<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT No. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 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
Number of shares of registrant's common stock outstanding as of
March 31, 1997........................................................13,550,000
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ IN 000s)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 2,164 $ 2,214
Accounts receivable, including $460 and $267 due from related
party at March 31, 1997 and December 31, 1996, respectively
and less allowance for doubtful accounts of $1,065 at
March 31, 1997 and $1,078 at December 31, 1996 14,192 13,137
Notes receivable - current portion 471 323
Notes receivable from officers & shareholders, net of
reserves of $209 795 438
Inventories 326 2,760
Other current assets 1,086 1,332
------- --------
Total current assets 19,034 20,204
Property, plant and equipment, at cost, net 14,139 14,537
Patent rights, net 1,241
Goodwill, net 4,468 4,542
Investment in marketable securities 191
Deposits and other 357 376
Investments, notes receivable and other assets 223 243
------- --------
Total assets $38,222 $ 40,587
------- --------
------- --------
2
<PAGE>
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $12,438 $ 14,746
Accrued expenses 7,601 8,217
Current portion of notes payable 220 3,918
Deferred income 3,313 4,040
------- --------
Total current liabilities 23,572 30,921
Notes payable 925 1,041
Liability in excess of asset 3,952
Commitments (Note 12)
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; and 13,553,229 shares at March 31,
1997 and 13,369,681 shares issued and outstanding
at December 31, 1996 61,785 61,320
Preferred stock, no par value; 100,000 shares authorized;
2,075 shares issued and outstanding at March 31, 1997 and
2,440 shares issued and outstanding at December 31, 1997 1,990 2,355
Treasury stock (5,492) (5,492)
Additional paid in capital 36
Accumulated deficit (48,547) (49,557)
------- --------
Total shareholders' equity 9,772 8,626
------- --------
Total liabilities, minority interest & shareholders' equity $ 38,221 $ 40,587
------- --------
------- --------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
3
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
($ in 000s)
1997 1996
----------- -----------
SALES $ 31,169 $ 24,399
----------- -----------
OPERATING COSTS & EXPENSES:
Cost of sales 21,531 15,906
General & administrative 6,159 6,290
Depreciation & amortization 665 429
Bad debt expense 1,697 1,091
Other (income)/expense (83) 69
NTC Acquisition - goodwill amortization 74 74
RCI Acquisition - patent rights amortization 503
RCI Acquisition - interest and legal 6
----------- -----------
Total costs & expenses 30,043 24,363
----------- -----------
Income before income taxes,
extraordinary items & minority interest 1,126 31
INCOME TAXES 107 94
----------- -----------
Income before extraordinary items &
minority interest 1,019 (63)
MINORITY INTEREST 480
EXTRAORDINARY ITEMS 9 --
----------- -----------
Net income $ 1,010 $ 417
----------- -----------
----------- -----------
INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ .07 $ .03
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 13,550,000 13,278,242
----------- -----------
----------- -----------
See accompanying "Notes to Consolidated Financial Statements."
4
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
($ in 000s)
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,010 $ 417
Minority interest -- (480)
Depreciation & amortization - operations 665 429
Depreciation & amortization - acquisitions 74 577
Other -- 74
------- ------
Net cash inflow/(outflow) from operating activities 1,749 1,017
------- ------
CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS:
Accounts receivable (1,055) 416
Notes receivable - current portion (147) (113)
Notes receivable - due from officers and shareholders (357) (65)
Inventories 2,434 443
Prepaid expenses & other 245 (188)
Notes receivable - long term 155
Deferred tax (41)
Deposits & other (148) (52)
------- ------
Net cash inflow/(outflow) from changes in
operating assets 931 596
------- ------
CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES:
Accounts payable (2,308) 299
Accrued expenses (616) (384)
Deferred income (727) 71
------- ------
Net cash inflow/(outflow) from changes in operating liabilities (3,651) (14)
------- ------
Net cash inflow/(outflow) from operations (971) 1,577
------- ------
CASH FLOWS FROM (INCREASE)/DECREASE IN INVESTING ACTIVITIES:
Acquisition of plant & equipment (447) (2,162)
Organization cost (184)
Patents/intangible assets 1,241 (36)
Investment in Lab Tech 35
Investment in RCI
Liability in excess of asset 3,952
------- ------
Net cash inflow/(outflow) from investing activities 4,597 2,198
------- ------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
5
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, (CONT'D)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM INCREASE/(DECREASE) IN FINANCING ACTIVITIES:
Bank overdraft --
Minority interest (1)
Notes payable - current (3,698) 158
Sale of common stock, net 465 147
Preferred Stock (365)
Treasury stock --
Notes payable - long term (114) 495
Paid in capital 36 --
Prior period adjustment to retainer earnings --
Change in valuation allowance --
------- -------
Net cash inflow/(outflow) from financing activities (3,676) 799
------- -------
Net cash inflow/(outflow) from investing & financing 921 (1,399)
------- -------
Net increase/(decrease) in cash & cash equivalents $ (50) $ 200
------- -------
------- -------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
6
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
1. MANAGEMENT'S REPRESENTATION:
The consolidated financial statements included herein have been prepared by the
management of Incomnet, Inc. (the Company) without audit. Certain information
and note disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the consolidated financial
statements have been included and were of a normal recurring nature, and the
accompanying consolidated financial statements present fairly the financial
position as of March 31, 1997, and the results of operations for the three
months ended March 31, 1997 and 1996, and cash flows for the three months March
31, 1997 and 1996.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes for the three
years ended December 31, 1996, included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission on April 15, 1997. The
interim results are not necessarily indicative of the results for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, National Telephone &
Communications-Registered Trademark-, Inc. (NTC). The statements do not include
consolidated results of Rapid Cast, Inc., the Company's 35%-owned subsidiary,
which is accounted for using the equity method of accounting under FASB
Statement No. 94. The Company accounted for RCI using the consolidated method of
accounting from the third quarter of 1995 until December 31, 1996 because the
Company owned 51% of RCI. In January 1997, the Company's ownership changed from
51% of RCI to 35% and, as a result, the method of accounting has changed to the
equity method under FASB Statement No. 94.
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
revenues when the cash is received, and recognized as revenue as the
telephone service is utilized. The reserve for deferred revenues is carried
on the balance sheet as an accrued liability. Long distance telephone
service sales in the three months ending March 31, 1997 totaled $25.1 million
versus long distance telephone service sales of $20.3 million in the three
months ending March 31, 1996, an increase of 24%.
(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
7
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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 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 is deferred and recognized over a twelve month period
to accrue the Company's obligation to provide customer support to its
independent representatives. For the three months ending March 31, 1997,
marketing sales totaled $5.7 million versus marketing sales of $2.7 million
for the three months ended March 31, 1996, an increase of 113%.
(3) The Company's network service revenues are recognized as sales as the
service is delivered. Network service sales in the three months ending March
31, 1997 totaled $0.4 million versus $0.3 million in the three months ending
March 31, 1996.
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. Rapid Cast sells its optical products both
domestically and internationally. Reserves for uncollectible amounts are
provided, which management believes are sufficient.
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 the assets' estimated useful lives of 5 to
10 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 the assets' estimated
useful lives of 3 to 10 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 PER SHARE - Net income per common share is based on the weighted
average number of common shares for 1997, and common shares and common share
equivalents for 1996.
ACQUISITION AMORTIZATION - The excess of purchase price over net assets of
NTC has been recorded as an intangible asset and is being amortized by the
straight-line method over twenty years.
DEFERRED TAX LIABILITY - Deferred income taxes result from temporary
differences in the basis of assets and liabilities reported for financial
statement and income tax purposes.
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 reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
3. Funding of Marketing Commissions and Deferred Income:
8
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
The Company's subsidiary, NTC, maintains separate bank accounts for the payment
of marketing commissions. Funding of these accounts 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.
IMPAIRMENT OF LONG LIVED ASSETS: In accordance with the provisions of SFAS No.
121, the Company regularly reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount to the assets may not be recoverable.
CURRENT ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board has
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages
companies to account for stock compensation awards based on their fair value at
the date the awards are granted. This statement does not require the application
of fair value method and allows the continuance of current accounting method,
which requires accounting for stock compensation awards based on their intrinsic
value as of the grant date. However, SFAS No. 123 requires pro forma disclosure
of net income and, if presented, earnings per share, as if the fair value based
method of accounting defined in this statement has been applied. The accounting
and disclosure requirements of this statement are effective for financial
statements for fiscal years beginning after December 15, 1995, although earlier
adoption is encouraged. The Company has elected not to adopt the fair value
provisions of this statement.
4. NETWORK MARKETING COSTS:
During the three months ending March 31, 1997, NTC's net costs to operate its
network marketing program was $0.5 million versus $0.7 million for the three
months ended March 31, 1996, as summarized below (in $ millions):
3 Months Ending 3 Months Ending
March 31, 1997 March 31, 1996
--------------- --------------
Sales $ 5.7 $ 2.7
------- -----
Cost of sales 4.9 2.5
Operating expenses for support services 1.3 0.9
------- -----
Total marketing-related costs 6.2 3.4
------- -----
Net marketing cost $ 0.5 $ 0.7
------- -----
------- -----
% of total NTC (long distance &
marketing) sales 1.8% 3.2%
9
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
Marketing sales of $5.7 million for the three months ended March 31, 1997 and
$2.7 million for the three months ended March 31, 1996 were 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. 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 equal to approximately $.09 million is shown as a cumulative
effect adjustment. When the three month marketing-related costs of $6.2
million is compared against marketing-related revenues of $5.7 million the
result is $0.5 million in net marketing-related activities during the three
months ended March 31, 1997 versus a net cost of $0.7 million in marketing
related activities during the three months ended March 31, 1996.
5. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES:
The Company's subsidiary, NTC, compensates its independent sales
representatives by an earned commission structure based upon signing up new
telephone customers and based upon the telephone usage generated by those
customers. In the three months ending March 31, 1997, expenses associated
with commissions, bonuses and overrides paid out to NTC's independent
representatives were $5.4 million versus $3.3 million for the three months
ended March 31, 1996.
6. COMMITMENTS AND CONTINGENCIES:
Litigation - The Company is a defendant in a class action matter and related
lawsuits alleging securities law violations 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 the
former Chairman of the Board and one of his affiliates. Counsel for the Company
is unable to estimate the ultimate outcome of these matters and is unable to
predict a range of potential loss. Accordingly, no amounts have been provided
for the class action or related lawsuits 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.
7. SUBSEQUENT EVENT:
In April 1997, NTC 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
10
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
for office space in Honolulu, Hawaii, with the lease expiring in 2007. The
monthly payments on the lease in Honolulu 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW:
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 Cautionary Statements. See "Part II. Cautionary Statements".
LIQUIDITY AND CAPITAL RESOURCES:
GENERAL - Overall, the Company achieved slightly negative cash flows of
$50,000 during the first three months of 1997 resulting from negative cash
flows from operations ($971,000) which were almost entirely offset by
positive cash flows from investing $4.6 million less negative cash flow from
financing activities ($3.7 million) as discussed below:
CASH FLOW FROM OPERATIONS - The Company generated $971,000 in negative cash
flow from operations during the first nine months of 1996, compared to $1.6
million in positive cash flow from operations during the prior year's
comparable period. This year-to-year decrease in cash flow from operations
resulted primarily from: (1) a $1.1 million increase in profits adjusted for
non-cash expenses, offset by (2) a $1.1 million increase in accounts
receivable, and (3) a $2.3 million decrease in accounts payable. Much of the
changes in operating assets arise from the change in accounting for the Rapid
Cast subsidiary, which was presented on the consolidated basis at December
31, 1996, but because Incomnet's ownership diminished to approximately 33%
during the first quarter, was presented on the equity method of accounting at
March 31, 1997.
CASH FLOW FROM INVESTING - The Company generated positive cash flows from
investing activities of $4.6 million in the first three months of 1997 and
negative cash flows of ($2.2 million) in the first three months of 1996.
CASH FLOW FROM FINANCING - Positive cash flows from investing activities of
$4.6 million were offset by negative cash flow from financing activities of
($3.7 million) during the first three months of 1997, due principally from
the change in method of accounting for the Rapid Cast subsidiary.
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.
12
<PAGE>
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 "Part II. Item 1.
Legal Proceedings."
RESULTS OF OPERATIONS:
SALES - First quarter, 1997 sales of $31.2 million increased 28% over the
first quarter, 1996 sales of $24.4 million. The majority of this increase
was attributable to NTC's sales increase to $30.8 million from $23.0 million
in the three months ending March 31, 1997 as compared to the same period in
1996, respectively. The following table summarizes the Company's sales
performance by subsidiary and segment during the comparable first quarters in
1997 and 1996:
$ in millions
-----------------
Subsidiary Segment 1997 1996
- --------------- --------------------------------------- ---- ----
NTC Telephone (telecommunications services) $25.1 $20.3
NTC Telephone (marketing programs) 5.7 2.7
RCI Optical -- 1.1
AutoNETWORK Network 0.4 0.3
----- -----
Total Company Sales $31.2 $24.4
----- -----
----- -----
COST OF SALES - Total Company cost of sales increased to $21.5 million or 69% of
sales during the quarter ending March 31, 1997 versus $15.9 million or 65% of
sales during the comparable prior year quarter. The quarter-to-quarter increase
in cost of sales resulted largely from increasing carrier costs associated with
increased telephone service sales by NTC.
The following table summarizes the Company's changes in three major cost
components for the first quarter:
$ in millions
-------------------
1997 1996
------ -------
Commissions paid to NTC independent sales reps $ 5.4 $ 3.5
Carrier costs for NTC's long distance telephone 15.9 12.2
AutoNETWORK .2 .2
------ -------
Total Cost of Sales (excluding
$0.7 million of costs relating to RCI in 1996) $ 21.5 $ 15.9
------ -------
------ -------
13
<PAGE>
NTC's total commission expense increased to $5.4 million in the first quarter
of 1997 compared to $3.5 million in the same quarter of 1996. NTC's carrier
costs to deliver long distance telephone service to its telephone customers
increased to $15.9 million in the first quarter of 1997 compared to $12.2
million in the first quarter of 1996. This increase in carrier costs reflects
the year-to-year growth in telephone sales, although these costs have grown
at a slower pace than sales, thus reflecting improvements in overall
telephone gross profits. The third cost component shown in the table above is
the AutoNETWORK division's costs of providing communications network products
and services.
GENERAL & ADMINISTRATIVE - Total general and administrative costs decreased
to $6.2 million or 20% of sales in the quarter ending March 31, 1997 compared
to $6.3 million or 26% of sales in the same prior year quarter. General and
administrative costs generally include the costs of employee salaries, fringe
benefits, supplies, and related support costs which are required in order to
provide such operating functions as customer service, billing, marketing,
product development, information systems, collections of accounts receivable,
and accounting. The reduction in the current quarter primarily reflects the
elimination of Rapid Cast.
NTC's general and administrative costs decreased to 18% of sales in the first
quarter of 1997 from 21% of sales in the first quarter of 1996. This reduction
is caused largely by increases in sales volume without a corresponding increase
in the overhead structure. During 1996 NTC made significant expenditures in
building its infrastructure to support future sales growth.
DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization
expense was $665,000 in the first quarter of 1997 verses $429,000 in the
first quarter of 1996. This increase was caused by continuing investment by
NTC in computer hardware and software, furniture and equipment, and leasehold
improvements required to support its anticipated expansion in sales.
BAD DEBT EXPENSE - Total Company bad debt expense increased to $1.7 million in
the first quarter of 1997 compared to $1.1 million in the same prior year
quarter. The quarter-to-quarter increase in bad debt was caused primarily by
increases in sales volumes.
ACQUISITION COSTS & EXPENSES - Acquisition costs decreased to $74,000 during
the first quarter of 1997 compared to $583,000 during the first quarter of
1996. This decrease was primarily caused by writing off in the third and
fourth quarters of 1996 the total patent rights acquired when the Company
acquired 51% of RCI in 1995 in the third and fourth quarters of 1996.
Acquisition costs & expenses in the first quarter of 1997 were related to the
acquisition of NTC in 1992.
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, $480,345, or 49% (the "minority interest") of RCI's losses
during the three months ending March 31, 1996, has been eliminated from the
Company's "Consolidated Statements of Operations" for 1996 and, therefor, no
RCI revenues or expenses are recognized after that date. On January 1, 1997,
the Company converted back to the equity method of accounting.
NET INCOME - Total Company net income increased to $1 million or 3.2% of sales
in the first quarter of 1997 as compared to net income of $417,000 or 1.7% of
sales in the first quarter ended March 31,
14
<PAGE>
1996. The quarter-to-quarter increase in net income resulted from no longer
recording losses incurred at the Rapid Cast subsidiary.
15
<PAGE>
PART II - OTHER INFORMATION
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-Q 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 Quarterly 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 or
its subsidiaries' products, technical problems with the Company's or its
subsidiaries' 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 Quarterly 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.
ITEM 1. LEGAL PROCEEDINGS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
The investigation of the Company by the SEC, which was commenced in August
1994, has not experienced any material changes from its status as described
in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year
ending December 31, 1996.
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The Company continues to believe that it has provided substantial
documentation to the Commission that demonstrates the propriety of its
business operations and that the ultimate result of the investigation will
not have a material adverse effect on the Company's financial condition or
results of operations.
CLASS ACTION AND RELATED LAWSUITS:
The status of the pending class action lawsuit described in "Item 3. Legal
Proceedings" in the Company's Form 10-K for its fiscal year ending December
31, 1996, SANDRA GAYLES, ET AL. VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case
No. CV95-0399 KMW (BQRx), has materially changed since the filing of the Form
10-K for the fiscal year ending December 31, 1996 in the following manner:
On May 6, 1997, the court in the pending class action lawsuit SANDRA GAYLES
ET AL. VS. SAM D. SCHWARTZ AND INCOMNET, INC. ruled that approximately 20
former shareholders of the Company have the right to "opt out" of the class
action lawsuit and file their own separate lawsuit against the Company and Sam
D. Schwartz, the Company's former President. The Company expects these
potential plaintiffs to file a separate lawsuit against it and its former
President in the near future. The potential plaintiffs purchased the
Company's stock in the open market through Everest Securities, a brokerage
firm which has since terminated its business. The potential claims are
expected to be based on alleged violations of applicable securities laws,
because of alleged statements made by the Company's former President to the
securities broker at Everest Securities in 1995. The amount of damages to be
sought by the potential plaintiffs is not yet known. The Company intends to
vigorously defend the claims if they are asserted against it.
In a hearing on May 5, 1997, the plaintiffs in a 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 ANTILLANO, 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 and transferred in March 1997 to the same court
in California which is hearing the pending class action lawsuit, were allowed
to continue as a separate pleading from the class action lawsuit. As such,
the Company anticipates that it will be involved in a separate lawsuit with
the SILVA RUN WORLDWIDE LIMITED plaintiffs as described in "Item 3. Legal
Proceedings" in the Company's Form 10-K for its fiscal year ending December
31, 1996.
INCOMNET, INC. VS. SAM D. SCHWARTZ:
On April 25, 1997, the Company filed a lawsuit against Sam D. Schwartz, its
prior President and Chairman of the Board, alleging fraud, breach of
fiduciary duty, negligence, declaratory relief, breach of contract and
imposition of constructive trust. The lawsuit was filed in the Superior Court
of California in the County of Los Angeles. In the lawsuit, the Company
alleges that Mr. Schwartz failed to disclose to the Company or its board of
directors that he would obtain a direct financial benefit in connection with
certain transactions considered or entered into by the Company during the
period from 1993 to 1995. The Company further alleges that Mr. Schwartz
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fraudulently induced the Company to enter into a Severance Agreement between
him and the Company in November 30, 1995 (see "Item 1. Business - Employees,
Officers and Directors - Officers" in the Company's Form 10-K for the fiscal
year ending December 31, 1995), and that he breached his fiduciary duty to
the Company by self-dealing, acting in bad faith and concealing material
facts. The Company seeks payment from Mr. Schwartz of the actual damages
incurred by it as a result of Mr. Schwartz's conduct, as well as interest,
punitive damages, attorney's fees and costs and reimbursements of all
payments previously made to Mr. Schwartz pursuant to the Severance Agreement.
Furthermore, the Company seeks a declaratory order that Mr. Schwartz
committed acts or omissions involving known misconduct, the absence of good
faith, an improper personal benefit, a reckless disregard of his duties to
the Company and its shareholders, an unexcused pattern of inattention, and
a violation of Sections 310 and 316 of the California Corporations Code. The
Company cannot predict at this time the outcome of the case or the effect it
may have on the operating results, financial condition or business
performance of the Company or its subsidiaries.
In addition to the above changes to the status of the class action lawsuit,
the case currently remains in the discovery phase and the parties continue to
engage in settlement discussions.
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. The status of
that case has not materially changed since the filing of the Form 10-K for
the fiscal year ending December 31, 1996, except as follows: Notice of the
settlement was given to the shareholders on or about 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.
LEGAL ACTION AGAINST PRIOR REPRESENTATIVES:
The status of the pending lawsuit by NTC against certain of its prior
representatives described in "Item 3. Legal Proceedings" in the Company's
Form 10-K for its fiscal year ending December 31, 1996, has not materially
changed since the filing of the Form 10-K.
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. 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 Form 10-K for the fiscal
year ending December 31, 1995. If such claims are filed as legal complaints,
the Company will seek to have them consolidated with
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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.
ITEM 2. CHANGES IN SECURITIES
Item 2 is not applicable for the three months ended March 31, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Item 3 is not applicable for the three months ended March 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4 is not applicable for the three months ended March 31, 1997.
ITEM 5. OTHER INFORMATION
LOAN TO ROBERT AND NANCY ZIVITZ:
On November 5, 1996, the Company loaned $265,000 to Robert and Nancy Zivitz
for a period of 90 days, at an interest rate of 10% per annum. Nancy Zivitz
is a member of the Company's Board of Directors. The loan was approved by a
vote of the Company's Board of Directors on October 11, 1996 and is secured
by 201,800 shares of the Company's stock held in the name of Robert Zivitz.
On February 5, 1997, the maturity date of the loan was extended by the
Company until December 31, 1997.
ACQUISITION OF CALIFORNIA INTERACTIVE COMPUTING. INC. (CIC):
GENERAL: On May 2, 1997, Incomnet, Inc. ("Company") acquired 88,370.5 shares
representing 100% of the outstanding common stock of California Interactive
Computing, Inc. ("CIC"), a private corporation headquartered in Valencia,
California. The Company agreed to pay a total of $1,758,302 in cash, payable
over a five year period of time. See Item 5. Other Information - Acquisition
of California Interactive Computing, Inc. - Schedule of Payments." In
addition, the Company has agreed to assume the outstanding balance of
$418,527.91 for loans to CIC made by two of CIC's shareholders. The Company
has also signed an employment agreement for a period of two years with Jerry
C. Buckley, CIC's former president and CEO, pursuant to which it will pay Mr.
Buckley $10,000 per month in consideration for Mr. Buckley's services as the
Director of Strategic Planning for CIC. The Company has also agreed to
provide 10,000 and 20,000 stock options, respectively, in CIC to two former
shareholders when a plan is established for CIC's officers, directors,
employees and key consultants.
CIC is engaged in the development and marketing of software that is used to
process insurance-related claims, including workers compensation, disability,
general medical and property &
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casualty. Its software is leased to companies who provide their own insurance
and claims administration, to insurance companies, and to third-party
administrators who process claims for either self-insured companies or
insurance companies. CIC was incorporated in 1977 in California and has
provided software for claims processing for 20 years.
SCHEDULE OF PAYMENTS: At the close of the transaction on May 2, 1997, the
Company paid a total of $249,818 to the former shareholders of CIC, $84,818
of which was paid to acquire CIC's stock and $165,000 of which was utilized
to pay down loans to two former CIC shareholders. The Company has signed
promissory notes in the aggregate principal amount of $1,927,016.91 to four
former shareholders of CIC to repay the balance of the loans owed by CIC
($253,527.91 as of May 2, 1997) and to pay the balance of the price to
purchase their CIC stock by the Company ($1,674,489 as of May 2, 1997). These
notes bear interest at the rate of 8% per annum. The stock of CIC purchased
by the Company is held in an escrow account until the promisory notes issued
by the Company to CIC former shareholders are repaid in full. The outstanding
balances owed on these notes can be repaid at any time, which would lower the
total amount of scheduled payments, including interest.
During the first year after the acquisition, the Company has agreed to pay
$27,859 to one shareholder in 12 equal monthly payments of principal and
interest. During the 13th - 24th month after the acquisition, the Company has
contracted to pay a total of $591,175 of principal and interest, of which
$369,136 is scheduled to be paid for the purchase of CIC stock from four
former shareholders and of which $222,039 is scheduled to pay down the
outstanding loans owed by CIC to two former shareholders.
During the 25th - 36th month after the acquisition, the Company has
contracted to pay a total of $559,662 of principal and interest, of which
$514,662 is scheduled to be paid for the purchase of CIC stock from four
former CIC shareholders and of which $45,000 is scheduled to pay off the
remaining balance of the loans owed by CIC to two former CIC shareholders.
During the 37th - 48th month after the acquisition, the Company is contracted
to pay a total of $574,572 of principal and interest for the purchase of CIC
stock from four former shareholders.
During the 49th - 60th month after the acquisition, the Company is contracted
to pay a total of $514,662 of principal and interest for the purchase of CIC
stock from four former shareholders.
DIRECTORS OF CIC: The former directors of CIC tendered their resignation,
effective at the acquisition. The Company has named Melvyn Reznick, its
President and CEO, Stephen A. Caswell, its Vice President and Corporate
Secretary, and Jerry C. Buckley, CIC's former President and CEO, to serve on
CIC's Board of Directors. Mr. Reznick will serve as Chairman, President, CEO
and CFO of CIC. Mr. Caswell will serve as Executive Vice President and
Secretary of CIC. Mr. Buckley will serve as a director. See the Company's
Report on Form 8-K, dated May 13, 1997.
PRODUCTS & SERVICES: CIC develops and markets a trademarked line of software
products designed to handle insurance-related claims processing.
Insurance-related products include GenCOMP-TM-, GenMED-TM-, GenDIS-TM-,
GenPAC-TM-, GenRISK-TM-, GenIRIS-TM- and Top Rate-TM-. In addition, CIC also
offers several computer and service-related products, including GenARS-TM-,
which is an optical disk-based information storage and retrieval system, and
GenSERVE-TM-, which is a maintenance and service program for customers.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10-1 Amended Lease Agreement for National Telephone &
Communication's Corporate headquarters at 2801 Main St.,
Irvine, California*
* Previously filed on Form 10-Q filed with the Securities and Exchange
Commission on May 15, 1997.
REPORTS ON FORM 8-K, FILED IN 1997
- ----------------------------------
20.1 Report on Form 8-K - Election of Dr. Howard Silverman As Director
& Amendment to Employment Contract of Melvyn Reznick, filed on
February 7, 1997.
20.2 Report on Form 8-K - Reincorporation of National Telephone &
Communications, Inc. filed on April 10, 1997.
20.3 Report on Form 8-K - Acquisition of California Interactive
Computing, Inc., filed on May 13, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INCOMNET, INC.
Date: July 8, 1997 /s/ Melvyn Reznick
--------------------------
Melvyn Reznick
President, CEO & CFO
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