument was signed in
behalf of said corporation by authority of its Board of Directors, and the said
officers acknowledged said instrument to be the free act and deed of the
corporation.
WITNESS my hand and official seal.
/s/ Debra A. Chuckas
-----------------------------------
Notary Public, in and for said State and
County
My Commission Expires: July 3, 1998
---------------
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<PAGE>
EXHIBIT A
LOCATION OF PREMISES AND FLOOR PLAN
EXHIBIT A - Page 1
<PAGE>
EXHIBIT B
LAND DESCRIPTION
FOR
AIRPORT TRADE CENTER
[550 PAIEA STREET, HONOLULU]
All of that certain parcel of land situate at Moanalua, Honolulu, City
and County of Honolulu, State of Hawaii, described as follows:
LOT 3836, area 298,147.0 square feet, more or less, as shown on Map 652,
filed in the Office of the Assistant Registrar of the Land Court of the State of
Hawaii with Land Court Application No. 1074 of the Trustees under the Will and
of the Estate of Samuel M. Damon, Deceased;
Being a portion of the premise described in Transfer Certificate of
Title No. 406,734 issued to Loyalty Development Company, Ltd., a Hawaii
corporation (the "Ground Lessor") and Assignment of Lease issued to Paiea
Properties in Land Court Document No. 1791977 and SUBJECT also to all
encumbrances noted on said Transfer Certificate.
EXCEPTING AND RESERVING THEREFROM all such rights and easements as
Landlord and Ground Lessor in their several and sole discretion may from time to
time require for overhead wire lines and poles or underground lines, pipes and
appurtenances thereto for drains, sewers, water, utilities and any other
purposes, services, substances whatsoever over, across and under any portion of
said Premises lying between a street boundary thereof and any setback line along
such boundary as shown on said Map 652 (herein called the 'service area') or any
easement shown on said Map, said reserved right to be exercised in such manner
as to cause the least practicable interference with the use and occupancy of
such Premises.
EXHIBIT B - Page 1
<PAGE>
EXHIBIT C
STANDARD RULES AND REGULATIONS
Except as may be otherwise specifically set forth in any provision of
the Lease, the following Rules and Regulations shall apply in accordance with
Section 4.05 of the Lease:
1. CONTROL OF COMMON AREA. The sidewalks, entrances, passages,
vestibules, stairways, corridors or halls shall not be obstructed or used for
any purpose other than ingress or egress. The halls, passages, entrances,
stairways, balconies are not for the use of the general public and Landlord
shall in all cases retain the right to control or prevent access thereto by all
persons whose presence in the reasonable judgment of Landlord shall be
prejudicial to the safety, character, reputation or interest of the Building(s)
and its tenants, provided that nothing herein contained shall be construed to
prevent such access by persons with whom Tenant normally deals in the ordinary
course of its business unless such persons are engaged in illegal activities or
are violating terms of the Lease or these Rules and Regulations. Tenant shall
not enter the mechanical rooms, air handler area, electrical closets or
janitorial closets. All parking ramps and area, pedestrian walkways, and other
public areas forming a part of the Building, if any, shall be under the sole and
absolute control of Landlord, who shall have the exclusive right to regulate and
control these areas.
2. ACCESS. On all days between the hours of 11:00 p.m. to 6:00 a.m.
the following day, access to the Building or to the Premises may be refused
unless the person seeking access is known to a tenant and has a key or is
otherwise properly identified. Each Tenant shall be responsible for all persons
for whom he permits entry to the Building and shall be liable to Landlord for
all acts of such persons. Landlord shall in no case be liable for damages for
any error with regard to the admission to or exclusion from the Building of any
person. In case of invasion, mob, riot, public excitement, or other commotion,
Landlord reserves the right to prevent access to the Building(s) during the
continuance of the same by closing the door or otherwise, for the safety of the
tenants and protection of property. Landlord reserves the right to exclude or
expel from the Building(s) any person who, in the judgment of Landlord is
intoxicated or under the influence of liquor or drugs, or who shall in any
manner do any act in violation of the Lease or these Rules and Regulations.
3. AIR CONDITIONING. For Office, Retail and Lower Floor Flex space,
Tenant shall have an individual air conditioning system which shall be under the
control of Tenant as to the temperature setting and hours of its usage;
PROVIDED, HOWEVER, Landlord may install a timing or energy saving device on the
air conditioning system and Tenant will operate same in accordance with
instructions received from Landlord. Tenant shall be solely responsible for the
utilities charged for the use of its system. Landlord shall provide routine
maintenance of the system as an operating expense in accordance with Tenant's
Lease.
4. EXTERIOR APPEARANCE. Other than as provided in the Construction
Plans described on Exhibit F approved by Landlord, no awning or other
projections shall be attached to the outside walls of the Building(s) and no
window shades, blinds, drapes or other window coverings shall be hung in the
Premises without the prior written consent of Landlord. Except as otherwise
specifically approved by Landlord, all electrical ceiling fixtures hung in the
Premises must be fluorescent, of a quality, type, number, design and bulb color
approved by Landlord. No radio or television antenna, loudspeakers, flood
lights, flag poles or any other devices shall be installed or attached to the
roof or the exterior walls of the Building(s), without the prior written consent
of Landlord.
5. SIGNAGE. These criteria have been established for the purpose of
ensuring an outstanding office/retail complex, and for the mutual benefit of all
tenants. Conformity will be strictly enforced; any non-conforming or unapproved
signs by Tenant must be brought into conformity at the expense of Tenant, or
promptly removed without liability.
Landlord shall administer and interpret the criteria, and
Landlord may, in Landlord's sole discretion, grant or withhold consent to any
deviation therefrom. Landlord makes no representation or warranty that any
signage it has approved will meet the approval of appropriate governmental
entities. Tenant is advised that the cumulative effect of signage within the
Project may prevent equal signage allotment or treatment among the tenants.
A. GENERAL REQUIREMENTS
(1) No sign shall be installed on the exterior of the
Building(s) in which Tenant's demised Premises is located except such sign as
shall first have been approved by Landlord, as to color, size, location and
design.
EXHIBIT C - Page 1
<PAGE>
(2) No sign, picture, advertisement or notice shall be
inscribed, exhibited, painted or affixed by any tenant on any part of Premises
so as to be seen from the outside of, the Premises or the Building without the
prior written consent of Landlord.
(3) No obstructions or advertising devices of any kind
whatsoever shall be placed in front of or in passageways, hallways, lobbies or
corridors of the Building(s) by Tenant.
(4) Interior signs on doors within the Building(s) and directory
tablets shall be inscribed, painted or affixed for each tenant by Landlord at
the expense of such Tenant, and shall be of a size, color and style acceptable
to Landlord.
(5) Each Tenant shall submit, or cause to be submitted, to
Landlord for written approval before fabrication, at least two copies of
detailed drawings covering the location, size, layout, design and color of the
proposed sign, including all lettering and/or graphics.
(6) All permits for signs and their installation shall be
obtained by Tenant or his representative, at Tenant's expense, prior to
installation.
(7) Tenant shall be responsible for the fulfillment of all
requirements and specifications.
(8) It is Tenant's responsibility to maintain all signs erected.
If any sign is not maintained after written notice by Landlord, the sign may be
removed by Landlord at Tenant's cost.
(9) Upon termination of Lease, for any reason, any signs erected
by Tenant shall be immediately removed and the Building(s) repaired at Tenant's
cost.
B. GENERAL SPECIFICATIONS
(1) Painted lettering will not be permitted, except as specified
under Section E (2) of these Rules and Regulations.
(2) Flashing, moving or audible signs will not be permitted.
(3) Pylon or pole signs will not be permitted.
(4) All electrical signs shall bear the UL label; and their
installation must comply with all local building and electrical codes.
(5) No exposed conduit, tubing or raceways will be permitted.
(6) All cabinets, conductors, transformers and other equipment
shall be concealed.
(7) Electrical service to all signs shall be on Tenant's
meter(s).
C. CONSTRUCTION REQUIREMENTS
(1) All exterior signs, bolts, fastenings and clips shall be of
hot dipped galvanized iron, stainless steel, aluminum, brass or bronze, and no
black iron materials of any type will be permitted.
(2) All exterior letters or signs exposed to the weather shall
be mounted at least 3/4" from the Building wall to permit proper dirt and water
drainage.
(3) Location of all openings for conduit and sleeves in Building
walls shall be indicated by the sign contractor on drawings submitted to
Landlord. Sign contractors shall install the same in accordance with the
approved drawings.
(4) No labels will be permitted on the exposed surface of signs,
except those required by local ordinance which shall be applied in an
inconspicuous location.
(5) All penetrations of the Building structure required for sign
installation shall be neatly sealed in a watertight condition.
(6) Sign contractor shall repair any damage to any work caused
by his work.
EXHIBIT C - Page 2
<PAGE>
(7) Tenant shall be fully responsible for the operations of
Tenant's sign contractors.
(8) Signs which lack a professional appearance in design and
manufacture shall not be allowed.
D. DESIGN REQUIREMENTS
(1) All Tenant storefront entrance/store identification designs
shall be subject to the approval of Landlord and shall be in conformance with
the City and County of Honolulu Sign Ordinance(s) as applicable.
(2) Tenant's identification signs shall be designed as an
integral part of the storefront in a manner compatible with and complimentary to
adjacent and facing storefronts and the overall design concept of the
Building(s). Letter size and location shall be approximately scaled and
proportioned to the overall storefront design. Maximum letter size shall not
exceed 12" for lower case letters and 14" for capital letters. If two lines of
copy are required, the total height of the two lines shall not exceed 14".
(3) Signs perpendicular to the face of the Building(s) or
storefront will not be permitted.
(4) No signs of any sort shall be permitted on canopy, soffits
or Building roofs.
(5) Wording of signs shall not include the product sold, except
as part of Tenant trade name or insignia.
(6) No sign, or any portion thereof, may project above the
parapet or top of wall upon which it is mounted.
E. MISCELLANEOUS REQUIREMENTS
(1) Each Tenant will be permitted to place upon each entrance to
its Premises an information sign of not more than 144 square inches, indicating
hours of business, emergency telephone number, etc., as approved by Landlord in
writing prior to installation.
(2) Each Tenant who has a non-customer door for receiving
merchandise may have uniformly applied on said door, in a location as directed
by Landlord, Tenant's name and address. Where more than one Tenant uses the same
door, each name and address shall be applied. The color and size of letters must
receive Landlord's prior written approval.
(3) Tenant may install on the mall front, if required by the
U.S. Post Office, the numbers only for the street address in exact location
determined by Landlord. Size, type, and color of numbers shall be as determined
by Landlord.
(4) Floor signs shall be permitted within Tenant's lease line in
their store fronts, if approved by Landlord.
(5) Tenants with two or more entrances in one front may install
an additional sign if the entries are recessed a minimum of three feet back of
the lease line. The additional sign is to be installed in the recess area, and
is limited to the store name only, and the letters shall not exceed 6". All
other criteria contained in this sign regulation shall apply and govern such
signs also.
(6) Credit card signs or other decals of any type are not to be
affixed to windows or doors. Such signs are to be mounted on their individual
stands or pedestals and set back a minimum of 12 inches from the glass line
unless otherwise approved by Landlord.
F. DIRECTORIES.
The directories of the Building(s) will be provided exclusively
for the display of the name and location of Tenant only and Landlord reserves
the right to exclude any other names therefrom. Landlord may reasonably limit
the amount of space utilized by any one tenant at Landlord's discretion.
Landlord may charge for initial listings and any subsequent changes or
additional listings which shall be the sole judgment of Landlord. A building
standard sign will be installed by Landlord on or adjacent to Tenant's office
entrance door at Tenant's expense. No other signs shall be permitted.
EXHIBIT C - Page 3
<PAGE>
6. CONTROL OF NAME. Without the written consent of Landlord, Tenant
shall not use the name of the Project in connection with or in promoting or
advertising the business of Tenant, except in connection with providing the
business address at which Tenant's business may be found. No Tenant shall engage
in advertising which in Landlord's opinion, tends to impair the reputation of
the Project or its desirability as an of office-commercial complex.
7. SOLICITORS. Landlord reserves the right to eject from the
Project, any solicitors, canvassers or peddlers and any other class of persons
who, in the judgment of Landlord, are annoying or interfering with any of
Tenant's or Landlord's operations or who are otherwise undesirable. Canvassing,
peddling, soliciting and distribution of any written materials on the Project
are prohibited and each Tenant shall cooperate to prevent the same.
8. USE RESTRICTION. The Premises shall be used only for the purpose
described in Section 1.01(f) of the Lease. Except as may be specifically
permitted in a tenant's Lease, no tenant shall occupy or permit any portion of
Premises to be occupied as an office for a public stenographer or typist, or for
the manufacture of direct sale of liquor, narcotics, or tobacco in any form or
as a medical office, or as a barber shop, hair salon, manicure shop or
employment agency. No tenant shall engage or pay any employees on the Premises
except those actually working for such tenant on the Premises, excluding only
"independent representatives" as that term is used as of this date in Tenant's
business operations, nor advertise for laborers giving an address at the
Premises. The Premises shall not be used for lodging or sleeping or for any
immoral or illegal purposes.
9. RESTRICTED ACTIVITIES. Other than as provided in the Construction
Plans described on Exhibit F approved by Landlord, the following activities are
restricted without the prior written consent of Landlord and then only as
Landlord may direct. Tenant and its agents, employees or visitors shall not:
a. Mark, paint, drill into or in any way deface any part of the
Premises or the Building(s).
b. Bore, string or cut wires.
c. Bring animals, bicycles or vehicles into the Building(s).
d. Prepare or cook any food on the Premises, except coffee,
tea, hot chocolate and similar items for Tenant and its employees and business
visitors. This restriction shall not apply to Retail tenants, such as
restaurants or convenience shops, where the use clause of their lease permits
food cooking or preparation.
e. Install air-conditioning unit, engine, boiler, machinery or
similar apparatus.
f. Operate any hand truck in spaces other than the Premises or
in the public corridors of the Building(s) except those equipped with rubber
tires and side guards.
g. Bring firearms or explosives onto the Premises.
h. Install, maintain or operate vending machines of any
description on the Premises, except for the exclusive use of Tenant and Tenant's
Employees.
i. Use of the water supplied by Landlord not separately metered
for other than drinking and toilet purposes.
j. No windows, glass doors or any other light sources that
reflect into the lobbies or other places of the Project shall be obstructed or
covered except in a manner approved in writing by Landlord.
k. No water cooled condenser or other water cooled apparatus
shall be used by Tenant, except upon such conditions as are established by, and
with the written consent of, Landlord.
10. PROHIBITED ACTIVITIES. The following activities are strictly
prohibited and shall not be conducted by Tenant and its agents, employees or
visitors:
a. Make or permit to be made any unseemly or disturbing noises,
sounds or vibrations, or otherwise disturb or interfere with occupants of this
nor neighboring buildings or premises or those having business with them by the
use of any musical instrument, radio, phonograph, unusual noise, or in any other
way.
b. Use toilet, wash basins and other plumbing fixtures for any
purpose other than those for which they were constructed, and no sweeping,
rubbish rags or other substances shall be thrown therein. All damage resulting
from any misuse of such fixtures shall be borne by Tenant or Tenant's Employees.
EXHIBIT C - Page 4
<PAGE>
c. Throw anything out of doors, windows, or down the public
corridors, stairwells or other areas of the Building(s) nor shall Tenant place
or allow to be placed any object on ledges or lanais of the Building(s).
d. Smoke, drink or eat in elevators, vestibules, entrances,
passages, stairways, corridors, hallways or restrooms. Open food or beverages
shall not be allowed in these areas.
e. Bring or keep in the Premises any inflammable, combustible or
explosive fluid, chemical, or substance nor do or permit anything to be done in
the Premises, or bring or keep anything therein which shall in any way increase
the rate of fire insurance on the Building(s) or on the property kept therein,
or obstruct or interfere with the rights of other tenants or in any way injure
or annoy them, or conflict with the regulations of the Fire Department or the
fire laws, or with any insurance policy upon the Building or any part thereof,
or with any rules and ordinances established by the Board of Health or other
governmental authority.
f. No Tenant shall cause or permit any unusual or objectionable
odors to be produced upon or permeate from the Premises.
g. All windows are to be kept closed during periods when the
Building(s) is being air-conditioned.
h. Overload the floors or the elevators or in anyway violate the
structural integrity of the Building(s).
11. CLOSING PRECAUTIONS. Each Tenant shall, before leaving the
Building close and securely lock all windows and doors of the Premises, turn off
all water faucets or water apparatus, and turn off all electrical equipment
(including air conditioning system but excluding any required night lighting)
within the Premises. Tenant will be responsible for all injuries sustained by
Landlord's other tenants or occupants of the Building(s) due to Tenant's default
or carelessness.
12. KEYS AND LOCKS. No locks or bolts other than those provided by
Landlord shall be placed on any doors without the written consent of Landlord. A
total of four keys per lock will be furnished to Tenant by Landlord. Additional
keys will be provided by Landlord upon Tenant's request at Tenant's cost. Lock
cylinders and keys shall be changed by Landlord at Tenant's expense upon receipt
of written request from Tenant. All keys will be surrendered upon termination of
Lease. Janitor and contract cleaners will be provided with a passkey to Tenant's
Premises unless Tenant declines in writing and thereby understands that Landlord
will not be responsible for providing janitorial services and emergency access
to the Premises.
13. DOORS. All doors opening onto public corridors shall be kept
closed during business hours, and, during non business hours, locked, except
when in use for ingress or egress.
14. TENANT EQUIPMENT. All equipment and any other devise of any
electrical or mechanical nature shall be placed by Tenant in the Premises so as
to absorb or prevent any vibration, noise or annoyance to other tenants of the
Project. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires or
stringing of wires will be allowed without the prior written consent of
Landlord, and then only as Landlord may direct. The location of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to the
reasonable approval of Landlord.
15. CONTROL OF CONTRACTORS. Any work to be done in order to repair
the Premises, or to alter, improve or add to Tenant's space shall be done by
contractors reasonably approved by Landlord. No person or contractor not
approved by Landlord shall be used to repair, alter, improve or add to the
Premises without the prior written consent of Landlord. Tenant shall not permit
any contractor or other person making any alterations, additions or
installations within the Premises, to use any Common Area as storage or work
areas, without the prior written consent of Landlord and Tenant shall be liable
for and pay the expense of any additional cleaning cost resulting from the
transportation or storage of materials and/or work performed within the
Building(s).
16. DRAPERIES. Draperies and wall coverings must be treated with fire
retardant and may be installed by Tenant only with the prior written consent of
Landlord. Cleaning of all draperies shall be the responsibility of Tenant and
shall be done as reasonably required.
17. JANITORIAL SERVICE. No one other than those reasonably approved
in writing by Landlord shall be permitted to perform any janitorial service on
the Property. Janitorial service, if supplied by Landlord, shall not include
shampooing or spot-cleaning of carpet nor dry cleaning of draperies. Landlord
shall not be responsible for any loss of or damage to any Tenant's property by
the janitor, its employees or any other person performing janitorial services.
EXHIBIT C - Page 5
<PAGE>
18. MAINTENANCE REQUESTS. All request for services by Tenant shall be
made to Landlord's Property Manager only. No employee of Landlord shall perform
any work or service for any Tenant or admit any person into any locked portion
of the Building(s) except under the specific instructions of Landlord's Property
Manager.
19. DELIVERIES AND SERVICE AREA. Except for warehouse operations,
only hand trucks equipped with rubber tires and side guards will be permitted on
the Project. All deliveries shall only be brought through a service entrance of
the Project designated by the Property Manager. All deliveries requiring
exclusive use of an elevator shall be scheduled through the Property Manager and
in any event such use will not be permitted without the use of elevator
protective padding and such use will not be permitted between the hours of 6:00
- - 9:00 a.m., 11:30 a.m. -1:30 p.m. and 3:30-5:00 p.m. Any damage to the Building
(s) caused by any such Tenant or its delivery service will be immediately
reported to Landlord's Property Manager and the repair will be made at Tenant's
expense.
20. MOVING OF HEAVY OBJECTS. Except for warehouse operations, all
removal, or the carrying in or out of any safes, freight, furniture, or bulky
matter of any description must take place at the time and in the manner which
Landlord may determine from time-to-time. The moving of safes or other fixtures
or bulky matter of any kind must be made upon previous notice to the Property
Manager of the Building and under his supervision, and the persons employed by a
Tenant for such work must be acceptable to Landlord. Landlord reserves the right
to inspect all safes, freight or other bulky articles to be brought into the
Building and to exclude from the Building all safes, freight or other bulky
articles which violate any of these Rules and Regulations or the Lease of which
these Rules and Regulations are a part. Landlord shall have the right to
prescribe the location of heavy objects and if considered necessary, the means
as to distribute the weight thereof (no more than 50 pounds per square foot
shall be allowed unless written approval is granted by Landlord). All cost
incurred will be charged to Tenant. Any damage to the Project caused by any such
Tenant or its contractor, delivery or moving service, will be repaired at such
Tenant's expense.
21. MOVING IN/OUT. All moving of furniture, fixtures and other
personal property in and out of the Building(s) must be done through the loading
area designed by the Property Manager and only via the designated elevator.
Tenant and its moving company should investigate loading area conditions prior
to the scheduled move. The freight elevator must be reserved at lease 24 hours
prior to the contemplated move date. Reservations must be made with the Property
Manager.
22. REMOVAL OF PROPERTY. Unless otherwise provided in the Lease to
the contrary, Tenant shall deliver a list of any fixtures or Improvements in the
Premises which Tenant desires to remove from the Building, and the list must be
approved by Landlord in writing before any such fixture of improvement is
removed. No fixtures permanently attached shall be removed.
23. CHANGE OF NAME AND ADDRESS. Landlord shall have the right,
exercisable without liability to Tenant, to change the name and the street
address of the Building(s) and Project. Landlord shall reimburse Tenant for
its reasonable costs necessitated by Landlord's name and address change.
24. TRASH REMOVAL. Each Tenant shall store all its trash within the
Premises in a location reasonably approved by Landlord until removal of the
same. No material shall be placed in trash boxes or receptacles if such material
is of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage in the City and County of
Honolulu without being in violation of any law, ordinance, or regulation
governing such disposal. The Premises shall at all times be kept in a clean and
sanitary condition. No open containers of food or liquid shall be placed in
waste baskets due to the possibility of carpet damage during their removal by
janitorial personnel. All Tenant construction debris shall be removed from the
Premises by Tenant, its contractor or its employees. Food or similar type of
waste product shall be sufficiently wrapped to prevent odors and/or other
residue from escaping through the container in or on Common Areas or in the
trash receptacles. Landlord reserves the right throughout the term of any
lease to cause any tenant whose waste consists of food or similar type of
product to independently arrange for the daily removal of such waste from the
Project at the tenant's sole cost. Further, all tenants will comply with any
applicable governmental regulation concerning recycling of waste.
25. COMPLIANCE WITH PROFESSIONAL STANDARDS. Any Tenant who shall be
engaged in any trade, occupation or profession which is regulated by the City
and County, State or Federal government or which is self policing, shall at all
times during the term of its Lease or any extension thereof, be and remain in
good standing with such regulatory or self policing body, and in the event such
Tenant shall be disciplined pursuant to final disciplinary action from which
there is no further appeal, at Landlord's sole discretion, Landlord may
terminate such Tenant's Lease forthwith excepted where such final disciplinary
action was as a direct result of the actions of an "independent representative"
as that term is used as of the date hereof in Tenant's business operations.
26. AUTHORIZED VENDORS. No Tenant shall purchase or otherwise obtain
for use in the Premises water, ice, towel, vending machine, barbering,
bootblacking, or other like service, or purchase
EXHIBIT C - Page 6
<PAGE>
or otherwise obtain janitorial, maintenance or other like services, except from
persons authorized by Landlord, and at hours and under regulations fixed by
Landlord.
27. COMMON ROOMS/AREA. Rooms used in common by Tenant shall be
subject to regulations adopted by Landlord, including the parking areas and the
rates applicable thereto.
28. SHOWING PREMISES. Landlord may show the Premises to any
prospective tenants within twelve (12) months prior to the expiration of the
Lease; PROVIDED, HOWEVER, that during the term of normal occupancy and Tenant
not being in default, Landlord shall have access to the Premises during Tenant's
regular business hours or as otherwise provided elsewhere in the Lease.
29. PREVENTION OF DEDICATION. Landlord reserves the right to close
off any and all of the streets, promenades and sidewalks of the Project for
twenty-four hours once every five years or as may be necessary to prevent
dedication.
30. RULES AND REGULATIONS. Pursuant to Section 4.05 of the Lease,
Landlord has the right to modify, supplement or rescind any of these Rules and
Regulations.
Tenant shall be liable for injury or damage caused by the infraction of
any of these Rules and Regulations. Landlord will repair such damage and shall
charge the resulting costs to Tenant. Such costs shall be payable within five
(5) days following Tenant's receipt of Landlord's billing and, if unpaid, shall
constitute sums due under Section 3.03 of the Lease.
Landlord shall not be responsible to any Tenant for the non-observance
or violation of any Rules and Regulations by any other tenant or other person.
Tenant acknowledges it has read these Rules and Regulations and agrees to abide
by them as a condition to its occupancy.
Landlord will appreciate any suggestions for the betterment of service
in the Building(s) and Project. Please address all communications to:
PAIEA PROPERTIES
550 Paiea Street
Suite 102
Honolulu, HI 96819
Attn: Property Manager
REVIEWED AND ACCEPTED BY TENANT this 20th day of November, 1996.
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Nevada corporation
By: /s/ Ed Jacobs
-------------------------------------
Its
----------------------------------
By:
-------------------------------------
Its
----------------------------------
EXHIBIT C - Page 7
<PAGE>
EXHIBIT D
BASE RENT
THE FOLLOWING IS A SCHEDULE OF THE BASE RENT for the Term of the Lease
dated November 20, 1996, by and between PAIEA PROPERTIES, a Hawaii limited
partnership ("Landlord"), and NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Nevada corporation ("Tenant"), leasing a portion of Airport Trade Center:
Lease Month Base Rent per
----------- -----------------------------
SF of Net
Rentable Area Lease Month
------------- -----------
1-24 $2.62 $25,964.20
25-48 $2.78 $27,549.80
49-72 $2.94 $29,135.40
73-96 $3.12 $30,919.20
97-120 $3.31 $32,802.10
The initial monthly payment due under this Lease shall be the sum of:
Base Rent $25,964.20
Initial Operating Expense Payment @ $0.38 3,765.80
Parking Monthly Fee [50 x $60] 3,000.00
Evening/Weekend Parking Monthly Minimum 2,500.00
----------
Sub Total 35,230.00
Hawaii State General Excise Tax 1,467.68
----------
Total Initial Monthly Payment 36,697.68
Security Deposit 36,697.68
----------
Total Due on execution of Lease $73,395.36
----------
----------
LANDLORD:
PAIEA PROPERTIES, a Hawaii limited partnership
By: NIMITZ-PAIEA, INC., its general partner
By: /s/ T. Gregory Kemp
----------------------------------------
T. Gregory Kemp
Its Vice President
TENANT:
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Nevada corporation
By: /s/ Ed Jacobs
----------------------------------------
Its President
-----------------------------------
By:
----------------------------------------
Its
-----------------------------------
EXHIBIT D - Page 1
<PAGE>
EXHIBIT E
SPECIAL CONDITIONS
THE FOLLOWING CONSTITUTES THE SPECIAL CONDITIONS of the Lease dated
November 20, 1996, by and between PAIEA PROPERTIES, a Hawaii limited partnership
("Landlord"), and NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Nevada
corporation ("Tenant"), leasing a portion of Airport Trade Center:
1. OPTION TO TERMINATE LEASE. Landlord and Tenant understand and agree
that Tenant shall use its best efforts, diligently and consistently applied, to
complete the Construction Plans for the Premises and submit application for a
building permit. Notwithstanding anything contained in this Lease to the
contrary, Tenant shall have a one (1) time option to terminate this Lease on or
before January 15, 1997 if the building permit is not issued to Tenant by giving
written notice thereof to Landlord; PROVIDED, HOWEVER, if such written notice is
not received by Landlord on or before the aforementioned date, or Landlord, at
its sole discretion does not agree in writing to extend said date, then Tenant's
option to terminate this Lease pursuant to this provision shall expire.
If Tenant shall exercise the option to terminate this Lease in a timely
manner, as consideration for such option, Landlord shall deduct from the
Security Deposit the amount of $307.00 per day for each day after November 10,
1996 that Tenant's written notice of termination is received by Landlord and the
balance of the Security Deposit shall immediately be return to Tenant. No
deduction shall be made from the Security Deposit in consideration of the option
if Tenant does not exercise such option.
2. SIGNAGE. Landlord will reasonably approve Tenant's signage plan on
the exterior of its Premises consistent with the Project signage standards and
which meets all City and County of Honolulu signage codes. Landlord will
consider additional Tenant signage in other areas of the Project, including the
facade of the roof mechanical area, subject to the same meeting all code
requirements and not being in conflict with any other tenant or tenant premises
in the Project. It is understood that the area surrounding the roof mechanical
area is under a long term lease with Budget Rent a Car and that Tenant signage
in this area of the building must be disclosed and agreed to by Budget Rent a
Car.
3. RESTRICTED ADDITIONAL PARKING. In addition to the parking stalls
allocated to Tenant pursuant to Section 1.01(g) of the Lease, Landlord agrees to
provide Tenant with up to a maximum of 100 unreserved parking stalls for
Tenant's customers for weekday evening use (only between the hours of 6:00 PM
and 11:00 PM) and for weekend use (Saturday and Sunday between the hours of 8:00
AM and 11:00 PM) only ("Restricted Parking"). Tenant shall advise Landlord in
writing as to the number and time requirement for such Restricted Parking stalls
on a business day prior to such use; the initial parking charge for the period
six (6) months from the date hereof shall be $2,500.00 per month to be charged
to Tenant as additional rent and billed to Tenant monthly. Prior to the
expiration of the initial 6-month period, Tenant and Landlord shall enter into
good faith negotiations to reach mutually agreeable terms and conditions for
such Restricted Parking; it being understood that should no agreement be
reached between Tenant and Landlord within thirty (30) days following the
expiration of the initial 6-month period, Landlord shall not be required to
provide any Restricted Parking thereafter during the Term of the Lease.
Landlord shall advise Tenant of the location(s) to be used on the
Project, the Koapaka Street lots and/or on the privately owned portion of
Koapaka Street for such additional parking (being the area graphically described
on Exhibit H - Location of Parking Area - attached hereto) and Tenant shall be
responsible to cone off such area (or otherwise identify the specified area as
reasonably directed by Landlord) and to monitor that its customers use such
specified location. Any additional parking needs of Tenant shall be provided
by Landlord subject to availability as determined by Landlord in compliance with
other leases in the Project and all code requirements of the City and County of
Honolulu.
4. TENANT'S OPTION FOR EARLY TERMINATION. Provided Tenant is not then
in default under the Lease, Tenant shall have the irrevocable option to
terminate this Lease effective the last day of the sixtieth (60th) Lease Month;
PROVIDED, HOWEVER, in order for such early termination to be effective, Tenant
shall (i) notify Landlord in writing as to Tenant irrevocably exercising such
termination option on or before the last day of the fiftieth (50th) Lease Month,
and (ii) pay to Landlord within ten (10) day following receipt of Landlord's
billing all reasonable costs of Landlord including, but not limited to, the
unamortized portion of real estate brokerage commissions. Tenant's written
notice for early termination shall be irrevocable and may not be withdrawn by
Tenant without the written approval of Landlord in its absolute and sole
discretion.
5. FIRST RIGHT TO LEASE ADDITIONAL SPACE. Subject to the rights of any
other tenant in the Project and provided Tenant is not then in default and has
not been in material default under the Lease, Tenant shall have the first right
to lease any first floor Retail space fronting Paiea Street as the same may
become available during the Term of the Lease. Landlord shall provide Tenant
with a written notice that such Retail space is available for lease and shall
provide a listing of the terms and Prevailing Rate thereof
EXHIBIT E - Page 1
<PAGE>
in accordance with the method set forth in Section 1(e) of this Exhibit E.
Within ten (10) days following the date of Tenant's receipt thereof, Tenant
shall advise Landlord in writing as to its acceptance of the terms of Landlord's
notice. If Tenant rejects the terms of Landlord's notice or fails to provide
Landlord with its response within the 10-day period, Tenant's first right to
lease shall be void and Landlord shall be free to enter into any agreement to
lease such space with any party upon any terms (whether similar or otherwise as
those contained in Landlord's notice to Tenant) as Landlord may choose in its
sole discretion.
6. OTHER TENANT USES. During the Term of the Lease, Landlord shall not
lease space in the mauka portion of the first floor Retail space fronting Paiea
Street (the area of which is marked on Exhibit A as "Exhibit E-Section 6 Space")
to any tenant whose use of such space would be materially detrimental to
Tenant's business operations in the Premises specifically including the sale of
sexually explicit adult materials or services.
7. ADA COMPLIANCE. Upon completion of Landlord's current renovation
program, the Project (excluding any premises for which the tenant shall be
responsible) shall be fully in compliance with The Americans with Disabilities
Act.
8. PREMISES ACCESS. Notwithstanding contained in the Lease to the
contrary and Tenant not being in default hereunder, Tenant shall be entitled to
have access to the Premises and parking area(s) (as such parking area is
designated from time to time by Landlord) 24-hours per day, 365-days per year
except in the case of an emergency.
9. RENEWAL.
a) If Tenant is not then in default and has not been in material
default hereunder and has not assigned this Lease or subleased all or any
portion of the Premises other than as may be permitted in Section 8.01 of the
Lease, then Tenant shall have the option to extend the Term for one (1)
additional five (5) year period commencing on the day next following the
Termination Date ("Extended Term") by giving written notice of said extension to
Landlord not later than nine (9) months prior to the Termination Date, time
being of the essence.
b) The Extended Term shall be for the period of Lease Months 121 to
180.
c) If Tenant exercises its option to extend the Term for an Extended
Term, then, not later than fifteen (15) days thereafter (or, if later, not later
than seventy-five (75) days prior to the expiration of the Term), Landlord shall
notify Tenant in writing ("Landlord's Rental Notice") of its determination of
the Prevailing Rental (as defined herein) for the Premises for the Extended
Term. Tenant shall notify Landlord not later than fifteen (15) days after
receipt of Landlord's Rental Notice that it elects either (i) to accept
Landlord's determination of the Prevailing Rental, (ii) to rescind the exercise
of its option to extend or (iii) to elect to have the Prevailing Rental
determined by appraisal in accordance with subparagraph (f) below. If Tenant
fails to so elect, it shall be deemed to have rescinded the exercise of its
option to extend. If the Term is extended it shall be so extended on the same
terms and conditions then set forth in this Lease except that (v) the Annual
Base Rent during the Extended Term shall be equal to the Prevailing Base Rental
Rate (as defined herein) set forth in Landlord's Rental Notice or by the number
of rentable square feet in the Premises, (x) Tenant shall receive the benefit of
the Prevailing Rental Concessions (as defined herein), if any, set forth in
Landlord's Rental Notice, (y) Tenant shall pay Additional Rent in the manner set
forth in this Lease, and (z) this Lease shall be modified to incorporate any
Other Prevailing Rental Terms (as defined herein) set forth in Landlord's Rental
Notice; PROVIDED, HOWEVER in no event shall the Annual Base Rent after
adjustment for Prevailing Rental Concessions during the Extended Term be LESS
than the Base Rent per square foot of Net Rentable Area on the Termination Date.
d) Landlord and Tenant shall enter into a written supplement to this
Lease confirming the terms, conditions and provisions applicable during the
Extended Term as determined in accordance with the provisions of this Section.
If Tenant fails to timely exercise its option to extend the Term for the
Extended Term, then this Lease shall expire by its terms on the expiration of
the Term.
e) For purposes of this Lease, the "Prevailing Rental" shall be the
rental for comparable space located near the Honolulu airport, determined by
Landlord, taking into consideration the class of building, size, location,
zoning and degree of improvements included in the space in question and for the
length of term comparable to the term of the lease in question. The Prevailing
Rental shall consist of an annual base rental rate per rentable square foot
("Prevailing Base Rental Rate") and shall include or take into account the
following rental related terms: (i) rent concessions such as rental abatements,
construction allowances and other concessions ("Prevailing Rental Concessions"),
(ii) periodic adjustments or additions to a fixed annual rent based on a share
of taxes and Operating Expenses and (iii) periodic increases in rent and other
then prevailing rental related terms, conditions and components of rent ("Other
Prevailing Rental Terms").
f) If Landlord or Tenant desires to invoke the appraisal procedure
set forth in this Section, the party invoking the appraisal procedure shall give
a notice ("Appraisal Notice") to the other party, stating that the party sending
the Appraisal Notice desires to meet within fourteen (14) days to attempt to
agree on a single appraiser to determine the Base Market Rent. The appraiser (i)
shall be MAI
EXHIBIT E - Page 2
<PAGE>
certified, (ii) shall have a minimum of five (5) years experience in the City of
Honolulu in real estate leasing or appraisal of leases in office and warehouse
buildings in Honolulu, and (iii) shall not have conducted within the previous
three years and shall not be presently conducting a material amount of business
with either Landlord or Tenant or their affiliates or otherwise have a financial
interest in or with either Landlord or Tenant or their affiliates and shall be
otherwise independent ("Appraiser Qualifications"). If Tenant and Landlord are
unable to agree upon a single appraiser within fifteen(15) days of the giving of
the Appraisal Notice, then Landlord and Tenant shall draw by lot to determine
which of them ("First Party") shall within the following seven (7) days provide
the other ("Second Party") with the names and qualifications of five appraisers
who are acceptable to the First Party and who meet the Appraiser Qualifications.
Such list shall be accompanied by a statement of all business conducted by each
such proposed appraiser with the First Party within the previous three years.
The Second Party within seven (7) days thereafter shall select one of the five
appraisers and shall notify the First Party in writing of its selection. The
appraiser so selected shall be the appraiser hereunder. The parties shall share
equally the cost of the appraiser.
Within ten (10) days following the selection of the appraiser,
Landlord and Tenant shall each notify the other (but not the appraiser) of their
determination of the Prevailing Rental for the applicable Extended Term. During
the next seven (7) days following said 10-day period, both Landlord and Tenant
shall prepare a written critique of the other's determination and on the seventh
day, Landlord's and Tenant's determinations (as originally submitted to the
other party, with any modification or additions whatsoever permitted) and
Landlord's and Tenant's critique shall be submitted to the appraiser. Within
fifteen (15) days thereafter, the appraiser shall decide in writing whether
Landlord's or Tenant's determination of the Prevailing Rental is more correct
and shall state in detail the reasons therefor. The appraiser shall be empowered
to choose only the Landlord's or the Tenant's determinations, and shall reach no
other or compromise decision. The appraiser's decision shall be final,
conclusive and binding on Landlord and Tenant.
g) Except as set forth in this Section, Landlord shall have no
obligation to extend or renew this Lease, or to enter into another lease of the
Premises with Tenant upon expiration of this Lease. Upon expiration of this
Lease, or if this Lease is extended, the Extended Term, Landlord may lease the
Premises to whomever it chooses for the operation therein of a business that is
the same as or different from that operated by Tenant in the Premises.
10. BROKERAGE COMMISSIONS. Landlord entered into an exclusive
listing agreement for the Project with CB Commercial Real Estate of Hawaii, Inc.
and will pay all commission to CB Commercial in accordance with the terms
thereof resulting from this Lease.
LANDLORD:
PAIEA PROPERTIES, a Hawaii limited partnership
By: NIMITZ-PAIEA, INC., its general partner
By: /s/ T. Gregory Kemp
-----------------------------------------------
T. Gregory Kemp
Its Vice President
TENANT:
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Nevada corporation
By: /s/ Ed Jacobs
-----------------------------------------------
Its President
------------------------------------------
By:
-----------------------------------------------
Its
------------------------------------------
EXHIBIT E - Page 3
<PAGE>
EXHIBIT F
IMPROVEMENT SPECIFICATIONS
All Improvements shall be installed in the Premises by Tenant at the
expense of Tenant. All construction drawings detailing the improvements to be
install in the Premises by Tenant shall be approved by Landlord in writing and
the final construction draws thereof shall be attached to this Exhibit F and by
this reference incorporated herein ("Construction Plans").
Tenant may wish to install a satellite communications dish on a portion
of the Building or Project that is outside of the area of Tenant's Premises.
Tenant shall provide full plans relating to such equipment and the preferred
location for the installation of same and such other detail as may be requested
by Landlord. Landlord shall provide its reasonable approval of such satellite
communications dish specifically subject to the requirements of any building
codes, the rights of all other tenants in the Project and the favorable
appearance and/or screening of same.
EXHIBIT F - Page 1
<PAGE>
EXHIBIT G
ALLOCATIONS OF OPERATING EXPENSES
AND TENANT'S PROPORTIONATE SHARE
The schedules attached hereto set forth the Net Usable Area as defined
in Section 2.08, the Net Rentable Area, the current year Operating Expense
budget in accordance with Section 2.09 and Tenant's Proportionate Share as
defined in Section 2.16.
EXHIBIT G - Page 1
<PAGE>
EXHIBIT H
LOCATION OF PARKING AREA
EXHIBIT H - Page 1
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 03-27-1997 04-30-1998 9730000139 110
- -----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
Particular loan or item.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400
2801 MAIN STREET 2400 MICHELSON DRIVE
IRVINE, CA 92614 IRVINE, CA 92612
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Amount: Initial Rate: Date of Note:
$5,000,000.00 9.500% March 27, 1997
PROMISE TO PAY, NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Borrower") promises
to pay to FIRST BANK & TRUST ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Five Million & 00/100 Dollars
($5,000,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on
April 30, 1998. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning April 27, 1997, and all subsequent interest
payments are due on the same day of each month after that. Interest on this
Note is computed on a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the Prime
rate as published in the Wall Street Journal. When a range of rates has been
published, the higher of the rates will be used (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. The Index currently is 8.500% per annum. The
interest rate to be applied to the unpaid principal balance of this Note will be
at a rate of 1.000 percentage point over the Index, resulting in an initial rate
of 9.500% per annum. NOTICE: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve Borrower
of Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $1.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b)
if the cure requires more than fifteen (15) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon Borrower's
failure to pay all amounts declared due pursuant to this section, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Note to 6.000 percentage points over the Index. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorney's fees and Lender's legal expenses whether
or not there is a lawsuit, including attorney's fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law. This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Orange
County, the State of California. Lender and Borrower hereby waive the right
to any jury trial in any action, proceeding, or counterclaim brought by
either Lender or Borrower against the other. (Initial Here /s/ VCS) This
Note shall be governed by and construed in accordance with the laws of the
State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which borrower pays is later dishonored.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. All
oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: JAMES R. QUANDT, PRESIDENT; VICTOR C. STREUFERT,
CHIEF FINANCIAL OFFICER; and JERRY DECICCIO, CONTROLLER. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; or (d) Borrower has
applied funds provided pursuant to this Note for purposes other than those
authorized by Lender.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
2
<PAGE>
Loan No 9730000139 (Continued)
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PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
----------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
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3
<PAGE>
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
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PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 03-27-1997 04-30-1998 9730000139 110
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References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400
2801 MAIN STREET 2400 MICHELSON DRIVE
IRVINE, CA 92614 IRVINE, CA 92612
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- --------------------------------------------------------------------------------
THIS BUSINESS LOAN AGREEMENT between NATIONAL TELEPHONE & COMMUNICATIONS,
INC. ("Borrower") and FIRST BANK & TRUST ("Lender") is made and executed on
the following terms and conditions. Borrower has received prior commercial
loans from Lender or has applied to Lender for a commercial loan or loans and
other financial accommodations, including those which may be described on any
exhibit or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) in granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of March 27, 1997, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means NATIONAL TELEPHONE & COMMUNICATIONS,
INC. The word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means FIRST BANK & TRUST, its successors and
assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guarantees, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the
initial Loan Advance and each subsequent Loan Advance under this Agreement
shall be subject to the fulfillment to Lender's satisfaction of all of the
conditions set forth in this Agreement and in the Related Documents.
4
<PAGE>
03-27-1997 BUSINESS LOAN AGREEMENT Page 2
Loan No. 9730000139 (Continued)
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LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of Insurance as required below; and (e) any other documents required under
this Agreement or by Lender or its counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the Sate of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposed to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any other
properties; and any such activity shall be conducted in compliance with all
applicable federal, state and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a) releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release occurring prior to Borrower's ownership or interest
in the properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the indebtedness and
the termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties, whether
by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 2801 MAIN STREET, IRVINE, CA 92614. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
5
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03-27-1997 BUSINESS LOAN AGREEMENT Page 3
Loan No. 9730000139 (Continued)
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AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 3.00 to 1.00. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender holds
or is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of the
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender, (b) Borrower becomes insolvent, files a
petition in bankruptcy or similar proceedings, or is adjudged a bankrupt;
(c) there occurs a material adverse change in Borrower's financial condition,
in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) a Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or
any other loan with Lender.
6
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03-27-1997 BUSINESS LOAN AGREEMENT Page 4
Loan No. 9730000139 (Continued)
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ADDITIONAL PROVISIONS.
1. BORROWERS TANGIBLE NET WORTH AT SEPTEMBER 30, 1997 WILL BE $10,000,000.00
AND AT DECEMBER 31, 1997 WILL BE $11,000,000.00.
2. NET INCOME AFTER TAX AT DECEMBER 31, 1997 WILL BE AT LEAST $2,000,000.00.
3. BORROWER WILL NOT UPSTREAM CASH TO ITS PARENT OR OTHER AFFILIATED COMPANIES
IN EXCESS OF $100,000.00 PER MONTH OR $1,200,000.00 ANNUALLY, WITHOUT THE PRIOR
WRITTEN CONSENT OF FIRST BANK & TRUST. BORROWER CAN ONLY UPSTREAM CASH UPON
MEETING ALL OF ITS FINANCIAL OBLIGATIONS/COMMITMENTS WITH FIRST BANK & TRUST AND
ALL OTHERS. A CONDITION OF DEFAULT UNDER ANY NOTE OR CONTRACTUAL AGREEMENT MAY
NOT EXIST AT THE TIME OF UPSTREAMING CASH.
4. A DEFAULT UNDER ANY AND ALL CONTRACTUAL AGREEMENTS ENTERED INTO BY AND
BETWEEN NATIONAL TELEPHONE & COMMUNICATIONS, INC. AND WILTEL, INC., A DELAWARE
CORPORATION, OR WORLDCOM NETWORK SERVICES, INC., WILL BE AN AUTOMATIC DEFAULT
UNDER THE SUBJECT LOAN DOCUMENTS AND ANY FUTURE MODIFICATIONS TO THE SUBJECT
LOAN DOCUMENTS.
5. BORROWER IS REQUIRED TO NOTIFY FIRST BANK & TRUST OF ALL LEGAL SETTLEMENTS
OF $100,000.00 OR MORE AND OPEN LAW SUITS PENDING IN WRITING AS SOON AS ITS
MANAGEMENT IS AWARE OF IT.
6. BORROWER AGREES NOT TO GUARANTEE THE OBLIGATIONS OR DEBT OF ANOTHER ENTITY
WITHOUT THE PRIOR WRITTEN CONSENT OF FIRST BANK & TRUST.
7. BORROWER AGREES TO AT LEAST ONE ACCOUNTS RECEIVABLE AUDIT ANNUALLY, TO BE
PERFORMED AT BORROWER'S EXPENSE. (____/s/____INITIAL HERE).
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on
or of any of Borrower's deposit accounts with Lender. However, this Event
of Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the court of Orange
County, the State of California. Lender and Borrower hereby waive the
right to any jury trial in any action, proceeding, or counterclaim brought
by either Lender or Borrower against the other. (Initial Here__/s/__) This
Agreement shall be governed by and construed in accordance with the laws of
the State of California.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well
as all notices of any repurchase of such participation interests.
Borrower also agrees that the purchasers of any such participation
interests will be considered as the absolute owners of such interests in
the Loans and will have all the rights granted under the participation
agreement or agreements governing the sale of such participation interests.
Borrower further waives all rights of offset or counterclaim that it may
have now or later against Lender or against any purchaser of such a
participation interest and unconditionally agrees that either Lender or
such purchaser may enforce Borrower's obligation under the Loans
irrespective of the failure or insolvency of any holder of any interest in
the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
7
<PAGE>
03-27-1997 BUSINESS LOAN AGREEMENT Page 5
Loan No. 9730000139 (Continued)
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actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right of any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Borrower, or between Lender and
any Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
MARCH 27, 1997.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
----------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
LENDER:
FIRST BANK & TRUST
By: /s/ K.P. Balkrishna
----------------------------------------------
Authorized Officer
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8
<PAGE>
[LETTERHEAD]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
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PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 03-27-1997 04-30-1998 9730000139 110
- -----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
Particular loan or item.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400
2801 MAIN STREET 2400 MICHELSON DRIVE
IRVINE, CA 92614 IRVINE, CA 92612
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- --------------------------------------------------------------------------------
THIS COMMERCIAL SECURITY AGREEMENT is entered into between NATIONAL TELEPHONE &
COMMUNICATIONS, INC. (referred to below as "Grantor"); and FIRST BANK & TRUST
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
All inventory, chattel paper, accounts, equipment and general
intangibles, together with the following specifically described
property: EXCLUDING AND EXCEPTING LEASEHOLD IMPROVEMENTS AND CUSTOMER
LISTS.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means NATIONAL TELEPHONE & COMMUNICATIONS,
INC., its successors and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the
word "Indebtedness" includes all other obligations, debts and liabilities,
plus interest thereon, of Grantor, or any one or more of them, to Lender,
as well as all claims by Lender against Grantor, or any one or more of
them, whether existing now or later; whether they are voluntary or
involuntary, due or not due, direct or indirect, absolute or contingent,
liquidated or unliquidated; whether Grantor may be liable individually or
jointly with others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable. (Initial Here /s/ VCS)
LENDER. The word "Lender" means FIRST BANK & TRUST, its successor and
assigns.
NOTE. The word "Note" means the note or credit agreement dated March 27,
1997, in the principal amount of $5,000,000.00 from NATIONAL TELEPHONE &
COMMUNICATIONS, INC. to Lender, together with all renewals of, extensions
of, modifications of, refinancings of, consolidations of and substitutions
for the note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's Interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the Indebtedness is paid in full and
even though for a period of time Grantor may not be indebted to Lender.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of Intangible property such as accounts,
the records concerning the Collateral) at Grantor's address shown above,
or at such other locations as are acceptable to Lender. Except in the
9
<PAGE>
Loan No. 9730000139 (Continued)
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ordinary course of its business, including the sales of inventory, Grantor
shall not remove the Collateral from its existing locations without the
prior written consent of Lender. To the extent that the Collateral
consists of vehicles, or other titled property, Grantor shall not take or
permit any action which would require application for certificates of title
for the vehicles outside the State of California, without the prior written
consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if
junior in right to the security interests granted under this Agreement.
Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust for Lender and
shall not be commingled with any other funds; provided however, this
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor is
in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral is
not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest Grantor shall
defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as
an additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive
the payment of the indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at lease ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed with six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at lease fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid.
If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender.
The reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of determining
that value; and (f) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
indebtedness.
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03-27-1997 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 9730000139 (Continued)
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EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b) if the cure requires more than fifteen (15) days, immediately initiates
steps which Lender deems in Lender's sole discretion to be sufficient to
cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
lease ten (10) days, or such lesser time as required by state law, before
the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether or
not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or storage
of any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of Orange
County, the State of California. Lender and Grantor hereby waive
the rights to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Grantor against the other. (Initial Here VCS)
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
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Loan No. 9730000139 (Continued)
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ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Grantor, shall constitute a waiver
of any of Lender's rights or of any of Grantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH 27,
1997.
GRANTOR:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
----------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
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MASTER ADDENDUM TO LOAN DOCUMENTS
This MASTER ADDENDUM TO LOAN DOCUMENTS (this "ADDENDUM") dated as of
March 27, 1997, is made between National Telephone & Communications, Inc. (the
"BORROWER") and First Bank & Trust (the "LENDER").
RECITALS
WHEREAS, the Borrower and the Lender are parties to the Business Loan
Agreement, dated as of March 27, 1997 (the "CREDIT AGREEMENT"), pursuant to
which the Lender shall extend credit to the Borrower in an aggregate principal
amount not exceeding $5,000,000 to finance the purchase of the Borrower's
headquarters and for other commercial purposes;
WHEREAS, the Borrower shall, contemporaneously with the execution of
this Agreement, execute a Promissory Note, dated as of March 27, 1997 (the
"NOTE") in favor of the Lender in an aggregate principal amount of $5,000,000
and enter into Commercial Security Agreement, dated as of March 27, 1997 (the
"SECURITY AGREEMENT"), pursuant to which the Borrower shall grant to the Lender
a security interest in certain property of the Borrower as security for the
Borrower's obligations under the Credit Agreement and the Note; and
WHEREAS, the Borrower and the Lender have agreed that the Credit
Agreement, the Note, the Security Agreement and all Related Documents (as
defined below) shall be modified and amended in the respects set forth below.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements set forth below and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined in this
Addendum shall have the meanings assigned to such terms in the Credit Agreement.
Section 2. AMENDMENTS TO THE CREDIT AGREEMENT.
2.01 AMENDMENTS TO "DEFINITIONS".
(a) The "Definitions" section of the Credit Agreement is amended by
adding the following new definitions in the correct alphabetical order:
"INITIAL PUBLIC OFFERING. The words "Initial Public Offering" mean, the
initial public offering by Incomnet, Inc. of certain of Borrower's equity
as previously disclosed to Lender by Borrower and pursuant to that certain
letter agreement dated January 28, 1997 between Borrower and Incomnet, Inc.
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"TOTAL LIABILITIES. The words "Total Liabilities" mean, as at any date, all
liabilities of Borrower as reflected on the Borrower's balance sheet for
such date, excluding any and all deferred income and minority interests of
Borrower.
(b) The "Definitions" section of the Credit Agreement is amended by
replacing subsection (e) of the definition of "Permitted Liens" with the
following new subsection (e):
"(e) liens and security interests of Borrower which are in existence as of
the date of this Agreement;"
2.02 AMENDMENTS TO "REPRESENTATIONS AND WARRANTIES". The "Representations
and Warranties" section of the Credit Agreement is amended as follows:
(a) The "Properties" representation is amended by adding the words
"Permitted Liens or" after the words "except for" contained in the second line
of such representation.
(b) The "Hazardous Substances" representation is amended by deleting
the third and fourth sentences in their entirety.
(c) The "Taxes" representation is replaced with the following new
representation:
"TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except (a) those that Borrower believes in good faith are not yet due and
payable or those presently being or to be contested by Borrower in good
faith in the ordinary course of business and (b) for which adequate
reserves have been provided."
(d) The "Lien Priority" representation is amended by adding the words
", other than Permitted Liens" after the words "Security Interests" in the
second line of such representation.
(e) The "Commercial Purposes" representation is replaced with the
following new representation:
"COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
the acquisition of certain real property and other business or commercial
related purposes."
2.03 WAIVER OF "CONDITION PRECEDENT TO EACH ADVANCE". Lender hereby agrees
that the provision of evidence of insurance as required by subsection (c) of
this section may be provided within thirty days subsequent to the date of this
Addendum.
2.04 AMENDMENTS TO "AFFIRMATIVE COVENANTS". The "Affirmative Covenants"
section of the Credit Agreement is amended as follows:
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(a) The "Taxes, Charges and Liens" covenant is amended by adding the
following words at the beginning of subclause (a) "Borrower believes in good
faith such amount is not yet due and payable or;
(b) The "Compliance Certificate" covenant is replaced with the
following new covenant:
"COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender (a) within 45 days of the last day of each of the first three
fiscal quarters of Borrower and (b) within 90 days of the last day of
the fourth fiscal quarter of Borrower, with a certificate executed by
Borrower's chief financial officer, or other officer or person
acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the
date of the certificate (or, if stated to be made solely as of an
earlier date, were true and correct as of such date) and further
certifying that, as of the date of the certificate, no Event of
Default exists under this Agreement."
2.05 AMENDMENT TO "NEGATIVE COVENANTS". The "Negative Covenants" section of
the Credit Agreement is amended as follows:
(a) The "Indebtedness and Liens" section is amended by (i) adding the
words "indebtedness that is in existence as of the date of this Agreement and"
after the word "Except" in subsection (a) of such section, (ii) adding the words
"and indebtedness which would be secured by a Permitted Lien," after the words
"this Agreement" in the second line of subsection (a) of such section and (iii)
replacing the word "including" with the word "other" in the second line of
subsection (a) of such section;
(b) The "Continuity of Operations" section is amended as follows: (i)
by deleting the words "change ownership" in subsection (b) of such section, (ii)
by adding the words "after the occurrence of an Event of Default," before the
words "pay any dividends" in subsection (c) of such section and (iii) by adding
at the end of such section the words "other than in connection with the Initial
Public Offering"; and
(c) The "Loans, Acquisitions and Guaranties" section is amended by
adding the words "Except as provided in the "Additional Provisions" section
below," at the beginning of subsection (a) of such section.
2.06 AMENDMENT TO "EVENTS OF DEFAULT". The "Events of Default" section of
the Credit Agreement is amended by deleting the "Change in Ownership" default.
2.07 AMENDMENT TO "MISCELLANEOUS". The "Miscellaneous" section of the
Credit Agreement is amended by adding the following new sentence to the end of
the "Consent of Loan Participation Section":
"Notwithstanding anything to the contrary contained in the foregoing
or in this Agreement, Lender agrees to hold at least $5,000,000 of the
Loans and remain the "lead bank" or "agent" with respect to the
administration of the Loans and the Collateral."
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Section 3. AMENDMENTS TO THE NOTE.
3.01 AMENDMENT TO "PAYMENT". The first sentence of the "Payment" section of
the Note is amended to read as follows:
"Borrower will pay this loan in one payment of all outstanding
principal (plus all accrued interest not paid pursuant to the
following sentence) on April 30, 1998."
3.02 AMENDMENT TO "GENERAL PROVISIONS". The "General Provisions" section of
the Note is amended by deleting the first two sentences of such section.
Section 4. AMENDMENTS TO THE SECURITY AGREEMENT.
4.01 AMENDMENT TO "DEFINITIONS". The "Definitions" section of the Security
Agreement is amended by adding the following to the list of excluded property of
Borrower. ", ANY ARCHITECTURAL DESIGN AND DEVELOPMENT COSTS AND ANY PRE-PAID
COSTS REFLECTED AS AN ASSET ON THE FINANCIAL STATEMENTS OF BORROWER AND RELATED
TO THE LEASEHOLD IMPROVEMENTS OR REAL PROPERTY TO BE PURCHASED BY BORROWER, ANY
CUSTOMER LISTS AND ALL NOTES RECEIVABLE OF A CERTAIN JIM CARTER TO BORROWER.
4.02 AMENDMENT TO "TITLE". The "Title" section of the Security Agreement is
amended (i) by adding the words "and except for Permitted Liens" at the end of
the first sentence of such section and (ii) by adding the words "and other than
those relating to Permitted Liens" at the end of the second sentence to such
section.
4.03 AMENDMENT TO "TAXES, ASSESSMENTS AND LIENS". The "Taxes, Assessments
and Liens" section of the Security Agreement is amended by replacing the second
sentence of such section with the following:
"Grantor may withhold any such payment or may elect to contest any
lien if Grantor in good faith believes that such amount is not yet due
and payable or Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's
interest in the Collateral is not jeopardized in Lender's sole
opinion."
Section 5. REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants as follows:
(a) this Addendum constitutes the legal, valid and binding
obligation of such party enforceable against such party in accordance with
its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability; and
(b) none of the execution and delivery by such party of
this Addendum, the consummation of the transactions contemplated by
this Addendum
16
<PAGE>
does or will conflict with, violate any provision of, or require any
consent under, the charter or by-laws of such party.
Section 6. CONDITIONS TO EFFECTIVENESS. This Addendum shall be and become
effective upon the execution and delivery by the parties of this Addendum, the
Credit Agreement, the Note, the Security Agreement and each Related Document.
Section 7. REFERENCE TO AND EFFECT ON THE AFFECTED DOCUMENTS. This Addendum
shall be construed as one with the Credit Agreement, the Note, the Security
Agreement and the Related Documents, and each such document shall, where the
context requires, be read and construed throughout so as to incorporate this
Addendum.
Section 8. ENTIRE AGREEMENT. This Addendum, together with the Credit
Agreement, the Note, the Security Agreement and each Related Document supersede
all prior agreements and understandings, written or oral, among the parties with
respect to the subject matter of this Addendum. No party shall have any duties
or responsibilities except those expressly set forth in the Credit Agreement,
the Note, the Security Agreement and each Related Document (as from time to time
amended, including by this Addendum).
Section 9. SUCCESSORS AND ASSIGNS. This Addendum shall be binding upon and
inure to the benefit of its parties and their respective successors and
permitted assigns.
Section 10. COUNTERPARTS. This Addendum may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties to this Addendum may execute this Addendum by
signing any such counterpart.
Section 11. GOVERNING LAW. THIS ADDENDUM HAS BEEN DELIVERED TO BY EACH
PARTY HERETO AND ACCEPTED BY SUCH PARTY IN THE STATE OF CALIFORNIA. IF THERE IS
A LAWSUIT, EACH PARTY AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF
ORANGE COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE
RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS ADDENDUM SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be duly
executed and delivered as of the day and year first above written.
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
----------------------------------------
Name: Victor C. Streufert
Title: VP, CFO
FIRST BANK & TRUST
By: /s/ K.P. Balkrishna
----------------------------------------
Name:
Title: Sr. V.P.
18
<PAGE>
National Telephone & Communications, Inc.
March 26, 1997
Page five
ACCEPTANCE:
This proposal to extend credit shall expire, unless accepted in writing, on
or before 5:00 p.m., March 26, 1997. Please indicate your acceptance of the
foregoing agreement on or before such date by signing as indicated below.
We appreciate the opportunity to make this proposal to you and we hope that it
lays the foundation for a long and mutually beneficial relationship.
Sincerely,
/s/ K.P. Balkrishna
- --------------------------------
K.P. Balkrishna
Senior Vice President
Regional Manager
The undersigned hereby accepts the foregoing Agreement on the terms and
conditions set forth therein.
/s/ Victor C. Streufert
- --------------------------------
(Name)
VP, CFO
- --------------------------------
(Title)
19
<PAGE>
EXHIBIT 21
INCOMNET, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage
of voting
State or other jurisdiction of securities
Name incorporation or organization owned
- ------- ------------------------------ ----------
<S> <C> <C>
Incomnet India Limited India 32%
Rapid Cast, Inc. New Jersey 35%
National Telephone & Nevada 100%
Communications, Inc.
</TABLE>
59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS, BALANCE SHEETS AND STATEMENTS
OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,214
<SECURITIES> 0
<RECEIVABLES> 15,130
<ALLOWANCES> 1,993
<INVENTORY> 2,760
<CURRENT-ASSETS> 20,204
<PP&E> 18,151
<DEPRECIATION> 3,794
<TOTAL-ASSETS> 40,587
<CURRENT-LIABILITIES> 30,922
<BONDS> 1,040
0
2,355
<COMMON> 61,320
<OTHER-SE> (55,049)
<TOTAL-LIABILITY-AND-EQUITY> 20,204
<SALES> 106,905
<TOTAL-REVENUES> 106,905
<CGS> 68,562
<TOTAL-COSTS> 68,562
<OTHER-EXPENSES> 89,860
<LOSS-PROVISION> 10,989
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (51,517)
<INCOME-TAX> (7,812)
<INCOME-CONTINUING> (43,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (877)
<NET-INCOME> (37,676)
<EPS-PRIMARY> (2.82)
<EPS-DILUTED> (2.82)
</TABLE>
