<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
September 30, 1997...................................14,006,793
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents 1,169 $ 2,214
Accounts receivable, including $287,000 and $267,000 due from related
party at September 30, 1997 and December 31, 1996, respectively
and less allowance for doubtful accounts of $2.1 million at
September 30, 1997 and $1.9 million at December 31, 1996 18,914 13,137
Notes receivable - current portion 445 323
Notes receivable from officers & shareholders, net of reserves
of $209,000 1,009 438
Inventories 499 2,760
Other current assets 1,327 1,332
-------- --------
Total current assets 23,363 20,204
Property, plant and equipment, at cost, net 16,670 14,357
Goodwill, net 6,894 5,783
Investments, notes receivable and other assets 1,725 243
-------- --------
Total assets 48,652 $ 40,587
-------- --------
-------- --------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
2
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 14,597 $ 14,746
Accrued expenses 6,502 8,217
Current portion of notes payable 5,994 3,918
Deferred income 3,190 4,040
-------- --------
Total current liabilities 30,283 30,921
Long-term liabilities
Notes payable 1,190 1,040
Notes payable, GenSource 2,165 --
Liabilities in excess of assets 3,600 --
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; 14,006,793 shares issued and outstanding
at September 30, 1997 and 13,369,681 shares at
December 31, 1996 69,972 61,320
Preferred stock, no par value; 100,000 shares authorized;
3,909 issued and outstanding September 30, 1997 and
2,355 shares issued and outstanding at
December 31, 1996 3,698 2,355
Treasury stock (5,492) (5,492)
Accumulated deficit (56,765) (49,557)
-------- --------
Total shareholders' equity 11,413 8,626
-------- --------
Total liabilities & shareholders' equity $ 48,652 $ 40,587
-------- --------
-------- --------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
3
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996
---- ----
SALES $ 33,318 $ 27,591
-------- --------
OPERATING COSTS & EXPENSES:
Cost of sales 23,384 17,777
General & administrative 6,730 8,254
Depreciation & amortization 821 502
Bad debt expense 1,600 1,292
Other (income)/expense 11,238 10,676
-------- --------
Total operating costs and expenses 43,773 38,501
-------- --------
Income/(loss) before income taxes and minority interest (10,455) (10,910)
INCOME TAX BENEFITS/(EXPENSE) 887 (866)
-------- --------
Income/(loss) before minority interest (9,569) (10,044)
MINORITY INTEREST -- 781
Net income/(loss) $ (9,569) $ (9,263)
-------- --------
-------- --------
INCOME/(LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Net income/(loss) $ (0.70) $ (0.70)
-------- --------
-------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 13,687,977 13,244,674
---------- ----------
---------- ----------
See accompanying "Notes to Consolidated Financial Statements."
4
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
1997 1996
---- ----
SALES $ 99,341 $ 77,296
--------- --------
OPERATING COSTS & EXPENSES:
Cost of sales 69,525 49,144
General & administrative 20,740 22,083
Depreciation & amortization 2,218 1,396
Bad debt expense 3,448 3,829
Other (income)/expense 11,297 12,046
--------- --------
Total operating costs and expenses 107,228 88,498
--------- --------
Income/(loss) before income taxes and minority interest (7,886) (11,202)
INCOME TAX BENEFITS/(EXPENSE) 679 (679)
--------- --------
Income/(loss) before minority interest (7,207) (10,523)
MINORITY INTEREST -- 1,908
--------- --------
Net income/(loss) $ (7,207) $ (8,615)
--------- --------
--------- --------
INCOME/(LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Net income/(loss) $ (0.53) $ (0.65)
--------- --------
--------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING 13,687,977 13,268,050
---------- ----------
---------- ----------
See accompanying "Notes to Consolidated Financial Statements."
5
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,207) $ (10,523)
Depreciation and amortization 2,524 3,222
--------- --------
(4,683) (7,301)
-------- --------
CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS:
Accounts receivable (5,777) (372)
Notes receivable - current (122) (67)
Notes receivable - due from officers (571) 711
Inventories 2,261 (1,101)
Prepaid expenses and other& (5) (1,374)
Notes receivable - long term - 155
Deposits and other (1,481) (20)
-------- --------
(5,695) (2,068)
-------- --------
CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES
Accounts payable (149) 2,225
Accrued expenses (1,715) 869
Deferred income (850) 528
-------- --------
(2,714) 3,622
-------- --------
Net cash flow from operations (13,092) (5,747)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of plant and equipment (3,725) (5,159)
Patents/intangible assets - (162)
Investment in Lab Tech - 66
Goodwill from acquisition of GenSource (2,223)
Liability in excess of assets 3,600
Goodwill from acquisition of NTC - 222
Goodwill from acquisition of RCI - 8,000
-------- --------
Net cash flow from investing activities (2,348) 2,967
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable - current - 3,146
Sale of common stock, net 8,651 436
Preferred stock 1,343
Notes payable - long term 4,391 (876)
Other - net 10 46
-------- --------
Net cash flow from financing activities 14,395 2,752
-------- --------
Net increase/(decrease) in cash and equivalents $ (1,045) $ (28)
-------- --------
-------- --------
See accompanying "Notes to Consolidated Financial Statements."
6
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 September 30, 1997, and the
results of operations for the three and nine months ended September 30, 1997
and 1996, and cash flows for the nine months ended September 30, 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 14,
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 subsidiaries, National
Telephone & Communications-TM-, Inc. (NTC) and GenSource-TM- Corporation
(GenSource - see "Item 5. Change of Name From California Interactive
Computing, Inc. to GenSource Corporation"). The statements do not include
consolidated results of Rapid Cast, Inc., the Company's 22%-owned
subsidiary, which is accounted for using the equity method of accounting. 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%, as a result, the method of accounting has changed to the equity
method. In June 1997, the Company's ownership position changed to 22%.
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 and nine months ending September 30, 1997
totaled $28.7 million and $83.5 million, respectively versus long distance
telephone service sales of $21.1 million and $61.6 million, respectively in
the three months and nine months ending September 30, 1996.
(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 Home
Study 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 and nine months ending September 30, 1997, marketing sales totaled
$3.6 million and $13.6 million, respectively versus marketing sales of $4.8
million and $10.9 million, respectively for the three months and nine months
ended September 30, 1996.
7
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
(3) The Company's network service revenues from its AutoNETWORK service are
recognized as sales as the service is delivered. Network service sales in
the three months and nine months ending September 30, 1997 totaled $369,885
and $1.1 million, respectively versus $360,587 and $1.1 million, respectively
in the three months and nine months ending September 30, 1997.
(4) Revenues from the Company's GenSource subsidiary (see "Item 5. Change of
Name From California Interactive Computing, Inc. to GenSource Corporation")
are derived from the sale of computer software and from related services,
such as software maintenance fees, custom programming and customer training.
Revenues are recognized when software is shipped to customers and when
services are performed and invoiced. Because the Company acquired GenSource
on May 2, 1997, revenues and earnings only reflect GenSource's operations
from May 2, 1997. Revenues in the three months and five months ending
September 30, 1997 totaled $662,678 and $1.1 million, respectively.
CONCENTRATION OF CREDIT RISK - The Company sells its telephone, network
services and insurance-related software and related services to individuals
and small businesses throughout the United States and does not require
collateral. 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 3 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 and common share equivalents for 1997 and
1996.
ACQUISITION AMORTIZATION - The excess of purchase price over net assets of
NTC and GenSource have 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:
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
8
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
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.
4. NOTES PAYABLE:
Notes payable consist of the following as of September 30, 1997:
Notes payable to founding stockholders of GenSource, interest
at 8%, due beginning in May 1998 $ 2,165,095
Note payable to bank for line of credit to NTC, interest at
prime plus 1.25%, due as current liability $ 5,550,000
Capitalized lease obligations $ 1,633,995
-----------
$ 9,349,090
-----------
-----------
5. NETWORK MARKETING COSTS:
During the three and nine months ending September 30, 1997, NTC's net costs to
operate its network marketing program were $3.0 million and $11.2 million,
respectively, as summarized below (in $ millions):
<TABLE>
<CAPTION>
3 Months Ending 9 Months Ending
September 30,1997 September 30,1997
----------------- -----------------
<S> <C> <C>
Sales $ 3.6 $ 13.6
----- ------
Cost of sales 3.0 11.2
Operating expenses for support services 1.3 4.1
----- ------
Total marketing-related costs 4.3 15.3
----- ------
Net marketing cost $ 0.7 $ 1.7
% of total NTC (long distance & marketing) sales 2.2% 1.8%
</TABLE>
9
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
Marketing sales of $3.6 million and $13.6 million, during the three and nine
month periods ending September 30, 1997, respectively 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. Beginning in January 1996, NTC began to
accrue its obligation to provide customer support to its representatives.
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. When marketing-related costs of $4.3 million and $15.3 million
for the three months and nine months ended September 30, 1997, respectively
are compared against marketing-related revenues of $3.6 million and $13.6
million for the same period, the results are a net cost in marketing-related
activities during the three months and nine months ended September 30, 1997
of $0.7 million and $1.7 million, respectively, or 2.2% and 1.8%,
respectively of total NTC sales.
6. 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 and nine months ending September 30, 1997, expenses
associated with commissions, bonuses and overrides paid out to NTC's
independent representatives were $4.4 million and $15.3 million, respectively
versus commissions, bonuses and overrides paid out to NTC's independent
representatives of $5.0 million and $12.3 million, respectively for the three
months and nine months ended September 30, 1996.
7. 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 an affiliate of the former Chairman of the Board. On
October 7, 1997, the Company announced that it had reached a settlement of
the class action lawsuit for $8,650,000. Accordingly, the Company has taken a
reserve of $8,650,000 in the third quarter ended September 30, 1997 for
expenses associated with the anticipated settlement
[see "Part II. Item 1. Legal Proceedings - Class Action and Related Lawsuits"].
Counsel for the company is unable to estimate the ultimate outcome of the
related lawsuits and is unable to predict a range of potential loss.
Accordingly, no amounts have been provided for the related lawsuits in the
accompanying financial statements. In addition, the Company has recorded an
additional 1.5 million shares of its common stock in connection with the
settlement of this matter.
On October 28, 1997, the Company announced that that its NTC subsidiary
reached a settlement of a civil consumer protection lawsuit with the State of
California. Accordingly, the Company has taken a reserve of $1.6 million in
the third quarter ended September 30, 1997 for expenses associated with the
anticipated settlement [see "Part II. Item 1. Legal Proceedings - Civil
Consumer Protection Lawsuit With The State of California"].
The amounts provided for these matters are included in the caption "Other
(income)/expense" in the accompanying Consolidated Statements of Operations.
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Overall, the Company had negative cash flows of $1.1 million during the first
nine months of 1997 resulting from negative cash flows from operations of
$13.1 million and negative cash flows from investing activities of $2.4
million, which were offset by positive cash flows from investing activities
of $14.4 million. The Company expects that its operating and investing
activities will continue to experience negative cash flows due to (1)
anticipated cash costs associated with the class action lawsuit, related
lawsuits and other legal and regulatory issues (see "Item 1. Legal
Proceedings") and (2) anticipated funding requirements of approximately $1.2
million through fiscal year 1998 associated with the operation and
acquisition of GenSource (see the Company's Report on Form 10-Q for the
second quarter ended June 30, 1997). To meet these anticipated funding needs,
the Company has issued options to acquire up to 250,000 shares of common
stock at 88% of the market value of the Company's common stock at date of
exercise, the right to acquire 200 shares of Series B 6% Convertible
Preferred Stock and warrants to acquire 105,000 shares of the Company's
common stock (see "Item 5. Conveyance of Series A 2% Convertible Preferred
Stock and Issuance of Series B 6% Convertible Preferred Stock"). Management
believes that its liquidity and capital resources will be sufficient to fund
these activities for the foreseeable future and believes that it has the
ability to raise more funds if required.
The Company's cash flows are discussed below, as follows:
CASH FLOW FROM OPERATIONS - The Company experienced $13.1 million in negative
cash flow from operations during the first nine months of 1997 compared to
$5.8 million in negative 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 net loss from operating activities of $7.2
million, which includes reserves of $8.65 million and $1.6 million for
anticipated legal settlements, (2) an increase in operating assets, primarily
accounts receivable of $5.7 million and (3) a decrease in operating
liabilities of $2.7 million.
CASH FLOW FROM INVESTING - The Company experienced negative cash flows from
investing activities of $ 2.3 million in the first nine months of 1997 as
compared with a positive cash flow of $2.9 million in the first nine months
of 1996. The negative cash flow in the first nine months of 1997 resulted
primarily from $3.7 million used to acquire plant and equipment, primarily by
NTC, and by $2.2 million for the acquisition of GenSource, reduced by a $3.6
million liability in excess of assets arising from changing to the equity
method of accounting for RCI.
CASH FLOW FROM FINANCING - Positive cash flows from financing activities
totaled $14.4 million during the first nine months of 1997 compared with $2.7
million during the first nine months of 1996. The positive cash flow during
the first nine months of 1997 resulted primarily from (1) issuance of $8.65
million of common stock primarily to settle the class action lawsuit against
the Company (see "Item 1. Legal Proceedings"), (2) net sales of $1.3 million
worth of convertible preferred stock (see "Item 5. Conveyance of Series A 2%
Convertible Preferred Stock and Issuance of Series B 6% Convertible Preferred
Stock"), (3) increased borrowings under NTC's line of credit and (4)
assumption of $2.2 million in obligations associated with the acquisition of
GenSource.
RESULTS OF OPERATIONS:
SALES - Sales of $33.3 million in the third quarter ended September 30, 1997
increased 21% over sales of $27.6 million in the third quarter ended
September 30, 1996. The majority of this increase was attributable to NTC's
sales increase to $32.3 million in the three months ended September 30, 1997
from $25.8 million in the three months ended September 30, 1996,
respectively. The following table summarizes the Company's sales performance
by subsidiary and segment during the comparable third quarters in 1997 and
1996:
$ in millions
------------------
Subsidiary Segment 1997 1996
- -------------- --------------------------------------- ------ ------
NTC Telephone (telecommunications services) $ 28.7 $ 21.1
NTC Telephone (marketing programs) 3.6 4.7
RCI Optical -- 1.4
GenSource Software 0.6 --
AutoNETWORK Network 0.4 0.4
------ ------
Total Company Sales $ 33.3 $ 27.6
------ ------
------ ------
COST OF SALES - Total Company cost of sales increased to $23.4 million or 70%
of sales during the quarter ending September 30, 1996 verses $17.7 million or
64% of sales during the comparable prior year quarter. The
quarter-to-quarter increase in cost of sales resulted largely from the
increase in carrier costs associated with increased telephone service sales
by NTC. The increase in the percentage of overall sales to 70% in the third
quarter of 1997 from 64% in the third quarter of 1996 was due primarily to a
percentage increase in NTC's carrier costs in the third quarter of 1997
versus the third quarter of 1996. The following table summarizes the
Company's changes in three major cost components in the third quarter ended
September 30, 1997 and 1996, respectively:
$ in millions
----------------------
September September
30, 1997 30, 1996
--------- ---------
Commissions paid to NTC independent sales reps $ 4.4 $ 5.0
Carrier costs for NTC's long distance telephone service 17.8 11.0
All other costs of sales 1.2 1.8
------ ------
Total Company Cost of Sales $ 23.4 $ 17.8
------ ------
------ ------
11
<PAGE>
NTC's total commission expense decreased to $4.4 million in the third quarter
of 1997 compared to $5.0 million in the same quarter of 1996. NTC's carrier
costs to deliver long distance telephone service to its telephone customers
increased to $17.8 million in the third quarter of 1997 compared to $11.0
million in the third quarter of 1996. This increase in carrier costs reflects
a decline in the gross margin of carrier-related sales. In the third quarter
of 1996, gross margin was 48%, or $11.0 million in carrier costs on $21.1
million in carrier sales, while in the third quarter of 1997, gross margin
declined to 38%, or $17.8 million in carrier costs on $28.7 million in
carrier sales.
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) GenSource's cost of producing software
products and related services, and (3) AutoNETWORK's costs of providing
communications network products and services.
GENERAL & ADMINISTRATIVE - Total general and administrative costs decreased
to $6.7 million or 20% of sales in the quarter ending September 30, 1996
compared to $8.3 million or 30% 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 decrease in general and
administrative expense is associated with improved efficiencies at NTC and by
no longer consolidating the financial statements of RCI.
DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization
expense was $821,409 in the third quarter of 1997 verses $501,787 in the
third quarter of 1996. This increase was caused primarily 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 $1.6 million
in the third quarter of 1997 from $1.3 million in the third quarter of 1996.
The increase in bad debt was associated with an increase in total sales at
NTC in the third quarter of 1997 versus the third quarter of 1996.
OTHER INCOME & EXPENSE - The Company's other income and expense was an
expense of $11.2 million in the third quarter of 1997 compared to other
expense of $10.7 million in the third quarter of 1996. The $11.2 million in
other expenses consists primarily of: (1) an $8.7 million reserve for the
settlement of the class action lawsuit against the company, (2) a $1.6
million reserve for the settlement of a civil consumer protection lawsuit by
the State of California against the Company's NTC subsidiary and
approximately $600,000 in additional legal expenses associated with related
lawsuits and administrative matters.
NET INCOME - The Company incurred a net income loss of $9.6 million in the
third quarter of 1997 compared to a loss of $9.3 million in the third quarter
of 1997. The net loss was due primarily to the reserves taken for legal
settlements, including $8.65 million to settle the class action lawsuit
against the Company and $1.6 million for NTC to settle a civil consumer
protection lawsuit with the State of California (See "Item 1. Legal
Proceedings"). Without the reserves for legal settlements and associated
expenses, the Company had net operating income of approximately $806,397 in
the third quarter ended September 30, 1997.
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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
CIVIL CONSUMER PROTECTION LAWSUIT WITH THE STATE OF CALIFORNIA:
On October 28, 1997, the Company announced that its NTC subsidiary reached a
settlement of a civil consumer protection lawsuit with the State of
California. In the settlement, which NTC reached without admitting any
wrongdoing, NTC agreed to a court order requiring them to implement policies
to prevent the practice of slamming (switching customers' long distance
telephone service without their permission or knowledge) by its independent
sales representatives and employees, and agreed to pay $1,250,600 in costs
and penalties. NTC also agreed to institute safeguards to prevent slamming
violations from occurring in the future. Among those safeguards, NTC agreed
to wait 24 hours after the consumer agrees to switch their telephone company
to NTC before calling the customer to confirm that the consumer really wants
to switch to NTC.
The lawsuit was brought through the California Attorney General's Office and
the Orange County District Attorney Office. The California Public Utility
Commission was the investigative agency. As part of a related administrative
action, restitution to consumers is being sought by the Consumer Services
Division of the California Public Utility Commission. NTC is in settlement
discussions with the California Public Utility Commission, but there is no
assurance that a settlement will be reached.
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. The Company continues to believe that it has provided
substantial documentation to
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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, known as and updated in "Item 1. Legal Proceedings" in the
Company's Form 10-Q for its fiscal quarters ending March 31, 1997 and June
30, 1997, 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 and Form 10-Q for the
fiscal quarter ending June 30, 1997, in the following manner:
On October 7, 1997, the Company reached a settlement of the lawsuit. The
settlement, which is subject to court approval, consists of a payment of
$500,000 in cash plus securities with a value of $8.15 million for a total
settlement value of $8.65 million. The securities consist of 1,500,000 shares
of the Company's common stock, plus a number of warrants to be determined if
the value of the common stock does not equal at least $8.15 million after the
settlement is approved by the court.
On July 22, 1997, the Company was named in a lawsuit, JAMES A BELTZ, ET AL.
VS. SAMUEL D. SCHWARTZ and RITA SCHWARTZ, husband and wife; STEPHEN A.
CASWELL; JOEL W. GREENBERG; INCOMNET, INC., a California corporation; DAVID
BODNER and MURRAY HUBERFELD, in the United States District Court, District of
Minnesota. The lawsuit was filed by 17 individuals who were allowed to opt
out of the class action lawsuit to pursue a lawsuit on their own. The lawsuit
alleges that Mr. Schwartz and the other defendants created a fraudulent
scheme to drive up the price of the Company's stock in violation of federal
securities law. The lawsuit alleges losses by the plaintiffs of approximately
$1.5 million and seeks unspecified damages.
The status of the pending lawsuit described in the Company's Form 10-Q for
its second quarter ending June 30, 1997, known as 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 has not
materially changed since the filing of the Form 10-Q for the second quarter
ending June30, 1997.
INCOMNET, INC. VS. SAM D. SCHWARTZ:
The status of the lawsuit by the Company 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, which was commenced in April 25, 1997, has not
experienced any material changes from its status as described in "Item 1.
Legal Proceedings - INCOMNET VS. SAM D. SCHWARTZ" in the Company's Form 10-Q
for its fiscal quarter ending June 30, 1997.
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 and updated in the
filing of the Form 10-Qs for the fiscal quarters ending March 31, 1997 and
June 30, 1997, respectively, 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 class action
lawsuit against the Company have opted out and filed their own lawsuits
against the Company as described above. From time to time, the Company is
also involved in litigation arising from the ordinary course of
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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 September 30, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Item 3 is not applicable for the three months ended September 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4 is not applicable for the three months ended September 30, 1997.
ITEM 5. OTHER INFORMATION
EMPLOYMENT AGREEMENT BETWEEN INCOMNET AND EDWARD R. JACOBS:
On October 30, 1997, the Company's NTC subsidiary entered into a new
employment agreement with Edward R. Jacobs, who had been the Chairman and
Chief Executive Officer of NTC under a previous employment agreement from
December 28, 1994 to July 25, 1997. Under terms of the new agreement, which
was approved by NTC's Board of Directors, Mr. Jacobs will serve as the
Chairman of the Board of NTC until July 25, 1999. Detailed information on the
employment agreement is in the Company's Proxy Statement dated November 17,
1997.
CONVEYANCE OF SERIES A 2% CONVERTIBLE PREFERRED STOCK AND ISSUANCE OF SERIES B
6% CONVERTIBLE PREFERRED STOCK:
CONVEYANCE OF SERIES A 2% CONVERTIBLE PREFERRED STOCK. From September 20, 1996
to October 25, 1996, the Company sold 2,440 shares of Series A 2% Convertible
Preferred Stock (the "Series A Stock") to 12 accredited private investors [See
the Company's Annual Report on Form 10-K for fiscal year ended December 31,
1996]. The sale included an agreement that the Company would register the stock
with an S-3 Registration Statement and included liquidated damages of 3% per
month should the Registration Statement not be declared effective beginning 75
days after the funding was completed. The Company submitted the Registration
Statement in November 1996, but has not yet had it declared effective, which has
resulted in liquidated damages commencing in January 1997. These damages have
been paid by the Company to holders of the Series A Stock as either cash or
additional shares.
On November 7, 1997, 1,700 shares of the Series A Stock was purchased from four
institutional investors, who were original purchasers of the Series A Stock, for
$1.7 million by 12 individual accredited investors. These individuals have all
agreed to waive all registration rights and liquidated damage rights associated
with the Series A Stock and have agreed that they will convert their Series A
Stock into shares subject to Rule 144 of the Securities and Exchange Act of
1933, as amended, instead of shares that will be registered by the Company. The
Company has paid total liquidated damages of $540,000 in cash to the four
original purchasers of the Series A Stock conveyed to the new buyers.
On November 3, 1997, three other individuals converted $225,000 of the Series
A Stock (i.e. the original investment amount) to the Company's common stock,
subject to Rule 144. These three individuals received liquidated damages of
$67,500 paid in additional shares of common stock at a price of $3.00 per
share. As of November 7, 1997, only 150 shares of original Series A Stock
remains on the Company's books held by two individuals. These individuals are
owed liquidated damages of approximately $45,000.
SERIES B 6% CONVERTIBLE PREFERRED STOCK. In July 1997, the Company's Board of
Directors approved the issuance of 2,990 shares of Series B 6% Convertible
Preferred Stock (the "Series B Stock"), with each share worth $1,000 that
could be converted into the Company's common stock. At that time, the Company
raised $1.8 million by selling 1,834 shares of the authorized Series B Stock
(see the Company's Report on Form 10-Q for the second quarter ending June 30,
1997 for a detailed description). On November 4, 1997, the Company issued 600
additional shares of Series B Stock, raising an additional $600,000, less a
cash fee of $60,000 to the
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investment banker, who arranged the sale ( the same investment banker
arranged the sale of the 1,834 shares of Stock sold in July 1997). In
connection with this new issuance of the Series B Stock, the Company also
issued warrants to the investment banker to purchase 55,000 shares of the
Company's common stock at an exercise price of $3.00 per share for a period
of two years, an option to the investment banker to acquire an additional 125
Series B Stock at 88% of the average bid price of the Company's common stock
quoted on the five trading days immediately preceding the date of issuance of
the additional Series B Stock, and the right for one year of the investment
banker to provide the Company with an additional $200,000 in Series B Stock.
The cash fee, warrants and options paid and issued, respectively to the
investment banker were contingent upon the investment banker placing $1.7
million of Series A Stock being sold by four original institutional
purchasers who owned the Series Stock, to 12 new individuals who would waive
all associated registration rights. On November 7, 1997, this contingency was
met (see "Conveyance of Series A 2% Convertible Preferred Stock").
The basic terms and conditions of the Series B Stock are as follows:
VOTING. The Series B Stock does not have voting rights.
DIVIDEND. The Series B Stock has a cumulative non-compounded annual dividend of
6% payable in cash or stock at the Company's option upon conversion of the
Series B Stock into the Company's common stock, and prior to the payment of any
dividends on the Company's common stock. No dividends may be declared or paid on
the Series B Stock until all cumulative unpaid dividends have been declared and
paid on the outstanding Series A Stock.
LIQUIDATION PREFERENCE. The Series B Stock has a liquidation preference of
$1,000 per share plus all cumulative unpaid dividends, whether or not declared
by the Company's Board of Directors. Upon any liquidation or change of control
of the Company (i.e. transfer of more than 50% of its voting stock), the
Preferred Stockholders are entitled to the second 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. The Series B Stock is junior
in preference to Series A Stock issued in October 1996 (see the Company's Annual
Report of Form 10-K filed on April 15, 1997). No liquidation preference may be
paid to the holders of the Series B Stock until the full liquidation preference
has been paid to the holders of the outstanding Series A Stock.
CONVERSION. The Preferred Stockholders may convert each share of Series B Stock
into the number of shares of the Company's common stock calculated as follows,
at any time upon the earlier of (i) 120 days after the issuance of the Preferred
Stock, or (ii) when 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 B Stock is equal to the
lesser of (a) 80% of the average bid price for the Company's common stock on the
public trading market for the five trading days immediately preceding the
conversion date, as specified by the Preferred Stockholder, or (b) the bid price
of the Company's common stock on the funding date (i.e. the issuance date of the
Preferred Stock). To calculate the number of shares of common stock issuable
upon the conversion of the Preferred Stock, the Conversion Price is multiplied
by a ratio, the numerator of which is the sum of 1,000 and the accrued but
unpaid dividends, and the denominator of which is the Conversion Price. If for
any reason a registration statement covering the shares of common stock issuable
upon the conversion of the Preferred Stock is not in effect with the Securities
and Exchange Commission at the time of a valid conversion by a Preferred
Stockholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late, and
thereafter the Company is obligated to pay a cash penalty equal to 3% of the
investment per month. 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 B Stock, the Company is
obligated to file a registration statement
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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
120 days after it is filed.
ANTIDILUTION PROVISION. The Certificate of Determination for the Series B 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 B Stock is
issued, the Company is not permitted to issue any other securities, except in
limited circumstances, including pursuant to the exercise of outstanding options
or warrants or pursuant to existing settlement agreements, without first
notifying the Preferred Stockholders and giving them a right of first refusal to
purchase the securities themselves. While the Series B Stock is outstanding or
until it is converted into common stock, the Company is not permitted to engage
in certain transactions, such as the redemption or purchase of its own common
stock (except in connection with the collection of Section 16(b) short-swing
profits), without the prior consent of the Preferred Stockholders. Furthermore,
the Company cannot take any action which would modify the rights of the
Preferred Stockholders under the Certificate of Determination without the prior
consent of the Preferred Stockholder being affected by the modification.
AMENDMENT OF EMPLOYMENT AGREEMENT OF MELVYN REZNICK AND EMPLOYMENT AGREEMENT
WITH STEPHEN A. CASWELL:
On June 8, 1997, the Company's Board of Directors approved an extension of
the employment agreement with Melvyn Reznick, the President and Chairman of
the Board of the Company, and a new employment agreement with Stephen A.
Caswell, the Company's Vice President and Corporate Secretary. The existing
employment agreement with Mr. Reznick was extended until the earlier of (i)
June 30, 2002, or (ii) six months after the date that 100% of the Company's
holdings of NTC stock are sold, conveyed or otherwise distributed but no
sooner than December 31, 1999 ("Early Termination Date"). In the event of an
improper termination of the agreement by the Company for any reason, Mr.
Reznick is entitled (i) to be paid a lump sum amount equal to his annual
salary during the remaining term of his agreement plus his annual salary for
three additional years, plus accrued bonus, if any, (ii) to receive all of
his benefits during such period, and (iii) to exercise all of his vested
stock options at any time during the remaining term of the options. In the
event of an early termination because of the disposition of 100% of the
Company's NTC stock, then the Company has agreed to pay Mr. Reznick a lump
sum amount equal to the sum of the annual compensation and accrued but unpaid
bonus (if any, with respect to the bonus) which would be payable to him for
one additional year after the Early Termination Date, but not beyond June 30,
2002, as well as receive his benefits during that period and exercise his
vested stock options during the remaining term of the options.
Mr. Caswell's employment agreement has a term which expires on the earlier of
(i) December 31, 1999, or (ii) six months after the date that 100% of the
Company's holdings of NTC stock are sold, conveyed or otherwise distributed.
In the event of an improper termination of Mr. Caswell's employment agreement
by the Company for any reason, Mr. Caswell is entitled (i) to be paid a lump
sum amount equal to his annual salary during the remaining term of his
agreement plus his annual salary for 15 additional months, (ii) to receive
all of his benefits during that period, and (iii) to exercise all of his
vested stock options at any time during the remaining term of the options.
In the event of an early termination because of the disposition of 100% of
the Company's NTC stock, then the Company has agreed to pay Mr. Caswell a
lump sum amount equal to the sum of the annual compensation and accrued bonus
(if any, with respect to the bonus) which would be payable to him for one
additional year after the Early Termination Date, but not beyond December 31,
1999, as well as receive his benefits during the remaining term of the
options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS:
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Amendment to Employment Agreement Between Incomnet and
Melvyn Reznick, dated June 8, 1997.
10.2 Employment Agreement Between Incomnet and Stephen A.
Caswell, dated June 8, 1997.
10.3 Employment Agreement Between NTC and Edward R. Jacobs,
dated July 25, 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.
20.4 Report on Form 8-K - Election of Richard M. Horowitz, Stanley C.
Weinstein and David Wilstein as Directors, filed on August 20, 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: November 13, 1997 /s/ MELVYN REZNICK
--------------------------
Melvyn Reznick
President, CEO & CFO
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Exhibit 10.1 Amendment to Employment Agreement Between Incomnet, Inc.
and Melvyn H. Reznick, dated June 5, 1997
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made this 5th
day of June 1997 by and between Melvyn H. Reznick, an individual (the
"Employee") and Incomnet, Inc., a California corporation (the "Company") with
respect to the following facts:
R E C I T A L S
A. The Company and the Employee entered into an Employment Agreement,
dated November 27, 1995, as amended on February 5, 1996 and on
September 3, 1996 (collectively, the "Agreement").
B. Pursuant to the Employment Agreement, Mr. Reznick is serving the
Company as its President.
C. Since November 27, 1995, Mr. Reznick has been performing exemplary
work and extraordinary duties for the Company. The Company strongly
believes that the retention of Mr. Reznick for an extended term is
critically important to the long term stability of the Company and its
subsidiaries.
D. On January 21, 1997 and on June 5, 1997, the Company's Board of
Directors adopted resolutions authorizing this Amendment to the
Employment Agreement for Mr. Reznick.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, THE PARTIES HERETO AGREE AS FOLLOWS:
1. ANNUAL SALARY. The following statement is hereby added to Section
6.1 of the Agreement: "In consideration for the exemplary work performed by
the Employee for the Company and his importance to the financing and
operation of Rapid Cast, Inc., an important subsidiary of the Company, and
his extraordinary accomplishment in solidifying the relationship of the
Company with its wholly-owned subsidiary, National Telephone Communications,
Inc., the Employee and the Company hereby agree that effective December 1,
1996, Mr. Reznick's annual salary shall be $250,000, payable in semi-monthly
installments of $10,416.66."
2. TERM OF AGREEMENT. Section 5 of the Agreement is hereby amended
and restated to be as follows: "The term of this Agreement commences on
November 27, 1995 and will continue until the earlier of (i) six months after
the date that 100% of the Company's holdings of NTC stock are sold, conveyed,
spun-off, or otherwise distributed, but no sooner than December 31, 1999
("Early Termination Date", which means six months after said sale,
conveyance, spin-off or distribution, but no sooner than December 31, 1999)
provided, that in the event of a termination of this Agreement, as amended,
pursuant to Section 2(i) herein, then (a) the Company shall pay to
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the Employee a lump sum payment equal to the sum of the annual compensation
and accrued but unpaid bonus (if any, with respect to bonus) which would be
payable to the Employee for one year after the Early Termination Date
pursuant to Sections 6.1 and 6.2 herein, respectively, but not beyond June
30, 2002, (b) Employee shall be entitled to all of the benefits under
Sections 7 and 10 of this Agreement, as amended, for one additional year
after the Early Termination Date, but not beyond June 30, 2002, and (c)
Employee shall be entitled to exercise all vested stock options which he owns
for the entire remaining exercise period of the stock options as set forth in
Section 8 of the Company's 1996 Stock Option Plan, no such stock options
shall terminate prior to said expiration dates, and no "severance" shall be
deemed to have occurred under the Company's 1996 Stock Option Plan or under
existing Stock Option Agreements covering said stock options, or (ii) June
30, 2002, unless properly terminated sooner as provided in Section 14 of the
Agreement, as amended by this Amendment.
3. IMPROPER TERMINATION. Section 15 of the Agreement is hereby amended
and restated to be as follows: "If this Agreement, as amended, is terminated
by Employee for any reason pursuant to Section 14.2 of this Agreement or by
the Company in any manner except specifically in accordance with Section 14.1
or 14.3 of this Agreement, then (i) the Company shall immediately pay to the
Employee a lump sum payment equal to the sum of (a) the Employee's entire
annual compensation and accrued but unpaid bonus (if any, with respect to
bonus) payable through June 30, 2002 pursuant to Sections 6.1 and 6.2 herein,
respectively, and (b) the annual compensation and accrued but unpaid bonus
(if any, with respect to bonus) which would be payable to the Employee for
three additional years pursuant to Sections 6.1 and 6.2 herein, respectively,
(ii) Employee shall be entitled to all of the benefits under Sections 7 and
10 of this Agreement, as amended, through June 30, 2005, and (iii) Employee
shall be entitled to exercise all vested stock options which he owns for the
entire remaining exercise period of the stock options as set forth in Section
8 of the Company's 1996 Stock Option Plan, no such stock options shall
terminate prior to said expiration dates, and no "severance" shall be deemed
to have occurred under the Company's 1996 Stock Option Plan or under existing
Stock Option Agreements covering said stock options. It is specifically
agreed that in such event Employee shall have no duty to mitigate his damages
by seeking comparable, inferior or different employment."
4. TERMINATION BY EMPLOYEE OR THE COMPANY. Section 14.2 of the
Agreement is hereby amended and restated as follows: "Employee may at his
option and in his sole discretion terminate this Agreement, as amended, for
(i) the material breach by the Company of the terms of this Agreement, or
(ii) any material change by the Company in the working environment or
conditions of the Employee, or any material change in the duties or authority
of the Employee under this Agreement, as amended. Section 14.3 of the
Agreement is hereby amended and restated as follows: "The Company may at its
option terminate this Agreement, as amended, in the event that the Employee
commits gross negligence in the performance of his duties under this
Agreement, as amended, or breaches his fiduciary duty to the Company, to the
Board of Directors or to the Company's shareholders; provided, however, that
the Company shall give the Employee written notice of specific instances for
the basis of any termination of this Agreement by the Company pursuant to
Section 14.3 of this Agreement, as amended. Employee shall have a period of
30 days after said notice in which to cease the alleged violations before the
Company may terminate this Agreement. If Employee ceases to commit the
alleged violations within said 30 day period, the
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Company may not terminate this Agreement pursuant to this Section. If
Employee continues to commit the alleged violations after said 30 day period,
the Company may terminate this Agreement immediately upon written
notification to Employee."
5. ORIGINAL EMPLOYMENT AGREEMENT IN FULL FORCE AND EFFECT. The original
Employment Agreement, as amended, shall remain in full force and effect and
unmodified except as specifically amended by this Amendment. In the event of
any contradiction between the terms of the original Employment Agreement, as
amended, and this Amendment, the terms of this Amendment will govern.
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
COMPANY:
INCOMNET, INC.,
a California corporation
By:
/s/ Nancy Zivitz
Nancy Zivitz, Director
/s/ Albert Milstein
Albert Milstein, Director
/s/ Howard Silverman
Howard Silverman
EMPLOYEE:
/s/ Melvyn H. Reznick
Melvyn H. Reznick
21031 Ventura Boulevard, Suite 1100
Woodland Hills, California 91364
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Exhibit 10.2 Employment Agreement Between Incomnet, Inc. and Stephen A.
Caswell, dated June 5, 1997
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the 5th day of
June 1997, by and between Incomnet, Inc., a California corporation (the
"Company"), and Stephen A. Caswell, an individual ("Employee"), and is made with
respect to the following facts:
R E C I T A L S
A. The Company and the Employee wish to ensure that the Company will
receive the benefit of Employee's loyalty and service.
B. In order to help ensure that the Company receives the benefit of
Employee's loyalty and service, the parties desire to enter into this
formal Employment Agreement to provide Employee with appropriate
compensation arrangements and to assure Employee of employment
stability.
C. The parties have entered into this Agreement for the purpose of
setting forth the terms of employment of the Employee by the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, THE PARTIES HERETO AGREE AS FOLLOWS:
1. EMPLOYMENT OF EMPLOYEE AND DUTIES. The Company hereby hires Employee
and Employee hereby accepts employment upon the terms and conditions described
in this Agreement. The Employee shall be the Secretary and Vice-President of
the Company with all of the duties, privileges and authorities usually attendant
upon such office, including but not limited to responsibility for the management
of the Company's books and records, the keeping of corporate minutes, the
preparation of the Company's reports under the Securities and Exchange Act of
1934, as amended, the supervision of the administration of the Company, and
assisting the President of the Company in managing its day-to-day business.
Subject to (a) the general supervision of the President and the Board of
Directors of the Company, and (b) the Employee's duty to report to the President
and the Board of Directors periodically, as specified by them from time-to-time,
Employee shall have the authority to perform his employment duties for the
Company.
2. TIME AND EFFORT. Employee agrees to devote his full working time and
attention to the management of the Company's business affairs, the
implementation of its strategic plan, as determined by the President and the
Board of Directors, and the fulfillment of his duties and responsibilities as
the Company's corporate Secretary. Expenditure of a reasonable amount of time
for personal matters and business and charitable activities shall not be deemed
to be a breach of this Agreement, provided that those activities do not
materially interfere with the services required to be rendered to the Company
under this Agreement.
3. THE COMPANY'S AUTHORITY. Employee agrees to comply with the Company's
rules and regulations as adopted by the Company's President and Board of
Directors regarding the performance of his duties, and to carry out and perform
those orders, directions and policies established by the Company with respect to
his engagement. Employee shall promptly notify the Company's President or Board
of Directors,
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as the case may be, of any objection he has to the President's or the Board's
directives, respectively, and the reasons for such objection.
4. NONCOMPETITION BY EMPLOYEE. During the term of this Agreement and
during any period in which Employee is receiving severance benefits, if any,
the Employee shall not, directly or indirectly, either as an employee,
employer, consultant, agent, principal, partner, stockholder (in a private
company), corporate officer, director, or in any other individual or
representative capacity, engage or participate in any business that is in
competition with the business of the Company or its affiliates.
5. TERM OF AGREEMENT. Unless properly terminated earlier pursuant to
Section 13 of this Agreement, this Agreement shall commence to be effective
on the date first above written and shall continue until (i) six months after
the date that 100% of the Company's holdings of NTC stock are sold, conveyed,
spun-off, or otherwise distributed ("Early Termination Date", which means six
months after said sale, conveyance, spin-off or distribution) provided, that
in the event of a termination of this Agreement, as amended, pursuant to
Section 2(i) herein, then (a) the Company shall pay to the Employee a lump
sum payment equal to the sum of the annual compensation and accrued but
unpaid bonus (if any, with respect to bonus) which would be payable to the
Employee for one year after the Early Termination Date pursuant to Sections
6.1 and 6.2 herein, respectively, but not beyond December 31, 1999, (b)
Employee shall be entitled to all of the benefits under Section 7 of this
Agreement, as amended, for one additional year after the Early Termination
Date, but not beyond December 31, 1999, and (c) Employee shall be entitled to
exercise all vested stock options which he owns for the entire remaining
exercise period of the stock options as set forth in Section 8 of the
Company's 1996 Stock Option Plan and the Minutes (as defined in Section 6.3
of this Agreement), no such stock options shall terminate prior to said
expiration dates, and no "severance" shall be deemed to have occurred under
the Company's 1996 Stock Option Plan or under existing Stock Option
Agreements covering said stock options, or (ii) December 31, 1999, unless
properly terminated sooner as provided in Section 13 of the Agreement, as
amended by this Amendment.
6. COMPENSATION. During the term of this Agreement, the Company shall
pay the following compensation to Employee:
6.1 ANNUAL COMPENSATION. Employee shall be paid a fixed salary of
$115,000 per year, payable in two installments per month of $4,791.66 each on
the 15th and last day of each month, commencing for the period from June 5,
1997 to June 15, 1997 and ending for the period from December 15, 1999 to
December 31, 1999.
6.2 ADDITIONAL COMPENSATION. In addition to the compensation set
forth in Sections 6.1 and 6.3 of this Agreement, Employee may be paid a bonus
or bonuses during each year, as determined at the sole discretion of the
Company's Board of Directors based on the Board's evaluation of the
Employee's definable efforts, accomplishments and similar contributions.
6.3 STOCK INCENTIVES. The Company and the Employee hereby
reconfirm the terms and conditions of the stock options granted to the
Employee by the Company to date as set forth in Section 8 of the Company's
1996 Stock Option Plan, and the stock options to purchase 40,000 shares of
the Company's common stock pursuant to the terms and conditions set forth in
the minutes of the meeting of the Company's Board of Directors, dated January
21, 1997 and January 22, 1997 (collectively, the "Minutes").
7. FRINGE BENEFITS. Employee shall be entitled to all fringe benefits
which the Company or its subsidiaries may make available from time-to-time
for persons with comparable positions and responsibilities. Without
limitation, such benefits shall include participation in any life and
disability
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insurance programs, profit incentive plans, pension or retirement plans, and
bonus plans as are maintained or adopted from time-to-time by the Company.
The Company shall also provide Employee with medical group insurance coverage
or equivalent coverage for Employee and his dependents.
8. OFFICE AND STAFF. In order to enable Employee to discharge his
obligations and duties pursuant to this Agreement, the Company agrees that it
shall provide suitable office space for Employee in the Los Angeles
Metropolitan Area, together with all necessary and appropriate supporting
staff and secretarial assistance, equipment, stationery, books and supplies.
Employee agrees that the supporting staff presently in place is suitable for
the purposes of this Agreement. The Company agrees to provide at its expense
parking for one vehicle by the Employee at the Company's executive offices.
9. REIMBURSEMENT OF EXPENSES. The Company shall reimburse Employee for
all reasonable travel, mobile telephone, promotional and entertainment
expenses incurred in connection with the performance of Employee's duties
hereunder. Employee's reimbursable expenses shall be paid promptly by the
Company upon presentment by Employee of an itemized list of invoices
describing such expenses. All compensation provided in Sections 6, 7 and 9
of this Agreement shall be subject to customary withholding tax and other
employment taxes, to the extent required by law.
10. VACATION. Employee shall be entitled to three weeks of paid
vacation per year or pro rata portion of each year of service by Employee
under this Agreement. The Employee shall be entitled to the holidays
provided in the Company's established corporate policy for employees with
comparable duties and responsibilities.
11. RIGHTS IN AND TO INVENTIONS AND PATENTS.
11.1 DESCRIPTION OF PARTIES' RIGHTS. The Employee agrees that with
respect to any inventions made by him or the Company during the term of this
Agreement, solely or jointly with others, (i) which are made with the
Company's equipment, supplies, facilities, trade secrets or time, or (ii)
which relate to the business of the Company or the Company's actual or
demonstrably anticipated research or development, or (iii) which result from
any work performed by the Employee for the Company, such inventions shall
belong to the Company. The Employee also agrees that the Company shall have
the right to keep such inventions as trade secretes, if the Company chooses.
11.2 DISCLOSURE REQUIREMENTS. For purposes of this Agreement, an
invention is deemed to have been made during the term of this Agreement if,
during such period, the invention was conceived or first actually reduced to
practice. The Employee agrees that any patent application filed within one
year after termination of his employment shall be presumed to relate to an
invention made during the term of this Agreement unless he can provide
evidence to the contrary. In order to permit the Company to claim rights to
which it may be entitled, the Employee agrees to disclose to the Company in
confidence all inventions which the Employee makes during the term of this
Agreement and all patent applications filed by the Employee within one year
after termination of this Agreement.
12. ARBITRATION. Any disputes arising under this Agreement will be
resolved in accordance with the rules of the American Arbitration Association
as they apply in the County of Los Angeles, State of California. The
decision of the arbitrator shall be binding on all parties to this Agreement.
13. TERMINATION. This Agreement may be terminated in the following
manner and not otherwise:
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13.1 MUTUAL AGREEMENT. This Agreement may be terminated by the
mutual written agreement of the Company and Employee to terminate.
13.2 TERMINATION BY EMPLOYEE FOR BREACH. Employee may at his option
and in his sole discretion terminate this Agreement for the material breach
by the Company of the terms of this Agreement. In the event of such
termination, Employee shall give the Company 30 days' prior written notice.
13.3 TERMINATION BY THE COMPANY FOR BREACH. The Company may at its
option immediately terminate this Agreement in the event Employee commits
gross negligence in the performance of his duties under this Agreement, or
breaches his fiduciary duty to the Company, to the Board of Directors or to
the Company's shareholders; provided, however, that the Company shall give
the Employee written notice of specific instances for the basis of any
termination of this Agreement by the Company pursuant to Section 13.3 of this
Agreement. Employee shall have a period of 30 days after said notice in
which to cease the alleged violations before the Company may terminate this
Agreement. If Employee ceases to commit the alleged violations within said
30 day period, the Company may not terminate this Agreement pursuant to this
Section. If Employee continues to commit the alleged violations after said
30 day period, the Company may terminate this Agreement immediately upon
written notification to Employee.
13.4 TERMINATION UPON DEATH. This Agreement shall terminate upon
the death of the Employee.
13.5 TERMINATION UPON THE DISABILITY OF THE EMPLOYEE. This
Agreement shall terminate upon the disability of the Employee. As used in
the previous sentence, the term "disability" shall mean the complete
disability to discharge Employee's duties and responsibilities for a
continuous period of not less than six months during any calendar year.
Any physical or mental disability which does not prevent Employee from
discharging his duties and responsibilities in accordance with usual
standards of conduct as determined by the Company in its reasonable opinion
shall not constitute a disability under this Agreement.
14. IMPROPER TERMINATION. If this Agreement is terminated by Employee
pursuant to Section 13.2 herein or by the Company in any manner except as
specifically provided in Section 13 herein, then (i) the Company shall
immediately pay to the Employee a lump sum payment equal to the sum of (a)
the Employee's entire annual compensation and accrued but unpaid bonus (if
any, with respect to bonus) payable through December 31, 1999 pursuant to
Sections 6.1 and 6.2 herein, respectively, and (b) the annual compensation
and accrued but unpaid bonus (if any, with respect to bonus) which would be
payable to the Employee for 15 additional months pursuant to Sections 6.1 and
6.2 herein, respectively, (ii) Employee shall be entitled to all of the
benefits under Section 7 of this Agreement, through March 31, 2001, and (iii)
Employee shall be entitled to exercise all vested stock options which he owns
for the entire remaining exercise period of the stock options as set forth in
Section 8 of the Company's 1996 Stock Option Plan and the Minutes, no such
stock options shall terminate prior to said expiration dates, and no
"severance" shall be deemed to have occurred under the Company's 1996 Stock
Option Plan or under existing Stock Option Agreements covering said stock
options. It is specifically agreed that in such event Employee shall have no
duty to mitigate his damages by seeking comparable, inferior, or different
employment.
15. INDEMNIFICATION OF EMPLOYEE. Pursuant to the provisions and subject
to the limitations of the California Corporations Code, and in particular
Sections 204 and 317 therein, the Company shall indemnify and hold Employee
harmless as provided in Sections 15.1, 15.2 and 15.3 of this Agreement. The
Company shall, upon the request of Employee, assume the defense and directly
bear all of the expense of
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any action or proceedings which may arise for which Employee is entitled to
indemnification pursuant to this Section.
15.1 INDEMNIFICATION OF EMPLOYEE FOR ACTIONS BY THIRD PARTIES. The
Company hereby agrees to indemnify and hold Employee harmless from any
liability, claims, fines, damages, losses, expenses, judgments or settlements
actually incurred by him, including but not limited to reasonable attorneys'
fees and costs actually incurred by him as they are incurred, as a result of
Employee being made at any time a party to, or being threatened to be made a
party to, any proceeding (other than an action by or in the right of the
Company, which is addressed in Section 15.2 of this Agreement), relating to
actions Employee takes within the scope of his employment as the Secretary
and Vice-President of the Company or in his role as a director of the
Company, provided that Employee acted in good faith and in a manner he
reasonably believed to be in the best interest of the Company and, in the
case of a criminal proceeding, had no reasonable cause to believe his conduct
was unlawful.
15.2 INDEMNIFICATION OF EMPLOYEE FOR ACTIONS IN THE RIGHT OF THE
COMPANY. The Company hereby agrees to indemnify and hold Employee harmless
from any liability, claims, damages, losses, expenses, judgments or
settlements actually incurred by him, including but not limited to reasonable
attorneys' fees and costs actually incurred by him as they are incurred, as a
result of Employee being made a party to, or being threatened to be made a
party to, any proceeding by or in the right of the Company to procure a
judgment in its favor by reason of any action taken by Employee as an
officer, director or agent of the Company, provided that Employee acted in
good faith in a manner he reasonably believed to be in the best interests of
the Company and its shareholders, and provided further, that no
indemnification by the Company shall be required pursuant to this Section
15.2 (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that
Employee believed to be contrary to the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of
Employee, (iii) for any transaction from which Employee derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard
by Employee of his duties to the Company or its shareholders in circumstances
in which Employee was aware, or should have been aware, in the ordinary
course of performing his duties, of a risk of serious injury to the Company
or its shareholders, (v) for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of Employee's duties to
the Company or its shareholders, (vi) for any violation by Employee of
Section 310 of the California Corporations Code or (vii) for any violation by
Employee of Section 316 of the California Corporations Code. Furthermore,
the Company has no obligation to indemnify Employee pursuant to this Section
15.2 in any of the following circumstances:
A. In respect of any claim, issue, or matter as to which Employee is
adjudged to be liable to the Company in the performance of his duties to the
Company and its shareholders, unless and only to the extent that the court in
which such action was brought determines upon application that, in view of
all the circumstances of the case, he is fairly and reasonably entitled to
indemnity for the expenses and then only in the amount that the court shall
determine.
B. For amounts paid in settling or otherwise disposing of a threatened
or pending action without court approval.
C. For expenses incurred in defending a threatened or pending action
which is settled or otherwise disposed of without court approval.
15.3 REIMBURSEMENT. In the event that it is determined that
Employee is not entitled to indemnification by the Company pursuant to
Sections 15.1 or 15.2 of this Agreement, then Employee is
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obligated to reimburse the Company for all amounts paid by the Company on
behalf of Employee pursuant to the indemnification provisions of this
Agreement. In the event that Employee is successful on the merits in the
defense of any proceeding referred to in Sections 15.1 or 15.2 of this
Agreement, or any related claim, issue or matter, then the Company will
indemnify and hold Employee harmless from all fees, costs and expenses
actually incurred by him in connection with the defense of any such
proceeding, claim, issue or matter.
16. ASSIGNABILITY OF BENEFITS. Except to the extent that this provision
may be contrary to law, no assignment, pledge, collateralization or
attachment of any of the benefits under this Agreement shall be valid or
recognized by the Company. Payment provided for by this Agreement shall not
be subject to seizure for payment of any debts or judgments against the
Employee, nor shall the Employee have any right to transfer, modify,
anticipate or encumber any rights or benefits hereunder; provided that any
stock issued by the Company to the Employee pursuant to this Agreement shall
not be subject to Section 16 of this Agreement.
17. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company will
review in good faith the prospect of purchasing directors' and officers'
liability insurance for the officers and directors of the Company, which
would include the same coverage for Employee, provided, that any decision was
to whether or not the Company purchases such insurance coverage will be in
the sole discretion of the Company's Board of Directors.
18. NOTICE. Except as otherwise specifically provided, any notices to
be given hereunder shall be deemed given upon personal delivery, air courier
or mailing thereof, if mailed by certified mail, return receipt requested, to
the following addresses (or to such other address or addresses as shall be
specified in any notice given):
In case of the Company:
Incomnet, Inc.
21031 Ventura Boulevard, Suite 1100
Woodland Hills, California 91364
Attention: Melvyn Reznick, President and
Chairman of the Board of Directors
In case of the Employee:
Stephen A. Caswell
21031 Ventura Blvd. #1100
Woodland Hills, CA 91364
19. ATTORNEYS' FEES. In the event that any of the parties must resort
to legal action in order to enforce the provisions of this Agreement or to
defend such suit, the prevailing party shall be entitled to receive
reimbursement from the nonprevailing party for all reasonable attorneys' fees
and all other costs incurred in commencing or defending such suit.
20. ENTIRE AGREEMENT. This Agreement embodies the entire understanding
among the parties and merges all prior discussions or communications among them,
and no party shall be bound by any
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definitions, conditions, warranties, or representations other than as
expressly stated in this Agreement or as subsequently set forth in a writing
signed by the duly authorized representatives of all of the parties hereto.
21. NO ORAL CHANGE; AMENDMENT. This Agreement may only be changed or
modified and any provision hereof may only be waived by a writing signed by
the party against whom enforcement of any waiver, change or modification is
sought. This Agreement may be amended only in writing by mutual consent of
the parties.
22. SEVERABILITY. In the event that any provision of this Agreement
shall be void or unenforceable for any reason whatsoever, then such provision
shall be stricken and of no force and effect. The remaining provisions of
this Agreement shall, however, continue in full force and effect, and to the
extent required, shall be modified to preserve their validity.
23. APPLICABLE LAW. This Agreement shall be construed as a whole and in
accordance with its fair meaning. This Agreement shall be interpreted in
accordance with the laws of the State of California, and venue for any action
or proceedings brought with respect to this Agreement shall be in the County
of Los Angeles in the State of California.
24. SUCCESSORS AND ASSIGNS. Each covenant and condition of this
Agreement shall inure to the benefit of and be binding upon the parties
hereto, their respective heirs, personal representatives, assigns and
successors in interest. Without limiting the generality of the foregoing
sentence, this Agreement shall be binding upon any successor to the Company
whether by merger, reorganization or otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
COMPANY:
INCOMNET, INC.,
a California corporation
By: /s/ Melvyn Reznick
--------------------------
Melvyn Reznick, President and Chairman of the Board of Directors
/s/ Nancy Zivitz
- -----------------------------
Nancy Zivitz, Director
/s/ Albert Milstein
- -----------------------------
Albert Milstein, Director
/s/ Howard Silverman
- -----------------------------
Howard Silverman
EMPLOYEE:
/s/ Stephen A. Caswell
- -----------------------------
Stephen A. Caswell
21031 Ventura Boulevard, Suite 1100
Woodland Hills, California 91364
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10.3 Employment Agreement Between National Telephone & Communications, Inc.
and Edward R. Jacobs, dated July 25, 1997
This Employment Agreement ("Agreement") is between National Telephone &
Communications, Inc., a Delaware corporation located at 2801 Main Street,
Irvine, California 92614 ("NTC") and Edward R. Jacobs, an individual ("Jacobs"),
and is entered into by the parties with reference to the following facts:
A. NTC is a rapidly growing telecommunications services company that
markets its products on a nationwide basis with a network of
independent sales representatives.
B. NTC is currently a wholly-owned subsidiary of a public company,
Incomnet, Inc. ("Incomnet") and has reached an agreement with
Incomnet under which NTC shall become a separate public company,
independent from Incomnet.
C. Jacobs is currently serving as the senior executive officer of NTC
pursuant to an employment agreement (the "Former Agreement") dated
December 28, 1994 between Jacobs, NTC and Incomnet and also is
currently serving as Chairman of NTC's Board of Directors.
D. The term of the Former Agreement expires on July 25, 1997.
E. The Former Agreement does not contain any agreement by Jacobs not to
compete with NTC.
F. NTC desires to (i) make provision for Jacobs' service with NTC after
July 25, 1997 as a senior executive officer and/or Chairman of NTC's
Board of Directors and (ii) secure an agreement by Jacobs not to
compete with NTC.
NOW THEREFORE, in consideration of the mutual promises contain herein, the
parties agree as follows:
1.0 THE EXECUTIVE POSITION
1.1 Jacobs shall continue to serve as, and be appointed by NTC's Board of
Directors to the office of Chairman and/or a senior executive officer of NTC
(the "Executive Position") until July 25, 1999, unless such employment is
terminated prior to such date in accordance with the provisions hereof. Jacobs
shall faithfully and competently perform such duties as are prescribed by the
By-Laws of NTC, and shall also perform and discharge such other executive
employment duties and responsibilities consistent with the business requirements
of the Executive Position as NTC's Board of Directors from time to time may
reasonably prescribe. Jacobs shall
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perform his duties in the Executive Position at such places and times as
NTC's Board of Directors from time to time may reasonably prescribe. Except
as may otherwise be approved in advance by NTC's Board of Directors, and
except during vacation periods and reasonable periods of absence due to
sickness, personal injury or other disability, Jacobs shall devote his full
time during normal business hours until July 25, 1999, as set forth herein,
and shall use his best efforts, judgment and energy to improve and advance
the business interests of NTC in a manner consistent with his duties and
responsibilities in the Executive Position.
2.0 SALARY AND OTHER COMPENSATION
2.1 As compensation for Jacobs' complete and satisfactory performance of
his services in the Executive Position during the period from the date hereof
until July 25, 1999, NTC shall pay Jacobs a base salary of not less than
forty thousand dollars ($40,000) per month (said amount, together with any
incremental increases thereto as may be determined from time to time by NTC's
Board of Directors, being hereinafter referred to as "Salary"). Any Salary
payable hereunder shall be paid in regular intervals, but in no event less
frequently than semi-monthly, in accordance with NTC's payroll practices from
time to time in effect.
2.2 During the period from the date hereof through July 25, 1999, Jacobs
shall be entitled to receive such bonuses and stock options as may be granted
to him from time to time by NTC's Board of Directors.
2.3 As additional compensation for entering into this Agreement, NTC
shall pay for and maintain insurance policies through July 25, 1999, without
income tax consequences to Jacobs, which policies, upon Jacobs' Disability
(as such Disability is defined below in Paragraph 7.2(a) shall pay Jacobs on
a monthly basis for the duration of his life not less than seventy percent
(70%) of the Salary that Jacobs was receiving on the first day of the one
hundred eighty (180) day period of such Disability
3.0 EMPLOYEE BENEFITS
3.1 During the term of Jacobs' service under this Agreement, Jacobs
shall: (i) be eligible to participate in employee fringe benefits and pension
and/or profit sharing plans that may be provided by NTC for its senior
executive employees in accordance with the provisions of any such plans, as
the same may be in effect from time to time; (ii) be eligible to participate
in any medical and health plans or other employee welfare benefit plans that
may be provided by NTC for its senior executive employees in accordance with
the provisions of any such plans, as the same may be in effect from time to
time, (iii) be entitled to annual paid vacation in accordance with NTC's
policy that may be applicable to senior executive employees, as the same may
be in effect from time to time; (iv) be entitled to sick leave, sick pay and
disability benefits in accordance with NTC's policy that may be applicable to
senior executive employees, as the same may be in effect from time to time;
and (v) be entitled to reimbursement for all reasonable and necessary
out-of-pocket business expenses incurred by Jacobs in the performance of his
duties hereunder in accordance with NTC's policy that may be applicable
thereto to senior executive employees, as the same may be in effect from time
to time.
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4.0 WITHHOLDING
4.1 The payment of any Salary, employee benefits and bonuses hereunder
shall be subject to applicable withholding and payroll taxes and such other
deductions as may be required under NTC's employee benefit program.
5.0 STOCK OPTIONS
5.1 In accordance with that certain letter agreement between NTC and
Incomnet dated January 28, 1997 ("January 28, 1997 Letter Agreement"), on
March 20, 1997, NTC granted Jacobs two options (the "Options") to purchase
shares of NTC's common stock, par value $.01 per share (the "Common Stock")
under NTC's 1996 Stock Option Plan. One Option is for 240,835 shares of the
Common Stock and vests in four equal annual installments, subject to
acceleration of vesting in the event that NTC achieves certain financial
performance targets in certain time periods specified in such Option. The
second Option is for 288,462 shares of the Common Stock and vests on January
31, 2002, subject to acceleration of vesting in the event that NTC achieves
certain financial performance targets in certain time periods specified in
such Option.
5.2 The parties hereby now agree that the full vesting of the Option
shall be accelerated to the date this Agreement is approved by NTC's Board of
Directors, and NTC shall make such changes in the Options and 1996 Stock
Option Plan as may be necessary to achieve such accelerated vesting at no
cost to Jacobs.
6.0 TERM OF AGREEMENT
6.1 The parties agree that the term of this Agreement, and Jacobs'
service hereunder, shall commence on the date hereof and continue until July
25, 1999, unless earlier terminated pursuant to the provisions of Paragraph 7.
7.0 EARLY TERMINATION
7.1 TERMINATION OF JACOBS BY NTC FOR "CAUSE"
7.1.a Jacobs' service under this Agreement shall immediately
terminate upon Jacobs' receipt of written notice from NTC's Board of
Directors that NTC is terminating Jacobs service under this Agreement for
"cause," as "cause" is defined below in Paragraphs 7.1.b and 7.1.c
("For-Cause Termination").
7.1.b The parties agree that "cause" for termination within the
meaning of Paragraph 7.1.a above shall constitute any one or more of the
following reasons: (i) Jacobs' conviction for having committed a felony'
(ii) acts of dishonest or moral turpitude by Jacobs that a reasonable person
would agree are materially detrimental to NTC; (iii) gross negligence by
Jacobs in the performance of his obligations as set forth in this Agreement;
(iv) willful disregard by Jacobs of
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his obligations set forth in this Agreement ("Willful Disregard"); and/or (v)
failure by Jacobs to obey the reasonable and lawful orders of NTC's Board of
Directors ("Failure to Obey").
7.1.c The parties also agree that, provided a Willful Disregard
and/or Failure to Obey do not also constitute "cause" under any of clauses
(i) through (v) of Paragraph 7.1.b above, then a Willful Disregard and/or a
Failure to Obey shall not constitute "cause" for termination within the
meaning of Paragraph 7.1.b above, unless and until Jacobs will have received
written notice of such Willful Disregard or Failure to Obey and shall have
been (i) given a reasonable opportunity to discuss the matter with NTC's
Board of Directors, followed by a written notice that NTC's Board of
Directors adheres to its position, and (ii) given a reasonable opportunity to
cure such Willful Disregard or comply with such Failure to Obey, as the case
may be.
7.1.d In the event that Jacobs' termination is a For-Cause
Termination, notwithstanding anything to the contrary expressed or implied
herein, except as required by applicable law, NTC shall not be obligated to
make any payments to Jacobs or make any payments on Jacobs' behalf of any
kind or nature whatsoever by reason of Jacobs' For-Cause Termination, other
than (i) such amounts, if any, of the Salary or other compensation described
in Paragraphs 2.1, 2.2 and 2.3 as shall have accrued and remain unpaid as of
the date of such For-Cause Termination and (ii) such other amounts, if any,
which may be then otherwise payable to Jacobs from NTC's benefit plan or
reimbursement policies.
7.1.e In the event Jacobs' termination is a For-Cause Termination,
then on the date of such termination any and all of the shares of the Common
Stock subject to the Options in which Jacobs has vested but has not yet
exercised shall be null and void if not exercised within ninety (90) days of
the date of such termination.
7.2 TERMINATION OF JACOBS DUE TO DEATH OR DISABILITY
7.2.a Jacobs' service under this Agreement shall be immediately
terminated upon the occurrence of (i) Jacobs' death ("Death"), or (ii)
Jacobs' inability to perform his duties as set forth in this Agreement on
account of his disability or incapacity for a period of one hundred eighty
(180) or more days, whether or not consecutive, occurring within any period
of twelve (12) consecutive calendar months ("Disability").
7.2.b The parties agree that in the event of the termination of
Jacobs' service under this Agreement due to Death or Disability, then NTC
shall pay to Jacobs or shall cause to be paid to Jacobs, or to Jacobs'
personal representative, as the case may be, the amount of the Salary or
other compensation described in Paragraph 2.1, 2.2 or 2.3, if any, that
Jacobs would have otherwise been entitled to receive, as set forth above in
Paragraphs 2.1, 2.2 and 2.3, through the date of such termination.
7.2.c The parties also agree that in the event of the termination of
Jacobs' service under this Agreement due to Death or Disability, then on the
date of such termination, any and all shares of the Common Stock subject to
the Options in which Jacobs has vested but not yet exercised shall become
null and void if not exercised on or before July 25, 1999.
4
<PAGE>
7.3 TERMINATION OF JACOBS BY NTC OTHER THAN FOR "CAUSE"
7.3.a The parties agree that in the event of the termination of
Jacobs service under this Agreement prior to July 25, 1999 for any reason
other than (a) for reason of a For-Cause Termination, or (b) for reason of
Death or Disability (collectively, "Not-For-Cause Termination"), then NTC
shall continue to pay to Jacobs the amount of the monthly Salary that Jacobs
would have otherwise been entitled to receive as set forth above in Paragraph
2.1 through July 25, 1999.
7.3.b The parties further agree that in the event of a Not-For-Cause
Termination any and all of the shares of the Common Stock subject to the
Options in which Jacobs has vested but not yet exercised shall become null
and void if not exercised on or before July 25, 1999.
7.4 RESIGNATION BY JACOBS FOR "GOOD CAUSE"
7.4.a Jacobs' service under this Agreement shall immediately
terminate upon NTC's receipt of written notice from Jacobs that Jacobs is
resigning his employment for "good cause," as "good cause" is defined below
in Paragraphs 7.4.b and 7.4.c ("Good-Cause Resignation").
7.4.b The parties agree that Jacobs' resignation for "good cause"
within the meaning of Paragraph 7.4.a above, shall occur when notice of such
resignation is given because (i) a material reduction in the duties and
responsibilities of Jacobs, as set forth in this Agreement ("Reduction of
Duties") has taken place, and/or (ii) a material breach of this Agreement by
NTC ("Breach") has taken place, provided that in either such event Jacobs
shall have given NTC written notice specifying such Reduction in Duties
and/or Breach, stating that Jacobs intends to resign by reason thereof, and
such Reduction of Duties and/or Breach shall continue without cure for thirty
(30) days thereafter.
7.4.c The parties agree that Jacobs' resignation for "good cause"
within the meaning of Paragraph 7.4.a above, shall also occur when notice of
such resignation is given within six (6) months following a Change in
Control, as defined in the following sentence. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred if any
"person" (as such term in used in Sections 13(d) and 14(d)(2) of the
Securities and Exchange Act of 1934 (the "Exchange Act")), other than a
person or group (as such term is used in Rule 13d-5(b) of the General Rules
and Regulations promulgated under the Exchange Act) (the "Rules and
Regulations") of persons who are affiliates (as such term is defined in Rule
12b-2 of the Rules and Regulations) of NTC or Incomnet on the date hereof,
after the date of this Agreement becomes the beneficial owner, directly or
indirectly, of securities of NTC or Incomnet representing twenty percent
(20%) or more of the combined voting power of NTC or Incomnet's then
outstanding securities (including securities the holder of which has the
right to convert into voting securities of NTC or Incomnet.
7.4.d The parties agree that in the event of the termination of
Jacobs' service under this Agreement due to Jacobs' Good Cause Resignation,
then NTC shall continue to pay to Jacobs
5
<PAGE>
the amount of the monthly Salary that Jacobs would have otherwise been
entitled to receive, as set forth above in paragraph 2.1 through July 25,
1999.
7.4.e The parties further agree that in the event of a Good Cause
Resignation, any and all of the shares of the Common Stock subject to the
Options in which Jacobs has vested but not yet exercised shall become null
and void if not exercised on or before July 25, 199.
7.5 RESIGNATION BY JACOBS OTHER THAN FOR "GOOD CAUSE"
7.5.a Jacobs' service under this Agreement shall immediately
terminate upon NTC's receipt of written notice from Jacobs that Jacobs is
resigning his service under this Agreement other than for "good cause," as
"good cause" is defined above in Paragraphs 7.4.b and 7.4.c ("Not-For-Cause
Resignation").
7.5.b In the event Jacobs' termination is a Not-For-Cause
Resignation, notwithstanding anything to the contrary expressed or implied
herein, except as required by applicable law, NTC shall not be obligated to
make any payments to Jacobs or make payments on Jacobs' behalf of any kind or
nature whatsoever by reason of Jacobs' Not-For-Cause Resignation, other than
(i) such amounts, if any, of the Salary or other compensation described in
Paragraphs 2.1, 2.2 and 2.3 as shall have accrued and remain unpaid as of the
date of such Not-For-Cause Resignation and (ii) such other amounts, if any,
which may be then otherwise payable to Jacobs from NTC's benefit plans or
reimbursement policies.
7.5.c In the event Jacobs' termination is a Not-For-Cause
Resignation, then on the date of such termination, any and all of the shares
of the Common Stock subject to the Options in which Jacobs has vested but has
not yet exercised shall become null and void if not exercised within one (1)
year of the date of such resignation.
8.0 CONFIDENTIAL INFORMATION
8.1 Jacobs acknowledges and agrees that he will have access to and will
participate in the development of or be acquainted with confidential and/or
proprietary information and trade secrets related to the business of NTC or
used in the business and operations of NTC which are not made publicly
available, including but not limited to: (i) business plans, financial
reports, operating data, budgets, wage and salary rates, pricing strategies
and information, terms of agreements with suppliers or bankers and others,
customer lists, lists of independent representatives, products, proposed
products, services, proposed services, marketing plans, sales plans, patents,
devices, software programs, reports, correspondence, tangible property and
specifications owned or used by NTC's businesses; (ii) information pertaining
to future developments such as but not limited to potential acquisition of
other companies or product lines, potential strategic alliance agreements for
products or market segments, research and development, public offerings,
marketing, distribution, delivery or merchandising plans or ideas, and
potential new business locations; and (iii) other tangible and intangible
property (collectively, "Confidential Information").
6
<PAGE>
8.2 Jacobs agrees that all Confidential Information shall be the exclusive
properties of NTC. Jacobs further agrees and warrants that he shall not
disclose, use of make known for his or another's benefit any Confidential
Information in any way except in the best interests of NTC in the performance of
Jacobs' duties under this Agreement. However, NTC agrees Jacobs may disclose
Confidential Information when required by applicable law or judicial process,
but only after notice to NTC of Jacobs' intention to do so and opportunity for
NTC to challenge or limit the scope of the disclosure.
8.3 Jacobs acknowledges and agrees that a remedy at law for any breach or
threatened breach of the provisions of this paragraph 8.0 would be inadequate.
Therefore, Jacobs agrees that NTC shall be entitled to injunctive relief in
addition to any other available rights and remedies in cash of any such breach
or threatened breach, provided, however, that nothing contained herein shall be
construed as prohibiting NTC from pursuing any other rights and remedies
available for any such breach or threatened breach.
8.4 Jacobs agrees that upon termination of his service pursuant to this
Agreement for any reason, Jacobs shall forthwith return to NTC any and all
Confidential Information in Jacobs' possession which was obtained in any way by
Jacobs during the period of his service with NTC and which in any way relates to
the business of NTC including but not limited to documents, correspondence,
notebooks, reports, computer programs, computer discs and other electronic
media, and all other materials and copies thereof.
8.5 Jacobs agrees that his obligations under this Paragraph 8.0 shall
survive the expiration or termination of this Agreement and shall terminate
three (3) years after the last to occur of such events.
9.0 AGREEMENT NOT TO COMPETE
9.1 During Jacobs' service under this Agreement and for a one (1) year
period immediately following the termination of Jacobs' service under this
Agreement (other than any termination pursuant to either of Paragraphs 7.3 or
7.4), for any reason whatsoever, Jacobs will not directly or indirectly, as a
director, officer, employee, manager, consultant, contractor, advisor or
otherwise, engage in competition with, or own any interest in, perform any
services for, participate in or be connected with any business or organization
which engages in competition with NTC (i) in any geographical area where any
business is presently carried on by NTC, or (ii) in any geographical area where
any business, during the period of Jacobs' services under this Agreement, shall
be hereafter carried on by NTC, if such business is then being carried on by NTC
in any such geographical area. The parties agree, however, that the provisions
of this Paragraph 9.1 shall not be deemed to prohibit Jacobs' ownership of not
more than four percent (4%) of the total shares of all classes of stock
outstanding of any publicly held company.
9.2 During Jacobs' service under this Agreement and for a one (1) year
period immediately following the termination of Jacobs' service under this
Agreement (other than any termination pursuant to either of Paragraphs 7.3 or
7.4), Jacobs shall not for any reason whatsoever (i) directly or indirectly
solicit for employment any employee of NTC, or (ii) directly
7
<PAGE>
or indirectly advise or recommend to any other person that they employ or
solicit for employment any employee of NTC.
9.3 During Jacobs' service under this Agreement and for a one (1) year
period immediately following the termination of Jacobs' service under this
Agreement (other than any termination pursuant to either of Paragraphs 7.3 or
7.4), for any reason whatsoever, Jacobs shall not (i) directly or indirectly
solicit for employment, or solicit for services, or solicit for any other
business reason any person who was or is an independent sales representative in
NTC's marketing program during the period of Jacobs' service under this
Agreement, or (ii) directly or indirectly advise or recommend to any other
person that such other person, directly or indirectly, solicit for employment,
or solicit for services, or solicit for any other business reason any person who
was or is, during the period of Jacobs' service under this Agreement, an
independent sales representative in NTC's marketing program.
9.4 During Jacobs' service under this Agreement and for a one (1) year
period immediately following the termination of Jacobs' service under this
Agreement (other than any termination pursuant to either of Paragraphs 7.3 or
7.4), for any reason whatsoever, Jacobs shall not directly or indirectly hire,
engage, send work to, place orders with, or in any manner be associated with any
supplier, contractor, subcontractor, or other person or firm which rendered
services to, or sold products to NTC if such actions by Jacobs would have a
material adverse effect on the business, assets or financial condition of NTC.
9.5 For the purposes of this Paragraph 9.0, a person or entity, including
without limitation, Jacobs, shall be deemed to be a competitor of NTC, shall be
deemed to be engaging in competition with NTC, if such person or entity in any
way conducts, operates, carries out or engages in (i) the business of marketing
long distance telephone services or pager services or Internet access services,
and/or (ii) such other future business or businesses as NTC may reasonably be
expected to conduct within the one (1) year period immediately following the
termination of Jacobs' services under this Agreement (other than any termination
pursuant to either Paragraphs 7.3 or 7.4) in such geographic areas or area as
such future business or businesses may reasonably be conducted by NTC.
9.6 In connection with all of the above provisions of this Paragraph 9.0,.
Jacobs represents to NTC that his experience, capabilities and circumstances are
such that such provisions will not prevent Jacobs from earning a livelihood.
Jacobs agrees and understands that the covenants he has made in this paragraph
9.0, shall survive the expiration or termination of this Agreement and shall
terminate one (1) year after the last to occur of such events. Jacobs further
agrees that the limitations set forth in this Paragraph 9.0, including all time
and territorial limitations, are reasonable and properly required for the
reasonable and adequate protection of the business of NTC.
9.6 Jacobs acknowledges and agrees that a remedy at law for any breach of
threatened breach by Jacobs of any of the provisions of this Paragraph 9.0 would
be inadequate. Jacobs therefore agrees that NTC shall be entitled to injunctive
relief of any such breach or threatened
8
<PAGE>
breach, provided however, that nothing contained herein shall be construed as
prohibiting NTC from pursuing any other rights and remedies available for any
such breach or threatened breach.
10.0 RIGHT TO PAYMENTS
10.1 Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to exclusion,
attachment, levy or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null and
void and of no effect.
11.0 GENERAL PROVISIONS
11.1 DISPUTES AND SELECTION VENUE. In the event of any dispute,
controversy or claim ("Disputed Matter") between the parties to this
Agreement or the breach thereof, the parties agree to and are obligated to
submit the Disputed Matter to binding arbitration in accordance with the
Rules of the American Arbitration Association. The parties further agree
that such arbitration shall be held in the County of Orange in the State of
California ("Venue"). By execution of this Agreement, the parties
irrevocably and unconditionally submit to the jurisdiction of said
arbitration in any such Disputed Matter. Nothing herein shall be construed
to limit or restrict the rights of the parties to obtain equitable remedies
and relief from any court of competent jurisdiction in said Venue.
11.2 APPLICABLE LAW. This Agreement shall be construed, governed and
enforced in accordance with the laws of the State of California.
11.3 ATTORNEY FEES. In the event of any Disputed Matter between the
parties hereto in connection with this Agreement, the prevailing party shall be
entitled to receive from the losing party all of his or its reasonable costs,
fees and expenses including but not limited to court costs and reasonable
attorneys' fees.
11.4 AMENDMENT. No amendment, modification, waiver, discharge or change
("Amendment") to this Agreement shall be valid unless such Amendment is in
writing and signed by both of the parties hereto.
11.5 ADDITIONAL DOCUMENTS. Each of the parties hereto specifically agrees
to execute such other and further instruments and documents as may reasonably be
required to effectuate the terms, conditions and objectives of this Agreement.
11.6 SEVERABILITY AND COMPLIANCE. If any term, condition or provisions
of this Agreement is found to be invalid, contrary to law or otherwise
unenforceable ("Invalid Provision"), such finding shall in no way affect the
validity or enforceability of the other terms, conditions and provisions
herein. Such other terms, conditions and provisions shall be valid and
enforceable as if the Invalid Provision was never a part hereof. Each party
hereto shall be excused without further liability from the performance of any
duty, obligation or responsibility
9
<PAGE>
hereunder to the extent it is prevented from such performance by applicable
laws, rules or regulations or by the order or decision of any regulatory
authority.
11.7 WAIVER OF BREACH. The waiver of one party of a breach of any term,
condition or provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach of any type whether of
similar or dissimilar nature.
11.8 NOTICES. Any and all notices, demands or other communications
("Notice") given hereunder shall be delivered to the party to whom such Notice
is addressed by delivery in person or by delivery through United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Jacobs: Edward R. Jacobs
c/o NTC
2801 Main Street
Irvine, CA 92614
If to NTC: National Telephone & Communications, Inc.
2801 Main Street
Irvine, CA 92614
Attn: President
If delivery is by United States mail, notice shall be deemed to have been
given three (3) working days after being placed in such mail, as evidenced by
a mailing receipt. Either party may change its address for the purpose of
this Agreement by giving the other party written notice of its new address.
11.9 ASSIGNMENTS. Unless specifically granted in a term, condition or
provisions hereinabove, this Agreement and the rights and obligations granted
and agreed to hereunder may not be assigned by either party to this Agreement by
sale of business, operation of law or otherwise without first obtaining the
written consent of the other party which both parties agree will not be
unreasonably withheld unless such an assignment is specifically disallowed in a
term, condition or provision hereinabove. The parties further agree that
nothing in this paragraph 11.9 above shall preclude Jacobs from designating a
beneficiary to receive any benefit payable hereunder upon Jacobs' death or
incapacity.
11.10 VALID ENTITY. Each party to this Agreement which is a legal entity
such as a partnership, corporation or trust or the like represents that it is a
validly formed and existing entity, that it has the authority to enter into this
Agreement and that all acts necessary to make this Agreement valid and binding
have been done. The person or persons executing this Agreement on behalf of
such entity represents that they have the right and authority to do so.
11.11 REPRESENTATION BY COUNSEL OF OWN CHOOSING. By executing this
Agreement, each party of this Agreement represents and warrants that said party
is either represented by counsel of
10
<PAGE>
his or its choosing, or has been advised to seek such representation, advice
or counsel, and has voluntarily and knowingly declined to do so.
11.12 CONSTRUCTION. Any rule of law to the contrary notwithstanding, this
Agreement shall be construed as if drafted by all parties regardless of which
part or which party's legal counsel either actually drafted this Agreement or
printed or physically memorialized this Agreement between the parties.
11.13 CAPTIONS. The captions in this Agreement are inserted for convenience
of reference only and do not define, describe or limit the scope or the intent
of this Agreement or any of the terms, conditions or provisions hereof.
11.14 NUMBER AND GENDER. The use of neuter, masculine or feminine gender
and the similar plural number in any term, condition or provision of this
Agreement shall be deemed to include the other whenever the context so requires.
11.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and each such counterpart shall be deemed an original; but all
of such counterparts taken together shall constitute one and the same
agreement.
11.16 SURVIVAL. In the event this Agreement provides for a closing or a
transfer of possession to or title of property, all terms, covenants,
warranties and conditions of this Agreement shall survive such closing or
transfer except for payments actually fully made or acts fully performed
before or at the time of such closing or transfer.
11.17 ENTIRE AGREEMENT. This Agreement and the January 28, 1997 Letter
Agreement, and all amendments thereto, set forth and constitute the entire
agreement between parties with respect to the subject matter herein and
supersede all previous agreements, promises and representations, either oral
or in writing, between the parties hereto with respect to the transaction
covered hereby, and contain all the covenants and agreements between the
parties.
11.8 BENEFITS. Subject to the restrictions on assignment and transfers,
if any, which may be set forth in this Agreement, the terms, conditions and
provisions of this Agreement shall inure to the benefit of and be binding on
the parties hereto and all their respective successors including but not
limited to permitted assigns, executors, administrators, heirs and
representatives; and no other person or entity shall have any rights
whatsoever under this Agreement.
This Agreement is now therefore agreed to effective July 25, 1997, in the
County of Orange, State of California.
NTC: JACOBS:
National Telephone &
Communications, Inc. Edward R. Jacobs
11
<PAGE>
By: /s/ James R. Quandt /s/ Edward R. Jacobs
----------------------- --------------------
James R. Quandt Edward R. Jacobs
President and Director
By: /s/ Melvyn Reznick
-----------------------
Melvyn Reznick
Director
By: /s/ Fred Jager
-----------------------
Fred Jager
Director
By: /s/ Pamela Carter
-----------------------
Pamela Carter
Director
12
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