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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 JUNE 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
June 30, 1997.......................................................13,554,239
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ITEM 1. FINANCIAL STATEMENTS
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN 000S)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,601 $ 2,214
Accounts receivable, including $277,680 and
$267,000 due from related party at June 30,
1997 and December 31, 1996, respectively and
less allowance for doubtful accounts of
$1,140,000 at June 30, 1997 and $1,993,000
at December 31, 1996 19,074 13,137
Notes receivable - current portion 454 323
Notes receivable from officers & shareholders,
net of reserves of $209,000 1,218 438
Inventories 395 2,760
Other current assets 1,133 1,332
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Total current assets 23,875 20,204
Property, plant and equipment, at cost, net 13,957 14,357
Patent rights, net 1,241
Goodwill, net 6,709 4,542
Building construction/remodeling 2,418 --
Deposits, investments and other assets 879 243
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Total assets $47,838 $40,587
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONT'D)
(DOLLARS IN 000S)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------------
LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $14,455 $14,746
Accrued expenses 7,996 8,217
Current portion of notes payable 5,198 3,918
Deferred income 3,485 4,040
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Total current liabilities 31,134 30,921
Liabilities in excess of asset 3,600 --
Notes payable -- 1,041
Notes payable - CIC 1,919 --
Commitments (Note 12)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares
authorized; and 13,554,239 shares at June 30,
1997 and 13,369,681 shares issued and
outstanding at December 31, 1996 61,847 61,320
Preferred stock, no par value; 100,000 shares
authorized; 2,075 shares issued and outstanding
at June 30, 1997 and 2,440 shares issued and
outstanding at December 31, 1997 1,990 2,355
Treasury stock (5,492) (5,492)
Accumulated deficit (47,160) (49,557)
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Total shareholders' equity 11,185 8,626
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Total liabilities, & shareholders' equity $ 47,838 $ 40,587
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See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
(DOLLARS IN 000s)
1997 1996
---- ----
SALES $ 34,855 $ 25,305
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OPERATING COSTS & EXPENSES:
Cost of sales 24,610 15,461
General & administrative 7,851 7,537
Depreciation & amortization 732 465
Bad debt expense 152 1,444
Other (income)/expense 67 721
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Total operating costs and expenses 33,411 25,628
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Income/(loss) before income taxes
& minority interest 1,443 (323)
INCOME TAXES 101 93
---------- ----------
Income/(loss) before minority interest 1,342 (416)
MINORITY INTEREST -- 646
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Net income 1,342 $ 230
=========== ==========
INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Income before extraordinary items $ 0.10 $ 0.02
Extraordinary items -- --
----------- ----------
Net income $ 0.10 $ 0.02
=========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 13,600,000 13,294,324
=========== ==========
See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN 000s)
1997 1996
---- ----
SALES $ 66,023 $ 49,705
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OPERATING COSTS & EXPENSES:
Cost of sales 46,141 31,367
General & administrative 14,010 13,829
Depreciation & amortization 1,397 894
Bad debt expense 1,848 2,537
Other (income)/expense 59 1,370
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Total operating costs and expenses 63,455 48,797
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Income/(loss) before income taxes,
extraordinary items & minority interest 2,569 (292)
INCOME TAXES 208 187
---------- ----------
Income/(loss) before extraordinary
items & minority interest 2,361 (477)
MINORITY INTEREST -- 1,127
EXTRAORDINARY ITEMS 9 --
---------- ----------
Net income 2,370 $ 648
========== ==========
INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Income before extraordinary items $ 0.18 $ 0.05
Extraordinary items -- --
---------- ----------
Net income $ 0.18 $ 0.05
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 13,500,000 13,286,283
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
(Dollars in 000s)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,370 $(477)
Depreciation & amortization 1,397 894
Minority interest -- 1,127
Other - net -- 52
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Net cash inflow/(outflow) from
operating activities 3,767 1,596
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CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS:
Accounts receivable (5,937) (1,156)
Notes receivable - current portion (131) (81)
Notes receivable - due from officers and shareholders (780) (65)
Inventories 2,365 (521)
Prepaid expenses & other 199 (467)
Notes receivable - long term -- 155
Deposits & other (636) (6)
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Net cash inflow/(outflow) from changes in
operating assets (4,920) (2,143)
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CASH FLOWS FROM INCREASE/(DECREASE) IN
OPERATING LIABILITIES:
Accounts payable (291) 1,541
Accrued expenses (221) (652)
Deferred income (555) 715
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Net cash inflow/(outflow) from changes
in operating liabilities (1,067) 1,605
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Net cash inflow/(outflow) from operations (2,220) 1,058
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CASH FLOWS FROM (INCREASE)/DECREASE IN
INVESTING ACTIVITIES:
Acquisition of plant & equipment (3,415) (3,390)
Patents/intangible assets 1,241 (106)
Investment in Lab Tech -- 17
Liability in excess of assets 3,600 --
Goodwill (2,167) 148
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Net cash inflow/(outflow) from investing
activities (741) (3,331)
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See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONT'D)
SIX MONTHS ENDED JUNE 30,
(Dollars in 000s)
1997 1996
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CASH FLOWS FROM INCREASE/(DECREASE) IN
FINANCING ACTIVITIES:
Notes payable - current 1,280 2,803
Sale of common stock, net 527 148
Loans from a major shareholder -- 320
Notes payable - long term 818 (808)
Other - net 88 46
Preferred stock (365) --
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Net cash inflow/(outflow) from
financing activities 2,348 2,509
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Net increase/(decrease) in cash &
cash equivalents $ (613) $ 236
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------ ------
See accompanying "Notes to Consolidated Financial Statements."
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 June 30, 1997, and the results of
operations for the three months and six ended June 30, 1997 and 1996, and
cash flows for the six months June 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 15, 1997. The interim
results are not necessarily indicative of the results for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, National
Telephone & Communications-Registered Trademark-, Inc. (NTC) and California
Interactive Computing, Inc. (CIC) (see Item 5. Acquisition of California
Interactive Computing, Inc.). The statements do not include consolidated
results of Rapid Cast, Inc., the Company's 35%-owned subsidiary, which is
accounted for using the equity method of accounting under FASB Statement No.
94. The Company accounted for RCI using the consolidated method of accounting
from the third quarter of 1995 until December 31, 1996 because the Company
owned 51% of RCI. In January 1997, the Company's ownership changed from 51%
of RCI to 35% and, as a result, the method of accounting has changed to the
equity method under FASB Statement No. 94.
REVENUE RECOGNITION - The Company recognizes revenue during the month in
which services or products are delivered, as follows:
(1) NTC's long distance telecommunications service revenues are generated
when customers make long distance telephone calls from their business or
residential telephones or by using any of NTC's telephone calling cards.
Proceeds from prepaid telephone calling cards are recorded as deferred
revenues when the cash is received, and recognized as revenue as the
telephone service is utilized. The reserve for deferred revenues is carried
on the balance sheet as an accrued liability. Long distance telephone
service sales in the three and six months ending June 30, 1997 totaled $29.7
million and $54.8 million, respectively versus long distance telephone
service sales of $20.2 million and $40.5 million, respectively in the three
and six months ending June 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 Long
Distance University programs. The Company requires that all such services
and materials be paid at the time of purchase. Revenues from
marketing-related materials, net of amounts deferred for future services
provided to the representatives, are booked as cash sales when the revenues
are received. A portion of the revenues from marketing related programs and
materials is deferred and recognized over a twelve month period to accrue
the Company's obligation to provide customer support to its independent
representatives. For the three months and six months ending June 30, 1997,
marketing sales totaled $4.3 million and $10 million, respectively versus
marketing sales of $3.5 million and $6.1 million, respectively for the three
months and six months ended June 30, 1996.
(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 six months ending June 30, 1997 totaled $371,564 and
$741,092, respectively versus $363,844 and $701,034, respectively in the
three months ending June 30, 1996.
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(4) Revenues from the Company's CIC subsidiary 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 CIC on May 2, 1997, revenues and
earnings only reflect CIC's operations from May 2, 1997. For the first two
months of operation commencing on May 2, 1997, CIC had revenues of $447,043.
CONCENTRATION OF CREDIT RISK - The Company sells its telephone and network
services to individuals and small businesses throughout the United States and
does not require collateral. Rapid Cast sells its optical products both
domestically and internationally. Reserves for uncollectible amounts are
provided, which management believes are sufficient.
COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware,
furniture and office equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives of 5 to
10 years.
COMPUTER SOFTWARE - The Company capitalizes the costs associated with
purchasing, developing and enhancing its computer software. All software
costs are amortized using the straight-line method over the assets' estimated
useful lives of 3 to 10 years.
LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and
are amortized using the straight-line method over the expected lease term.
NET INCOME PER SHARE - Net income per common share is based on the weighted
average number of common shares for 1997, and common shares and common share
equivalents for 1996.
ACQUISITION AMORTIZATION - The excess of purchase price over net assets of
NTC has been recorded as an intangible asset and is being amortized by the
straight-line method over twenty years.
DEFERRED TAX LIABILITY - Deferred income taxes result from temporary
differences in the basis of assets and liabilities reported for financial
statement and income tax purposes.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
3. FUNDING OF MARKETING COMMISSIONS AND DEFERRED INCOME:
The Company's subsidiary, NTC, maintains separate bank accounts for the
payment of marketing commissions. Funding of these accounts is adjusted
regularly to provide for management's estimates of required reserve balances.
NTC estimates the total commissions owed to active independent
representatives ("IR Earned Compensation") each week for all monies collected
that week due to the efforts of those active independent representatives.
All IR Earned Compensation is then paid to the independent representatives,
when due, directly out of the separate bank account.
IMPAIRMENT OF LONG LIVED ASSETS: In accordance with the provisions of SFAS
No. 121, the Company regularly reviews long-lived assets and intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount to the assets may not be recoverable.
CURRENT ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board
has issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
encourages companies to account for stock compensation awards based on their
fair value at the date the awards are granted. This statement does not
require the application of fair value method and allows the continuance of
current accounting method, which requires accounting for stock compensation
awards based on their intrinsic value as of the grant date. However, SFAS No.
123 requires pro forma disclosure of net income and, if presented, earnings
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
per share, as if the fair value based method of accounting defined in this
statement has been applied. The accounting and disclosure requirements of
this statement are effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is encouraged.
The Company has elected not to adopt the fair value provisions of this
statement.
4. NOTES PAYABLE:
Notes payable consist of the following as of June 30, 1997:
Notes payable to founding stockholders of CIC,
interest at 8%, due beginning in May 1998 $1,918,533
Note payable to bank for line of credit to NTC,
interest at prime plus 1%, due as current liability $4,010,686
Capitalized lease obligations $1,187,371
-------------
$7,116,590
-------------
-------------
5. NETWORK MARKETING COSTS:
During the three and six months ending June 30, 1997, NTC's net costs to
operate its network marketing program were $0.4 million and $0.6 million,
respectively, as summarized below (in $ millions):
<TABLE>
<CAPTION>
3 Months Ending 6 Months Ending
June 30, 1997 June 30, 1997
--------------- ---------------
<S> <C> <C>
Sales $ 4.3 $ 10.0
Cost of sales 3.3 8.2
Operating expenses for support services 1.4 2.4
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Total marketing-related costs 4.7 10.6
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Net marketing cost $ 0.4 $ 0.6
% of total NTC (long distance & marketing) sales 1.2% 0.9%
------- --------
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</TABLE>
Marketing sales of $4.3 million and $10.0 million, during the three and six
month periods ending June 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
commenced reserving a portion of all marketing revenues in order to provide a
fund from which to draw estimated future refunds of marketing proceeds.
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 the three and six month marketing-related costs of $4.7
million and $10.6 million, respectively, are compared against
marketing-related revenues of $4.3 million and $10.0 million for the same
periods, the result is a net loss in marketing-related activities of $0.4
million and $0.6 million or 1.2% and 0.9% of total NTC sales, respectively.
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INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
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 six months ending June 30, 1997, expenses
associated with commissions, bonuses and overrides paid out to NTC's
independent representatives were $4.8 million and $10.9 million, respectively
versus $3.8 million and $7.3 million, respectively in the three and six
months ended June 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 the former Chairman of the Board and one of his
affiliates. Counsel for the Company is unable to estimate the ultimate
outcome of these matters and is unable to predict a range of potential loss.
Accordingly, no amounts have been provided for the class action or related
lawsuits in the accompanying financial statements. The Company is under
investigation by the Securities and Exchange Commission under a non-public
"formal order of private investigation." Management has furnished all
information requested by the Commission and does not believe that the matter
will have a material adverse impact on its financial position or results of
operations.
EXTENSION OF LEASE: In April 1997, NTC entered into an agreement to extend
the lease on its headquarters building at 2801 Main Street, Irvine,
California. According to the terms of this agreement, NTC would be obligated
to pay formula based monthly lease payments estimated to be approximately
$57,000 per month during 1997 and increasing to approximately $72,000 per
month for the remainder of the initial five year lease term. In addition, in
February 1997, NTC entered into a ten year lease for office space in
Honolulu, Hawaii, with the lease expiring in 2007. The monthly payments on
the lease in Honolulu commence at $36,698 per month in 1997 and 1998, and
increase on a bi-annual basis through the term of the lease to $43,536 per
month in 2006 and 2007.
8. ACQUISITION OF CALIFORNIA INTERACTIVE COMPUTING. INC. (CIC):
GENERAL: On May 2, 1997, Incomnet, Inc. ("Company") acquired 88,370.5 shares
representing 100% of the outstanding common stock of California Interactive
Computing, Inc. ("CIC"), a private corporation headquartered in Valencia,
California. The Company agreed to pay a total of $1,758,302 in cash, payable
over a five year period of time. See Item 5. Other Information - Acquisition
of California Interactive Computing, Inc. - Schedule of Payments." In
addition, the Company has agreed to assume the outstanding balance of
$418,527.91 for loans to CIC made by two of CIC's shareholders. The
transaction has been accounted for using the purchase method of
accounting.
The Company has also signed an employment agreement for a period of two
years with Jerry C. Buckley, CIC's former president and CEO, pursuant to
which it will pay Mr. Buckley $10,000 per month in consideration for Mr.
Buckley's services as the Director of Strategic Planning for CIC. The
Company has also agreed to provide 10,000 and 20,000 stock options,
respectively, in CIC to two former shareholders when a plan is established
for CIC's officers, directors, employees and key consultants.
CIC is engaged in the development and marketing of software that is used to
process insurance-related claims, including workers compensation, disability,
general medical and property & casualty. Its software is leased to
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companies who provide their own insurance and claims administration, to
insurance companies, and to third-party administrators who process claims
for either self-insured companies or insurance companies. CIC was
incorporated in 1977 in California and has provided software for claims
processing for 20 years.
SCHEDULE OF PAYMENTS: At the close of the transaction on May 2, 1997, the
Company paid a total of $249,818 to the former shareholders of CIC, $84,818
of which was paid to acquire CIC's stock and $165,000 of which was utilized
to pay down loans to two former CIC shareholders. The Company has signed
promissory notes in the aggregate principal amount of $1,927,016.91 to four
former shareholders of CIC to repay the balance of the loans owed by CIC
($253,527.91 as of May 2, 1997) and to pay the balance of the price to
purchase their CIC stock by the Company ($1,674,489 as of May 2, 1997). These
notes bear interest at the rate of 8% per annum. The stock of CIC purchased
by the Company is held in an escrow account until the promisory notes issued
by the Company to CIC former shareholders are repaid in full. The outstanding
balances owed on these notes can be repaid at any time, which would lower
the total amount of scheduled payments, including interest.
During the first year after the acquisition, the Company has agreed to pay
$27,859 to one shareholder in 12 equal monthly payments of principal and
interest.
During the 13th - 24th month after the acquisition, the Company has
contracted to pay a total of $591,175 of principal and interest, of which
$369,136 is scheduled to be paid for the purchase of CIC stock from four
former shareholders and of which $222,039 is scheduled to pay down the
outstanding loans owed by CIC to two former shareholders.
During the 25th - 36th month after the acquisition, the Company has
contracted to pay a total of $559,662 of principal and interest, of which
$514,662 is scheduled to be paid for the purchase of CIC stock from four
former CIC shareholders and of which $45,000 is scheduled to pay off the
remaining balance of the loans owed by CIC to two former CIC shareholders.
During the 37th - 48th month after the acquisition, the Company is contracted
to pay a total of $574,572 of principal and interest for the purchase of CIC
stock from four former shareholders. During the 49th - 60th month after
the acquisition, the Company is contracted to pay a total of $514,662 of
principal and interest for the purchase of CIC stock from four former
shareholders.
DIRECTORS OF CIC: The former directors of CIC tendered their resignation,
effective at the acquisition. The Company has named Melvyn Reznick, its
President and CEO, Stephen A. Caswell, its Vice President and Corporate
Secretary, and Jerry C. Buckley, CIC's former President and CEO, to serve on
CIC's Board of Directors. Mr. Reznick will serve as Chairman, President, CEO
and CFO of CIC. Mr. Caswell will serve as Executive Vice President and
Secretary of CIC. Mr. Buckley will serve as a director. See the Company's
Report on Form 8-K, dated May 13, 1997.
PRODUCTS & SERVICES: CIC develops and markets a trademarked line of software
products designed to handle insurance-related claims processing.
Insurance-related products include GenCOMP-TM-, GenMED-TM-, GenDIS-TM-,
GenPAC-TM-, GenRISK-TM-, GenIRIS-TM- and Top Rate-TM-. In addition, CIC also
offers several computer and service-related products, including GenARS-TM-,
which is an optical disk-based information storage and retrieval system, and
GenSERVE-TM-, which is a maintenance and service program for customers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
The following is management's discussion and analysis of certain significant
factors which have affected the results of operations and financial condition
of the Company during the period included in the accompanying financial
statements. This discussion should be read in conjunction with the financial
statements and associated notes. The discussion herein is qualified by
reference to the Cautionary Statements. See "Part II. Cautionary Statements".
LIQUIDITY AND CAPITAL RESOURCES:
GENERAL - Overall, the Company achieved negative cash flows of $613,000
during the first six months of 1997 versus positive cash flow of $236,000
during the first six months of 1996. The negative cash flows resulted from
negative cash flows from operations of $2.2 million and negative cash flows
from investing activities of $0.7 million, which were offset by positive
cash flows from financing activities of $2.3 million as discussed below:
CASH FLOW FROM OPERATIONS - The Company generated $2.2 million in negative
cash flow from operations during the six months ended June 30, 1997,
compared to $1.1 million in positive cash flow from operations during the
prior year's comparable period. This decrease in cash flow from operations
resulted primarily from: (1) a $3.8 million inflow of cash from net income
and depreciation & amortization, offset by (2) a $5.9 million increase in
accounts receivable and a $2.4 million decrease in inventories. During this
period, operating liabilities decreased by $1.1 million.
CASH FLOW FROM INVESTING - The Company generated negative cash flows from
investing activities of $0.7 million in the six months ended June 30, 1997
versus negative cash flows $3.3 million in the first six months of 1996. In
the first six months of 1997, the Company increased its acquisition of plant
& equipment by $3.4 million. Goodwill also increased by $2.2 million
associated with the Company's acquisition of CIC. The increase in plant &
equipment was primarily due to capital expenditures of $1.5 million in tenant
improvements for NTC`s Honolulu, Hawaii office space. The Company expects
NTC to continue making improvements to its headquarters building and to
purchase additional equipment commensurate with the expansion of its
business. The Company also anticipates investing in software development at
CIC.
As an offset to the Company's negative cash flows from investing activities,
the Company experienced positive cash flows from investing activities due to
a $1.2 million decrease in patents/intangible assets and a $3.6 million
decrease in liability in excess of assets associated with the write-off of
the Company's investment in RCI.
CASH FLOW FROM FINANCING - The Company had net cash inflow of $2.4 million in
the six months ended June 30, 1997 versus net cash inflow of $2.5 million in
the six months ended June 30, 1997. Significant items include an increase of
$1.3 million in notes payable - current and $0.8 million in notes payable -
long term, as well as an increase of $0.5 million due to the sale of common
stock.
LITIGATION - The Company is subject to pending litigation and an
investigation by the Securities and Exchange Commission. Management is not
yet able to predict the impact of the pending litigation on its financial
condition and results of operations. Management does not believe that the
investigation by the Securities and Exchange Commission will result in a
material impact on the Company's financial condition or results of
operations. See "Part II. Item 1. Legal Proceedings."
RESULTS OF OPERATIONS:
SALES - Second quarter, 1997 sales of $34.9 million increased 38% over the
second quarter, 1996 sales of $25.3 million. The majority of this increase
was attributable to NTC's sales increase to $34 million from $23.6 million in
the three months ending June 30, 1997 versus 1996, respectively. A secondary
cause of the
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<PAGE>
increase in sales was the inclusion of $447,043 in sales from two months of
operations of the Company's newly-acquired subsidiary, CIC (see Item 5. Other
Information.- Acquisition of California Interactive Computing, Inc.). The
following table summarizes the Company's sales performance by subsidiary and
segment during the comparable second quarters in 1997 and 1996:
$ in millions
-----------------
Subsidiary Segment 1997 1996
- ---------- --------------------------------------- ------- -------
NTC Telephone (telecommunications services) $ 29.7 $ 20.2
NTC Telephone (marketing programs) 4.3 3.4
RCI Optical -- 1.3
CIC Computer Software 0.5 --
AutoNETWORK Network 0.4 0.4
------- -------
Total Company Sales $ 34.9 $ 25.3
------- -------
------- -------
COST OF SALES - Total Company cost of sales increased to $24.6 million or 70%
of sales during the quarter ending June 30, 1997 verses $15.5 million or 61%
of sales during the comparable prior year quarter. The increase in cost of
sales resulted largely from an increase in carrier costs associated with
increased telephone service sales by NTC. The increase in costs as a percent
of sales was largely generated by a drop in NTC's telecommunication service
gross profits due to a special limited-time offer of attractive international
rates.
The following table summarizes the changes in three major cost components
from the second quarter ended June 30, 1997 and 1996, respectively:
$ in millions
-----------------
1997 1996
------- -------
Commissions paid to NTC independent sales reps $ 4.8 $ 3.8
Carrier costs for NTC's long distance telephone service 18.6 10.2
All other costs of sales 1.2 1.5
------- -------
Total Company Cost of Sales $ 24.6 $ 15.5
------- -------
------- -------
NTC's total commission expense increased to $4.8 million in the second
quarter of 1997 compared to $3.8 million in the same quarter of 1996. NTC's
carrier costs to deliver long distance telephone service to its telephone
customers increased to $18.6 million in the second quarter of 1997 compared
to $10.2 million in the second quarter of 1996. This increase in carrier
costs reflects the increased growth in telephone sales, although these costs
have grown at a faster pace than sales, thus reflecting a decline in gross
profits from telephone service.
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) CIC's costs of producing its
computer software and providing related services, and (3) AutoNETWORK costs
of providing communications network products and services.
GENERAL & ADMINISTRATIVE - Total general and administrative costs increased
to $7.9 million or 23% of sales in the quarter ending June 30, 1997 compared
to $7.5 million or 30% of sales in the same prior year quarter. General and
administrative expenses for the six months ended June 30, 1997 increased to
$14 million or 21% of sales versus $13.8 million or 28% of sales in the
second quarter of 1996. General and administrative costs generally include
the costs of employee salaries, fringe benefits, supplies, and related
support costs which are
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<PAGE>
required in order to provide such operating functions as customer service,
billing, marketing, product development, information systems, collections of
accounts receivable, and accounting.
This decrease in general and administrative expenses as a percentage of sales
in the three month and six month periods was caused by improved efficiencies
at NTC and by no longer consolidating the financial statements of RCI. In the
second quarter of 1996, RCI's general and administrative expenses represented
11% of total general and administrative expenses.
DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization
expense increased to approximately $732,000 in the three months ended June
30, 1997 verses $464,896 in three months ended June 30, 1996. Depreciation
and amortization expense increased to $1.4 million in the six months ended
June 30, 1997 versus approximately $894,000 in the same period of 1996. This
increase was primarily caused by greater investment by NTC in computer
hardware and software, furniture and equipment, and leasehold improvements
required to support its rapid expansion in sales.
BAD DEBT EXPENSE - Total Company bad debt expense decreased to approximately
$152,000 in the second quarter of 1997 compared to $1.4 million in the same
prior year quarter. Bad debt expense for the six months ended June 30, 1997
decreased to $1.8 million from $2.5 million in the six months ended June 30,
1996. The decrease was due primarily to decreases in NTC's LEC-billed bad
debt.
OTHER INCOME & EXPENSE - The Company's other income and expense declined to
net other expense of approximately $67,000 in the second quarter of 1997
verses net other income of approximately $721,000 during the comparable prior
year quarter. The Company's other income and expense declined to net other
expense of approximately $59,000 in the six months ended June 30, 1997 verses
net other income of approximately $1.3 million during the six months ended
June 30, 1996. This net decline was primarily caused by no longer booking
acquisition costs associated with the acquisition of the Company's 35%-owned
subsidiary, RCI. In the six month period ended June 30, 1996, the Company
booked acquisition expense of $1.1 million associated with its acquisition of
RCI.
MINORITY INTEREST - Beginning on July 1, 1995, the Company converted from the
equity method to the consolidated method of accounting for its 51% ownership
in RCI. As a result, $646,265 or 49% of RCI's losses from April 1 through
June 30, 1996 (the "minority interest") was eliminated from the Company's
"Consolidated Statements of Operations" for 1996. On January 1, 1997, the
Company converted back to the equity method of accounting.
NET INCOME - Total Company net income increased to $1.3 million or 3.8% of
sales in the second quarter of 1997 as compared to net income of $230,429 or
0.9% of sales in the same quarter of 1996. Net income increased to $2.4
million in the six months ended June 30, 1997 from $648,003 in the six months
ended June 30, 1996. The increase in net income resulted from: (1) no longer
booking losses associated with the acquisition and operations of RCI, (2)
reserving for anticipated legal fees associated with lawsuits against the
Company and (3) slightly increased earnings at NTC. In the six months ended
June 30, 1997, earnings at NTC were $2.8 million versus $2.7 million for the
six months ended June 30, 1996.
-15-
<PAGE>
PART II - OTHER INFORMATION
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. The Company intends
that such forward-looking statements be subject to the safe harbors created
by such statutes. The forward-looking statements included herein are based on
current expectations that involve a number of risks and uncertainties.
Accordingly, to the extent that this Quarterly Report contains
forward-looking statements regarding the financial condition, operating
results, business prospects or any other aspect of the Company and its
subsidiaries, please be advised that the Company and its subsidiaries' actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by the Company in forward-looking
statements. The differences may be caused by a variety of factors,
including but not limited to adverse economic conditions, intense
competition, including intensification of price competition and entry of new
competitors and products, adverse federal, state and local government
regulation, inadequate capital, unexpected costs and operating deficits,
increases in general and administrative costs, lower sales and revenues than
forecast, loss of customers, customer returns of products sold to them by
the Company or its subsidiaries, disadvantageous currency exchange rates,
termination of contracts, loss of supplies, technological obsolescence of
the Company's or its subsidiaries' products, technical problems with the
Company's or its subsidiaries' products, price increases for supplies and
components, inability to raise prices, failure to obtain new customers,
litigation and administrative proceedings involving the Company, including
the pending class action and related lawsuits and SEC investigation, the
possible acquisition of new businesses that result in operating losses or
that do not perform as anticipated, resulting in unanticipated losses, the
possible fluctuation and volatility of the Company's operating results,
financial condition and stock price, losses incurred in litigating and
settling cases, dilution in the Company's ownership of its subsidiaries and
businesses, adverse publicity and news coverage, inability to carry out
marketing and sales plans, challenges to the Company's patents, loss or
retirement of key executives, changes in interest rates, inflationary
factors, and other specific risks that may be alluded to in this Quarterly
Report or in other reports issued by the Company. In addition, the business
and operations of the Company are subject to substantial risks which
increase the uncertainty inherent in the forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
ITEM 1. LEGAL PROCEEDINGS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
The investigation of the Company by the SEC, which was commenced in August
1994, has not experienced any material changes from its status as described
in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year
ending December 31, 1996. The Company continues to believe that it has
provided substantial documentation to the Commission that demonstrates the
propriety of its business operations and that the ultimate result of the
investigation will not have a material adverse effect on the Company's
financial condition or results of operations.
CLASS ACTION AND RELATED LAWSUITS:
The status of the pending class action lawsuit described in "Item 3. Legal
Proceedings" in the Company's Form 10-K for its fiscal year ending December
31, 1996, known as and updated in "Item 1. Legal Proceedings" in the
Company's Form 10-Q for its fiscal quarter ending March 31, 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 March 31, 1997, in the following manner:
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<PAGE>
On May 6, 1997, the court in the pending class action lawsuit SANDRA GAYLES
ET AL. VS. SAM D. SCHWARTZ AND INCOMNET, INC. ruled that approximately 20
former shareholders of the Company have the right to "opt out" of the class
action lawsuit and file their own separate lawsuit against the Company and
Sam D. Schwartz, the Company's former President. The Company expects these
potential plaintiffs to file a separate lawsuit against it and its former
President in the near future. The potential plaintiffs purchased the
Company's stock in the open market through Everest Securities, a brokerage
firm which has since terminated its business. The potential claims are
expected to be based on alleged violations of applicable securities laws
relating to alleged statements made by the Company's former President to the
securities broker at Everest Securities in 1995. The amount of damages to be
sought by the potential plaintiffs is not yet known. The Company intends to
vigorously defend the claims if they are asserted against it. The Company
is presently engaged in settlement discussions with the plaintiff's counsel
in the class action lawsuit. There are no assurances that any settlement will
be reached.
In a hearing on May 5, 1997, the plaintiffs in a lawsuit entitled SILVA RUN
WORLDWIDE LIMITED VS. INCOMNET, INC., SAM D. SCHWARTZ, BEAR STEARNS & CO.,
INC., LESLIE SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI
INVESTIMENTO ANTILLANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G.
EMBIRICOS, AND JOS SCHUETZ, filed in the United States District Court for the
Southern District of New York and transferred in March 1997 to the same
court in California which is hearing the pending class action lawsuit, were
allowed to continue as a separate pleading from the class action lawsuit. As
such, the Company anticipates that it will be involved in a separate lawsuit
with the SILVA RUN WORLDWIDE LIMITED plaintiffs as described in "Item 3.
Legal Proceedings" in the Company's Form 10-K for its fiscal year ending
December 31, 1996.
INCOMNET, INC. VS. SAM D. SCHWARTZ:
On April 25, 1997, the Company filed a lawsuit against Sam D. Schwartz, its
prior President and Chairman of the Board, alleging fraud, breach of
fiduciary duty, negligence, declaratory relief, breach of contract and
imposition of constructive trust. The lawsuit was filed in the Superior Court
of California in the County of Los Angeles. In the lawsuit, the Company
alleges that Mr. Schwartz failed to disclose to the Company or its board of
directors that he would obtain a direct financial benefit in connection with
certain transactions considered or entered into by the Company during the
period from 1993 to 1995. The Company further alleges that Mr. Schwartz
fraudulently induced the Company to enter into a Severance Agreement between
him and the Company in November 30, 1995 (see "Item 1. Business - Employees,
Officers and Directors - Officers" in the Company's Form 10-K for the fiscal
year ending December 31, 1995), and that he breached his fiduciary duty to
the Company by self-dealing, acting in bad faith and concealing material
facts.
The Company seeks payment from Mr. Schwartz of the actual damages incurred
by it as a result of Mr. Schwartz's conduct, as well as interest, punitive
damages, attorney's fees and costs and reimbursements of all payments
previously made to Mr. Schwartz pursuant to the Severance Agreement.
Furthermore, the Company seeks a declaratory order that Mr. Schwartz
committed acts or omissions involving known misconduct, the absence of good
faith, an improper personal benefit, a reckless disregard of his duties to
the Company and its shareholders, an unexcused pattern of inattention, and a
violation of Sections 310 and 316 of the California Corporations Code. On
June 24, 1997, Mr. Schwartz answered the Company's lawsuit against him
denying the allegations and counterclaiming for (i) enforcement of any
payments due under his Severance Agreement with the Company, (ii)
indemnification against third party claims, and (iii) payment of the same
settlement to him as was paid to the prior noteholders who purchased
convertible notes from the Company on February 8, 1995 (Mr. Schwartz also
purchased convertible notes from the Company on February 8, 1995), even
though the Company's settlement with those prior noteholders was based on the
misconduct of Mr. Schwartz. See "THE COMPANY - Settlement with Prior
Noteholders." The Company intends to vigorously assert its claims against
Mr. Schwartz, including possible contribution claims with respect to the
Company's proposed settlement payments to the plaintiffs in the class action
lawsuit, and to vigorously defend against Mr. Schwartz's counterclaims. The
lawsuit against Mr. Schwartz has entered the discovery phase and there is no
assurance regarding its outcome. There is no assurance that the case will
not have a material adverse impact on the financial condition, operating
results and business performance of the Company or its subsidiaries. See
"Item 1. Legal Proceedings - INCOMNET, INC. VS. SAM D. SCHWARTZ" in the
Company's Form 10-Q for
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<PAGE>
the quarter ended March 31, 1997, and "Item 3. Legal Proceedings -
Settlement with Prior Noteholders" in the Company's 1996 Form 10-K.
SECTION 16(B) LAWSUIT:
In January 1996, the Company was served with a derivative shareholders
lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225 in the United States District Court for the Southern District of
New York, alleging violations of Section 16(b) of the Securities Exchange Act
of 1934, as amended, and demanding that the Company assert claims against
Mr. Schwartz for the payment of short-swing profits plus interest. On July
10, 1997, the United States District Court for the Southern District of New
York gave final approval to the settlement of that lawsuit in which Mr. Sam
D. Schwartz agreed to pay to the Company cash and stock valued at $4,250,000.
In final settlement of the lawsuit, Mr. Schwartz has delivered to the Company
1,047,966 shares of the Company's common stock and $600,000 in cash. Under
the agreement, the Company paid $626,450 in attorney's fees and expenses to
the shareholder's counsel.
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-Q for the fiscal quarter ending March 31, 1997, has not
materially changed since the filing of the Form 10-K.
POTENTIAL LAWSUITS:
There is no assurance that claims similar to those asserted in the pending
class action and related lawsuits, or other claims, will not be asserted
against the Company by new parties in the future. In this regard, potential
plaintiffs have from time to time orally asserted claims against the Company
and its prior directors. Several members of the class in the pending class
action lawsuit against the Company have opted out. If such claims are filed
as legal complaints, the Company will seek to have them consolidated with
other pending lawsuits, if appropriate, or will defend them separately. From
time to time, the Company is also involved in litigation arising from the
ordinary course of business, the ultimate resolution of which management
believes will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Item 2 is not applicable for the three months ended June 30, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Item 3 is not applicable for the three months ended June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4 is not applicable for the three months ended June 30, 1997.
ITEM 5. OTHER INFORMATION
ADDITION OF NEW BOARD MEMBERS:
On August 7, 1997, the Company entered into an agreement with Stanley C.
Weinstein, David Wilstein and Richard M. Horowitz in which all three
individuals would join the Company's Board of Directors. On May 5, 1997, Mr.
Wilstein and Mr. Horowitz were members of a group that filed a Schedule 13D
with the Securities and Exchange Commission ("SEC"), stating that they may be
deemed to be a group pursuant to SEC Rule 13d-5(b)(1) promulgated under
Sections 13(d) and 13(g) of the Securities and Exchange Act of 1934, as
amended.
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<PAGE>
Pursuant to the Agreement, the Company agreed to (1) hold harmless and
indemnify all of the members of the Company's Board of Directors to the
maximum extent permitted by the General Corporation Law of California, (2)
increase directors and officers insurance to $5 million and (3) resolve
uncertainties that are merely of a technical nature that may exist in the
Company's Articles of Incorporation at the next meeting of the Company's
shareholders.
As part of the Agreement, Mr. Wilstein and Mr. Horowitz agreed that they
would not assert that any other director of the Company should be deemed to
be a member of the group that filed the Schedule 13D on May 5, 1997.
As part of the Agreement, all parties agreed (1) that it would be the policy
of the Board that the Board will not support any derivative lawsuit unless
such a suit pleads with particularity facts that give rise to a strong
inference that a director or directors acted in violation of his, her or
their duty of loyalty or duty of care to the Company, unless a different
standard is required, (2) to recommend that the shareholders of the Company
approve clarifying amendments to the Company's Articles of Incorporation,
deleting reference to the number of directors, (3) to amend the Company's
Bylaws so that the Board shall be comprised of seven members, and (4) to take
actions to cause the annual meeting to be held on September 22, 1997 and to
act together to nominate all seven Board members as the slate for the
upcoming meeting of shareholders, provided that all members wish to serve on
the Board or resign from the Board and subsequently nominate a different
slate of directors.
ISSUANCE OF 6% CONVERTIBLE PREFERRED STOCK:
In July 1997, the Company issued 1,800 shares of Series B 6% Convertible
Preferred Stock to raise $1.8 million, less fees equal to approximately 7% of
the capital raised. In connection with the issuance of the Series B Preferred
Stock, the Company also issued warrants to purchase 50,000 shares of the
Company's common stock at an exercise price of $5.36 per share for a period
of two years and an option to acquire an additional 125 Series B Preferred
Stock at 88% of the average bid price of the Company's common stock in the
five days preceding the date of issuance of the additional Series B Preferred
Stock. The basic terms and conditions of the Series B 6% Convertible
Preferred Stock are as follows:
VOTING. The Series B 6% Convertible Preferred Stock does not have voting
rights.
DIVIDEND. The Series B 6% Convertible Preferred Stock has a cumulative
noncompounded annual dividend of 6% payable in cash or stock at the Company's
option upon conversion of the Preferred Stock into Common Stock, and prior to
the payment of any dividends on the Common Stock. No dividends may be
declared or paid on the Convertible Series B Preferred Stock until all
cumulative unpaid dividends have been declared and paid on the outstanding
Convertible Series A Preferred Stock.
LIQUIDATION PREFERENCE. The Series B 6% Convertible Preferred Stock has a
liquidation preference of $1,000 per share plus all cumulative unpaid
dividends, whether or not declared by the Company's Board of Directors. Upon
any liquidation or change of control of the Company (i.e. transfer of more
than 50% of its voting stock), the Preferred Stockholders are entitled to the
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 6% Convertible Preferred Stock is junior in preference
to Series A 2% Convertible Preferred 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 Convertible Series B Preferred
Stock until the full liquidation preference has been paid to the holders of
the outstanding Convertible Series A Preferred Stock.
CONVERSION. The Preferred Stockholders may convert each share of Series B 6%
Convertible Preferred Stock into the number of shares of the Company's Common
Stock calculated as follows, at any time upon the earlier of (i) 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 6% Convertible Preferred Stock is equal to the lesser of
(a) 80% of the average bid price for the Company's Common Stock on the public
trading market for the five
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<PAGE>
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 6% Convertible
Preferred Stock, the Company is obligated to file a registration statement
with the Securities and Exchange Commission covering the shares of Common
Stock underlying the Preferred Stock within 30 days after the Preferred Stock
is issued, and to have the registration statement declared effective within
120 days after it is filed.
ANTIDILUTION PROVISION. The Certificate of Determination for the Series B 6%
Convertible Preferred Stock contains comprehensive provisions for adjustments
to the Conversion Price and the conversion ratio of the Preferred Stock in
the event of stock dividends, asset distributions, reorganizations,
recapitalizations, mergers, stock splits or similar transactions by the
Company, in order to protect the Preferred Stock from dilution as a result of
such transactions.
RESTRICTIVE COVENANTS. During the first 90 days after the Series B 6%
Convertible Preferred Stock is issued, the Company is not permitted to issue
any other securities, except in limited circumstances, including pursuant to
the exercise of outstanding options or warrants or pursuant to existing
settlement agreements, without first notifying the Preferred Stockholders and
giving them a right of first refusal to purchase the securities themselves.
While the Series B 6% Convertible Preferred Stock is outstanding or until it
is converted into Common Stock, the Company is not permitted to engage in
certain transactions, such as the redemption or purchase of its own Common
Stock (except in connection with the collection of Section 16(b) short-swing
profits), without the prior consent of the Preferred Stockholders.
Furthermore, the Company cannot take any action which would modify the rights
of the Preferred Stockholders under the Certificate of Determination without
the prior consent of the Preferred Stockholder being affected by the
modification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ----------- -----------------
10-1 Loan Agreement between National Telephone & Communications,
Inc. and First Bank
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<PAGE>
& Trust, Irvine, CA.
10-2 Agreement As To Board Membership Between Incomnet, Inc. and
Stanley Weinstein, David Wilstein and Richard Horowitz, dated
August 7, 1997.
REPORTS ON FORM 8-K, FILED IN 1997
- - ----------------------------------------------------
20.1 Report on Form 8-K - Election of Dr. Howard Silverman As Director &
Amendment to Employment Contract of Melvyn Reznick, filed on February 7,
1997.
20.2 Report on Form 8-K - Reincorporation of National Telephone &
Communications, Inc. filed on April 10, 1997.
20.3 Report on Form 8-K - Acquisition of California Interactive Computing,
Inc., filed on May 13, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INCOMNET, INC.
Date: August 14, 1997 /s/ MELVYN REZNICK
--------------------------
Melvyn Reznick
President, CEO & CFO
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<PAGE>
[LOGO]
LOAN AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 06-30-1998 973000139 110
- ------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -----------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400
2801 MAIN STREET 2400 MICHELSON DRIVE
IRVINE, CA 92614 IRVINE, CA 92612
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THIS LOAN AGREEMENT between NATIONAL TELEPHONE & COMMUNICATIONS, INC.
("Borrower") and FIRST BANK & TRUST ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any
exhibit or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as the
"Loan" and collectively as the "Loans." Borrower understands and agrees that:
(a) in granting, renewing, or extending any Loan, Lender is relying upon
Borrower's representations, warranties, and agreements, as set forth in this
Agreement; (b) the granting, renewing, or extending of any Loan by Lender at
all times shall be subject to Lender's sole judgment and discretion; and (c)
all such Loans shall be and shall remain subject to the following terms and
conditions of this Agreement.
TERM. This Agreement shall be effective as of March 27, 1997, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Loan Agreement from time to
time.
ACCOUNT. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.
BORROWER. The word "Borrower" means NATIONAL TELEPHONE & COMMUNICATIONS,
INC.. The word "Borrower" also includes, as applicable, all subsidiaries
and affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $10,000,000.00; or (b) 75.000% of
the aggregate amount of Eligible Accounts.
BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for a
Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever whether created by law,
contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender in
writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or its
shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by
the Account Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become liable
to the Account Debtor for goods sold or services rendered by the
Account Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped
or delivered, or the services have not been rendered, to the
Account Debtor.
(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy, insolvency,
or debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or
who has made an assignment for the benefit of creditors or has
become insolvent or fails generally to pay its debts (including its
payrolls) as such debts become due.
(i) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(j) Accounts which have not been paid in full with 90 DAYS FROM
DATE OF INVOICE from the invoice date.
(k) EXCLUDING ALL INTER-COMPANY RECEIVABLES, GOVERNMENT
RECEIVABLES, FOREIGN RECEIVABLES AND CONTRA ACCOUNTS.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of
termination of the Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as
well as all claims by Lender against Borrower, or any one or more of
them; whether now or hereafter existing, voluntary or involuntary, due
or not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or
hereafter may
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06-26-1997 LOAN AGREEMENT
Loan No 973000139 (Continued) Page 2
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become otherwise unenforceable.
LENDER. The word "Lender" means FIRST BANK & TRUST, its successors and
assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guarantees, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection with
the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form of
a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien or title retention contract, lease or consignment
intended as a security device, or any other security or lien interest
whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's
total assets excluding as intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement s subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and
all Related Documents have been duly authorized, executed, and
delivered by Borrower to Lender.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement,
and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled "Compliance
Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
orally by authorized persons. All oral requests shall be confirmed in
writing on the day of the request. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of Borrower
(a) when credited to any deposit account of Borrower maintained with Lender
or (b) when advanced in accordance with the instructions of an authorized
person. Lender, at its option, may set a cutoff time, after which all
requests for Advances will be treated as having been requested on the next
succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such
property and assets as Lender may require (the "Collateral"), including
without limitation Borrower's present and future Accounts and general
intangibles. Lender's Security Interests in the Collateral shall be
continuing liens and shall include the proceeds and products of the
Collateral, including without limitation the proceeds of any insurance. With
respect to the Collateral, Borrower agrees and represents and warrants to
Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution or this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will notify
Lender of any change in Borrower's Social Security Number or Employer
Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which
records shall be available to Lender or Lender's representative upon
demand for inspection and copying at any reasonable time. With respect
to the Accounts, Borrower agrees to keep and maintain such records as
Lender may require, including without limitation information concerning
Eligible Accounts and Account balances and agings.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery
of this Agreement, Borrower shall execute and deliver to Lender a
schedule of Accounts and Eligible Accounts, in form and substance
satisfactory to the Lender. Thereafter and at such frequency as Lender
shall require, Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts as Lender may request.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to
the Accounts, Borrower represents and warrants to Lender: (a) Each
Account represented by Borrower to be an Eligible Account for purposes
of this Agreement conforms to the requirements of the definition of an
Eligible Account; (b) All Account information listed on schedules
delivered to Lender will be true and correct, subject to immaterial
variance, and (c) Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect, examine, and audit
Borrower's records and
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06-26-1997 LOAN AGREEMENT Page 3
Loan No 973000139 (Continued)
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to confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any
Loan, and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which duly organized, validly
existing, and in good standing under the laws of the state of
Borrower's incorporation and is validly existing and in good standing
in all states in which Borrower is doing business. Borrower has the
full power and authority to own its properties and to transact the
businesses in which it is presently engaged or presently proposes to
engage. Borrower also is duly qualified as a foreign corporation and is
in good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good
title to all of Borrower's properties free and clear of all Security
Interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last
five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 2O
of the California Health and Safety Code, Section 25100, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants
that: (a) During the period of Borrower's ownership of the properties,
there has been no use, generation, manufacture, storage, treatment,
disposal, release or threatened release of any hazardous waste or
substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has
been (i) any use, generation, manufacture, storage, treatment,
disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners
or occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or
other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste
or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the
properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under such laws, and (b)
agrees to indemnity and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of the
Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of
the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other that litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from any
such plan or initiated steps to do so, (iii) no steps have been taken
to terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 2801 MAIN STREET, IRVINE, CA
92614. Unless Borrower has designated in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's Indebtedness shall be
paid in full, or until this Agreements shall be terminated in the
manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not
less than $9,000,000.00.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to
Tangible Net Worth of less than 3.00 to 1.00. Except as provided
above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true
and correct.
INSURANCE. Maintain fire and other risk insurance, public
liability insurance, and such other insurance as Lender may
require with respect to Borrower's properties and operations, in
form, amounts, coverages and with insurance companies reasonably
acceptable to Lender.
<PAGE>
Borrower, upon request of Lender, will deliver to Lender from time to time
the policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or diminished
without at least ten (10) days' prior written notice to Lender. Each
insurance policy also shall include an endorsement providing that coverage
in favor of Lender will not be impaired in any way by any act, omission or
default of Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security interest for
the Loans. Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those values,
and (f) the expiration date of the policy. In addition, upon request of
Lender (however not more often than annually) Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
party and notify Lender immediately in writing of any default in connection
with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income or profits.
Provided however, Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the legality of
the same shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with respect
to such contested assessment, tax, charge, levy, lien, or claim in accordance
with generally accepted accounting practices. Borrower, upon demand of
Lender, will furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written statement of
any assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds with
a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
INDEBTEDNESS AND lIENS. (c) sell with recourse any of Borrower's accounts,
except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock, provided,
however that notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
on its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income tax
payments to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d) purchase or
retire any of Borrower's outstanding shares or alter or amend Borrower's
capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surely or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan Proceeds
if: (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings, or
is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrower's financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; or (d) any Guarantor
seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.
ADDITIONAL PROVISIONS.
1. BORROWERS DEBT RATIO (TOTAL LIABILITIES TO TANGIBLE NET WORTH) WILL NOT
EXCEED 3.0:1 AS OF 6/30/97. 2.75:1 AS OF 9/30/97 AND 2.50:1 AS OF 12/31/97.
2. NET INCOME AFTER TAX AT DECEMBER 31, 1997 WILL BE AT LEAST $2,000,000.00
3. BORROWER WILL NOT UPSTREAM CASH TO ITS PARENT OR OTHER AFFILIATED
COMPANIES IN EXCESS OF $100,000.00 PER MONTH OR $1,200,000.00 ANNUALLY,
WITHOUT THE PRIOR WRITTEN CONSENT OF FIRST BANK & TRUST. BORROWER CAN ONLY
UPSTREAM CASH UPON MEETING ALL OF ITS FINANCIAL OBLIGATIONS/COMMITMENTS WITH
FIRST BANK & TRUST AND ALL OTHERS. A CONDITION OF DEFAULT UNDER ANY NOTE OR
CONTRACTUAL AGREEMENT MAY NOT EXIST AT THE TIME OF UPSTREAMING CASH.
4. A DEFAULT UNDER ANY AND ALL CONTRACTUAL AGREEMENTS ENTERED INTO BY AND
BETWEEN NATIONAL TELEPHONE & COMMUNICATIONS, INC. AND WILTEL, INC., A
DELAWARE CORPORATION, OR WORLDCOM NETWORK SERVICES, INC., WILL BE AN
AUTOMATIC DEFAULT UNDER THE SUBJECT LOAN DOCUMENTS AND ANY FUTURE
MODIFICATIONS TO THE SUBJECT LOAN DOCUMENTS.
5. BORROWER IS REQUIRED TO NOTIFY FIRST BANK & TRUST OF ALL LEGAL SETTLEMENTS
OF $100,000.00 OR MORE AND OPEN LAW SUITS PENDING IN WRITING AS SOON AS ITS
MANAGEMENT IS AWARE OF IT.
6. BORROWER AGREES NOT TO GUARANTEE THE OBLIGATIONS OR DEBT OF ANOTHER ENTITY
WITHOUT THE PRIOR WRITTEN CONSENT OF FIRST BANK & TRUST.
7. BORROWER AGREES TO AT LEAST ONE ACCOUNTS RECEIVABLE AUDIT ANNUALLY.
8. BORROWER AGREES TO PROVIDE LENDER MONTHLY SUMMARY OF RECEIVABLES, THE
DETAIL LEC AGING AND THE LAST PAGE (TOTAL OF THE DETAIL "DIRECT RECEIVABLE"
AGING IN ORDER TO SUPPORT AND COMPUTE THE BORROWING BASE BY THE 15TH OF EACH
MONTH.
9. BORROWER AGREES TO PROVIDE LENDER NOTIFICATION OF PLEDGE OF RECEIVABLES
ACKNOWLEDGED BY PAC BELL AND ZPDI.
10. BORROWER AGREES TO PROVIDE LENDER ANNUAL AUDITED FINANCIAL STATEMENT AND
MONTHLY COMPANY PREPARED FINANCIAL
<PAGE>
06-26-1997 LOAN AGREEMENT Page 5
LOAN NO 973000139 (CONTINUED)
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STATEMENTS ( VCS INITIAL HERE).
---------
INTEREST RATE PROVISION.
THE INTEREST RATE WILL BE ADJUSTED ACCORDING TO THE DEBT/TNW RATIO:
GREATER THAN 3.0 = WALL STREET JOURNAL PRIME PLUS 1.50%
2.5 - 3.0 = WALL STREET JOURNAL PRIME PLUS 1.25%
2.0 - 2.5 = WALL STREET JOURNAL PRIME PLUS 1.00%
LESS THAN 2.0 = WALL STREET JOURNAL PRIME PLUS .75% ( VCS INITIAL HERE).
---
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owned by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers,
or other like liens arising in the ordinary course of business and securing
obligations which are not yet delinquent; (d) purchase money liens or purchase
money security interests upon or in any property acquired or held by Borrower
in the ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph of this
Agreement titled "Indebtedness and Liens"; (e) liens and security interests
which, as of the date of this Agreement, have been disclosed to and approved
by the Lender in writing; and (f) those liens and security interests which in
the aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar default within the preceding twelve (12) months, it may
be cured (and no Event of Default will have occurred) if Borrower or Grantor,
as the case may be, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option,
all indebtedness immediately will become due and payable, all without notice
of any kind to Borrower, except that in the case of an Event of Default of
the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Orange
County, the State of California. Lender and Borrower hereby waive the right
to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. (Initial
Here VCS ) This Agreement shall be governed by and construed in
---------
accordance with the laws of the State of California.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect the
Loans and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
<PAGE>
06-26-1997 LOAN AGREEMENT Page 6
Loan No 973000139 (Continued)
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- -------------------------------------------------------------------------------
prepaid, addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties specifying that
the purpose of the notice is to change the party's address. To the extent
permitted by applicable law, if there's more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice purposes,
Borrowers will keep Lender informed at all times of Borrower's current
address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity
however, if the offending provision cannot be so modified it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon
by Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or any
other provision of this Agreement. No prior waiver by Lender, nor any course of
dealing between Lender and Borrower or between Lender and any Grantor shall
constitute a waiver of any of Lender's rights or of any obligations of Borrower
or of any Grantor as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender in
any instance shall not constitute continuing consent in subsequent instances
where such consent is required, and in all cases such consent may be granted
or withheld on the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 26, 1997.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
--------------------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
LENDER:
FIRST BANK & TRUST
By: /s/ Paul McGraw
--------------------------------------------------------
Authorized Officer
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<PAGE>
[LOGO]
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10,000,000.00 06-30-1998 973000139 110
- ---------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. Irvine Regional Office - 400
2801 MAIN STREET 2400 Michelson Drive
IRVINE, CA 92614 Irvine, CA 92612
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT: $10,000,000.00 DATE OF AGREEMENT: June 26,1997
DESCRIPTION OF EXISTING INDEBTEDNESS. PROMISSORY NOTE DATED MARCH 27, 1997 IN
THE AMOUNT IF $5,000,000.00.
DESCRIPTION OF COLLATERAL.
UCC FILING RECORDED APRIL 3, 1997 AS INSTRUMENT NUMBER 9710060309
COMMERCIAL SECURITY AGREEMENT DATED MARCH 27,1997.
DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE IS HEREBY CHANGED TO JUNE
30,1998 FROM A PREVIOUS MATURITY DATE OF APRIL 30, 1998. THE NOTE AMOUNT IS
HEREBY INCREASED TO $10,000,000.00 FROM A PREVIOUS AMOUNT OF $5,000,000.00.
BORROWER HEREBY ACKNOWLEDGES THAT THE COMMERCIAL SECURITY AGREEMENT DATED
MARCH 27, 1997 AS WELL AS THE COMMERCIAL SECURITY AGREEMENT DATED JUNE 26,
1997 REMAINS IN FULL FORCE AND EFFECT. BORROWER AGREES TO THE REPAYMENT
TERMS OUTLINED BELOW. ALL OTHER TERMS AND CONDITIONS REMAIN THE SAME.
PROMISE TO PAY. NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Borrower")
promises to pay FIRST BANK & TRUST ("Lender"), or order, in lawful money of
the United States of America, the principal amount of Ten Million & 00/100
Dollars ($10,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance.
Interest shall be calculated from the date of each advance until repayment of
each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand interest is
made, in one payment of all outstanding principal plus all accrued unpaid
interest on June 30, 1998. In addition, Borrower will pay regular monthly
payments of accrued unpaid interest beginning June 27, 1997 and all
subsequent interest payments are due on the same day of each month after
that. Interest on this Agreement is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance multiplied by
the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest,
then to principal, and any remaining amount to any unpaid collection costs
and late charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an independent index which is
the Prime rate as published in the Wall Street Journal. When a range of
rates has been published, the higher of the rates will be used (the "Index").
The Index is not necessarily the lowest rate charged by Lender on its loans.
If the Index becomes unavailable during the term of this loan, Lender may
designate a substitute Index after notice to Borrower. Lender will tell
Borrower the current index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each quarter. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Agreement will be at a rate of 1.000 percentage
point over the Index, resulting in an initial rate of 9.500% per annum.
NOTICE: Under no circumstances will the interest rate on this Agreement be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing,
relieve Borrower of Borrower's obligation to continue to make payments of
accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment or $1.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other
agreement or loan Borrower has with Lender. (c) Borrower defaults under any
loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Borrower's property or Borrower's ability to repay
this Note or perform Borrower's obligations under this Note or any of the
Related Documents. (d) Any representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (e) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (f) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender. (g)
Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is
impaired.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this
Agreement within the preceding twelve (12) months, it may be cured (and no
event of default will have occurred) if Borrower, after receiving written
notice from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce compliance
as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Agreement and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount.
Upon Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its option,
may also, if permitted under applicable law, increase the variable interest
rate in this Agreement to 6.000 percentage points over the Index. Lender may
hire or pay someone else to help collect this Agreement if Borrower does not
pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgement collection services. Borrower also will pay any court costs in
addition to all other sums provided by law. This Agreement has been delivered
to Lender and accepted by Lender in the State of California. If there is a
lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction
of the courts of Orange County, the State of California. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other. (Initial
Here /s/ VCS) This Agreement shall be governed by and construed
-------
in accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested orally by Borrower or by an authorized
person. All oral requests shall be confirmed in writing on the day of the
request. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority. JAMES R. QUANDT, PRESIDENT;
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER; and JERRY DECICCIO, CONTROLLER.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or
by Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Agreement if: (a) Borrower or
any guarantor is in default under the terms of this Agreement or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement, (b) Borrower or any guarantor
ceases doing business or is insolvent, (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Agreement or any other loan with Lender; or (d) Borrower has applied
funds provided pursuant to this Agreement for purposes other than those
authorized by Lender.
<PAGE>
06-26-1997 CHANGE IN TERMS AGREEMENT Page 2
Loan No 973000139 (Continued)
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CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations, including all agreements evidenced
or securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligations including
accommodation parties, unless a party is expressly released by Lender in
writing. Any maker or endorser, including accommodation makers will not be
released by virtue of this Agreement. If any person who signed the original
obligation does not sign this Agreement below, then all persons signing below
acknowledge that this Agreement is given conditionally, based on the
representation to Lender that the non-signing party consents to the changes
and provisions of this Agreement or otherwise will not be released by it. The
waiver applies not only to any initial extension, modification or release,
but also to all such subsequent actions.
INTEREST RATE PROVISION
THE INTEREST RATE WILL BE ADJUSTED ACCORDING TO THE DEBT/TNW RATIO:
> 3.0 = WALL STREET JOURNAL PRIME PLUS 1.50%
2.5 - 3.0 = WALL STREET JOURNAL PRIME PLUS 1.25%
2.0 - 2.5 = WALL STREET JOURNAL PRIME PLUS 1.00%
< 2.0 = WALL STREET JOURNAL PRIME PLUS .75%
(/s/ VCF INITIAL HERE).
---------
NON-USE FEE PROVISION. BORROWER AGREES TO A NON-USE FEE OF .2% PAID QUARTERLY.
(/s/ VCF INITIAL HERE).
---------
MISCELLANEOUS PROVISIONS. This Agreement is payable on demand. The inclusion
of specific default provisions or rights of Lender shall not preclude
Lender's right to declare payment of this Agreement on its demand. Lender may
delay or forgo enforcing any of its rights or remedies under this Agreement
without losing them. Borrower and any other person who signs, guarantees or
endorses this Agreement, to the extent allowed by law, waive any applicable
statute of limitations, presentment, demand for payment, protest and notice
of dishonor. Upon any change in the terms of this Agreement, and unless
otherwise expressly stated in writing, no party who signs this Agreement,
whether as maker, guarantor, accomodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time, this loan, or release any
party or guarantor or collateral; or impair, fail to realize, upon or perfect
Lender's security interest in the collateral, and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All
such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is
made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE AGREEMENT.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/Victor C. Streufert
----------------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
<PAGE>
[logo]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
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Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10,000,000.00 06-30-1998 973000139 110
- -------------------------------------------------------------------------------------------
</TABLE>
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References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or term.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. LENDER: FIRST BANK & TRUST
2801 MAIN STREET IRVINE REGIONAL OFFICE-400
IRVINE, CA 92614 2400 MICHELSON DRIVE
IRVINE, CA 92612
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN NATIONAL
TELEPHONE & COMMUNICATIONS, INC. (REFERRED TO BELOW AS "GRANTOR"); AND FIRST
BANK & TRUST (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION,
GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE
INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS
AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS
WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar anounts shall mean amounts in lawful money of the
United States of America.
Agreement. The word "Agreement" means this Commercial Security
Agreement as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired whether existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: EXCLUDING AND EXCEPTING LEASEHOLD IMPROVEMENTS AND
CUSTOMER LISTS.
In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising and wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property descibed in
this Collateral section.
(c) All accounts, general intangibles, instruments, rents,
monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property described in
this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in the Collateral section.
(e) All records and data relating to any of the property
described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media,
together with all of Grantor's right, title, and interest in and
to all computer software required to utilize, create, maintain,
and process any such records or data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "Events of Default."
GRANTOR. The word "Grantor" means NATIONAL TELEPHONE & COMMUNICATIONS,
INC., its successors and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties and accomodation parties
connection with the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the
word "Indebtedness" includes all other obligations, debts and liabilities,
plus interest thereon, of Grantor, or any one or more of them, to Lender,
as well as all claims by Lender against Grantor, or any one or more of
them, whether existing now or later; whether they are voluntary or
involuntary, due or not due, direct or indirect, absolute or contingent,
liquidated or unliquidated; whether Grantor may be liable individually or
jointly with others; whether Grantor may be obligated as guarantor,
surety, accomodation party or otherwise; whether recovery upon such
indebtedness may be or hereafter may become banned to any statute of
limitations and whether such indebtedness may be and hereafter may become
otherwise unenforceable. (Initial Here /s/ VCS )
---------
LENDER. The word "Lender" means FIRST BANK & TRUST, its successors and
assigns.
NOTE. The word "Note" means the Change in Terms Agreement between
Borrower and Lender dated June 26, 1997, which modifies the following
described existing indebtedness: PROMISSORY NOTE DATED MARCH 27, 1997
IN THE AMOUNT OF $5,000,000.00.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as
follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituing the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to
Lender for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic, or other reproduction of any
financing statement or of this Agreement for use as a financing statement.
Grantor will reimburse Lender for all expenses for the perfection and the
contiuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the indebtedness is paid in full
and even though for a period of time Grantor may not be indebted to
Lender.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they
appear to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation to the following: (a) all real property owned or being
purchased by Grantor; (b) all real property being rented or leased by
Grantor; (c) all storage facilities owned, rented, leased, or being used
by Grantor, and (d) all other properties where Collateral is or may be
located. Except in the ordinary course of its business Grantor shall not
remove the Collateral from its existing locations without the prior
written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as accounts,
the records concerning the Collateral) at Grantor's address shown above,
or at such other locations as are acceptable to the Lender. Except in the
ordinary course of its business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing locations
without the prior written consent of the Lender. To the extent that
the Collateral consists of vehicles, or other titled property,
Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the
State of California, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall
<PAGE>
06-26-1997 COMMERCIAL SECURITY AGREEMENT Page 2
LOAN NO 973000139 (CONTINUED)
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- ----------------------------------------------------------------------------
not sell, offer to sell, or otherwise transfer or dispose of the
Collateral. While Grantor is not in default under this Agreement,
Grantor may sell inventory, but only in the ordinary course of its
business and only to buyers who qualify as a buyer in the ordinary
course of business. A sale in the ordinary course of Grantor's business
does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security interest
provided for in this Agreement, without the prior written consent of
Lender. This includes security interests even if junior in right to the
security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good
and marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing
statement covering any of the Collateral is on file in any public
office other than those which reflect the security interest created by
this Agreement or to which Lender has specifically consented. Grantor
shall defend Lender's rights in the Collateral against the claims and
demands of all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists
of inventory, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral
as Lender may require to identify the nature, extent, and location of
such Collateral. Such information shall be submitted for Grantor and
each of its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not
commit or permit damage to or destruction of the Collateral or any part
of the Collateral. Lender and its designated representatives and agents
shall have the right at all reasonable times to examine, inspect, and
audit the Collateral wherever located. Grantor shall immediately
notify Lender of all cases involving the return, rejection,
repossession, loss or damage of or to any Collateral; of any request
for credit or adjustment or of any other dispute arising with respect
to the Collateral; and generally of all happenings and events affecting
the Collateral or the value or the amount of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor
is in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral is
not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest Grantor shall
defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as
an additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly, with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral. Grantor
may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate
appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this
Agreement remains a lien on the Collateral, used for the
generation, manufacture, storage, transportation, treatment,
disposal, release or threatened release of any hazardous waste
or substance, as those terms are defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"),
the Superfund Amendments and Reauthorization Act of 1986
Pub. L. No. 99-499 ("SARA"), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq. or
other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous
waste" and "hazardous substance" shall also include, without
limitation, petroleum and petroleum by-products or any
fraction thereof and asbestos. The representations and
warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes
and substances. Grantor hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in
the event Grantor becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement.
This obligation to indemnify shall survive the payment of the
Indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
all risks, insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may
require with respect to the Collateral, in form, amounts, coverages and
basis reasonably acceptable to Lender and issued by a company or
companies reasonably acceptable to Lender. Grantor, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without
at least ten (10) days' prior written notice to Lender and not including
any disclaimer of the insurer's liability for failure to give such a
notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender
holds or is offered a security interest, Grantor will provide Lender
with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required
under this Agreement, Lender may (but shall not be obligated to) obtain
such insurance as Lender deems appropriate, including if it so chooses
"single interest insurance," which will cover only Lender's interest in
the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender
of any loss or damage to the Collateral. Lender may make proof of loss
if Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed
Collateral, Lender shall, upon satisfactory proof of expenditure, pay
or reimburse Grantor from the proceeds for the reasonable cost of
repair or restoration. If Lender does not consent to repair or
replacement of the Collateral, Lender shall retain a sufficient amount
of the proceeds to pay all of the Indebtedness, and shall pay the
balance to Grantor. Any proceeds which have not been disbursed within
six (6) months after their receipt and which Grantor has not committed
to the repair or restoration of the Collateral shall be used to prepay
the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender
to be sufficient to produce, at least fifteen (15) days before the
premium due date, amounts at least equal to the insurance premiums to
be paid. If fifteen (15) days before payment is due, the reserve funds
are insufficient, Grantor shall upon demand pay any deficiency to
Lender. The reserve funds shall be held by Lender as a general deposit
and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by
Grantor as they become due. Lender does not hold the reserve funds in
trust for Grantor, and Lender is not the agent of Grantor for payment
of the insurance premiums required to be paid by Grantor. The
responsibility for the payment of premiums shall remain Grantor's sole
responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of
determining that value; and (f) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not more often
than annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to
possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by Lender is required by law to perfect Lender's
security interest in such Collateral. If Lender at any time has possession of
any Collateral, whether before or after an Event of Default, Lender shall be
deemed to have exercised reasonable care in the custody and preservation of
the Collateral if Lender takes such action for that purpose as Grantor shall
request or as Lender, in Lender's sole discretion, shall deem appropriate
under the circumstances, but failure to honor any request by Grantor shall
not of itself be deemed to be a failure to exercise reasonable care. Lender
shall not be required to take any steps necessary to preserve any rights in
the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any installment payments to
become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or (c) be treated as a balloon
payment which will be due and payable at the Note's maturity. This Agreement
also will secure payment of these amounts. Such right shall be in
addition to all other rights and remedies to which Lender may be entitled
upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
<PAGE>
6-26-1997 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 973000139 (Continued)
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OTHER DEFAULTS. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or in any other agreement
between Lender and Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement,
the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any collateral documents to create a valid and perfected security
interest or lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor gives Lender written
notice of the creditor or forfeiture proceeding and deposits with
Lender monies or a surety bond for the creditor or forfeiture
proceeding, in an amount determined by Lender, in its sole discretion,
as being an adequate reserve or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent. Lender, at its option, may, but shall not
be required to, permit the Guarantor's estate to assume unconditionally
the obligations arising under the guaranty in a manner satisfactory to
Lender, and, in doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance
of the indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness,
is curable and if Grantor has not been given a prior notice of a
breach of the same provision of this Agreement, it may be cured (and
no Event of Default will have occurred) if Grantor, after Lender sends
written notice demanding cure of such default, (a) cures the default
within fifteen (15) days; or (b), if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the California Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following
rights and remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to
pay, immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of title
and other documents relating to the Collateral. Lender may require Grantor
to assemble the Collateral and make it available to Lender at a place to
be designated by Lender. Lender also shall have full power
to enter upon the property of Grantor to take possession of and remove
the Collateral. If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor agrees Lender
may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at
public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days, or such
lesser time as required by state law, before the time of the sale or
disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral, shall
become a part of the indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either through itself or
through a receiver, may collect the payments, rents, income, and
revenues from the Collateral. Lender may at any time in its discretion
transfer any Collateral into its own name or that of its nominee and
receive the payments, rents, income, and revenues therefrom and hold
the same as security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as the Lender may determine.
Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or
similar property, Lender may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Collateral as
Lender may determine, whether or not Indebtedness or Collateral is
then due. For these purposes, Lender may, on behalf of and in the name
of Grantor, receive, open and dispose of mail addressed to Grantor,
change any address to which mail and payments are to be sent, and
endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment or storage of any
Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to
Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights
provided in this Agreement. Grantor shall be liable for a deficiency
even if the transaction described in this subsection is a sale of
accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition,
Lender shall have and may exercise any or all other rights and remedies
it may have available at law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Grantor
under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Grantor agrees upon Lender's request to submit to the jurisdiction of the
courts of Orange County, the State of California. Lender and Grantor
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Grantor against the other.
(Initial Here /s/VCS) This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement,
and Grantor shall pay the costs and expenses of such enforcement. Costs
and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court
costs and such additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to
Grantor shall mean each and every Grantor. This means that each of the
persons signing below is responsible for all obligations in this
Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing may be sent by telefacsimile and shall be effective when
<PAGE>
6-26-1997 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 973000139 (Continued)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es.)
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact irrevocably, with full power of substitution to
do the following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign
and endorse any and all claims, instruments, receipts, checks, drafts
or warrants issued in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the Collateral and, in the
place and stead of Grantor, to execute and deliver its release and
settlement for the claim, and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its
own name or in the name of Grantor, or otherwise, which in the
discretion of Lender may seem to be necessary or advisable. This power
is given as security for the indebtedness and the authority hereby
conferred is and shall be irrevocable and shall remain in full force
and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
indebtedness and at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible any
such offending provision shall be deemed to be modified to be within
the limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid and
enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor shall constitute a waiver of any of Lender's rights
or of any of Grantor's obligations as to any future transactions.
Wherever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in
the sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the indebtedness, Borrower irrevocably waives, disclaims and
relinquishes all claims against such other person which Borrower has or
would otherwise have by virtue of payment of the indebtedness or any
part thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
JUNE 26, 1997.
GRANTOR:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
---------------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 06-30-1998 973000139 110
- --------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability
of this document to any particular loan or item.
- --------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. Irvine Regional Office - 400
2801 MAIN STREET 2400 Michelson Drive
IRVINE, CA 92614 Irvine, CA 92612
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Grantor")
understands that insurance coverage is required in connection with the
extending of a loan or the providing of other financial accommodations to
Grantor by Lender. These requirements are set forth in the security
documents. The following minimum insurance coverages must be provided on the
following described collateral (the "Collateral"):
COLLATERAL: ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: EXCLUDING AND EXCEPTING LEASEHOLD IMPROVEMENTS
AND CUSTOMER LISTS.
TYPE. All risks, including fire, theft and liability.
AMOUNT. Full insurable value.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Lender.
INSURANCE MAILING ADDRESS. All documents and other materials relating to
insurance for this loan should be mailed, delivered or directed to the
following address:
FIRST BANK & TRUST - LOAN SERVICING DEPARTMENT
2400 MICHELSON DRIVE
IRVINE, CA 92612
(714) 260-0353
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, ten (10)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of June 26, 1997, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required
insurance or fails to continue such insurance in force, Lender may do so at
Grantor's expense as provided in the applicable security document. The cost
of any such insurance, at the option of the Lender, shall be payable on
demand or shall be added to the indebtedness as provided in the security
document. GRANTOR ACKNOWLEDGES THAT IF THE LENDER SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL
DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S
EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY
NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY
NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26,
1997.
GRANTOR:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
- -------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
- -------------------------------------------------------------------------------
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
------------------ -------------
AGENT'S NAME:
----------------------------------------
INSURANCE COMPANY:
-------------------------------------------------------------
POLICY NUMBER:
-----------------------------------------------------------------
EFFECTIVE DATES:
---------------------------------------------------------------
COMMENTS:
----------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO]
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 06-30-1998 973000139 110
- --------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability
of this document to any particular loan or item.
- --------------------------------------------------------------------------------------------
</TABLE>
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST
COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400
2801 MAIN STREET 2400 MICHELSON DRIVE
IRVINE, CA 92614 IRVINE, CA 92612
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate (1.000% over Prime rate as published in
the Wall Street Journal. When a range of rates has been published, the higher
of the rates will be used, making an initial rate of 9.500%), Revolving Line
of Credit Loan to a Corporation for $10,000,000.00 due on June 30, 1998.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
/ / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
--------
/X/ /s/ VCS BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
--------
SPECIFIC PURPOSE. The specific purpose of this loan is: INCREASE AND
EXTENSION OF REVOLVING LINE OF CREDIT.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $10,000,000.00 as follows:
UNDISBURSED FUNDS: $6,000,000.00
AMOUNT PAID ON BORROWER'S ACCOUNT: $4,000,000.00
$4,000,000.00 Payment on Loan
# 400973000139 (MODIFY)
AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $0.00
----------------
NOTE PRINCIPAL: $10,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $12,500.00
$12,500.00 LOAN FEE
----------------
TOTAL CHARGES PAID IN CASH: $12,500.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN THE BORROWER'S
FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL
STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JUNE 26, 1997.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
- -------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NOTICE OF FINAL AGREEMENT
<TABLE>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initial
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 06-30-1998 973000139 110
- -------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item
- --------------------------------------------------------------------------------
Borrower: NATIONAL TELEPHONE Lender: FIRST BANK AND TRUST
& COMMUNICATIONS, INC. Irvine Regional Office - 400
2801 MAIN STREET 2400 Michelson Drive
IRVINE, CA 92614 Irvine, CA 92612
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE
WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES,
(B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE
WRITTEN LOAN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE
PARTIES.
--------------------------------------------------------------------------
As used in this Notice, the following terms have the following meanings:
Loan. The term "Loan" means the following described loan: a Variable
Rate (1.000% over Prime rate as published in the Wall Street Journal.
When a range of rates has been published, the higher of the rates will
be used, making an initial rate of 9.500%). Nondisclosable Revolving
Line of Credit Loan to a Corporation for $10,000,000.00 due on June 30,
1998.
Parties. The term "Parties" means FIRST BANK & TRUST and any and all
entities or individuals who are obligated to repay the loan or have
pledged property as security for the Loan, including without limitation
the following:
Borrower: NATIONAL TELEPHONE & COMMUNICATIONS, INC.
Loan Agreement. The term "Loan Agreement" means one or more promises,
promissory notes, agreements, undertakings, security agreements, deeds
of trust or other documents, or commitments, or any combination of
those actions or documents, relating to the Loan, including without
limitation the following:
NECESSARY FORMS
Loan Agreement/Negative Pledge Promissory Note/Change in Terms Agr.
Security Agreement UCC - 1
Agreement to Provide Insurance Disbursement Request and Authorization
Notice of Final Agreement
OPTIONAL FORMS
Collateral Schedule
--------------------------------------------------------------------------
Each Party who signs below, other than FIRST BANK & TRUST, acknowledges,
represents, and warrants to FIRST BANK & TRUST that it has received, read and
understood this Notice of Final Agreement. This Notice is dated June 26, 1997.
BORROWER:
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ VICTOR C. STREUFERT
---------------------------------------------
VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER
LENDER:
FIRST BANK & TRUST
By: /s/ PAUL McGRAW
----------------------------------------------
Authorized Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MASTER ADDENDUM TO LOAN DOCUMENTS
This MASTER ADDENDUM TO LOAN DOCUMENTS (this "ADDENDUM") dated as
of June 26, 1997, is made between National Telephone &
Communications, Inc. (the "BORROWER") and First Bank & Trust (the "LENDER").
R E C I T A L S
WHEREAS, the Borrower and the Lender are parties to the Loan Agreement,
dated as of June 26, 1997 (the "CREDIT AGREEMENT"), pursuant to which the
Lender shall extend credit to the Borrower in an aggregate principal amount
not exceeding $10,000,000 to finance the purchase of the Borrower's
headquarters and for other commercial purposes;
WHEREAS, the Borrower shall, contemporaneously with the execution of
this Agreement, execute a Change in Terms Agreement (the "CHANGE IN TERMS
AGREEMENT"), dated as of June 26, 1997, modifying the Promissory Note, dated
as of March 27, 1997, (as modified by the Change in Terms Agreement, the
"NOTE") in favor of the Lender in an aggregate principal amount of
$10,000,000, and enter into a Commercial Security Agreement, dated as of June
26, 1997 (the "SECURITY AGREEMENT"), pursuant to which the Borrower shall
grant to the Lender a security interest in certain property of the Borrower
as security for the Borrower's obligations under the Credit Agreement and the
Note, as modified by the Change in Terms Agreement; and
WHEREAS, the Borrower and the Lender have agreed that the Credit
Agreement, the Note, as modified by the Change in Terms Agreement, the
Security Agreement and all Related Documents (as defined below) shall be
modified and amended in the respects set forth below.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements set forth below and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined in this
Addendum shall have the meanings assigned to such terms in the Credit
Agreement.
Section 2. AMENDMENTS TO THE CREDIT AGREEMENT.
2.01 AMENDMENTS TO "DEFINITIONS".
(a) The "Definitions" section of the Credit Agreement is amended by
adding the following new definitions in the correct alphabetical order:
"INITIAL PUBLIC OFFERING. The words "Initial Public Offering" mean, the
initial public offering by Incomnet, Inc. of certain of Borrower's equity as
previously disclosed to Lender by
<PAGE>
Borrower and pursuant to that certain letter agreement dated January 28, 1997
between Borrower and Incomnet, Inc."
"TOTAL LIABILITIES. The words "Total Liabilities" mean, as at any date,
all liabilities of Borrower as reflected on the Borrower's balance sheet for
such date, excluding any and all deferred income and minority interests of
Borrower."
(b) The "Definitions" section of the Credit Agreement is amended by
replacing subsection (e) of the definition of "Permitted Liens" with the
following new subsection (e):
"(e) liens and security interests of Borrower which are in existence as of
the date of this Agreement;"
2.02 AMENDMENTS TO "CONDITIONS PRECEDENT TO EACH ADVANCE". The
"Conditions Precedent to Each Advance" section of the Credit Agreement is
amended by deleting subsections (b), (d) and (e) of such section.
2.03 AMENDMENTS TO "REPRESENTATIONS AND WARRANTIES". The "Representations
and Warranties" section of the Credit Agreement is amended as follows:
(a) The "Hazardous Substances" representation is amended by
deleting the third and fourth sentences in their entirety.
(b) The "Taxes" representation is replaced with the following new
representation:
"TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except (a) those that Borrower believes in good faith are not yet due and
payable or those presently being or to be contested by Borrower in good faith
in the ordinary course of business and (b) for which adequate reserves have
been provided."
(c) The "Lien Priority" representation is amended by adding the
words", other than Permitted Liens" after the words "Security Interests" in
the second line of such representation.
(d) The "Commercial Purposes" representation is replaced with the
following new representation:
"COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for the acquisition of certain real property and other business or commercial
related purposes."
2.04 WAIVER OF "CONDITION PRECEDENT TO EACH ADVANCE". Lender hereby
agrees that the provision of evidence of insurance as required by subsection
(f) of this section may be provided within thirty days subsequent to the date
of this Addendum.
-2-
<PAGE>
2.05 AMENDMENTS TO "AFFIRMATIVE COVENANTS". The "Affirmative
Covenants" section of the Credit Agreement is amended as follows:
(a) The "Taxes, Charges and Liens" covenant is amended by
adding the following words at the beginning of subclause (a) "Borrower
believes in good faith such amount is not yet due and payable or;
(c) The "Compliance Certificate" covenant is replaced with
the following new covenant:
"COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender (a) within 45 days of the last day of each of the first three
fiscal quarters of Borrower and (b) within 90 days of the last day of
the fourth fiscal quarter of Borrower, with a certificate executed by
Borrower's chief financial officer, or other officer or person acceptable
to Lender, certifying that the representations and warranties set forth
in this Agreement are true and correct as of the date of the certificate
(or, if stated to be made solely as of an earlier date, were true and
correct as of such date) and further certifying that, as of the date of
the certificate, no Event of Default exists under this Agreement."
2.06 AMENDMENT TO "NEGATIVE COVENANTS". The "Negative Covenants"
section of the Credit Agreement is amended as follows:
(a) The "Continuity of Operations" section is amended as
follows: (i) by deleting the words "change ownership" in subsection (b) of
such section, (ii) by adding the words "after the occurrence of an Event of
Default," before the words "pay any dividends" in subsection (c) of such
section and (iii) by adding at the end of such section the words "other than
in connection with the Initial Public Offering"; and
(b) The "Loans, Acquisitions and Guaranties" section is
amended by adding the words "Except as provided in the "Additional
Provisions" section below," at the beginning of subsection (a) of such
section.
2.07 AMENDMENT TO "EVENTS OF DEFAULT". The "Events of Default" section
of the Credit Agreement is amended by deleting the "Change in Ownership"
default.
2.08 AMENDMENT TO "MISCELLANEOUS PROVISIONS". The "Miscellaneous
Provisions" section of the Credit Agreement is amended by adding the
following new sentence to the end of the "Consent to Loan Participation"
section:
"Notwithstanding anything to the contrary contained in the
foregoing or in this Agreement, Lender agrees to hold at least
$10,000,000 of the Loans and remain the "lead bank" or "agent"
with respect to the administration of the Loans and the Collateral."
- 3 -
<PAGE>
Section 3. AMENDMENTS TO THE CHANGE IN TERMS AGREEMENT.
3.01 AMENDMENT TO "PAYMENT". The first sentence of the "Payment"
section of the Change in Terms Agreement is amended to read as follows:
"Borrower will pay this loan in one payment of all outstanding principal
(plus all accrued interest not paid pursuant to the following sentence)
on June 30, 1998."
3.02 AMENDMENT TO "MISCELLANEOUS PROVISIONS". The "Miscellaneous
Provisions" section of the Change in Terms Agreement is amended by deleting
the first two sentences of such section.
Section 4. AMENDMENTS TO THE SECURITY AGREEMENT.
4.01 AMENDMENT TO "DEFINITIONS". The definition of "Collateral"
contained in the "Definitions" section of the Security Agreement is amended
by adding the following to the list of excluded property of Borrower: ", ANY
ARCHITECTURAL DESIGN AND DEVELOPMENT COSTS AND ANY PRE-PAID COSTS REFLECTED
AS AN ASSET ON THE FINANCIAL STATEMENTS OF BORROWER AND RELATED TO THE
LEASEHOLD IMPROVEMENTS OR REAL PROPERTY TO BE PURCHASED BY BORROWER, ANY
CUSTOMER LISTS AND ALL NOTES RECEIVABLE OF A CERTAIN JIM CARTER TO BORROWER.
4.02 AMENDMENT TO "TITLE". The "Title" section of the Security
Agreement is amended (i) by adding the words "and except for Permitted Liens"
at the end of the first sentence of such section and (ii) by adding the words
"and other than those relating to Permitted Liens" at the end of the second
sentence to such section.
4.03 AMENDMENT TO "TAXES, ASSESSMENTS AND LIENS." The "Taxes,
Assessments and Liens" section of the Security Agreement is amended by
replacing the second sentence of such section with the following:
"Grantor may withhold any such payment or may elect to contest any lien
if Grantor in good faith believes that such amount is not yet due and
payable or Grantor is in good faith conducting an appropriate proceeding
to contest the obligation to pay and so long as Lender's interest in the
Collateral is not jeopardized in Lender's sole opinion."
Section 5. REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants as follows:
(a) this Addendum constitutes the legal, valid and binding
obligation of such party enforceable against such party in accordance with
its terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or limiting creditors' rights
generally or by equitable principles relating to enforceability; and
(b) none of the execution and delivery by such party of this
Addendum, the consummation of the transactions contemplated by this Addendum
- 4 -
<PAGE>
does or will conflict with, violate any provision of, or require any
consent under, the charter or by-laws of such party.
Section 6. CONDITIONS TO EFFECTIVENESS. This Addendum shall be and
become effective upon the execution and delivery by the parties of this
Addendum, the Credit Agreement, the Change in Terms Agreement, the Security
Agreement and each Related Document.
Section 7. REFERENCE TO AND EFFECT ON THE AFFECTED DOCUMENTS. This
Addendum shall be construed as one with the Credit Agreement, the Note, as
modified by the Change in Terms Agreement, the Security Agreement and the
Related Documents, and each such document shall, where the context requires,
be read and construed throughout so as to incorporate this Addendum.
Section 8. ENTIRE AGREEMENT. This Addendum, together with the Credit
Agreement, the Note, as modified by the Change in Terms Agreement, the
Security Agreement and each Related Document supersede all prior agreements
and understandings, written or oral, among the parties with respect to the
subject matter of this Addendum. No party shall have any duties or
responsibilities except those expressly set forth in the Credit Agreement,
the Note, as modified by the Change in Terms Agreement, the Security
Agreement, and each Related Document (as from time to time amended,
including by this Addendum).
Section 9. SUCCESSORS AND ASSIGNS. This Addendum shall be binding
upon and inure to the benefit of its parties and their respective successors
and permitted assigns.
Section 10. COUNTERPARTS. This Addendum may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties to this Addendum may execute this
Addendum by signing any such counterpart.
Section 11. GOVERNING LAW. THIS ADDENDUM HAS BEEN DELIVERED TO BY EACH
PARTY HERETO AND ACCEPTED BY SUCH PARTY IN THE STATE OF CALIFORNIA. IF THERE
IS A LAWSUIT, EACH PARTY AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF
ORANGE COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE
RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS ADDENDUM SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be duly
executed and delivered as of the day and year first above written.
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ Victor C. Streufert
----------------------------
Name: Victor C. Streufert
Title: VP
FIRST BANK & TRUST
By: /s/ Paul McGraw
---------------------------
Name: Paul McGraw
Title: VP
<PAGE>
Exhibit 10-2
AGREEMENT AS TO BOARD MEMBERSHIP
THIS AGREEMENT AS TO BOARD MEMBERSHIP (this "Agreement"), dated as
of August 7, 1997, is entered into by and among Incomnet, Inc. (the
"Company"), Stanley C. Weinstein ("Weinstein"), David Wilstein ("Wilstein")
and Richard M. Horowitz ("Horowitz", and together with Weinstein, Wilstein
and the Company, the "Parties").
RECITALS
A. On May 5, 1997, Wilstein, Horowitz and Messrs. Leonard
Wilstein and Jack Gilbert filed a Schedule 13D with the Securities Exchange
Commission ("SEC") stating that they may be deemed to be a group pursuant to
SEC Rule 13d-5(b)(1) promulgated under Sections 13(d) and 13(g) of the
Securities Exchange Act of 1934 (the "Act").
B. Weinstein, Wilstein, Horowitz have expressed a desire to
serve the Company as members of the Board of Directors of the Company (the
"Board").
C. The Company desires Weinstein, Wilstein and Horowitz to join
the Board as directors.
NOW, THEREFORE, in consideration of the mutual agreements,
covenants, representations and warranties herein contained, the parties
hereby agree as follows:
1. CERTAIN DEFINITIONS.
"FFHSJ MEMORANDUM" shall mean that certain memorandum dated
June 23, 1997 by David Robbins and Karen Seto of Fried, Frank, Harris,
Shriver & Jacobson of Los Angeles, California, with regard to the ambiguity
in the charter documents of the Company as to the appropriate number of
directors to serve on the Company's Board.
"GROUP" shall mean a group as referenced in SEC Rule 13d-5
promulgated pursuant to Sections 13(d) and 13(g) of the Act.
2. BOARD COMPOSITION. As of the date hereof, for so long as
each of the individuals named herein shall agree to serve and until such time
as any successor directors shall be duly elected in accordance with the
Company's Bylaws, the Board of the Company shall consist of Mr. Albert
Milstein, Ms. Nancy Zivitz, Mr. Howard Silverman, Mr. Melvyn Reznick, Mr.
David Wilstein, Mr. Richard M. Horowitz and Mr. Stanley C. Weinstein.
3. LACK OF ASSURANCES The Parties acknowledge the issues raised
by the FFHSJ Memorandum. The Parties agree that any issues raised by the
FFHSJ Memorandum are merely of a technical nature and the Parties agree to
clarify the Company's Articles of Incorporation at the next meeting of the
Company's shareholders so as to resolve any existing uncertainty.
Notwithstanding anything in this Paragraph 3 to the contrary,
1
<PAGE>
the Parties acknowledge and agree that no Party has made any representation
to any other Party with respect to the issues raised in the FFHSJ Memorandum
as the same may relate to the service of any person on the Board, and that
all persons serving on the Board do so at their own risk with respect to any
liability in connection with the issues raised in the FFHSJ Memorandum.
4. INDEMNIFICATION. Notwithstanding anything in this Agreement
to the contrary, the Company agrees to hold harmless and indemnify all of the
persons named as directors in Paragraph 2 hereof, to the maximum extent
permitted by the General Corporation Law of California, against any expenses,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any causes of actions, suits or proceedings
arising by reason of the fact any such person is or was a director of the
Company.
5. D&O INSURANCE. The Company hereby agrees to use best efforts
to raise its Directors and Officers Insurance from $1,000,000 to $5,000,000.
6. DISCLAIM GROUP MEMBERSHIP. Wilstein and Horowitz hereby
agree that (i) they will not assert that any other director of the Company
should be deemed to be a member of the Group referenced in the Schedule 13D
filed on May 5, 1997 by Wilstein, Horowitz and the individuals referenced in
Recital A hereof solely by virtue of the execution and performance of this
Agreement by the parties hereto and (ii) the Company shall not be considered
to have endorsed the Group referenced in the Schedule 13D solely by virtue of
the execution and performance of this Agreement by the parties hereto.
7. DERIVATIVE SUITS. The parties agree that it shall be the
policy of the Board that, in view of the current condition of the Company and
the cost and expense of indemnifying officers and directors, the presumption
will be that the Board will not support (after a review of all the then
relevant facts and circumstances) any derivative action unless such action
pleads with particularity facts that give rise to a strong inference that a
director or directors acted in violation of his, her or their duty of loyalty
or duty of care to the Company, which policy is not applicable to the extent
that the exercise of a director's fiduciary duties under applicable law, in
light of the then relevant facts and circumstances, requires a different
standard for evaluating a specific matter then before the Board.
8. SHAREHOLDER MEETING; ARTICLES AMENDMENT The parties hereto
agree (i) to use their best efforts to cause the next annual meeting of the
shareholders of the Company to take place on September 22, 1997; (ii) to
approve, and recommend that the shareholders of the Company approve,
clarifying amendments to the Company's Articles of Incorporation and Bylaws,
as recommended to the Board by the Company's counsel and reasonably approved
by counsel to Wilstein and Horowitz, stating that the Board shall be
comprised of seven (7) members; and (iii) that each director will either (A)
support the election, at such meeting of shareholders, of a slate of
directors nominated by majority vote of the Board (which slate shall include
Wilstein, Horowitz and Weinstein to the extent each of Wilstein, Horowitz and
Weinstein shall have not resigned from the Board pursuant to Clause (B)
hereof); or (B) resign from the Board and subsequently nominate and support
any slate of directors that such persons may choose, provided, however, that,
in any case, no party shall be entitled (x) to take any action that would
cause the annual meeting to take place subsequent to September 22, 1997
(other than an assertion in an appropriate forum that an party has violated
the California General Corporation Law or the federal securities laws in
connection with such meeting provided, however, that no assertion shall be
made in any forum in opposition to the clarifying amendments described in
clause (ii) above) or (y) to solicit proxies in opposition to clarifying
amendments described in clause (ii) above. In
2
<PAGE>
the event that a director should resign from the Board pursuant to this
Section or should be unable or unwilling to continue to serve on the Board,
the Board shall then be entitled to fill such vacancy and/or to nominate and
support the election to the Board of such other person as the Board shall,
in its discretion, determine is appropriate.
9. CHOICE OF LAW. The parties agree that this Agreement shall
be governed by and construed in accordance with the laws of the State of
California, excluding any laws which would direct application of another
jurisdiction.
10. MISCELLANEOUS.
(a) This Agreement may not be amended or modified except by
written instrument signed by the Company, Weinstein, Horowitz and Wilstein.
(b) This Agreement constitutes the entire agreement and
understanding among the Parties and supersedes all other prior agreements and
undertakings, both written and oral, among the Parties, or any of them, with
respect to the subject matter hereof.
(c) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to render it
legal, valid and enforceable, and if no such modification shall render it
legal, valid and enforceable, then this Agreement shall be construed as if
not containing the provision held to be invalid, and the rights and
obligations of the Paries shall be construed and enforced accordingly.
(d) This Agreement may not be assigned.
(e) The Headings of the Sections of this Agreement have been
inserted for convenience of reference only and do not constitute a part of
this Agreement.
(f) This Agreement may be executed in any number of counterparts
and by the Parties in separate counterparts, with the same effect as if all
Parties had signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute one and the
same instrument.
(g) When the context requires, the gender of all words used
herein shall include the masculine, feminine and neuter and the number of all
words shall include the singular and plural.
3
<PAGE>
IN WITNESS WHEREOF, the Company, Weinstein, Wilstein and Horowitz
have caused this Agreement to be executed as of the date first written above.
INCOMNET, INC.
/s/ MELVYN REZNICK
- -------------------------
Melvyn Reznick
President and Chief Executive Officer
/s/ STANLEY C. WEINSTEIN
- -------------------------
Stanley C. Weinstein
/s/ DAVID WILSTEIN
- -------------------------
David Wilstein
/s/ RICHARD M. HOROWITZ
- -------------------------
Richard M. Horowitz
4
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,601
<SECURITIES> 0
<RECEIVABLES> 19,074
<ALLOWANCES> 1,140
<INVENTORY> 395
<CURRENT-ASSETS> 23,875
<PP&E> 13,957
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,838
<CURRENT-LIABILITIES> 31,134
<BONDS> 0
0
1,990
<COMMON> 61,847
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 47,838
<SALES> 34,855
<TOTAL-REVENUES> 34,855
<CGS> 24,610
<TOTAL-COSTS> 33,411
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<INCOME-PRETAX> 1,342
<INCOME-TAX> 101
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